Legislature(2011 - 2012)BARNES 124

02/01/2012 01:00 PM House RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 298 EXEMPTIONS FROM MINING TAX TELECONFERENCED
Moved CSHB 298(RES) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 276 OIL/GAS PRODUCTION TAX CREDITS: NENANA TELECONFERENCED
Heard & Held
         HB 276-OIL/GAS PRODUCTION TAX CREDITS: NENANA                                                                      
                                                                                                                                
1:58:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  next order of  business would                                                               
be continued discussion on HOUSE  BILL NO. 276, "An Act providing                                                               
for a  credit against the  oil and  gas production tax  for costs                                                               
incurred  in  drilling certain  oil  or  natural gas  exploration                                                               
wells in the Nenana Basin."  [Before the committee was Version M,                                                               
the  proposed  committee  substitute  (CS)  labeled  27-LS1193\M,                                                               
Bullock, 1/18/12, adopted on 1/30/12.]                                                                                          
                                                                                                                                
CO-CHAIR FEIGE  invited the sponsor  to discuss points  that were                                                               
brought up in meetings on 1/31/12.                                                                                              
                                                                                                                                
1:58:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE STEVE THOMPSON,  Alaska State Legislature, sponsor                                                               
of HB 276, related that  there have been ongoing discussions with                                                               
the Department  of Revenue  (DOR) and  the Department  of Natural                                                               
Resources (DNR).   He said  that DOR and  DNR are looking  at how                                                               
this tax credit  would fit with existing tax credits  and will be                                                               
getting  back to  him on  [2/6/12]  with additional  information.                                                               
One possibility  being looked at  is expanding the bill  to cover                                                               
regions  that  are underserved  and  suffering  from high  energy                                                               
costs.                                                                                                                          
                                                                                                                                
1:59:37 PM                                                                                                                    
                                                                                                                                
JANE PIERSON, Staff, Representative  Steve Thompson, Alaska State                                                               
Legislature, explained  that one  of the most  interesting things                                                               
discussed yesterday was that these  are wildcat basins with a low                                                               
potential  - 5  to 15  percent -  of success.   So,  a three-step                                                               
process was looked at, the  first being seismic exploration which                                                               
would be shared with the state.   The seismic data would increase                                                               
the odds for success and would  be valuable to the state to have.                                                               
The  second  step would  be  pre-qualification  for the  drilling                                                               
incentive  from the  Alaska Oil  and Gas  Conservation Commission                                                               
(AOGCC) and  DNR based on the  seismic data provided.   The third                                                               
step  would be  the  drilling  and the  issuance  of the  credit.                                                               
Given that "the  devil is in the details," work  will continue on                                                               
making all the  pieces fit together so that the  tax credits work                                                               
smoothly with those that are already  on the books and get to the                                                               
sponsor's intent.                                                                                                               
                                                                                                                                
2:00:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE THOMPSON explained  that by the pre-qualification,                                                               
DNR and AOGCC would have to  determine that something does have a                                                               
potential that  is worthy of  drilling.  They could  disallow the                                                               
credits  for drilling  on  a  location that  does  not have  much                                                               
potential, which could save the state  a lot of money in the long                                                               
run from a total wildcat of just going out and drilling a hole.                                                                 
                                                                                                                                
2:02:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON pointed  out that the 40  percent exploration tax                                                               
credit would still be applicable,  so somebody wanting to proceed                                                               
with a  well that  did not qualify  for this  [proposed] enhanced                                                               
credit  could   still  take  the  existing   credits,  which  are                                                               
substantial.   For  locations that  are over  the distances  away                                                               
from someplace  else, there  is the 40  percent tax  credit, plus                                                               
conversion of the cost at 25  percent to a credit, thus basically                                                               
it is  65 percent  of the well  cost as long  it is  within those                                                               
parameters.    He  said  he  is just  clarifying  that  the  pre-                                                               
qualification is only for this [proposed] enhanced credit.                                                                      
                                                                                                                                
2:03:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON observed  that  there are  the Cook  Inlet                                                               
credits and  now there  is this legislation  for credits  for the                                                               
Nenana Basin.   He  asked whether this  discussion is  leading to                                                               
the creating of a template so  that some other basin in the state                                                               
does not have to come back to the legislature.                                                                                  
                                                                                                                                
REPRESENTATIVE  THOMPSON responded  yes, he  is looking  at other                                                               
basins  and possibly  regions,  but he  has not  yet  put it  all                                                               
together.                                                                                                                       
                                                                                                                                
2:04:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  commented that gas-starved  Fairbanks is                                                               
looking for energy  solutions, and while this  is the appropriate                                                               
committee  in which  to debate  a statewide  policy, he  does not                                                               
want to  get caught  in the  weeds.   Fairbanks and  other places                                                               
across  the   state  have  been  struggling   to  have  something                                                               
effectively  passed  and he  would  like  to see  the  questions,                                                               
especially on the pre-qualification,  answered sooner rather than                                                               
later.                                                                                                                          
                                                                                                                                
2:05:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE recognized  that  HB 276,  as currently  written,                                                               
would apply  incentives directly to  the Nenana Basin  alone, but                                                               
said he  would like to  step back and  look at the  state overall                                                               
and  the incentivizing  of oil  and gas  and get  a feel  for the                                                               
committee's basic  philosophy for what  should be done here.   He                                                               
said he  would like to ask  five questions, with the  first being                                                               
whether  it is  appropriate to  further incentivize  oil and  gas                                                               
exploration above and beyond what is already on the books.                                                                      
                                                                                                                                
REPRESENTATIVE GARDNER responded that she  has a concern any time                                                               
it is a  100 percent incentive because it molds  behavior in ways                                                               
that are not always beneficial.                                                                                                 
                                                                                                                                
REPRESENTATIVE KAWASAKI recollected that  many of the exploratory                                                               
and  production wells  shown  on  the map  from  the Division  of                                                               
Geological  & Geophysical  Surveys  are centered  in two  basins.                                                               
The city of Fairbanks is far  away from those two basins and that                                                               
puts Fairbanks in a poorly placed  strategic area.  However, as a                                                               
state he  thinks Alaska  ought to  be wildcatting  because pretty                                                               
much every hole  ever drilled was a wildcat hole  at one point in                                                               
time, including the Prudhoe Bay and  Cook Inlet areas.  So, there                                                               
is cause for it, he agreed.                                                                                                     
                                                                                                                                
REPRESENTATIVE  HERRON, looking  at Mr.  Swenson's PowerPoint  of                                                               
all  the  basins  that  have   potential,  said  he  agrees  with                                                               
Representative  Kawasaki.    The Yukon-Kuskokwim  Delta  has  low                                                               
potential for  a big producer,  but it has  significant potential                                                               
for  local  use.    He  said   he  therefore  thinks  it  is  the                                                               
committee's responsibility to discuss that policy.                                                                              
                                                                                                                                
2:08:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON concurred,  but questioned how something                                                               
found in the middle  of nowhere will be taken out  of there.  For                                                               
areas along  the pipeline the product  can be taken out,  but for                                                               
[remote areas] it will cost the  state or somebody a lot of money                                                               
once it is found  to build a pipeline or a road.   She added that                                                               
she  firmly believes  in developing  ways to  get to  the state's                                                               
resources,  and building  infrastructure is  probably the  number                                                               
one thing the state should be doing.   She said she does not know                                                               
how to  connect the dots at  this point, but it  is something the                                                               
committee needs to deal with.                                                                                                   
                                                                                                                                
REPRESENTATIVE THOMPSON  pointed out that  he did not  intend for                                                               
this to be  something for export.   He is looking at it  as a way                                                               
to  bring relief  to  depressed  areas and  remote  areas of  the                                                               
state.   It would  bring down  their costs  which would  save the                                                               
state millions of dollars in power cost equalization.                                                                           
                                                                                                                                
REPRESENTATIVE P.  WILSON surmised  that [the  gas] could  not be                                                               
used as it comes out of the  ground and would have to be refined.                                                               
She  asked  what would  therefore  need  to  be  done to  help  a                                                               
community.                                                                                                                      
                                                                                                                                
REPRESENTATIVE THOMPSON, qualifying that he  is not a gas person,                                                               
related that  Cook Inlet gas is  very dry and can  nearly be used                                                               
right out  of the ground, while  North Slope gas is  very wet and                                                               
has to be  cleaned before it can  be used in a home  furnace.  He                                                               
allowed  that there  are differences  and it  depends on  what is                                                               
found as to whether it will need to be processed to be usable.                                                                  
                                                                                                                                
CO-CHAIR FEIGE commented that it will  not be known until the gas                                                               
is found.                                                                                                                       
                                                                                                                                
2:11:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  cautioned that he does  not want the idea  to be                                                               
that it  is just small basins  with small quantities of  gas that                                                               
can be  used only there.   For example, natural gas  found in the                                                               
Copper River  Basin would provide a  ready source of gas  to heat                                                               
the oil  in the Trans-Alaska  Pipeline System (TAPS)  to overcome                                                               
some of  the pipeline's  problems; the same  thing for  any extra                                                               
gas  in Nenana.   The  Donlin Creek  Mine is  projecting to  have                                                               
usage greater than what the  entire Railbelt and Southcentral are                                                               
using right  now, so in-state  usage does not  mean it has  to be                                                               
small.   Depending  on the  quantity found,  the gas  could allow                                                               
other economic  bases in those areas  to flourish as well.   Most                                                               
of what  is being thought about  is natural gas, but  there could                                                               
be oil in the Nenana Basin just as well as gas.                                                                                 
                                                                                                                                
CO-CHAIR SEATON  added that  a bill by  regions would  get beyond                                                               
the idea of a  bill for just one group that has  a license for an                                                               
area.  He said he wants to  make sure the bill is expanded beyond                                                               
[the   Nenana   Basin]  so   that   it   has  general   statewide                                                               
implications.  In response to  Co-Chair Feige, he confirmed he is                                                               
meaning for Alaska as a whole.                                                                                                  
                                                                                                                                
2:14:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI,   regarding  pre-qualification,  stated                                                               
that if  the bill  is expanded as  mentioned by  Co-Chair Seaton,                                                               
thought needs  to be given  about anchor  tenants and how  to get                                                               
that gas  to market.  The  exploration credits on the  books have                                                               
done their job, but the problem  has been with production and the                                                               
realization of  a project.   He said  he does not  want to  see a                                                               
bunch  of wildcat  drilling  without any  results.   The  state's                                                               
investment  needs   to  result   in  gas  production,   not  just                                                               
exploration, and that should be part of the pre-qualification.                                                                  
                                                                                                                                
2:15:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  said he thinks it  is a general consensus  of the                                                               
committee that  some kind  of incentive  should be  provided, but                                                               
that members do  not want to pay 100 percent  just to punch holes                                                               
in the ground.   Even though the state is  bringing in revenue it                                                               
does not have  enough money to punch holes all  over the state to                                                               
find the  resource, so a  way must  be found for  getting someone                                                               
else  to pony  up  the  money and  that  is  a delicate  process.                                                               
Therefore, the  question for the  committee is what the  best way                                                               
is to incentivize that.  Given  that the average wildcat well has                                                               
only a  10 percent chance  for success, he requested  Mr. Swenson                                                               
to address how the risk of  drilling a dry exploratory well could                                                               
be lowered and  how the state could improve  the information that                                                               
it has through a program of incentives.                                                                                         
                                                                                                                                
2:17:27 PM                                                                                                                    
                                                                                                                                
ROBERT  SWENSON, Petroleum  Geologist,  Acting Director,  Central                                                               
Office, Division of Geological  & Geophysical Surveys, Department                                                               
of Natural Resources (DNR), began  by clarifying what wildcat and                                                               
chance  of  success mean.    A  prospect  said  to be  a  wildcat                                                               
prospect  means that  the amount  of information  that is  had is                                                               
relatively  limited,  so  the  chance  of  geologic  or  economic                                                               
success is  always based on  just that  one well rather  than the                                                               
entire basin.  Every piece  of information gathered is incredibly                                                               
important because  each piece provides a  better understanding of                                                               
what is  in the subsurface,  which increases the  chance factors.                                                               
It is  not that all of  these basins have a  5-15 percent [chance                                                               
of success]; rather, it is  that there is very little information                                                               
for most of these basins.   As additional information is gathered                                                               
the chance factors will either  increase or decrease.  An example                                                               
of this  is Nenana Basin in  which the explorer is  very far down                                                               
the exploration road in comparison  to Minchumina Basin which has                                                               
only gravity data and no  subsurface information whatsoever.  The                                                               
Minchumina  Basin is  truly  wildcat and  drilling  a well  there                                                               
would  be incredibly  difficult  because it  would  be hard  just                                                               
placing where to go to get the most information.                                                                                
                                                                                                                                
2:19:29 PM                                                                                                                    
                                                                                                                                
MR.  SWENSON continued  by pointing  out that  it is  a difficult                                                               
process to  combine all of this  together and have a  template in                                                               
which  each basin  is  played the  same  way.   The  issue is  to                                                               
understand  the data  that is  there and  to understand  what the                                                               
prospect  is.   He said  he thinks  it important  that the  state                                                               
understand what is available to it  as far as the geology and the                                                               
petroleum potential; it does not mean  that that will take it all                                                               
the way  to production,  but it is  understood what  is available                                                               
from the standpoint  of resources, and this is  what is important                                                               
about  this discussion  and HB  276.   Unlike many  other states,                                                               
Alaska has  a lot of  geology that is  conducive to both  oil and                                                               
gas and  minerals.  He reiterated  that the Nenana Basin  is much                                                               
further along than  most of the other areas because  it has a lot                                                               
of seismic, three wells, and a lot of subsurface information.                                                                   
                                                                                                                                
2:20:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER, in  regard to  gathering information  on                                                               
broad areas, asked  whether it would make sense for  the state to                                                               
do seismic work and then  make it available to potential bidders,                                                               
thereby increasing the value, potentially, of lease sales.                                                                      
                                                                                                                                
MR.  SWENSON responded  that  how  data is  acquired  is what  he                                                               
thinks this discussion is about,  whether the state subsidizes or                                                               
provides  tax  credits  or  some other  process.  Whether  it  is                                                               
seismic data,  gravity information,  shallow core holes,  or deep                                                               
wells, each piece of information  would help develop the model of                                                               
what is there.  For example,  take away all the wells and seismic                                                               
from  the  North Slope  and  think  about  when Prudhoe  Bay  was                                                               
discovered.   Nine  wells were  drilled  in that  region and  the                                                               
first  eight   were  dry,  but  each   well  provided  additional                                                               
information.   The target being drilled  for at the time  was the                                                               
Lisburne, a  carbonate rock  beneath where  the oil  was actually                                                               
found.  When  the Sadlerochit was hit, which is  Triassic in age,                                                               
there was absolutely  no idea that this rock  formation was going                                                               
to be  the target,  and it  is unbelievable  how many  times that                                                               
type  of  thing happens.    Going  back from  that  serendipitous                                                               
event, the issue  is that it was known from  the other wells that                                                               
there was  a lot of  potential because of the  active hydrocarbon                                                               
that  was found,  along  with  a lot  of  shows  and the  thermal                                                               
history.   Much of the  picture was put  together and all  of the                                                               
pieces  were there,  but the  picture was  incomplete.   When the                                                               
Sadlerochit  was hit  and Prudhoe  Bay  found it  was a  complete                                                               
surprise.   That same  process must be  gone through  to evaluate                                                               
any one  of these basins.   It will  be unknown what  is actually                                                               
there  until  it  is  hit   and  produced,  but  the  ability  to                                                               
understand it  increases with each piece  of data - so  any piece                                                               
of data is important.                                                                                                           
                                                                                                                                
2:23:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired  whether it is fair to say  that the more                                                               
information  available to  a potential  investor, the  higher the                                                               
likelihood that a potential investor will make that investment.                                                                 
                                                                                                                                
MR. SWENSON replied correct, but  stressed it is specifically the                                                               
basin that is  being talked about.  Then what  must be taken into                                                               
account is what  infrastructure is available and  how the product                                                               
will  be taken  to  market.   Sticking with  just  the basin,  he                                                               
continued,  the  more  data that  is  positive  information,  the                                                               
better  the chance  of  bringing an  outside  investor into  that                                                               
basin.  The Nenana Basin has a significant amount of data.                                                                      
                                                                                                                                
2:24:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  presumed  that the  state's  data  is  primarily                                                               
stored with the Division of  Geological & Geophysical Survey.  He                                                               
asked  whether the  division has  an  inventory of  what data  is                                                               
available where in the state.                                                                                                   
                                                                                                                                
MR. SWENSON  answered yes, and  added that a number  of different                                                               
agencies have  various types  of data.   The  Alaska Oil  and Gas                                                               
Conservation Commission  (AOGCC) collects  all the well  logs and                                                               
samples from any of  the oil and gas drilling in  the state.  The                                                               
Division of  Geological & Geophysical  Survey gets  those samples                                                               
after they  have become public;  the division does not  house any                                                               
confidential information whatsoever.   The Division of  Oil & Gas                                                               
(DOG), specifically  DOG resource evaluation, and  the AOGCC have                                                               
a significant amount of seismic  data that is proprietary because                                                               
statute requires  that it be turned  over to the state.   Some of                                                               
that data becomes  public after a period of 2-10  years, and once                                                               
that  is made  public the  Division of  Geological &  Geophysical                                                               
Survey has  access and can publish  it, along with maps,  to help                                                               
people understand the geology and to facilitate exploration.                                                                    
                                                                                                                                
CO-CHAIR FEIGE  surmised that the confidential  seismic data made                                                               
available  to the  state is  data that  the individual  companies                                                               
themselves are paying the cost to acquire.                                                                                      
                                                                                                                                
MR. SWENSON  responded correct and  noted that some of  that data                                                               
never does become public.                                                                                                       
                                                                                                                                
2:26:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER inquired  whether seismic  data that  was                                                               
publicly  available   for  a  lease   would  tell   an  adjoining                                                               
leaseholder anything about that leaseholder's nearby land.                                                                      
                                                                                                                                
MR. SWENSON said  there are two levels of understanding.   One is                                                               
regional and tells what the basin  is doing - what temperature it                                                               
got to,  what the basin's  history is.  This  upfront information                                                               
would definitely help  that person with an  adjoining lease block                                                               
in  understanding  the  basin.   However,  the  second  level  of                                                               
understanding is where  to specifically put down  an 8.5-inch bit                                                               
into a very  expansive area, and the cost of  getting it there is                                                               
high.  That is why  such a tremendous amount of three-dimensional                                                               
seismic is being  shot now - it gives that  much more information                                                               
and helps  to focus in  on a very, very  small target.   For this                                                               
level, an adjacent  line in another area will  probably not help,                                                               
but for an understanding of the basin it will.                                                                                  
                                                                                                                                
2:27:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  related  his  experience  in  seeing  the  great                                                               
advancements that  have occurred  over the  years in  the quality                                                               
of, and  the means for  gathering, seismic  data.  He  asked what                                                               
the most  cost-effective means  would be for  the state  to delve                                                               
into to overview what a basin is really like.                                                                                   
                                                                                                                                
MR.  SWENSON  concurred  that  the  seismic  data  and  all  data                                                               
acquisition  technology has  changed  in leaps  and  bounds.   He                                                               
advised  that [the  state]  is  facilitating something  everybody                                                               
wants -  the explorers  want to find  something, the  state wants                                                               
the  explorers to  find something,  and  the Native  corporations                                                               
want those companies  to find something.  In  that scenario there                                                               
will  be  different  ideas  about  what the  best  data  is,  but                                                               
everyone wants  to get the  most cost-effective look  at whatever                                                               
it is  they are  trying to  get at.   For example,  in Minchumina                                                               
Basin  where there  is  very  little data,  one  or two  regional                                                               
seismic lines to acquire the  basic basin geometry would probably                                                               
work.  Areas like Yukon  Flats, Nenana, and Kotzebue already have                                                               
significantly more data,  so the next step in  those places would                                                               
be determining  the most cost-effective  piece of  information to                                                               
provide  the next  phase  of understanding  to  prove up  whether                                                               
there  is a  petroleum system  or trappable  structures.   Rather                                                               
than the state  being a gate keeper, it is  more of a partnership                                                               
for coming up with the best idea for evaluating the basin.                                                                      
                                                                                                                                
2:31:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON understood the  state has lots  of data                                                               
but  that some  companies never  give the  state any  data.   She                                                               
asked how and when the state acquires the information.                                                                          
                                                                                                                                
MR. SWENSON  qualified that he is  not the best person  to answer                                                               
this question and  said he will get back to  the committee with a                                                               
detailed brief in this regard.   However, he continued, sometimes                                                               
there are  "spec surveys" where  a seismic company shoots  a huge                                                               
area and  then sells the  opportunity to  get that data  with the                                                               
stipulation  that  it  cannot  be  passed on.    He  offered  his                                                               
understanding that  for [spec  surveys] on  state land  the state                                                               
must  get a  copy and  it is  held confidential.   Under  certain                                                               
scenarios,  such as  some incentive  programs,  the data  becomes                                                               
public after  some period of  time; for the licensing  program he                                                               
believes that  time period is  10 years.   Thus, there is  a full                                                               
spectrum   depending   on  the   location,   the   part  of   the                                                               
confidentiality process, and how it is held.                                                                                    
                                                                                                                                
2:32:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DICK noted that a  dry hole that costs $25 million                                                               
to drill provides  some data.  He  asked how the data  from a dry                                                               
hole compares to the other methods of gathering data.                                                                           
                                                                                                                                
MR. SWENSON  began his reply  by comparing remote sensing  to the                                                               
medical world, saying  that even with all the  different types of                                                               
imaging  for  looking into  a  person's  body,  it is  still  the                                                               
surgery  that  ultimately  shows   what  something  actually  is.                                                               
Because drilling  is the most  expensive part of the  process, he                                                               
continued,  it behooves  a company  to get  information to  focus                                                               
where that  drill should go and  to have a fair  understanding of                                                               
the basin's  geometries and how  deep to  go.  However,  the only                                                               
ultimate understanding is actually  drilling a well, and probably                                                               
more than  one well, because  the chance  of success for  any one                                                               
well becomes so low.                                                                                                            
                                                                                                                                
REPRESENTATIVE DICK  surmised that  it might then  make a  lot of                                                               
sense to drill maybe five holes in a basin.                                                                                     
                                                                                                                                
MR. SWENSON responded  that sometimes by the fourth  well it will                                                               
be  known that  it is  not going  to work,  and sometimes  by the                                                               
first well that  will be known.  "It really  depends on where you                                                               
are," he said.                                                                                                                  
                                                                                                                                
2:35:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON noted  that  there are  many  basins across  the                                                               
state and therefore  the state cannot put itself on  the hook for                                                               
every basin.   He asked  whether it would  make sense to  do this                                                               
regionally and limit the regions  and to have Mr. Swenson provide                                                               
the contours for where those regions should be.                                                                                 
                                                                                                                                
MR. SWENSON  answered that a  key issue  in drawing the  areas is                                                               
that a  basin not be  cut in half  - that the  differentiation be                                                               
based  on geology  and not  geopolitical surface  issues.   There                                                               
will  be  some  upfront  knowledge  about a  basin  to  date,  he                                                               
continued.    However, because  the  overall  prospectivity of  a                                                               
basin will  likely be  relatively limited,  it would  probably be                                                               
best  to   prioritize  by  identifying  which   has  the  highest                                                               
potential  from the  geologic perspective  of what  is known,  or                                                               
that additional  information is  needed.   A number  of different                                                               
variables will go into that equation.                                                                                           
                                                                                                                                
2:38:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  understood  Mr.   Swenson  to  be  saying  that                                                               
regional is  not the way  to go; rather, prioritizing  the basins                                                               
statewide is the way to go.                                                                                                     
                                                                                                                                
MR. SWENSON  replied that,  in reality, the  number of  basins is                                                               
less than  30, so it  is important  that [his division]  get that                                                               
information  for  the  committee  and then  have  the  discussion                                                               
again.   For  example, the  Nenana  Basin is  a relatively  small                                                               
surficial area.   It is important  to look at which  one of these                                                               
basins maintains potential  and to look at the area  of extent of                                                               
a basin with that potential, and to then have discussions.                                                                      
                                                                                                                                
CO-CHAIR SEATON requested that Mr.  Swenson provide the committee                                                               
with  a prioritization  and an  estimate of  regional guidelines.                                                               
He said this might be part of the pre-qualification information.                                                                
                                                                                                                                
MR. SWENSON agreed to do so.                                                                                                    
                                                                                                                                
2:41:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  asked what  kind  of  information would  go  the                                                               
greatest distance  in reducing the  exploration risk  that Doyon,                                                               
Limited is facing  with projects that are  currently underway [in                                                               
the Nenana Basin].                                                                                                              
                                                                                                                                
JAMES MERY,  Senior Vice President,  Doyon, Limited,  stated that                                                               
there  are a  couple  of difficulties.    Because these  frontier                                                               
basins are not Cook Inlet or  the North Slope the majors perceive                                                               
them as too small, while people  Outside see Alaska as scary;  so                                                               
it is  a difficult  environment.   One helpful  thing is  that in                                                               
some of these basins the  oil potential has gone up substantially                                                               
through Doyon's work.  However,  Doyon is losing partners in this                                                               
venture, not gaining them.  Doyon  drilled a well and gained some                                                               
valuable data even  though it was not a productive  well in terms                                                               
of commerciality.  The data  from that well heightens the promise                                                               
of these Interior  basins.  Doyon is undertaking  its own seismic                                                               
program right now  because it is a strong believer  in the area's                                                               
promise, but most  of its other partners in the  Nenana Basin are                                                               
not participating in that project.                                                                                              
                                                                                                                                
MR. MERY  noted that it  all comes to a  head at the  next stage,                                                               
which is  drilling.  It  will take at  least two more  wells, and                                                               
maybe five, to  know what is out there and  getting to that point                                                               
is  going to  be very  difficult.   Doyon is  not in  a financial                                                               
position, even after  it shoots the seismic, to  fund 100 percent                                                               
of a well that may be drilled in  the future.  The state has been                                                               
a welcome partner  through the other programs, he  said, and what                                                               
Doyon is  looking for here  is for the state  to be a  little bit                                                               
more of  a partner so  that Doyon can get  over the next  hump to                                                               
move this project forward.                                                                                                      
                                                                                                                                
2:44:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  inquired about the cost  for Doyon's last                                                               
well and the anticipated cost for the next wells.                                                                               
                                                                                                                                
MR.  MERY answered  that  Doyon's  last well  was  a summer  time                                                               
operation within  a few miles  of the  road system and  the costs                                                               
were a little south of $19  million.  According to a recent Doyon                                                               
study,  a 12,000  foot  well  in summer  time,  and without  pre-                                                               
contingencies,  will  likely  cost  a  little  over  $25  million                                                               
completed.                                                                                                                      
                                                                                                                                
2:46:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON related  that since the Norway  policy tour there                                                               
has  been a  fair amount  of  interest in  the legislature  about                                                               
state  direct  financial  investment  (SDFI),  which  is  like  a                                                               
working interest  owner.   He asked whether  Doyon would  find it                                                               
appealing to  have the state as  a working interest owner  in the                                                               
20-25 percent range.  He noted  that a couple of different models                                                               
have  been run,  including one  model  by Pedro  van Meurs  which                                                               
found that  the fiscal  system could be  made more  attractive by                                                               
converting  the  12.5  percent  royalty to  a  25  percent  SDFI.                                                               
Another scenario  is to  leave the  royalty as  is and  have some                                                               
SDFI.                                                                                                                           
                                                                                                                                
MR. MERY responded that Doyon has  had no discussions and has not                                                               
given any thought  to it, but he  is aware of what  Mr. van Meurs                                                               
has talked  about.  While  there have  not been formal  or direct                                                               
talks, he said he is sure that Doyon would be open to it.                                                                       
                                                                                                                                
REPRESENTATIVE DICK  commented that the two  things driving where                                                               
the drilling  takes place are  how good  the basin looks  and how                                                               
desperate the market is, and that  is what makes the Nenana Basin                                                               
so compelling.                                                                                                                  
                                                                                                                                
2:48:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON inquired whether  Doyon would be able to                                                               
get investors to come back after  there is more seismic data that                                                               
indicates  where the  best place  is to  drill the  next well  or                                                               
wells.  She allowed this would depend on what the seismic finds.                                                                
                                                                                                                                
MR. MERY  replied that the objective  is to drill wells  and that                                                               
with success  he thinks  Doyon would  have no  problem attracting                                                               
new investors.   The next biggest risky part of  a venture in the                                                               
Nenana Basin  is drilling in the  central part of the  basin, and                                                               
investment  will follow  quickly once  it is  established through                                                               
discovery that there are many things to chase out there.                                                                        
                                                                                                                                
2:50:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON related that the  bill's structure of 100 percent                                                               
has  created  a lot  of  consternation.    This has  resulted  in                                                               
discussions about  80 percent on  all three, given that  [HB 276]                                                               
has no differentiation between the  first, second, and third well                                                               
like  there was  in  the  Cook Inlet  issue.    The committee  is                                                               
wrestling with how  to structure a bill:  one  structure being an                                                               
80 percent  tax credit with a  payback of half of  that amount if                                                               
there  is profitable  production; the  other structure  being the                                                               
current  40  percent  exploration   tax  credit  and  25  percent                                                               
conversion of  expenses to a  transferable tax credit.   He asked                                                               
how Doyon would evaluate these two structures of credit.                                                                        
                                                                                                                                
2:52:20 PM                                                                                                                    
                                                                                                                                
MR. MERY  answered that it  becomes a harder question  for Doyon.                                                               
Addressing  it   from  the   standpoint  of   previous  committee                                                               
discussions about  "no skin in  the game," he explained  that the                                                               
Cook  Inlet legislation  has a  90  percent reimbursement  across                                                               
three wells,  with an up-to-$25-million cap  on each well.   A 90                                                               
percent credit across three wells  - the first, second, and third                                                               
wells - would work  quite well for Doyon.  As far  as skin in the                                                               
game, he  said Doyon's cost estimates  are a little bit  north of                                                               
$25 million.   If anything goes  wrong and it costs  $30 million,                                                               
Doyon will only get reimbursed  for $25 million, not $30 million,                                                               
so  Doyon  is holding  the  insurance  policy on  cost  overruns.                                                               
Additionally, it  is likely that  later this calendar  year Doyon                                                               
will have to  convert its license to leases, and  then Doyon will                                                               
have to write checks to the  State of Alaska every year for about                                                               
$1.5 million just to  hold the leases.  On top  of that, Doyon is                                                               
now spending  money on doing  seismic.  Also, while  drilling, it                                                               
would be  Doyon's intention  to do more  seismic on  the southern                                                               
end of  the basin.   The  legislation that  would allow  Doyon to                                                               
drill  these things  with these  enhanced incentives  really just                                                               
triggers a  whole lot of  other things  that will happen,  and in                                                               
that respect Doyon certainly has a lot  of skin in the game.  The                                                               
notion of having  the Division of Oil & Gas  involved and perhaps                                                               
pre-approving  some of  this  does not  trouble  Doyon and  Doyon                                                               
welcomes that because  it has an open relationship  with both Mr.                                                               
Swenson's division and  Mr. Barron's division.   Doyon has shared                                                               
a lot  of information that  it did not  have to share  because it                                                               
wants the participation and input of those divisions.                                                                           
                                                                                                                                
2:55:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON, regarding the  sharing of information, explained                                                               
that  one  concern about  enhanced  credits  was that  the  state                                                               
should get  something for that.   The data would be  available to                                                               
the state  without a long  restriction on time limits  because it                                                               
is all  under license  which can  be converted  to leases  and is                                                               
therefore not competitive.                                                                                                      
                                                                                                                                
MR. MERY replied, "No problem with that at all."                                                                                
                                                                                                                                
2:55:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  stated that  in  the  course of  discussion  the                                                               
committee has  gone over the rest  of the questions that  he had.                                                               
If  the committee  decides  it  is going  to  incentivize and  it                                                               
determines  exactly  how  it  wants   to  incentivize,  his  last                                                               
question is  whether those incentives  should be made  open ended                                                               
or only  available for  a fixed period  of time.   If it  is open                                                               
ended  that becomes  the state's  basic structure,  while a  time                                                               
limit  might force  people to  respond to  the state's  desire to                                                               
have more exploration sooner.                                                                                                   
                                                                                                                                
2:56:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI  said  his   comments  are  not  to  the                                                               
timeline, although  he thinks it would  be a good policy  for the                                                               
committee to make.  Continuing, he  noted that there is a limited                                                               
amount  of  money  but  lots   of  potential  areas  to  explore.                                                               
Regarding  the limited  amount of  money, the  politics are  that                                                               
everybody wants  to add his or  her area into the  whole equation                                                               
and he wants to  make sure that it does not  become so large that                                                               
the committee cannot figure out what  to do.  In prioritizing the                                                               
basins, he would like to come up with a policy that is fair.                                                                    
                                                                                                                                
CO-CHAIR FEIGE, in  regard to taking the  politics out, commented                                                               
that some  entity has to make  a decision about where.   He asked                                                               
where the appropriate place is to have that decision made.                                                                      
                                                                                                                                
REPRESENTATIVE  KAWASAKI responded  that  on the  policy side  he                                                               
wants to make sure the committee  does not pigeon it so much that                                                               
it  helps one  group or  another, which  has been  seen too  many                                                               
times.                                                                                                                          
                                                                                                                                
2:58:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER,  responding to Co-Chair  Feige's question                                                               
about the  length of time,  said the benefit  of a time  limit is                                                               
that the legislature can always extend it if it is successful.                                                                  
                                                                                                                                
CO-CHAIR SEATON pointed  out that the information  on some basins                                                               
is  much farther  along than  that  on others;  for example,  the                                                               
Nenana Basin has seismic being  shot and other development, so it                                                               
is hard  for something else to  catch up.  For  people willing to                                                               
drill in  basins, the  Nenana is  well on  its way.   He  said he                                                               
thinks  the committee  is waiting  for Mr.  Swenson to  come back                                                               
with  those  prioritizations  and  some  kind  of  regional  mix.                                                               
Regarding  a timeline,  he said  it takes  time to  develop these                                                               
sorts of  things, so  it could become  problematic for  a company                                                               
trying to  develop something because  the company would  not know                                                               
whether that  incentive would still  be there.   Additionally, if                                                               
the committee was to look  at a state direct financial investment                                                               
(SDFI) model, then it would  probably want restrictions based not                                                               
so  much on  timelines,  but on  newer fields  not  going in  and                                                               
taking  that kind  of  position and  an old  field  where it  has                                                               
mostly been  produced because  there are  liabilities to  being a                                                               
working interest owner, such as liabilities for oil spills.                                                                     
                                                                                                                                
3:00:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE held over HB 276.                                                                                                

Document Name Date/Time Subjects
HB0298A.PDF HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 sponsor statement.pdf HRES 2/1/2012 1:00:00 PM
HB 298
GravelProducts.pdf HRES 2/1/2012 1:00:00 PM
HB 298 Support Letter AGC.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Anch Sand & Gravel.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Brian Vreeling.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter COLASKA.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Jon Fuglestad.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Samuel Trotzke.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter SECON.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Twin Peaks Construction.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB298 Support Letter Calista Corp.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB298-DNR-DMLW-1-30-12.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB298-DOR-TAX-01-27-12.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Marc Cottini.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Tim Hroza.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Sheep Creek Development.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB298 Support Letter Browns Hill Quarry.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Amendment A.1.PDF HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter QAP.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter University Redi-Mix.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter HC Contractors.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Great NW Inc.pdf HRES 2/1/2012 1:00:00 PM
HB 298
HB 298 Support Letter Zac Campbell.pdf HRES 2/1/2012 1:00:00 PM
HB 298