Legislature(2011 - 2012)BARNES 124
02/17/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HJR29 | |
| HB229 | |
| HB276 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HJR 29 | TELECONFERENCED | |
| += | HB 276 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 229 | TELECONFERENCED | |
HB 276-OIL/GAS PRODUCTION TAX CREDITS: NENANA
1:46:45 PM
CO-CHAIR FEIGE announced that the final order of business would
be 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 the proposed committee
substitute (CS), Version M, labeled 27-LS1193\M, Bullock,
1/18/12, adopted on 1/30/12 as the working document.]
CO-CHAIR FEIGE noted that HB 276 has generated much discussion
between the committee, the sponsor, and the Department of
Natural Resources (DNR) as to the best overall way to proceed.
He drew attention to the [2/16/12] discussion document prepared
by DNR included in the committee packet, and pointed out that
the document does not constitute an endorsement of the
legislation by DNR. He added that before any amendments are
brought up, he would like to have a fair amount of discussion on
the general concept and determining the best ways to proceed if
this is to be applied to more areas of the state than just the
Nenana Basin.
REPRESENTATIVE P. WILSON offered her appreciation to DNR for
providing the discussion document, saying it is much better to
prevent any unintended consequences than to have to deal with
them later.
1:49:09 PM
JOE BALASH, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), noted that the discussion
document and associated map have been provided to the committee,
the bill sponsors, and others in an effort to help policy makers
make informed choices about the consequences of the particular
policy calls the committee is being presented with. He said the
department is not endorsing legislation of one sort or another
since that is a policy call by the governor's office. However,
because some of the dollars being considered could be quite
large, DNR thought it important to lay out as much as possible
in the discussion document. The document includes suggestions
on things to consider for defining the scope of the incentive
and, in particular, the kinds of things that the state should
expect to get for making such a large investment in something
that is, by definition, not otherwise able to attract private
prudent investors. The department believes certain pre-
qualification steps would be helpful to ensure that the
exploration programs in question make sense and are designed to
recover information that would be of value not just to the
individual investors or companies, but also to the state and the
public.
1:51:14 PM
MR. BALASH, in regard to drilling the wells and the type of
information being gathered, said it needs to be ensured that
there is a full suite of data collection, that this is performed
by the driller, and that it be turned over to the state for full
public release before the credit is earned. He pointed out that
this is different from some of the other exploration incentive
credits the state has had before in that those required the data
to be held confidential for a fairly long period of time.
However, those were for smaller credits not nearly as valuable
as the ones presently being contemplated.
1:52:20 PM
MR. BALASH addressed the map accompanying the document entitled
"Regions for Potential Frontier Basin Oil and Gas Exploration."
He said the map represents a high level screening of basins in
the state that are within some reasonable proximity to either
existing infrastructure or populations. The map identifies oil
and gas, population centers, and the amount of energy used in
each community; proximity to mineralized zones was not included
to avoid the map becoming too busy. He added that the document
captures some of the things spoken to by Mr. Swenson and Mr.
Barron, and that Mr. Paul Decker, Resource Evaluation, Division
of Oil & Gas, assisted with the document. He noted that all
three gentlemen have spent considerable time in the private
sector working for exploration companies and that they helped
think through the things that would be of value to the state if
these types of programs are put into place.
1:54:39 PM
REPRESENTATIVE FOSTER surmised that the waters south of Nome in
Norton Sound are not included on page [2] in the list of
eligible areas for geophysical and/or drilling credits because
they would be federal waters. Observing symbols on the map, he
asked why the Nome area was not considered eligible for
geophysical or drilling credits.
MR. BALASH explained that the symbol next to Nome represents the
amount of heating oil and diesel consumed by the community, not
the area's oil and gas potential. He agreed that in particular
there is potential for gas offshore south of Nome, but said that
at this point in time the federal government has not seen fit to
share those particular revenues with the state. He added that
he thinks it would be difficult to get permits anyway.
1:56:38 PM
REPRESENTATIVE FOSTER understood that the [potential] onshore
sources of gas [near Nome] are in very thin layers and therefore
production from such a source would be unlikely. He asked
whether those areas could nevertheless be included for credits
because something new might be found down the road.
MR. BALASH responded that the document attempts to stratify the
basins identified in terms of those that would warrant a seismic
exploration program versus a drilling program. He said the
smaller or thinner the accumulations the less helpful seismic
is, but that he will talk to his staff about the relative merits
of authorizing a seismic program in that area.
1:58:09 PM
MR. BALASH returned to his review of the discussion document and
stated that it might be constructive to talk about possible
mechanisms for constraining the program in a fashion that makes
sense. While DNR's pre-screening effort has identified
particular basins, a three-well program like that authorized for
Cook Inlet, which is $65-$67.5 million, would be a big number
when multiplied by nine basins, and the heavier a bill gets the
harder it is to move. An approach to this particular problem
might be to authorize a certain number of wells within these
frontier basins statewide on a first-come, first-served basis.
So long as there is a reasonable limit on the credit amount
itself, the private sector "skin in the game" will help limit,
naturally, the number of wells that will be drilled under the
program. The legislature could further set out how many wells
per year or how many wells per basin, and in that fashion keep
the legislature fully in charge of how many of these wells might
get drilled that are expected to have a very low probability of
success in reaching a technical resource, let alone an economic
one.
2:00:12 PM
CO-CHAIR FEIGE commented that from the standpoint of data
collection a lot would be learned about the relatively
unexplored areas of the state if everyone showed up at once to
take advantage of the credits; however, that could also cause
the state to run out of money. He asked whether Mr. Balash has
a suggestion for a way to entice people to sign up for the
program realizing that the state might not have enough money to
deliver on the credits right away.
MR. BALASH replied that one way might be to have a separate
credit refund bucket. Currently, credits under the production
tax can be realized by the taxpayer when there is production or
when there is no production tax liability the taxpayer can go to
the Department of Revenue for a refund, in essence. Right now,
the legislature funds that refund fund annually with an estimate
provided by the Department of Revenue. If the legislature
wanted to have a separate bucket within that fund for these
types of credits then the legislature would be able to keep a
handle on how much money would be available, and that could
limit the number of efforts that are undertaken, in a manner of
speaking. However, if it is broadly authorized under the
production tax code and subject to realization or refund as
something just on the books, then there may be a number of
underemployed consultants and geologists, he quipped, who could
justify a given program for the free money.
2:03:41 PM
CO-CHAIR FEIGE reiterated this same question for the Department
of Revenue regarding a mechanism that could or should be
considered to pay for a future exploration program.
LENNIE DEES, Audit Master, Production Audit Group, Tax Division,
Department of Revenue (DOR), answered that the mechanism to do
that would be to ensure that anybody going for the credit has a
duty to perform certain actions, such as the information sharing
and ensuring that feasible targets are being sought, not
uneconomic exploration plays. Putting those requirements into
the program would tend to limit people from doing something that
they otherwise would not do if they had to spend their own
money.
2:06:23 PM
CO-CHAIR FEIGE asked whether 75 percent is a reasonable amount
of subsidy, which is a 10 percent increase over what the state
currently has in place.
MR. DEES responded that he thinks what is in place now is
reasonable, which is that companies can get up to 65 percent
through combination of the credits and the carry forward loss
credit. He said 75 percent adds a little bit more pain to the
state from a cash flow standpoint, and he thinks that that would
be the limit.
2:07:23 PM
REPRESENTATIVE P. WILSON understood the recommendation being
suggested is to set limits on the number of projects and wells
allowed in each area. She recalled that for Cook Inlet the
legislature limited it to the first person to get jack-up rigs
into the inlet and asked whether this is what is being
suggested.
MR. BALASH replied that the jack-up rig credit was designed to
attract a specific piece of infrastructure and equipment that
was creating an obstacle to further exploration in Cook Inlet
waters. He noted that those waters are largely state leases
that will pay a royalty to the state, and the credit amounts and
percentages are incredibly high. However, the efforts that
would be undertaken [through HB 276] would be entirely onshore
with equipment that is already in the state and that could
probably be used at times of the year when rigs cannot be
employed on the North Slope, which is currently winter-only
exploration. Therefore, it is a different set of considerations
between Cook Inlet and here. Because most of the areas here are
remote and it will be very difficult to move equipment in and
out of them, DNR has tried to balance the required depth for
drilling and the information that is required to be collected.
2:09:59 PM
MR. BALASH, continuing his answer, said it is a tricky balance
in regard to the overall percentage because in some areas of the
state there are companies that do not pay federal corporate
income tax. When dealing with a federal taxpayer that enjoys a
65 or 75 percent credit from the state plus the benefit of the
federal right-off and right-down, there is a loss of that skin
necessary for people to make what is hoped to be sound
decisions. For this program to be of benefit to the public, the
result needs to be information that is valuable to the state or
a resource that can, at a minimum, be used locally. Thus, some
semblance of a profit motive, so to speak, needs to be retained.
That difference between the suggested 75 percent rate for
coverage here versus the 180 [percent] with Cook Inlet is
because this is a little bit different animal.
2:11:42 PM
CO-CHAIR FEIGE inquired when, under the current system of
incentives under AS 43.55.025, the required geophysical data is
made public.
MR. BALASH offered his belief that it is a 10-year term from the
time that data is acquired to when it is made public.
CO-CHAIR FEIGE said that that is a significant delay even though
it was subsidized by the state, but for an extra subsidy in this
case that data could be made public sooner.
MR. BALASH answered correct; the Division of Oil & Gas has a
collection of geologic and subsurface information that is
sitting on the shelf waiting for the clock to turn.
2:12:38 PM
CO-CHAIR SEATON observed that in the committee's consideration
of HB 276, the direction of the bill has been changed from a
single basin to a basin-opening concept. He noted that the
state currently has a 65 percent credit through the 40 percent
exploratory tax credits under AS 43.55.025 and the 25 percent in
loss carry forward conversion. Given that 75 percent is being
considered for the bill, he surmised that it might be cleaner to
write it as a 10 percent basin-opening credit on top of what
people can already do. It is risk capital because these are
risky things and the state would be getting the information, but
the 10 percent basin-opening credit would be limited to so many
wells in each basin with prior DNR consultation. He asked
whether such a system would provide enough control over this
program.
MR. BALASH replied he is not trying to dodge the question, but
that it should be addressed by the Department of Revenue in
terms of administration and whether it would be another layer of
complexity that is hard to explain or whether it would be better
to have something that stands alone to which regulations can be
applied separately. He further suggested that the question be
asked of the landowners and operators who have appeared before
the committee. He understood that the players in question have
run into difficulty attracting capital and if it is presented in
one way or another it might help or hinder them.
2:15:36 PM
CO-CHAIR SEATON noted that there is differentiation between the
amounts of credit under AS 43.55.025. The problem is that an
existing producer with a high tax rate liability could get the
40 percent tax credit and if that producer's tax rate is 40
percent the producer could take that as a deduction from the
expenditure plus the other on top of it, which would lose the
concept of skin in the game. He said it would seem logical to
say that when taking an exploration tax credit under AS
43.55.025 and the deductibility or conversion of expenses to
loss carry forward, that that amount cannot exceed 65 percent.
That would limit the state's liability to 65 percent on any of
these basins and then the 10 percent on top as a basin-opening
portion. He said he wanted to clarify this because he heard the
worry of Mr. Dees about stacking credits too high and not
controlling them, although 65 percent is not necessarily the
rate because it depends on whether it is a producer or an
explorer. He asked whether Mr. Balash agrees that this approach
should be investigated.
MR. BALASH qualified that his familiarity with the production
tax program is from his time in the capitol building, not his
time as an administrator at DNR. He said one way to achieve the
control being described would be to disallow these qualified
lease expenditures from being used as a deduction or a credit
for anything else under AS 43.55; then a specific number could
be designated that is intended for this program to cover. He
suggested that Mr. Dees speak to the question.
CO-CHAIR SEATON added that this needs to be explored so it is
known what the state liability will be.
2:19:38 PM
CO-CHAIR FEIGE said one of the committee's questions is the
difference in return. Part of what Mr. Balash is suggesting is
that the state receives a return for its subsidy and one return
under HB 276 would be the geophysical data and a much earlier
release of that data. He asked what the different returns to
the state would be on any projects that go into production,
given that three categories of lands may potentially be opened
for exploration - federal, Native corporation, and state.
MR. DEES responded that in addition to the information the state
would receive from these activities, the state's revenue would
increase from the collection of production taxes on a producing
activity. Regarding federal lands, he said he is unsure what
the arrangements are for sharing royalties with the federal
government, but that the state would benefit from the throughput
in the Trans-Alaska Pipeline System because it would lower the
tariff that everyone pays. In regard to Native lands, the state
would benefit from the production taxes. In further response to
Co-Chair Feige, Mr. Dees said the state would not collect
production tax from the federal lands, but the production would
flow through TAPS which might lower the tariffs on state royalty
barrels as well as the tariffs on the other production in the
state. He said he is unsure about royalty sharing [from federal
lands].
2:23:12 PM
CO-CHAIR FEIGE clarified that he is talking about onshore
federal lands, not offshore.
MR. DEES answered that in that case he believes onshore federal
lands are part of the tax base. In further response to the co-
chair, he confirmed that the state would receive production tax
from Native corporation lands but no royalty, and said he is
unfamiliar with Section 7(i) monies related to Native lands.
2:24:23 PM
CO-CHAIR FEIGE, in regard to Mr. Balash's suggestion to speak to
folks with an investment stake in this, asked how the
aforementioned suggestion would be perceived by investors and
the Alaska business community that is seeking investors.
JAMES MERY, Senior Vice President, Lands and Natural Resources,
Doyon, Limited, pointed out that this is the state's money and
said groups like his are very appreciative of the relatively
generous exploration credits currently in place. The initial
notion in HB 276 was focused on state lands in the Nenana Basin
and to get a lot done very quickly. The higher rate appealed to
Doyon because it presented an opportunity to drill two to three
wells in a row rather than having to wait two, three, or four
years to get those wells drilled. It was a unique opportunity
at that point in time and was, in effect, like the Cook Inlet
jack-up rig situation because it was a unique circumstance that
Senator Wagner and Representative Thompson wanted to address.
However, with the discussion now broadened, he said he did not
think the ability to drill three wells in a row at 65-75 percent
would happen. While he did not want to diminish these wonderful
credits, he said it was the special nature of finding out
something about a basin that is very close to infrastructure and
that could happen relatively quickly as compared to some of the
other basins that are now being discussed. Doyon is happy with
the 65 percent, he continued, but if the committee saw fit to
move it to 75 percent because of the extra risk associated with
most, if not all, of these basins, Doyon would just have to see
how it works in the marketplace.
2:27:28 PM
CO-CHAIR SEATON understood Mr. Mery to be saying that if it were
like Cook Inlet with 100 percent state money on the first well,
90 percent on the second, and 80 percent on the third it would
stimulate Doyon's wells to happen, but 75 percent paid by state
money would not be significant enough for rapid development in
Nenana Basin.
MR. MERY said he is saying he is not sure.
2:28:32 PM
CO-CHAIR SEATON asked whether a basin-opening credit of an
additional percentage above the 65 percent would still stimulate
folks to share the geological data with the state on a
relatively short turn around for public access.
MR. MERY qualified that he is speaking for Doyon only and said
the quicker release is no trouble for Doyon because it has
already shared a lot of data in the Nenana Basin way ahead of
time with both the state and the public in an effort to get more
investment and more aggressive investment. Regarding Doyon's
Native lands in the Yukon Flats, he said the notion of sharing
the data and making it public is an easy decision because that
land is surrounded by federal lands that will never be opened to
exploration; therefore, no competitive advantage would be lost
by pushing data into the public sector sooner rather than later.
2:30:25 PM
CO-CHAIR SEATON inquired whether Doyon finds it acceptable to be
required to receive DNR's pre-approval to qualify for receiving
the additional amount of credit.
MR. MERY, again qualifying that he is speaking for Doyon only,
stated that Doyon has a very good relationship with both the
Division of Oil & Gas (DOG) and the Division of Geological &
Geophysical Surveys (DGGS) and talks to them on a regular basis
about its projects, so that is something that would not trouble
Doyon at all.
2:31:30 PM
CO-CHAIR SEATON observed that the DNR discussion document
recommends a 50 percent payback provision for the additional
basin-opening credit. He said he was not inclined to include
such a provision because he thinks the amount of information and
cooperation with the state would be well worth the additional 10
percent. He presumed that Doyon would not want to have the
payback if it found something and asked whether Doyon believes
it is more stimulating for getting investors if there is not a
payback provision of the credit.
MR. MERY replied, "Of course, yes."
CO-CHAIR SEATON explained he wants to make sure that when this
is approached at a future time it can be said it was discussed
with the industry and the industry agreed that a payback
provision on the 75 percent limit would be counter to the
state's purpose of stimulating investors and drilling. He added
that he thinks the committee is only talking about a limited
number of wells per basin.
2:33:15 PM
MR. BALASH, in response to Co-Chair Feige, pointed out that it
would be the Department of Revenue administering this proposed
program.
REPRESENTATIVE HERRON asked whether the discussion document
recommendations are set in stone.
MR. BALASH answered that DNR was trying to capture the balance,
relatively speaking, of something that might be available on a
general basis. The legislature could limit the number of wells
and go with a higher percentage, which is a policy call for the
committee to make. However, he cautioned, under a more general
law that opens multiple basins at a time, the higher the credit
rate, the less of a natural selection there will be. There are
parts of the state where it has been seen that free money
engendered unrealistic hopes and expectations to go after things
that are not there.
REPRESENTATIVE HERRON said the discussion has evolved to whether
the state should have a template and he does not believe the
committee is interested in a template that says it is wide open
and that would create a Wild West rush. The template is so that
every single basin does not have to go through a meticulous
legislative process, although there might be safeguards in the
template that require DNR to come back for permission from the
policy makers.
2:36:29 PM
CO-CHAIR SEATON observed that some of the basins identified on
the map may have development restrictions, such as Bristol Bay
and the Aleutian Islands. He said he wants to ensure that there
is nothing in the contemplation and offering of the credits in
HB 276 that would override any places where leasing or
exploration are off limits under current law.
MR. BALASH quipped that if this could be done by offering a
credit then perhaps the map could be moved a little farther
north and east.
CO-CHAIR SEATON understood Mr. Balash to be saying that having
the credits in HB 276 would not change any lease restrictions
that are currently in place
MR. BALASH replied correct. He pointed out that even when state
land is leased it does not entitle the lessee to explore however
or where ever it wants. The lessee must still comply with all
state requirements and permitting restrictions. Regarding the
Aleutian Island basin identified on the map, he said that the
area is largely representative of the Alaska Peninsula area-wide
lease sale area where DNR has conducted an annual sale for the
last 10 years and at one time had bidders and lessees. He said
he thinks DNR might have one left there and that DNR still sees
high potential in the region and continues to hold those lease
sales. If a credit like this were available it might generate
some additional interest that has not shown up at the last
couple of sales.
2:39:32 PM
CO-CHAIR FEIGE opened public testimony.
LISA HERBERT, Executive Director, Greater Fairbanks Chamber of
Commerce, stated that the chamber represents collectively 700
businesses in Interior Alaska. She offered the chamber's
support for HB 276, speaking as follows:
The Fairbanks Chamber has adopted a handful of key
priorities this year that will ensure a healthy
economic environment for both the business and
residential communities of the Interior. Two of those
priorities are to support initiatives that will reduce
the high cost of energy and to also support projects
and initiatives that will encourage new oil and gas
development. We believe HB 276 is a step in the right
direction in achieving both of these priorities for
the Interior. As you know, we currently do not have
access to affordable energy at this time. The small
number of individuals and businesses who use natural
gas for heat are paying three times as much as
citizens in Southcentral Alaska. The cost of space
heating and production of electricity is negatively
impacting our economy's ability to grow. And many of
our Interior families and businesses are struggling
just to make due. This bill not only promotes
exploration in the Interior, but it allows similar
incentives to those offered in other regions of the
state.... In addition, the seismic and technical data
that will be collected in exploration is of benefit to
the State of Alaska. We would like to commend Doyon,
Limited, a large Interior corporation and Fairbanks
Chamber member and other investors for their years of
commitment to this particular region. Doyon and their
partner investors have had a great success for showing
potential in the Nenana Basin and surrounding areas
and, as such, will offer the ability for oil and gas
for local or regional use is extremely high.
Additionally, the Fairbanks Chamber supports HB 276
because it supports short- to mid-term growth for
Interior business communities. With the Nenana
Basin's close proximity to Fairbanks, just 50 miles
away, this legislation will help local businesses by
affording them the opportunity to offer their products
and services for the projects we hope will occur.
These projects will also likely put Alaskan residents
to work with new high paying and highly skilled jobs.
2:42:00 PM
JERRY MCCUTCHEON stated that the original HB 276 was a good
idea, but it has now been turned into garbage. He said Kotzebue
should be addressed by itself because the solution for Kotzebue
is probably different than for Nenana Basin. Nenana Basin
deserves a clean bill that should have been passed half a dozen
years ago. Kotzebue should receive grants or an appropriation
to the Department of Natural Resources (DNR) to run the
available two dimensional seismic through two dimensional
enhanced seismic in time for the next session of the
legislature. Regarding the Nenana Basin, he suggested that the
operator be able to get back some share or multiple of
investment early on and then, once the company gets its
investment back, the state could "sock it to 'em". Mr.
McCutcheon said that what he would like to see different is that
the companies must first pay all their taxes due and then get
their credits after justifying them. The state is doing it the
wrong way by letting the companies determine what they want to
take off and then the state playing a guessing game of what it
is all about. He offered his hope that a bill for the Nenana
Basin gets through the legislature this session.
2:45:09 PM
REPRESENTATIVE STEVE THOMPSON, Alaska State Legislature, joint
prime sponsor, said HB 276 was introduced in an effort to bring
energy and home heating relief to Alaska's second largest
community, which is only 50 miles from the Nenana Basin. The
intent was to encourage investment and, hopefully, production of
natural gas from that basin. The bill has grown quite a bit and
he can understand the interest in wanting to help with
additional frontier basins that are close to other regional
areas in need of energy relief. He thanked the Department of
Natural Resources, his staff, and the staff of other legislators
who all put in an incredible amount of work researching how this
might be accomplished.
REPRESENTATIVE THOMPSON expressed his fear, however, that the
weight of a growing fiscal note with more and more additions
would sink the bill. He cautioned about taking existing credits
of 65 percent and just adding 10 percent because 40 percent of
the accumulated tax credits, which are in AS 43.55.025(b),
sunset as of July 1, 2016, and the work would therefore have to
be completed by that date. While he understood the need for
energy in smaller areas other than the Fairbanks region, he said
the intent was to keep it simple and get things accomplished.
2:47:19 PM
CO-CHAIR SEATON appreciated Representative Thompson's concern
and advised that the committee has amended a previous bill to
extend those tax credits another 10 years, although that bill
has not passed. He asked whether the sponsor would like to see
the credits in AS 43.55.025(b) extended another 10 years if
[Version M] goes forward.
REPRESENTATIVE THOMPSON responded that that would definitely
make it more acceptable and possibly more workable because if
the bill's provisions did extend into other regions it would
likely be past 2016 before anything could even start.
CO-CHAIR FEIGE left public testimony open and held over HB 276.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB276 Potential Frontier Basins Map.pdf |
HRES 2/17/2012 1:00:00 PM |
HB 276 |
| HB276 Frontier Stampede DNR 2.16.12.pdf |
HRES 2/17/2012 1:00:00 PM |
HB 276 |
| CSHB 229 Amendment - Seaton.PDF |
HRES 2/17/2012 1:00:00 PM |
HB 229 |
| HJR 29 Support Letter AK Conservation Alliance.pdf |
HRES 2/17/2012 1:00:00 PM |
|
| HJR 29 BLM Response to HRES.pdf |
HRES 2/17/2012 1:00:00 PM |
|
| HJR29 Fiscal Note - LAA.pdf |
HRES 2/17/2012 1:00:00 PM |