Legislature(2005 - 2006)

04/04/2005 02:48 PM RES

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02:48:12 PM Start
02:51:26 PM HB71
03:31:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB  71-AK PENINSULA OIL & GAS LEASE SALE; TAXES                                                                               
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 71  "An  Act relating to a  credit for certain                                                               
exploration expenses  against oil  and gas  properties production                                                               
taxes on  oil and gas  produced from a  lease or property  in the                                                               
state;  relating   to  the   deadline  for   certain  exploration                                                               
expenditures used  as credits against  production tax on  oil and                                                               
gas produced  from a  lease or property  in the  Alaska Peninsula                                                               
competitive oil  and gas areawide  lease sale area after  July 1,                                                               
2004; and providing for an effective date."                                                                                     
HENRY WEBB,  Staff to Representative Ralph  Samuels, Alaska State                                                               
Legislature, said  HB 71  is designed  to extend  exploration tax                                                               
credits  through 2010  on the  Alaska Peninsula.   The  committee                                                               
substitute  (CS) clarifies  how the  tax credits  work.   He said                                                               
there  is a  20-percent credit  for 2003-2007  exploratory wells,                                                               
and the wells  must be at least three miles  from existing wells;                                                               
there is  a 40-percent credit  for wells that satisfy  the 3-mile                                                               
requirement and are also over  25 miles from existing development                                                               
units; and there is a  40-percent credit for seismic testing that                                                               
occurs  outside the  boundaries  of a  production or  exploration                                                               
unit.  The  CS also extends the exploration credit  regime to the                                                               
Nenana Basin  until 2008.  He  noted that there was  an amendment                                                               
from the  previous committee exempting  private and  federal land                                                               
from  the existing  credit, which  runs  through 2007.   This  CS                                                               
removes that amendment,  he said, except for  the Arctic National                                                               
Wildlife Refuge.                                                                                                                
2:51:26 PM                                                                                                                    
MARK  MYERS, Director,  Division of  Oil and  Gas, Department  of                                                               
Natural Resources,  said the bill extends  the exploration credit                                                               
on  the Alaska  Peninsula to  encourage a  competitive sale  this                                                               
October, allowing a  reasonable amount of time for  the credit to                                                               
be applicable.   The credit  is intended to  increase competitive                                                               
bidding in an area that has  no infrastructure, he said.  By only                                                               
extending  the credit  to  2010, the  state  hopes to  accelerate                                                               
exploration and acquisition of speculative areas.                                                                               
MR. MYERS said  the Nenana Basin language is a  judgment call for                                                               
the  legislature because  there is  active exploration  going on.                                                               
If the  survey results are  favorable, operators would  only have                                                               
one season  to apply the credit.   There is actually  very little                                                               
good exploration data available, he  added.  There is exploration                                                               
risk in the  Nenana Basin, so the extended credit  will allow for                                                               
two drilling seasons.   He said he thinks it  will help encourage                                                               
and accelerate a more aggressive evaluation of the basin.                                                                       
2:55:45 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  about the  credit being  applied to                                                               
production  tax,  and if  the  credit  is designed  to  stimulate                                                               
production in the areas where the exploration credit is offered.                                                                
MR.  MYERS  said   it  is  an  exploration  credit,   and  it  is                                                               
transferable and  sellable.  He  said the credits will  likely be                                                               
sold to producers  on the North Slope, and they  usually sell for                                                               
over 90 percent of their value.   The bill will not allow its use                                                               
in the Arctic National Wildlife Refuge.                                                                                         
2:58:52 PM                                                                                                                    
MR. MYERS  said that  for the  Nenana Basin  it applies  only for                                                               
state land, and  in the Alaska Peninsula credit  could be applied                                                               
to state lands or Native lands.                                                                                                 
CO-CHAIR SAMUELS asked if the bill changes the transfer rules.                                                                  
MR. MYERS said it does not.                                                                                                     
REPRESENTATIVE SEATON  said transferring the credit  is in direct                                                               
contradiction with the  title of HB 71, which  says production in                                                               
the Alaska Peninsula.                                                                                                           
MR. MYERS  said the title  gives that impression, but  the intent                                                               
is to have transferability, so changing the title makes sense.                                                                  
3:01:35 PM                                                                                                                    
GARY ROGERS,  Auditor, Department  of Revenue, said  the transfer                                                               
language is  in the  original statute.   Last  year's legislation                                                               
allowed statewide application of the credit, he said.                                                                           
3:03:36 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  HB  71  was  an  outgrowth  of                                                               
Representative Chenault's bill a few years ago.                                                                                 
MR. ROGERS said  he is not sure, but that  Senate Bill 185 became                                                               
AS43.55.025 in statute.                                                                                                         
JERRY BURNETT, Special Assistant  to the Commissioner, Department                                                               
of  Revenue, said  Senate Bill  185 passed  in 2003,  and it  was                                                               
Senator Wagoner's bill.                                                                                                         
REPRESENTATIVE  SEATON said  Representative Chenault's  intention                                                               
was  that  the  credit  would  be  available  for  exploring  and                                                               
producing, so  that the  state wasn't  spending money  on finding                                                               
oil without  it being produced.   "The entire purpose was  to tie                                                               
it  to a  production tax  credit for  producing wells,"  he said.                                                               
The state will be paying for  exploration of an area where people                                                               
can decide not  to produce it, and they get  a tax credit anyway.                                                               
It was a key provision on the  floor, he said, and "it seems like                                                               
we have lost it here."                                                                                                          
MR.  BURNETT said  the bill  that was  introduced always  allowed                                                               
transferability.    "There  may   have  been  some  misimpression                                                               
carried in  some testimony at some  point, but going back  to the                                                               
committee  record,  in each  of  the  committees it  was  clearly                                                               
explained," he said.                                                                                                            
3:06:50 PM                                                                                                                    
CO-CHAIR  SAMUELS said  the  bill is  to  encourage companies  to                                                               
explore on the peninsula.                                                                                                       
MR. BURNETT  said if a commercial  quantity is found, it  will be                                                               
produced--that's the  idea.  He  said he understands  the concern                                                               
about the title and will look into it.                                                                                          
3:07:34 PM                                                                                                                    
REPRESENTATIVE SEATON said the original  title meant the bill was                                                               
tied to  production, and that is  why the title is  what it is--a                                                               
tax credit applied to production.                                                                                               
CO-CHAIR  SAMUELS  said  a  company is  not  guaranteed  to  find                                                               
anything so no  one will explore.  The point  of the incentive is                                                               
to encourage exploration,  and if no one is willing  to put their                                                               
own capital  on the peninsula, "which  is a long ways  away," the                                                               
state will have to "sweeten the pot."                                                                                           
3:09:27 PM                                                                                                                    
REPRESENTATIVE GATTO  said that  is the  nature of  the business;                                                               
that is the risk they take.  Now  we are also adding a reward for                                                               
producing, he said.                                                                                                             
3:10:04 PM                                                                                                                    
CO-CHAIR SAMUELS asked,  "Do we want to sell the  leases or don't                                                               
REPRESENTATIVE  LEDOUX said  she  agrees  with Co-Chair  Samuels,                                                               
because getting the reward isn't needed once oil is found.                                                                      
3:10:45 PM                                                                                                                    
CO-CHAIR SAMUELS  said the front-end  costs are  minimal compared                                                               
to a long-term process once oil is found.                                                                                       
CO-CHAIR RAMRAS said he thinks the bill  is dead on.  "We need to                                                               
find resource wealth," he added.                                                                                                
3:11:27 PM                                                                                                                    
MR.  ROGERS said  he receives  a number  of calls  regarding this                                                               
credit.    The  explorers'  concern   is  the  sweetener  in  the                                                               
exploration phase.                                                                                                              
3:12:10 PM                                                                                                                    
MR. MYERS said the  tax credit is only for the  first part of the                                                               
exploration,  not for  the expensive  evaluation  follow-up.   It                                                               
minimizes the  cost to the  state, and  gives the credit  for the                                                               
riskiest activity in frontier areas, he said.                                                                                   
3:13:59 PM                                                                                                                    
CO-CHAIR SAMUELS said it is only  an extension from 2007 to 2010.                                                               
Operators will have to start exploring  now or the credit will go                                                               
REPRESENTATIVE SEATON  asked if there  will be no  exploration in                                                               
Nenana without the credit.                                                                                                      
MR.  MYERS  said  the  idea  of the  extension  is  to  encourage                                                               
multiple  exploration targets.   If  operators found  good fields                                                               
this  season,  they would  not  need  a  credit.   If  the  first                                                               
exploration wells are so-so, the  credit might be an incentive to                                                               
spend additional exploratory funds.                                                                                             
3:15:41 PM                                                                                                                    
REPRESENTATIVE SEATON  asked where  in the bill  does it  say the                                                               
credit is for just the exploratory phase.                                                                                       
MR. MYERS said the original bill has that language.                                                                             
3:18:09 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  how  HB 71  differs  from the  Cook                                                               
Inlet exploration tax credit from last year.                                                                                    
MR. MYERS  said there  are areas  in Cook  Inlet where  this bill                                                               
applies.    Additionally  there  was  a  credit  allowed  against                                                               
development costs  for gas, he said,  and it was more  focused on                                                               
actual development.   It was the opposite  approach, because only                                                               
successful wells allowed  the use of the  exploration tax credit.                                                               
All capital costs were included, he said.                                                                                       
REPRESENTATIVE SEATON asked  if HB 71 will  allow deeper drilling                                                               
depths  off the  Cook Inlet  platform if  the wells  are over  35                                                               
years old.                                                                                                                      
MR. MYERS said most of the  platforms have newer wells, and there                                                               
are  very few  cases with  old wells  that will  qualify, because                                                               
there is generally  a unit around the well, and  even outside the                                                               
boundary  of a  unit, another  well will  likely be  within three                                                               
miles.  The  bill is envisioned to look  at frontier exploration,                                                               
not exploration for deeper targets, he said.                                                                                    
3:21:40 PM                                                                                                                    
CO-CHAIR  SAMUELS  offered  Amendment  1  labeled  24-GH1040\I.1,                                                               
Chenoweth, 4/4/05, as follows:                                                                                                  
     Page 4, lines 22 - 24:                                                                                                     
          Delete all material and insert:                                                                                       
          "Sections 25 - 36;"                                                                                                   
     Page 5, line 22:                                                                                                           
          Delete all material and insert:                                                                                       
          "Sections 1 - 4, 9 - 16, and 19 - 36;"                                                                                
     Page 5, line 24:                                                                                                           
          Delete all material and insert:                                                                                       
          "Sections 19 - 36;"                                                                                                   
There being no objection, Amendment 1 carried.                                                                                  
3:22:28 PM                                                                                                                    
CO-CHAIR SAMUELS said  he would accept a  conceptual amendment to                                                               
the title to note that the credit can be transferable.                                                                          
REPRESENTATIVE  SEATON said  he will  offer  it only  to make  it                                                               
REPRESENTATIVE GATTO asked if the amendment just deletes line 4.                                                                
CO-CHAIR SAMUELS said on line 4, after the word gas.                                                                            
3:24:28 PM                                                                                                                    
REPRESENTATIVE SEATON  said the  intent [of  conceptual Amendment                                                               
2] is  for the title  to say the exploration  needs to be  on the                                                               
Alaska Peninsula or the Nenana  Basin, but the production doesn't                                                               
have to  be from there.   Conceptual  Amendment 2 was  treated as                                                               
3:25:09 PM                                                                                                                    
REPRESENTATIVE GATTO asked if offshore exploration is included.                                                                 
MR.  MYERS  said it  includes  state  submerged waters,  but  not                                                               
offshore beyond  three miles.   The bill itself does  not include                                                               
any of the  outer continental shelf activity, he said.   With the                                                               
preliminary   best  interest   findings,  the   commissioner  has                                                               
restricted any  drilling from onshore directionally  offshore, he                                                               
said.  So  the sale as proposed would not  allow the placement of                                                               
offshore   drilling  facilities.     In   Cook  Inlet,   offshore                                                               
facilities are allowed, he added.                                                                                               
3:26:41 PM                                                                                                                    
REPRESENTATIVE SEATON  said he  wants a  letter of  intent saying                                                               
there will be no offshore exploration off the Alaska Peninsula.                                                                 
MR.  MYERS said  it is  also in  testimony by  Commissioner Irwin                                                               
from last year.                                                                                                                 
REPRESENTATIVE  SEATON suggested  that the  committee have  it in                                                               
legislative intent, instead of just in someone's testimony.                                                                     
CO-CHAIR SAMUELS said  if it is in the best  interest finding, he                                                               
feels it is covered.                                                                                                            
3:28:00 PM                                                                                                                    
REPRESENTATIVE  SEATON  said  it   would  be  consistent  to  the                                                               
committee to  indicate what it means.   He said he  doesn't think                                                               
anyone is supporting offshore drilling.                                                                                         
CO-CHAIR SAMUELS  said, "Perhaps an  amendment to page 7,  at the                                                               
end of line  31, saying the production tax credit  does not apply                                                               
to any offshore drilling."                                                                                                      
REPRESENTATIVE  SEATON   said  he  will  offer   that  conceptual                                                               
Amendment 3.                                                                                                                    
REPRESENTATIVE GATTO  asked if  offshore means  everything beyond                                                               
three miles.                                                                                                                    
MR. MYERS said  in the five-year schedule  Commissioner Irwin put                                                               
in  the  letter  of  intent  that he  would  not  allow  offshore                                                               
drilling.  "The  stipulations are pretty much in  the lease sale,                                                               
and I don't think  we buy much by repeating that  here.  It would                                                               
only  tell you  that you  couldn't get  the credit  for something                                                               
that  is not  going  be allowed  in the  lease  sale anyway,"  he                                                               
noted.    The  credit  cannot   be  used  on  the  federal  outer                                                               
continental shelf, he  said.  The letter of intent  was on Senate                                                               
Bill 266 and  said companies are only allowed  to access offshore                                                               
drilling prospects from onshore  drilling sites using directional                                                               
drilling technology.                                                                                                            
REPRESENTATIVE SEATON withdrew Amendment 3.                                                                                     
3:31:16 PM                                                                                                                    
CO-CHAIR  RAMRAS  moved  to  report  HB  71  as  amended  out  of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal notes.  There being  no objection, CSHB 71(RES) was passed                                                               
out of the House Resources Standing Committee.                                                                                  

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