Legislature(2005 - 2006)

04/21/2006 02:09 PM RES


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02:09:31 PM Start
02:13:48 PM Board of Game
02:18:20 PM HB498
03:38:58 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 498-TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS announced that the  next order of business would                                                               
be HOUSE  BILL NO. 498,  "An Act authorizing tax  credits against                                                               
the production tax on oil  and gas for qualified expenditures for                                                               
challenged  or  nonconventional  oil  or gas  and  for  qualified                                                               
expenditures for  nonconventional or renewable  energy resources;                                                               
giving the Act contingent effect;  and providing for an effective                                                               
date."     [Before  the  committee  is   the  proposed  committee                                                               
substitute  (CS)  for  HB  498,  Version  24-LS1817\L,  Chenoweth                                                               
4/20/06.]                                                                                                                       
                                                                                                                                
CO-CHAIR  SAMUELS  reminded  the  committee  that  [at  the  last                                                               
hearing] several  of the large  items were brought out.   Without                                                               
going into the  specific language of Version L,  he expressed the                                                               
need to  have a  sense as  to how the  committee would  like this                                                               
legislation to  [be changed] in order  that he can work  with the                                                               
sponsor  and  the administration's  staff  to  craft a  committee                                                               
substitute for the committee's consideration.                                                                                   
                                                                                                                                
2:18:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO referred to page  5, lines 20-31, of Version                                                               
L and highlighted that it doesn't include nuclear energy.                                                                       
                                                                                                                                
CO-CHAIR SAMUELS related  his understanding that there  will be a                                                               
motion  to delete  that entire  [subsection]  of Version  L.   He                                                               
related  his further  understanding  that there  isn't  a lot  of                                                               
willpower  to offer  these credits  only to  oil companies  to do                                                               
these types of projects.                                                                                                        
                                                                                                                                
2:19:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  then began  reviewing  his  list of  concerns,                                                               
beginning with credits for research  and development.  He related                                                               
his concern with  regard to how research and  development will be                                                               
audited,  even if  it's  performed in  the  state.   Furthermore,                                                               
research  and development  credits may  or  may not  lead to  the                                                               
development  of   heavy  oil,  which   is  the  intent   of  this                                                               
legislation.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO,  regarding   the  aforementioned  concern,                                                               
related his  concern with use of  the word "or" on  page 2, lines                                                               
25-27.  "If  you put 'or' in,  then research ... is  wide open if                                                               
it doesn't lead to development," he opined.                                                                                     
                                                                                                                                
CO-CHAIR SAMUELS noted his agreement  and indicated the desire to                                                               
eliminate any  credit on any  research and development  work that                                                               
the industry may do.                                                                                                            
                                                                                                                                
REPRESENTATIVE  SEATON  noted  his agreement,  adding  that  this                                                               
research and  development is really  research and  development of                                                               
techniques not development of a field.                                                                                          
                                                                                                                                
2:21:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD also noted his agreement.                                                                               
                                                                                                                                
REPRESENTATIVE   NORMAN  ROKEBERG,   Alaska  State   Legislature,                                                               
sponsor, opined  then that the  committee's desire is  to broaden                                                               
the application of this legislation.                                                                                            
                                                                                                                                
CO-CHAIR SAMUELS  related his view  that if a  development credit                                                               
is to  be offered,  it should  be based on  field geography.   He                                                               
opined that it  will be difficult for the state  to link research                                                               
activity directly to [development in] Alaska.                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG said he has  no problem with that because                                                               
it provides direction  and a foundation for the  remainder of the                                                               
legislation.   He assumed  then that HB  498 could  duplicate the                                                               
provisions  in  HB  488  for   implementing  and  auditing  those                                                               
credits.                                                                                                                        
                                                                                                                                
CO-CHAIR SAMUELS said,  "I would assume that  that language would                                                               
be  identical, it  would just  be another  credit for  a specific                                                               
area at a specific depth."                                                                                                      
                                                                                                                                
2:23:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS then  turned the  committee's attention  to the                                                               
rate of the  credit depending on the  proposed production profits                                                               
tax (PPT).  He indicated that until  final action on HB 488 or SB
305  occurs, it  would be  difficult to  reach consensus  on this                                                               
issue.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  ROKEBERG  opined that  clearly  the  rate of  the                                                               
credit  has  to  be  related  to  the  baseline  in  the  primary                                                               
legislation [HB  488/SB 305].  For  example, if HB 488  or SB 305                                                               
had a  25 percent credit, then  it would be appropriate  to lower                                                               
the credit in HB 498.                                                                                                           
                                                                                                                                
2:24:40 PM                                                                                                                    
                                                                                                                                
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
surmised that if  the PPT rate is 20 percent  and the credit rate                                                               
proposed in HB 498 is 15  percent, then the total credit would be                                                               
35  percent.   Therefore,  she  suggested that  HB  498 could  be                                                               
drafted such  that the credit  rate is  equal to 35  percent less                                                               
the  credit  rate  in  the   specified  section  [of  statute  as                                                               
specified in HB 488 or SB 305].                                                                                                 
                                                                                                                                
CO-CHAIR SAMUELS  then turned to  the matter of how  to determine                                                               
what heavy oil is.  He  recalled that at yesterday's meeting, the                                                               
committee came  to consensus with  regard to naming  the specific                                                               
areas  that  are  currently  heavy oil  areas.    The  department                                                               
indicated agreement with the aforementioned  notion.  However, he                                                               
recalled that the  debate was in regard to the  future when there                                                               
is the  desire to  add a  new area  and whether  it would  be the                                                               
legislature  or  the  commissioner  that would  approve  such  an                                                               
addition.  He  acknowledged that there are pros and  cons to both                                                               
paths.                                                                                                                          
                                                                                                                                
2:27:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG mentioned that Mr.  Van Dyke had issued a                                                               
memorandum, which may be appropriate for the committee to have.                                                                 
                                                                                                                                
CO-CHAIR  SAMUELS  said the  committee  could  work with  DNR  to                                                               
determine the current  areas of heavy oil to be  specified in the                                                               
legislation.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  he  didn't view  this  as a  crucial                                                               
decision that needs  to be made by the commissioner  at a certain                                                               
point.   Rather,  he  opined,  that due  to  the  long lead  time                                                               
required for  these projects,  the industry  should have  time to                                                               
approach  the  legislature.    He highlighted  that  one  of  the                                                               
developments will  be $2 billion,  which amounts to  $300 million                                                               
in credits.   The aforementioned determination is of  a size that                                                               
should come before the legislature, he suggested.                                                                               
                                                                                                                                
2:29:27 PM                                                                                                                    
                                                                                                                                
MS. WILSON, in  response to Co-Chair Samuels, opined  that if the                                                               
commissioner  were  given  enough guidelines  and  criteria,  the                                                               
comfort level  increases.   She noted  her concern  with language                                                               
such   as  "the   commissioner  shall   determine"  without   the                                                               
appropriate criteria  upon which  to make such  a judgment.   She                                                               
then related her belief that  DNR would be the appropriate agency                                                               
to determine what formations are heavy oil.                                                                                     
                                                                                                                                
BILL  VAN  DYKE,  Acting  Director,  Division  of  Oil  and  Gas,                                                               
Department  of   Natural  Resources,  said  that   he  is  fairly                                                               
comfortable leaving  the decision  [whether to add  an area  as a                                                               
heavy oil area]  with the administration.  He  mentioned that the                                                               
decision could  be reported to  the Legislative Budget  and Audit                                                               
Committee,   which   is   currently    the   case   for   royalty                                                               
modifications.                                                                                                                  
                                                                                                                                
2:31:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD, referring  to the  proposed definitions                                                               
and guidelines  for heavy oil, pointed  out that it refers  to an                                                               
American  Petroleum  Institute  (API)  gravity of  22  while  the                                                               
legislation specifies  an API gravity of  25.  He inquired  as to                                                               
the  pros  and cons  of  either  API  gravity.   He  related  his                                                               
understanding  that  in other  instances  of  challenged oil  the                                                               
[state] has  the ability to apply  for royalty relief.   He asked                                                               
if this legislation would be in addition to royalty relief.                                                                     
                                                                                                                                
MR.   VAN  DYKE   said  there   is  no   single  definition   for                                                               
challenged/viscous oil.  However, he  pointed out that the United                                                               
States Geological  Survey (USGS) uses an  API gravity of 22  as a                                                               
standard for heavy/viscous  oil.  He mentioned  that the glossary                                                               
of terms related  to the PPT includes a definition  for heavy oil                                                               
with the standard of 20 API gravity.   The staff at DNR feel more                                                               
comfortable with  the standard  of an  API gravity  of 22.   With                                                               
regard to  royalty modifications, royalty modifications  could be                                                               
granted on  top of these  proposed credits.  "But  certainly when                                                               
we  do the  economic analysis,  we will  take into  consideration                                                               
that  the  project  was  earning  tax  credits  in  the  economic                                                               
evaluation," he said.                                                                                                           
                                                                                                                                
CO-CHAIR SAMUELS related his understanding  that the only royalty                                                               
relief  the state  has  granted was  the  recent Pioneer  royalty                                                               
relief  at   Uguruk,  although  it   wasn't  for  heavy   oil  by                                                               
definition.  The program, he commented, is relatively new.                                                                      
                                                                                                                                
2:34:37 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE  said that  Co-Chair Samuels  is correct  under the                                                               
traditional royalty  modifications, although he noted  that there                                                               
are  mechanical royalty  modifications  for Cook  Inlet that  are                                                               
based on  production rates per  platform.  Again, he  agreed with                                                               
Co-Chair  Samuels that  the Pioneer  request was  granted on  the                                                               
basis of low-rate wells.                                                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG recalled  his time as chair  of the House                                                               
Special  Committee  on Oil  and  Gas  in  1995  when he  had  the                                                               
privilege  of  working  on  legislation that  was  a  rewrite  of                                                               
statute that included  the ability for the  commissioner to grant                                                               
royalty  relief to  marginal  oil  fields.   He  opined that  the                                                               
Senate made the statute unworkable  and unintelligible, such that                                                               
the  only   grant  requested  wasn't  granted.     Representative                                                               
Rokeberg  cautioned the  committee with  regard to  providing the                                                               
commissioner  discretion in  granting these  credits because  the                                                               
credits aren't always  granted.  He then related  his belief that                                                               
the commissioner  of DNR, due  to his/her competency  with regard                                                               
to geology, should make the recommendation.                                                                                     
                                                                                                                                
2:38:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  posed  a scenario  in  which  the  legislation                                                               
provides  the  discretion  to  the  commissioner,  but  specifies                                                               
parameters such as a specific API gravity.                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON referred to the  second paragraph of page 2                                                               
of  Mr. Van  Dyke's comments  regarding proposed  definitions and                                                               
guidelines.   That paragraph says:   "The commissioner  may grant                                                               
credits for challenged oil produced  from the areas excluded from                                                               
eligibility in the definition (i.e.,#1)  above for challenged oil                                                               
if that  oil is produced  using enhanced oil  recovery techniques                                                               
or  other  approved   non-conventional  recovery  and  production                                                               
methods ...."   Therefore, it  would seem that  the applicability                                                               
could  be for  anything  the commissioner  approves  with such  a                                                               
definition.  He opined that  [the legislature] hasn't had trouble                                                               
getting credits through.                                                                                                        
                                                                                                                                
2:40:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  pointed  out  that Mr.  Van  Dyke  made                                                               
recommendations regarding  the identification of areas  and units                                                               
similar to those  identified by the oil  producers, including the                                                               
exclusion  of drill  sites 1C,  1D, 1E,  and 1J  of the  West Sak                                                               
formation  as  well as  drill  site  S  in  Schrader Bluff.    He                                                               
inquired  as to  why  the aforementioned  drill  sites should  be                                                               
excluded.                                                                                                                       
                                                                                                                                
MR.  VAN DYKE  explained that  his exclusion  listed in  item one                                                               
under the first definition of  challenged oil would exclude areas                                                               
where projects are  well underway and will occur  with or without                                                               
these credits.   He  opined that it  probably isn't  necessary to                                                               
grant credits in areas and formations  where there is a core area                                                               
within a  viscous reservoir that  is already producing  today and                                                               
promises  more development  in the  future.   However, he  opined                                                               
that  it's necessary  to  consider credits  outside  of the  core                                                               
areas and  in formations such as  Ugnu where there is  no regular                                                               
production today  and the  oil is very  viscous.   Therefore, the                                                               
first definition  attempts to carve  out the "sweet  spots" under                                                               
development  today.   He related  his belief  that it  would make                                                               
sense to  grant credits  for enhanced oil  recovery in  the sweet                                                               
spots and credits  for development outside of the  sweet spots in                                                               
the reservoirs.                                                                                                                 
                                                                                                                                
2:43:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS commented  that the committee can  work with DNR                                                               
as the legislation is drafted.                                                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON recalled  discussions with  regard to  the                                                               
PPT  when  the  DNR  commissioner related  his  belief  that  the                                                               
legislature  wouldn't want  to place  big  money decisions,  with                                                               
regard to  the buybacks, on  the commissioner.   The commissioner                                                               
has seemed  to indicate that  such considerations should  be left                                                               
to the legislature.                                                                                                             
                                                                                                                                
REPRESENTATIVE ROKEBERG  opined that if by  definition particular                                                               
areas should be  specified, then the only  discretion comes about                                                               
for new areas  applying for consideration.   Therefore, he opined                                                               
that the  commissioner should be  able to do make  such decisions                                                               
if sufficient guidelines are in place.                                                                                          
                                                                                                                                
2:44:56 PM                                                                                                                    
                                                                                                                                
MS. WILSON  highlighted the importance of  specifying the process                                                               
and  approval if  the  commissioner is  given  the discretion  to                                                               
certify an area as heavy oil.                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS asked  if the concern is that  a developer won't                                                               
know whether there's  heavy oil until the  first exploratory well                                                               
is drilled  in a new area.   He recalled that  testimony from the                                                               
engineers related that  there is some knowledge as  to whether an                                                               
area has heavy  oil, although nothing is certain  until the first                                                               
well is drilled.                                                                                                                
                                                                                                                                
MS. WILSON,  referring to  page 2, explained  that the  credit is                                                               
envisioned  for   exploration.    Therefore,  once   an  area  is                                                               
identified as a  potential target, the question  of timing should                                                               
be specified.                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS said  he would talk to the  commissioner of DOR,                                                               
who   recommended  not   leaving  such   determinations  to   the                                                               
discretion  of  the commissioner.    As  far as  identifying  the                                                               
current areas,  he announced that  he was available to  work with                                                               
anyone  interested,  including  the   industry,  to  develop  the                                                               
language.  Co-Chair Samuels then  recalled that the rate floating                                                               
with the price  is of a concern for Representative  Crawford.  He                                                               
also  recalled  that there  was  a  question  as to  whether  the                                                               
credits are transferable.                                                                                                       
                                                                                                                                
2:48:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  related   his  understanding  that  the                                                               
consensus was to not make the credits transferable.                                                                             
                                                                                                                                
REPRESENTATIVE SEATON suggested  that if [the notion  is to allow                                                               
credits]  for exploration,  then  they need  to be  transferable.                                                               
However,  if  the  exploratory aspect  is  eliminated,  then  the                                                               
transferability  isn't  of  concern.   "But  if  we  are  leaving                                                               
exploratory stuff  in, we  don't want  to cut  out all  the small                                                               
guys that  don't have  big production going,  and saying  this is                                                               
only for the big guys," he said.                                                                                                
                                                                                                                                
REPRESENTATIVE ROKEBERG  noted his disagreement.   He opined that                                                               
the  assumption is  that the  majority  of this  will impact  the                                                               
larger   producers.     The   issue   is   whether  the   smaller                                                               
producers/explorers   have  the   cash   flow   to  offset   [the                                                               
development].  "If we just make  it a standard on that issue that                                                               
they  have to  have, before  they can  take any  credit, I  think                                                               
that's  okay,"  he  said.   He  related  his  understanding  that                                                               
Representative   Seaton  is   suggesting   that   it  should   be                                                               
liberalized and transferable.                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON related  his disagreement.   He  clarified                                                               
that if  the exploratory part  is included,  it would need  to be                                                               
transferable   because   explorers   aren't   necessarily   large                                                               
entities.                                                                                                                       
                                                                                                                                
REPRESENTATIVE    ROKEBERG    said    he    doesn't    understand                                                               
Representative Seaton's logic.                                                                                                  
                                                                                                                                
CO-CHAIR SAMUELS  interjected that two separate  issues are being                                                               
discussed.   He related his  understanding that the  consensus at                                                               
the prior hearing  was to make the credit  nontransferable.  With                                                               
regard  to the  exploration,  the question  was  whether to  have                                                               
another 15  percent exploration credit "because  this doesn't say                                                               
heavy  oil on  that  line."   Therefore,  the aforementioned  was                                                               
going to be eliminated because  it referred to the development of                                                               
heavy oil whereas for exploration  one wouldn't know whether  the                                                               
exploration is for heavy oil or not.   He then inquired as to how                                                               
it would  be determined  that an  exploration expense  is looking                                                               
for heavy oil when, by  definition, exploration is occurring.  He                                                               
reminded the  committee that for  a wildcatter, the  .185 credits                                                               
are up to about 60 percent in the PPT.                                                                                          
                                                                                                                                
2:50:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG highlighted that  it's known that Chevron                                                               
has a  heavy oil prospect south  of the Kuparuk River  Unit.  The                                                               
aforementioned site/area isn't included  in the list because it's                                                               
a  prospect  at  this  point.     Therefore,  he  questioned  why                                                               
additional heavy oil exploration should be discouraged.                                                                         
                                                                                                                                
CO-CHAIR SAMUELS inquired as to  how to differentiate between all                                                               
exploration and exploration for heavy oil.                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG replied,  "We  could make  it a  delayed                                                               
effect.  They'd  have to prove-up and ... meet  the standards and                                                               
guidelines ...  because that would  be outside the area  of named                                                               
area."     He  related   that  the  company   could  turn   in  a                                                               
retrospective application, which is not uncommon.                                                                               
                                                                                                                                
MS.  WILSON related  her understanding  that to  give credit  for                                                               
heavy oil exploration  seems to assume that the  purpose is heavy                                                               
oil, which  doesn't make  sense.   She preferred  there [to  be a                                                               
credit] for all exploration or  no exploration rather than trying                                                               
to  prove.   She expressed  concern  with the  intention and  the                                                               
primary purpose.                                                                                                                
                                                                                                                                
2:53:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS inquired  as to  the company's  perspective and                                                               
how it goes about exploring heavy oil.                                                                                          
                                                                                                                                
MICHAEL  HURLEY,  ConocoPhillips  Alaska,  Inc.,  explained  that                                                               
oftentimes when  a company sets  out to explore it's  looking for                                                               
whatever oil it  can find.  He specified that  often all that the                                                               
company has  is seismic  data and other  data that  will indicate                                                               
that  hydrocarbons  will  be  in a  particular  area.    However,                                                               
nothing  is guaranteed  until drilling  takes place.   Still,  in                                                               
areas that are  relatively shallow and close to  the perma frost,                                                               
one can expect it to be  relatively viscous oil.  Again, drilling                                                               
offers the  only knowledge  as to  what type  of oil  is actually                                                               
present.                                                                                                                        
                                                                                                                                
CO-CHAIR SAMUELS posed a scenario  under which Conoco explored in                                                               
a new  area and found  something that  it thought would  be heavy                                                               
oil.   After  drilling and  finding it  to be  heavy oil,  Conoco                                                               
would apply  for the  area to  be included in  the heavy  oil tax                                                               
credit.  In such a scenario,  he questioned how much of the total                                                               
cost of  exploration would Conoco  have already expended  to that                                                               
point.                                                                                                                          
                                                                                                                                
MR. HURLEY answered  that it would be a  relatively small amount.                                                               
Developing a  heavy oil  resource includes a  lot of  expense for                                                               
development  wells.   For the  first exploration  well, depending                                                               
upon the nearest  infrastructure, the cost amounts  to about $10-                                                               
$30  million.   With  regard  to development  of  that well,  the                                                               
additional  development   wells  and  the  construction   of  the                                                               
facilities are where the cost lies.                                                                                             
                                                                                                                                
MR.  HURLEY, in  response to  Representative Rokeberg,  noted his                                                               
agreement  that  when  a company  drills  shallower  areas,  it's                                                               
likely to be  viscous oil because of the nature  of the crude and                                                               
the proximity to the permafrost.                                                                                                
                                                                                                                                
REPRESENTATIVE ROKEBERG  interjected that  if it's light  oil per                                                               
the guidelines, then the company wouldn't receive the credit.                                                                   
                                                                                                                                
CO-CHAIR  SAMUELS  surmised that  a  small  amount of  money  was                                                               
expended  to  find  this  heavy  oil,  while  development  of  it                                                               
requires a large amount of money.   Therefore, once the heavy oil                                                               
is  found, the  company can  approach the  appropriate entity  to                                                               
request  the  credits  proposed  in HB  498.    Co-Chair  Samuels                                                               
suggested   that  the   policy  call   is  whether   to  do   the                                                               
aforementioned or only [allow the credit] for development.                                                                      
                                                                                                                                
2:58:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG commented  that Representative Seaton has                                                               
a good  point if there  is trouble  identifying the heavy  oil or                                                               
the company runs into lenses  of heavy oil during drilling, which                                                               
he suggested is the more common  occurrence.  He then returned to                                                               
the case  in which a company  would attempt to produce  heavy oil                                                               
from the  beginning, which  would result  in the  construction of                                                               
the lacking infrastructure.                                                                                                     
                                                                                                                                
CO-CHAIR SAMUELS  reiterated that development would  still be the                                                               
large expense.                                                                                                                  
                                                                                                                                
2:59:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  clarified  that   his  problem  is  in  a                                                               
situation in which a company explores  for gas and finds a little                                                               
heavy  oil and  thus can  receive the  additional 15  percent tax                                                               
credit.                                                                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he doesn't disagree  with that line                                                               
of thinking.                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS opined  that if most of the  money [expended] is                                                               
in  the development,  he  didn't  mind having  a  credit for  it.                                                               
However, he expressed  concern with regard to  the possibility of                                                               
a company  going back and forth  depending upon what is  found in                                                               
the well.  He highlighted  that there are already exploration tax                                                               
credits on the  books and incentivizing it  separately would seem                                                               
to be an entirely separate policy.                                                                                              
                                                                                                                                
3:00:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said, "If we  identify let's say West Sak                                                               
-  we use  the  geographic  definitions and  the  units ...;  the                                                               
boundaries are clear by AOGCC  and DNR, then there's recognition.                                                               
... if  you were  exploring the shallower  depths there,  are you                                                               
saying you don't get the credit for  that?  Like, ... you have to                                                               
discover it  first or can  you discover it?   That's kind  of the                                                               
question."                                                                                                                      
                                                                                                                                
CO-CHAIR SAMUELS  opined that once  the area is determined  to be                                                               
heavy oil,  then it  will be  considered development  rather than                                                               
exploration.  He  asked that if a heavy oil  field is designated,                                                               
would everything done in that  field be considered as development                                                               
or would  some of it be  considered exploration.  He  opined that                                                               
once the  area is  determined to  be heavy  oil, then  the credit                                                               
would be received.                                                                                                              
                                                                                                                                
MR. VAN  DYKE related his belief  that if the definition  of West                                                               
Sak formation  within the  Kuparuk River Unit  is used,  then any                                                               
West Sak activity would be creditable.                                                                                          
                                                                                                                                
3:01:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  turned  to alternative  energy  and  expressed                                                               
concern with giving  the credits to the big producers  and not to                                                               
others.                                                                                                                         
                                                                                                                                
REPRESENTATIVE   SEATON  remarked   that   this  legislation   is                                                               
complicated enough with only addressing  heavy oil, and therefore                                                               
he  opined that  [the  alternative energy  provisions should  be]                                                               
excised.                                                                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG related his  belief that [the alternative                                                               
energy provisions]  were worth including,  especially due  to the                                                               
source  of   funds  being  created.     However,  he   noted  his                                                               
sensitivity to piling on [with legislation].                                                                                    
                                                                                                                                
3:03:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  opined that  there is a  reason to  do a                                                               
heavy oil  credit, but there  is a price  at which the  heavy oil                                                               
won't be  developed no  matter the credits  available.   There is                                                               
also  a point,  perhaps  $50-$55  per barrel,  at  which all  oil                                                               
becomes  economic.   [This legislation]  influences  the band  in                                                               
between the aforementioned and will  lead to more oil development                                                               
and oil  in the pipeline.   Representative Crawford said  that he                                                               
didn't  see a  reason  to  provide for  more  advantages after  a                                                               
certain price.                                                                                                                  
                                                                                                                                
3:05:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  commented  that  price  prospectivity  is                                                               
difficult to  gauge.  He  related his understanding that  this is                                                               
being viewed somewhat  on history and thus if there  was a three-                                                               
year past  average price such  that the credit wouldn't  apply if                                                               
the average  is over  $50 per  barrel.   Therefore, if  for three                                                               
years  the range  is $50  per  barrel, the  companies are  making                                                               
decisions  based on  the  credit  on what  the  market is  really                                                               
doing.   At  that  point,  the state  doesn't  need  to pay  this                                                               
proposed credit.                                                                                                                
                                                                                                                                
3:06:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG expressed  concern with reviewing history                                                               
to  determine some  predictors.   The problem  with that  is that                                                               
currently  the price  has hit  an all  time record  high and  the                                                               
state isn't familiar  with the situation and  where it's heading.                                                               
Representative  Rokeberg then  related  that  he doesn't  believe                                                               
there is any need for a floor because it's self-fulfilling.                                                                     
                                                                                                                                
REPRESENTATIVES CRAWFORD  AND SEATON clarified that  they weren't                                                               
referring to a floor.                                                                                                           
                                                                                                                                
REPRESENTATIVE  ROKEBERG then  reminded  the  committee that  the                                                               
legislation   includes   a   10-year    sunset.      Having   the                                                               
aforementioned will  result in incenting the  development now and                                                               
provide  the legislature  the  right  to come  back  and make  an                                                               
adjustment.  Therefore, he recommended not having a cap.                                                                        
                                                                                                                                
3:09:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS inquired as to  whether there is a tax mechanism                                                               
that would  incent [development]  without placing an  investor in                                                               
the position of being unsure about the economics.                                                                               
                                                                                                                                
MS. WILSON  expressed concern  about having  the credit  based on                                                               
price because  it is  difficult to  apply it  since there  is the                                                               
potential for  "bumping up and  down over  the trigger."   From a                                                               
tax  administration  point of  view,  a  sunset in  a  reasonable                                                               
amount of  time makes some sense.   She highlighted that  had the                                                               
committee  had this  discussion six  years ago,  no one  would've                                                               
imagined this  price and  the trigger would  be different.   It's                                                               
difficult to  look into  the future  and specify  the appropriate                                                               
cutoff.  Therefore, she opined  that she would support the notion                                                               
of a sunset before a price cutoff.                                                                                              
                                                                                                                                
JEFF SPENCER, Heavy Oil  Specialist, ConocoPhillips Alaska, Inc.,                                                               
reminded   the  committee   that  these   projects  need   to  be                                                               
competitive  with  other  investment  opportunities  within  each                                                               
company's portfolio.   At a  given price,  say $50 per  barrel, a                                                               
light oil will be more likely  to be pursued because of the lower                                                               
operational  costs,  the higher  recoveries  and  rates, and  the                                                               
better price  for the product.   Therefore, he agreed  that there                                                               
is  no need  to place  a cap  on the  price as  it would  be very                                                               
difficult to manage and would  increase uncertainty.  In fact, he                                                               
said  he couldn't  even  envision  how to  factor  that into  his                                                               
economic analysis of a heavy development project.                                                                               
                                                                                                                                
REPRESENTATIVE GATTO  questioned how  it would work  to implement                                                               
an equivalency  between light  oil and heavy  oil.   He specified                                                               
that heavy  oil is worth less  and is more difficult  to get, and                                                               
thus when  heavy oil  reaches the market  the money  collected is                                                               
less  than  that  collected  by   selling  crude  oil.    If  the                                                               
difference [in value] between the two  was known, as the price of                                                               
oil drops,  the state  would simply  get the  royalty share.   "I                                                               
guess  the question  is:   the equivalent  value of  a barrel  of                                                               
heavy, when you  take away this extra cost and  the lower selling                                                               
price," he said.                                                                                                                
                                                                                                                                
3:15:12 PM                                                                                                                    
                                                                                                                                
MR. SPENCER opined  that such would be  complicated and difficult                                                               
to  administer.   He highlighted  that the  price of  oil changes                                                               
widely within one day.                                                                                                          
                                                                                                                                
REPRESENTATIVE  GATTO  said  the  price  of  oil  doesn't  matter                                                               
because the  equivalent value  is going to  be a  specific amount                                                               
less and the state will make up the difference.                                                                                 
                                                                                                                                
MS. WILSON  noted her agreement  that it would be  more difficult                                                               
to administer  such.  She  then expressed concerns  with settling                                                               
on  the   prevailing  value  of  all   of  it  as  well   as  the                                                               
differential.   Ms.  Wilson  opined that  it's  not workable  and                                                               
doesn't seem to justify the advantage specified.                                                                                
                                                                                                                                
3:17:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that  Mr. Spencer said the difference                                                               
in cost is  the only incentive that makes it  more difficult than                                                               
light oil.  The legislature could  say it is a certain amount per                                                               
barrel,  and  thus there  doesn't  have  to  be any  worry  about                                                               
percentages.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO agreed,  adding  the value  of the  product                                                               
would also be included.                                                                                                         
                                                                                                                                
MS. WILSON said  that if the committee wanted to  go that way and                                                               
[specify] the number  that is the cost differential,  it would be                                                               
easy to administer.  However, if  the desire is to divvy up costs                                                               
and  assign them  to either  light or  heavy oil  on a  field-by-                                                               
field, month-by-month basis, it would be an auditing nightmare.                                                                 
                                                                                                                                
3:20:10 PM                                                                                                                    
                                                                                                                                
MR. HURLEY opined  that it's similar to  incenting development of                                                               
a   differential  type   crude.     The  aforementioned   can  be                                                               
accomplished  in  one  of  two   ways.    The  incentive  can  be                                                               
accomplished by  providing some credit  for development  costs or                                                               
by  determining  the  differential  per barrel  on  the  product.                                                               
However, he didn't  believe there would be a  single number [that                                                               
would  fit]  the  different  fields.    Mr.  Hurley  related  his                                                               
understanding that the sponsor originally  went with providing an                                                               
incentive on the development dollars  because there would be more                                                               
incentive [to  develop] the Ugnu  field because  more development                                                               
dollars  will  have  to  be  spent.   Therefore,  15  percent  of                                                               
development dollars  will be larger at  Ugnu than it would  be at                                                               
West Sak, for example.                                                                                                          
                                                                                                                                
REPRESENTATIVE GATTO said:                                                                                                      
                                                                                                                                
     But Ugnu has a number that's  stuck on the name Ugnu of                                                                    
     $8 and West  Sak has a number that's  nailed right into                                                                    
     the  side of  the  barrel  and it's  called  $7.   Then                                                                    
     whoever produces it in whatever  quantities, ... it's a                                                                    
     pretty  simple calculation  that says  this ...  barrel                                                                    
     has a bounty on it and it's  a $7 bounty - you get that                                                                    
     just by  turning it over.   And now  it's up to  you to                                                                    
     say, "You know  what, I like that bounty,  I'm going to                                                                    
     produce what I  can ...."  You don't  have to calculate                                                                    
     much; it  comes out of the  ground and you put  it in a                                                                    
     wood stave barrel,  we know what it's worth  to us that                                                                    
     we have to pay ....                                                                                                        
                                                                                                                                
3:23:18 PM                                                                                                                    
                                                                                                                                
MR. HURLEY noted  his agreement that the aforementioned  is a way                                                               
to do  it.  However,  when using that  method experts have  to be                                                               
utilized to determine the correct number on the correct barrel.                                                                 
                                                                                                                                
REPRESENTATIVE OLSEN  opined that  there is  a certain  appeal to                                                               
this  method  because the  credit  wouldn't  be given  until  the                                                               
product comes out of the ground.                                                                                                
                                                                                                                                
MR. SPENCER pointed  out that it will be many,  many years before                                                               
Ugnu is commercially developed.   With regard to the proposed 10-                                                               
year  sunset, Mr.  Spencer  opined that  the  incentive would  no                                                               
longer be available  when Ugnu is finally developed.   He related                                                               
that it could  10 years before the first barrel  is produced, and                                                               
the  company wouldn't  recover anything  until  many years  later                                                               
under a per  barrel scenario.  However, if the  investment can be                                                               
made within  the next 10  years, there  would be an  incentive to                                                               
accelerate that development.                                                                                                    
                                                                                                                                
3:25:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG opined  that  the aforementioned  sounds                                                               
deceptively simple.  However, the  difficulty lies in determining                                                               
the cost  of the  various formations  and how  the cost  would be                                                               
assigned.   Such a  methodology would  cause an  ongoing auditing                                                               
situation, which would be labor intensive.                                                                                      
                                                                                                                                
REPRESENTATIVE GATTO  said there could  be a number  that doesn't                                                               
sunset.   Furthermore,  it  could be  determined  that after  the                                                               
first  10 million  barrels, the  remaining barrels  could have  a                                                               
different [cost] assigned.                                                                                                      
                                                                                                                                
CO-CHAIR SAMUELS  indicated that Representative  Gatto's proposal                                                               
would be appropriate in separate legislation.                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON  returned  to   the  notion  of  the  rate                                                               
floating  with the  price.   He opined  that it's  problematic if                                                               
companies aren't incentivized to enter  into projects when oil is                                                               
$50 per barrel for three years, for example.                                                                                    
                                                                                                                                
3:27:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS said:                                                                                                          
                                                                                                                                
     If  they're  looking  at  investing  over  a  five-year                                                                    
     timeframe and having  no hope of getting  oil ... until                                                                    
     year six  or seven,  do you  incorporate this  into the                                                                    
     math or do you not incorporate  it into this math?  And                                                                    
     how would  you know?  Say you're at  $70 a  barrel now,                                                                    
     you're right  ... we're throwing  money away,  no doubt                                                                    
     about it.   And  then next  year we're  at $50  and the                                                                    
     year after  that we're down to  $35 again and all  of a                                                                    
     sudden they  didn't incorporate it  into the  math, the                                                                    
     project doesn't go forward.                                                                                                
                                                                                                                                
REPRESENTATIVE SEATON  noted his  disagreement and said  that the                                                               
project would go forward because  the credit would be received if                                                               
oil falls to $35 or $45.                                                                                                        
                                                                                                                                
CO-CHAIR SAMUELS inquired  as to when the money is  spent and how                                                               
much  would  be  spent.   Practically  speaking,  how  would  one                                                               
administer  when the  series of  expenditures for  exploration or                                                               
development would occur.                                                                                                        
                                                                                                                                
3:28:10 PM                                                                                                                    
                                                                                                                                
MS.  WILSON  reiterated her  earlier  testimony  that this  is  a                                                               
timing issue that  could result in the amendment of  claims.  She                                                               
opined  that [the  credit]  via  an oil  price  trigger would  be                                                               
problematic.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD  opined  that the  committee  is  losing                                                               
sight of  what it's after.   If the  credit has a  price ceiling,                                                               
then there's a  guarantee that when the price of  oil falls below                                                               
the specified  amount, the [companies] will  receive the credits.                                                               
However, the  companies don't need  the credits at the  price per                                                               
barrel of  over $55.   Therefore,  if the  price goes  above [the                                                               
specified  price], the  companies don't  need the  credit because                                                               
they've had plenty of incentive.                                                                                                
                                                                                                                                
REPRESENTATIVE SEATON  reminded the committee that  the notion is                                                               
to use  a three-year calendar  average, and thus  won't fluctuate                                                               
madly.   He stressed  that when the  credits don't  apply because                                                               
the  price  of  oil  is  higher than  the  specified  price,  the                                                               
companies are making money hand over fist.                                                                                      
                                                                                                                                
3:30:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked:                                                                                                         
                                                                                                                                
     You're idea would  be they'd get the credits  on all of                                                                    
     the expenditures that they've had.   At [$]70, it's one                                                                    
     thing to  sit here and  have the discussion,  but let's                                                                    
     say we  put the  pivot point  at $50.   When  ... three                                                                    
     weeks ago when  we all sat in this room  on the PPT, we                                                                    
     used ...  $60 a barrel  it was going between  [$]59 and                                                                    
     [$]61.   What  are  you  going to  do  when your  magic                                                                    
     number is $50  and you get a 15 percent  credit.  Well,                                                                    
     it drops  down to your tenth  and all of a  sudden a 15                                                                    
     percent credit would get $40  million and all of sudden                                                                    
     you don't get it ....                                                                                                      
                                                                                                                                
REPRESENTATIVE  SEATON  interjected that  it  would  be based  on                                                               
three-year calendar averages.                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG  highlighted that if a  cap is specified,                                                               
that cap  will be  gamed.   He explained that  if the  price went                                                               
through the gap,  he would, were he running the  field, shut down                                                               
any   new  investment,   although   production  would   continue.                                                               
Therefore, the  company would wait  to continue  production until                                                               
the price decreases.                                                                                                            
                                                                                                                                
REPRESENTATIVE SEATON opined  that a company wouldn't  do that at                                                               
$50 per barrel.                                                                                                                 
                                                                                                                                
REPRESENTATIVE ROKEBERG  begged to  differ, and  highlighted that                                                               
price fluctuates.                                                                                                               
                                                                                                                                
REPRESENTATIVE SEATON  reminded the  committee that it's  a year-                                                               
long average.                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG opined then that  the field would be shut                                                               
down for a longer period of time.                                                                                               
                                                                                                                                
3:32:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  related his belief that  with a three-year                                                               
average  price on  a  calendar year,  everyone  has the  planning                                                               
stages they  need.   He further  related his  belief that  such a                                                               
methodology would  be self-correcting and not  something that can                                                               
be gamed.                                                                                                                       
                                                                                                                                
REPRESENTATIVE ROKEBERG  emphasized that the intention  is to get                                                               
investment in  heavy oil.  There  are 20 billion barrels  in Ugnu                                                               
just sitting there.  He then reiterated his belief that a three-                                                                
year average can  be gamed.  Furthermore, there is  no history to                                                               
utilize in setting it.                                                                                                          
                                                                                                                                
REPRESENTATIVE  SEATON  pointed  out that  there  are  three-year                                                               
average  prices  for West  Texas  Intermediate  and Alaska  North                                                               
Slope West  Coast, all of  which are known numbers  calculated in                                                               
average prices.                                                                                                                 
                                                                                                                                
3:35:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS turned  the committee's  attention to  his last                                                               
major concern, which  was the reference to gas in  the title.  He                                                               
recalled  that the  engineers testified  that generally  speaking                                                               
there isn't  a lot  of gas  associated with  heavy oil,  which he                                                               
said satisfied him.                                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON commented, "As long  as they put the 5,500-                                                               
foot limit  in there and identifying  the fields, I don't  have a                                                               
problem."                                                                                                                       
                                                                                                                                
3:36:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG requested  that  Ms. Wilson  true up  on                                                               
subsection (f) on page 3 to HB 488 in terms of its application.                                                                 
                                                                                                                                
CO-CHAIR SAMUELS  related his understanding that  the outstanding                                                               
issues are in  regard to whether the determination  of the credit                                                               
should be  left to the  commissioner or the legislature,  and the                                                               
rate floating with  the price.  Co-Chair Samuels,  in response to                                                               
Ms. Wilson,  confirmed that there  was consensus that  this won't                                                               
be exploration tax credit legislation.                                                                                          
                                                                                                                                
[HB 498 was held over.]                                                                                                         

Document Name Date/Time Subjects