Legislature(2003 - 2004)

05/13/2003 04:41 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CS FOR SENATE BILL NO. 185(RES)                                                                                            
     "An Act providing for a reduction of royalty on certain oil                                                                
     produced from Cook Inlet submerged land."                                                                                  
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  informed the Committee that this  bill would reduce                                                            
royalty  rates on  oil production  from  offshore  oil platforms  on                                                            
submerged lands in Cook  Inlet based in a specified daily production                                                            
rate. He  moved for  CS SB 185,  23-LS0926\Q, to  be adopted  as the                                                            
working document.                                                                                                               
Senator Hoffman and Senator  Taylor objected for further explanation                                                            
of the committee substitute.                                                                                                    
SENATOR  THOMAS  WAGONER,  the  bill's   sponsor,  stated  that  the                                                            
original intent of the  bill was to revise State statutes pertaining                                                            
to royalties  on certain  Cook Inlet oil fields  nearing the  end of                                                            
their production  capacity. He declared that a reduction  in royalty                                                            
expenses  would make a field  more economical  to operate and  allow                                                            
producers   to   maximize   production   and   continue   employment                                                            
Senator Wagoner  stated that this increase in oil  production "would                                                            
be more than would have  originally been realized, and subsequently,                                                            
more royalty  revenue even at the  reduced rate." He continued  that                                                            
encouraging production  in these "marginal fields  will extend their                                                            
life by a minimum of eighteen to twenty four months."                                                                           
Senator  Wagoner  continued that,  in  addition, the  original  bill                                                            
proposed new  field exploration tax  credits in order to  create new                                                            
jobs and revenue for the State.                                                                                                 
MARY  JACKSON,  Staff   to  Senator  Wagoner,  explained   that  the                                                            
committee  substitute expands  the  original bill  by inserting  new                                                            
language  in Section  1  that would  grant the  Alaska  Oil and  Gas                                                            
Conservation  Commission   the  authority  to  incorporate  the  new                                                            
provisions of the bill  into statute. Furthermore, she stated that a                                                            
new subsection pertaining  to "midrange producers" was inserted into                                                            
Section 2.                                                                                                                      
Ms.  Jackson  detailed  the  entirety   of  Section  2  as  follows:                                                            
Subsection (6)(A)  identifies the rigs that would  be eligible under                                                            
the  1,200  barrel  per  day  jurisdiction  and  Subsection   (6)(B)                                                            
identifies  the  royalty  percentages  for  those  identified  rigs;                                                            
Subsection  (6)(C)   inserts  a  new  "midrange"  production   level                                                            
pertaining  to rigs that  produce in the 975  barrels per day  range                                                            
and Subsection  (6)(D) specifies the  royalty rate for the  midrange                                                            
rigs;  Subsection (6)(E)  identifies  rigs producing  less than  750                                                            
barrels per day with Subsection  (6)(F) specifying the royalty range                                                            
for those rigs;  and Subsection (6)(G) pertains to  rigs in the West                                                            
McArthur  River  field with  Subsection  (6)(H)  specifying  royalty                                                            
ranges for  that field.  She stated that  Subsection (6)(I)  defines                                                            
the  criteria  for determining  the  daily  barrel production  of  a                                                            
platform or field.                                                                                                              
Ms. Jackson  continued that  Section 3 of  the committee  substitute                                                            
outlines the new tax credit provisions.                                                                                         
Senator Hoffman removed his objection.                                                                                          
Without  further objection,  committee  substitute  Version "Q"  was                                                            
ADOPTED as the working document.                                                                                                
Senator Hoffman asked how  the fiscal notes would be impacted by the                                                            
committee substitute.                                                                                                           
Ms. Jackson  informed the  Committee that the  Section 3 tax  credit                                                            
provisions  are addressed in the Department  of Revenue fiscal  note                                                            
dated  May 11,  2003 and  that  the new  section pertaining  to  the                                                            
midrange  oil producers is  addressed in  the Department of  Natural                                                            
Resources fiscal note, dated May 9, 2003.                                                                                       
Senator Bunde  asked whether the proposed tax credits  would only be                                                            
applied upon discovery of a viable oil field.                                                                                   
Senator Wagoner  responded that the tax credits are  more applicable                                                            
to exploration than discovery.  He continued that the purpose of the                                                            
language is to entice companies  "to invest more money in Alaska and                                                            
drill more  wells" so  that the  possibility of  both discovery  and                                                            
production could be "substantially" increased.                                                                                  
Senator Bunde  summarized therefore that the answer  to his question                                                            
is no.                                                                                                                          
Senator Wagoner concurred.                                                                                                      
BILL CORBUS,  Commissioner, Department  of Revenue, commented  that,                                                            
"the exploration tax credit  which would be applied to the severance                                                            
tax …  is one  ingredient  of the  Governor's long-range  plan."  He                                                            
shared that the Alaska oil pipeline is currently operating at 50-                                                               
percent of capacity and  the goal of incentives such as the proposed                                                            
tax credit  is to enable the pipeline  to operate at full  capacity.                                                            
He noted  that  the State  currently  offers minimal  incentives  to                                                            
companies  to explore,  and  he expressed  that  Governor  Murkowski                                                            
"strongly urges that this legislation be adopted."                                                                              
Senator Olson asked the  regions of the State that would be affected                                                            
by this  legislation,  specifically  whether it  would affect  North                                                            
Slope producers.                                                                                                                
Commissioner Corbus affirmed  that the provision would be applicable                                                            
Senator  Taylor observed  that  the  bill originally  addressed  oil                                                            
production  in the  Cook Inlet  region; however,  he continued,  the                                                            
committee substitute  expands it to  a statewide scenario.  He asked                                                            
for further information  regarding Section 3(c) which provides a 20-                                                            
percent tax  credit for a  hole drilled more  than three miles  away                                                            
from  an  existing   hole,  and  Section  3(d)  which   provides  an                                                            
additional  20-percent  credit were  the hole  drilled  at least  25                                                            
miles from an existing  hole. He contended that recently a major new                                                            
reservoir was discovered  but was "set idle" in anticipation of this                                                            
legislation  being enacted. Furthermore,  he declared that  advances                                                            
in technology  allow for such technique  as "slant drilling,"  which                                                            
enables  holes to  be drilled  to a  reservoir from  distances  that                                                            
would  allow companies  to  unfairly  "take  advantage"  of the  tax                                                            
MARK  MYERS,  Director,  Division  of Oil  and  Gas,  Department  of                                                            
Natural Resources, assured  that exploration drilling within an area                                                            
of "an existing  unit" would not qualify for the tax  credits as the                                                            
bill contains  restrictions  that specifically  address this  issue.                                                            
Additionally,  he clarified  that wells that  are currently  planned                                                            
for exploration  and development would  not qualify. He stated  that                                                            
it  has  been determined   "that three  miles  from  a  bottom  well                                                            
location" is "a reasonable  distance" as it would likely drill "into                                                            
a separate accumulation."  He stated that there might be an occasion                                                            
where  a  new  well   might  drill  into  a  substantial   adjoining                                                            
accumulation,  but  "it  is  unlikely."  In  responding  to  Senator                                                            
Taylor's comment  about a recent major discovery,  he stated that he                                                            
is unaware of any "capped off major discoveries" at this time.                                                                  
Senator Taylor asked whether  provisions exist that would prevent an                                                            
entity from  "capping off"  a major find and  drilling into  it from                                                            
three-miles  distance in  order to qualify  for these "significant"                                                             
tax credits.                                                                                                                    
Mr.  Myers  responded  that  the  distance  requirements   could  be                                                            
increased  or  that  the "language  could  be  crafted"  to  further                                                            
address this scenario.                                                                                                          
Senator  Taylor expressed  "some sensitivity  for the position  that                                                            
the oil industry" alleges  regarding the high cost of exploration in                                                            
the State as  he avowed that the State  has worked to address  these                                                            
industry  concerns for years.  Furthermore,  he voiced that  because                                                            
the State's current  fiscal crisis mandates that such  things as the                                                            
Longevity Bonus  Program be eliminated, various taxes  and user fees                                                            
be instituted, and a Statewide  sales tax be considered, he finds it                                                            
difficult  to support further  benefits to  the industry. He  stated                                                            
that  granting  tax  credits  to the  oil  industry  appears  to  be                                                            
contrary  to  attempts  to  increase  the  revenue  that  the  State                                                            
Commissioner Corbus  qualified that the potential  impact on revenue                                                            
to the State would  not occur until FY 05. He asserted  that "oil is                                                            
our  future," and  that  he considers  this  legislation  to be  "an                                                            
investment."  He asserted that the  State must offer this  incentive                                                            
in order to secure "a long-term stream of oil."                                                                                 
Senator B. Stevens asked  for further information regarding language                                                            
in  Section 3(g)  that  specifies  that the  production  tax  credit                                                            
certificate  could  be  transferred,  conveyed  or sold  to  another                                                            
Commissioner Corbus  confirmed that the production  tax credit could                                                            
be sold  provided that  the purchasing  entity has  a severance  tax                                                            
obligation within the State.                                                                                                    
Senator B. Stevens asked  whether there are limits on the tax credit                                                            
amounts that could be accumulated.                                                                                              
DAN  DICKINSON,  Director,  Tax  Division,  Department  of  Revenue,                                                            
stated that the  amount of tax credit that a producer  could utilize                                                            
toward their tax  liability is "the face value of  the certificate."                                                            
Senator  B.  Stevens asked  whether  limits  have  been established                                                             
regarding the "discounted  value" of the tax credit certificate that                                                            
could be sold to a qualifying entity.                                                                                           
Mr.  Dickinson  responded  that  no  limits  are  specified  as,  he                                                            
asserted, were discounts  disallowed, there "would be no reason" for                                                            
another entity to purchase the certificate.                                                                                     
Mr. Dickinson  exampled a  scenario wherein  a producer might  spend                                                            
five million dollars conducting  the practice of what is referred to                                                            
in the industry  as "shooting seismic on spec." He  conveyed that it                                                            
is common  industry practice  to sell that  five million dollar  tax                                                            
credit at a discounted  price to another producer.  He avowed that a                                                            
purchasing  entity would not  be willing to  pay $5 million  for the                                                            
tax credit certificate.                                                                                                         
SFC 03 # 92, Side B 05:29 PM                                                                                                    
Mr.  Dickinson  continued   that,  regardless  of   the  amount  the                                                            
purchaser  pays for  the tax credit  certificate,  the credit  value                                                            
would  be five  million  dollars, which  is  the face  value of  the                                                            
certificate.  He clarified that no  limits are placed on  the number                                                            
of certificates that an entity could accumulate.                                                                                
Mr.  Dickinson  informed  the  Committee   that  the  three  largest                                                            
producers  in  the State  currently  pay  approximately  $20 to  $30                                                            
million a  month in taxes.  He stressed that  were this legislation                                                             
adopted and  credits accumulating  "at that  level, we would  have a                                                            
very very vibrant" program.                                                                                                     
Co-Chair Wilken  provided Committee members with a  handout [copy on                                                            
file]   that   contains   information   regarding   the   "Cost   of                                                            
Exploration,"   dated  May  12,  2003   and  charts  depicting   the                                                            
exploration  goals and expectations  of this  incentive program.  He                                                            
stated  that  the handout  might  provide  Members  with  additional                                                            
explanatory information.                                                                                                        
Senator  Taylor   asked  whether   entities  that  conduct   seismic                                                            
fieldwork regularly  contract to sell  that information as  a normal                                                            
course of business.                                                                                                             
Mr. Dickinson stated that is correct.                                                                                           
Senator Taylor argued therefore,  that those entities are being paid                                                            
to conduct seismic research,  and, in addition, receive a tax credit                                                            
from the  State that they  could then discount  and sell to  another                                                            
company.  He continued that  the purchasing  company could  then use                                                            
the certificate,  at  full face  value, against  that company's  tax                                                            
liability with the State.                                                                                                       
Senator Taylor  continued that the initial contractor  gets paid for                                                            
the seismic work and, in  addition, receives a discounted amount for                                                            
selling  their  tax  credit  certificate.   He  concluded  that  the                                                            
purchaser of  the certificate would  then be able to apply  the full                                                            
face  value  of  that  tax  credit  certificate   toward  their  tax                                                            
liability with the State.                                                                                                       
Senator Taylor  inquired as  to whether the  full face value  of the                                                            
certificate  is  based on  actual  dollar  costs of  conducting  the                                                            
seismic work or a percentage of the production number.                                                                          
Mr.  Dickinson  explained  that  the  price  paid  for  the  seismic                                                            
information "is a negotiated  figure." He stated that, "it is highly                                                            
unlikely" that  the buyer of the tax credit certificate  is the same                                                            
entity that purchased the  original seismic information. He asserted                                                            
that it is  a small market and that  there are not many purchasers;                                                             
therefore,  he attested,  the interested  parties are knowledgeable                                                             
about the tax credit. He  stated that the price would be affected by                                                            
that knowledge.                                                                                                                 
Senator Taylor asked the  number of steps involved in this scenario;                                                            
specifically whether one or two agreements would be involved.                                                                   
Mr. Dickinson  informed that the situation could involve  one or two                                                            
parties. Furthermore,  he commented  that the situation could  apply                                                            
to another  group of "independents  who don't yet have production."                                                             
Senator  Taylor asked for  further information  regarding the  value                                                            
assigned to the certificate.                                                                                                    
Mr. Dickinson  affirmed that the certificate is based  on the actual                                                            
cost  of  conducting  the  research.  He  clarified  that  the  only                                                            
limitation  currently in  the legislation  is  specified in  Section                                                            
3(i)(1) which reads as follows.                                                                                                 
               (1) the amount of credit that may be applied against                                                             
     the production tax for each tax month may not exceed the total                                                             
     production tax liability of the taxpayer applying the credit                                                               
     for the same month.                                                                                                        
Mr. Dickinson  continued  that the  tax liability  could be  carried                                                            
forward to the following months.                                                                                                
Senator  Taylor opined, therefore,  that the  tax liability  credits                                                            
could  be carried  forth infinitely  as  no statute  of limitations                                                             
Mr.  Dickinson replied  that  none exists;  however,  he noted  that                                                            
there  is a  four-year  limit in  which  the qualifying  work  could                                                            
Senator  Taylor asked  whether  the  legislation has  a termination                                                             
Mr.  Dickinson  identified   information  in  Section   3(a),  which                                                            
indicates that  credits against the  tax due are subject  to oil and                                                            
gas  produced on  or after  July  1, 2004,  and Section  3(b)  which                                                            
states  that  exploration  expenditure  must  be incurred  for  work                                                            
performed  on or  after July  1, 2003 and  before July  1, 2007.  He                                                            
stated  that this four-year  window  would prompt  "this work  to be                                                            
done," and  were it done,  the State "would  underwrite up  to forty                                                            
percent of it."                                                                                                                 
Senator  B.  Stevens asked  why  the  oil and  gas  exploration  tax                                                            
credits for  dry well expenditures  differs from that allowed  for a                                                            
successful well.                                                                                                                
Mr. Dickinson noted that these are "very different" situations.                                                                 
Senator  B. Stevens  observed that  the expenditures  that could  be                                                            
applied to the credit for  a successful well are "more expansive" in                                                            
their incorporation of associated, allowable expenses.                                                                          
Mr.  Myers  stated that  there  "is  a different  element  of  risk"                                                            
associated  with the expense of developing  a successful  well hole.                                                            
He continued  that  expenses  such as  roads, leasing  permits,  and                                                            
helicopter  pads   would  be  necessary  as  opposed   to  only  the                                                            
exploration expenses associated with a dry well.                                                                                
Mr. Myers  stated that  the exploration  credits are "deliberately"                                                             
limited  "on  the  exploration   side  not  to  include  testing  or                                                            
development  costs or  … delineation  costs to try  to minimize  the                                                            
fiscal impact, yet encourage exploration."                                                                                      
Mr. Myers stated that as  exploration is conducted further away from                                                            
existing infrastructure,  "you need to find a substantial  discovery                                                            
or series  of discoveries  to make  it economical."  He avowed  that                                                            
this legislation would  assist in "pushing" those endeavors forward.                                                            
Mr. Dickinson  interjected that philosophical  differences  occur in                                                            
discussions regarding  offering a broad-based project  a ten percent                                                            
credit and a narrower based project a larger credit.                                                                            
Senator  Hoffman  inquired  regarding  the reason  for  offering  an                                                            
exploration tax credit of up to a 40 percent.                                                                                   
Commissioner Corbus responded  that this proposal is a test program,                                                            
which the Department would evaluate "at the end of year four."                                                                  
Senator Taylor  asked the Department whether this  legislation would                                                            
"encourage independents and wildcat" developers.                                                                                
Mr.  Dickinson voiced  the  belief that  this program  would  entice                                                            
those  types of developers.  He  commented that  this program  would                                                            
provide the  Department with information  regarding what  incentives                                                            
are  required  to  encourage  a  variety   of  entities  to  conduct                                                            
exploration in the State.                                                                                                       
Mr.  Dickinson  referred Committee  members  to  the aforementioned                                                             
handout titled  "Cost of  Exploration." He  noted that Alaska  is at                                                            
the "very  bottom" of  the table  depicting the  level of  financial                                                            
assistance  that developers  receive from the  State as compared  to                                                            
other governmental entities.                                                                                                    
Senator   Taylor  noted   that  another   obstacle  to  encouraging                                                             
independents to operate  in the State is the inability to access the                                                            
Trans  Alaska Pipeline  with  their  product. As  a  result of  this                                                            
access  problem, he  stated that  even though  these entities  might                                                            
have a successful find,  they are forced to sell that find to one of                                                            
the larger companies.                                                                                                           
Mr. Dickinson commented  that, while this concern is "clearly one of                                                            
several aspects"  of the industry, the focus of this  legislation is                                                            
to encourage  the performance of exploratory  work by the  industry.                                                            
Mr.  Myers shared  that he  has professionally  worked  in  numerous                                                            
exploration projects,  and, as a result, he believes  that there are                                                            
multiple ways  that a credit like  this would work: first,  it would                                                            
provide  companies  that are  not exploring  their  large tracts  of                                                            
exploration  acreage the ability "to  farm out an interest  in their                                                            
properties in  which case this credit would be of  value in bringing                                                            
other  companies"  to  share  the  value of  the  credit.  This,  he                                                            
asserted,  would enable  such  things as  drilling  costs and  other                                                            
expenses to  be more manageable. Secondly,  he contended,  the large                                                            
number of small  independents operating on the North  Slope and "who                                                            
are literally  cash constrained" would benefit, as  this legislation                                                            
would assist them in getting their projects operational.                                                                        
Mr. Myers shared  that, in addition to the access  issue facing some                                                            
developers, the  availability of rigs and ice making  equipment; the                                                            
cost of transportation  of the crude  oil; and "maneuvering  through                                                            
the environmental  permitting process"  are other areas of  concern.                                                            
However, he  stressed that receiving  up to a 40-percent  tax credit                                                            
as specified  in this legislation  would be important in  addressing                                                            
the cost restraints placed upon a company.                                                                                      
Senator  Taylor  noted  that  the  legislation  requires  an  actual                                                            
ownership   interest  in   the  well  rather   than  a  partnership                                                             
relationship, in order to qualify for the credit.                                                                               
Mr. Dickinson  clarified  that  the "earlier  exploration  incentive                                                            
credit" did require  an ownership interest; however,  this committee                                                            
substitute  does not.  However, he  continued  that "typically,"  it                                                            
would be  expected that the  ownership company  would be present  in                                                            
the activity.  He stated that, "if they have an over-riding  royalty                                                            
interest  or  some other  interest  in there  that  is  not a  clear                                                            
working interest they would qualify for this credit."                                                                           
Senator Taylor  voiced the understanding  that in order "to  get the                                                            
credit…you had to have an actual ownership in that well."                                                                       
Mr.  Dickinson  confirmed  "to  take  the  credit,  because  it's  a                                                            
severance tax,  yes, you have to have  that interest." He  clarified                                                            
that were  an independent  to own  the credit,  "they would  have to                                                            
sell it to someone who could actually take it."                                                                                 
Senator  Taylor voiced  concern that  due to the  limited market  of                                                            
entities  with ownership interests,  the discounts  on the  price of                                                            
the tax credit certificate "would get pretty stiff."                                                                            
Mr. Myers attested  that the Department's  experience pertaining  to                                                            
the  sale of  incentive credits  indicates  that  they "have  traded                                                            
fairly well,"  with the trades being  approximately ninety  cents on                                                            
the dollar.  He professed that while  it is a discounted  value, "it                                                            
does  have  real  value"  and  that   there  is  a  market  for  the                                                            
DOUG SHULTZ,  Vice President  of Operations,  XTO Energy,  testified                                                            
from an offnet site and  informed the Committee that he oversees the                                                            
Alaska Operations  for the company.  He stated that he is  available                                                            
to answer questions  pertaining to the midrange language  section of                                                            
the bill.                                                                                                                       
Senator  Hoffman   stated  that  being   provided  with   additional                                                            
"snapshot"  information regarding  developmental  costs and  credits                                                            
would be helpful.                                                                                                               
Mr.  Dickinson  responded  that a  table  of  this nature  could  be                                                            
generated and provided to the Committee.                                                                                        
Mr.  Dickinson  theorized   that  were  another  Alpine   Oil  Field                                                            
discovered, it  would generate approximately one billion  dollars of                                                            
revenue for the State.  He voiced that this program should be gauged                                                            
by the rate  of return on  the investment  rather than how  much the                                                            
State would  lose by offering  tax incentives.  He stated that  "the                                                            
problem lies in  the hope" that another large oil  field like Alpine                                                            
would be discovered,  as opposed to finding large  quantities of oil                                                            
generated from  numerous smaller pools.  He stated that the  smaller                                                            
pool scenario  would not generate the same high rate  of return as a                                                            
large pool. He  stated that by proposing this exploration  incentive                                                            
program, the State is attempting  to increase the rate of success of                                                            
finding another large field  by increasing the amount of exploration                                                            
being conducted.                                                                                                                
Senator  Hoffman   calculated  that  were  this  incentive   program                                                            
implemented,   the  State  would   move  from  the  bottom   of  the                                                            
aforementioned  Cost  of  Exploration  table  depicting   government                                                            
incentive programs to approximately the middle.                                                                                 
Mr. Dickinson  agreed that this tax  credit incentive program  would                                                            
make the State "just average."                                                                                                  
Senator Hoffman  stated that Alaska's incentives would  therefore be                                                            
comparable  to those offered  in the Gulf  of Mexico and the  United                                                            
Kingdom, but  substantially below  the incentive program  offered by                                                            
Mr. Dickinson  agreed that this would be a good reference;  however,                                                            
he noted that the chart  is based on theoretical rates. He continued                                                            
that there might be a two or three cent variation.                                                                              
Senator Hoffman  asked whether the level of production  would affect                                                            
the credit amount being provided.                                                                                               
Mr.  Dickinson confirmed  that  the  credit level  is  based on  the                                                            
actual amount of oil being produced.                                                                                            
Senator Hoffman asked whether  a higher potential of discovery in an                                                            
area would correspondingly be assigned a larger incentive.                                                                      
Mr.  Dickinson  communicated  that,  "in  the  final  analysis,  the                                                            
geology is  what is going to matter."  He continued that  regardless                                                            
of the  level of incentive,  an area with  minimal chance of  return                                                            
would not be explored.  He continued that areas such  as Prudhoe Bay                                                            
did  not require  an  incentive because  it  was believed  that  the                                                            
probability of a successful find was high.                                                                                      
Senator  Hoffman  asked for  additional  information  regarding  the                                                            
incentives provided by  Russia and China as these countries' credits                                                            
stipulate that  the incentives offered  would be "less depending  on                                                            
level of production."                                                                                                           
Mr. Dickinson responded  that this language is included in the chart                                                            
because  in  some  countries   "there  is  not  a  single  rule  for                                                            
everything."  He noted that in Kazakhstan,  for example,  incentives                                                            
are determined by production  sharing agreements some of which might                                                            
be high and some  that might be low. He stressed that,  "the ability                                                            
to take the credit ties back to the ability to produce."                                                                        
Senator  B. Stevens  asked  for an  explanation of  "an exploration                                                             
unit" as specified in Section 3(b)(4) which reads as follows.                                                                   
               (4) may not be incurred for an exploration well or                                                               
     seismic exploration that is included in a plan of exploration                                                              
     or a plan of development for any unit in the state at the time                                                             
     the expense is incurred.                                                                                                   
Senator B. Stevens additionally  asked whether the credit applies to                                                            
expenses associated with  the purchase of a lease that establishes a                                                            
new unit.                                                                                                                       
Mr.  Dickinson  responded  that  lease  acquisition  costs  are  not                                                            
included in the credit calculation.                                                                                             
Mr. Myers responded to  Senator Stevens' question by explaining that                                                            
this credit "is designed  to stimulate activity that would not occur                                                            
otherwise."  He continued that,  "a unit is  an aggregate of  leases                                                            
put together  for common exploration  or development." He  recounted                                                            
that  the  State  forms  an  agreement  with  the  lessees  who  are                                                            
obligated to perform  certain activities in order  to extend a lease                                                            
beyond  the  primary   term.  He  stated  that  these  "reasonable"                                                             
conditions  and activities could include  such things as  specifying                                                            
that  a  certain  number of  wells  must  be  driven  as well  as  a                                                            
commitment  to shoot  seismic. He  stated that a  typical unit  term                                                            
might be  three to five  years, and were  the conditions unmet,  the                                                            
State could cancel the lease and reissue it to another entity.                                                                  
Mr. Myers  clarified that  the costs associated  with upholding  the                                                            
extension  conditions  do not  qualify  for the  exploration  credit                                                            
incentive,  as they  are recognized  as a requirement  of the  lease                                                            
extension.  He  continued that  additional  exploration  work  could                                                            
occur  and he  asserted, that  this  is, in  fact, the  goal of  the                                                            
exploration  credit  program.  He  continued  that  once a  unit  is                                                            
established   and  exploration  occurring,   the  next  step,   upon                                                            
discovery   of  a   field,   would  be   the  development   of   the                                                            
infrastructure  to enable production to begin. He  noted that rather                                                            
than  shooting  separate  seismic  surveys,   some  companies  shoot                                                            
seismic surveys  both inside and outside of the perimeter  of a unit                                                            
for  economic reasons  and  that credits  could  be  issued for  the                                                            
seismic work conducted outside of the unit.                                                                                     
Senator B. Stevens summarized,  therefore, that a unit does not need                                                            
to exist to qualify for a tax credit.                                                                                           
Mr. Myers  agreed and furthered  that allowance  of the exploration                                                             
credit for  seismic surveys conducted  outside of a unit  could lead                                                            
to the development of new  units for production as, he conveyed, the                                                            
natural evolution  after something  is discovered is to form  a unit                                                            
for development.  He stated that,  while a typical lease  term for a                                                            
unit is  seven to ten  years, a  lease could be  extended for  up to                                                            
thirty years.                                                                                                                   
Senator B. Stevens commented  that the credits should be referred to                                                            
as unit exploration credits rather than oil exploration credits.                                                                
Senator  Taylor noted  that the  Department of  Revenue fiscal  note                                                            
explanation  specifies that  were the State  successful in  doubling                                                            
the amount  of exploration  that is currently  being conducted,  the                                                            
credit program  would cost the State $100 million  in revenue in the                                                            
next fiscal year.                                                                                                               
Mr.  Dickinson  responded  that, based  on  estimates,  that  amount                                                            
"would be the ceiling."  He stated that while this figure might be a                                                            
little high, the possibility "is in that order of magnitude."                                                                   
Senator Taylor  voiced that it is  difficult to support legislation                                                             
that might  result in a revenue reduction  of $100 million  when the                                                            
State's current  revenue and expense  projections might result  in a                                                            
$400 million  draw on the  Constitutional  Budget Reserve (CBR).  He                                                            
pointed out that  the fiscal note additionally states  that there is                                                            
little likelihood  that the State  would garner offsetting  revenues                                                            
as a result of this legislation  until the year 2007. He stated that                                                            
this is a "major"  concept and that the Committee  should not make a                                                            
quick decision on it.                                                                                                           
Co-Chair Wilken  agreed; however, he stated that this  discussion is                                                            
providing   information   that  would   assist   the  Committee   in                                                            
understanding "this big legislation."                                                                                           
STEVE PORTER,  Deputy Commissioner,  Department  of Revenue,  stated                                                            
that "the amount  of drilling it would  statistically take"  to cost                                                            
the State $100  million in revenue  would need to be "substantial."                                                             
He   continued  that   the   fiscal   note's  "high   numbers"   are                                                            
conservatively  presented   to  reflect  the  range  that  might  be                                                            
possible. Additionally,  he noted that to incur this  level, most of                                                            
the drilling  must occur  outside  of the 25-mile  zone as  compared                                                            
with  current  practice whereby  the  majority  of the  wells  being                                                            
drilled this year are located  within the three to 25-mile zone with                                                            
only one well being drilled outside of the 25-mile zone.                                                                        
KEVIN  TABLER, Land  and  Government  Affairs Manager,  Unocal  Oil,                                                            
testified  via teleconference  from offnet  site to stress  that the                                                            
discussion not  lose, "the importance of the primary  purpose of the                                                            
bill" which is "the royalty  reduction aspect in the Cook Inlet," He                                                            
opined that  this "would  be a wonderful thing  to have." He  voiced                                                            
concern that the  focus is now exploration on the  North Slope when,                                                            
he attested,  the focus  should be  on furthering  exploration  on a                                                            
statewide basis.                                                                                                                
Mr. Tabler commented  on language in Section 3(c)(2)  which reads as                                                            
          c) To be eligible for a 20 percent production tax credit,                                                             
     exploration expenditures must                                                                                              
                (1) qualify under (b) of this section; and                                                                      
               (2) be for an exploration well that is located and                                                               
     drilled  in such a manner  that neither  the bore hole  nor any                                                            
     part of  the bore hole is at  any time located less  than three                                                            
     miles  away  from any  part of  a bore  hole  of a preexisting                                                             
     suspended, completed, or abandoned oil or gas well.                                                                        
Mr. Tabler  stated  that while  he understands  the  intent of  this                                                            
language,  he voiced the  concern that were  a three-mile arc  drawn                                                            
around every  bore hole in Cook Inlet  that has been drilled,  there                                                            
would be no  place for a new exploratory  well. He stated  that this                                                            
negates the incentive to drill in the area.                                                                                     
Mr. Tabler voiced that  in addition to the density concern, there is                                                            
an issue  regarding  the depth component.  He exampled  that  were a                                                            
company  to drill a  15,000 foot or  19,000 foot  test well  from an                                                            
existing  platform,  this,  in essence  could  meet  the  three-mile                                                            
criteria.  Therefore,  he  suggested  that language  be  changed  to                                                            
specify, "certified"  rather than pre-existing oil  or gas well and,                                                            
in addition, insertion  of the language "producing  from a formation                                                            
or certified  capable  to produce  from  the same  formation in  the                                                            
exploration well."  He reemphasized that the discussion  "should not                                                            
lose sight of the royalty component" of the bill.                                                                               
Mr. Myers voiced  that "the focus  should be on what you  are trying                                                            
to incentiveize."  He stated that  exploration for deeper  wells and                                                            
step-out  wells  is occurring  in  existing  fields, and  that  true                                                            
wildcat  exploration is  occurring in  areas that  are removed  from                                                            
existing  infrastructure  and that  have more  uncertainty and  less                                                            
mapping  accumulations.   He  stated  that  all  of  this  could  be                                                            
characterized as exploration,  but he attested, the goal is to focus                                                            
"on what you  wish to incentiveize."  He stated that the  three-mile                                                            
limit would promote wildcat  exploration that involves more risk and                                                            
expense.  He reemphasized   that this  type  of development  is  the                                                            
intent of the credit program.                                                                                                   
Co-Chair  Wilken  echoed Senator  Taylor's  comments  that "this  is                                                            
significant  legislation." He noted  that the bill would  be held in                                                            
Committee,  and he  continued, that  upon completion  of  testimony,                                                            
further technical changes  could be entertained. He noted that a new                                                            
committee substitute would be forthcoming.                                                                                      
Senator Taylor voiced concern  that as "the pool of participants and                                                            
producers has  diminished," the State  might be "being manipulated"                                                             
by  corporations  that  leverage exploration   in one  area  against                                                            
another, specifically  playing the State's budget  deficit situation                                                            
in their  favor.  He stated  that  these corporate  decisions  might                                                            
influence   legislation  that  could   provide  the  industry   with                                                            
additional  incentives.  He  voiced concern  that  this  might be  a                                                            
factor behind this legislation.                                                                                                 
Commissioner  Corbus stressed that,  while the aforementioned  chart                                                            
comparing  Alaska's incentives  against other  countries might  have                                                            
been  some influence,  Governor  Murkowski  and  the Administration                                                             
presented the exploration credit legislation.                                                                                   
Mr.  Porter  assured   the  Committee  that  this  legislation   was                                                            
initiated  by  the   Governor  rather  than  by  the   industry.  He                                                            
communicated  that the  oil industry  currently  "has a substantial                                                             
amount of production"  in the State; however, he continued  that the                                                            
benefits of that asset  could be taken and invested either in Alaska                                                            
or in  another area  of the  world. He  stated that  an oil  company                                                            
could decide  to invest 20-cents or  65-cents of that dollar  in the                                                            
State or elsewhere.  He stated that the industry would  invest in an                                                            
area where  "they would get  the most bang  for their buck,"  and he                                                            
contended,  the intent of this legislation  is to draw some  of that                                                            
dollar back to the State.                                                                                                       
At Co-chair Wilken's  request, Mr. Porter shared with  the Committee                                                            
his professional experience,  which includes twenty-one years in the                                                            
oil  and gas  industry and  incorporated  such things  as  community                                                            
relations  and  negotiations,   specifically  dealing   with  issues                                                            
pertaining to the North Slope.                                                                                                  
Mr. Myers  further explained  that the bill  specifies that  seismic                                                            
data that would  be collected would  have "clear value" as  it would                                                            
be "released after ten  years." He noted that this information would                                                            
"help everyone  across the  board." Furthermore,  he clarified  that                                                            
the exploration tax credits  would be available to both independents                                                            
as well as  producers although, he  specified that the independents                                                             
would be  required to  sell the credits  at a  discount in order  to                                                            
receive that benefit.                                                                                                           
SFC 03 # 93, Side A 06:17 PM                                                                                                    
Mr. Myers  continued that  while the legislation  might not  address                                                            
all the issues, it does further exploration efforts.                                                                            
Senator Taylor  shared that he has  consistently supported  measures                                                            
that could  assist independent operators  as, he attested,  having a                                                            
multitude of entities operating  in the State "was the only way that                                                            
we as a State  could find out what the value of our  resource really                                                            
was." He  noted that 30-percent  of the Lower  48's oil is  produced                                                            
either by wildcats  or independents,  and he stressed that  he would                                                            
like to see those percentages  in Alaska. He voiced support for this                                                            
type of legislation  in addition to  legislation that "would  reduce                                                            
environmental costs to  enable the State to be more competitive with                                                            
the rest  of the  oil producing  world."  Yet, he  continued, he  is                                                            
disappointed  that this legislation  is being presented late  in the                                                            
Legislation  session as  it deters  the ability  "to have a  greater                                                            
opportunity  to  explore it;"  however,  he  voiced "faith"  in  the                                                            
information being provided.                                                                                                     
Senator B.  Stevens asked  the source of  the "Cost of Exploration"                                                             
comparison  chart   information  that  has  been  provided   to  the                                                            
Mr.  Dickinson  replied   that  a  private  consultant   renown  for                                                            
producing  annual  summaries  pertaining  to world  fiscal  regimes,                                                            
supplied the information to the State.                                                                                          
Senator B.  Stevens clarified that  the consultant was hired  by the                                                            
Mr. Dickinson clarified  that the individual was hired by the State;                                                            
however,  he noted  that the  information  was not  compiled at  the                                                            
direction  of the  State,  as this  information is  commutated  from                                                            
information the consultant compiles on an on-going basis.                                                                       
Co-Chair  Wilken  asked  whether  this  legislation  differentiates                                                             
between  royalties and  severance  taxes for  production on  private                                                            
land as compared to those in place on State or federal land.                                                                    
Mr. Dickinson stated that  work conducted on private land is treated                                                            
in  the same  manner  as  State  or federal  land.  He  stated  that                                                            
property and income  taxes occur regardless of the  ownership status                                                            
of the  land;  however, he  reminded that  royalties  apply only  to                                                            
production  on  State  land  and that  royalties  on  production  on                                                            
federal  land  are  negotiated  with  the  federal   government.  He                                                            
specified  that a severance  tax is  applicable to  all oil  and gas                                                            
produced  in  the State  based  on  the size  of  the accumulation.                                                             
Therefore,  he noted that while every  pool on the North  Slope pays                                                            
the State, the  rates vary. Nonetheless, he concluded,  "more oil in                                                            
the pipeline"  is the  focus of  this legislation,  and he  stressed                                                            
that the royalty  and severance taxes  could be addressed  once that                                                            
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
AT EASE 6:21 PM / 6:22 PM                                                                                                       

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