Legislature(2001 - 2002)
04/13/2002 03:10 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 307-OIL/GAS EXPLORATION INCENTIVE CREDIT
CHAIRMAN TAYLOR announced the first bill to be heard would be HB
307.
MR. JAY HARDENBROOK, staff to Representative Hugh Fate, thanked
Chairman Taylor and the Judiciary Committee for holding the
hearing on HB 307 in Fairbanks. Fairbanks is an area that will
receive benefits from this legislation.
MR. HARDENBROOK explained HB 307 extends the sunset date for the
exploration incentive credit program. This program gives a tax
incentive to companies that do exploratory drilling for petroleum
in Alaska. The Commissioner of the Department of Natural
Resources (DNR) handles each tax credit application on a case-by-
case basis before the credit is granted. The judgment on whether
or not the credit is given is based on the value of the
information to the state. This program, though it has not been
used as of yet, has the potential to open up the Interior and
several other basins throughout the state to petroleum
exploration.
MR. HARDENBROOK said DNR, specifically the Division of Oil and
Gas, was neutral in earlier hearings on HB 307. HB 307 had
bipartisan support in both the Senate and the House.
MR. DEAN OWEN, Executive Director, Fairbanks Economic Development
Corporation, said it supports HB 307 for the following reasons.
· It is good for economic growth in the Interior.
· It encourages responsible resource exploration.
· It helps create a positive environment for oil and gas
exploration.
MR. JIM DODSON, Executive Vice President, Amdex Resources LLC,
said Amdex filed on an exploration license area west/southwest of
Fairbanks in the Nenana Basin. Amdex anticipates its license
will be issued in August or September of 2002. It would like to
be in the Nenana Basin this winter shooting seismic with the hope
of ultimately drilling some wells in the winter of 2003 and 2004.
With a successful exploration project Amdex will be able to
supply natural gas to the Fairbanks and Interior Alaska markets.
MR. DODSON said HB 307 allows a company to take additional risk
when conducting seismic and exploratory drilling activities. If
they have an exploration incentive credit attached to a seismic
program or an exploratory well they are more willing to shoot
more seismic data or drill a well deeper or possibly drill a
second or third well they would not otherwise drill. It extends
the amount of work they can do in a particular exploration
budget. They are highly supportive of HB 307.
CHAIRMAN TAYLOR said they shared the excitement in the
possibilities this gas opportunity will bring for Fairbanks and
the whole Interior. He wished Amdex the best on their
exploration venture.
MR. DODSON said they hope to reduce fuel costs to the Interior
where people are currently paying just over $10 per million BTU
and about $1.30 or $1.35 per gallon for heating fuel delivered to
homes. That is an expensive source of energy and Amdex hopes to
lower the cost by providing natural gas.
CHAIRMAN TAYLOR hoped Amdex has a successful venture.
MR. MARK MYERS, Director, Division of Oil and Gas, was available
to answer questions.
CHAIRMAN TAYLOR asked if the Administration supports the
legislation to extend the date.
MR. MYERS said the Administration is neutral on the legislation.
It recognizes that the program has value and that the bill gives
discretion to the Commissioner of DNR. It is his understanding
that the Governor is neutral on the bill.
SENATOR THERRIAULT asked how transferability of the credit would
work. According to the fiscal note, the credit may not exceed $5
million per eligible project. He asked how an eligible project
would be defined.
MR. MYERS said the credit is good for royalties, rentals, taxes
and bonus bids and is transferable to other companies if, for
instance, that particular company doesn't have production at that
time or doesn't have enough to offset bonuses or rentals. It has
not been used with this program but it is almost identical to the
Economic Investment Credit (EIC) program. Many of those credits
have been transferred with the EIC structure that is attached to
leasing. It is an arrangement between the companies. The credit
itself is transferable and can be used for royalties, rentals,
taxes and bonus bids.
SENATOR THERRIAULT asked for the definition of single project.
MR. MYERS said that is a discretionary call at this point and is
not specifically defined in regulations. An eligible project
could be a well or a group of wells. The commissioner looks at
the value of the information. If the area has three tightly
spaced wells, a project will probably consist of all three wells.
The strict informational value from each well in close proximity
wouldn't be very high so the commissioner would probably type
that as one project. Regional seismic data might be another
project. There is a cap of $5 million per project and the total
for a program can't exceed $30 million. The definition of
"project" is not specifically defined in either statute or
regulation but passes as a common sense test when they see the
company's proposal before them.
SENATOR THERRIAULT asked if the individual applicant would make
that pitch to DNR when submitting an application.
MR. MYERS said yes. The EIC would be approved prior to the
drilling and is based on so many dollars per foot of well or so
many dollars per line mile or square mile of seismic.
CHAIRMAN TAYLOR asked if the entire question of whether or not
the credit would be granted is totally discretionary with the
commissioner, it would then be up to the commissioner and DNR
personnel to provide the parameters or definitions for the
project question.
MR. MYERS answered yes.
SENATOR COWDERY asked if there was anyway to tighten up the issue
of discretion and whether or not it should be tightened up. He
commented that it seems the discretion would be decided by
regulation and they had discussed regulation vs. statute early
that day. He asked for Chairman Taylor's or Mr. Myer's thoughts
on the matter and said he did not like the idea they could
hypothetically tax the companies $10 or $50. He liked to have
the things they did be tight.
CHAIRMAN TAYLOR said he was part of the group when that
legislation was passed. At that time he was concerned about that
discretion but to date no one had taken advantage of it or
applied for credit.
He explained the state would receive valuable information it
would not have a right to otherwise. Most of that information is
seismic, very proprietary and very important to the companies.
The companies are willing to exchange that if they receive credit
in return for having developed a new project. They left both
sides of that issue open. They have not set parameters on what
would be adequate information to be conveyed by the company and
yet at the same time they haven't set parameters on what would be
considered adequate for value of the project for the commissioner
to grant the credit.
CHAIRMAN TAYLOR said a lot of this is going to have to proceed on
a trust basis until people actually start to work and take
advantage of it. If there is a dispute between the commissioner
and the company, something that defined it would be in front of
the legislature. He thought they should hold off rather than try
to define something in a vacuum.
SENATOR COWDERY hoped if there were any problems DNR would come
back to the legislature.
CHAIRMAN TAYLOR thought they would have to.
SENATOR THERRIAULT asked Mr. Hardenbrook if Representative Fate
had looked at the regulations. AS 41.09.010 section (f),
referenced in the legislation, states an "eligible project, as
defined by the commissioner by regulation." He asked if
Representative Fate or Mr. Hardenbrook looked at that regulatory
definition to see if it was overly stringent when drafting the
legislation and whether that was the reason they had no takers
for this section of the statute.
MR. HARDENBROOK said he had not and that the Division of Oil and
Gas would be much better suited to answer the question.
MR. MYERS replied:
Basically, the regulations under 11 AAC 89.015,
eligible project, basically describes the project must
be described and the plan submitted under the
regulations providing sufficient detail to determine
whether proposed activity will provide data to enhance
the state's resource evaluation program. So,
fundamentally, it's turned back to say that again it's
the value of the information and the value of the
information has to be determined by professionals, in
this case either geophysicists or geologists. So
there's again a specialized skill there involved in
determining what is the value. And I think the level
of the credit then would be associated with the value
the state sees in that information.
Specifically on state owned lands the state would -
does, in fact, receive the seismic data. So it would
be primarily on private, privately or federally owned
or federal government lands the state would be most
interested in seeing - paying for an EIC on seismic
data historically because again we get the data. The
only exception to that would be if the state determined
that showing this data to a third party was very
important the state could pay for that even though it
was getting the data because there is a provision in
that for specifically showing that data, not giving but
showing to third parties.
On the well data, fundamentally again, on private lands
the state would normally receive that data 25 months
after it's drilled. The state would look at it and say
it's important for us to get this information earlier
than is typical. Or the other thing it does if the
state pays for the information, the well cannot be put
under extended confidentiality on either private or
state lands. Those are released at 25 months from the
date of completion [under] normal circumstances. But
there are circumstances in which extended
confidentiality is granted because of the significance
of the information from that well to un-leased acreage
nearby. So when credit is granted on this program the
companies have to waive their right for extended
confidentiality.
So those are kind of the sidebars and issues that go
into determining sort of whether or not the value of
the information is sufficient the state will want to
pay for it whether it wouldn't otherwise get the
information.
SENATOR THERRIAULT thanked Mr. Myers.
SENATOR COWDERY moved HB 307 from committee with accompanying
fiscal note and individual recommendations. There being no
objection, the motion carried.
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