Legislature(2001 - 2002)
04/13/2002 03:10 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.