Legislature(2001 - 2002)

04/13/2002 03:10 PM JUD

Audio Topic
* first hearing in first committee of referral
+ 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
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                                                              
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                                                                     
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                                                                   
     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                                                                        
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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