Legislature(2005 - 2006)BUTROVICH 205
04/13/2005 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB163 | |
| SCR6 | |
| SCR7 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 53 | TELECONFERENCED | |
| *+ | SB 163 | TELECONFERENCED | |
| *+ | SCR 6 | TELECONFERENCED | |
| *+ | SCR 7 | TELECONFERENCED | |
SB 163-COOK INLET OIL & GAS TAX CREDIT
CHAIR THOMAS WAGONER announced SB 163 to be up for
consideration.
3:44:15 PM
SENATOR KIM ELTON joined the committee.
MARY JACKSON, staff to Senator Wagoner, explained that
exploration incentive credits were extended to regions in Alaska
in previous legislation, but not in the Cook Inlet region. She
was instructed to work on credits that would apply to the Cook
Inlet and that's what SB 163 does. She provided a map to explain
positioning for credits and said that the old bill provided that
exploration wells must be outside of three miles from the first
drill to receive the first 20 percent incentive credit. Any
wells outside of 25 miles would receive a second 20 percent
credit. "None of it fits the Cook Inlet."
3:46:32 PM
MS. JACKSON explained that SB 163 says the drill must be within
the three miles for the first 20 percent credit and outside of
ten miles for the second 20 percent. However, she pointed out
that even the 10 mile is too big and very little would be
applicable there. It also provides that the producer has to
apply for the credits and the department must respond within 60
days, although the department would like 90 days. The credit is
capped at $20 million.
3:47:40 PM
SENATOR KIM ELTON asked how much incentive would be needed in
terms of making production efficient in Cook Inlet at the
current price levels.
3:47:56 PM
MARK MYERS, Director, Division of Oil and Gas and Division of
Geological and Geophysical Surveys, replied that the chairman
asked him what could be done in terms of incentives for Cook
Inlet that already has a large number of wells. There are still
some legitimate exploration targets that have not been explored.
He explained why saying that the earlier tax EIC used a
mechanical mechanism that defined an exploration well via its
distance from other wells. That's only one test that may be
relevant and while it is simple, it's really artificial. It is
irrelevant to the geological and economic risk taken on by a
producer or an explorer. A lot of the plays are in deeper
horizons near existing infrastructure, but they are no less
risky geologically than a frontier area or wildcat in the sense
of the geologic risk. The question is in a basin that is
relatively mature, how to define viable exploration plays and
how to provide incentives for them. Recognizing the three-mile
distance criteria doesn't really define an exploration play.
This presupposes a geological test - that a company would make
its case to the department with seismic and well data or other
geological and geophysical data and the commissioner would
predetermine if it is a separate target or if it is a
development well of an existing discovery.
If they can demonstrate that it is geologically
distinct or reasonably estimated with the data to be
distinct, the commissioner would pre-certify that they
would be eligible for the credit for the well.
The Cook Inlet is seen by the majors as a relatively mature
asset and the credit should encourage smaller independent
companies to explore. It would assist in their drilling
relatively expensive wells or bringing in the expensive jack up
rigs or other infrastructure needed to drill in the offshore
areas. Capping the amount at $20 million limits the downside
potential to the state.
SENATOR ELTON said he didn't think there was a perfect answer
because it's highly speculative.
3:52:00 PM
SENATOR DYSON joined the committee.
SENATOR ELTON asked what the status of the shallow gas leases in
the southern Kenai Peninsula are and if this credit would be
applicable there.
MR. MYERS replied there is no restriction on the credits as to
where they would apply in Cook Inlet - any well as long as it
meets the standards would qualify.
3:53:49 PM
SENATOR SEEKINS commented that a dry hole is still a dry hole
regardless of the price of oil.
3:54:28 PM
LISA PARKER, Agrium Inc., Kenai, said she appreciated the
legislature's efforts to encourage development in Cook Inlet.
With respect to SB 163, she said section 1 would apply to
activity after July 1, 2005 only and she asked if that is the
intent or a typing error.
She said section 4 and the five-year program in Cook Inlet with
the $20 million limit would mean that five or six wells could be
drilled or one, if it is offshore. She asked them to reexamine
the limit.
The programs still contain the usual exclusions, which diminish
the attractiveness of the incentive program. These exclusions
include administration, supervision, engineering, geological,
management and the environmental costs - all of which are
significant components and reduce the actual incentive from 20
percent to around 10 percent. With the incentive being at the
discretion of the commissioner who usually decides after the
work is incurred, potentially these would have little impacts on
an oil company's economics.
3:56:33 PM
CHAIR WAGONER said the July 1, 2005 date was wanted in the bill
and that the $20 million limit could at least get activity
started and could be revisited.
At this time I think the $20 million laying out there
gives some certainty to a lot of people that sometimes
question an open-ended incentive....
DAN DICKINSON, Director, Tax Division, Department of Revenue
(DOR), echoed Mr. Myers' and Ms. Jackson's comments. He said
this is a production tax credit that is more attuned to what is
going on in Cook Inlet. He corrected Ms. Parker who said that
the credit is capped at $20 million per well, saying that it is
not per well, but each well getting 20 percent credit not to
exceed $20 million total. But, he thought who actually gets the
credit could be clarified.
CHAIR WAGONER noted that there was no further public testimony
and set SB 163 aside.
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