Legislature(2005 - 2006)BUTROVICH 205
03/02/2005 03:30 PM RESOURCES
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* first hearing in first committee of referral
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SB 53-AK PENINSULA OIL & GAS LEASE SALE; TAXES CHAIR THOMAS WAGONER announced SB 53 to be up for consideration. DAN DICKERSON, Director, Tax Division, said the intent of SB 53 is to extend the Alaska Peninsula as part of the active oil and gas province in Alaska. It takes an exploration credit that was passed two years ago and says if the Department of Natural Resources (DNR) is contemplating a sale on the Alaska Peninsula, a four-year window will be opened. "If any exploration occurs, the state will bear some of that risk." The Governor and folks in Bristol Bay support this bill. MARK MYERS, Director, Division of Oil and Gas, noted the division's preliminary best interest findings that were just put out for public comment on the recent Alaska Peninsula lease sale. He hoped to issue final findings and a commissioner's approval soon; the sale would actually occur in October 2005 and has significant potential for natural gas and oil. The sale will cover onshore state lands and waters out to the three-mile limit with onshore drilling only. The basin has 20 or so wells that were drilled before 1985. After that, there was only leasing and drilling on federal and submerged lands on the Outer Continental Shelf (OCS), but this was discontinued over environmental concerns. The community has had a change of heart and it now wants an oil and gas lease sale. MR. MYERS said the companies hadn't really looked at the area in any great detail since about 1985 when it left and a big gap in oil and gas exploration data exists. This incentive credit is strategically placed to accelerate the acquisition of modern seismic data and the potential early exploration drilling in the basin. The credit is available for the first five years. Because there are no active leases in the area, a credit like this gets factored into the bid if people come to the sale at all. It is a frontier basin without data or oil and gas infrastructure. "There is significant geologic and economic risk." The credit is up to 40% and if it is accepted, the state will be allowed to release the data in 10 years. Generally, data is released after 25 months unless confidentiality is extended, but seismic data is never released. This bill provides an opportunity to get data out there faster. He thinks it will bring more companies to participate in the sale and increase the size of their bids. It will be seen very positively by industry. SENATOR GUESS arrived at 3:42. SENATOR ELTON asked if he could quantify if the increased activity that has taken place in other oil and gas regimes since the passage of the original bill in 2003. 3:45:56 PM MR. MYERS replied that he hadn't seen any increased spending activity. He has eight applications under the program and most of them are on the North Slope; two are on the NPRA. There is no way to quantify whether it has led to incremental bids because the program is too young. Much of the perspective acreage on the North Slope is already under lease. However, the value and number of the bids have increased as well as the number of companies bidding in the last two years. He pointed out that oil prices have been higher, too. The increased number of applications indicates the credit is being used. But he didn't know in basins like the North Slope whether the credit was bringing the companies in or whether the companies using it were already planning on making the investment. There is an up-tic of interest in using this credit in some of the exploration license areas like Copper River and Nenana. Revenues will not increase until production beings, however. 3:47:28 PM GARY ROGERS, Revenue Auditor, Tax Division, said he audits the exploration tax credits. Drilling an exploration well more than three miles from a preexisting well receives 20% allowable expenses. An exploration well drilled more than 25 miles from the unit receives 20% of exploration drilling costs. If the well is both more than three miles from a preexisting well and more than 25 miles from the unit, it gets 40% credit for the drilling costs. The credit also provides for a 40% credit in seismic exploration costs. 3:49:37 PM Once the credit application has been audited and the credit has been issued, the explorer can either use it to offset his production tax liability or sell or transfer the credit to another party that has a production tax liability. In general, allowable expenses are directly related to the work; excluded are administration, environmental, overhead indirect costs. SB 53 extends the provisions of last year's credit program to the Alaska Peninsula lease sale area and extends its deadline. SENATOR ELTON asked if the bill extends the tax credit in the Bristol Bay area to 2010 and they are given based on the distance the new wells are from existing wells. MR. ROGERS responded that there actually are some old wells out there. SENATOR ELTON sought to clarify: If you go out and drill two wells in a season, say, right next to each other, the first well won't turn around and disqualify the second. We'll look at that as a project. Then the other point, which I think is made, I think when Mark said there have been 20 wells drilled up to 1985, there's a cut off.... The ones that were done back... at the turn of the century...some very old ones, won't be considered. I think the cut off is roughly 30 years. Ones that were drilled as recently as 1985, you would have to be three miles from that well to get your total 40% credit. 3:51:41 PM CHAIR WAGONER said the state might already have all of the information from that well. MR. MYERS responded that the information from those old wells are public knowledge. But wells like the Amoco Pitcherov, drilled around 1985, would disqualify other wells drilled within a three-mile radius. There's two components. The 20% credit applies for - any well gets at least 20% if it's more than three miles away from an existing well post 1979. There's a second criteria that it has to be 25 miles from an existing oil and gas unit as of 2003. There are no oil and gas units; so, if a well qualifies in the Bristol Bay area, at least for the first season, it will qualify for a full 40% credit.... There may be four or five wells that are post '79; the rest of the area would qualify at the full 40%. 3:53:37 PM SENATOR SEEKINS asked if every new well would qualify unless it was within three miles of a preexisting well from back then; so if there is a really hot strike, every other well around it qualifies for the 40% credit no matter what. MR. DICKERSON replied that is correct. 3:55:25 PM SENATOR ELTON said he understood that happened for the first year, but would the credit only be for new wells outside the three miles in the second year. MR. DICKERSON replied that is correct. CHAIR WAGONER noted a large number of supporting letters from municipal and tribal governments, which represented the communities in the area, but commercial fishing groups hadn't commented yet. He announced that the bill would be held until the next meeting.