Legislature(2005 - 2006)BUTROVICH 205
04/13/2005 03:30 PM RESOURCES
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.