Legislature(2011 - 2012)BUTROVICH 205

03/07/2011 03:30 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Bills Previously Heard/Scheduled
Heard & Held
-- Invited and Public Testimony --
Moved HJR 11 Out of Committee
Presentation by Sponsor - Public Testimony
        SB  85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                     
3:41:32 PM                                                                                                                    
CO-CHAIR WAGONER announced  SB 85 to be up  for consideration. He                                                               
open public testimony and said  invited testimony would happen on                                                               
3:42:00 PM                                                                                                                    
MIKE MILLIGAN, representing  himself, said he had  been an Alaska                                                               
resident  since 1974  and had  raised a  bunch of  kids here  and                                                               
worked  on the  pipeline; he  had also  held elected  office. One                                                               
issue  that unites  all Alaskans  regardless  of their  political                                                               
persuasion is  that they all want  to build a gas  line, he said.                                                               
But,  due to  a movie  and New  York Times  articles he  saw last                                                               
week, he said he is  greatly concerned that the hydraulic fracing                                                               
occurring  in New  York, Pennsylvania,  Colorado  and Wyoming  is                                                               
going to  make Alaska's  gas less  economically viable;  they are                                                               
also  convincing the  public  that  natural gas  is  not a  clean                                                               
energy source. Pennsylvania is using radioactive road salts.                                                                    
He  was concerned,  particularly, that  the producers  would take                                                               
those  tax credits  and  go  to the  Lower  48  to develop  "this                                                               
fracing."  He wanted  some language  -  maybe in  section 1  that                                                               
would recognize  those oil  developers that  are not  involved in                                                               
fracing. He  related how using  road salts on  Pennsylvania roads                                                               
contributes radioactive substances to the groundwater there.                                                                    
3:45:04 PM                                                                                                                    
CO-CHAIR  WAGONER  thanked him  for  testifying,  and finding  no                                                               
further  comments, closed  public testimony.  He asked  if anyone                                                               
from DNR could answer committee questions at this time.                                                                         
3:46:37 PM                                                                                                                    
At ease 3:46 to 3:48 p.m.                                                                                                       
3:48:52 PM                                                                                                                    
CO-CHAIR WAGONER called the meeting back to order at 3:48 p.m..                                                                 
BRUCE  TANGEMAN,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR),  said  he   had  been  asked  to  be   available  for  any                                                               
questions." In  general, he  said the  department feels  that any                                                               
bill that  will increase  production and  create jobs  or attract                                                               
investment in  Alaska is  certainly worth  looking at.  They have                                                               
done some research  and found some technical issues  that need to                                                               
be addressed,  but in general  they feel  they can work  with the                                                               
SENATOR WIELECHOWSKI asked if this bill has a fiscal note.                                                                      
CO-CHAIR PASKVAN replied that the fiscal note is indeterminate.                                                                 
SENATOR WIELECHOWSKI asked  if he could come up  with a five-year                                                               
projection on what the fiscal impact might be.                                                                                  
MR. TANGEMAN  replied that  it is  an indeterminate  fiscal note,                                                               
and it would  depend on the type and size  of investment and size                                                               
of field, and those cannot be determined at this point.                                                                         
SENATOR WIELECHOWSKI  asked him  to talk  about some  fields that                                                               
might be  incentivized by  this tax  credit that  might therefore                                                               
provide an estimate.                                                                                                            
MR. TANGEMAN replied that this bill  looks at fields that are not                                                               
unitized at this point and it  would be more appropriate to ask a                                                               
producer that question.                                                                                                         
SENATOR  WIELECHOWSKI asked  if he  had  any sense  of leases  in                                                               
fields that are  not yet unitized. For instance,  Great Bear just                                                               
purchased  500,000 acres  that he  assumed  hadn't been  unitized                                                               
yet. Any estimates  of what this would cost if  it were developed                                                               
the way Great Bear presented to the committee last week?                                                                        
MR. TANGEMAN replied that would be a DNR question.                                                                              
3:52:47 PM                                                                                                                    
SENATOR WIELECHOWSKI said he thought  there would have to be some                                                               
collaboration between the two departments  on anything that would                                                               
MR.  TANGEMAN replied  there would  be some  coordination between                                                               
the two departments, but he is  not in a position to forecast for                                                               
development of  fields that  are not  unitized and  only unitized                                                               
fields are addressed in the department's production forecast.                                                                   
SENATOR WIELECHOWSKI asked if he supports the bill.                                                                             
MR.  TANGEMAN replied  that it  needs  some work  in its  current                                                               
form.  Their biggest  concern is  that the  sponsor's intent  was                                                               
that the explorer/producer would either  use this or the existing                                                               
structure as  a tax  credit vehicle  - either  one or  the other.                                                               
Their biggest  concern is that it  may not be exactly  clear that                                                               
that is the way forward.                                                                                                        
SENATOR WIELECHOWSKI asked if he  would support this bill even if                                                               
he had no idea what it would cost the state.                                                                                    
MR. TANGEMAN  replied, revenue aside,  that the  department would                                                               
support a  bill that would  increase production and get  more oil                                                               
in the pipeline. A tax  credit structure already exists, and this                                                               
is a  totally different type  of tax credit structure  that would                                                               
need a "little work" and  would certainly need regulations put in                                                               
place to implement.                                                                                                             
SENATOR WIELECHOWSKI  asked him  to coordinate  with DNR  and get                                                               
some  sort  of projections  together  on  what impacts  they  are                                                               
looking at based on the  developments with Repsol, Great Bear and                                                               
some of the other groups coming into Alaska.                                                                                    
MR. TANGEMAN replied, "Absolutely, Senator Wielechowski."                                                                       
3:55:59 PM                                                                                                                    
SENATOR FRENCH said  maybe they could use  Nakiachuk and Oooguruk                                                               
numbers for  walking them  through how the  bill would  work, and                                                               
said that  Oooguruk cost $500  million to develop and  under this                                                               
bill they would be getting a dollar-for-dollar credit.                                                                          
MR. TANGEMAN replied  that the amount of the  credit would depend                                                               
on the tax liability for the first five years of production.                                                                    
CO-CHAIR PASKVAN  said following  that line of  questioning under                                                               
the  definition of  "qualified development  expenditure" starting                                                               
on the  bottom of page 3  is an expenditure for  activities other                                                               
than exploring for new oil or  gas. So for example, if Great Bear                                                               
had a  $2 billion  annual drilling expenditure,  would that  be a                                                               
"qualified development expenditure?"                                                                                            
MR. TANGEMAN replied it is  a qualified expenditure based on when                                                               
the pool of  oil is certified and the expenses  that are incurred                                                               
up to  production. So, it would  depend on the acreage  that that                                                               
pool  covered  and   the  amount  of  expenses   that  went  into                                                               
developing them.                                                                                                                
CO-CHAIR PASKVAN  put forth a  scenario where  a pool isn't  in a                                                               
unit and a  producer is spending $2 billion a  year in a drilling                                                               
program  there,   and  asked  if   that  would  be   a  qualified                                                               
development expenditure?                                                                                                        
MR. TANGEMAN  answered that  he thought it  would be  a qualified                                                               
expenditure  depending  on  when  the pool  was  certified  as  a                                                               
producing pool or  a pool that could  be commercially productive.                                                               
He added  that the current  tax credit structure is  ongoing year                                                               
to year.  This bill is "the  clock starts and then once you start                                                               
producing  the clock  stops  - and  the  expenditures in  between                                                               
those time  are covered at 100  percent - against the  first five                                                               
years of production...."   The difference in tax  credits is more                                                               
of a cash flow issue.                                                                                                           
CO-CHAIR  PASKVAN  asked  if the  credits  are  for  expenditures                                                               
during production that are offset  against production or are they                                                               
solely for exploration until the pool is identified.                                                                            
MR. TANGEMAN  replied the credits  are for  expenditures incurred                                                               
once the pool  has been discovered but has not  yet started being                                                               
producing -  expenditures that get  the company to  the producing                                                               
stage. Those  would be applied  against the tax liability  in the                                                               
first five years of production.                                                                                                 
4:00:51 PM                                                                                                                    
CO-CHAIR PASKVAN said  if, for example, the producer was  in a $2                                                               
billion  annual drilling  budget that  would not  be a  qualified                                                               
development expenditure.                                                                                                        
MR. TANGEMAN replied  that he may not understand  it exactly, but                                                               
if  once  a  producer  has  discovered  the  pool  and  they  are                                                               
incurring  $2 billion  a year  but  has not  produced yet,  those                                                               
expenses  would be  covered under  this  bill. But  if they  have                                                               
started  producing, the  clock stops.  Only  the expenditures  in                                                               
between those  times are the  expenditures that would  be covered                                                               
under this bill.                                                                                                                
CO-CHAIR WAGONER remarked, "It's a kick start."                                                                                 
CO-CHAIR  PASKVAN said  he  was  struggling to  put  it into  the                                                               
context  of  a  choice  between  this tax  credit  bill  and  the                                                               
existing tax credit and asked how  they can analyze what the cost                                                               
to the state will be with either scheme.                                                                                        
MR. TANGEMAN said he would have to talk to department folks.                                                                    
CO-CHAIR WAGONER  said it might be  better to graph out  a string                                                               
of  exploration defining  a pool  and  beginning production  that                                                               
this bill would cover.                                                                                                          
CO-CHAIR PASKVAN agreed.  They need to understand  best and worst                                                               
case scenarios of what  is or is not going to be  the cost to the                                                               
State of Alaska under existing law and this potential law.                                                                      
MR. TANGEMAN  agreed, but explained  the difficulty  in comparing                                                               
the two will  be the fiscal note for the  Governor's bill (SB 49)                                                               
shows  the reduction  through the  first five  years against  the                                                               
production tax  (from their production  forecast). This  looks at                                                               
how  the  tax credits  would  impact  the  "tax credit  pool,"  a                                                               
slightly different scenario.                                                                                                    
4:04:38 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if he had  any idea of how  much more                                                               
development this would incentivize.                                                                                             
MR. TANGEMAN answered no.                                                                                                       
SENATOR WIELECHOWSKI asked if he  would support a lower credit of                                                               
90, 80 or 50 percent. Would  a lower credit spur development just                                                               
as well?                                                                                                                        
MR. TANGEMAN answered that the  department would support anything                                                               
that would increase  production that would get more  oil into the                                                               
pipeline whether it's 100 percent or 90.                                                                                        
SENATOR WIELECHOWSKI asked  if he had any idea how  much more oil                                                               
this would put into the pipeline.                                                                                               
MR. TANGEMAN  answered no; he was  not prepared "to go  down that                                                               
road with this particular bill." His projections go with SB 49.                                                                 
4:06:17 PM                                                                                                                    
CO-CHAIR  WAGONER said  this bill  doesn't  put a  dime into  the                                                               
state  treasury nor  does it  cost the  state treasury.  The only                                                               
time it costs  anything is when the company  goes into production                                                               
and the  five years of production  tax. The state still  gets its                                                               
royalty, its corporate and property tax.                                                                                        
4:07:27 PM                                                                                                                    
CO-CHAIR  PASKVAN  followed up  saying  that  he understands  the                                                               
over-arching  principal  is  to   increase  production,  but  the                                                               
analysis needs  to include  some understanding  of what  it would                                                               
cost the state over 10 years even  if for the first five years it                                                               
may consume the entire production tax that would be applied.                                                                    
MR. TANGEMAN  responded that the biggest  difference between this                                                               
bill and the  current tax credit system that is  in place is that                                                               
this  bill  intends it  to  be  a  choice  - either  this  credit                                                               
structure or  the existing one.  If a  producer chose to  use the                                                               
current  system,   they  would   carry  the  costs   incurred  to                                                               
production and be  reimbursed for the exploration  costs that are                                                               
currently in statute on an annual  basis. In they chose this bill                                                               
they would  have to carry all  those costs up until  the point of                                                               
production  and then  start getting  relief  from those  expenses                                                               
against their tax liability starting  after production. It's more                                                               
a matter of a cash-flow, carrying-cost type of discussion.                                                                      
4:10:21 PM                                                                                                                    
CO-CHAIR PASKVAN  asked for some  10-year hypotheticals  for both                                                               
tax credit structures.                                                                                                          
MR. TANGEMAN replied that he would work on that.                                                                                
CO-CHAIR PASKVAN said that Mr.  Tangeman appears to be struggling                                                               
with the difference  between a conventional resource  play and an                                                               
unconventional  resource  play and  asked  if  this credit  would                                                               
apply to both.                                                                                                                  
MR. TANGEMAN replied yes; it's  available to whoever wants to use                                                               
it.  Then it's  up  to  the explorers  and  producers  to make  a                                                               
CO-CHAIR  WAGONER said  they are  looking at  existing units  but                                                               
this credit could  be applied to some areas in  those units. They                                                               
may have some pools of oil  that haven't been economic to develop                                                               
at this time and this might get those a development schedule.                                                                   
CO-CHAIR PASKVAN  said this is  where he gets confused  and asked                                                               
if this  credit would apply  to the  development of heavy  oil if                                                               
it's in an existing unit.                                                                                                       
CO-CHAIR WAGONER  said it  wouldn't apply at  this time,  but the                                                               
bill could be rewritten so it  would apply to some of those areas                                                               
- as  an incentive to get  more oil into the  pipeline. This bill                                                               
wasn't designed as a "give-away;" it  is designed to put more oil                                                               
in the pipe.                                                                                                                    
4:13:03 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  Mr.  Tangeman to  address the  "gold                                                               
plating" issue with the 100 percent tax credit.                                                                                 
MR. TANGEMAN answered that he didn't  see it as a concern because                                                               
the  developer  only  has  five  years  to  recover  his  capital                                                               
expenditures.  So,  if  they  are producing  a  lot,  they  could                                                               
recover it  quickly; if they are  not producing a lot  they still                                                               
have only five years to recover their capex.                                                                                    
SENATOR WIELECHOWSKI asked the "standard  amount of time it takes                                                               
for  a producer  to recover  its  capital costs"  for drilling  a                                                               
MR. TANGEMAN replied that he didn't know, but would find the                                                                    
answer for him.                                                                                                                 
CO-CHAIR WAGONER added that it depends on how much the well is                                                                  
producing, because it's based on a curve of production.                                                                         
SENATOR WIELECHOWSKI said a chart showing how quickly that costs                                                                
are recovered would be informative.                                                                                             
MR. TANGEMAN replied okay.                                                                                                      
4:15:34 PM                                                                                                                    
CO-CHAIR WAGONER thanked him and adjourned the meeting at 4:15                                                                  

Document Name Date/Time Subjects
HJR 11_Hearing Request Memo S RES.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HRJ 11_Bill Version M.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Fiscal Note -LAA 2-03-11.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Back-Up_ CACFA Letter 6-07-10.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Back-Up_Central Arctic Caribou Herd.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Sponsor Statement.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Letter of Support _Alliance.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR 11_Letter of Support_AOGA.pdf SRES 3/7/2011 3:30:00 PM
HJR 11
HJR11_Letter of Support_Arctic Power.pdf SRES 3/7/2011 3:30:00 PM
HJR 11