Legislature(2003 - 2004)
05/18/2003 07:07 PM House FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
May 18, 2003
7:07 P.M.
TAPE HFC 03 - 102, Side A
TAPE HFC 03 - 102, Side B
CALL TO ORDER
Co-Chair Harris called the House Finance Committee meeting
to order at 7:07 P.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Ethan Berkowitz
Representative Mike Chenault
Representative Richard Foster
Representative Mike Hawker
Representative Beth Kerttula
Representative Bill Stoltze
Representative Jim Whitaker
MEMBERS ABSENT
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Eric Croft
Representative Reggie Joule
Representative Carl Moses
ALSO PRESENT
Senator Thomas Wagoner; Steve Porter, Deputy Commissioner,
Department of Revenue
PRESENT VIA TELECONFERENCE
Dan Dickinson, Director, Division of Oil and Gas Audit,
Department of Revenue; Mark Meyers, Director, Division of
Oil and Gas, Department of Natural Resources, Anchorage
SUMMARY
CSSB 185(FIN)
An Act providing for a reduction of royalty on certain
oil produced from Cook Inlet submerged land, and for a
credit for certain exploration expenses against oil and
gas properties production taxes on oil and gas produced
from a lease or property in the state.
CS SB 185 (FIN) was HEARD and HELD in Committee for
further consideration.
CS FOR SENATE BILL NO. 185(FIN)
An Act providing for a reduction of royalty on certain
oil produced from Cook Inlet submerged land, and for a
credit for certain exploration expenses against oil and
gas properties production taxes on oil and gas produced
from a lease or property in the state.
SENATOR THOMAS WAGONER presented an overview of SB 185. He
stated that the bill would amend statutes to provide for
reduction of royalty on oil produced in certain Cook Inlet
fields and platforms as they near the end of their
production capability.
The intent of the legislation is to provide a monetary
incentive in the form of royalty relief to help maximize
production from old fields and extend the longevity of Cook
Inlet oil platforms. In return, there would be continued
employment in the area. Additionally, there could be
production that otherwise would not be realized because the
fields will become more economical due to reduced costs. He
added that it would result in more oil production than
originally realized, subsequently more unexpected royalty
revenues even at the reduced rate.
Senator Wagoner added that encouraging production in the
marginal fields could extend their life by 18 to 24 months.
SB 185 also offers an exploration severance tax credit to
explorers for work performed on or after July 1, 2003 and
before July 1, 2007.
At present time, the maximum tax credits for exploration in
Alaska results in costs of about 65 cents on the dollar; a
number that compares poorly with the credits received from
our Canadian competitors. Alaska is at the bottom of the
list in terms of exploration credits. The bill provides a
40% tax credit for exploration applied against severance
taxes, reducing costs in Alaska to 39 cents.
Senator Wagoner pointed out the Cost of Exploration chart in
member's packets, concluding that the bill provides "bold
step" in making Alaska a major player in the world market.
(Copy on File).
Representative Berkowitz asked what a "bottom hole" was.
MARK MEYERS, (TESTIFIED VIA TELECONFERENCE), DIRECTOR,
DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES,
ANCHORAGE, explained that a bottom hole is an area that is
not on the path and based on the survey is the area in the
bottom of the well. For the purposes of describing a three-
mile area, the bottom hole location is where the bit finally
ends in the bottom of the well. The bottom hole location
will typically be in a different location than the surface
location.
Representative Berkowitz asked what "butted" meant. Mr.
Meyers explained that "butting" is the actual date that
drilling starts.
Representative Kerttula asked if the producer could
directionally "drill out" of the three miles and continue to
use those calculations. Mr. Meyers replied that the three
miles of the bottom hole is used as a point of reference in
the subsurface. If one well was drilled in one direction
and another in a different direction, both wells would
qualify if their horizontal distance was more than 3 miles.
The search location could be the same location.
Representative Kerttula asked about existing wells. Mr.
Meyers explained that an existing well was defined as a well
that either was less than 15 years old or greater than 150
days old. The older exploration wells would not be
considered a bottom hole.
Representative Kerttula asked what would happen if there
were many wells going in around one another and if the 150
days would continue to be reasonable. Mr. Meyers advised
that would allow for two companies to be drilling
simultaneously during the season. More than one well would
potentially be paid for in the same location under the
program and they would all have to be exploration wells.
Representative Kerttula questioned if there was a need for
incentive when a party already knows where the oil is and
that it was worthwhile to drill. Mr. Meyers responded that
there are other protections contained in the bill. One is
that it cannot be an existing loan gas unit. There are
examples where earlier discoveries were made and if the
discovery was greater than 15 years old, then it would be
considered under the bill.
DAN DICKINSON, (TESTIFIED VIA TELECONFERENCE), DIRECTOR,
DIVISION OF OIL AND GAS AUDIT, DEPARTMENT OF REVENUE,
ACHORAGE, offered to answer questions of the Committee. He
noted that Alaska was one of the only places in the world
that does not have a program as proposed in the legislation.
Representative Berkowitz asked why Alaska had not
implemented such a program before if it was "such a
universal condition". Mr. Dickinson responded that the
State did have prior rate credits in place in the royalties
that were used actively in the 1980's. Conditions now are
changing. It is anticipated that there would only be
drilling where the good wells are located. At present time,
many of the good areas have been taken. The State is
attempting to create incentives similar to other areas
around the world.
Representative Berkowitz questioned how the proposed
incentives would compare to other worldwide incentives. Mr.
Dickinson noted that there was back up in member's packets
that indicate such information. Most projects focus on
exploration. Once oil is discovered, the company wants to
get it to the pipeline. The place where the biggest
difference is made is when oil is found in individual
jurisdictions.
Representative Berkowitz commented that he did not
understand the mechanism. Mr. Dickinson explained the
production sharing agreement and that for every dollar
produced, if it is reinvested, there will be a low or no tax
rate on it. The federal government would be providing the
35 cents on each dollar for exploration in Alaska. If the
bill passes, then Alaska would be "kicking in" another 40
cents per dollar per well.
Representative Kerttula agreed that the State needs to
impact exploration now. She pointed out that the list
indicates exploration only and does not indicate the other
taxes or the stability of the other referenced governments.
She inquired how Alaska currently ranks. Mr. Dickinson
advised that legislators must look at total production costs
and total State pay during these times of high prices.
Alaska is one of the best places in the world for the
companies to do business. Although, when prices are low,
Alaska is one of the worst places to undertake business. He
stressed that the Legislature must look at pricing, which is
clearly part of the structure.
Representative Kerttula voiced concern with the 40% number
and asked for an economic analysis on that determination.
Mr. Dickinson responded that there are two important pieces
of analysis. He commented on taking the 40% number and
adding it to 35% of the federal government contribution,
which would place Alaska approximately in the middle. Any
change must be a bold move. He acknowledged that the
legislation would be picking up a significant amount of the
incurred costs. Mr. Dickinson stressed that drilling wells
is expensive and that it needs to be a significant portion.
There are additional documents that model three possible
results.
Senator Wagoner pointed out that next year, there are three
scheduled wells on the North Slope.
Representative Whitaker understood that the proposed
legislation was part of a larger program for the continued
oil exploration on the North Slope. Mr. Meyers acknowledged
that it is. Representative Whitaker added that the proposed
legislation was a key component to that larger picture.
Representative Berkowitz voiced concern with the size of the
package and the repercussions. He asked why it had taken so
long to come before the Legislature if it was such a good
idea. Senator Wagoner responded that Section 3 was the
amendment to the original bill and that the drafters had
been working on it for several weeks and took that long to
develop this bill.
Representative Berkowitz pointed out that there is not a lot
of back up on a bill that involved such a lot of work. He
reiterated that there is not enough information provided
warranting an informed decision.
Co-Chair Harris pointed out that the Governor has indicated
that he is going to push for natural resource development.
Senator Wagoner acknowledged that the Governor has indicated
that he wants to grow the economy, which cannot happen
without developing resources and this is the first step on
the plan for development. He spoke about the twenty-five
mile radius, encouraging exploration further out for
exploring and drilling more remote areas and away from
current production.
Representative Kerttula asked how the Department would be
getting the seismic data and when would they be able to use
it. Mr. Meyers responded that it will be available within
six months. Under current permitting requirements, the
State gets the data on all State lands. On private and
federal lands, the State does not automatically receive that
data. The legislation allows the State to get it, but
allows the applicant six months to determine if they want to
use the credit or not. Representative Kerttula clarified
that the Department could use the data but could not release
it to public for ten years. Mr. Meyers agreed that was
correct.
Representative Kerttula reiterated that internally, the
Department will be able to have the data but cannot use it
for anything released to the public. Mr. Meyers replied
that was correct.
Representative Kerttula asked what would happen if the data
indicated that a rich area had been hit. How would
exploration be started in that particular area and if that
happened, how would the State receive the credit. She
acknowledged that she supports exploration but is concerned
about the State's finances.
Mr. Meyers responded that there are multiple issues
contained within the question. The first issue is the
seismic data from new areas, which is suggestive of oil or
gas. Only when it is calibrated with well data, can it be
certain and that is not known until it is drilled. The
seismic data provides basic structural information and in
some cases an indication of hydrocarbons. The
productability of the potential reservoirs does not just
happen. The next step would be to encourage someone to go
in and drill. In the early stages, seismic data was sought
after acquiescing the lease of an area. In modern times, it
is more typical to shoot before they acquire the leases and
helps in the evaluation of the State land lease terms. On
federal and private land, the ability to more effectively
push is provided to open areas that have the highest
potential. The seismic data on the private and federal
lands is an important planning tool for the State. The data
helps the State understand the common use of the facilities
if those fields were produced. He reiterated that the data
is very valuable and an important aspect of the bill, which
gets the data distributed.
Representative Kerttula asked if the State adopts the
legislation and if exploration is begun, would it be fair to
say that the State has done their part by providing the
break without any other royalty reductions. She indicated
it would be a fair trade.
Mr. Dickinson explained that exploration is only a piece of
the process. He thought that once that area is found, they
would pay close to 12.25%. However, other incentives are
needed. It is important to have a wide variety of tools.
He pointed out that it is important that the dry holes also
receive credits, as drilling a dry whole is risky
exploration.
Representative Hawker questioned the mechanics of the
credit. He asked if they were transferable with no
expiration date. Mr. Meyer replied that was correct. The
credits trade at about 95 cents to the dollar. He pointed
out that there are three companies that have sent checks to
the State in the range of $20 million dollars. There are
only four players that currently can take the credit. The
legislation would open it up to a whole new set of players.
He clarified that Section A indicates that the credit cannot
be taken until July 1, 2004. It will have no effect in
FY04, but the work can be done in FY03.
Representative Hawker emphasized that the utilization of any
credits could not commence until July 1, 2004. Mr. Meyers
agreed and pointed out that the work would have to be done
before July 1, 2007. A four-year window has been created.
There is no sunset on when the credit could be used.
Representative Hawker commented on the transferability and
that the drillers do not have to be producers. Mr. Meyer
advised that was correct. The intent is to bring other
producers in. They would still have to create their own
funding. If the work was previously contracted for, they
would not get the incentive. There is specific language
addressing that concern.
Representative Hawker understood that was the May 13th, 2003
date. Mr. Meyer added that before July 1st, they could
qualify. Once the plans are in effect, that would determine
development.
Representative Hawker asked about the utilization of the
credits. He understood that commencing July 1, 2004,
qualifying production could offset their entire monthly
liability using whatever credits are available. Mr. Meyer
acknowledged that was correct. They could use their entire
monthly liability for the severance tax; they would also
have:
· Monthly royalty payments,
· Quarterly income tax payments, and
· Annual property tax payments.
Representative Hawker clarified that it would only be the
severance tax. He asked if there had been consideration on
how to "soften the blow to the treasury" by perhaps allowing
the off set on ½ of the monthly liability of the producer.
Mr. Meyer responded that HB 61 would create a credit for
certain activities in Cook Inlet, indicating that not more
than 50% could be taken in one year. The Department did
consider that, however, in the context, the type of credits
expected would be taken in three consecutive month packages.
Because of the monthly tax, carrying it forward would still
show in the same fiscal year.
Representative Hawker commented on the qualifying
expenditures. He asked if there was a rule of thumb of how
much the oil well costs and how much each drill site would
generate a credit. Mr. Dickinson responded that a company
could find a wide variety in Alaska. The types of well
being referenced are 25-miles beyond the nearest
infrastructure and typically run in the $25 million dollar
range. Mr. Meyers agreed that it was a wide range. Typical
exploration costs on the low end are at about $3 million
dollars and the high costs would amount to approximately $25
million dollars. Realistically, they could get multiple
wells from a single path, so the individual well costs goes
dramatically down. A good rule of thumb for a dry hole cost
would be $12 million dollars.
Representative Hawker asked if the State had any offshore
projects that would qualify for this. Mr. Meyers replied
there are. Examples would be using the offshore drilling
equipment. A well using that tool would cost in the upper
end of the $25 million dollar range.
Mr. Dickinson added that if the drilling were more than
twenty miles offshore, at some point it would be on federal
land.
Representative Hawker asked if a single well could be in
excess of $100 million dollars. Mr. Meyers stated that was
correct and that offshore wells are ones that approach that
price range. Another place where that could be applicable
would be State waters around Cook Inlet. The individual
well costs could run high but if they were open to a multi-
cost program, the costs could decline.
Representative Berkowitz asked about work that is scheduled
for this summer that has already been permitted. Mr. Meyer
commented that the State has some ideas of the permitting.
The companies that want to have additional commitments have
not completed their budget outlines until typically late in
the fall.
Representative Berkowitz asked why the State would give
already scheduled work, incentives to do something that they
are already going to do. He stated that is a "give away".
STEVE PORTER, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
explained that they only do summer fieldwork. They cannot
do seismic activity on the slope in the summertime. Most of
the company's cycles for permitting happen in the late fall.
Representative Berkowitz reiterated that there are companies
that are already committed to doing work during "x" periods
of time. He questioned the incentive. Mr. Porter responded
that there are only a few wells with multiple-year
commitments, which is a unique circumstance. Exploration
programs are generally year-to-year. He did not know of any
approved wells at this time.
Mr. Meyers added that the committee process has not been
completed on any of the wells. There are tentative plans
that would be eligible for the credits and the credits could
lead to additional drillings. He admitted that there was a
risk for the first year plan but it is anticipated that
there will be more investment in the State. That is the
balance and the risk taken. Mr. Dickensen observed that it
would be detrimental to delay one year's drilling season.
Representative Berkowitz requested further time to look at
the bill in order to review the consequences.
Senator Wagoner reminded members that the companies that do
the exploration, operate on time budgets also and that most
of the money for next year's operations is being negotiated
at this time.
TAPE HFC 03 - 102, Side B
Senator Wagoner reminded members that those companies are
currently negotiating worldwide on exploration ideas.
Representative Kerttula referenced Page 7, Lines 8-10,
pointing out the July 1st, 2003 date, the date that the
boundaries would be set. She asked if that would still
"roll" and what would happen with a unit after that date.
Mr. Meyers replied that the length of a credit is four
years. The only exception might be in certain areas of
National Petroleum Reserve-Alaska (NPR-A), where many are
within the 25-mile zone. Realistically, the unit must be
formed and in those cases, the negotiated work permit would
take into consideration the credits. He added that it is
not likely that there will be any new units.
Representative Kerttula asked if there was a sunset pushing
that concern. Mr. Meyers replied it was.
Co-Chair Harris stated that the bill would be HELD in
Committee for further consideration.
Senator Wagoner acknowledged that there had been similar
concerns voiced on the Senate side. He added that SB 185
was a "jobs" bill and would get people back to work. He
encouraged passage of the bill.
SB 185 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 8:00 P.M.
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