Legislature(2003 - 2004)

05/18/2003 07:07 PM FIN

Audio Topic
* first hearing in first committee of referral
+ 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                                                                         
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
   ·    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                                                                   
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.                                                                         
The meeting was adjourned at 8:00 P.M.                                                                                          

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