Legislature(2001 - 2002)
03/05/2002 10:20 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 5, 2002
10:20 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
Representative Fred Dyson
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 44
Urging the President of the United States, the United States
Congress, and appropriate federal officials to support the
construction and operation of the Alaska Highway Natural Gas
Pipeline route.
- MOVED CSHJR 44(O&G) OUT OF COMMITTEE
HOUSE BILL NO. 220
"An Act establishing an exploration and development incentive
tax credit for persons engaged in the exploration for and
development of less than 150 barrels of oil or of gas for sale
and delivery without reference to volume from a lease or
property in the state; and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HJR 44
SHORT TITLE:ALASKA NATURAL GAS PIPELINE ROUTE
SPONSOR(S): OIL & GAS BY REQUEST OF NATURAL GAS PIPELINES
Jrn-Date Jrn-Page Action
02/19/02 2307 (H) READ THE FIRST TIME -
REFERRALS
02/19/02 2307 (H) O&G, RES
02/19/02 2307 (H) REFERRED TO OIL & GAS
03/05/02 (H) O&G AT 10:00 AM CAPITOL 124
BILL: HB 220
SHORT TITLE:OIL & GAS TAX CREDIT FOR EXPLORATION/DEV
SPONSOR(S): REPRESENTATIVE(S)KOTT
Jrn-Date Jrn-Page Action
03/29/01 0773 (H) READ THE FIRST TIME -
REFERRALS
03/29/01 0773 (H) O&G, RES, FIN
03/29/01 0773 (H) REFERRED TO O&G
04/20/01 (H) O&G AT 8:00 AM CAPITOL 124
04/20/01 (H) <Bill Postponed to 4/27>
04/27/01 (H) O&G AT 8:00 AM CAPITOL 124
04/27/01 (H) <Bill Canceled>
03/05/02 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
THE HONORABLE SCOTT KENT, Minister of Economic Development,
Minister of Government Services, and Minister Responsible for
the Yukon Development Corporation/Yukon Energy Corporation
Government of Yukon
Box 2703
Whitehorse, Yukon, Canada Y1A 2C6
POSITION STATEMENT: Testified in support of an Alaska Highway
pipeline project, the subject of HJR 44.
REPRESENTATIVE JOE GREEN
Alaska State Legislature
Capitol Building, Room 403
Juneau, Alaska 99801
POSITION STATEMENT: Offered a suggestion on HJR 44, Version C,
that became Amendment 2.
PAUL FUHS, Lobbyist
for Yukon Pacific Corporation
1635 Sitka, Number 301
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of HJR 44; offered
language that became Amendment 3.
LINDA SYLVESTER, Staff
to Representative Pete Kott
Alaska State Legislature
Capitol Building, Room 204
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 220 on behalf of
Representative Kott, sponsor.
JOHN A. BARNES, P.E., Alaska Business Unit Manager
Marathon Oil Company
P.O. Box 196168
Anchorage, Alaska 99519-6168
POSITION STATEMENT: Testified in support of HB 220 and answered
technical questions.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
550 West Seventh Avenue, Suite 800
Anchorage, Alaska 99501-3560
POSITION STATEMENT: Testified on HB 220 and answered questions.
CHUCK LOGSDON, Chief Petroleum Economist
Tax Division
Department of Revenue
550 West 7th Avenue, Suite 500
Anchorage, Alaska 99501-3566
POSITION STATEMENT: Voiced department's concerns about HB 220
and answered questions.
ACTION NARRATIVE
TAPE 02-13, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 10:20 a.m. Present at the call to order
were Representatives Ogan, Chenault, Guess, and Joule.
Representatives Fate and Kohring arrived as the meeting was in
progress.
HJR 44 - ALASKA NATURAL GAS PIPELINE ROUTE
Number 0060
CHAIR OGAN brought before the committee HOUSE JOINT RESOLUTION
NO. 44, Urging the President of the United States, the United
States Congress, and appropriate federal officials to support
the construction and operation of the Alaska Highway Natural Gas
Pipeline route.
CHAIR OGAN introduced a delegation from the Yukon Legislative
Assembly: Mike McLarnon, the Honorable Scott Kent, Eric
Fairclough, Gary D. McRobb, and Peter W. Jenkins. He invited
Mr. Kent to testify.
Number 0191
THE HONORABLE SCOTT KENT, Minister of Economic Development,
Minister of Government Services, and Minister Responsible for
the Yukon Development Corporation/Yukon Energy Corporation,
Government of Yukon, provided an update on what the Yukon
Government has been doing to promote the Alaska Highway natural
gas pipeline on the Canadian side of the border.
MR. KENT noted that he'd met Representative Green in Vancouver,
British Columbia, approximately a month and a half ago, as part
of the joint committee chaired by Senator Torgerson. He
indicated the Yukon Government is working on opportunities
including access to gas, training, and other opportunities for
his constituents. He also indicated that Senator Torgerson had
relayed the desire to have "real Alaskans and real Yukoners"
working on this project when it becomes a reality.
Number 0267
MR. KENT reported that $750,000 has been put in the upcoming
budget to support the Pipeline Unit in the Yukon Territory's
Department of Economic Development; he indicated the unit is
doing an economic study that it can share with other governments
in Alaska, British Columbia, and Alberta, as well as with the
Canadian and United States federal governments. He explained
that his government is lobbying [the federal government in]
Ottawa to have the "NPA office" reestablished and set up in the
Yukon, as well as making a streamlined regulatory environment,
once this project becomes a reality, to ensure that it can be
done as seamlessly as possible.
Number 0371
MR. KENT addressed First Nations and infrastructure issues:
On the First Nations front, the premier and the
Federal Minister of Indian and Northern Affairs, as
well as the First Nations with outstanding land
claims, are working ... towards the March 31st
deadline. ... It's hard work, and it's hard
negotiating at the tables, but we're committed to it,
... as are the other two parties that ... sit at that
table, which will provide even more certainty ... for
the Alaska Highway pipeline once ... the producers
come around and make their decision ... on the route.
As far as infrastructure in the Yukon Territory, ...
we're improving the Alaska Highway significantly, not
only at the Shakwak project that is funded by the U.S.
federal government on the north Alaska Highway, north
of Haines Junction, but our government is also doing
some ... work between ... Champagne, Yukon, and north
towards Haines Junction to ... improve that stretch of
highway, too, so that ... the infrastructure is there
and in place when ... the project proceeds.
Number 0484
MR. KENT emphasized the importance to Yukoners and Alaskans of
having access to the gas once the pipeline is in place. He
noted the benefits that will come from having that access, "to
fuel future industries and to provide a keep-clean alternative
energy source to our communities and to ... the industry," which
will lead to strong, long-term economic development. Mr. Kent
offered to answer questions regarding "our undying support for
the Alaska Highway pipeline project."
Number 0553
CHAIR OGAN remarked that he has been impressed with the level of
support for a gas pipeline project offered by the Yukon
Government in particular. He noted that he, Representative
Green, and other members of the joint committee went through
Canada this past summer and met with Mr. Kent and others; he
expressed appreciation for the premier's meeting with them at
the airport as well.
CHAIR OGAN indicated he looks forward to a good working
relationship in trying to facilitate the project; he noted that
its fate is in the federal government's hands now, but offered
his understanding that there is support in Washington, D.C. He
referenced the upcoming Energy Council meeting there, which he,
Representative Green, Representative Fate, Representative Joule,
and a few other legislators would attend.
Number 0671
CHAIR OGAN briefly turned attention to efforts to open the
Arctic National Wildlife Refuge (ANWR) [to exploration]. He
said there are six times as many caribou at Prudhoe Bay as when
oil drilling began, but noted that the premier [the Honorable
Pat Duncan, Premier, Yukon Government] has said it is an
emotional argument for her constituents.
MR. KENT reported that in the following week he would travel to
Ottawa to "check in" and remind federal ministers and
politicians about the importance of the Alaska Highway pipeline
project to Yukoners and the benefits to all Canadians. He
added:
We've always said [there are going to] be two projects
in the north, one that will carry North Slope gas to
market via ... the TAPS [Trans-Alaska Pipeline System]
right-of-way and the Alaska Highway, and a second
project that will take Beaufort delta gas up the
Mackenzie valley and ... towards southern markets.
MR. KENT, with regard to ANWR, said:
There's certainly some things that we can agree on,
such as the Alaska Highway pipeline, and there's some
things that we ... agree to disagree on, such as ...
the debate over ANWR. So I prefer to concentrate on
the things that ... we both want to see happen, and
the Alaska Highway pipeline is, of course, one of
them.
Number 0925
CHAIR OGAN turned attention to HJR 44, sponsored by the House
Special Committee on Oil and Gas. He offered a new proposed
committee substitute (CS), Version C.
Number 0960
REPRESENTATIVE FATE moved to adopt the proposed CS [version 22-
LS1577\C, Chenoweth, 2/28/02] as a work draft. There being no
objection, Version C was before the committee.
CHAIR OGAN explained that HJR 44 urges Congress to support the
construction and operation of the Alaska Highway natural gas
pipeline route; this is being debated currently on Capitol Hill
in Washington, D.C. He emphasized the importance of sending a
unified message from the legislature.
Number 1065
REPRESENTATIVE JOULE requested that Chair Ogan highlight the
differences between the original version and Version C.
CHAIR OGAN called an at-ease at 10:31 a.m. [A draft bill
version used in preparing Version C was handed out by the
committee aide. Like the original, it was labeled "22-LS1577\A"
in the upper right-hand corner; however, it was labeled
"HJR044A" in the lower left-hand corner, whereas the original
version was "HJR044a." Furthermore, the draft was typed on
numbered legal paper so that the first page and all subsequent
pages had 25 lines numbered. Members noted that Version C's
title used the words "Strongly urging" rather than "Urging".]
CHAIR OGAN called the meeting back to order at 10:37 a.m.
Number 1145
CHAIR OGAN explained that on page 3, the subsistence language
has been dropped out of respect to those with concerns about
subsistence on the North Slope; he said he believed it was best
left silent. On page 4, the following language was dropped
[after "terms," on line 22]: "do not have to pay for pipeline
services that they do not use".
CHAIR OGAN further noted that on page 5, three "WHEREAS" clauses
have been added [beginning at lines 6 of Version C]; in
addition, the word "strongly" was added to lines [12 and 16, so
it read "strongly urges" in both places]. He said the concern
is that if momentum might be lost. He offered as an example
that John Brown of BP, to paraphrase him, has said the project
is not economically viable.
CHAIR OGAN referred to page 5, lines [20, 23, and 27, at the
beginning of paragraphs (1) through (3), Version C]. He said he
believes the word "provisions" is better here than
"protections".
CHAIR OGAN referred to language regarding fair and reasonable
access [remaining language in Version C, page 5, line 21, and
new language that read "fair and reasonable tariffs" on page 5
[line 24]. He said it is to continue to encourage exploration
by independent companies on the North Slope, in the foothills,
and other places; without fair access and fair and reasonable
tariffs, he explained, they may be discouraged from doing that.
Number 1336
CHAIR OGAN referred to page 6 of the draft [page 5, beginning at
line 30, of Version C], noting that it contains new language
[paragraph (4)]. He pointed out that the amount of any tax
credit would be limited to periods when gas prices are extremely
low, and it would be paid back when the gas prices are high. He
commented, "I feel that if ... we're asking the taxpayers to
share in the risk, that there's an upside, that the taxpayers
should get a rebate." He pointed out that often taxpayers are
asked to share high risks, but don't enjoy the benefits when the
risks are low. He suggested it would make the resolution a
little more "salable."
Number 1417
REPRESENTATIVE GUESS requested a copy of the enabling federal
legislation, S. 1766.
CHAIR OGAN called an at-ease at 10:41 a.m. He called the
meeting back to order at 10:43 a.m.
Number 1448
REPRESENTATIVE GUESS moved to adopt Amendment 1, on page 5,
line 8, to change "will" to "may". [Thus lines 8-9 would read
in part: "WHEREAS the large volume of gas delivered to the
lower 48 states may initially stabilize gas prices at a lower
level, bringing financial benefit to the lower 48 economy".]
Representative Guess explained that perhaps the economist in her
makes her worry about such a strong statement when she hasn't
analyzed the gas market.
CHAIR OGAN asked whether there was any objection. There being
no objection, Amendment 1 was adopted.
Number 1496
REPRESENTATIVE GUESS began discussion of the rationale for what
would become Amendment 2. Given that federal S. 1766 has
changed several times in the past week and that there are "a few
hundred amendments floating around," she asked whether the
committee is comfortable strongly urging passage of something
whose final form is unknown.
CHAIR OGAN replied that the committee is strongly urging passage
[by Congress] of something that incorporates these provisions
[in Version C under the "FURTHER RESOLVED" clause in paragraphs
(1)-(4)].
REPRESENTATIVE GUESS brought attention to page 5, lines 16-19,
which read:
FURTHER RESOLVED that the legislature strongly urges
passage during the first half of 2002 of the Alaska
Gas Producers Pipeline Team's federal enabling
legislation contained in S. 1766 so long as it
contains a provision similar to that in H.R. 4 banning
the over-the-top route and the following amendments:
Number 1558
REPRESENTATIVE GUESS said she didn't know how much a resolution
means, but if S. 1766 turns out to contain provisions that
"we're not comfortable with, as Alaskans," she was wondering how
Chair Ogan was reconciling it.
CHAIR OGAN remarked that if a resolution contains an issue that
he'll be voting on or is particularly interested in, he reads
it, but otherwise he may not. He said the legislature obviously
cannot control Congress, and this just says what the legislature
would like Congress to do.
Number 1666
REPRESENTATIVE JOE GREEN, Alaska State Legislature, offered a
suggestion that would become Amendment 2. Noting that he agreed
with Representative Guess, he said there will be a significant
number of amendments [to the federal legislation], including
some by Alaska's own U.S. Senator [Ted Stevens]. He proposed
saying "federal [enabling] legislation", then deleting
"contained in S. 1766" and having the paragraph continue on. In
that way, it would encourage something similar to H.R. 4 and
banning the over-the-top route; it would then contain the
provisions [in paragraphs (1)-(4), beginning on page 5, line 20,
of Version C]. It wouldn't say anything different, but just
wouldn't specify the particular [federal] bill.
CHAIR OGAN said it is a good suggestion.
Number 1729
REPRESENTATIVE GUESS moved to adopt Amendment 2, on page 5,
line 18, to delete "contained in S. 1766". There being no
objection, Amendment 2 was adopted.
CHAIR OGAN called an at-ease at 10:48 a.m. He called the
meeting back to order at 10:53 a.m.
Number 1840
PAUL FUHS, Lobbyist for Yukon Pacific Corporation (YPC), came
forward to testify. He stated:
I'm here to speak in favor of House Joint Resolution
Number 44, and you might find that interesting since
we're supporting a project which goes through Alaska
to tidewater. But I want to explain to you why we're
supporting this resolution. ...
First, there are two ways that Alaska gas could get to
the U.S. market. And one could be the overland ...
by-the-highway route, or the other could be as LNG
[liquefied natural gas]. Now, people have said the
LNG project is uneconomic, but none of the economic
analyses that have been done included shipments of
Alaskan gas to the U.S. as LNG. So we've done that,
and on the 14th we'll be announcing an economic model
to you, before this committee, of a project that we
think works.
So why are we supporting this? Well, when you get
down into the "BE IT RESOLVED" of this, there's a
couple [of] really important provisions here, and one
of these is the recognition of ANGTA [Alaska Natural
Gas Transportation Act of 1976]. And we do recognize
the validity of ANGTA, and I want to make it clear
that also our presidential authorizations to export
gas from Alaska are included under the ANGTA
framework. So this is very important to our project,
also, that ANGTA is identified.
Number 1932
MR. FUHS continued:
Also, the issues here on financial incentives, income
tax credits, and when the prices are extremely low --
I did want to let you know that what I read in the
Peninsula Clarion, that ... when the prices went below
[$]3.75, that it would kick in, that it was [a] $1.25-
a-thousand-cubic-foot subsidy of the project, and
prices are about [$]2.20 today. So this would be
fully in effect as long as the price is below $2.50 a
thousand cubic feet in the U.S. So I don't know how
successful it's going to be to get the Rocky Mountain
states and the Gulf states to agree to a subsidy that
would essentially displace their gas anytime that it's
below [$]2.50, but if you can pull it off, that would
be great, because it's probably what's necessary to
make the highway project economic, according to what
the producers have been saying about the economics of
it.
Number 1968
Our fear is not that the Canadian route will be built.
If it was, then a "Y-line" concept is the most
economic configuration for both projects. You go to
Canada; you take a spur line to Valdez - that's the
most economic. Our fear is that the Canadian route
will not be built, even after all the tax credits and
everything else.
And we still haven't seen these studies that the
producers said that they were going to bring to the
legislature and talk to you about. ... But according
to what John Brown [of BP] said, as you referred to,
they believe it may still ... not be economic. Our
point is that we do not require the Canadian line for
our project to be economic, we don't believe. We're
going to bring that before you and see if we can
justify it.
Our biggest concern if this goes through - we heard
talk, and [U.S.] Senator Murkowski said it, and other
people have said it - if they are going to mandate a
Canadian highway route for this project, what you
could end up with down there is that the Canadian line
never gets built, and then because of this mandate, we
could not even sell Alaskan gas to our own country.
Now, that would be a perverse outcome, if that's how
it's stated, that we are mandating the highway route.
It should be treated fairly. And we don't have any
problem with the subsidies; if this goes, it's great
for us, and it's great for Alaska, and it's great for
Canada. But if it doesn't, we may be blocking
our[selves] in the end. ... I think ... you don't
want to do that.
Number 2053
MR. FUHS proposed a further amendment [later adopted as
Amendment 3], to add the following:
these provisions are not intended to exclude the
supply of Alaska North Slope gas to U.S. markets as
LNG.
He explained, "Support the whole package. Do everything you can
to try to get this line to go. But make sure that you don't
exclude the potential of LNG sales of Alaskan gas to the U.S.
That's all we're asking you."
MR. FUHS expressed pleasure at how the joint pipeline committee
has treated both projects equally. He conveyed concern,
however, that HJR 44's title says "the Alaska Highway Natural
Gas Pipeline route", but noted that the "BE IT RESOLVED" clause
[on page 5] says "a natural gas pipeline through Alaska along a
southern route". Mr. Fuhs said that is more equal language,
adding, "That could also even include our project. When you put
'Alaska Highway Natural Gas Pipeline route', you might be
playing into something that mandates it and excludes Alaskan gas
from going as LNG. That's our only concern with the resolution
as it's written."
Number 2113
CHAIR OGAN asked whether anyone else wished to testify; he then
closed public testimony. He called an at-ease at 10:58 a.m. and
brought the meeting back to order at 11:03 a.m.
Number 2152
REPRESENTATIVE FATE moved to adopt Amendment 3 [Mr. Fuhs'
proposed language, provided in handwritten form during the at-
ease], to be placed under the "BE IT RESOLVED" section, as
[paragraph (5), page 6, after line 3]. There being no
objection, Amendment 3 was adopted.
Number 2203
REPRESENTATIVE GUESS moved to report CSHJR 44 [version 22-
LS1577\C, Chenoweth, 2/28/02], as amended, out of committee with
individual recommendations and the attached zero fiscal note.
There being no objection, CSHJR 44(O&G) was moved out of the
House Special Committee on Oil and Gas.
HB 220 - OIL & GAS TAX CREDIT FOR EXPLORATION/DEV
Number 2235
CHAIR OGAN announced the final order of business, HOUSE BILL NO.
220, "An Act establishing an exploration and development
incentive tax credit for persons engaged in the exploration for
and development of less than 150 barrels of oil or of gas for
sale and delivery without reference to volume from a lease or
property in the state; and providing for an effective date."
Number 2256
LINDA SYLVESTER, Staff to Representative Pete Kott, Alaska State
Legislature, presented HB 220 on behalf of Representative Kott,
sponsor, noting that the bill was introduced by request. She
informed members that John Barnes of Marathon Oil Company would
address technical issues and answer questions. Online was Chuck
Logsdon from the Department of Revenue, who had written the
indeterminate fiscal note [with regard to revenues]. Ms.
Sylvester read from the written sponsor statement as follows:
HB 220 creates a new income tax credit designed to
encourage increased exploration and development of
natural gas reserves that are primarily located in the
Cook Inlet region. To qualify for the credit,
operators must successfully drill and develop
hydrocarbon [reserves] that produce gas for sale and
delivery. The credit can offset no more than 50
percent of an operator's annual income tax liability,
and it would be effective for a period of ten years.
The tax credit would amount to 10 percent of qualified
capital investments for each year. For example, an
operator who spends $20 million in a given year
successfully developing natural gas reserves would
receive an income tax credit for $2 million,
applicable up to one half of its income tax liability
for that year. Credits in excess of 50 percent of the
operator's income tax liability can be carried forward
for future years. No credits will be given for dry
holes or for development of crude oil reserves.
The Cook Inlet region continues to have great
potential for additional natural gas production.
However, the combination of high development costs and
relatively low natural gas prices [creates] a
disincentive to drill for new gas reserves in this
area, compared to other places. By providing a credit
for successful exploration efforts, more drilling will
occur in southern Alaska, leading to much-needed new
natural gas reserves. And this will benefit all
residents and businesses at little cost to the state.
In addition to the benefit of developing new gas
reserves, increased Cook Inlet drilling will also aid
the general economic status ... of the Kenai Peninsula
and in Anchorage. Moreover, increased tax revenue
from additional hydrocarbon production should largely
mitigate the fiscal impact of the proposed credit.
Number 2420
JOHN A. BARNES, P.E., Alaska Business Unit Manager, Marathon Oil
Company ("Marathon"), extended his appreciation and that of
Marathon for the opportunity to testify in support of House Bill
220. He noted that Marathon is focused on the Cook Inlet
natural gas business, having produced and sold about 68.25 bcf
[billion cubic feet] of natural gas last year, an annual average
of 187 million cubic feet a day. This production rate set a
Marathon record for annual sales in Alaska. While the rate
itself is significant, during cold spells in December last year
Marathon produced, at instantaneous rates, in excess of 300
million cubic feet a day - an accomplishment he said every
member of Marathon's Alaskan business is proud of; it required
not only hard work, but also ongoing investments in wells and
infrastructure. He said the regulatory and permitting
environment plays a role in Marathon's ability to predictably
bring projects to production within budget and on time.
MR. BARNES noted that project economics are critical to getting
projects approved; that is the area in which HB 220 can have the
largest impact. He said Alaskan project economics are
considered not only on their absolute merit, but also relative
to other worldwide opportunities in which Marathon and probably
other companies can invest. "And the intent of House Bill 220
is to maybe level the playing field or even tip it in favor of
Alaskan opportunities," he said, noting that the bill is
intended to provide an incentive to oil and gas development
activities through an investment tax credit. Under HB 220,
qualified expenditures could be applied as a credit to offset
future tax liabilities; the credit couldn't be used to offset
more than 50 percent of the taxpayer's liability, and there
would be a term limit of five years.
Number 2528
MR. BARNES explained that to be effective for both the State of
Alaska and the producer, the credit must act as an incentive to
exploration and development. He said he would talk briefly
about how HB 220 could impact Marathon and presumably other
producers as they evaluate investment opportunities in Alaska
and around the world.
MR. BARNES told members three issues impact investment decisions
with regard to the Cook Inlet gas business: the resource base,
the market opportunities, and the price at which the gas can be
sold. The Cook Inlet gas business is critical to the Anchorage
and Kenai Peninsula economies. Natural gas provides clean,
cost-effective fuel to heat and light homes and businesses. It
also serves as an important feedstock for two industries, the
Agrium fertilizer and Phillips/Marathon LNG [liquefied natural
gas] plants, which provide important jobs and local taxes. He
mentioned that Marathon currently services over 60 percent of
the local utility market and was the first producer that sold to
all three of these users.
MR. BARNES reported that over the last few years, several
technical evaluations have been completed "looking at Cook Inlet
reserves and resources." The current Cook Inlet reserve base is
approximately 2,000 bcf [billion cubic feet], based on the
latest DNR [Department of Natural Resources] information. At an
annual consumption rate of about 200 bcf a year, this is
equivalent to nine or ten years' worth of production. He said:
These reserves are considered proven, both developed -
which are currently capable of production - and
undeveloped - for which some amount of additional work
and expenditure is required to bring them on
production. By local analogy, proven developed
reserves are equivalent to "the fish is in the boat;
you've weighed him, you can smell him, and you're
going to eat him." ... Similarly, proven undeveloped
reserves are typified by "the fish is on your hook by
the boat, you're ready to net him, you can tell how
big he looks, but you've got to remember that they
always look bigger in the water."
Number 2657
MR. BARNES turned attention to resources, noting that he would
also mention probable reserves. He told members:
These represent unproven gas volumes for which
engineering and geological data suggest that it's more
likely than not that they'll be recovered. And for
the Cook Inlet, various state, federal, and other
organizations have provided some estimates. One group
is the Potential Gas Committee; a couple of years ago,
they provided an estimate of Cook Inlet probable
reserves of 1,050 bcf, which is about five years of
consumption at current rates. ...
The final category to consider is possible reserves,
which represents gas volumes for which engineering and
geological analysis suggest they are less likely than
the probable reserves to be produced. And that same
Potential Gas Committee estimated that there's about
2.1 tcf - that's 2,100 bcf - of possible reserves in
the Cook Inlet.
MR. BARNES offered a key point: technical analysis strongly
suggests there are additional gas reserves in the Cook Inlet to
explore for and to develop. Unfortunately, these reserves are
more difficult to find and more costly to develop "than our
existing reserve base"; these risk and cost factors play against
drawing investments to the Cook Inlet. However, he reiterated,
technical data supports the high probability of finding
additional Cook Inlet reserves.
Number 2728
MR. BARNES turned attention to the market. He said although
Cook Inlet consumes a lot of gas, it is for all intents and
purposes a closed market. At this time, no clear definition
exists of available utility markets for sales sooner than about
2009 - a disincentive for investments. In fact, he said, a
major, world-class producer recently stated in the press that it
sees the Cook Inlet gas market as closed, and doesn't plan to
invest in it. He added that some producers may be willing to
make investments for other non-utility opportunities, or may do
so because they speculate that opportunities may open up sooner.
He concluded, "But again, this lack of market opportunities does
serve to drive investments elsewhere."
Number 2770
MR. BARNES addressed the final area to consider in evaluating
Cook Inlet gas opportunities: the price at which the gas may be
sold. It is in this area where HB 220 can probably serve as an
incentive, he told members. Historically, most Cook Inlet local
gas sales have been made at prices significantly below those
received for gas in the Lower 48. The most recent ENSTAR
[Natural Gas Company] gas sales contracts, however, are priced
at or above Lower 48 benchmarks, which are above existing legacy
contract prices in the inlet. Mr. Barnes reported that ENSTAR
has said it has used this price structure in recognition of the
need to "incentivize" investments in the Cook Inlet gas
industry. He said these higher prices will help encourage new
investments in Cook Inlet. Unfortunately, not all producers can
avail themselves of these prices, and some gas purchasers may
not be able to pay these higher prices. It is in this area
where the impact of HB 220 must be carefully considered.
Number 2815
MR. BARNES offered a scenario that encompasses the three areas -
resource, market, and price - and how they affect investment
decisions. He told members:
If a producer looks at the Cook Inlet, he'll first ask
himself, "What are my prospects for finding gas?" And
once he believes that the risks are acceptable, then
he'll look at the market. He'll see that some market
opportunity may exist, but probably not at the gas
sales price he could receive if he spent his monies
... in the Lower 48 or somewhere else.
That's where House Bill 220 may swing his decision to
send investment dollars to Alaska. Furthermore, if
sufficient funds from multiple companies are attracted
to Alaska and the Cook Inlet, sufficient gas reserves
might be found to potentially even attract a new
industry or perhaps create competition, which ought to
ultimately benefit the consumers.
MR. BARNES turned attention to the fiscal note, saying it raises
an interesting comment that potentially all the tax liability
for oil and gas companies could be reduced by 50 percent. He
told members:
If you use the number that they represent in the
fiscal note for this year, it's about $150 million
income tax for oil and gas companies. If that number
was reduced by half, that would imply that $75 million
in credits were available; that would imply, based on
10-percent capital lid, companies had spent $750
million looking for natural gas or oil. Now, if you
look at an average finding-and-development cost of
about 50 cents to a dollar per mcf, that $750-million
expenditure would equilibrate to finding between 750
bcf and maybe 1.5 tcf. So in that case I would say
that rather than the state believing that they have
lost tax revenue, they should applaud themselves for
actually having incentivized exploration and
development, and bringing gas reserves to the table.
MR. BARNES concluded by saying Marathon Oil Company believes HB
220 can serve as a stimulus to maintain or even enhance Cook
Inlet exploration and development activities.
Number 2930
REPRESENTATIVE FATE asked how far north [68 degrees North
latitude, referenced on page 3, line 10] is.
MR. BARNES answered, "Brooks Range. It basically is trying to
look for areas south of the Brooks Range."
REPRESENTATIVE FATE said the sponsor statement looks as though
it is specific to Cook Inlet, and yet the bill contains a
latitude farther north.
MR. BARNES indicated Cook Inlet is being used as an example, but
that it could be taken as far north as the Brooks Range. He
added, "For Marathon's business, you're accurate: our business
is primarily the Cook Inlet, and that's our belief, as to the
bill. But I would believe that it might serve as an incentive
to other areas in the state."
REPRESENTATIVE FATE said there are several types of state tax
liabilities in the oil and gas business, and yet both the
sponsor statement and Mr. Barnes' statements refer to income
tax. He asked, "What other credits against state tax liability
do you foresee - tax against royalty?"
[Not on tape but recorded in the committee secretary's log notes
was Mr. Barnes' reply: the intent is that it is against
corporate income tax - State of Alaska income tax.]
TAPE 02-13, SIDE B
Number 2995
REPRESENTATIVE FATE inquired about the requirement [page 3,
lines 15-16] that to qualify for this, [the reserves] must
produce 150 barrels a day "or produce gas for sale and
delivery". Suggesting it could mean almost any quantity of gas,
as long as it could be for sale, he said, "My fear is that ...
if we're going to have a tax rebate or a tax credit on the
delivery system, [it] could amount to a lot, depending on what's
involved in the delivery system, such as a pipeline."
MR. BARNES answered:
Again, those would get caught up in the overall
project economics and, ... again, you're trying to aim
it at successful efforts, where if you have wells that
potentially have [a] ... lower gas rate - be they
coal-bed methane or some other wells - in aggregate,
though your well rate may be small, as you aggregate
that together through your production facilities,
compression, and then pipeline delivery systems; ... a
company will analyze that as an entire capital
investment. And that would be the ... qualified
investment for which the credit would be applicable.
And, again, a company will look ... at an entire
project.
Now, the income tax that gets paid to the state ... is
not based on a single well; it's based on the overall
State of Alaska business. And ... in the case of a
coal-bed methane or something, a new entry or a
development in Kenai or someplace else, then that gets
rolled into the overall company's income tax.
Number 2905
REPRESENTATIVE FATE brought attention to two bills [sponsored by
him] that were heard in this committee: HB 307, which had
already passed the House and which had to do with tax credits on
exploration; and HB 308 [heard once and then held in committee],
which had to do with tax credits on development. Suggesting
this current bill bundles those two together, he recalled
testimony that HB 308 had cost the state millions of dollars
because a tax on development is a tax on royalty. By contrast,
there was more positive testimony on [HB 307] because [the tax
credit on development] enabled the state to get stratigraphic
data, geologic data, and proprietary data, for example.
Representative Fate told Mr. Barnes, "You haven't said anything
in the bill here, which includes exploration, whether or not you
would be willing to give that data, or whether it would, in
fact, be proprietary data."
MR. BARNES responded that [HB 220] is trying to get beyond
ownership-of-land issues, where royalty incentives have been
used in the past. He noted that there also are leases that are
federal acreage, or where private landowners have the mineral
rights and those are pooled into larger units. He said, "We
have not tried to look at anything as to the sharing of data -
you're accurate in that. The intent was to try to treat all
production - be it from federal, state, or even private
leasehold - in a manner that would encourage development across
those."
MR. BARNES offered his experience that most wells ultimately
going public anyway, so the data is usually available. He
added, "There are some notable exceptions, but in my experience,
at least where Marathon has operated, well data usually becomes
available ultimately, and I believe the state usually benefits."
Acknowledging that he hadn't answered the question, Mr. Barnes
said that wasn't an issue that "we sought to address here."
Number 2777
REPRESENTATIVE GUESS inquired about Marathon's current activity
in Cook Inlet.
MR. BARNES affirmed that Marathon does have current activity.
That work was begun, including some of the leaseholds, in the
1997-99 timeframe. He said most exploration activities are a
multi-year effort. He continued:
So in a multi-year program, we're just finishing off a
land-acquisition program, some well work. And we will
actually develop, if sufficient reserves are there, a
discovery that was announced down south, and build a
pipeline. I can tell you, when Marathon looks at
future markets and future opportunities beyond those
line-of-sight issues, there's a question mark. And so
I would just say that yes, we have been active. We
are active. But current activity, as you've seen
around the state in the oil and gas industry, is never
an assurance of long-term activity.
Number 2709
CHAIR OGAN posed a scenario in which the bill is wildly
successful, causes all kinds of development, and attracts more
independent companies; he asked whether that could detrimentally
affect the price. Referring to Mr. Barnes' indication that one
major producer has already said the market is closed, Chair Ogan
noted that a smaller, independent company might be interested in
something a major producer wouldn't be.
MR. BARNES mentioned supply-demand curves. He agreed that if
this were wildly successful and large supplies were found, then
new market opportunities would be sought, whether LNG or Agrium
expansion, for example. He said with a big discovery, marginal
costs go down. The attempt would be a balance between the
economics of a large discovery and the economics of "whatever
projects ... you could potentially sell to." He added that
other than for gas under contract at very high prices, it would
tend to competitively push gas prices down, which he surmised
would be positive for consumers and, hopefully, for the overall
industry.
Number 2587
REPRESENTATIVE GUESS, noting that the discussion has centered on
gas, asked why oil is included [in the bill].
MR. BARNES answered, "When we looked at putting this together a
year ago, we were just basically trying to stimulate overall
activity." He offered that although Marathon has focused on
gas, Marathon has made others aware of the bill, although he
doesn't know what their particular corporate outlook would be.
He said oil had been added in recognition of stimulating overall
Cook Inlet activity, which is nowhere near what it was 20 years
ago.
CHAIR OGAN asked whether anyone is producing 150 barrels of oil
[a day].
MR. BARNES answered that [Marathon] has one small field at
Beaver Creek that produces about 180 barrels a day. He
mentioned platforms and added, "I do know that we have a very
low-rate field."
CHAIR OGAN noted that this bill is about a tax credit for new
[discoveries]. He conveyed his understanding that it is
unlikely, unless perhaps there were an onshore discovery, that
somebody would produce 150 barrels [a day] and build the
infrastructure.
MR. BARNES suggested that other parties more active in oil might
choose to discuss whether that should go higher or lower. He
added:
We're not always very smart about what we'll find.
Sometimes we find gas. Sometimes you find oil.
Sometimes you find nothing. So that was the other
reason to having some amount of flexibility, that
you'd have some incentive, that if you found oil, to
potentially try to get it on production, even if it
was a smaller-type find. If it was a very large find,
market forces ought to be a very good incentive. A
smaller discovery, you probably need all the help you
can get.
Number 2486
REPRESENTATIVE GUESS referred to [AS 38.05.180], subsection (j),
whereby the state can reduce royalties if the economics [merit
it]. Noting that it had been discussed with regard to HB 308 as
well, Representative Guess said, "As a trustee of the state,
that seems like a better approach because then we're actually
reducing where people need the incentive." She asked, "Why not
use that (j) provision?"
MR. BARNES replied:
My belief would be twofold. First, that's a
negotiation, and you never know how a negotiation will
turn out. And when you factor into your investment
decision the fact that you have a risk - you ask
whether you'll win - that will tend to be seen as a
disincentive or an incomplete incentive to draw money
into Alaskan-type expenditures. And the other point -
and I know you guys are well aware of this; companies
much bigger than Marathon have said it over and over -
but the test of "is a project economic or not" is
telling me that you're right on the edge ... of a
viable project. And ... though it seems significant
on the royalty side, a reduction could be small in
comparison to overall project risk, overall project
"spend portfolio," and those projects will fall to the
bottom of a prioritized list of where to spend your
money.
And the intent of this bill was to basically recognize
that an overall incentive that basically allows
projects where you operate with a higher cost, which
we have in Alaska, where you do have permit-timing and
other issues, to try to get them higher up the project
ranking ... on a worldwide basis. ... It's a
difference between an absolute measure of economics
versus a relative, when you have a portfolio. And
companies are like you and I: you invest your money
where you think you'll get the best return. And
Alaska ... maybe doesn't draw ... as much investment
as we'd all like.
Number 2349
REPRESENTATIVE GUESS offered her understanding that there is
more activity in Cook Inlet now than has been seen in a while.
Therefore, she questioned the need to take some potential state
revenue to provide incentives for more activity.
MR. BARNES answered that with regard to activity in Cook Inlet,
there are three or four onshore drilling rigs running. He
added:
The inlet's not been able to respond as you see in the
Lower 48 when prices are stronger. And when gas
prices shot up, ... the rig count went up ... by a
factor of about two. So while this activity level
looks good, ... my belief is it's probably not enough
that ultimately you'll bring the type of discoveries
to the table that you'd like to see. ... If you have a
one-in-three risk, three rigs running says you may
find only ... one field. If you have ten rigs
running, you might find three. So while it's
undeniable that activity level's higher, the question
I would ask is, is it as high as the state would like
it to be?
REPRESENTATIVE GUESS added, "And at what cost."
MR. BARNES responded:
And, again, the analysis that I proposed was, I would
feel real good to think that $75 million of income tax
was not being paid, because the implication is that
people spent $750 million, plowed into the economy,
looking for oil and gas. And that ... could have a
substantial impact across the board.
Number 2247
CHAIR OGAN noted that the Joint Committee on Natural Gas
Pipelines had an extensive presentation the previous summer with
regard to supply and demand; he suggested making that
information available to the current committee. He mentioned
peak loads and the possibility that by 2003 those might not be
met. He suggested there might be some price incentives. He
also mentioned ENSTAR and negotiations by the RCA [Regulatory
Commission of Alaska] tying the price of gas to the Henry Hub,
which he said increased the price quite a bit. He asked, "Did
you have the opportunity to bid on that?"
MR. BARNES replied that it didn't go out for bid. He added, "We
were having discussions, with alternate proposals."
CHAIR OGAN asked whether there is a possibility of getting in on
"that ENSTAR deal."
MR. BARNES said the volume commitment is 450 bcf, "which is
about 20 years if they have the gas." He added, "I do not know
when Marathon can sell into that market - or any other
producer."
Number 2153
CHAIR OGAN asked Mr. Barnes who is operating in [Cook Inlet]
now, and whether anyone besides Marathon is "looking in Cook
Inlet directly."
MR. BARNES answered that to his knowledge, Phillips [Alaska,
Inc.] is drilling a big well at [Point] Starichkof, farther
south on the peninsula; Unocal has drilled one well and is on a
second well farther south around the Ninilchik and Deep Creek
area, though he doesn't know the results there; Marathon has
been active in exploration in the Ninilchik Unit, where it has
announced a discovery; and Forest [Oil Corporation] is working
offshore on its Osprey Platform, a field he believes would
benefit from the royalty reduction.
CHAIR OGAN recalled having made a decision, as a business owner,
to spend capital money based on an investment credit on federal
taxes. He thanked Mr. Barnes and called upon Mr. Myers.
Number 2037
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources (DNR), testified via teleconference, noting
that he would also provide a lead-in to the testimony of Mr.
Logsdon of the Department of Revenue regarding the physical
impacts of the bill in terms of the tax structure.
MR. MYERS agreed that a lot more activity is being seen. The
division recently formed three new Cook Inlet gas units: the
Ninilchik Unit, the South Ninilchik Unit, and the Deep Creek
Unit. All have well commitments. Based on known planned wells
plus the committed wells, he projected that perhaps nine
exploration wells will be drilled in Cook Inlet, seven of those
for gas - an historical high there. Although long-term activity
isn't guaranteed, he predicted elevated activity for gas over
the next several years. Mentioning the success of Forest Oil
Corporation with Redoubt Shoal, Mr. Myers said that will be a
very significant increase in oil production for the inlet. He
noted that historically, gas production has been fairly flat
since about 1981. Pointing out that oil production came down in
the late 1980s and has held stable, he remarked, "We expect that
to go up. But I think we're seeing some very encouraging
movements."
MR. MYERS, returning attention to gas, said the ENSTAR contract
clearly has gotten folks' attention. The "prevailing value" of
gas has increased dramatically since 2000, from about $1.36 to
about $2.50; despite the drop in the Lower 48 market, it has
held at over $2.00. Mr. Myers predicted it would remain high,
saying that since 1995 it has been part of a gradual price
increase for gas in Cook Inlet, "due to, again, the ... higher
pricings for the commodity, especially to the utility market,
but also higher LNG prices and also older contracts expiring for
the utility market, and then newer gas being brought on at ...
higher values." He added that it is expected the ENSTAR
contract will expire in about 2007.
Number 1911
MR. MYERS highlighted positive developments: the gas pipeline
being built, based on the success of the "go" (ph) well in the
Ninilchik Unit, and future potential in other units for
exploration. He listed active players in Cook Inlet: Unocal,
Forest, Phillips, Marathon, Aurora Gas, Cross Timbers, Gas-Pro,
and Evergreen [Resources], with some potentially significant
exploration activity by Escapeta (ph). He also noted that
Pelican Hills (ph) has bought mental health trust leases and is
actively shooting seismic [data]. He added, "We're seeing, I
think, a larger, more diversified industry of smaller players
right now in Cook Inlet - very positive, from our perspective."
Mr. Myers told members:
I guess in light of that - and in light of that we
believe that, in large, the gas market is somewhat
captive ... to the three major uses, the demand and
supply curve being roughly equal now, higher prices
leading to that ... additional exploration - we think
we have a fairly stable situation in Cook Inlet. I
guess, then, the question you have to weigh is: if we
were to accelerate it, (a) would it in fact lead to
additional gas being brought online, other than just
additional reserves being discovered; and [(b)] what
cost is there involved with that?
Number 1840
MR. MYERS, in response to Chair Ogan, offered his understanding
that both Marathon and Unocal are participating in all three new
gas units: Ninilchik, South Ninilchik, and Deep Creek. He
added that "several of these units" are managed jointly by the
state and CIRI [Cook Inlet Region, Incorporated], "so there's a
combination of Native and state lands in them, as well as some
fee acreage." In further response, he said in some cases there
is federal acreage involved, as well as some university lands.
"Fairly complication historical land-ownership pattern there and
subsurface ownership pattern," he concluded.
Number 1752
CHUCK LOGSDON, Chief Petroleum Economist, Tax Division,
Department of Revenue, testified via teleconference, noting that
the Department of Revenue has several concerns with the bill.
For one thing, the tax credit allowed against corporate income
tax under the bill is allowed on oil and gas exploration and
development south of the Brooks Range; however, most of the
current revenue from the corporate income tax comes from
activities on the North Slope. As a result, a company with
producing properties both on the North Slope and at Cook Inlet
could use credits earned for exploration and development in the
inlet to offset some or all of its North Slope-associated income
tax.
MR. LOGSDON informed members that the big issue - as with all
tax credits - is the difficult revenue question of how much
additional incentive is necessary to make a project economically
feasible. Currently, he noted, there are a number of
significant incentives in the form of reduced royalty rates,
exploration tax, and royalty incentive credits, all available
south of the Brooks Range. This bill allows the credit without
regard to the specific economics of a development prospect; this
increases the risk that the credits will reduce state revenue
without necessarily increasing industry activity beyond that
which already would have been commercially attractive. That is
[the department's] biggest concern about the bill.
Number 1669
CHAIR OGAN referred to the zero fiscal note from the department,
pointing out that it is indeterminate [with regard to revenue].
He asked what would happen if the bill were successful in
spurring further development. He inquired about an indication
in [the analysis of the fiscal note] that the bill might result
in "a wash" or actually making money for the state.
MR. LOGSDON replied:
That is correct. That's one of the reasons why it is
difficult to put a revenue number, because unless you
know the economics of the development activity, ... or
have a good notion of what it could be, it's hard to
put a number on whether or not the prospect would be
... a net gain or a net loss to the state treasury.
CHAIR OGAN asked Mr. Logsdon whether he believes it would be
prudent, if the bill moved out, to add a sunset date, do some
analysis, and see how it works.
MR. LOGSDON answered that at this point, considering the
testimony from Mr. Myers, he didn't know that he was in a
position to make any recommendation. He added that the
department believes there is a very good risk that [the state]
would give up revenue with a fairly high risk of getting little
in the way of additional activity.
Number 1518
CHAIR OGAN asked whether there were further questions or if
anyone else wished to testify; there was no response. He
announced that HB 220 would be held over.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:50
a.m.
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