Legislature(2005 - 2006)CAPITOL 124
01/26/2006 05:00 PM House OIL & GAS
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| HB294 | |
| Adjourn |
* first hearing in first committee of referral
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= bill was previously heard/scheduled
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| *+ | HB 294 | TELECONFERENCED | |
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ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
January 26, 2006
5:08 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Lesil McGuire
Representative Ralph Samuels
Representative David Guttenberg
MEMBERS ABSENT
Representative Norman Rokeberg
Representative Nancy Dahlstrom
Representative Berta Gardner
OTHER MEMBERS PRESENT
Representative Kurt Olson
COMMITTEE CALENDAR
HOUSE BILL NO. 294
"An Act amending and extending the exploration and development
incentive tax credit under the Alaska Net Income Tax Act for
operators and working interest owners directly engaged in the
exploration for and development of gas for delivery and sale
from a lease or property in the state; providing for an
effective date by amending the effective date for sec. 2, ch.
61, SLA 2003; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 294
SHORT TITLE: GAS EXPLORATION\DEVELOPMENT TAX CREDIT
SPONSOR(S): REPRESENTATIVE(S) CHENAULT
04/30/05 (H) READ THE FIRST TIME - REFERRALS
04/30/05 (H) O&G, RES, FIN
01/26/06 (H) O&G AT 5:00 PM CAPITOL 124
WITNESS REGISTER
SUE WRIGHT, Staff
to Representative Mike Chenault
House Finance Committee
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided the background on HB 294 on behalf
of Representative Chenault, the sponsor.
JOHN A. BARNES, Manager
Alaska Production Region
Marathon Oil Company
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 294.
JERRY McCUTCHEON
POSITION STATEMENT: Testified that HB 294 will not accomplish a
lot, and suggested an alternative.
MARK GRABER, Income Audit Manager
Anchorage Office
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: During discussion of HB 294, answered
questions and discussed the accompanying fiscal note.
CHERYL L. NIENHUIS, Petroleum Economist
Tax Division
Juneau Office
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Discussed the accompanying fiscal note for
HB 294, and testified that from an economic standpoint, the
price of gas is almost as much of an incentive as a tax credit.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 5:08:47 PM. Representatives Kohring,
McGuire, Samuels, and Guttenberg were present at the call to
order. Also in attendance was Representative Olson.
HB 294-GAS EXPLORATION\DEVELOPMENT TAX CREDIT
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 294, "An Act amending and extending the
exploration and development incentive tax credit under the
Alaska Net Income Tax Act for operators and working interest
owners directly engaged in the exploration for and development
of gas for delivery and sale from a lease or property in the
state; providing for an effective date by amending the effective
date for sec. 2, ch. 61, SLA 2003; and providing for an
effective date."
5:09:16 PM
SUE WRIGHT, Staff to Representative Mike Chenault, House Finance
Committee, Alaska State Legislature, sponsor, explained on
behalf of Representative Chenault, that HB 294 is an act that
amends and extends the exploration and development incentive tax
credit that was originally enacted in 2003 as House Bill 61.
This tax credit continues to apply under the Alaska Net Income
Tax Act for operators and working interest owners directly
engaged in the exploration for and development of natural gas,
primarily in the Cook Inlet area. She informed the committee
that any natural gas production and supply in the Cook Inlet
area has been declining for a number of years. During that same
time, demand has been increasing steadily. Therefore, a sharp
increase in drilling to find new reserves is drastically needed.
She stated that the original investment tax credit enacted in
2003, while modestly successful in stimulating new drilling and
development, needs to be made a much more effective incentive in
order for developers to increase capital spending in a large
manner. These changes will go a long way toward achieving that
goal, and it will also increase employment.
5:10:55 PM
JOHN A. BARNES, Manager, Alaska Production Region, Marathon Oil
Company, stated that Marathon Oil Company is in support of HB
294. He informed the committee that Marathon Oil Company's
Alaska operations are focused on the Cook Inlet natural gas
industry. Last year [in 2005], Marathon Oil Company produced
and sold about 68 billion cubic feet (bcf) of natural gas. He
said that during [2005], Marathon Oil Company sold to
"essentially" every natural gas market that was available. The
markets include: ENSTAR Natural Gas Company, Chugach Electric
Association, Inc., a liquefied natural gas (LNG) plant in
Nikiski, Tesoro [Corporation], and Agrium Inc. He stated that
the Marathon Oil Company is committed to the Cook Inlet natural
gas market, including serving its long-term contractual
commitments to the local utilities and seeking other available
opportunities.
MR. BARNES reminded the committee that in 2003, the legislature
passed and the governor signed, several bills that were directed
at providing incentives for new exploration and development
activities. Marathon Oil Company was particularly interested in
House Bill 61, which was intended to incentivize exploration and
development of natural gas reserves, specifically in Cook Inlet.
He stated that HB 294 will strengthen the incentives.
5:12:46 PM
MR. BARNES said that one might ask about the need to incentivize
natural gas development in Cook Inlet. The answer to the
question is found by considering the long-term decline in
natural gas reserves, which Cook Inlet has experienced. He
stated that what must be addressed is whether there is currently
sufficient exploration activity to arrest the decline in
reserves, and not whether the Cook Inlet is running out of gas.
At the current minimal level of Cook Inlet exploration, it's
unlikely that Cook Inlet reserve additions will replace annual
production on an ongoing basis. As such, natural gas reserves
are at risk of continual decline in Cook Inlet. He informed the
committee that the net result of not addressing the issue will
be the loss of industries and associated jobs.
5:13:36 PM
MR. BARNES stated that the lack of Cook Inlet exploration is an
artifact of the historic oversupply of natural gas, which kept
prices well below Lower 48 prices, which created a lack of
incentive for drilling. Furthermore, regulatory and permitting
hurdles in Alaska have played roles in reducing project
economies, due to uncertainties and predictably bringing
projects online on time and within the budget. He announced
that there is, however, good news. Recently, the U.S.
Department of Energy completed a report, which identified
significant potential in Cook Inlet for additional gas through
infield reserve growth, new discoveries, and other gas sources.
5:14:23 PM
MR. BARNES informed the committee that the same report
identifies the need for significant capital expenditures to
bring the gas to market, including $500 million associated with
finding and developing infield reserve growth of 1.4 trillion
cubic feet (tcf). An expenditure of $5 billion to $6 billion
was associated with exploration and development of 6 tcf to 8.5
tcf of resource.
5:14:59 PM
MR. BARNES stated that the [aforementioned] targets represent a
significant opportunity to reinvigorate the Cook Inlet natural
gas industry. The net result of developing the reserves would
be additional jobs, ongoing industrial use of natural gas, and
revenue increases to the State of Alaska through tax and
royalties.
5:15:24 PM
MR. BARNES posed the question: how will HB 294 help? He stated
that Alaska projects are not considered solely on their absolute
economic merit. Companies are scrutinized on a relative scale,
in comparison to other opportunities around the world where
people can invest. The intent of HB 294 is to level the playing
field between Alaska opportunities and other opportunities
around the world. He added that HB 294 is intended to provide
an incentive to oil and gas development activities through an
investment tax credit. Most importantly, under HB 294, the
percentage of qualified expenditures that could be applied as a
credit to offset future tax liabilities is increased from 10 to
25 percent.
5:16:22 PM
MR. BARNES added that timing is "very important" on Cook Inlet
development. It currently takes an excess of three years to
bring any potential Cook Inlet discovery to production. If a
sufficiently high level of exploration activity can be
stimulated, there's an increased probability that some
discoveries may be brought to market sooner, which ultimately
will benefit industries and consumers.
5:16:49 PM
MR. BARNES summarized that Marathon Oil Company believes that HB
294 can serve as a stimulus to enhance Cook Inlet exploration
and development activities.
5:17:00 PM
CHAIR KOHRING opined that the legislation that the legislature
passed in 2003 benefited the industry, including Marathon Oil
Company, and inquired as to what the justification is for
generously increasing the tax credits as well as taking out the
50 percent limitation. He also asked, "Why would that be needed
in light of the fact that [House Bill 61] has been successful?"
5:17:31 PM
MR. BARNES responded that the key word is that [House Bill 61]
has been "moderately" successful. If one looks at the overall
level of activity in Cook Inlet, he opined that [House Bill 61]
hasn't drawn the type of exploration that would ultimately
benefit the State of Alaska. He added that another thing to
consider is the multiplier effect. For example, if a company
receives $1 million in tax credit, that implies it has spent $10
million in Alaska ultimately finding and developing natural gas.
Then one would also have to think about the development cost and
what the ultimate revenue to the State of Alaska would be, which
is dependent on oil price. He stated that through severance
tax, royalty, and ad valorem tax, the multiplier benefit to the
State of Alaska is probably on the order of the investment that
the company makes. The key point is that for every $1 of
credit, $10 was spent in Alaska, making an important
contribution to Alaska commerce.
5:19:02 PM
CHAIR KOHRING noted that money has also been generated which is
in the state treasury. He said that his understanding is that
there's about $1.5 million, and that for every dollar that is in
the state treasury, the industry is spending about ten times
that. Therefore, he opined that there has been a benefit from
[House Bill 61]. He expressed his concern that the legislature
doesn't go "too far" in terms of extending "already generous"
provisions, and added that the reasons for extensions are
adequately justified.
MR. BARNES expressed his understanding of the need for the State
of Alaska to determine the amount of stimulus it deems required
to increase activity.
5:19:53 PM
REPRESENTATIVE MCGUIRE described another "incentive bill" heard
by the House Rules Standing Committee. She opined that she's
leery of eliminating the 50 percent requirement entirely. She
also expressed her concern regarding extending [the sunset date]
to 2024, and said that she doesn't see any justification for it.
She opined that a periodic checkpoint is necessary. Therefore,
she inquired about the reasoning behind the sunset date of 2024.
5:23:19 PM
MR. BARNES explained that if the "tool" works, one wants to try
to get to the point where there is an "ongoing span profile" of
Cook Inlet. He opined that having a sunset date of 2020 or 2024
offers a stable picture of a reward that could be there for
ongoing investment. He informed the committee that currently,
Cook Inlet burns between 150-200 bcf of gas per year. If one is
able to find and replace reserves at $1 per thousand cubic feet
(mcf), it would imply that one has a $200-million-per-year
capital program occurring in Cook Inlet. In order to keep that
level of activity going, one has to create an environment that
draws the capital in. He said that he doesn't know whether Cook
Inlet will ever achieve the degree of sustainability that's
required.
5:26:39 PM
REPRESENTATIVE GUTTENBERG commented that a tax credit of up to
100 percent would allow operators to execute development
exploration without risk.
5:27:49 PM
REPRESENTATIVE SAMUELS asked for examples of other tax and
royalty systems around the world that the Marathon Oil Company
deals with.
5:28:21 PM
MR. BARNES mentioned production-sharing agreements, which
typically occur when there's a higher probability of the
resource base. He also mentioned typical royalty and severance
tax approaches. The U.S. government has implemented royalty
reduction in an attempt to stimulate deepwater exploration. He
said that Alaska is one of the few states [in the U.S.] that has
implemented royalty reduction as an incentive in the oil and gas
industry.
5:30:26 PM
JERRY McCUTCHEON opined that [HB 294] will not accomplish a lot.
He suggested that a method to spur gas production would be to
start taxing leases on which seismic information has not been
collected and/or drilling has not occurred. He also suggested
that if an operator is not drilling on a lease, he/she should
let another operator take over the lease to begin drilling. His
motto is, "drill it or lose it."
5:32:09 PM
REPRESENTATIVE SAMUELS, referring to page two of [HB 294] and
line five and line eleven, inquired about the 25 percent for
qualified services in the state and asked whether it's an
operating tax credit also.
MARK GRABER, Income Audit Manager, Anchorage Office, Tax
Division, Department of Revenue (DOR), said no, and that it's
for capital expenditures only; therefore, operating expenditures
wouldn't qualify.
5:32:51 PM
REPRESENTATIVE SAMUELS quoted page 2, lines 4-6, of HB 294 which
read, "10 percent of the annual cost incurred by the taxpayer
for qualified services in the state during each tax year for
which a credit is allowable for a qualified capital investment"
and asked what a qualified service would be.
MR. GRABER said that he can't answer Representative Samuels
question precisely. He added that the DOR has not performed any
audits on the credits that have been claimed. He conveyed his
understanding that a "qualified service" pertains to seismic
work and to the types of things that will eventually get
capitalized, as opposed to capital assets that are purchased.
5:34:10 PM
REPRESENTATIVE SAMUELS clarified that on page three, there is a
definition of "qualified capital investment", but there isn't a
definition of "qualified service."
REPRESENTATIVE GUTTENBERG inquired as to whether there's a
definition of "qualified service" in [Alaska Statutes].
CHAIR KOHRING asked whether he would be correct in saying that
Mr. Graber "wasn't aware" of what "qualified service" meant.
MR. GRABER confirmed "not precisely." He added that the first
credit showed up in 2004, and the DOR "really" hasn't had time
to audit it yet.
CHAIR KOHRING requested that the DOR identify "qualified
service" in [Alaska Statute].
5:34:57 PM
CHAIR KOHRING inquired about the number of times since [House
Bill 61] was enacted, that the credit has actually been taken
advantage of, and by which companies other than the Marathon Oil
Company.
MR. GRABER acknowledged that there are two companies that have
"taken" the credit.
5:35:54 PM
CHAIR KOHRING asked whether it appears as though [House Bill 61]
has been effective in terms of companies having interest in it
and taking advantage of it.
MR. GRABER said that he wasn't able to answer Chair Kohring's
question.
5:37:12 PM
CHAIR KOHRING indicated that [HB 294] might be held over in
order to address some of the concerns of members. He expressed
his support of the concept behind [HB 294], and of the committee
doing something to accelerate additional development,
particularly in the Kenai Peninsula. He opined that House Bill
61 facilitated additional development, and that the committee
should be able to "tweak" [existing statute] in order to attract
more companies and therefore, more investment.
5:38:32 PM
CHAIR KOHRING expressed an additional concern that might result
in having to add a provision to [HB 294] if necessary, and
[Legislative Legal and Research Services] would be able to make
the decision. He said his concern is in regard to the potential
gas line, "spurs," and any gas-related infrastructure, since he
doesn't feel they should be included in HB 294. He opined that
the State of Alaska doesn't want to be "too generous" to
companies that build the gas line, with the credit increased to
25 percent. To "narrow down" [HB 294], he said his suggested
wording would be, "The provisions of this act do not apply to
cost and revenue associated with gas pipelines and
infrastructure." He added that the Marathon Oil Company seems
amenable to his suggestion.
5:39:38 PM
MR. BARNES said that his initial thought is whether there are
concerns regarding a North Slope gas line or spur line. The
intent of [HB 294] is for exploration and development of new
gas, south of the Brooks Range. He added that at a high level
pass, there's a possibility that a gas line or spur line would
be excluded, because gas from the North Slope is produced north
of the Brooks Range. He said, "You're right, there may be a
need to tweak and make certain there's not a gap there in the
wording."
5:40:27 PM
REPRESENTATIVE SAMUELS asked whether [HB 294] specifies
geographic location.
REPRESENTATIVE GUTTENBERG answered, "68th parallel."
5:40:52 PM
REPRESENTATIVE SAMUELS asked if the DOR has conducted any
economic modeling to establish how much [money] would have to be
spent and how much [gas] would have to be found, to make [the
gas line] worthwhile. He added, "Not counting the impact on the
economy, but the impact on the state treasury."
5:41:28 PM
MR. GRABER defined "qualified services" as, "Expenditures for
labor, seismic, and other services that are directly applicable
to a qualified capital investment." He added that "qualified
services" does not include operating lease expenses.
5:42:11 PM
CHAIR KOHRING requested that Mr. Graber discuss the accompanying
fiscal note.
5:42:28 PM
MR. GRABER explained that [HB 294] retains the following
characteristics: only exploration and development outlays for
gas wells qualify for the credit; the credit may be applied
against the taxpayers total income tax liability - the credit
may offset tax arising from oil production and pipeline
activity, as well as gas exploration and production; unused
credits may be carried forward to the subsequent five years; and
once gas production begins, additional outlays for the field
cease to accrue credits. On the other hand, he explained that
[HB 294] makes four significant changes to current law:
increases the amount of the credit to 25 percent [from 10
percent] of the amount of qualified capital investment and
qualified services spending; removes the 50 percent limitation
on the amount of credits that can apply in a single year;
removes the "successful efforts" requirement that developers
must find and deliver new gas resources to market to qualify for
the credit; and extends the sunset date of the investment tax
credit from January 1, 2013, to January 1, 2020.
5:44:32 PM
MR. GRABER informed the committee that in the two years since
the enactment [of House Bill 61], the DOR has seen claims of
[$]6.3 million. He added, "That relates to three fields."
5:44:47 PM
MR. GRABER stated that the rest of the fiscal note is
essentially an economic analysis that he did not prepare.
5:45:19 PM
CHERYL L. NIENHUIS, Petroleum Economist, Tax Division, Juneau
Office, Department of Revenue (DOR), informed the committee that
some of the language in [HB 294 reflects language in existing
statute]. She said that from an economic standpoint, the price
of gas is almost as much of an incentive as a tax credit.
Therefore, as long as the price of gas remains high, it should
be a good incentive in addition to a tax credit.
5:46:02 PM
CHAIR KOHRING, upon determining that no one else wished to
testify on HB 294, announced the closure of public testimony.
He noted that the committee is holding [HB 294] in order to
address the "50-50 split," the extension [of the sunset date],
the definition of "qualified services," and the concern of gas-
related infrastructure. He reiterated his support of the
concept behind [HB 294].
5:47:10 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 5:47
p.m.
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