Legislature(2001 - 2002)

03/05/2002 10:20 AM O&G

Audio Topic
* first hearing in first committee of referral
+ 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 -                                                                        
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 -                                                                        
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                                                               
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                                                               
     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                                                                    
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                                                               
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                                                               
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                                                                    
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                                                                       
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                                                                    
     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                                                               
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                                                               
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                                                               
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                                                               
MR. BARNES suggested that other  parties more active in oil might                                                               
choose to  discuss whether that  should go  higher or lower.   He                                                               
     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                                                                    
     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                                                                      
     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                                                               
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                                                               
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                                                               
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.                                                                                       
There being no further business before the committee, the House                                                                 
Special Committee on Oil and Gas meeting was adjourned at 11:50                                                                 

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