03/06/2003 03:22 PM House O&G
| Audio | Topic |
|---|
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 6, 2003
3:22 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Mike Chenault, Vice Chair
Representative Hugh Fate
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Beth Kerttula
MEMBERS ABSENT
Representative Harry Crawford
OTHER LEGISLATORS PRESENT
Representative Jim Holm
COMMITTEE CALENDAR
HOUSE BILL NO. 61
"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."
- MOVED CSHB 61(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 61
SHORT TITLE:OIL & GAS TAX CREDIT FOR EXPLORATION/DEV
SPONSOR(S): REPRESENTATIVE(S)CHENAULT
Jrn-Date Jrn-Page Action
01/24/03 0060 (H) READ THE FIRST TIME -
REFERRALS
01/24/03 0060 (H) O&G, RES, FIN
01/24/03 0060 (H) REFERRED TO OIL & GAS
02/04/03 (H) O&G AT 3:15 PM CAPITOL 124
02/04/03 (H) <Bill Hearing Canceled>
02/27/03 (H) O&G AT 3:15 PM CAPITOL 124
02/27/03 (H) Heard & Held
MINUTE(O&G)
03/06/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
KATHY ZABEL, Senior Tax Counsel
Marathon Oil Corporation
Houston, Texas
POSITION STATEMENT: Answered questions on HB 61, Version D.
JOHN A. BARNES, P.E., Alaska Business Unit Manager
Marathon Oil Company
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 61, Version D.
CHUCK LOGSDON, Chief Petroleum Economist
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified that Version D of HB 61 is a
better bill; said the department had no position on it, but
offered that the bill will provide a commercial incentive to
look for gas and develop it in the Cook Inlet.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 61, Version D;
pointed out an oversight later addressed by Amendment 3.
ACTION NARRATIVE
TAPE 03-13, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:22 p.m. Representatives Kohring,
Chenault, Rokeberg, Fate, and McGuire were present at the call
to order; Representative Kerttula arrived shortly thereafter.
Representative Holm also was in attendance.
HB 61-OIL & GAS TAX CREDIT FOR EXPLORATION/DEV
Number 0051
CHAIR KOHRING announced that the committee would hear HOUSE BILL
NO. 61, "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."
CHAIR KOHRING indicated the new proposed committee substitute
(CS) addresses members' concerns expressed previously.
Number 0171
REPRESENTATIVE FATE moved to adopt the proposed CS, Version 23-
LS0270\D, Chenoweth, 3/6/03, as a work draft. There being no
objection, Version D was before the committee.
Number 0223
CHAIR KOHRING began explaining changes in Version D. On page 1,
lines 9-10, he noted, the oil incentive has been eliminated.
REPRESENTATIVE CHENAULT, sponsor of HB 61, pointed out its
removal from the title as well.
CHAIR KOHRING informed members that on page 1, line 15, and
page 2, lines 1-2, the credit for qualified services has been
reduced from 100 percent to 10 percent in order to address a
member's concern. On page 2, lines 13-15, because of an issue
brought up by the Department of Revenue, the amount of tax
credit in a single year must not be greater than 50 percent of
the taxpayer's total tax liability for that year, and is
calculated prior to application of any other credits. On page
3, lines 13-16, as brought up by a committee member, Version D
eliminates the "double-up" with other incentive programs; a
taxpayer who elects to participate in this exploration and
development program, as noted in the bill, isn't entitled to any
other set of programs such as royalty reductions, but may forego
this incentive and still use other programs.
Number 0461
CHAIR KOHRING continued with Version D. On page 3, lines 20-21,
as requested by the Department of Natural Resources (DNR), it
better defines what is meant by "new gas to market"; he said it
has to do with new gas now being defined as gas reserves in a
gas reservoir for which there has not yet been any commercial
production. On page 3, lines 27-28, it tightens the definition
of "qualified capital investment" to address concerns of
Representative Fate. Language has been added to clarify that
this only deals with exploration and development expenses,
rather than any expenses relating to ongoing production in the
future. In addition, the provision is being eliminated that
deals with property relating to oil exploration and development.
Furthermore, "air strips" in the previous bill is being replaced
with "helicopter pads", and aircraft and motor vehicles also are
eliminated as far as any allowable expense.
CHAIR KOHRING continued with Version D. On page 4, lines 11-13,
it tightens the definition of "qualified services" and clarifies
the language, to address concerns of Representative Rokeberg.
It adds language to clarify that "qualified services"
expenditures must be directly attributed to "qualified capital
investments." Furthermore, it adds language to clarify that
ongoing operating expenses won't be available for the credit.
Number 0653
KATHY ZABEL, Senior Tax Counsel, Marathon Oil Corporation,
[responding to a question from Representative Holm as to why
page 2, line 22, of Version D says "on a form prescribed by the
department", whereas line 24 of the original bill says "on a
form prescribed and provided by the department"], explained that
it was a change suggested by the Department of Revenue to
clarify that the department normally would prescribe the forms,
but wouldn't necessarily deliver them to the taxpayer.
MS. ZABEL, in response to questions from Representative
Rokeberg, explained that there was an investment tax credit in
the federal Internal Revenue Code, but that was changed
considerably in 1986; now, the [federal] investment tax credit
is limited to three different types of qualified property and is
brought in under the general business credit. When it was in
existence, the investment tax credit was basically a 10-percent
credit on a very broad category of qualified property; the
taxpayer could take that credit back three years and forward
fifteen years. In response to further questions, she added that
normally credits on both the state and federal level prescribe
some "carry back" or "carry forward" period, or indicate that
credits generated in a particular tax year must be used that tax
year. It would be limited by the amount of taxable income, and
most states have had some type of "ordering rule" with regard to
how this had to be utilized in each of the tax years, requiring
it to be carried back three years and then only forward if there
were remaining credits, for instance.
Number 1143
REPRESENTATIVE ROKEBERG noted that [Version D] has a five-year
period but no more than 50 percent.
MS. ZABEL responded that there is a limitation as to the carry-
forward period, as well as a limitation as to taxable income in
this particular bill.
REPRESENTATIVE ROKEBERG surmised that a taxpayer would want to
maximize the "write-down" but would be limited by the "50
percent the first year" rule.
MS. ZABEL affirmed that.
REPRESENTATIVE ROKEBERG suggested that a taxpayer with profits
the second year presumably would take the balance of the 50
percent the second year. He asked whether that is correct.
MS. ZABEL answered in the affirmative.
REPRESENTATIVE ROKEBERG asked whether a taxpayer could carry it
forward if there were no net income the second year, for
example.
MS. ZABEL replied, "Yes, in theory." She indicated that
normally there is some type of preference by the Alaska
Department of Revenue or the federal government as to how these
credits are utilized in particular years.
Number 1218
REPRESENTATIVE ROKEBERG referred to Ms. Zabel's mention of the
provision for carrying it back three years and forward fifteen
years. He asked, "If you had the 10 percent and you had
sufficient net income that year, you could actually take 100
percent of the credit that particular year?"
MS. ZABEL answered in the affirmative.
Number 1244
REPRESENTATIVE ROKEBERG conveyed concern about the qualified
services on [page 4] of Version D. He suggested perhaps his
concern could be ameliorated by testimony on the record
interpreting the "directly applicable" language as it relates to
such things as "overhead burden and other soft-cost-type things
that might be ... corporate overhead" for a discrete project
that might qualify under this bill. He asked whether Ms. Zabel
believed the language would prohibit that or allow it to occur.
MS. ZABEL responded, "It was our intention that normal lease
operating expenses ... and things of that nature would not be
included in this bill."
REPRESENTATIVE ROKEBERG suggested that an accountant for a
particular company would try to find everything possible to
qualify. Expressing concern, he asked, "Do we need a brighter
line?"
MS. ZABEL answered that generally Alaska's corporate income tax
system follows the federal system. The Internal Revenue Code
prescribes what are considered capitalized items and lease-
operating-expense items, as well as an intangible drilling cost
or intangible personal property. She specified, "It would be
our intention to ... be consistent with the parameters that are
already in there in the Alaska income tax provisions, as well as
the Internal Revenue Code provisions."
Number 1395
REPRESENTATIVE ROKEBERG asked whether general corporate
operating expenses would or wouldn't be allowed to be
incorporated into what he called the "soft-cost category" of
qualified services.
MS. ZABEL replied, "No, that would not be our intention to
include those type of overhead costs in the calculation of
qualified services."
REPRESENTATIVE ROKEBERG still expressed concern that the statute
could be read to allow it.
MS. ZABEL responded, "Certainly, we could provide whatever
language would make the committee feel more comfortable that the
statute itself was restricted to the type of cost that we
intended to include here."
Number 1489
REPRESENTATIVE ROKEBERG asked about adopting language within the
statute to mirror or cite the United States Code for these
issues, and whether that would be applicable and would help
define the boundaries.
MS. ZABEL agreed it would be one way to handle the issue.
REPRESENTATIVE ROKEBERG asked whether Ms. Zabel believed that
would cover "some of these other areas of soft costs" he was
talking about.
MS. ZABEL said it possibly could, but suggested the need to look
at it further.
REPRESENTATIVE ROKEBERG indicated he would draft an amendment to
cover it when the time was appropriate. He asked that the
committee and the sponsor track it, suggested that feedback
could be obtained from the Department of Revenue, and indicated
it could be addressed in the House Finance Committee.
Number 1570
REPRESENTATIVE FATE moved to adopt Amendment 1, on page 4,
line 8, to delete "unrefined oil". He explained that unrefined
oil had been removed everywhere else, but this had been missed.
CHAIR KOHRING noted that the deletion would be "or refined oil".
Number 1624
CHAIR KOHRING asked whether there was any objection to adopting
Amendment 1. There being no objection, it was so ordered.
Number 1649
REPRESENTATIVE KERTTULA offered her reading that gas could be
known to be in the reservoir, but that it couldn't have been
commercially produced yet in order to qualify. She asked if
that is right.
MS. ZABEL deferred to Mr. Barnes.
Number 1701
JOHN A. BARNES, P.E., Alaska Business Unit Manager, Marathon Oil
Company, responded:
You're correct. There ... could be cases where it's
known that gas may be in a reservoir but it's not yet
been commercially produced because of technological
issues, development cost issues. It may have been a
tighter reservoir, lower productivity, that under some
price regimes were not producible, or it could be new
gas that's found, or even, conceptually, a resource.
But I believe your reading on that is correct.
Number 1736
REPRESENTATIVE KERTTULA returned to the intent behind the
legislation. She said in terms of exploration and looking for
new finds, she sees the reasoning; however, she expressed a
little difficulty if known gas would have been "perfectly
producible under any other regime." She asked whether that has
happened elsewhere, and whether there is a way to make that kind
of determination and cut it that fine.
MR. BARNES, noting that it was a good question, indicated within
Cook Inlet there probably haven't been many cases that line up
with that scenario, but acknowledged the possibility. He added,
"Again, I think the intent was to ... look at commercial
development." Mr. Barnes said there is risk in both exploration
and development. For example, even under current technology,
there could be cases when [a company isn't] capable of producing
because it requires lower drilling costs and "better
stimulation"; that is typically called a "resource." Referring
to his testimony at the previous bill hearing, he reiterated
that there are some "resource estimates" in Cook Inlet.
MR. BARNES recapped some of his testimony of the previous week,
noting that reserves are typically categorized as "proven" if
they are, under SEC [Securities and Exchange Commission]
definitions, commercially producible at this time under current
technological and economic conditions. "Probable" reserves are
normally deemed as having less than a 50-percent probability of
production under "current commercial cases." With regard to the
Susitna basin and coal bed methane, he added, "That would be
called a resource, that they know that there's a lot of coal
there, they know that there's a lot of resource potentially with
it, [but] can it be made producible?" The final category of
reserves, "possible," is when there is an inkling that something
may be there, which gets more into the "exploration side."
Noting that there is a gray area, he remarked, "Oftentimes,
people do call [it] an exploration well when you go into an area
to drill for a resource that might have been seen on an earlier
drilled well but it was never properly identified or captured,
so you're now going in, mobilizing a drilling rig, maybe perhaps
acquiring the lease, seismic [data]."
Number 1927
REPRESENTATIVE KERTTULA said her concern was discrete. She
expressed the need to define it so that there is no special
credit for something a company probably would do anyway.
MR. BARNES replied:
I might suggest that a good test of the water would be
market conditions. Again, in my last week's
testimony, I described where reserves were going in
the Cook Inlet, and, indeed, there is even a
deliverability shortfall now. So I would suggest, I
believe, that if there were known gas reserves in the
inlet right now - or potentially in other basins that
could easily be hooked up - market conditions would
drive that. So that's, I believe, the intent of
trying to say commercial development. If ... someone
can make money at it today, ... I would believe they'd
be trying to do it.
Number 2016
REPRESENTATIVE McGUIRE followed up on Representative Kerttula's
concern. Noting that she supports this legislation, she
provided an example: if the Division of Oil & Gas was
negotiating already on a particular project, unbeknownst to the
legislature, and this legislation passed and thereby gave away
more than is needed to get that reserve developed,
Representative McGuire said she would feel that the legislature
wasn't upholding its constitutional mandate. Suggesting perhaps
language could be added later, she agreed with the need to
perhaps clarify that [this credit wouldn't apply] if
negotiations were pending or if there were some concrete,
substantial activity toward securing a deal. She indicated her
belief that it is the legislature's job to try to gain the
maximum benefit of these resources for the people of Alaska.
Number 2099
REPRESENTATIVE ROKEBERG agreed with some concerns expressed by
Representative Kerttula, suggesting this demands a clearer
statutory response to at least try to set those parameters and
remove discretion from the decision making.
REPRESENTATIVE KERTTULA said she doesn't know what those
[parameters] are.
REPRESENTATIVE ROKEBERG suggested the question is whether to
draw a line there. He noted that the bill draws a line in that
these expenditures - both the services and the capital
investment - must be made [for a tax year beginning] after
December 31, 2002. He pointed out that [the date] is another
question: why not say 2003, for example? He also noted that
Mr. Barnes had gotten his attention when he mentioned coal bed
methane. He remarked:
That's kind of the problem here. If we know the
reservoir gas is there, we may not know if it's
commercially producible. And, as he's pointed out,
it's market conditions. So what we need here is a
bill that's going to be applicable ... for all those
situations. So, what is our intention here? ... What
if they found an "elephant" gas field? ... If they
found an elephant gas field, that's exactly what this
bill's all about, so we shouldn't feel bad about that,
because the ... ITC is limited to their investment
amount, not the long-term, provable reserves or
protections or net profits going to flow from that.
That's the point here, because the relationship is
between the ITC ... and what they've invested, not
what's being produced or the profit. Don't forget
that the state royalty and corporate taxes not offset
by the ITC, and other sources of revenues we'd have,
... even ELF [economic limit factor] may apply to that
particular production. So, therefore, ... we
shouldn't delimit the applicability of the credit
because you have a larger field.
Number 2252
REPRESENTATIVE ROKEBERG highlighted coal bed methane, for which
he suggested this type of bill will encourage development. He
explained, "We know it's there, but we don't know [whether] it's
going to be economically producible. And you really don't know
it until you get in there and spend the dollars to see if it
works." Noting that capital investment would vary, he proposed
that the credit would go up with the capital investment. He
added, "So I would venture to say, philosophically, you should
have ... the credit if you make the investments that produce the
gas." He acknowledged that [the bill] doesn't address whether
the amount produced would be large or small, but emphasized that
there is no credit for dry holes. He offered his understanding
that there must be successful commercial production to apply for
the credit.
Number 2306
REPRESENTATIVE KERTTULA said she agreed with the intent
expressed by Representative Rokeberg, as well as the idea behind
the bill. However, she again relayed her concern about the
possibility - especially if prices rise - that the state could
be allowing this [incentive for a reservoir that is already
known to be there].
Number 2342
REPRESENTATIVE FATE offered that a gas field has exploration;
development; and production, which won't occur without a market.
Development may take several "collecting lines": is that
production or development? If there is only one well, for
example, with only one gathering line to a main transportation
system, is that development or production? Representative Fate
said that in discussing some of this to come up with a good
bill, he'd tried to delineate exploration from development.
Within development comes delineation of the field, he said, as
well as ascertaining whether it will be "commercial," the market
price, and so forth; once those are established, there is
production - the stage at which it is transported and sold. He
said it was quite clear to him: production is "out here
somewhere and could not be taxed, because this is an incentive,
and you don't incentivize production; you do incentivize ...
exploration and development."
Number 2445
REPRESENTATIVE ROKEBERG suggested that was one reason for a
trigger date [in the bill]. He said:
They couldn't be banking some gas, if you will, and
then going back retrospectively and asking for an ITC
based on an existing reservoir that, because of the
high price of gas right now, they ... want to put some
additional capital money in, then bring in the
production. It's like gaming the system or cooking
the books, if you will, to try to get ... a 10-percent
discount on the capital investment you're going to
make - ... unless they really just found something
here. And the only new thing you've brought on is
Ninilchik, right, Mr. Barnes?
MR. BARNES said it was the only thing discovered lately.
REPRESENTATIVE ROKEBERG asked whether most of [the company's]
money was spent before December 31, 2002.
MR. BARNES responded that it is ongoing, wells have been
drilled, and it's in the middle of development.
REPRESENTATIVE ROKEBERG referred to Representative Fate's
discussion of the line between [exploration and production]. He
asked: What about additional wells drilled after production of
a first well begins? Or will all wells be drilled before
production begins? He also asked whether the economics would
become a stronger driving force than the 10-percent ITC.
MR. BARNES remarked that incremental wells, once they're on
production, wouldn't fall under this bill.
Number 2537
REPRESENTATIVE ROKEBERG asked Ms. Zabel if there is a way to
draft a brighter line.
MS. ZABEL replied, "I guess it was our intention that ... the
language was fairly clear with respect to that, that this really
was only with respect to new investments. However, ... where we
could ..." [The teleconference cut out at this point.]
REPRESENTATIVE ROKEBERG suggested different scenarios could be
arrived at with regard to what is exploration, production, and
development. He said the infrastructure clearly is allowable
under the bill - rightfully so, because there must be
infrastructure in place to have production. He mentioned coal
bed methane and that if trying to increase field size, someone
may punch in 30, 40, or 50 wells "to keep the deal going."
Asking where to draw that line, he requested input from Mr.
Barnes.
MR. BARNES responded that probably the clearest trigger would be
when the initial production begins. He then suggested that the
day when gas is first sold might be an appropriate trigger. He
explained:
At that point in time you've shifted phases, and you
might have, as you said, additional drilling ... in a
fault block that's already under production, and then,
by the definition of reservoir, it's not to qualify.
If you step out into a riskier area, a new fault
block, a new strata - it's not currently [being]
produced - then ... I believe that you ... would
incentivize that well, but not any facilities, because
that's already on production. But I would think that
a good trigger point, whether it was for a well or a
facility, would be the day first gas goes through ...
that tangible item. It would be ... the least
controversial, I would think.
Number 2650
REPRESENTATIVE KERTTULA asked whether there is any other
definition of "production" under this title in the statutes.
MR. BARNES replied, "I'm not certain. I know that's when we
start ... paying taxes."
REPRESENTATIVE FATE offered his belief that a yardstick for oil
is when the first molecule enters the pipeline going to market.
Therefore, he suggested that production of gas should be when
that first molecule - whether from one well or from collecting
lines, for example - gets into the transportation system to go
to market.
Number 2693
REPRESENTATIVE ROKEBERG proposed that it would be easier [to
determine] with gas - which this bill applies to - than with oil
because there wouldn't be "small little stripper gas wells."
MR. BARNES said he hoped not. Noting that he isn't an expert on
it, he offered that coal bed methane operations involve moving
significant volumes of water to dewater the coal; after a point,
gas is being produced that goes through a sales meter and so
forth; it is bound by lease terms, royalty, and severance tax.
He suggested there is a fiduciary responsibility to monitor and
account for that gas. Even though there is activity going on,
it is known when gas has been sold, he indicated.
REPRESENTATIVE ROKEBERG referred to Evergreen [Resources].
Indicating the desire to make sure companies qualify and can
make a profit, he suggested making [the legislation] even looser
for coal bed methane.
Number 2792
REPRESENTATIVE FATE pointed out that the [Alaska Oil & Gas
Conservation Commission (AOGCC)] could determine where
development ends and production begins. He suggested that would
be simple, and offered his belief that one responsibility of
AOGCC is to determine when that molecule goes through [the
pipeline] that will go to market.
Number 2812
REPRESENTATIVE McGUIRE, following up on the testimony of Mr.
Barnes, highlighted the importance of determining the intent.
She posed a scenario in which there has been exploration on one
well and production has begun. If a company wanted to "step out
a little bit and see what's around," that would be exploration.
She asked, "Are we going to count that as new exploration, even
though there is production that has already ... come into play
on a well within a certain region? ... Do we want to define it
by proximity ... to the original, or do we care?" She asked to
hear from the sponsor.
REPRESENTATIVE CHENAULT responded that it has been addressed
somewhat in the definitions of gas reservoirs. He noted that
the bill says [in subsection (h)(1)] "gas reserves in a gas
reservoir for which there has not been commercial production".
He offered his interpretation: if a company "stepped out into
the reservoir during more [discovery], I guess there would be
... either an understanding there that ... if you have
commercial production out of that reservoir, then that wouldn't
apply to the tax credit [or] if you stepped outside of that
reservoir or you went into ... another area, then, in turn, that
could be conceived ... as new exploration, and it would fall in
underneath this incentive program."
Number 2897
CHAIR KOHRING asked whether members wanted to amend the bill to
provide that delineation, or leave it as is and have the AOGCC
determine any needed clarification.
The committee took an at-ease from 4:09 p.m. to 4:11 p.m. [Tape
ends 1.5 minutes early; no testimony is missing.]
TAPE 03-13, SIDE B
Number 2924
CHAIR KOHRING requested that Mr. Logsdon address the committee
on this issue.
Number 2898
CHUCK LOGSDON, Chief Petroleum Economist, Tax Division,
Department of Revenue, told members the proposed CS [Version D],
in the department's view, is a better bill and will provide
additional commercial incentive to industry to explore and
develop the gas resource in Cook Inlet. Noting that the
department didn't have a position on the bill, he said it is
clear from the committee's discussion that members fairly well
understand what the issues are. From the department's
standpoint of determining a monetary effect, he pointed out, it
is fairly complicated to determine an exact dollar amount,
because the bill is broad-based and could cover any gas from an
"elephant" field to coal bed methane. Fixing a price tag would
be fairly difficult without knowing where the gas would be
found, and what quantity and quality it would be.
Number 2836
MR. LOGSDON highlighted the importance of the price of natural
gas: if the bill were put into law, there is a modest risk that
if gas prices continued to rise, there would be an
"accelerating, market-driven development" of new gas reserves,
which would suggest that the credit wasn't needed. He added
that now that [the bill] has a 10-percent credit for any
[qualified capital investment or 10 percent of the annual cost
incurred for qualified services], "we're looking at something
that's a little more conventional from an income tax standpoint,
as was also mentioned that the ITC in the federal tax for that
is a little more conventional, and that although ... it's
possible ... that there might be a better way of incentivizing,
clearly this bill ... would increase commercial incentive to
look for gas and develop it in the Cook Inlet."
Number 2766
REPRESENTATIVE ROKEBERG referred to page 3 of Version D [lines
18-22, subsection (h)(1)], which read in part:
(1) "qualified capital investment" means a cash
expenditure or binding payment agreement, as described
in (b)(1) of this section, for real property or
tangible personal property used in this state in the
exploration and development of gas reserves in a gas
reservoir for which there has not been commercial
production if the reserves produce gas for sale and
delivery;
REPRESENTATIVE ROKEBERG asked Mr. Logsdon whether additional
language was needed to clarify the exact point of triggering the
ITC or when it would cease.
MR. LOGSDON said he hadn't thought about whether there is a need
for a more specific trigger. He offered some initial thoughts
on it, however, as follows:
We know that there are areas where it's more likely to
find gas than other areas right now. ... And as Mr.
Barnes stated, gas ... reserves often are produced in
a different way than oil reserves. I've been told
that in some cases, because there is a deliverability
requirement, you might find that you could have
initial production from a reserve to meet your
deliverability by drilling one well, and that ... as
other ... reserves decline [and] you need the ...
additional deliverability from that reserve, you may
need to drill more wells. ... But that's just an
example. So, to come up with a triggering mechanism
that covers all cases, I think, you ... might find
difficult.
Number 2658
CHAIR KOHRING pointed out that the committee hadn't received a
revised fiscal note [for Version D from the Department of
Revenue], but surmised that it would remain a zero fiscal note.
MR. LOGSDON affirmed that.
Number 2587
REPRESENTATIVE ROKEBERG began discussion of Conceptual
Amendment 2. He asked Ms. Zabel for any recommendations about
incorporating the U.S. tax code as a guideline in relation to
qualified capital investments and qualified services.
MS. ZABEL responded, "It was our intention that the language
that was included in there, 'directly applicable', would be
limiting enough." She expressed the need to think about it
further.
REPRESENTATIVE ROKEBERG asked her to consider it.
Number 2540
REPRESENTATIVE ROKEBERG moved to adopt Conceptual Amendment 2,
to amend subsection (h) beginning on page 3, line 17. He noted
that this may apply both to [paragraph] (1) on line 18,
"qualified capital investment", and to [paragraph] (2) on page
4, line 10, "qualified services". He explained:
The conceptual amendment would be to modify subsection
(h) ... to reflect ... the United States Code as to
the guidelines for the definitions and then
implementations of an investment tax credit as it
relates to this ... section.
REPRESENTATIVE ROKEBERG said the idea is to be "consistent in
the Alaska application of what the definitions of those items
would be, and not inconsistent with the U.S. tax code," to
hopefully give the department some guidelines in terms of
defining "stop-cost" and other issues. He suggested the bill
could then be moved to the next committee of referral, and
either that committee or the House Finance Committee could
"verify that, to see how that works." He concluded by saying it
is a conceptual amendment "to adopt the U.S. Code ... under
investment tax credits to that section (h), as appropriate."
Number 2413
CHAIR KOHRING asked whether there was any objection to the
adoption of Conceptual Amendment 2. There being no objection,
it was so ordered.
Number 2395
REPRESENTATIVE KERTTULA, apologizing for her absence at the
previous hearing, requested confirmation that there is no price
trigger under the bill, no matter what the price of gas is. If
there were a known field and the price were "hitting the
ceiling," this [incentive] would still be allowed. She asked
Mr. Myers whether she was reading that right.
Number 2359
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, answered, "Yes, you are. There is no sort of
needs-based assessment or requirement here. It's simply a
credit for the investment, regardless of price."
REPRESENTATIVE KERTTULA asked, when incentives are instituted,
whether [the legislature] ever considers a ceiling if the price
is high and [the incentive] isn't necessary to spur production.
MR. MYERS offered his belief that, with this type of incentive,
it is sort of a gamble, a "chicken or egg," which is the reason
for the difficulty in quantifying its worth and cost. [This
bill] puts some protection in the form of sideboards so that
pre-commercial production is clearly the limit of the
expenditures. Also, by using a date of 2002, he indicated it
assumes the intention of wanting to pay credits for things that
have already been done for at least a year. He suggested that
if the motivation is to incentivize future behavior rather than
current behavior, the date might be an issue.
Number 2280
MR. MYERS began discussion of what would become Amendment 3.
Noting that there is some protection against double dipping in
conjunction with other incentives, he pointed out that
subsection (g), page 3, line 13, says "tax" rather than "tax or
royalty". With the bill written that way, there wouldn't be the
ability to double dip on tax incentives, but would be the
ability to get royalty [modification] plus this incentive. He
offered his belief, based on previous committee discussion, that
it was an oversight.
MR. MYERS concluded his response to Representative Kerttula by
saying this is not necessarily needs-based, although it is a
rational credit similar to federal credits. He said there
certainly is a need for more exploration and development in Cook
Inlet. He added, "I think you struggle with the concept of what
are you incentivizing. This clearly is beyond just
incentivizing exploration, but all those pre-production expenses
as well. And it would work for established fields that have yet
to [be] proven commercial, as well as undiscovered resources."
Number 2178
REPRESENTATIVE CHENAULT addressed the possible addition of "or
royalty" in subsection (g). He said this question had arisen
earlier, and that he didn't see any problem with putting
"royalty tax credit" in there also. He said it would be an
"either/or," as an option.
Number 2134
REPRESENTATIVE FATE suggested asking Mr. Barnes as well. He
said he himself didn't like the double dipping, and that, to his
belief, the intent of [Marathon Oil Company] wasn't to do so.
He suggested that adding "royalty" still allows an either/or,
but not both [the incentive and another].
CHAIR KOHRING, responding to a pronouncement from the audience,
stated, "Just for the record, they do concur with adding the
verbiage in there."
Number 2102
REPRESENTATIVE FATE moved to adopt Amendment 3, adding "or
royalty" [on page 3, line 13]. There being no objection, it was
so ordered.
REPRESENTATIVE ROKEBERG asked whether the amendment should read
"royalty credit or modification", for example.
MR. MYERS, in response to a request for his input, offered his
belief that "royalty modification" would be more clear. He
explained that in some cases there is a credit such as an
economic incentive credit; in other cases, such as royalty
reduction, there is a modification in the royalty rate.
Number 1985
REPRESENTATIVE KERTTULA requested an amendment to Amendment 3 so
that it would read "or royalty modification". Thus subsection
(g) would read:
A taxpayer who obtains a credit under this section may
not claim a tax credit or royalty modification
provided for under any other title. However, a
taxpayer may, at the taxpayer's election, forgo a
credit under this section in order to continue to
qualify for a credit provided for in another title.
CHAIR KOHRING, hearing no objection to the amendment to
Amendment 3, announced that [Amendment 3, as amended] was
adopted.
Number 1973
REPRESENTATIVE KERTTULA began discussion of what she would offer
later as Amendment 4. She expressed concern about the
retroactivity on page 4, line 28, which says [AS 43.20.043,
added by Section 1] is retroactive to January 1, 2003. She
noted that this bill is meant to be an incentive and forward-
looking.
MR. BARNES suggested it is a policy question.
The committee took an at-ease from 4:31 p.m. to 4:33 p.m.
Number 1884
REPRESENTATIVE KERTTULA noted that the law would become
applicable January 1, 2003. She said the question goes to what
would have happened in that period to which this [incentive]
might apply.
MR. BARNES responded:
I think we've announced the discovery, and we are
doing some work. ... This bill has been two or three
years in the making, and each year you just start with
the date. I think the policy issue for this committee
or someone else [is] ... to pick a start date. ...
Frankly, I care more about getting a bill in place
than the start date. But, again, as written, it
starts January 1, ... 2003.
Number 1839
REPRESENTATIVE ROKEBERG pointed out that this isn't new
legislation. He suggested the need to use the December 31 date
because of the tax year - assuming it's a calendar year,
notwithstanding whatever fiscal year a company might use,
consistent with the tax code. He suggested the other option is
to have it not apply to anything that has occurred "this
calendar year as a tax year." He suggested Marathon Oil Company
needs to answer how much money it has spent this year for which
it might benefit this particular calendar year.
MR. BARNES replied:
We're spending money this year. We spent some money
last year. I hope to spend some money next year.
Again, the intent of the bill is to try to level that
playing field so we can see capital investments ... by
Marathon plus other companies. So, Marathon's
position is that a start date's a policy question. We
are doing some work. Some other parties are doing
some work. I think ... our point all along has been
that there's not sufficient activity in the inlet. So
I don't know what a correct start date would be.
Number 1756
REPRESENTATIVE ROKEBERG alluded to page 2, lines 5-7, which
read, "(1) cash expenditures or binding payment agreements
entered into after December 31, 2002". He suggested it is clear
that anything after that date would apply. He suggested that
with the Ninilchik field, most of the money would have been
spent before that date.
MR. BARNES responded:
We're in the middle of trying to get the field
developed, so there will be ongoing expenditures. I'm
not certain, depending on where you draw a line, how
much is last year, this year to date, and next year.
... We could provide that. But, clearly, ... I care
more about, "Pick a date, get an incentive going."
But you are correct: we are doing work, and we are
spending money.
REPRESENTATIVE ROKEBERG expressed concern about negative media
coverage if there isn't full disclosure about whether the
legislature is doing this specifically to help [Marathon Oil
Company] on one project. He said he believed what Mr. Barnes
was saying, that Mr. Barnes was more concerned about future
public policy. He suggested that if the company would have
spent tens of millions of dollars this year that would apply,
for example, the legislature should know about that before
making a final decision.
Number 1675
REPRESENTATIVE FATE, noting that this bill has been before the
legislature at least two years, said this also refers back to
when [Marathon Oil Company's] project started, because
expenditures before that date wouldn't be applicable. He
suggested that expenditures from some of the development work
might be much greater than the expenditures from January 1,
2003. He agreed with Representative Rokeberg that, if that is
the case, it should be publicized and [the legislature] should
know it.
Number 1617
REPRESENTATIVE KERTTULA moved to adopt [Conceptual Amendment 4],
to remove the retroactivity. She explained:
At this point, we don't know. And I think if the
information comes forward and we feel confident when
it goes to [the House Finance Committee], it could be
added back in. But right now, at this time, I don't
feel confident; I don't know what they are. I think
it does throw the whole thing into question, because
this is an incentive. It's not for things that have
really already been on line, that we know are going to
happen. It really is to get people out and to do new
things. And I'd feel more comfortable if the
retroactivity were out.
Number 1590
REPRESENTATIVE ROKEBERG objected for discussion purposes. He
suggested it is a matter of faith with regard to whether to move
this out of committee and let [Representatives Fate and
Chenault, who co-chaired the House Resources Standing Committee]
work on it. He said he agreed with Representative Kerttula's
point, which is why he'd asked that information be brought
forward. He said the question is whether to amend it out just
because she isn't comfortable until the data can be seen. He
said he didn't want the bill to sit [in committee] too much
longer.
REPRESENTATIVE KERTTULA again expressed concern that if
something is happening already, it isn't proper for that to
receive an incentive.
Number 1539
REPRESENTATIVE FATE asked [Mr. Barnes] if he could come up with
some figures before the bill goes to the House Resources
Standing Committee. He said he had no objection to a
retroactive date if it could be justified.
MR. BARNES replied:
My feeling would be, if there's a discussion there, I
would suggest we just follow Representative Kerttula's
suggestion ... and really just ... drop the
retroactivity, because no matter how much money
Marathon spent, ... we've spent a significant amount
last year, we're spending a pretty good amount of
money this year. ... I believe that it'd always be a
question. And, frankly, I don't know that Marathon
wants that question, "Was this done just for this
project or that?" And, ... frankly, I'd rather just
... step away from it and get a bill going that does
incentivize activity. And if that's ... really the
critical issue, I think ... that would be the simplest
thing. And, as I said before, I'd rather see Marathon
and other companies out there doing work without
having this question in front of us.
REPRESENTATIVE FATE responded that it's probably a good
suggestion because of proprietary information that might be
exposed, which Marathon Oil Company might not want exposed.
Number 1462
REPRESENTATIVE ROKEBERG said, "I think the cat's out of the bag.
They have to expose it, one way or the other, and ... they owe
it to the public." He surmised that Representatives Kerttula,
Fate, and Chenault, who all currently served on the House
Resources Standing Committee, would ensure that this is right
after it moves along. He recommended leaving it alone and
getting a promise from the sponsor and [Representative Fate] to
take it up or offer another amendment [in the House Resources
Standing Committee].
Number 1400
REPRESENTATIVE McGUIRE remarked that what she was hearing from
Mr. Barnes was that he'd rather see a good bill go forward that
will do the right thing, without having distractions about the
retroactivity that she believed would exist. She explained that
people would assume this is some sort of gift being given by the
legislature to special interests. She said:
I'd rather see it be cleaner. I think it's the right
thing to do, to give incentives. I think we want to
see these ... reservoirs developed. I think this bill
is great. I applaud all the work of Marathon. And I
think that's what I hear you saying. So I don't
understand why we're going to leave it in, when you
hear the people who are wanting the bill [Mr. Barnes]
... say "out".
Number 1324
REPRESENTATIVE KERTTULA thanked Representative Rokeberg for
pointing out the importance of obtaining the information. She
said she would hope Marathon Oil Company would come forward and
elaborate on that in [the House Resources Standing Committee].
She said it isn't just because of the long history of the bill;
this will still be open to the challenge of rising market prices
and whether [the incentive] is really necessary. She expressed
appreciation for the openness.
Number 1266
REPRESENTATIVE ROKEBERG maintained his objection, saying that he
lives in the Cook Inlet area, which needs gas.
CHAIR KOHRING concurred with Representative Rokeberg, suggesting
that the more that is put in the bill, the more there will be
incentives to develop gas. He specified the desire to keep the
January 1 [2003] start date. He said he also wondered about the
issue of proprietary information. Noting that the intent of the
legislation is to encourage [exploration and development], he
said he thinks [this amendment] takes a little away from that.
Number 1220
MR. BARNES told members:
Just another observation that I would throw out
regarding Representative Kerttula's comment on price:
I think the goal of an incentive is to mitigate price
increases. If prices do go up, you're correct. I
would say that that would be one stimulus, but that
would probably be a measure of lack of incentive,
because it reflects market conditions, it reflects
supply-demand, which says that, ... obviously, the
supply is down relative to the demand. So, ...
indeed, that would be a driver. My thought, my
suggestion might be that that would be a measure that
we were too late, perhaps, in considering the
incentive.
And the other thing I would offer up, though, is: the
intent of this bill was to draw capital into the Cook
Inlet. So it's not only Cook Inlet gas prices that we
will watch, it's other investment opportunities that
companies have. If gas prices increase in the Cook
Inlet to ... a level that we don't like, but that's
less than perhaps Lower 48 prices are, then capital
will, nonetheless, go to the Lower 48 until prices
rise in the Cook Inlet again to that same level. So
it's not only Cook Inlet supply-demand directly, it's
also that relative balance between investment
opportunities that corporations have.
REPRESENTATIVE KERTTULA said that was a good point.
Number 1105
A roll call vote was taken. Representatives Kerttula and
McGuire voted in favor of Conceptual Amendment 4.
Representatives Chenault, Rokeberg, Fate, and Kohring voted
against it. Therefore, Conceptual Amendment 4 failed by a vote
of 2-4.
REPRESENTATIVE ROKEBERG surmised that the bill's sponsor and
[Representative Fate] would follow up on the concern expressed
by Representative Kerttula. He said he'd certainly change his
position [on the retroactivity] if it turned out there was an
unwarranted amount. He again suggested the need to see the
figures from this company, if it would provide them. He then
asked Representative Chenault where the 68th parallel is.
Number 0971
REPRESENTATIVE CHENAULT said it is about at the Brooks Range.
As the sponsor and current co-chair of the House Resources
Standing Committee, he announced the intention of working to
answer these questions and to talk with representatives from
Marathon Oil Company, in order to answer the questions so that
everyone is happy with the bill.
REPRESENTATIVE FATE echoed those comments. Going to a map on
the wall, he pointed out the 68th parallel, noting that it
basically runs to the Brooks Range. He said there is coal bed
methane at Red Dog [Mine] above the 68th parallel, to his
understanding; however, most gas above the 68th parallel is
conventional gas.
REPRESENTATIVE ROKEBERG suggested perhaps finding a way to get
the line above the Red Dog [Mine].
Number 0814
REPRESENTATIVE McGUIRE moved to report CSHB 61, Version 23-
LS0270\D, Chenoweth, 3/6/03, as amended, out of committee with
individual recommendations and the forthcoming fiscal note.
There being no objection, CSHB 61(O&G) was reported from the
House Special Committee on Oil and Gas.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
4:51 p.m.
| Document Name | Date/Time | Subjects |
|---|