Legislature(2003 - 2004)
05/18/2003 11:15 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
May 18, 2003
11:15 a.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Hugh Fate
Representative Jim Holm
Representative Norman Rokeberg
MEMBERS ABSENT
Representative Lesil McGuire
Representative Harry Crawford
Representative David Guttenberg
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 185(FIN)
"An Act providing for a reduction of royalty on certain oil
produced from Cook Inlet submerged land, and for a credit for
certain exploration expenses against oil and gas properties
production taxes on oil and gas produced from a lease or
property in the state."
- MOVED HCS CSSB 185(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: SB 185
SHORT TITLE:ROYALTY REDUCTION ON CERTAIN OIL/TAX CRED
SPONSOR(S): SENATOR(S) WAGONER
Jrn-Date Jrn-Page Action
04/11/03 0811 (S) READ THE FIRST TIME -
REFERRALS
04/11/03 0811 (S) RES
05/05/03 (S) RES AT 3:30 PM BUTROVICH 205
05/05/03 (S) Heard & Held -- Recessed to
4:00 pm 5/6/03 --
05/05/03 (S) MINUTE(RES)
05/06/03 (S) RES AT 4:00 PM BUTROVICH 205
05/06/03 (S) Moved CSSB 185(RES) Out of
Committee
05/06/03 (S) MINUTE(RES)
05/07/03 1201 (S) RES RPT CS 4DP 3NR SAME TITLE
05/07/03 1201 (S) DP: OGAN, WAGONER, SEEKINS,
STEVENS B;
05/07/03 1201 (S) NR: ELTON, DYSON, LINCOLN
05/07/03 1201 (S) FN1: (DNR)
05/07/03 1201 (S) FIN REFERRAL ADDED AFTER RES
05/10/03 (S) FIN AT 9:00 AM SENATE FINANCE
532
05/10/03 (S) Scheduled But Not Heard
05/13/03 (S) FIN AT 4:30 PM SENATE FINANCE
532
05/13/03 (S) Heard & Held -- time change
MINUTE(FIN)
05/14/03 1382 (S) FIN RPT CS 5DP 2NR NEW TITLE
05/14/03 1382 (S) DP: GREEN, WILKEN, TAYLOR,
05/14/03 1382 (S) BUNDE, STEVENS B; NR:
HOFFMAN, OLSON
05/14/03 1382 (S) FN2: (DNR)
05/14/03 1382 (S) FN3: (REV)
05/14/03 1397 (S) RULES TO CALENDAR 5/14/2003
05/14/03 1397 (S) READ THE SECOND TIME
05/14/03 1397 (S) FIN CS ADOPTED Y12 N8
05/14/03 1398 (S) ADVANCED TO THIRD READING
5/15 CALENDAR
05/14/03 1407 (S) COSPONSOR(S): WILKEN, STEVENS
B, DYSON
05/14/03 (S) FIN AT 8:30 AM SENATE FINANCE
532
05/14/03 (S) Moved CSSB 185(FIN) Out of
Committee -- Time Change --
MINUTE(FIN)
05/15/03 1445 (S) READ THE THIRD TIME CSSB
185(FIN)
05/15/03 1446 (S) PASSED Y17 N3
05/15/03 1446 (S) ELTON NOTICE OF
RECONSIDERATION
05/16/03 1475 (S) RECON TAKEN UP - IN THIRD
READING
05/16/03 1476 (S) PASSED ON RECONSIDERATION Y18
N2
05/16/03 1492 (S) TRANSMITTED TO (H)
05/16/03 1492 (S) VERSION: CSSB 185(FIN)
05/16/03 1730 (H) READ THE FIRST TIME -
REFERRALS
05/16/03 1730 (H) O&G
05/17/03 (H) FIN AT 10:00 AM HOUSE FINANCE
519 (pending referral)
05/17/03 (H) Scheduled But Not Heard
05/18/03 1833 (H) FN2: (DNR)
05/18/03 1833 (H) FN3: (REV)
05/18/03 1868 (H) FIN REFERRAL ADDED AFTER O&G
05/18/03 (H) FIN AT 10:30 AM HOUSE FINANCE
519 (heard after O&G meeting)
05/18/03 (H) O&G AT 11:00 AM CAPITOL 124
WITNESS REGISTER
SENATOR THOMAS WAGONER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as the sponsor of SB 185.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Explained details relating to SB 185 and
the department's fiscal note for Section 3; said the bill has
two significantly different portions with very different
purposes; answered questions.
STEVE PORTER, Deputy Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions pertaining to SB 185 and
the department's fiscal note for Sections 1 and 2.
ACTION NARRATIVE
TAPE 03-22, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 11:15 [a.m.]. Representatives Kohring,
Holm, Rokeberg, and Fate were present at the call to order.
The committee took an at-ease from 11:16 a.m. to 11:27 a.m.
SB 185-ROYALTY REDUCTION ON CERTAIN OIL/TAX CRED
[Contains discussion of HB 198, which was included in the new
House committee substitute]
Number 0079
CHAIR KOHRING brought before the committee CS FOR SENATE BILL
NO. 185(FIN), "An Act providing for a reduction of royalty on
certain oil produced from Cook Inlet submerged land, and for a
credit for certain exploration expenses against oil and gas
properties production taxes on oil and gas produced from a lease
or property in the state."
CHAIR KOHRING requested a motion to adopt the proposed House
committee substitute (HCS).
[There was a motion to adopt Version U, the version passed by
the Senate previously.]
The committee took an at-ease from 11:28 a.m. to 11:29 a.m. in
order to distribute copies of Version X.
Number 0132
REPRESENTATIVE FATE moved to adopt the proposed HCS, Version 23-
LS0926\X, Chenoweth, 5/17/03, as a work draft. There being no
objection, Version X was before the committee.
CHAIR KOHRING explained that Version X includes the original
HB 198, which relates to platform royalty-reduction provisions;
the governor's tax-severance credit provisions that were put in
on the Senate side; and new amendments requested by the
industry.
Number 0224
The committee took an at-ease at 11:30 a.m. that lasted less
than a minute.
CHAIR KOHRING explained that rather than dealing with
amendments, he'd rolled the changes into one package. He asked
that the sponsor provide details.
Number 0263
SENATOR THOMAS WAGONER, Alaska State Legislature, sponsor of
SB 185, thanked Chair Kohring for his work on the bill. He then
told members SB 185 provides for reduction of royalty [on] oil
produced in certain Cook Inlet fields and platforms as they near
the end of their production capability. The intent is to
provide a monetary incentive in the form of royalty relief to
maximize production from oil fields and extend the longevity of
Cook Inlet oil platforms; in return, there will be continued
employment in the area, rather than loss of jobs because of the
abandonment of those fields. Senator Wagoner said that, to him,
this is about saving onshore and offshore jobs, including
maintenance and operations, if only for a few years. He
stressed the importance of this to the community in Kenai.
SENATOR WAGONER explained that the bill also offers exploration
severance-tax credits to explorers for work performed on or
after July 1, 2003, and before July 1, 2007. Presently, maximum
tax credits for exploration in Alaska result in a cost of about
65 cents per dollar, which compares poorly with the credits of
Northwest Territories, Alaska's nearest competitor in Canada,
where the cost is 10 cents [per dollar]. He told members:
Alaska is at the bottom of the list in terms of
exploration credits; basically, the world's passed us
by. And to catch up with that, the governor has
offered this amendment to the bill to give the ...
exploration credits. This bill will result in some
cases in a 20 percent tax credit ... for any hole
that's drilled in a radius from an existing well, 3
miles from that well out to 25 miles. Any well
drilled in a radius 25 miles from an existing well and
further out will get a 40 percent tax credit; that's
very substantial. And that credit will be applied
against severance taxes and would reduce the cost in
Alaska to some 39 cents.
That'd put us in about the mid-range again, and being
in the mid-range and being in the United States, being
a stable entity, having stable taxes, should ... put
us back in good stead for the oil companies for
exploration and drilling.
Number 0576
REPRESENTATIVE HOLM surmised that Section 3 is the governor's
proposed language.
SENATOR WAGONER affirmed that.
REPRESENTATIVE HOLM asked, when moving out farther from
established fields, what happens when there are adjacent fields.
REPRESENTATIVE ROKEBERG suggested those are units, not "fields."
SENATOR WAGONER agreed and said, "The specific thing is the well
- out from an existing well."
AN UNIDENTIFIED SPEAKER said, "Or unit - a lease unit."
Number 0651
REPRESENTATIVE ROKEBERG asked Senator Wagoner to explain the
differences between [CSSB 185(FIN), labeled Version U] and
Version X.
The committee took an at-ease from 11:34 a.m. to 11:36 a.m.
Number 0673
CHAIR KOHRING brought attention to two additional lines that had
been inserted in Version X, page 7, lines 21 and 27. He asked
whether anyone wanted an explanation.
REPRESENTATIVE ROKEBERG asked whether it narrows the timeframe
and sets the timeframe for applying for the credit.
CHAIR KOHRING affirmed that. He then opened the public hearing.
Number 0745
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources (DNR), said he believed the legislation had
been accurately summarized, but emphasized that there are two
significantly different portions to the bill with very different
purposes. The first looks at the aging Cook Inlet
infrastructure and platforms, providing royalty relief modeled
on when operating costs exceed the profitability of the
platform; he mentioned a $20 netback oil price. He explained
that this was modeled in clusters or groups for Cook Inlet
platforms. It triggers automatic royalty relief: rather than
having to go to an application, it drops the royalty to 5
percent, with the goal of extending the platform life up to
perhaps 14 months' additional time.
MR. MYERS noted that in addition to the purpose of "incremental
oil production," this will maintain intact the inlet's
infrastructure. He explained that as platforms are yanked out,
the use of the infrastructure by the remaining platforms goes
up; this increases operating costs, and it may accelerate
abandonment of the offshore production, perhaps prematurely. He
told the committee:
So, by reducing royalty ... we believe we can have an
effect on extending the life of the Cook Inlet
platforms in general. And on specific platforms, by
triggering royalty relief slightly ahead of ... that
operating-costs-exceeding-profits point, we can
hopefully stimulate additional exploration and
development off the platforms.
MR. MYERS concluded the "platform" part of the bill by
explaining that the platforms are clustered into three groups,
based on their operating costs and reservoir characteristics;
this is fairly easy to quantify because there are about 30 years
of production data for most of these platforms. He offered his
belief that this has been modeled reasonably accurately.
Furthermore, if production increases from these platforms beyond
certain thresholds, the royalty rate goes back up gradually to
the original 12.5 percent; this provides some "upside
protection" for the state as well.
Number 0906
MR. MYERS explained that the second part of the bill is a
"stimulus for exploration" credit. Noting that the Department
of Revenue worked extensively on these credits, he said this
credit is for deposits that haven't yet been discovered. The
exploration must occur outside of [existing] oil and gas units.
He explained that this bill isn't intended to "incentivize"
activity within the units, and said units generally are
aggregations of leases that are in production. For "leases in
production with a planned development," he said exploration
inside that unit boundary does not receive the credit, but
outside it does. If it's more than three miles from a well, it
would receive a 20 percent credit; if less than three miles from
a well, it would receive no credit. He told members:
With the exception of certain timing restrictions on
wells, ... the amendment to the bill that you see on
page 7, ... [lines] 3 and 4, says that two cases where
wells really aren't considered wells for purposes of
[the] three-mile limit. The first is that if the well
is less than 150 days old, it doesn't count as a well.
And that, I think, allows for two purposes. One
purpose is, someone goes out and explores [and] a ...
second company is exploring nearby to them; both
companies would be eligible for the credit because
you'd have to base that well's existence, without this
kind of language, on the first well to spud or to
start drilling. The second part is, ... under this
kind of credit, delineation wells of an exploration
prospect would qualify as well.
MR. MYERS said the second part is that 15-year-old wells aren't
considered wells for this purpose. He remarked, "The logic
there, I guess, is to allow the credit to be used in areas where
earlier exploration occurred but there hasn't been recent
exploration." He said that is the major change to the bill.
Number 1057
MR. MYERS noted another major issue: when DNR gets the data,
there is a six-month window during which the company can decide
whether to take the credit. If it doesn't take the credit,
there is no obligation to give the data to DNR to use; if the
company uses the credit, it must give the data to DNR within six
months of completion of the data. This broad-based credit for
exploration drilling, particularly away from existing
infrastructure, is for costs incurred in the early parts of
exploration: the drilling of the well; the first, initial
logging of the well; and certain costs incurred because of
drilling. However, it doesn't allow for costs incurred from
testing a well. "Again, basically, you're trying to get the
company out there," he told members. Offering his experience
that once there is success in exploration, a company will test
the well, Mr. Myers said the state doesn't need to subsidize
that activity.
Number 1124
MR. MYERS specified that this bill applies equally to private,
state, and federal lands. Finally, it allows a 40 percent
credit for seismic data that is shot outside of units. He
explained:
One of the benefits of the data, in addition to
spurring the explorer to shooting that data - or ... a
seismic company to shoot it "on spec" - is that that
data becomes public in ten years. ... And I think
that's a very important concept in this bill. It's
been one of our issues with new companies coming up,
is it's very hard to get a hold of seismic data. Ten
years, I think, allows a long period of protection for
the initial investors in that seismic data, but at the
ten-year time point, the data still has some value
....
It also [corresponds] to the longest lease term we
have. So you'd be fully protected ... at or near the
time of leasing, for the entire time you held those
leases. And another company with surrounding leases
couldn't ... use that data ... that you had paid for.
Number 1202
MR. MYERS summarized by saying there are two distinct programs
under the bill. Referring to DNR's fiscal note, he pointed out
that it is the same as for [HB] 185 and just addresses the
platform parts of the bill, whereas the one from the Department
of Revenue addresses fiscal impacts from the severance tax
incentive. He urged members to get a more complete briefing
from the Department of Revenue on that second part.
Number 1237
REPRESENTATIVE ROKEBERG referred to Representative Holm's
earlier questions and asked what happens when multiple units,
such as at Prudhoe Bay, are "bounded together." He asked how
that boundary is accounted for if there are multiple units that
may or may not be contiguous.
MR. MYERS answered:
Basically, it uses the outside boundary of the unit
... under a plan of development as of a certain date.
So ... the units have a geographically described
outside boundary, normally referring to a lease
boundary, sometimes a segregated part of a lease. So
you'd be 25 miles from the aggregate of all those
units that have a plan of development.
REPRESENTATIVE ROKEBERG surmised that this must be 25 miles away
from any unit, then.
MR. MYERS said that is for the 40 percent credit, for the
additional 20 percent; it isn't the case for the first 20
percent.
REPRESENTATIVE ROKEBERG asked, "It's not less than 25 miles from
the outer boundary; is that because if it was more than 25
miles, we'd be getting in the area of the exploration credit
that already exists? Or what's the reason there?" He specified
that he was asking about the 40 percent credit.
MR. MYERS responded that closer than 25 miles, the economics are
clearly better; there's more incentive naturally to do it.
Also, 25 miles is about the distance that untreated oil, gas,
and water mixed together can be sent through a production
facility currently on the North Slope. So [the 25 miles] is a
rough number that approximately represents the change in
economics - from using the shared-facility infrastructure to
having to build at least partial facilities out on the
exploration site. That changes the size and scope of the
discovery and its economics quite dramatically. He noted that
the unit is where the production facilities reside.
Number 1389
REPRESENTATIVE ROKEBERG offered his understanding, then, that if
it is less than 3 miles from the bottom hole, there is zero
credit. From 3 to 25 miles, there is a 20 percent credit. And
beyond 25 miles, there is a 40 percent credit.
MR. MYERS affirmed that. He added that the wells are described
as wells less than 15 years old but more than 150 days old.
REPRESENTATIVE ROKEBERG asked whether an oil or gas well in the
Copper River basin automatically would qualify for the 40
percent credit because there are no units there.
MR. MYERS answered that there are no wells or units in the
Copper River basin; therefore, he affirmed that well and seismic
data in the Copper River basin would allow for a 40 percent
credit.
REPRESENTATIVE ROKEBERG asked about the proposed exploration in
Minto Flats.
MR. MYERS said that's an exploration license, which is different
from a unit.
Number 1503
STEVE PORTER, Deputy Commissioner, Department of Revenue,
informed members that also available on teleconference to answer
questions was Dan Dickinson, who'd worked on the fiscal note.
REPRESENTATIVE ROKEBERG referred to page 8 [lines 15-16] and
said the production tax credit certificate is for the amount of
credit allowed against production taxes. He asked whether
"production taxes" means severance taxes or something else.
MR. PORTER said it means severance taxes and nothing else.
REPRESENTATIVE ROKEBERG asked about impacts and noted that the
bill mentions the National Petroleum Reserve-Alaska (NPR-A). He
said, "We currently receive little or nothing in terms of the
general fund in NPR-A monies because of federal impact
legislation and so forth, and state statute." He asked, "Are we
giving away nothing, or could you explain that to the committee?
Are we going to receive anything from NPR-A, even in spite of
this?"
MR. PORTER said he would ask [Mr. Dickinson] to talk in detail
about this, but answered that there are basically three tax
types that [the state] still receives from NPR-A. He said,
"You're basically looking at severance taxes and corporate
income taxes - and depending on the size of the field that is
discovered, those can be substantial - as well as property
taxes."
[Mr. Dickinson was not available on teleconference.]
Number 1617
REPRESENTATIVE ROKEBERG referred to severance taxes and asked
whether there is minimum production required in order to
qualify.
MR. PORTER answered that this becomes an economic limit factor
(ELF) issue. He said that in a highly prolific field, there is
an ELF of, say, 0.9, which would be multiplied against the 12.25
or 15 percent. In a field with many wells but little
production, the ELF could be close to zero.
REPRESENTATIVE ROKEBERG asked about Alpine or Northstar, for
example.
MR. PORTER answered that Alpine actually pays a very high ELF,
about 8.4 to his recollection. It's very productive, with a
small number of wells.
Number 1683
REPRESENTATIVE ROKEBERG suggested that there would need to be a
relatively high producing, commercialized well for the ELF and
the credit to kick in. He proposed that if something was
marginal, it perhaps could be produced and yet wouldn't
necessarily qualify for the credit unless it was sufficient in
production to generate a qualification under the ELF.
MR. PORTER referred to the exploration tax credit and said
Section 3 [of the bill] applies to the exploration well. It
doesn't matter whether it is a dry hole or a producing well. It
is truly to provide an incentive for exploration.
REPRESENTATIVE ROKEBERG asked, "You could use the credit
generated by the dry hole against other income that would be
under an ELF generation?"
MR. PORTER said that is for the total severance tax liability.
REPRESENTATIVE ROKEBERG offered his understanding, then, that
the quality of the new well is not in play here.
MR. PORTER said that is correct.
REPRESENTATIVE ROKEBERG added that this [assists if the company]
is paying other corporate taxes on production.
The committee took a very brief at-ease.
Number 1796
REPRESENTATIVE ROKEBERG moved to report HCS CSSB 185 [Version
23-LS0926\X, Chenoweth, 5/17/03] out of committee with
individual recommendations and the accompanying fiscal note(s).
Number 1818
MR. PORTER informed members that the changes [in Version X]
don't modify the fiscal notes. He clarified that DNR had
produced the fiscal note for Sections 1 and 2, whereas the
Department of Revenue had produced the fiscal note for
Section 3.
Number 1836
CHAIR KOHRING asked whether there was any objection to the
motion. There being no objection, HCS CSSB 185(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
11:55 a.m.
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