02/17/2005 05:00 PM House OIL & GAS
| Audio | Topic |
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| Start | |
| HB71 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 71 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 17, 2005
5:05 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Nancy Dahlstrom
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Berta Gardner
Representative Beth Kerttula
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 71
"An Act relating to 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; relating to the
deadline for certain exploration expenditures used as credits
against production tax on oil and gas produced from a lease or
property in the Alaska Peninsula competitive oil and gas
areawide lease sale area after July 1, 2004; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 71
SHORT TITLE: AK PENINSULA OIL & GAS LEASE SALE; TAXES
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/12/05 (H) READ THE FIRST TIME - REFERRALS
01/12/05 (H) W&M, O&G, RES, FIN
02/11/05 (H) W&M AT 8:30 AM CAPITOL 106
02/11/05 (H) Moved CSHB 71(O&G) Out of Committee
02/11/05 (H) MINUTE(W&M)
02/14/05 (H) W&M RPT CS(W&M) NT 3DP 1AM
02/14/05 (H) DP: MOSES, GRUENBERG, WEYHRAUCH;
02/14/05 (H) AM: WILSON
02/17/05 (H) O&G AT 5:00 PM CAPITOL 124
WITNESS REGISTER
Jerry Burnett, Special Assistant
to the Commissioner of Revenue
Alaska Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Presented HB 71 to the committee and
answered questions.
GARY ROGERS, Revenue Auditor
Tax Division
Alaska Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Available to answer questions regarding
exploration credit regulations.
PAT GALVIN, Petroleum Land Manager
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding lease sales and
tax credits.
JIM COWAN, Resource Evaluation
Division of Oil and Gas
Alaska Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding exploration
activities on the Alaska Peninsula.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 5:04:55 PM. Representatives Kohring,
Dahlstrom, Samuels, Gardner, and Kerttula were present at the
call to order. Representatives McGuire and Rokeberg arrived as
the meeting was in progress.
HB 71 - AK PENINSULA OIL & GAS LEASE SALE; TAXES
5:05:08 PM
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 71, "An Act relating to 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; relating to the deadline for certain exploration
expenditures used as credits against production tax on oil and
gas produced from a lease or property in the Alaska Peninsula
competitive oil and gas areawide lease sale area after July 1,
2004; and providing for an effective date."
5:05:30 PM
Jerry Burnett, Special Assistant to the Commissioner of Revenue,
Alaska Department of Revenue, explained that HB 71 was
introduced by the governor and is intended to encourage
exploration and development of one of the largest undeveloped
onshore oil and gas fields remaining in Alaska, outside of the
North Slope. He commented that development of this field has
the potential to bring stable, high paying, year-round jobs to
an area which has traditionally relied on a seasonal commercial
fishing economy. He said, "Gas from this field can provide an
efficient, relatively low-cost energy source for heating and
production of electricity to the Alaska Peninsula area. And oil
and gas development can provide infrastructure [and] lower the
cost of living in the area." He pointed out that the committee
information packets contained letters of support from local
governments and Native corporations who support the development
of oil and gas resources in this area.
5:06:41 PM
MR. BURNETT stated that today the Alaska Department of Revenue
issued its first oil and gas exploration tax credit certificate
under the existing legislation for a well on the North Slope
drilled by Kerr-McGee Oil and Gas Corp.
CHAIR KOHRING asked if this was the result of Senate Bill 185
from two years ago.
MR. BURNETT replied that it was.
CHAIR KOHRING asked:
Are they about to lose their tax credit availability
on the Slope? Because this bill's germane to just
Bristol Bay for providing a tax credit extension, if I
understand. ... I ask that because I'm just wondering
if we ought to expand the scope of this legislation
and carry it outside of just Bristol Bay.
MR. BURNETT replied that at this point, the exploration tax
credit is in effect for work done through 2007 statewide; the
Bristol Bay extension was being done because the lease sale in
the Bristol Bay area will not be done until the spring of 2006.
5:08:54 PM
MR. BURNETT mentioned that the [House Special Committee on Ways
and Means] had a committee substitute for HB 71 in which there
were technical drafting changes, but no substantive changes.
Reviewing AS 43.44.025 on the Alaska Oil and Gas Exploration Tax
Credits, he explained:
[Under] 43.55.025(a)(1) companies are qualified for 20
percent of exploration expenditures for a well three
miles from an existing well, or 20 percent of
exploration expenditures for a well 25 miles outside a
unit, or both. So it's up to 40 percent of their
exploration expenditures for a well that is [both]
three miles from an existing well and 25 miles
[outside a unit]. And they ... may qualify for up to
40 percent credit for their seismic expenditures not
associated with a well. That credit can be taken
against tax on production that's done after July 1,
2004. ... Current law, statewide between July 1, 2003
and July 1, 2007, you could take the credits. With
the passage of HB 71 it would extend the credits on
the Alaska Peninsula for the sale which is described
in the bill for a time period between July 1, 2003 and
July 1, 2010.
5:11:04 PM
MR. BURNETT explained which types of exploration expenditures
qualify for the tax credits: seismic or geophysical exploration
not connected to a well; and exploration wells, specifically the
reasonably required costs for goods, services, and rentals to
prepare and drill, and the costs associated with abandonment of
dry holes within 18 months. He pointed out that overhead costs
are not allowed to be used toward tax credits.
MR. BURNETT, in response to Representative Samuels, clarified
that roads and airfields on site would count, but not "the
expenditures back at the head office that are in support of
this."
5:12:40 PM
GARY ROGERS, Revenue Auditor, Tax Division, Alaska Department of
Revenue stated that he worked on the exploration credit
regulations that were drafted as a result of Senate Bill 185
last year, and he is responsible for auditing the exploration
tax credits.
CHAIR KOHRING commented that he hasn't heard industry ask for
this bill, and he asked Mr. Burnett to explain why the bill
should be passed and how time sensitive the bill is.
MR. BURNETT deferred to Mark Myers, the director of the Division
of the Oil and Gas. [Mr. Myers was unable to attend the
meeting.]
5:14:49 PM
PAT GALVIN, Petroleum Land Manager, Division of Oil and Gas,
Department of Natural Resources, explained:
The legislation is needed to facilitate a successful
initial lease sale for the Alaska Peninsula. The
incentive credits [are] an opportunity that we see to
encourage companies to look at this new lease sale
that we're potentially going to offer in October. And
what we recognize is that while we can go through the
Best Interest Finding process and develop the
environmental safeguards to hold the lease sales and
have it be successful in the eyes of the local
governments, we need industry to feel that there is an
opportunity for them to go out and have it be
successful for them economically. And the incentive
credits were put in place to foster exploration
throughout the state, and to have them present for the
initial sale is something that we feel is really
important to really foster a successful first sale.
5:15:57 PM
CHAIR KOHRING asked, "How much does the industry actually want
this? ... Is this something that would spur them to actually
start sinking wells?"
MR. GALVIN responded:
With any new lease sale, the companies are generally
going to be somewhat reserved in their discussion of
their interest in the lease sale because, frankly,
they don't want to give any sort of commercial
advantage or indication of their interest in order to
... create a competitive situation where there may not
be one if they were to keep quiet about their
interests. So one of the reasons why we do areawide
lease sales is because companies are, just by their
nature, reluctant to provide [an] indication of a lot
of interest in particular areas or particular tracts.
And so with [a] new lease sale, we would not expect
any particular company to come out and say, ... "With
this incentive credit, we will bid on tracts."
5:17:30 PM
CHAIR KOHRING commented, "Well, if nothing else this can serve
as a starting point; if it doesn't work we can readjust it next
year."
MR. GALVIN replied:
At this point, we really don't know what kind of
interest we're going to get with this sale. It's
really going to be a matter of making it available and
seeing who comes. And the incentive credits are just
one thing to make the offer a bit more attractive to
the companies that are looking at exploring an
otherwise new area.
5:17:56 PM
REPRESENTATIVE GARDNER asked if the existing tax credits have
created any new exploration.
MR. BURNETT reiterated that Kerr-McGee Oil and Gas Corporation
has been issued the first tax credit. He said:
There are a number of other companies who are doing
it. We can't speak about them without their
permission, for the most part, so it's really
difficult to publicly quantify ... and to quantify
this ... program that's only been in place for a short
period of time. It does appear to be working at this
point.
CHAIR KOHRING commented that perhaps the legislature should
extend the tax credits more comprehensively and not focus it
only on Bristol Bay.
5:19:24 PM
REPRESENTATIVE ROKEBERG stated that he would like to know who
has applied for exploration expenditure tax credits since they
went into effect. He asked if the Kerr-McGee Oil and Gas
Corporation was receiving production tax incentive credits for
activities in the National Petroleum Reserve, Alaska (NPRA).
MR. BURNETT replied that he didn't know.
REPRESENTATIVE ROKEBERG responded that he would be very
disturbed if that was the case, "given the fact that we hardly
receive a dime from money expended on exploration in NPRA."
5:20:33 PM
MR. GALVIN pointed out that the Kerr-McGee wells are on state
land; they're both offshore and onshore North Slope.
REPRESENTATIVE ROKEBERG asked, "Do these credits that are now
currently existing apply to exploration in NPRA?"
MR. GALVIN responded affirmatively and said that the credits
apply to exploration throughout the state. He stated that there
are three wells in NPRA that have qualified for the tax credit.
5:21:37 PM
CHAIR KOHRING commented that he is concerned that the state is
giving a tax credit and a financial break to companies that the
state is not realizing a benefit from.
MR. GALVIN pointed out that the state does receive a benefit on
NPRA; there is a royalty sharing. He said, "When the
legislation was first passed, there were discussions with regard
to limiting it to merely state lands, but the decision was made
to make it statewide and not to distinguish between the land
status."
5:22:19 PM
REPRESENTATIVE KERTTULA asked if the tax credits apply to
federal leases.
MR. GALVIN replied affirmatively, that it applies whether it is
a state, federal, or private lease. In response to
Representative Rokeberg, he said, "When the legislation was
first written, it was not made specific to state lands, which
meant that it was applicable to all lands."
CHAIR KOHRING commented, "That one's a bit of a loophole, if you
ask me."
5:23:19 PM
CHAIR KOHRING asked if there has been any environmental
opposition to [HB 71].
MR. BURNETT responded, "We're not aware of any."
MR. GALVIN replied that [the Department of Natural Resources
(DNR)] just released a preliminary Best Interest Finding two
days ago for public comment. He said that DNR has been working
closely with the local governments and Native organizations to
ensure that it has addressed the concerns of the fishing
industry as well as protected the sensitive habitats. While
offshore acreage is available in the lease sale, he noted, no
offshore drilling would be allowed; the offshore acreage would
have to be explored and developed from onshore drilling
facilities using directional drilling techniques.
5:24:23 PM
CHAIR KOHRING noted that there was a two mile boundary off the
shoreline on the map he was viewing. He asked what this
boundary represented, and if it meant that a company could drill
offshore directionally, potentially as far out as two miles.
MR. GALVIN answered that the boundary on the map is the three-
mile jurisdictional boundary of the state. He explained, "What
it means is that, while that state submerged land is available
to the lease sale, the only development that could take place
... would be drilled directionally from an onshore drilling
facility."
CHAIR KOHRING asked what the potential is in Bristol Bay.
MR. GALVIN deferred to Jim Cowan.
5:25:56 PM
JIM COWAN, Resource Evaluation, Division of Oil and Gas, Alaska
Department of Natural Resources commented, "We really don't have
a good fix on this one. There has been no good resource
assessment done ... on the offshore part of this basin. But it
looks like it might be from 35 million to 200 million barrels of
oil and ... several tcf of gas."
MR. COWAN, in response to Chair Kohring, stated:
There has been very little seismic work onshore;
there's been a lot of seismic work adjacent to the
state lands, offshore on the federal OCS [Outer
Continental Shelf] acreage. ... There have however
been about 13 wells drilled along that side of the
peninsula dating back to as far as 1903, I believe,
but the last one was drilled in 1985. ... They have
oil and gas shows, almost all of them. ... We had a
field party out there for almost a month, ... two
sessions last summer with the Division of Oil and Gas,
and the DGGS [Division of Geological and Geophysical
Surveys] in Fairbanks. ... Lot of oil seeps. They
came back ... pretty encouraged about the reservoir
potential. ... There were field parties out there this
summer from two major oil companies also.
CHAIR KOHRING commented, "With such limited information out
there and little or no seismic work done, other than test wells,
... I'm kind of curious as to why there's such a concerted
effort here to proceed. ... It seems like we're giving a lot of
emphasis to Bristol Bay based on really nothing that we have so
far."
5:28:06 PM
MR. COWAN replied that it's been dormant out there for about 20
years. He said, "There was some activity out there about 25
years ago, 20 years ago, but [due to the] moratorium, the
concerns about the fishing and the environment, it's just been
put aside until just most recently."
REPRESENTATIVE MCGUIRE commented:
Part of the reason there isn't any seismic data is
just what was eluded to; this was a controversial
issue 20 years ago. There was extensive seismic that
was done and a lot of interest, and frankly the
stakeholders could not come to an agreement at that
point in time. And so ... you had various Native
groups, you had various fishing groups, and the oil
and gas industry infighting, and at the end of the
day, the moratorium went into effect, and so here we
are now. I remember last year before this committee
there was a lot of discussion about new seismic being
done and frankly it's very expensive. But I think we
all know from the information we've been able to
gather that this is a phenomenal resource waiting to
happen.
REPRESENTATIVE MCGUIRE continued:
Let me clarify something that I'm maybe
misunderstanding here. This bill does not extend the
three-year date to the NPRA areas, does it? Isn't
this just expanding the production tax credit to 2010
of July 1 for those competitive oil and gas areawide
... leases that are on the Alaska Peninsula? I'm just
concerned. I've heard a lot of referencing of NPRA
and things like that, but I think we kind of need to
stick back to what this bill is doing. We may have
regrets about the way that the bill itself came
together in years past, but this particular bill
really is simply a recognition of the fact that many
of the folks that are interested in this competitive
oil and gas areawide lease sale ... may not have
things in place by 2007. And so we're talking about
expanding it out three years.
5:30:27 PM
MR. BURNETT replied that this was exactly the purpose of the
bill: to allow a very specific area to have an extension because
it has not been leased yet.
CHAIR KOHRING asked why there is a timeline at all.
MR. BURNETT responded that this was a policy decision.
REPRESENTATIVE GARDNER commented that a time limit is important
because otherwise it's not an incentive.
5:31:10 PM
REPRESENTATIVE ROKEBERG stated that he would like to see a
report on the initial bill's impact on exploration activity and
investments, and on those credits that have been granted under
this legislation. He said:
While I agree with Representative McGuire that we need
to focus ... and I support the bill itself, I am most
disturbed because we have this before us, that there
was controversy about the language and I find it a
little bit disturbing ... that the administration
would interpret language ... without legislative input
to apply to federal leases, particularly in
consideration of the fact that we have limited
revenues from those area. In other words, we're
subsidizing; we're giving out more money than we even
take in. ... I'm not going to support moving this bill
until we get some answers on this and that can be
clarified.
5:32:53 PM
CHAIR KOHRING declared:
I pledge we will follow up on that; we will get some
information from DNR including a written report as to
the effect of [Senate Bill 185] and so forth, and a
clarification as to why they interpret the law to read
that we can expand this to places like NPRA, which
really wasn't our intent.
CHAIR KOHRING opened the meeting to public testimony. [No one
wished to testify. HB 71 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:34:08 PM.
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