Legislature(2015 - 2016)BARNES 124
03/11/2015 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB100 | |
| HB132 | |
| Presentation(s): Middle Earth Tax Credits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 100 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 132 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 11, 2015
1:02 p.m.
MEMBERS PRESENT
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair
Representative Bob Herron
Representative Kurt Olson
Representative Geran Tarr
Representative Craig Johnson
Representative Paul Seaton
Representative Andy Josephson
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 100
"An Act establishing a credit against the net income tax for an
in-state processing facility that manufactures urea or ammonia;
and providing for an effective date."
- HEARD & HELD
HOUSE BILL NO. 132
"An Act relating to the support of the Alaska liquefied natural
gas project by the Alaska Gasline Development Corporation."
- HEARD & HELD
PRESENTATION(S): MIDDLE EARTH TAX CREDITS
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 100
SHORT TITLE: UREA/AMMONIA FACILITY TAX CREDIT
SPONSOR(s): REPRESENTATIVE(s) CHENAULT
02/09/15 (H) READ THE FIRST TIME - REFERRALS
02/09/15 (H) RES, FIN
03/11/15 (H) RES AT 1:00 PM BARNES 124
BILL: HB 132
SHORT TITLE: AGDC SUPPORT OF NATURAL GAS PROJECTS
SPONSOR(s): REPRESENTATIVE(s) CHENAULT
03/02/15 (H) READ THE FIRST TIME - REFERRALS
03/02/15 (H) RES, L&C
03/06/15 (H) RES AT 1:00 PM BARNES 124
03/06/15 (H) Heard & Held
03/06/15 (H) MINUTE(RES)
03/11/15 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
TOM WRIGHT, Staff
Representative Mike Chenault
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 100 on behalf of
Representative Chenault, prime sponsor.
STEVE WENDT, Manager
Agrium Kenai Nitrogen Operations Facility
Kenai, Alaska
POSITION STATEMENT: During the hearing on HB 100, offered
testimony.
ADAM DIAMOND, Manager
Government Relations
Agrium U.S. Headquarters
Denver, Colorado
POSITION STATEMENT: During the hearing on HB 100, offered
testimony.
RENA DELBRIDGE, Staff
Representative Mike Hawker
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented changes in committee substitute
Version P, CSHB 132.
JAMES MERY, Senior Vice President
Lands and Natural Resources
Doyon, Limited
Fairbanks, Alaska
POSITION STATEMENT: Doyon, Limited presented "Interior Oil and
Gas Exploration," Park of "Middle Earth."
JOE BOVEE, Vice President
Land and Resources
Ahtna, Incorporated
Glennallen, Alaska
POSITION STATEMENT: Presented "Ahtna Natural Gas
Opportunities."
KEN ALPER, Director
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: During the presentation of "Ahtna Natural
Gas Opportunities," answered questions."
GRETA SCHUERCH, Corporate and Public Policy Liaison
NANA Regional Corporation
Kotzebue, Alaska
POSITION STATEMENT: Presented "NANA Regional Corporation
Hydrocarbon Exploration Efforts."
ACTION NARRATIVE
1:02:26 PM
CO-CHAIR BENJAMIN NAGEAK called the House Resources Standing
Committee meeting to order at 1:02 p.m. Representatives Hawker,
Herron, Olson, Talerico, and Nageak were present at the call to
order. Representatives Seaton, Josephson, Tarr, and Johnson
arrived as the meeting was in progress.
HB 100-UREA/AMMONIA FACILITY TAX CREDIT
1:03:38 PM
CO-CHAIR NAGEAK announced that the first order of business is
HOUSE BILL NO. 100, "An Act establishing a credit against the
net income tax for an in-state processing facility that
manufactures urea or ammonia; and providing for an effective
date."
1:04:29 PM
TOM WRIGHT, Staff, Representative Mike Chenault, Alaska State
Legislature, paraphrased from the following statement [original
punctuation provided]:
House Bill 100, Mr. Chairman, creates a new corporate
income tax credit for owners of facilities used in the
manufacture and sale of urea and ammonia.
When gas is produced from a state lease the state
receives a royalty. If an "in-state processing
facility" that "manufactures and sells urea and
ammonia" purchases gas as feed stock from a state
lease, a credit is established under this bill. The
amount of the credit is the amount of the royalty paid
to the state. The credit can be used to abate state
income taxes under AS 43.20. The amount of the credit
cannot be used to reduce the taxpayer's liability
below zero.
According to a McDowell study, conducted by Agrium, a
reopened Agrium facility using a single train, would
consume approximately 28 billion cubic feet (BCF) a
year of gas with an estimated 21 BCF coming from state
leases. It is anticipated the total royalty payment
to the state would be approximately $15 million
annually, assuming a wellhead value of $5.70 per MCF.
Benefits from a single train production would result
in 140 direct jobs with a payroll of $14 million.
Approximately 340 total jobs to include direct,
indirect, and induced, within the state with a payroll
of approximately $30 million. It is anticipated all
employees will be Alaska residents.
Plant rehabilitation would cost about $275 million and
require a temporary work force of 440 workers which
translates to a payroll of $75 million over the two
year rehabilitation timeframe.
It would place Agrium as one of the top local
taxpayers in the Kenai Peninsula Borough, with
approximately $2.2 million in tax revenue. This
doesn't include sales tax revenue new jobs will be
generated ... will generate.
In light of the Cook Inlet tax credits, small
producer's tax credits expiring in 2016, a new user of
Cook Inlet gas would continue to encourage additional
exploration and development of gas fields in Cook
Inlet.
1:07:04 PM
REPRESENTATIVE JOSEPHSON asked whether the improvements would be
$275 million or $75 million.
MR. WRIGHT advised Representative Josephson that improvements
would be $75 million.
1:07:37 PM
The committee took a brief at-ease.
1:08:23 PM
STEVE WENDT, Manager, Agrium Kenai Nitrogen Operations Facility,
stated he has been with Agrium U.S., Inc., for 23-years.
1:08:52 PM
ADAM DIAMOND, Manager, Government Relations, Agrium U.S. Inc.,
Headquarters, introduced himself.
1:09:01 PM
MR. WENDT corrected the testimony of Mr. Wright and advised that
rehabilitation costs will be $275 million. He stated that
Agrium is headquartered in Calgary, Alberta, Canada and Agrium
U.S. Incorporated, which owns the Kenai Nitrogen Operations
(KNO) facility in Kenai is located in Denver, Colorado. Agrium
produces all three major NPK fertilizers [NPK represents the
value of the three macro-nutrients used by plants, the macro-
nutrients are nitrogen (N), phosphorus (P) and potassium (K)].
He pointed out that its products are sold worldwide, and the
Kenai Nitrogen Operations (KNO) facility started initially in
1968 with production beginning in 1969. By 1978 it had doubled
in size and he pointed out that Agrium U.S. Incorporated is
considering restarting that 1968 model of a facility. It is
capable of producing approximately one million tons of ammonia
and urea on an annual basis. He offered that when it was
previously open it had approximately 300 employees, was a major
contributor to the Kenai Peninsula Borough property tax rolls,
spent approximately $75 million annually in Alaska for natural
gas of approximately $15 million on an annualized basis went to
approximately 400 vendors in-state. He opined that it was
difficult to close KNO and believes Agrium took every
opportunity to keep the facility open, but were unable to do so.
When KNO shut down it partnered with the Department of Labor and
opened a transition center in Kenai to help transition its
workforce to other jobs and training was involved. The
legislation that has passed in the last few years to incentivize
exploration and production in Cook Inlet has been successful.
In 2007, when the plant shut down, the company considered
selling the plant and subsequently the activity in Cook Inlet
inspired KNO to take another look at restarting the facility.
He remarked that it is encouraged by new gas discoveries and the
potential for KNO to restart. He asked that the committee
consider taking a subsequent action to support KNO thereby
creating an additional market for gas, and additional incentives
for explorers and producers in Cook Inlet. He pointed out that
with the assistance of the legislature, KNO will make the Kenai
project the most compelling project it can make before its board
of directors - as it will have to compete with other projects
for a limited amount of capital that Agrium would be putting
forward.
1:14:05 PM
REPRESENTATIVE HERRON asked Mr. Wendt why that site was
initially chosen.
MR. WENDT opined that the Cook Inlet gas resource was
significant and that UNICAL desired to monetize that resource.
1:14:57 PM
MR. DIAMOND advised that Agrium Kenai Nitrogen Operations
Facility (KNO) supports HB 100. He highlighted that in order
for any facility to benefit from HB 100 they would have to be
operating, and would have to be purchasing gas from state leases
thereby generating state revenue in the form of royalty
payments. In the case of KNO, the plant is not open as it would
take an upfront commitment on the part of Agrium of
approximately $275 million to get the plant to that point. He
further highlighted that there is nothing in HB 100 that will
directly impact the royalty payments the state receives as the
royalty number is there as a reference to ensure that the bill
would remain revenue neutral or revenue positive to the state.
He said that KNO recognizes the budget situation in Alaska is
tenuous at this point and it is important to note that HB 100
would not impact any existing revenue stream in the case of KNO.
The plant is not operating and its Alaska income tax bill is
currently approximately $30,000-$40,000. He opined that there
is not a current stream of revenue this will impact. In fact,
he suggested, that if this helps the project proceed it would
generate a significant new revenue stream in the form of royalty
payments from the gas.
1:16:54 PM
REPRESENTATIVE HAWKER questioned whether Mr. Diamond would
guarantee it will not make this business decision without this
credit, and whether he will guarantee it will make this business
decision with the credit.
MR. DIAMOND advised that this credit will help the project, but
he could not guarantee whether it will or will not push it over
the edge as that decision is over his pay grade. He highlighted
that there is a limited amount of capital expenditures a company
has and this project will compete with other projects. He
advised that he is trying to put the best project before those
decision makers, and the bill will absolutely help the process.
1:17:57 PM
REPRESENTATIVE HAWKER asked whether there are other corporate
operations outside of Alaska, and will the corporate operations
be solely inside Alaska if the plant is reopened.
MR. WENDT replied that there are corporations worldwide as
Agrium U.S. has facilities in: Alaska; Kennewick, Washington;
Sacramento, California; Border, Texas; Northland, Ohio; and
Conda, Idaho; are the major manufacturing facilities associated
with Agrium U.S. Inc.; and it has an extensive retail outlet
system through the lower-48.
REPRESENTATIVE HAWKER noted that Agrium has extensive worldwide
holdings and the credit it is proposing in the bill is credit
against its Alaska State Corporate Income Tax. He noted that
the taxable income is determined by factors within Agrium's
control relating to its apportionment of its income and expenses
on a worldwide basis to Alaska. He asked whether its corporate
tax allocation policy would result in the legislature granting a
credit in Alaska for earnings that were actually attributable
under an allocation policy to activities outside the state.
MR. DIAMOND responded that the credit being discussed here would
be against the state income tax and that income tax is
determined partially based on U.S. Federal Tax, which would vary
depending on how well Agrium does. In the event Agrium has a
good year the state apportionment will be higher and conversely
if it has a bad year it would go the other way. He advised that
on initial conversations with Agrium's accountants it
anticipates the Alaska State Income Tax would be in the
neighborhood of $3-$4 million annually.
1:20:29 PM
REPRESENTATIVE HAWKER advised Mr. Diamond that he did not answer
the question because that taxable income ... is that determined
on an Alaska statewide water's edge basis, or is that an
allocation of its various ... allocations are a multiplicity of
factors in the case of Agrium with payroll gross revenue and
assets. He explained that the state corporate income tax
allocation is not resultant from Agrium's discreet activities
within the State of Alaska. He pointed out that it is important
for him to understand where that taxable income is coming from
and whether the legislature is giving a credit that is
subsidizing taxable activity outside the State of Alaska.
MR. DIAMOND advised he does not have the answer but will take
the question back to Agrium and provide him with an answer.
1:21:25 PM
REPRESENTATIVE JOSEPHSON pointed to the McDowell Group study
"The Economic Benefits of Reopening the Agrium Kenai Nitrogen
Plant," assumes that gas used by Agrium will be new gas. He
asked the dynamics of the Cook Inlet market and why that
assumption is made.
MR. WENDT stated he was not sure he understood Representative
Josephson's question regarding the dynamics of Cook Inlet. He
advised that through incentives the legislature previously put
into place there is considerable increased activity, equipment,
and manpower, working in Cook Inlet to explore and produce not
only from existing fields but looking at new fields. He advised
they are meeting regularly with all of the producers in the
state and found that although they'll need to be proved up with
infrastructure put in place to put into production that there
are potentially significant new discoveries in state.
1:22:57 PM
REPRESENTATIVE JOSEPHSON stated he is not unsympathetic to this
bill and asked whether this is a matter of the industry priming
the pump, turning the valve, and producing the gas Agrium needs,
or whether that (indisc.) has already been purchased and the
state is earning royalty on it.
MR. WENDT responded that the majority, if not all, of the gas
Agrium hopes to put under contract would be new gas that is not
currently being produced and the state is not currently
receiving a royalty.
1:23:43 PM
REPRESENTATIVE HAWKER pointed out that Agrium is essentially
looking for a subsidization from the State of Alaska for a
project specific activity within the borders and confines of the
state. He asked whether Agrium considered a mechanism that
would assure the legislature that the credit was generated by
the investment and income producing assets in the state. He
suggested a restrictive physical asset investment tax credit so
the state is not subject to the vagaries of literally multi-
state and, in this case, worldwide income tax allocations.
MR. WENDT said he could only comment on HB 100, and that he has
not looked at other options.
1:24:43 PM
REPRESENTATIVE SEATON stated there is a situation where
ConocoPhillips is not operating at full volume as it does not
have enough gas. He pointed out that if ConocoPhillips had
access to the additional gas then corporate income tax would be
paid on that gas, the state would receive the royalty, and the
$0.17 per MCF production tax. He said he is trying to ascertain
how the state indicates it is going to utilize the gas so that
it doesn't generate any corporate income tax. He offered a
scenario that Donlin Creek wanted to put in a gas line and build
it and then asked how the state would be in position to tell
Donlin Creek that it will have to pay corporate income tax, yet
Agrium does not. He reiterated Agrium's comments saying, the
amount of gas used and the royalty amount is always going to
exceed its net income tax liability. He related that basically
the state would be saying that for ten years Agrium doesn't have
to pay any net income tax, and questioned how that relates to
any other potential use of the gas.
MR. WENDT answered that for Alaska there are additional benefits
to Agrium coming on line in that Agrium previously was a
supporter and a supplier to the local agricultural community and
it would be a positive impact on food security within the state.
He offered that Agrium provides urea to the aviation industry in
the state, and that all of the agricultural industry and
aviation industry products were at a reduced cost to them
because of transportation, et cetera. He pointed out that
Agrium would become a Kenai Peninsula Borough tax payer, and
would provide jobs which are substantial to the state. He
opined there are a number of reasons Agrium would have a
positive impact on the state.
1:28:07 PM
REPRESENTATIVE SEATON related that in a previous conversation
Mr. Wendt had indicated Agrium would be a big carbon dioxide
user and could use pipeline quality gas rather than liquefied
natural gas quality carbon dioxide. He reminded Mr. Wendt that
he had indicated he would provide the committee with the gross
amounts of carbon dioxide Agrium could utilize in the Cook Inlet
area in its manufacturing process thereby alleviating the huge
expense for the gas treatment plant on the North Slope. He
commented that another potential benefit to the state, in one of
the proposals that had come forward, was looking at pipeline
quality with gas coming down from the North Slope instead of the
carbon dioxide all taken out on the North Slope.
MR. WENDT acknowledged that he does not have the number today
and further stated his notes indicate that he does owe the
committee that information and would get back to the committee.
He advised that "Yes," Agrium can take natural gas off the
pipeline that contains percentages of carbon dioxide and use
that with no problem in its plant. He said that a previous
governor set up a pipeline task force of which Agrium is a
member. He described that it has been through many iterations
now that the standard has gone so many different directions ...
this has back as far as 2007, where Agrium has continued to have
interest in gas pipeline from the North Slope. He remarked that
Agrium has provided information to the state, or these
committees, each time they have made a request for information.
He posited that Agrium continues to be interested in being
considered a potential customer.
1:31:09 PM
REPRESENTATIVE SEATON pointed out that there are two different
kinds of projects the state has been looking at and one of the
holdups on one of those projects is that it would have higher
carbon dioxide levels than normal. He noted that it would be a
substantial benefit to the state on that project, if it comes to
fruition, of being able to use carbon dioxide in Agrium's
manufacturing project. In that regard, he said, Agrium should
provide the information to the committee in its proposal.
1:31:55 PM
CO-CHAIR NAGEAK held over HB 100.
HB 132-AGDC SUPPORT OF NATURAL GAS PROJECTS
1:32:03 PM
CO-CHAIR NAGEAK announced that the next order of business is
HOUSE BILL NO. 132, "An Act relating to the support of the
Alaska liquefied natural gas project by the Alaska Gasline
Development Corporation."
1:32:30 PM
CO-CHAIR TALERICO moved to adopt the proposed committee
substitute (CS), labeled 29-LS0623\P, Nauman, 3/11/15, as the
working document. There being no objection, Version P was
before the committee.
1:33:13 PM
RENA DELBRIDGE, Staff, Representative Mike Hawker, Alaska State
Legislature, paraphrased from the following summary of changes
from HB 132\E to CS for HB 132\P, [original punctuation
provided]:
Title
The CS expands on the bill title to more accurately
reflect the contents of the bill. Previously, the
title related to "the support of the Alaska liquefied
natural gas project by the Alaska Gasline Development
Corporation." However, the bill includes sections
related to AGDC's purpose, powers and duties and to
the instate natural gas pipeline fund. Also, the title
now mentions an effective date, which is added in this
CS.
Page 3, line 3, and Page 4, line 10
The bill temporarily prohibits AGDC from participating
in an in-state project in which a majority of the gas
is intended to be exported. The CS includes a project
in which a majority of the gas is intended for export
by AGDC or by another party.
Page 3, lines 8-9; Page 3, lines 19-20; Page 4, lines
16-17
The bill restricts AGDC's activities until the
earliest of three dates. One of these dates is the
time at which the state and other parties enter the
next development phase of AK LNG. The CS requires
"contractual agreements to undertake FEED", and
deletes the word "study" after "FEED."
Page 5, line 26
Changes the term being defined from "front end
engineering and design study" to "front end
engineering and design."
Page 6, line 16
Adds an immediate effective date. Previously, there
was no effective date.
1:35:53 PM
MS. DELBRIDGE stated that is extent of changes to the committee
substitute and requested an opportunity to clarify two pieces of
testimony made on Friday.
1:36:25 PM
CO-CHAIR NAGEAK brought a letter from the House Resources
Standing Committee co-chairs to Governor Bill Walker, dated
March 9, 2015, to the committee and public.
1:36:37 PM
MS. DELBRIDGE referred to the letter, and stated that last
Friday there was a discussion related to statements made by the
Governor Walker in a press conference regarding bringing the
market to Alaska in the 2012 TransCanada solicitation of
interest held under the terms of the Alaska Gasline Inducement
Act (AGIA) license. She advised that at the time of the hearing
she had indicated that she did not think the letter from Alaska
Gasline Port Authority (AGPA) back to TransCanada had been made
public. She pointed to a letter, provided to the House
Resources Standing Committee, which did not come from Alaska
Gasline Port Authority (AGPA), but was within a collection of
documents AGPA submitted to the U.S. Department of Energy (DOE)
in pursuit of an export license for LNG. She related that the
letter appeared to be a letter in response to the solicitation
of interest that TransCanada held. She encouraged the House
Resources Standing Committee to maintain its request for the
actual letter as she was not able to ascertain that this letter
is the response, yet it might be. She stated she was not
certain whether the letter is the complete response to the
solicitation of interest as the letter itself does not contain
much detail. She further stated she has included a host of
letters from potential Asian partners that AGPA also supplied in
conjunction with its DOE export license application that appears
to be part of the solicitation of interest letter. She noted
that these letters may or may not be part of AGPA's solicitation
response to TransCanada's non-binding offer, and stated her
intention is to make certain the clarification was made in that
the letter has not been in the public domain, but is certainly
part of a public document.
1:38:44 PM
MS. DELBRIDGE offered that the second clarification is that
during the hearing last Friday, she described AK LNG as
essentially a structure in which there was equal ownership
segments including, the state, ExxonMobil Corporation, BP,
ConocoPhillips. She precisely advised that AK LNG is roughly
commensurate with the gas share of each entity, in that the
state has 25 percent presuming the state makes a royalty-in-kind
decision and that tax is paid as gas, ExxonMobil Corporation has
roughly 33 percent interest, ConocoPhillips roughly 22 percent
interest, and BP roughly 21 percent. She remarked this was
discussed in conjunction with a question regarding whether the
state was a minority partner in AK LNG, and her response was
that the state is one of four equal 25 percent each partners.
In the regard, she wanted to put that clarification on the
record.
1:39:53 PM
REPRESENTATIVE JOSEPHSON surmised that the 25 percent interest
Ms. Delbridge asserts Alaska holds is subject to the conditions
of the contract with TransCanada, which considerably diminishes
the state's share.
MS. DELBRIDGE answered that the state has 25 percent of the
liquid faction facility, and within its agreement with the other
entities it still has the 25 percent with the gas treatment
plant and pipeline. She noted that the state has chosen to
bring TransCanada in and turn over some of its share to
TransCanada on that segment. She posited there were some
avenues within the Memorandum of Understanding (MOU), and the
agreements, for the state and TransCanada to periodically
reevaluate that relationship as the FEED decision approaches.
She related that while it is currently the case, it will be up
to the legislature, and the state involved in the AK LNG
negotiations, to determine the final shape.
1:40:59 PM
REPRESENTATIVE JOSEPHSON pointed out that HB 132 speaks to
exporting no more than Alaska uses domestically. He questioned
why that determination was made as opposed to something more or
less than that, and whether it relates to the existing export
project of ConocoPhillips.
MS. DELBRIDGE responded "in no way did it attempt to relate to
ConocoPhillips's existing export project," as the decision was
made in looking for a way to avoid a competing LNG project, and
to somehow cap the size of the project that Alaska Gasline
Development Corporation (AGDC) can go forward with to ensure it
is not primarily an export project. She advised, at that point
there are different avenues to review as there could be a
volumetric limitation on it. She noted that the sponsor chose
to go with simply a majority believing that then it could not be
a dedicated LNG project called an in-state project. She stated
that in-state demand currently is probably between 200 and 250
million cubic feet, and that being said the sponsor did not want
to put a volumetric cap because if AGDC is able to build in-
state demand and work that into its project, the sponsor wants
that to be a great as possible. For example, she noted,
regarding a value added industry desiring to participate in an
in-state pipeline, it could grow significantly and, therefore,
so could the availability for export projects.
1:42:39 PM
CO-CHAIR NAGEAK asked if there is an objection to a letter being
written by staff.
MS. DELBRIDGE offered that the committee has already submitted
the letter to Governor Walker requesting that information. She
advised she wanted to clear up her statement on the record and
explain that she believes the committee should keep that
previously sent letter as an ask to make sure the committee has
the correct document.
1:43:16 PM
REPRESENTATIVE JOSEPHSON asked the source of the documents she
presented today.
MS. DELBRIDGE replied that they came from AGPA's application to
the U.S. Department of Energy (DOE) for an LNG export license,
and she could provide a docket number and link to the web site
where they are all listed. She advised this was within several
volumes of backup material AGPS provided to DOE after DOE had
some questions on the original application.
1:43:54 PM
REPRESENTATIVE SEATON referred to the previous discussion
regarding competing projects as if they were the same. At that
time, Representative Seaton brought to her attention that the
producers generally have a much higher hurdle rate or internal
rate of return when doing production profit tax (PPT) that was a
minimum of 15 percent, sometimes up to 25, 27 percent before
they make final investment decision on a project. He opined
that utilities generally have a final investment decision
internal rate of return numbers more in the 6-9 percent range.
In that regard, these projects might be contemplated quite
differently because of the rates of return that might be
required whether it is by a producer sponsored project and
financed, or whether it is a buyer sponsored project through the
long-term contract. He asked that Ms. Delbridge address those
issues as the FEEDs are competitive projects for anything other
than gas and whether they are quite dissimilar that way.
MS. DELBRIDGE answered that not enough is known about this
alternative project to be conclusive that it would involve
utilities. She advised there has been some indication among the
people brought to Alaska as potentially interested parties in
the past have included utilities. However, there are entities
that are essentially trading companies, such as Mitsubishi, and
they certainly are not a utility and may have its own internal
needs. Without any sense of guarantee that this goes to
utilities and an understanding of what is what, she opined, it
is difficult to be clear on whether or not they are competing in
that manner as it depends on the system that is put together in
the end. She stated that she cannot speak to what was garnered
from the members during the PPT debate from who, from what. She
advised that she has heard from the companies that while they
have their hurdle rate, or their internal rate of return that
they look to, but there can be a lot of other factors going into
their decision making. They are the ones that need to be clear
with the committee on what they are looking for in conjunction
with that, she remarked.
1:46:55 PM
[HB 132 was held over.]
1:47:05 PM
The committee took an at-ease from 1:47 p.m. to 1:48 p.m.
^PRESENTATION(S): Middle Earth Tax Credits
PRESENTATION(S): Middle Earth Tax Credits
1:48:09 PM
CO-CHAIR NAGEAK announced that the next order of business is a
presentation entitled "Interior Oil and Gas Exploration"
conducted by Doyon, Limited.
1:49:06 PM
JAMES MERY, Senior Vice President, Lands and Natural Resources,
Doyon, Limited, said he is the Senior Vice President of Lands
and Natural Resources at Doyon, Limited, and has been with Doyon
since 1980. He remarked that his presentation is offering an
update on exploration Doyon has been involved in within Interior
Alaska, which he described as part of "Middle Earth." He stated
that Middle Earth is a creature of the legislature, but it is
defined within the credit statutes as everything outside of Cook
Inlet and south of the Brooks Range.
1:49:22 PM
MR. MERY referred to slide 2, and stated his presentation would
cover Doyon exploration in Nenana and Yukon Flats basins in that
there are similarities and difference between the two. His main
focus will be on Nenana as that is where most of Doyon's efforts
have been over the last several years, including drilling and
two seismic programs, and in the fall of 2014 a 3D program. He
stated that within these two basins is the presence of prolific
hydrocarbon systems, source traps, and seals. He noted their
recent well in 2013 where a lot of wet gas was seen which is an
indicator of an oil lease system. He remarked he will close out
his presentation with the importance of the exploration credits
program and what it has meant to the activities Doyon has been
performing that enabled it to get as far as it has gotten.
1:50:21 PM
MR. MERY referred to slide 3, and described Doyon, Limited as
the Alaska Native Claims Settlement Act (ANCSA) regional
corporation for Interior Alaska, and is the largest private
landowner in the state with over 19,000 shareholders of Native
American descent. He pointed out that Doyon has a large
operation focus in Alaska and most of the operating entities are
oil field support, primarily Doyon Drilling, and a number of
other support industry providers of services throughout the
state. Doyon also focuses on Interior oil, gas and hard
minerals exploration. In 2014 Doyon had profits, after tax of
$23 million in revenues, of over $350 million.
1:51:16 PM
MR. MERY referred to slide 4, and indicated it is a general
locater map of the Nenana Basin and Yukon Flats Basin relative
to Cook Inlet and the North Slope. He referred to slide 5, and
stated it is a focus on some of the land ownership issues, a
sense of the scale, and also to note the proximity of
infrastructure which is something a person doesn't see in a lot
of places in Alaska. He said it is relatively gifted,
especially the Nenana Basin with access to infrastructure.
1:51:53 PM
MR. MERY referred to slide 6, and pointed out that regarding the
Nenana Basin, Doyon is focused on 400,000 acres of State of
Alaska leases, with a small presence of Doyon lands. He advised
that under the seven year terms, Doyon pays the state
approximately $1.2 million a year in rentals. He said that the
Doyon lands are shared with the village corporation, Toghotthele
Corporation, and that it has provided a number of services to
Doyon. He noted there is no federal ownership nearby, however,
the northern third of the lease bought is in the Minto Flats
State Game Refuge where oil and gas is conditionally allowed.
He pointed out that with regard to Yukon Flats, Doyon owns
approximately 1.5 million acres that are prospective oil and
gas, and three separate sub-basins with no time constraints or
holding costs. He pointed out that Nenana Basin is on-the-clock
and is not on the lands Doyon owns in Yukon Flats. There are
three ANCSA villages with surface ownership. The adjacent
federal lands are within a national wildlife refuge and are off
limits to any oil and gas exploration and, he described them as
"a most uncooperative bunch of people."
1:53:47 PM
CO-CHAIR NAGEAK asked the name of the three village
corporations.
MR. MERY replied that they are corporations for Stevens Village,
Beaver and Birch Creek. He noted there are other areas in the
Yukon Flats but those are the areas Doyon believes there is
promise.
1:54:07 PM
MR. MERY referred to slide 7, and explained that the two basins
have similar geology in that they are deep, young basins with
potential source rock, coals, coal shales, and possibly lake bed
shales, with trapping opportunities as well. He pointed out
that oil is Doyon's primary target, and gas is its secondary.
1:54:30 PM
MR. MERY referred to slide 9, [no slide 8] and said it provides
history of prior exploration by major oil companies, both in the
1960s and 1980s. He remarked there is some seismic left over
from those projects, and two shallow wells on the basin flanks
that were fundamental and stratigraphic test wells. More
recently, during 2005, 2012, and 2014, there were three seismic
campaigns basin-wide, and two deep well in the central part of
the basin in 2009 and 2013, called Nunivak #1 and #2. He noted
there have been numerous studies over time and has re-evaluated
licensed heritage data from major oil companies out there in the
earlier days. He pointed out that Doyon had partners in the
early days that left Doyon, but Doyon has picked up the pace
considerably since they've gone. He stated that Doyon believes
it has more reasons to make this project work as it is in its
back yard, Minto and Nenana are on the flanks of the basin, and
if it has success it is creating new markets for all of the oil
field support industry groups that were in business then.
1:55:57 PM
MR. MERY referred to slide 10, and described it as a close-up of
Nenana Basin plus an especially gifted infrastructure with
respect to opportunities to monetize oil in particular. He
referred to slide 12, and stated it depicts a geophysics defined
Nenana Basin. He referred to slide 12, and stated the Nenana
Petroleum System source is excellent oil and wet gas source
rocks in coals and coal shales. Doyon has drilled wells and
found that the source goes deep into the hot kitchen of the
basin where oil and natural gas should be actively expelled
today, actually. He offered that Doyon knows the basin is hot
based on information from the wells and projections performed
from the heat measurements in the wells to generate oil and gas.
Doyon found migrated wet gases (propane, butane, pentane, and et
cetera.) in the well bore. He described that a wet gas system
is sometimes indicative of something that should be oily in most
of the analogs for these kinds of basins, if they are
productive, there will be gas and oil fields and mixed gas and
oil fields. He described world class reservoirs out there that
have been seen through the drill bit as well, and there should
be many opportunities to trap hydrocarbons.
1:58:47 PM
REPRESENTATIVE JOSEPHSON referred to heritage lines and surmised
Mr. Mery was referring to pre-1971 lines.
MR. MERY answered that the heritage lines are basically line
that are out there that Doyon did not shoot in an earlier era,
and in particular he is discussing shale lines that were shot in
approximately 1981.
REPRESENTATIVE JOSEPHSON surmised they were shot after Doyon
took title of the land.
MR. MERY explained that these were mostly on State of Alaska
lands, where most of Doyon's leases are located.
1:59:32 PM
MR. MERY referred to slide 13, and advised it is a
representation of the basin being over 20,000 feet deep, and
there should be plenty of heat to generate hydrocarbons from the
immature source rocks seen higher up in the system. He stated
they are much deeper in the system and can be tracked on the
seismic.
1:59:50 PM
MR. MERY referred to slide 14, and advised it is regarding the
Nunivak #2 well of which is the first well Doyon operated. He
pointed out that a lot of permits are necessary to drill a well
and most are run through the state system. He described the
relationship between Doyon and the State of Alaska as "great" in
that the state is helpful, diligent, and very professional. He
further described Doyon as having "great" relationship with
local communities who are supportive of Doyon's activities, and
that Doyon hires and works locally with contractors.
2:00:37 PM
MR. MERY referred to slide 15, and offered it depicts a road
system Doyon built which is focused a few miles west of Nenana.
He referred to slide 16, and described it as the manner in which
the Nenana River is crossed in the summer time when Doyon is
drilling. He pointed out there will be a bridge over the Nenana
River connecting to the Parks Highway System. He referred to
slide 17, and noted it depicts the countryside and the road
system. He referred to slide 18, and advised it is the most
recent well site which is approximately 11 miles due west of
Nenana.
2:02:23 PM
MR. MERY referred to slide 19, and addressed that Doyon believes
it has all of the elements of an active and prolific wet gas
and, hopefully, an oil system. Doyon knows that the hydrocarbon
system should be extensive as it has performed seismic
throughout the basin, through modeling in that it believes that
the basin given the thick packages of source rock could produce
billions of barrels of oil and trillions of cubic feet of gas.
He said that Doyon saw a lot of wet gas in the well bore and not
so much for oil and that Doyon substantially de-risked the gas
promise in the Nenana Basin. He pointed out that with nearby
infrastructure the North Slope size accumulations just simply
are not needed, although $50 per barrel (bbl) oil is not
helpful. He opined that a relatively small accumulation can get
Doyon started and there should be plenty more of those if it can
get the first one going.
2:03:32 PM
MR. MERY referred to slide 20, and advised that Doyon needs more
seismic, primarily on the north end of the basin where many of
Doyon's State of Alaska's leases are located. He pointed out
that Doyon is looking hard at drilling in 2016, within that
area. He referred to slide 21, "Nenana 2014 3D and 2D Seismic
Area," and said it depicts the 3D area, the road already there,
with some of the multiple landownership issues and proximity to
Nenana. He related that Doyon is right off the road system for
this portion of the basin. He referred to slide 22, and stated
this has been the wettest summer in the history of the Interior
and the workers had a rough time of drilling the holes for the
seismic program and collecting data was difficult because there
are extensive areas of burn in the past and a lot of dead falls.
2:04:52 PM
MR. MERY referred to slide 23, and said that oil would be the
best economic case for both Doyon and the state. Startup
minimum economic field size for this part of the world, is
somewhere between 25 and 50 million barrels of oil depending
upon oil price. He stated that Doyon clearly sees structures
out there that would hold that much and more. He pointed out
that there is plenty of room in the Trans-Alaska Pipeline System
(TAPS) via truck, rail, or feeder pipeline, and that Doyon views
the chances of success with the next well as one in five, to one
in ten. He explained that in the event gas is found it could be
stranded for a number of years as there may not be much of a
Fairbanks market for the next 10-12 years due to all of the
other projects, Cook Inlet trucking, state take-over, those
sorts of things. He clarified that he was not making a case
that "people shouldn't do that," and Doyon does not have a
product to offer right now but it is a complicated factor for
Doyon. He questioned whether the producers and the state would
allow Nenana gas into an export line and liquefaction plant, and
if so under reasonable terms. He noted that gas has been so de-
risked at this point that there is a 50/50 chance of commercial
success the next time Doyon drills.
2:06:38 PM
MR. MERY referred to slide 24, and offered Doyon's thanks to the
legislature for the credits program in place because they are
essential to the activities Doyon has performed in the Interior.
He noted there is one in particular that has not worked well for
Doyon and with a bit of tweaking it could work better. In
general, he offered, these programs have worked exceptionally
well and hopefully will result in a brand new industry for the
interior part of the state, and new revenue for the state.
2:07:28 PM
REPRESENTATIVE HAWKER stated he appreciates Mr. Mery's testimony
and that the credit structure has worked. He offered that he
believes that the big money is a mega oil discovery, but
sometimes a company gets gas. He asked when Doyon expects to be
able to prove up and provide an estimate of proven reserves of
gas on its properties as opposed to the probable and possible
discoveries.
MR. MERY said that theoretically, realistically, and
optimistically, if Doyon drills next winter with success it
would be looking at a couple of seasons of delineation drilling
and then Doyon would have a handle on its confidence level on
the resource and 2018 is the most optimistic case.
2:09:09 PM
REPRESENTATIVE HAWKER asked whether Doyon intends to follow-up
and prove-up its gas reserves.
MR. MERY answered that if Doyon was to find only gas ...
REPRESENTATIVE HAWKER restated his question in that Mr. Mery has
indicated strong gas shows, wet gas shows, and gas substantially
de-risked with a 50/50 chance of commercial success. He asked
whether Doyon intends to prove-up its gas and pursue that
resource.
MR. MERY responded that it is a decision for the Doyon, Limited
Board of Directors, and in the event Doyon found only gas the
next time it drills, Doyon would have to think long and hard
about that because its focus is on oil. If Doyon can't monetize
something for 10-20 years then Doyon would have to think hard
about spending more money, he opined.
2:10:20 PM
REPRESENTATIVE HAWKER stated in that situation he was not sure
which was cart and which was horse. He remarked that in the
event Doyon cannot tell Representative Hawker it intends to
pursue monetization of its resource, then naturally it will be
stranded for a decade or more, and naturally it would not be
able to make the Fairbanks market. Although, he pointed out, if
Doyon was aggressive and competitive that the market is out
there for the grabbing today. He asked that Mr. Mery take that
information back to the Doyon Board of Directors.
MR. MERY responded in the affirmative.
2:10:48 PM
REPRESENTATIVE SEATON asked how long the state leases run.
MR. MERY replied that they came out of several groupings, but
basically somewhere in the 2019-2020 timeframe.
2:11:10 PM
REPRESENTATIVE JOSEPHSON requested a thumbnail sketch of the
credits Doyon is receiving, how that is working, and what system
is being used.
MR. MERY answered that Doyon tried different things over time
and most recently used the .023 credits, although .025 credits
have been used in the past.
REPRESENTATIVE JOSEPHSON asked the value of those credits.
MR. MERY said it depends if they are on the system as there are
different programs with different requirements and different
eligibility of costs, but roughly Doyon is receiving $0.60 on
the dollar, more or less.
2:12:17 PM
The committee took a brief at-ease.
2:13:11 PM
JOE BOVEE, Vice President, Land and Resources, Ahtna,
Incorporated, said he is the Vice President of Land and
Resources for Ahtna, Incorporated. In follow-up to Mr. Mery's
testimony, he referred to the slide entitled "Oil and Gas Basins
in Alaska" and stated that there are six oil and gas basins in
Alaska. He referred to the slide entitled "New Frontier Basin
Tax Credits," and said that currently Ahtna is exploring under
the New Frontier Basin and Middle Earth tax credits. He offered
that there are different provisions within tax credit scenarios,
et cetera. He emphasized that without the tax credits Ahtna
would not be here today. He referred to the slide entitled
"What is Currently Known About Gas Prospects in the Ahtna
Region," and stated that the geologic structure of interest
currently under state land is that it has a 44,000 acre
exploration license with the State of Alaska, and over the
previous 30-40 years and specifically the last 5-10 years Ahtna
has spent millions of dollars exploring that region. Geological
data and past exploration give strong natural gas indications,
he offered, and the formation is accessible to south-central
Alaska population centers, state highway road system and
tidewater, however, technical drilling challenges are due to
high pressure water zones identified in previous wells.
2:14:28 PM
MR. BOVEE referred to the slide entitled "Copper River Basin
Natural Gas," and stated that the map shows the area outlined
where most of the exploration is performed, and inside the red
line is approximately 2 million acres primarily owned by the
State of Alaska and to a lesser degree Ahtna. The white box
depicts where the state exploration license is currently
located. He referred to the slide entitled "Geological
Summary," and offered that the chart depicts previous wells
drilled and shows that it is conducive to natural gas deposits
and entraps and holds the natural gas there. He referred to the
slide entitled "Current Prospects," and stated that in 2013,
Ahtna was awarded an exploration license on 44,000 acres of
state land, approximately 10-15 miles west of Glennallen. He
explained that in early 2014, Ahtna partnered with two
exploration partners, Rutter & Wilbanks of Midland, Texas, and
Santa Petroleum of Welland, Australia. He further explained
that in early 2014, Ahtna re-processed approximately 90 miles of
pre-existing seismic from the 1970s to 1980s, and basically tied
in some of the previous seismic with what has been performed
more recently in the 2000 era. Subsequent to re-processing the
90 miles, he said that Ahtna identified a structure within the
State of Alaska license area and conducted an additional 40-
miles of new seismic last winter. He pointed out that the job
finished on time and slightly over budget in that there were
problems with a warm winter in Copper Basin. He stated that
usually between November and December there are days or weeks of
at least 30 to 50 degrees below freezing. However, he remarked,
this year there were only several days of below zero.
Preliminary data shows the outline of a crest of gas structure
12-14 miles west of Glennallen, and less than 2 miles from the
Richardson Highway. He pointed to a map depicting well target,
state exploration license area, and oil and gas exploration
wells which are accessible. Ahtna is pleased with the results
of the seismic data that has been re-processed and the new
seismic performed last year. He referred to a cross-sectional
of the seismic, and stated that Moose Creek was drilled by
Rutter & Wilbanks in the early 2000 and the Ahtna 1-19, showing
some structure was performed in the mid-2000s, and the
exploration target now being pursued on state land is to the
right. He described them as similar depths and similar
structures, however, with lessons learned from previous
experiences in exploration Ahtna has performed, it knows there
will probably be high water pressures, certain amounts of depths
so it hired and contracted with professional engineers to
eliminate that.
2:18:01 PM
MR. BOVEE referred to the slide entitled, "Range of Market
Opportunities," and stated Ahtna has a small market there which
has probably withheld any development in the last 20-30 years.
Ahtna was looking at options and basically if it can produce
thousands of BTUs or cubic feet per day there would never be any
development. In the event millions of BTUs a day, it would
probably only be for local development, and if Ahtna can produce
billions it would probably be in-state or international markets.
Ahtna's focus would be to at least get gas to the local
residents of the Copper Basin at this time. He referred to the
slide entitled, "Development Options," and noted that it is an
illustration regarding what Ahtna has looked at, and preliminary
ideas and suggestions from experts. He referred to the slide
entitled, "Local Market is Viable," and stated the local market
price is approximately $3.50 per gallon, but there is still a
savings of roughly 40-50 percent over the current diesel market
in the region. He opined that is consistent with Interior
Alaska and rural Alaska rates so there is an undeniable savings
from natural gas.
2:19:11 PM
MR. BOVEE referred to the slide entitled, "Ahtna Gas Development
Timeline," and offered that currently Ahtna is in the green
section. He highlighted that to date Ahtna has spent
approximately $3 million in the last year and one-half, and
plans to spend another $1.3-$1.5 million in the next four-six
months with the drilling plans scheduled for a drilling rig,
subcontractors, permitting process, and so forth. He advised
that if all things stand, Ahtna will drill a first well on the
state license area sometime in December-January 2016, and at the
end Ahtna will have expended close to $10-$15 million, and
expects to come up with gas for the local or in-state gas. He
referred to the slide entitled, "Conclusion and Next Steps," and
stated that Ahtna will engineer and design a new well with
completion prior to June 2016. He pointed out that the New
Frontier Basin tax credits expire June 30, 2016, but Ahtna would
like to tweak some of these and possibly continue on for another
year or two. He advised that some of the tax credit issues are
confusing and when talking to DNR, a person should have a
lawyer, accountant, and a world champion arm wrestler because it
not all cut and dry. He opined that the legislature had
intended to incentivize some of the under-explored Middle Earth
areas which has helped a lot as Ahtna would not be where it is
today. Additionally, Ahtna is 50-60 percent confident that gas
would be found there as all the wells ever drilled in the basin,
the previous 40-50 years have had gas shows, and the last well
drilled had gas but Ahtna was not able to quantify it or give a
quality assessment to it. He opined that Ahtna knows what it
did wrong and will do it right the next time. In the process,
Ahtna is processing a Regulatory Commission of Alaska (RCA)
application for local gas distribution and continuing to
determine and develop markets, such as a pipeline only to
Glennallen, a pipeline to some of the neighboring communities,
possibly a micro LNG plant, or an electrical intertie.
2:21:37 PM
REPRESENTATIVE HAWKER referred to the slide, "New Frontier Basin
Tax Credits," wherein Ahtna requests changes to the .025 tax
structure, wherein the first item is to reduce well depth. He
asked whether the only well depth requirement for .025 credits
had to do with the "Cook Inlet stampede."
MR. BOVEE opined that the wells have to be 10,000 feet or proven
that the well has hit the ceiling or the floor of the structure.
REPRESENTATIVE HAWKER asked whether that requirement is a
regulatory matter or a statutory matter.
MR. BOVEE answered that it is a statutory matter. With regard
to .025, he opined, because there is .025 Middle Earth and New
Frontier, that under the .025 the commissioner has the authority
to determine whether the structure has been fully drilled to a
certain depth. Under the New Frontier, he suggested, the
provision is not there and the commissioner cannot make that
decision. He reiterated that to extend allowable credits beyond
2016 ... 2022 would be preferable to give Ahtna more time as it
is not going to be out there just drilling one more well, and
allow for a faster recovery of the tax credits. The way the
.025 Middle Earth tax credits work, Ahtna is just now in the
process of submitting its expenses and invoices but the
Department of Revenue advised Ahtna that it will be over a year
before Ahtna would receive any tax credits back. He pointed out
that under the .023 it is usually less than 3-6 months so it is
a shorter time period and the cost of money has to be assessed
to before ...
2:23:29 PM
REPRESENTATIVE HAWKER asked whether the provision in .025 that
you are concerned about a depth ... he advised he is pulling
this out of the tax, (M) subsection of .025 talking about
hydrocarbons likely to be found or reached 12,000 feet or more
to a vertical depth, and asked whether that is the concern.
MR. BEVEE replied "I believe so, yes."
2:24:43 PM
KEN ALPER, Director, Tax Division, Department of Revenue, said
the Frontier Basin credit regime was modeled in many ways on the
Cook Inlet stampede which passed several years earlier. He
described it is a higher level of credit in specific targeted
areas that have a depth requirement in order to qualify for that
specific credit.
REPRESENTATIVE HAWKER referred to the first line of subsection
(M), regarding the persons that drill the first four exploration
wells in the state. He asked whether this is limited to the
first four wells or actually a much broader provision.
MR. ALPER responded that the Frontier Basin credit is tied to
the first four wells ... you'll see some latitude and longitude
type information in that statute which is talking about target
areas, one of which is the area from which Ahtna is targeting.
In that regard, until such time as the fifth application for a
Frontier Basin credit comes in, the Department of Revenue is
receiving them, he opined, and it is his understanding that
Ahtna would be among those first four.
2:26:14 PM
REPRESENTATIVE SEATON pointed out that with the state's current
deficit situation it is somewhat concerning when discussing
large tax credits to encourage activities ... normally, a
company takes partners to supply part of the capital for
explorations and when it is successful they are a partner in the
income that comes from that. He further pointed out that in the
past the state had the position that it would partner to
encourage exploration and development, and as soon as there was
production the state would back out of the partnership and not
take anything other than the royalty or production tax. He said
that as the committee moves forward and discusses expanding or
extending credits to remember the state's current situation, and
especially if the legislature has given special tax
considerations to certain areas, he related that the state would
have to look at being a true partner in some aspect if the state
is extending capital credits and those kind of things. He said
he wants the committee to start thinking in a manner of
investing and not just giving away credits.
2:28:13 PM
REPRESENTATIVE HAWKER noted that with regard to the Frontier
Basin tax credits, the legislature identified six particular
areas, limited it to four wells, and specifically said that no
more than two of those may be in any one of those individual
areas - the one through six. He opined that it would seem to be
a fairly constraining thing for Doyon. He surmised that Doyon
was not discussing relief from that provision, but more from the
12,000 feet, vertical depth provision. He pointed out that the
current requirement is that before approving the exploration
well "the commissioner of natural resources shall consider," and
it does not state "thou may or thou may not," but wanted it to
consider that the targeted and planned depth and range are
designed to penetrate and fully evaluate the hydrocarbon
potential of the proposed prospect and reach the level below
which economic hydrocarbons are likely to be found. In other
words, he stated, if the state is giving tax credits and Ahtna
has a well mobilized, the state wants the company to go all the
way down and not just hit a shallow pocket but look at the
entire depth of the prospect there, but then it says, "or reach
12,000 feet." He described it as an "or" situation with a lot
of complications that will take a fair amount of consideration
before he would contemplate making a change.
MR. MERY answered that the problem is not the 10,000 foot depth
as that just identifies a potential problem due to the nature of
these basins including the extreme difficulties in going to
depths that are not essential in Doyon's view to evaluate the
opportunities. He described the bigger is the Frontier specific
credits sitting under .025. He stated that the list of
allowable expenses under .025 is restrictive in that an 80
percent well and 80 percent credit is not an 80 percent credit
as it is more like a 60-65 percent credit. He opined that it
doesn't deliver what the legislature intended and through more
recent discussions with DNR he is much more comfortable that
they will ... because there is flexibility that they can
accommodate Doyon. He highlighted that the real focus should be
on picking up the special 80 percent credits for wells that are
sitting under .025 and simply sliding them up under .023. He
indicated that Doyon is not asking for more wells or money, just
to put them in a place where the full benefit of the 80 percent,
and the state will get the money back a little bit sooner. He
pointed out that because of these problems no one has used these
and now everyone is up against the wall on the sunset date.
2:32:05 PM
REPRESENTATIVE HAWKER asked whether the real element is the
differential here ... he said he understands it is the velocity
of money but is the real issue the .023's being a directly
refundable credit, is that what is really facilitating this.
MR. MERY responded that they both are refundable, but there is a
longer list of allowable credits under .023 than under .025.
REPRESENTATIVE HAWKER stated that the ultimate issue is the
additional expenditures that are allowable under .023 and not
.025.
MR. MERY answered "Correct." He further answered that Doyon can
get 60-65 percent under .023 today and get the money back
quickly. If Doyon uses the .025 specialty 80 percent credit it
will still going to get the same 60-65 percent back and it will
take Doyon a year or two to get it back, he explained.
2:33:04 PM
The committee took a brief at-ease.
2:34:11 PM
GRETA SCHUERCH, Corporate and Public Policy Liaison, NANA
Regional Corporation, said NANA Regional Corporation appreciates
the opportunity to provide comments on Middle Earth tax credits.
She advised that in addition to being NANA's corporate and
public policy liaison she is also a shareholder. She referred
to the slide entitled, "NANA Regional Corporation," and advised
that NANA's mission is to improve the quality of life for more
than 13,500 Inupiat shareholders by maximizing economic growth,
protecting and enhancing lands, and promoting healthy
communities with decisions and behaviors guided by the Inupiat
Ilitquisiat, which is its traditional value system. She
referred to the slide entitled, "Alaska - Kotzebue Basin
Hydrocarbon Potential NANA Regional Corporation," and pointed
out that the figures show the location of the area in the
Kotzebue Basin with potential for gas. NANA shares Doyon and
Ahtna's position on the Middle Earth tax credits due to a dire
need for affordable energy in the region. She referred to the
slide entitled, "Need for Energy," and advised that residents in
Northwest Alaska are paying between $6 and $11.00 per gallon for
gasoline and heating fuel. Lower energy costs through natural
gas will offer sustainable solutions to the region's energy
crisis. She referred to the slide entitled, "Kotzebue Oil and
Gas Project History," and remarked it shows the history of
exploration in the Kotzebue Basin and that the initial work in
the basin was conducted by Chevron, in the 1970s, with two wells
drilled to approximately 6-8,000 feet together with seismic
work. She referred to a slide entitled, "Local Geography," and
noted the map shows the Kotzebue Basin. She referred to the
slide entitled, "Exploration History and Data," and advised it
shows the seismic data collected and the red dots show the wells
drilled by Chevron.
2:37:39 PM
MS. SCHUERCH referred to the slide entitled, "Primary Reservoir
Targets," and pointed out that it is a cross section, or
vertical slice through the earth. She said the geological
section is a correlation between the two wells drilled 60 miles
apart from the Chevron work. She addressed the stratigraphy of
mixed shales and sandstones are interpreted by a geologist to
have yielded some perspective zones and significant pole seams
over 100 feet thick were also encountered in the well. She
referred to the slide entitled, "TODAY - Advancing the Basin,"
and said that NANA's new efforts lead to five companies signing
confidentiality agreements in 2014, and one company from
overseas making two site visits. However, the company deemed
the basin as too high of a geological risk to fund the
exploration in total. She offered that there is no deal and
because of this NANA continues to evaluate how it could help
fund seismic work to de-risk the geology and technical aspects
of the basin. She referred to the slide entitled, "How and why
'de-risk' the geology of the basin," and commented that in
receiving more information in the way of seismic data NANA will
have a better chance of defining potential targets for drilling
as companies want to see more geological information. If
successful, more data will add greater value for NANA and
additional seismic data is required to lower the risk, she said.
She referred to the slide entitled, "Next Steps," and conveyed
that NANA's next steps is continuing to look for partners which
is challenging, although the state's incentives have helped the
progress to date. NANA continues to evaluate self-funding of
the seismic work, continues to work with interested parties on
data review for potential funding, and aims for seismic work in
2015-2016 or 2016-2017. NANA thanks the legislature for its
help to alleviate the cost of living and cost of energy in rural
areas. She remarked that while NANA does not know if there is
natural gas, it continues to move the project ahead to determine
the potential in that discovery of natural gas would
significantly help this area where some residents are paying
$11.00 per gallon to heat their homes.
2:40:13 PM
REPRESENTATIVE OLSON asked whether 10 years ago test drilling
and test holes were bored within about 20 miles of Red Dog,
possibly not by NANA's corporation.
MS. SCHUERCH replied that she does not know the answer but will
get back to the committee.
2:41:19 PM
ADJOURNMENT
The House Resources Standing Committee meeting was recessed at
2:41 p.m. and reconvened at 6:00 p.m.