Legislature(2005 - 2006)
04/21/2006 02:09 PM House RES
| Audio | Topic |
|---|---|
| Start | |
| Board of Game | |
| HB498 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 21, 2006
2:09 p.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
MEMBERS ABSENT
Representative Jim Elkins
Representative Mary Kapsner
COMMITTEE CALENDAR
CONFIRMATION HEARING(S)
Board of Game
Paul C. Johnson - Unalakleet
- CONFIRMATION(S) ADVANCED
HOUSE BILL NO. 498
"An Act authorizing tax credits against the production tax on
oil and gas for qualified expenditures for challenged or
nonconventional oil or gas and for qualified expenditures for
nonconventional or renewable energy resources; giving the Act
contingent effect; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 498
SHORT TITLE: TAX CREDITS NONCONVENTIONAL OIL/GAS
SPONSOR(s): RULES
04/03/06 (H) READ THE FIRST TIME - REFERRALS
04/03/06 (H) O&G, RES, FIN
04/11/06 (H) O&G AT 8:00 AM CAPITOL 120
04/11/06 (H) Moved Out of Committee
04/11/06 (H) MINUTE(O&G)
04/12/06 (H) O&G RPT 2DP 1NR 3AM
04/12/06 (H) DP: ROKEBERG, KOHRING;
04/12/06 (H) NR: SAMUELS
04/12/06 (H) AM: GUTTENBERG, DAHLSTROM, MCGUIRE
04/12/06 (H) LETTER OF INTENT WITH O&G REPORT
(FORTHCOMING)
04/19/06 (H) RES AT 1:00 PM CAPITOL 124
04/19/06 (H) Heard & Held
04/19/06 (H) MINUTE(RES)
04/20/06 (H) RES AT 1:00 PM CAPITOL 124
04/20/06 (H) Heard & Held
04/20/06 (H) MINUTE(RES)
04/21/06 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
PAUL C. JOHNSON, Appointee
to the Board of Game
Unalakleet, Alaska
POSITION STATEMENT: Testified as appointee to the Board of
Game.
VIRGIL UMPHENOUR
North Pole, Alaska
POSITION STATEMENT: Testified in support of the confirmation of
Mr. Johnson.
REPRESENTATIVE NORMAN ROKEBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as the sponsor of HB 498.
ROBYNN WILSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Offered comments and answered questions on
HB 498.
BILL VAN DYKE, Acting Director
Division of Oil & Gas
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 498.
MICHAEL HURLEY
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 498.
JEFF SPENCER, Heavy Oil Specialist
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided information with regard to HB 498
and answered questions.
ACTION NARRATIVE
CO-CHAIR JAY RAMRAS called the House Resources Standing
Committee meeting to order at 2:09:31 PM. Representatives
Samuels, Ramras, Seaton, LeDoux, Crawford, and Gatto.
^CONFIRMATION HEARING(S)
^Board of Game
CO-CHAIR SAMUELS announced that the first order of business
would be the confirmation hearing for Paul C. Johnson to the
Board of Game.
PAUL C. JOHNSON, Appointee to the Board of Game, informed the
committee of his background, including that he has resided in
Unalakleet for the majority of his life. He explained that his
family moved to Unalakleet in 1964 because of the value they
placed on higher education. Coming from a family with 12
siblings, Mr. Johnson said that he understands the importance of
hunting and gathering wild game and fish, which his family
relied upon for years. With regard to formal education, Mr.
Johnson informed the committee that he attended four years of
college, although he doesn't have a degree. He related that
currently he is a small boat crab fisherman in Norton Sound. In
fact, he said he has fished since he was 17 years old. He
further related that he has served on several civic
organizations and is currently a class A assistant guide.
During the formation of the community development quota (CDQ)
groups and the Norton Sound Economic Development Corporation,
Mr. Johnson was the president of the [Norton Sound Economic
Development Corporation] for a little over a year. Following
that, Mr. Johnson noted that he worked as the chief executive
officer of the Unalakleet Native Corporation for 10-11 years.
During those years, he said he was integral in working with the
local tribe, the city, and the [Unalakleet Native Corporation]
to solve and address community problems. He opined that his
work experience and serving on the Southern Norton Sound
Advisory Community Council have provided a fair understanding of
the makeup of the state. In fact, he said having testified
before the Board of Game has provided him a fair understanding
of issues and how the board works. As illustrated by the
aforementioned, Mr. Johnson stated that he isn't a stranger to
public service locally and although he said he wasn't sure why,
he said he looks forward to serving the state. He expressed the
hope that he could bring his personal experiences and common
sense to managing the state's resources.
2:13:48 PM
CO-CHAIR SAMUELS inquired as to Mr. Johnson's general thoughts
with regard to predator control.
MR. JOHNSON opined that predator control is necessary when
warranted by the situation and the facts of a particular region.
He related that he is well aware of the impacts of predators on
game, particularly with regard to moose and caribou in the
Unalakleet region.
2:14:37 PM
CO-CHAIR SAMUELS inquired as to the other significant items that
the Board of Game will face over the next several years.
MR. JOHNSON said that beyond predator control he was not sure.
He related that he would take each issue individually and weigh
the facts of the issue and the needs of the region impacted to
make a good decision.
2:15:17 PM
VIRGIL UMPHENOUR related that he is a resident of North Pole,
and has known Mr. Johnson when he was involved with the Board of
Fisheries regarding the crab and herring fisheries in Norton
Sound. Mr. Umphenour concluded by noting his support for Mr.
Johnson's confirmation.
2:16:16 PM
CO-CHAIR RAMRAS moved to advance the name of Paul C. Johnson, as
Appointee to the Board of Game, to the joint session for
consideration. Hearing no objection, it was so ordered.
HB 498-TAX CREDITS NONCONVENTIONAL OIL/GAS
CO-CHAIR SAMUELS announced that the next order of business would
be HOUSE BILL NO. 498, "An Act authorizing tax credits against
the production tax on oil and gas for qualified expenditures for
challenged or nonconventional oil or gas and for qualified
expenditures for nonconventional or renewable energy resources;
giving the Act contingent effect; and providing for an effective
date." [Before the committee is the proposed committee
substitute (CS) for HB 498, Version 24-LS1817\L, Chenoweth
4/20/06.]
CO-CHAIR SAMUELS reminded the committee that [at the last
hearing] several of the large items were brought out. Without
going into the specific language of Version L, he expressed the
need to have a sense as to how the committee would like this
legislation to [be changed] in order that he can work with the
sponsor and the administration's staff to craft a committee
substitute for the committee's consideration.
2:18:20 PM
REPRESENTATIVE GATTO referred to page 5, lines 20-31, of Version
L and highlighted that it doesn't include nuclear energy.
CO-CHAIR SAMUELS related his understanding that there will be a
motion to delete that entire [subsection] of Version L. He
related his further understanding that there isn't a lot of
willpower to offer these credits only to oil companies to do
these types of projects.
2:19:28 PM
CO-CHAIR SAMUELS then began reviewing his list of concerns,
beginning with credits for research and development. He related
his concern with regard to how research and development will be
audited, even if it's performed in the state. Furthermore,
research and development credits may or may not lead to the
development of heavy oil, which is the intent of this
legislation.
REPRESENTATIVE GATTO, regarding the aforementioned concern,
related his concern with use of the word "or" on page 2, lines
25-27. "If you put 'or' in, then research ... is wide open if
it doesn't lead to development," he opined.
CO-CHAIR SAMUELS noted his agreement and indicated the desire to
eliminate any credit on any research and development work that
the industry may do.
REPRESENTATIVE SEATON noted his agreement, adding that this
research and development is really research and development of
techniques not development of a field.
2:21:00 PM
REPRESENTATIVE CRAWFORD also noted his agreement.
REPRESENTATIVE NORMAN ROKEBERG, Alaska State Legislature,
sponsor, opined then that the committee's desire is to broaden
the application of this legislation.
CO-CHAIR SAMUELS related his view that if a development credit
is to be offered, it should be based on field geography. He
opined that it will be difficult for the state to link research
activity directly to [development in] Alaska.
REPRESENTATIVE ROKEBERG said he has no problem with that because
it provides direction and a foundation for the remainder of the
legislation. He assumed then that HB 498 could duplicate the
provisions in HB 488 for implementing and auditing those
credits.
CO-CHAIR SAMUELS said, "I would assume that that language would
be identical, it would just be another credit for a specific
area at a specific depth."
2:23:19 PM
CO-CHAIR SAMUELS then turned the committee's attention to the
rate of the credit depending on the proposed production profits
tax (PPT). He indicated that until final action on HB 488 or SB
305 occurs, it would be difficult to reach consensus on this
issue.
REPRESENTATIVE ROKEBERG opined that clearly the rate of the
credit has to be related to the baseline in the primary
legislation [HB 488/SB 305]. For example, if HB 488 or SB 305
had a 25 percent credit, then it would be appropriate to lower
the credit in HB 498.
2:24:40 PM
ROBYNN WILSON, Director, Tax Division, Department of Revenue,
surmised that if the PPT rate is 20 percent and the credit rate
proposed in HB 498 is 15 percent, then the total credit would be
35 percent. Therefore, she suggested that HB 498 could be
drafted such that the credit rate is equal to 35 percent less
the credit rate in the specified section [of statute as
specified in HB 488 or SB 305].
CO-CHAIR SAMUELS then turned to the matter of how to determine
what heavy oil is. He recalled that at yesterday's meeting, the
committee came to consensus with regard to naming the specific
areas that are currently heavy oil areas. The department
indicated agreement with the aforementioned notion. However, he
recalled that the debate was in regard to the future when there
is the desire to add a new area and whether it would be the
legislature or the commissioner that would approve such an
addition. He acknowledged that there are pros and cons to both
paths.
2:27:35 PM
REPRESENTATIVE ROKEBERG mentioned that Mr. Van Dyke had issued a
memorandum, which may be appropriate for the committee to have.
CO-CHAIR SAMUELS said the committee could work with DNR to
determine the current areas of heavy oil to be specified in the
legislation.
REPRESENTATIVE SEATON said he didn't view this as a crucial
decision that needs to be made by the commissioner at a certain
point. Rather, he opined, that due to the long lead time
required for these projects, the industry should have time to
approach the legislature. He highlighted that one of the
developments will be $2 billion, which amounts to $300 million
in credits. The aforementioned determination is of a size that
should come before the legislature, he suggested.
2:29:27 PM
MS. WILSON, in response to Co-Chair Samuels, opined that if the
commissioner were given enough guidelines and criteria, the
comfort level increases. She noted her concern with language
such as "the commissioner shall determine" without the
appropriate criteria upon which to make such a judgment. She
then related her belief that DNR would be the appropriate agency
to determine what formations are heavy oil.
BILL VAN DYKE, Acting Director, Division of Oil and Gas,
Department of Natural Resources, said that he is fairly
comfortable leaving the decision [whether to add an area as a
heavy oil area] with the administration. He mentioned that the
decision could be reported to the Legislative Budget and Audit
Committee, which is currently the case for royalty
modifications.
2:31:43 PM
REPRESENTATIVE CRAWFORD, referring to the proposed definitions
and guidelines for heavy oil, pointed out that it refers to an
American Petroleum Institute (API) gravity of 22 while the
legislation specifies an API gravity of 25. He inquired as to
the pros and cons of either API gravity. He related his
understanding that in other instances of challenged oil the
[state] has the ability to apply for royalty relief. He asked
if this legislation would be in addition to royalty relief.
MR. VAN DYKE said there is no single definition for
challenged/viscous oil. However, he pointed out that the United
States Geological Survey (USGS) uses an API gravity of 22 as a
standard for heavy/viscous oil. He mentioned that the glossary
of terms related to the PPT includes a definition for heavy oil
with the standard of 20 API gravity. The staff at DNR feel more
comfortable with the standard of an API gravity of 22. With
regard to royalty modifications, royalty modifications could be
granted on top of these proposed credits. "But certainly when
we do the economic analysis, we will take into consideration
that the project was earning tax credits in the economic
evaluation," he said.
CO-CHAIR SAMUELS related his understanding that the only royalty
relief the state has granted was the recent Pioneer royalty
relief at Uguruk, although it wasn't for heavy oil by
definition. The program, he commented, is relatively new.
2:34:37 PM
MR. VAN DYKE said that Co-Chair Samuels is correct under the
traditional royalty modifications, although he noted that there
are mechanical royalty modifications for Cook Inlet that are
based on production rates per platform. Again, he agreed with
Co-Chair Samuels that the Pioneer request was granted on the
basis of low-rate wells.
REPRESENTATIVE ROKEBERG recalled his time as chair of the House
Special Committee on Oil and Gas in 1995 when he had the
privilege of working on legislation that was a rewrite of
statute that included the ability for the commissioner to grant
royalty relief to marginal oil fields. He opined that the
Senate made the statute unworkable and unintelligible, such that
the only grant requested wasn't granted. Representative
Rokeberg cautioned the committee with regard to providing the
commissioner discretion in granting these credits because the
credits aren't always granted. He then related his belief that
the commissioner of DNR, due to his/her competency with regard
to geology, should make the recommendation.
2:38:50 PM
CO-CHAIR SAMUELS posed a scenario in which the legislation
provides the discretion to the commissioner, but specifies
parameters such as a specific API gravity.
REPRESENTATIVE SEATON referred to the second paragraph of page 2
of Mr. Van Dyke's comments regarding proposed definitions and
guidelines. That paragraph says: "The commissioner may grant
credits for challenged oil produced from the areas excluded from
eligibility in the definition (i.e.,#1) above for challenged oil
if that oil is produced using enhanced oil recovery techniques
or other approved non-conventional recovery and production
methods ...." Therefore, it would seem that the applicability
could be for anything the commissioner approves with such a
definition. He opined that [the legislature] hasn't had trouble
getting credits through.
2:40:43 PM
REPRESENTATIVE ROKEBERG pointed out that Mr. Van Dyke made
recommendations regarding the identification of areas and units
similar to those identified by the oil producers, including the
exclusion of drill sites 1C, 1D, 1E, and 1J of the West Sak
formation as well as drill site S in Schrader Bluff. He
inquired as to why the aforementioned drill sites should be
excluded.
MR. VAN DYKE explained that his exclusion listed in item one
under the first definition of challenged oil would exclude areas
where projects are well underway and will occur with or without
these credits. He opined that it probably isn't necessary to
grant credits in areas and formations where there is a core area
within a viscous reservoir that is already producing today and
promises more development in the future. However, he opined
that it's necessary to consider credits outside of the core
areas and in formations such as Ugnu where there is no regular
production today and the oil is very viscous. Therefore, the
first definition attempts to carve out the "sweet spots" under
development today. He related his belief that it would make
sense to grant credits for enhanced oil recovery in the sweet
spots and credits for development outside of the sweet spots in
the reservoirs.
2:43:11 PM
CO-CHAIR SAMUELS commented that the committee can work with DNR
as the legislation is drafted.
REPRESENTATIVE SEATON recalled discussions with regard to the
PPT when the DNR commissioner related his belief that the
legislature wouldn't want to place big money decisions, with
regard to the buybacks, on the commissioner. The commissioner
has seemed to indicate that such considerations should be left
to the legislature.
REPRESENTATIVE ROKEBERG opined that if by definition particular
areas should be specified, then the only discretion comes about
for new areas applying for consideration. Therefore, he opined
that the commissioner should be able to do make such decisions
if sufficient guidelines are in place.
2:44:56 PM
MS. WILSON highlighted the importance of specifying the process
and approval if the commissioner is given the discretion to
certify an area as heavy oil.
CO-CHAIR SAMUELS asked if the concern is that a developer won't
know whether there's heavy oil until the first exploratory well
is drilled in a new area. He recalled that testimony from the
engineers related that there is some knowledge as to whether an
area has heavy oil, although nothing is certain until the first
well is drilled.
MS. WILSON, referring to page 2, explained that the credit is
envisioned for exploration. Therefore, once an area is
identified as a potential target, the question of timing should
be specified.
CO-CHAIR SAMUELS said he would talk to the commissioner of DOR,
who recommended not leaving such determinations to the
discretion of the commissioner. As far as identifying the
current areas, he announced that he was available to work with
anyone interested, including the industry, to develop the
language. Co-Chair Samuels then recalled that the rate floating
with the price is of a concern for Representative Crawford. He
also recalled that there was a question as to whether the
credits are transferable.
2:48:18 PM
REPRESENTATIVE ROKEBERG related his understanding that the
consensus was to not make the credits transferable.
REPRESENTATIVE SEATON suggested that if [the notion is to allow
credits] for exploration, then they need to be transferable.
However, if the exploratory aspect is eliminated, then the
transferability isn't of concern. "But if we are leaving
exploratory stuff in, we don't want to cut out all the small
guys that don't have big production going, and saying this is
only for the big guys," he said.
REPRESENTATIVE ROKEBERG noted his disagreement. He opined that
the assumption is that the majority of this will impact the
larger producers. The issue is whether the smaller
producers/explorers have the cash flow to offset [the
development]. "If we just make it a standard on that issue that
they have to have, before they can take any credit, I think
that's okay," he said. He related his understanding that
Representative Seaton is suggesting that it should be
liberalized and transferable.
REPRESENTATIVE SEATON related his disagreement. He clarified
that if the exploratory part is included, it would need to be
transferable because explorers aren't necessarily large
entities.
REPRESENTATIVE ROKEBERG said he doesn't understand
Representative Seaton's logic.
CO-CHAIR SAMUELS interjected that two separate issues are being
discussed. He related his understanding that the consensus at
the prior hearing was to make the credit nontransferable. With
regard to the exploration, the question was whether to have
another 15 percent exploration credit "because this doesn't say
heavy oil on that line." Therefore, the aforementioned was
going to be eliminated because it referred to the development of
heavy oil whereas for exploration one wouldn't know whether the
exploration is for heavy oil or not. He then inquired as to how
it would be determined that an exploration expense is looking
for heavy oil when, by definition, exploration is occurring. He
reminded the committee that for a wildcatter, the .185 credits
are up to about 60 percent in the PPT.
2:50:55 PM
REPRESENTATIVE ROKEBERG highlighted that it's known that Chevron
has a heavy oil prospect south of the Kuparuk River Unit. The
aforementioned site/area isn't included in the list because it's
a prospect at this point. Therefore, he questioned why
additional heavy oil exploration should be discouraged.
CO-CHAIR SAMUELS inquired as to how to differentiate between all
exploration and exploration for heavy oil.
REPRESENTATIVE ROKEBERG replied, "We could make it a delayed
effect. They'd have to prove-up and ... meet the standards and
guidelines ... because that would be outside the area of named
area." He related that the company could turn in a
retrospective application, which is not uncommon.
MS. WILSON related her understanding that to give credit for
heavy oil exploration seems to assume that the purpose is heavy
oil, which doesn't make sense. She preferred there [to be a
credit] for all exploration or no exploration rather than trying
to prove. She expressed concern with the intention and the
primary purpose.
2:53:25 PM
CO-CHAIR SAMUELS inquired as to the company's perspective and
how it goes about exploring heavy oil.
MICHAEL HURLEY, ConocoPhillips Alaska, Inc., explained that
oftentimes when a company sets out to explore it's looking for
whatever oil it can find. He specified that often all that the
company has is seismic data and other data that will indicate
that hydrocarbons will be in a particular area. However,
nothing is guaranteed until drilling takes place. Still, in
areas that are relatively shallow and close to the perma frost,
one can expect it to be relatively viscous oil. Again, drilling
offers the only knowledge as to what type of oil is actually
present.
CO-CHAIR SAMUELS posed a scenario under which Conoco explored in
a new area and found something that it thought would be heavy
oil. After drilling and finding it to be heavy oil, Conoco
would apply for the area to be included in the heavy oil tax
credit. In such a scenario, he questioned how much of the total
cost of exploration would Conoco have already expended to that
point.
MR. HURLEY answered that it would be a relatively small amount.
Developing a heavy oil resource includes a lot of expense for
development wells. For the first exploration well, depending
upon the nearest infrastructure, the cost amounts to about $10-
$30 million. With regard to development of that well, the
additional development wells and the construction of the
facilities are where the cost lies.
MR. HURLEY, in response to Representative Rokeberg, noted his
agreement that when a company drills shallower areas, it's
likely to be viscous oil because of the nature of the crude and
the proximity to the permafrost.
REPRESENTATIVE ROKEBERG interjected that if it's light oil per
the guidelines, then the company wouldn't receive the credit.
CO-CHAIR SAMUELS surmised that a small amount of money was
expended to find this heavy oil, while development of it
requires a large amount of money. Therefore, once the heavy oil
is found, the company can approach the appropriate entity to
request the credits proposed in HB 498. Co-Chair Samuels
suggested that the policy call is whether to do the
aforementioned or only [allow the credit] for development.
2:58:12 PM
REPRESENTATIVE ROKEBERG commented that Representative Seaton has
a good point if there is trouble identifying the heavy oil or
the company runs into lenses of heavy oil during drilling, which
he suggested is the more common occurrence. He then returned to
the case in which a company would attempt to produce heavy oil
from the beginning, which would result in the construction of
the lacking infrastructure.
CO-CHAIR SAMUELS reiterated that development would still be the
large expense.
2:59:22 PM
REPRESENTATIVE SEATON clarified that his problem is in a
situation in which a company explores for gas and finds a little
heavy oil and thus can receive the additional 15 percent tax
credit.
REPRESENTATIVE ROKEBERG said he doesn't disagree with that line
of thinking.
CO-CHAIR SAMUELS opined that if most of the money [expended] is
in the development, he didn't mind having a credit for it.
However, he expressed concern with regard to the possibility of
a company going back and forth depending upon what is found in
the well. He highlighted that there are already exploration tax
credits on the books and incentivizing it separately would seem
to be an entirely separate policy.
3:00:18 PM
REPRESENTATIVE ROKEBERG said, "If we identify let's say West Sak
- we use the geographic definitions and the units ...; the
boundaries are clear by AOGCC and DNR, then there's recognition.
... if you were exploring the shallower depths there, are you
saying you don't get the credit for that? Like, ... you have to
discover it first or can you discover it? That's kind of the
question."
CO-CHAIR SAMUELS opined that once the area is determined to be
heavy oil, then it will be considered development rather than
exploration. He asked that if a heavy oil field is designated,
would everything done in that field be considered as development
or would some of it be considered exploration. He opined that
once the area is determined to be heavy oil, then the credit
would be received.
MR. VAN DYKE related his belief that if the definition of West
Sak formation within the Kuparuk River Unit is used, then any
West Sak activity would be creditable.
3:01:58 PM
CO-CHAIR SAMUELS turned to alternative energy and expressed
concern with giving the credits to the big producers and not to
others.
REPRESENTATIVE SEATON remarked that this legislation is
complicated enough with only addressing heavy oil, and therefore
he opined that [the alternative energy provisions should be]
excised.
REPRESENTATIVE ROKEBERG related his belief that [the alternative
energy provisions] were worth including, especially due to the
source of funds being created. However, he noted his
sensitivity to piling on [with legislation].
3:03:25 PM
REPRESENTATIVE CRAWFORD opined that there is a reason to do a
heavy oil credit, but there is a price at which the heavy oil
won't be developed no matter the credits available. There is
also a point, perhaps $50-$55 per barrel, at which all oil
becomes economic. [This legislation] influences the band in
between the aforementioned and will lead to more oil development
and oil in the pipeline. Representative Crawford said that he
didn't see a reason to provide for more advantages after a
certain price.
3:05:40 PM
REPRESENTATIVE SEATON commented that price prospectivity is
difficult to gauge. He related his understanding that this is
being viewed somewhat on history and thus if there was a three-
year past average price such that the credit wouldn't apply if
the average is over $50 per barrel. Therefore, if for three
years the range is $50 per barrel, the companies are making
decisions based on the credit on what the market is really
doing. At that point, the state doesn't need to pay this
proposed credit.
3:06:31 PM
REPRESENTATIVE ROKEBERG expressed concern with reviewing history
to determine some predictors. The problem with that is that
currently the price has hit an all time record high and the
state isn't familiar with the situation and where it's heading.
Representative Rokeberg then related that he doesn't believe
there is any need for a floor because it's self-fulfilling.
REPRESENTATIVES CRAWFORD AND SEATON clarified that they weren't
referring to a floor.
REPRESENTATIVE ROKEBERG then reminded the committee that the
legislation includes a 10-year sunset. Having the
aforementioned will result in incenting the development now and
provide the legislature the right to come back and make an
adjustment. Therefore, he recommended not having a cap.
3:09:45 PM
CO-CHAIR SAMUELS inquired as to whether there is a tax mechanism
that would incent [development] without placing an investor in
the position of being unsure about the economics.
MS. WILSON expressed concern about having the credit based on
price because it is difficult to apply it since there is the
potential for "bumping up and down over the trigger." From a
tax administration point of view, a sunset in a reasonable
amount of time makes some sense. She highlighted that had the
committee had this discussion six years ago, no one would've
imagined this price and the trigger would be different. It's
difficult to look into the future and specify the appropriate
cutoff. Therefore, she opined that she would support the notion
of a sunset before a price cutoff.
JEFF SPENCER, Heavy Oil Specialist, ConocoPhillips Alaska, Inc.,
reminded the committee that these projects need to be
competitive with other investment opportunities within each
company's portfolio. At a given price, say $50 per barrel, a
light oil will be more likely to be pursued because of the lower
operational costs, the higher recoveries and rates, and the
better price for the product. Therefore, he agreed that there
is no need to place a cap on the price as it would be very
difficult to manage and would increase uncertainty. In fact, he
said he couldn't even envision how to factor that into his
economic analysis of a heavy development project.
REPRESENTATIVE GATTO questioned how it would work to implement
an equivalency between light oil and heavy oil. He specified
that heavy oil is worth less and is more difficult to get, and
thus when heavy oil reaches the market the money collected is
less than that collected by selling crude oil. If the
difference [in value] between the two was known, as the price of
oil drops, the state would simply get the royalty share. "I
guess the question is: the equivalent value of a barrel of
heavy, when you take away this extra cost and the lower selling
price," he said.
3:15:12 PM
MR. SPENCER opined that such would be complicated and difficult
to administer. He highlighted that the price of oil changes
widely within one day.
REPRESENTATIVE GATTO said the price of oil doesn't matter
because the equivalent value is going to be a specific amount
less and the state will make up the difference.
MS. WILSON noted her agreement that it would be more difficult
to administer such. She then expressed concerns with settling
on the prevailing value of all of it as well as the
differential. Ms. Wilson opined that it's not workable and
doesn't seem to justify the advantage specified.
3:17:26 PM
REPRESENTATIVE SEATON noted that Mr. Spencer said the difference
in cost is the only incentive that makes it more difficult than
light oil. The legislature could say it is a certain amount per
barrel, and thus there doesn't have to be any worry about
percentages.
REPRESENTATIVE GATTO agreed, adding the value of the product
would also be included.
MS. WILSON said that if the committee wanted to go that way and
[specify] the number that is the cost differential, it would be
easy to administer. However, if the desire is to divvy up costs
and assign them to either light or heavy oil on a field-by-
field, month-by-month basis, it would be an auditing nightmare.
3:20:10 PM
MR. HURLEY opined that it's similar to incenting development of
a differential type crude. The aforementioned can be
accomplished in one of two ways. The incentive can be
accomplished by providing some credit for development costs or
by determining the differential per barrel on the product.
However, he didn't believe there would be a single number [that
would fit] the different fields. Mr. Hurley related his
understanding that the sponsor originally went with providing an
incentive on the development dollars because there would be more
incentive [to develop] the Ugnu field because more development
dollars will have to be spent. Therefore, 15 percent of
development dollars will be larger at Ugnu than it would be at
West Sak, for example.
REPRESENTATIVE GATTO said:
But Ugnu has a number that's stuck on the name Ugnu of
$8 and West Sak has a number that's nailed right into
the side of the barrel and it's called $7. Then
whoever produces it in whatever quantities, ... it's a
pretty simple calculation that says this ... barrel
has a bounty on it and it's a $7 bounty - you get that
just by turning it over. And now it's up to you to
say, "You know what, I like that bounty, I'm going to
produce what I can ...." You don't have to calculate
much; it comes out of the ground and you put it in a
wood stave barrel, we know what it's worth to us that
we have to pay ....
3:23:18 PM
MR. HURLEY noted his agreement that the aforementioned is a way
to do it. However, when using that method experts have to be
utilized to determine the correct number on the correct barrel.
REPRESENTATIVE OLSEN opined that there is a certain appeal to
this method because the credit wouldn't be given until the
product comes out of the ground.
MR. SPENCER pointed out that it will be many, many years before
Ugnu is commercially developed. With regard to the proposed 10-
year sunset, Mr. Spencer opined that the incentive would no
longer be available when Ugnu is finally developed. He related
that it could 10 years before the first barrel is produced, and
the company wouldn't recover anything until many years later
under a per barrel scenario. However, if the investment can be
made within the next 10 years, there would be an incentive to
accelerate that development.
3:25:07 PM
REPRESENTATIVE ROKEBERG opined that the aforementioned sounds
deceptively simple. However, the difficulty lies in determining
the cost of the various formations and how the cost would be
assigned. Such a methodology would cause an ongoing auditing
situation, which would be labor intensive.
REPRESENTATIVE GATTO said there could be a number that doesn't
sunset. Furthermore, it could be determined that after the
first 10 million barrels, the remaining barrels could have a
different [cost] assigned.
CO-CHAIR SAMUELS indicated that Representative Gatto's proposal
would be appropriate in separate legislation.
REPRESENTATIVE SEATON returned to the notion of the rate
floating with the price. He opined that it's problematic if
companies aren't incentivized to enter into projects when oil is
$50 per barrel for three years, for example.
3:27:10 PM
CO-CHAIR SAMUELS said:
If they're looking at investing over a five-year
timeframe and having no hope of getting oil ... until
year six or seven, do you incorporate this into the
math or do you not incorporate it into this math? And
how would you know? Say you're at $70 a barrel now,
you're right ... we're throwing money away, no doubt
about it. And then next year we're at $50 and the
year after that we're down to $35 again and all of a
sudden they didn't incorporate it into the math, the
project doesn't go forward.
REPRESENTATIVE SEATON noted his disagreement and said that the
project would go forward because the credit would be received if
oil falls to $35 or $45.
CO-CHAIR SAMUELS inquired as to when the money is spent and how
much would be spent. Practically speaking, how would one
administer when the series of expenditures for exploration or
development would occur.
3:28:10 PM
MS. WILSON reiterated her earlier testimony that this is a
timing issue that could result in the amendment of claims. She
opined that [the credit] via an oil price trigger would be
problematic.
REPRESENTATIVE CRAWFORD opined that the committee is losing
sight of what it's after. If the credit has a price ceiling,
then there's a guarantee that when the price of oil falls below
the specified amount, the [companies] will receive the credits.
However, the companies don't need the credits at the price per
barrel of over $55. Therefore, if the price goes above [the
specified price], the companies don't need the credit because
they've had plenty of incentive.
REPRESENTATIVE SEATON reminded the committee that the notion is
to use a three-year calendar average, and thus won't fluctuate
madly. He stressed that when the credits don't apply because
the price of oil is higher than the specified price, the
companies are making money hand over fist.
3:30:41 PM
CO-CHAIR SAMUELS asked:
You're idea would be they'd get the credits on all of
the expenditures that they've had. At [$]70, it's one
thing to sit here and have the discussion, but let's
say we put the pivot point at $50. When ... three
weeks ago when we all sat in this room on the PPT, we
used ... $60 a barrel it was going between [$]59 and
[$]61. What are you going to do when your magic
number is $50 and you get a 15 percent credit. Well,
it drops down to your tenth and all of a sudden a 15
percent credit would get $40 million and all of sudden
you don't get it ....
REPRESENTATIVE SEATON interjected that it would be based on
three-year calendar averages.
REPRESENTATIVE ROKEBERG highlighted that if a cap is specified,
that cap will be gamed. He explained that if the price went
through the gap, he would, were he running the field, shut down
any new investment, although production would continue.
Therefore, the company would wait to continue production until
the price decreases.
REPRESENTATIVE SEATON opined that a company wouldn't do that at
$50 per barrel.
REPRESENTATIVE ROKEBERG begged to differ, and highlighted that
price fluctuates.
REPRESENTATIVE SEATON reminded the committee that it's a year-
long average.
REPRESENTATIVE ROKEBERG opined then that the field would be shut
down for a longer period of time.
3:32:37 PM
REPRESENTATIVE SEATON related his belief that with a three-year
average price on a calendar year, everyone has the planning
stages they need. He further related his belief that such a
methodology would be self-correcting and not something that can
be gamed.
REPRESENTATIVE ROKEBERG emphasized that the intention is to get
investment in heavy oil. There are 20 billion barrels in Ugnu
just sitting there. He then reiterated his belief that a three-
year average can be gamed. Furthermore, there is no history to
utilize in setting it.
REPRESENTATIVE SEATON pointed out that there are three-year
average prices for West Texas Intermediate and Alaska North
Slope West Coast, all of which are known numbers calculated in
average prices.
3:35:27 PM
CO-CHAIR SAMUELS turned the committee's attention to his last
major concern, which was the reference to gas in the title. He
recalled that the engineers testified that generally speaking
there isn't a lot of gas associated with heavy oil, which he
said satisfied him.
REPRESENTATIVE SEATON commented, "As long as they put the 5,500-
foot limit in there and identifying the fields, I don't have a
problem."
3:36:35 PM
REPRESENTATIVE ROKEBERG requested that Ms. Wilson true up on
subsection (f) on page 3 to HB 488 in terms of its application.
CO-CHAIR SAMUELS related his understanding that the outstanding
issues are in regard to whether the determination of the credit
should be left to the commissioner or the legislature, and the
rate floating with the price. Co-Chair Samuels, in response to
Ms. Wilson, confirmed that there was consensus that this won't
be exploration tax credit legislation.
[HB 498 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:38:58
PM.
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