Legislature(2003 - 2004)
05/13/2003 04:41 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
May 13, 2003
4:41 PM
TAPES
SFC-03 # 92, Side A
SFC 03 # 92, Side B
SFC 03 # 93, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 4:41 PM.
PRESENT
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Robin Taylor
Senator Donny Olson
Senator Lyman Hoffman
Senator Ben Stevens
Also Attending: SENATOR THOMAS WAGONER; BILL CORBUS, Commissioner,
Department of Revenue; TRACI CARPENTER, Staff to Senator Lyda
Green; JOHN MACKINNON, Deputy Commissioner of Highways & Public
Facilities, Department of Transportation and Public Facilities;
KATHLEEN STRASBAUGH, Assistant Attorney General, Governmental
Affairs Section, Civil Division (Juneau), Department of Law; MARY
JACKSON, Staff to Senator Thomas Wagoner; MARK MYERS, Director,
Division of Oil & Gas, Department of Natural Resources; DAN
DICKINSON, Department of Revenue; STEVE PORTER, Deputy
Commissioner, Department of Revenue
Attending via Teleconference: From offnet sites: DOUG SHULTZ, Vice
President, XTO ENERGY; KEVIN TABLER, Land and Government Affairs
Manager, Unocal Oil
SUMMARY INFORMATION
SB 213-KNIK ARM BRIDGE AND TOLL AUTHORITY
The Committee heard from the Department of Transportation and
Public Facilities and the Department of Law. Three amendments were
adopted, and the bill reported from Committee.
SB 117-ELIMINATING LONGEVITY BONUS PROGRAM
A committee substitute was adopted, and the bill reported from
Committee.
SB 185-ROYALTY REDUCTION ON CERTAIN OIL
The Committee heard testimony from the sponsor, the Department of
Revenue, the Department of Natural Resources, and the public. A
committee substitute was adopted, and the bill was held in
Committee.
SB 100-APPROP: CAPITAL PROJECTS
One amendment was withdrawn from consideration, and the bill
reported from Committee
SENATE BILL NO. 213
"An Act establishing the Knik Arm Bridge and Toll Authority
and relating to that authority; and providing for an effective
date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this legislation would establish an
independent authority to build and operate a toll bridge over the
Knik Arm. He clarified that SB 213, 23-GS1149\A, is the version
before the Committee, and he reminded the Committee that previous
questions on the bill included the composition of the Bridge
Authority's members.
Amendment #4: This amendment provides for the appointment of two
additional members to the Knik Arm Bridge Authority. In addition,
the amendment provides for staggered member terms and defines
initial term timelines.
Co-Chair Wilken moved to adopt Amendment #4 on behalf of its
sponsor, Co-chair Green. He noted that Amendment #4 is similar to
Amendment #1, sponsored by Senator Hoffman, that has yet to be
offered for adoption.
TRACI CARPENTER, Staff to Senator Lyda Green, explained that
Amendment #4 would add two members to the Bridge Authority; one to
represent the Matanuska Susitna Borough and the other to represent
the Municipality of Anchorage. Additionally, she noted that the
amendment clarifies the initial length of Board service for the
three public members who are specified to serve five-year staggered
terms.
Ms. Carpenter noted that Amendment #4 differs from Amendment #1 in
that Amendment #4 does not address the Board vacancy appointment
process.
Senator Taylor questioned the need to define the areas the two
members would represent, as he attested, individuals from other
regions could be assets to the Board.
Senator B. Stevens asked the Department of Transportation and
Public Facilities' position on the amendment.
JOHN MACKINNON, Deputy Commissioner of Highways & Public
Facilities, Department of Transportation and Public Facilities,
commented that the amendment is acceptable to the Department.
Senator Olson asked whether the amendment would affect the fiscal
note.
Mr. MacKinnon responded that the fiscal note should be increased
approximately $14,400 to provide stipend funds for the two
additional members.
Co-Chair Wilken shared that Co-Chair Green is concerned about the
amount of the fiscal note, and that she is negotiating with the
Department to reduce it. He surmised that the final fiscal note
would be "significantly less" than the original $523,700 fiscal
note.
There being no objection, Amendment #4 was ADOPTED.
Amendment #3: This amendment deletes subsection (f) of Sec.
44.90.221 of the bill, on page 8, lines 16 - 20 that reads as
follows.
(f) The chair of the board shall annually, not later than
January 2, deliver to the governor and the legislature a
certificate stating the sum, if any, required to restore any
capital reserve fund to the capital reserve fund requirement.
Money appropriated during that fiscal year for capital reserve
fund restoration shall be deposited by the authority in the
proper capital reserve fund.
On behalf of Co-chair Green, Co-Chair Wilken moved for the adoption
of Amendment #3. He then objected for sake of explanation.
Ms. Carpenter informed the Committee that the Department of Law
recommends that Section (f) be deleted from the bill as it might
negatively impact the State's bond rating.
KATHLEEN STRASBAUGH, Assistant Attorney General, Governmental
Affairs Section, Civil Division (Juneau), Department of Law,
explained that subsection (f) would create "a moral obligation on
the part of the State to back the bonds of this agency." She stated
that this action is inconsistent with other sections of the bill
that are designed "to assure the financial independence" of the
Board. She voiced that the Treasury Division of the Department
strongly recommends that the section, whose inclusion is "an
oversight" be deleted.
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #3 was ADOPTED.
Senator Hoffman asked whether the Knik Arm Authority would be
subject to the requirements of the Executive Budget Act.
Ms. Strasbaugh explained that the Executive Budget Act requires
that, with the exception of debt retirement funds, any funds
generated from the State must be reported. She noted that the
information in question is located on page five line nine of the
committee substitute that reads as follows.
(2) comply with the provisions of AS 37.07
(Executive Budget Act), except that AS 37.07 does not apply to
the activities of the authority that relate to the authority's
borrowing of money as provided in this chapter, including the
issuing of its obligations or evidence of that borrowing and
the repayment of the debt obligation.
Ms. Strasbaugh continued that this section does not relieve the
Authority from certain reporting requirements as outlined in other
sections of the bill.
Senator Taylor asked about provisions that provide immunity to the
Authority.
Ms. Strasbaugh responded that provisions that relieve Board members
from personal liability are included in Sec. 44.90.241 on page
nine, lines 17 - 19 that reads as follows.
Sec 44.90.241. Nonliability on bonds. (a) Neither the
members of the board nor a person executing the bonds of the
authority is liable personally on the bonds or is subject to
personal liability or accountability by reason of issuance of
the bonds.
Senator Taylor voiced support for these provisions.
Amendment #2: This amendment inserts new subsections into Section
44.90.031 of the bill on page 2, line 13, following the word
"citizen" to read as follows.
(4) one nonvoting member who is a member of the
state house of representatives appointed by the speaker of the
house and who serves at the pleasure of the speaker of the
house; the speaker of the house shall consider the appointment
of a legislator elected from a house district that lies
entirely or partially within the Municipality of Anchorage or
the Matanuska-Susitna Borough for appointment under this
paragraph; and
(5) one nonvoting member who is a member of the
state senate appointed by the president of the senate and who
serves at the pleasure of the president of the senate; the
president of the senate shall consider the appointment of a
legislator elected from a house district that lies entirely or
partially within the Municipality of Anchorage or the
Matanuska-Susitna Borough for appointment under this paragraph
In addition, Amendment #2 contains conforming language and inserts
the word "voting" in language on page 2, lines 22, 23, 26 when
referring to members of the board.
Senator Hoffman moved for the adoption of Amendment #2.
Co-Chair Wilken objected for discussion.
Senator Hoffman stated that Amendment #2 specifies that a member of
the House of Representatives and the Senate would be non-voting
members on the Board. He stated that in addition to providing an
opportunity for other regions of the State to be represented on the
Board, the inclusion of Legislators would allow the Legislature to
be "better informed" regarding the Authority.
Amendment #1: This amendment inserts a new subsection into Sec.
44.90.031 on page 2, line 13 of the bill that reads as follows.
(4) one public member, appointed by the governor
from a list of 5 names submitted by the mayor of the
Municipality of Anchorage, who is a state resident, resident
of the Municipality of Anchorage, and United States citizen;
(5) one public, appointed by the governor from a
list of 5 names submitted by the mayor of the Matanuska-
Susitna Borough, who is a state resident, resident of the
Matanuska-Susitna Borough, and United States citizen;
Additionally the amendment inserts new language to subsection (c)
of Sec. 44.90.031 on page 2, line 18, following "appointment" to
read as follows.
(c) If a vacancy occurs in the public member seat on the
board, the governor shall make an appointment to fill the
vacancy in the same manner as the previous appointment to that
seat, effective immediately, for the unexpired portion of that
member's term.
Furthermore, in addition to technical changes, the amendment
inserts a new bill section on page 12, following line 30 to read as
follows.
Sec. 4. The uncodified law of the State of Alaska is amended
by adding a new section to read:
APPOINTMENT OF THE INITIAL PUBLIC MEMBERS OF THE KNIK ARM
BRIDGE AND TOLL AUTHORITY. Notwithstanding AS 39.05.055 and AS
44.90.031(b), added by sec. 1 of this Act, the governor shall
appoint the initial public members of the board of directors
of the Knik Arm Bridge and Toll Authority to terms as follows:
(1) one public member to a term of five years;
(2) one public member to a term of three years;
and
(3) one public member to a term of one year.
Senator Hoffman informed the Committee that he would not be
offering Amendment #1 for consideration because of its similarity
to Amendment #4.
Senator Bunde shared that there is a "parallel experience" with
Legislative representation on a Postsecondary Education Commission.
He noted that, "there is an on-going legal discussion as to
whether" this representation is appropriate because of Legislative
funding authority. Nonetheless, he voiced support for the concept.
Mr. MacKinnon stated that the reporting concern might be addressed
by language on page five, lines one through eight, that requires
the Authority to submit various reports to the Legislature and the
Governor on an annual basis.
Co-Chair Wilken asked the Department's position regarding
Legislative representation on the Board.
Mr. MacKinnon responded that the Department does not support the
amendment.
Senator Bunde commented that Legislative representation on the
Board might be beneficial in that it could provide the Board with
immediate Legislative reaction to a situation before rather than
after an event occurred.
Co-Chair Wilken removed his objection.
Without further objection, Amendment #2 was ADOPTED.
Senator Taylor moved to report the bill, as amended, from Committee
with individual recommendations and accompanying fiscal note;
however, he objected to state that while "this might be the most
expeditious way to get that bridge built," the citizens of the area
would be burdened with its administrative expense. He stated that
were the Department of Transportation and Public Facilities rather
than a bridge authority to build the bridge, the users would not
have a burden. He noted his repeated efforts to instill toll roads
and a Road Toll Authority in addition to a Marine Toll Authority to
replace the current Marine Advisory Board.
Senator Taylor voiced support for building the Knik Arm Bridge, as
he expressed that the citizens of the area, who might be required
to pay approximately twenty dollars to transit the Bridge, would
then be able to understand how the citizens of Southeast Alaska are
affected by having to pay for transportation on the Marine Highway
System.
Senator Taylor removed his objection.
Senator Bunde objected to the motion. He stated that, in
consideration of the State's fiscal dilemma, all expenses should be
questioned. He asked whether the State expenses associated with
this legislation would be factored into the operating expenses of
the bridge and into the toll amount charged for bridge transit.
Co-chair Wilken clarified that the question is whether State funds
and other expenses that establish the Authority would be reimbursed
via the toll system.
Mr. MacKinnon voiced the expectation that they would.
Senator Bunde repeated Mr. MacKinnon's comment, for the record,
that the State would be reimbursed. He removed his objection.
Senator Olson asked whether the toll amount has been established.
Mr. MacKinnon responded that the amount is unknown as the project
is in the conceptual stage.
Without further objection, CS SB 213(FIN) was REPORTED from
Committee with previous fiscal note #1 in the amount of $523,700
from the Department of Transportation and Public Facilities.
SENATE BILL NO. 117
"An Act eliminating the longevity bonus program and making
related conforming changes; and providing for an effective
date."
This was the third hearing for this bill in the Senate Finance
Committee.
Senator Taylor moved to adopt CS SB 117, 23-GS1100\B, as the
working document.
Senator Hoffman objected for explanation.
Senator Taylor explained that the committee substitute would
provide for a five-year phase out of the longevity bonus program
with the program being eliminated from State statute at the
conclusion of that time. He communicated that he is furthering this
proposal, not because he avidly supports it, but because it is an
acceptable solution to the Pioneers of Alaska and AARP whose
"wisdom" in the matter he acknowledges.
Co-Chair Wilken stated that the committee substitute's fiscal note
would be forthcoming.
Senator Hoffman removed his objection, although he opined that the
legislation does not reflect the wishes of "the masses" of the
State's senior citizen population.
Without further objection, Version "B" was ADOPTED as the working
document.
Senator Taylor moved to report the bill from Committee with
individual recommendations and forthcoming fiscal note.
Senator Hoffman and Senator Olson objected.
Senator Hoffman reiterated that this legislation does not represent
the desire of the majority of the State's seniors.
Senator Olson argued that the process has not provided sufficient
time for public input. He noted that the elders in his Legislative
District do not support the proposal.
A roll call was taken on the motion.
IN FAVOR: Senator B. Stevens, Senator Taylor, Senator Bunde and Co-
chair Wilken
OPPOSED: Senator Olson and Senator Hoffman
ABSENT: Co-chair Green
The motion PASSED (4-2-1)
CS SB 117(FIN) was REPORTED from Committee with a forthcoming
fiscal note.
CS FOR SENATE BILL NO. 185(RES)
"An Act providing for a reduction of royalty on certain oil
produced from Cook Inlet submerged land."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken informed the Committee that this bill would reduce
royalty rates on oil production from offshore oil platforms on
submerged lands in Cook Inlet based in a specified daily production
rate. He moved for CS SB 185, 23-LS0926\Q, to be adopted as the
working document.
Senator Hoffman and Senator Taylor objected for further explanation
of the committee substitute.
SENATOR THOMAS WAGONER, the bill's sponsor, stated that the
original intent of the bill was to revise State statutes pertaining
to royalties on certain Cook Inlet oil fields nearing the end of
their production capacity. He declared that a reduction in royalty
expenses would make a field more economical to operate and allow
producers to maximize production and continue employment
opportunities.
Senator Wagoner stated that this increase in oil production "would
be more than would have originally been realized, and subsequently,
more royalty revenue even at the reduced rate." He continued that
encouraging production in these "marginal fields will extend their
life by a minimum of eighteen to twenty four months."
Senator Wagoner continued that, in addition, the original bill
proposed new field exploration tax credits in order to create new
jobs and revenue for the State.
MARY JACKSON, Staff to Senator Wagoner, explained that the
committee substitute expands the original bill by inserting new
language in Section 1 that would grant the Alaska Oil and Gas
Conservation Commission the authority to incorporate the new
provisions of the bill into statute. Furthermore, she stated that a
new subsection pertaining to "midrange producers" was inserted into
Section 2.
Ms. Jackson detailed the entirety of Section 2 as follows:
Subsection (6)(A) identifies the rigs that would be eligible under
the 1,200 barrel per day jurisdiction and Subsection (6)(B)
identifies the royalty percentages for those identified rigs;
Subsection (6)(C) inserts a new "midrange" production level
pertaining to rigs that produce in the 975 barrels per day range
and Subsection (6)(D) specifies the royalty rate for the midrange
rigs; Subsection (6)(E) identifies rigs producing less than 750
barrels per day with Subsection (6)(F) specifying the royalty range
for those rigs; and Subsection (6)(G) pertains to rigs in the West
McArthur River field with Subsection (6)(H) specifying royalty
ranges for that field. She stated that Subsection (6)(I) defines
the criteria for determining the daily barrel production of a
platform or field.
Ms. Jackson continued that Section 3 of the committee substitute
outlines the new tax credit provisions.
Senator Hoffman removed his objection.
Without further objection, committee substitute Version "Q" was
ADOPTED as the working document.
Senator Hoffman asked how the fiscal notes would be impacted by the
committee substitute.
Ms. Jackson informed the Committee that the Section 3 tax credit
provisions are addressed in the Department of Revenue fiscal note
dated May 11, 2003 and that the new section pertaining to the
midrange oil producers is addressed in the Department of Natural
Resources fiscal note, dated May 9, 2003.
Senator Bunde asked whether the proposed tax credits would only be
applied upon discovery of a viable oil field.
Senator Wagoner responded that the tax credits are more applicable
to exploration than discovery. He continued that the purpose of the
language is to entice companies "to invest more money in Alaska and
drill more wells" so that the possibility of both discovery and
production could be "substantially" increased.
Senator Bunde summarized therefore that the answer to his question
is no.
Senator Wagoner concurred.
BILL CORBUS, Commissioner, Department of Revenue, commented that,
"the exploration tax credit which would be applied to the severance
tax … is one ingredient of the Governor's long-range plan." He
shared that the Alaska oil pipeline is currently operating at 50-
percent of capacity and the goal of incentives such as the proposed
tax credit is to enable the pipeline to operate at full capacity.
He noted that the State currently offers minimal incentives to
companies to explore, and he expressed that Governor Murkowski
"strongly urges that this legislation be adopted."
Senator Olson asked the regions of the State that would be affected
by this legislation, specifically whether it would affect North
Slope producers.
Commissioner Corbus affirmed that the provision would be applicable
statewide.
Senator Taylor observed that the bill originally addressed oil
production in the Cook Inlet region; however, he continued, the
committee substitute expands it to a statewide scenario. He asked
for further information regarding Section 3(c) which provides a 20-
percent tax credit for a hole drilled more than three miles away
from an existing hole, and Section 3(d) which provides an
additional 20-percent credit were the hole drilled at least 25
miles from an existing hole. He contended that recently a major new
reservoir was discovered but was "set idle" in anticipation of this
legislation being enacted. Furthermore, he declared that advances
in technology allow for such technique as "slant drilling," which
enables holes to be drilled to a reservoir from distances that
would allow companies to unfairly "take advantage" of the tax
credits.
MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources, assured that exploration drilling within an area
of "an existing unit" would not qualify for the tax credits as the
bill contains restrictions that specifically address this issue.
Additionally, he clarified that wells that are currently planned
for exploration and development would not qualify. He stated that
it has been determined "that three miles from a bottom well
location" is "a reasonable distance" as it would likely drill "into
a separate accumulation." He stated that there might be an occasion
where a new well might drill into a substantial adjoining
accumulation, but "it is unlikely." In responding to Senator
Taylor's comment about a recent major discovery, he stated that he
is unaware of any "capped off major discoveries" at this time.
Senator Taylor asked whether provisions exist that would prevent an
entity from "capping off" a major find and drilling into it from
three-miles distance in order to qualify for these "significant"
tax credits.
Mr. Myers responded that the distance requirements could be
increased or that the "language could be crafted" to further
address this scenario.
Senator Taylor expressed "some sensitivity for the position that
the oil industry" alleges regarding the high cost of exploration in
the State as he avowed that the State has worked to address these
industry concerns for years. Furthermore, he voiced that because
the State's current fiscal crisis mandates that such things as the
Longevity Bonus Program be eliminated, various taxes and user fees
be instituted, and a Statewide sales tax be considered, he finds it
difficult to support further benefits to the industry. He stated
that granting tax credits to the oil industry appears to be
contrary to attempts to increase the revenue that the State
requires.
Commissioner Corbus qualified that the potential impact on revenue
to the State would not occur until FY 05. He asserted that "oil is
our future," and that he considers this legislation to be "an
investment." He asserted that the State must offer this incentive
in order to secure "a long-term stream of oil."
Senator B. Stevens asked for further information regarding language
in Section 3(g) that specifies that the production tax credit
certificate could be transferred, conveyed or sold to another
entity.
Commissioner Corbus confirmed that the production tax credit could
be sold provided that the purchasing entity has a severance tax
obligation within the State.
Senator B. Stevens asked whether there are limits on the tax credit
amounts that could be accumulated.
DAN DICKINSON, Director, Tax Division, Department of Revenue,
stated that the amount of tax credit that a producer could utilize
toward their tax liability is "the face value of the certificate."
Senator B. Stevens asked whether limits have been established
regarding the "discounted value" of the tax credit certificate that
could be sold to a qualifying entity.
Mr. Dickinson responded that no limits are specified as, he
asserted, were discounts disallowed, there "would be no reason" for
another entity to purchase the certificate.
Mr. Dickinson exampled a scenario wherein a producer might spend
five million dollars conducting the practice of what is referred to
in the industry as "shooting seismic on spec." He conveyed that it
is common industry practice to sell that five million dollar tax
credit at a discounted price to another producer. He avowed that a
purchasing entity would not be willing to pay $5 million for the
tax credit certificate.
SFC 03 # 92, Side B 05:29 PM
Mr. Dickinson continued that, regardless of the amount the
purchaser pays for the tax credit certificate, the credit value
would be five million dollars, which is the face value of the
certificate. He clarified that no limits are placed on the number
of certificates that an entity could accumulate.
Mr. Dickinson informed the Committee that the three largest
producers in the State currently pay approximately $20 to $30
million a month in taxes. He stressed that were this legislation
adopted and credits accumulating "at that level, we would have a
very very vibrant" program.
Co-Chair Wilken provided Committee members with a handout [copy on
file] that contains information regarding the "Cost of
Exploration," dated May 12, 2003 and charts depicting the
exploration goals and expectations of this incentive program. He
stated that the handout might provide Members with additional
explanatory information.
Senator Taylor asked whether entities that conduct seismic
fieldwork regularly contract to sell that information as a normal
course of business.
Mr. Dickinson stated that is correct.
Senator Taylor argued therefore, that those entities are being paid
to conduct seismic research, and, in addition, receive a tax credit
from the State that they could then discount and sell to another
company. He continued that the purchasing company could then use
the certificate, at full face value, against that company's tax
liability with the State.
Senator Taylor continued that the initial contractor gets paid for
the seismic work and, in addition, receives a discounted amount for
selling their tax credit certificate. He concluded that the
purchaser of the certificate would then be able to apply the full
face value of that tax credit certificate toward their tax
liability with the State.
Senator Taylor inquired as to whether the full face value of the
certificate is based on actual dollar costs of conducting the
seismic work or a percentage of the production number.
Mr. Dickinson explained that the price paid for the seismic
information "is a negotiated figure." He stated that, "it is highly
unlikely" that the buyer of the tax credit certificate is the same
entity that purchased the original seismic information. He asserted
that it is a small market and that there are not many purchasers;
therefore, he attested, the interested parties are knowledgeable
about the tax credit. He stated that the price would be affected by
that knowledge.
Senator Taylor asked the number of steps involved in this scenario;
specifically whether one or two agreements would be involved.
Mr. Dickinson informed that the situation could involve one or two
parties. Furthermore, he commented that the situation could apply
to another group of "independents who don't yet have production."
Senator Taylor asked for further information regarding the value
assigned to the certificate.
Mr. Dickinson affirmed that the certificate is based on the actual
cost of conducting the research. He clarified that the only
limitation currently in the legislation is specified in Section
3(i)(1) which reads as follows.
(1) the amount of credit that may be applied against
the production tax for each tax month may not exceed the total
production tax liability of the taxpayer applying the credit
for the same month.
Mr. Dickinson continued that the tax liability could be carried
forward to the following months.
Senator Taylor opined, therefore, that the tax liability credits
could be carried forth infinitely as no statute of limitations
exists.
Mr. Dickinson replied that none exists; however, he noted that
there is a four-year limit in which the qualifying work could
occur.
Senator Taylor asked whether the legislation has a termination
date.
Mr. Dickinson identified information in Section 3(a), which
indicates that credits against the tax due are subject to oil and
gas produced on or after July 1, 2004, and Section 3(b) which
states that exploration expenditure must be incurred for work
performed on or after July 1, 2003 and before July 1, 2007. He
stated that this four-year window would prompt "this work to be
done," and were it done, the State "would underwrite up to forty
percent of it."
Senator B. Stevens asked why the oil and gas exploration tax
credits for dry well expenditures differs from that allowed for a
successful well.
Mr. Dickinson noted that these are "very different" situations.
Senator B. Stevens observed that the expenditures that could be
applied to the credit for a successful well are "more expansive" in
their incorporation of associated, allowable expenses.
Mr. Myers stated that there "is a different element of risk"
associated with the expense of developing a successful well hole.
He continued that expenses such as roads, leasing permits, and
helicopter pads would be necessary as opposed to only the
exploration expenses associated with a dry well.
Mr. Myers stated that the exploration credits are "deliberately"
limited "on the exploration side not to include testing or
development costs or … delineation costs to try to minimize the
fiscal impact, yet encourage exploration."
Mr. Myers stated that as exploration is conducted further away from
existing infrastructure, "you need to find a substantial discovery
or series of discoveries to make it economical." He avowed that
this legislation would assist in "pushing" those endeavors forward.
Mr. Dickinson interjected that philosophical differences occur in
discussions regarding offering a broad-based project a ten percent
credit and a narrower based project a larger credit.
Senator Hoffman inquired regarding the reason for offering an
exploration tax credit of up to a 40 percent.
Commissioner Corbus responded that this proposal is a test program,
which the Department would evaluate "at the end of year four."
Senator Taylor asked the Department whether this legislation would
"encourage independents and wildcat" developers.
Mr. Dickinson voiced the belief that this program would entice
those types of developers. He commented that this program would
provide the Department with information regarding what incentives
are required to encourage a variety of entities to conduct
exploration in the State.
Mr. Dickinson referred Committee members to the aforementioned
handout titled "Cost of Exploration." He noted that Alaska is at
the "very bottom" of the table depicting the level of financial
assistance that developers receive from the State as compared to
other governmental entities.
Senator Taylor noted that another obstacle to encouraging
independents to operate in the State is the inability to access the
Trans Alaska Pipeline with their product. As a result of this
access problem, he stated that even though these entities might
have a successful find, they are forced to sell that find to one of
the larger companies.
Mr. Dickinson commented that, while this concern is "clearly one of
several aspects" of the industry, the focus of this legislation is
to encourage the performance of exploratory work by the industry.
Mr. Myers shared that he has professionally worked in numerous
exploration projects, and, as a result, he believes that there are
multiple ways that a credit like this would work: first, it would
provide companies that are not exploring their large tracts of
exploration acreage the ability "to farm out an interest in their
properties in which case this credit would be of value in bringing
other companies" to share the value of the credit. This, he
asserted, would enable such things as drilling costs and other
expenses to be more manageable. Secondly, he contended, the large
number of small independents operating on the North Slope and "who
are literally cash constrained" would benefit, as this legislation
would assist them in getting their projects operational.
Mr. Myers shared that, in addition to the access issue facing some
developers, the availability of rigs and ice making equipment; the
cost of transportation of the crude oil; and "maneuvering through
the environmental permitting process" are other areas of concern.
However, he stressed that receiving up to a 40-percent tax credit
as specified in this legislation would be important in addressing
the cost restraints placed upon a company.
Senator Taylor noted that the legislation requires an actual
ownership interest in the well rather than a partnership
relationship, in order to qualify for the credit.
Mr. Dickinson clarified that the "earlier exploration incentive
credit" did require an ownership interest; however, this committee
substitute does not. However, he continued that "typically," it
would be expected that the ownership company would be present in
the activity. He stated that, "if they have an over-riding royalty
interest or some other interest in there that is not a clear
working interest they would qualify for this credit."
Senator Taylor voiced the understanding that in order "to get the
credit…you had to have an actual ownership in that well."
Mr. Dickinson confirmed "to take the credit, because it's a
severance tax, yes, you have to have that interest." He clarified
that were an independent to own the credit, "they would have to
sell it to someone who could actually take it."
Senator Taylor voiced concern that due to the limited market of
entities with ownership interests, the discounts on the price of
the tax credit certificate "would get pretty stiff."
Mr. Myers attested that the Department's experience pertaining to
the sale of incentive credits indicates that they "have traded
fairly well," with the trades being approximately ninety cents on
the dollar. He professed that while it is a discounted value, "it
does have real value" and that there is a market for the
certificates.
DOUG SHULTZ, Vice President of Operations, XTO Energy, testified
from an offnet site and informed the Committee that he oversees the
Alaska Operations for the company. He stated that he is available
to answer questions pertaining to the midrange language section of
the bill.
Senator Hoffman stated that being provided with additional
"snapshot" information regarding developmental costs and credits
would be helpful.
Mr. Dickinson responded that a table of this nature could be
generated and provided to the Committee.
Mr. Dickinson theorized that were another Alpine Oil Field
discovered, it would generate approximately one billion dollars of
revenue for the State. He voiced that this program should be gauged
by the rate of return on the investment rather than how much the
State would lose by offering tax incentives. He stated that "the
problem lies in the hope" that another large oil field like Alpine
would be discovered, as opposed to finding large quantities of oil
generated from numerous smaller pools. He stated that the smaller
pool scenario would not generate the same high rate of return as a
large pool. He stated that by proposing this exploration incentive
program, the State is attempting to increase the rate of success of
finding another large field by increasing the amount of exploration
being conducted.
Senator Hoffman calculated that were this incentive program
implemented, the State would move from the bottom of the
aforementioned Cost of Exploration table depicting government
incentive programs to approximately the middle.
Mr. Dickinson agreed that this tax credit incentive program would
make the State "just average."
Senator Hoffman stated that Alaska's incentives would therefore be
comparable to those offered in the Gulf of Mexico and the United
Kingdom, but substantially below the incentive program offered by
Canada.
Mr. Dickinson agreed that this would be a good reference; however,
he noted that the chart is based on theoretical rates. He continued
that there might be a two or three cent variation.
Senator Hoffman asked whether the level of production would affect
the credit amount being provided.
Mr. Dickinson confirmed that the credit level is based on the
actual amount of oil being produced.
Senator Hoffman asked whether a higher potential of discovery in an
area would correspondingly be assigned a larger incentive.
Mr. Dickinson communicated that, "in the final analysis, the
geology is what is going to matter." He continued that regardless
of the level of incentive, an area with minimal chance of return
would not be explored. He continued that areas such as Prudhoe Bay
did not require an incentive because it was believed that the
probability of a successful find was high.
Senator Hoffman asked for additional information regarding the
incentives provided by Russia and China as these countries' credits
stipulate that the incentives offered would be "less depending on
level of production."
Mr. Dickinson responded that this language is included in the chart
because in some countries "there is not a single rule for
everything." He noted that in Kazakhstan, for example, incentives
are determined by production sharing agreements some of which might
be high and some that might be low. He stressed that, "the ability
to take the credit ties back to the ability to produce."
Senator B. Stevens asked for an explanation of "an exploration
unit" as specified in Section 3(b)(4) which reads as follows.
(4) may not be incurred for an exploration well or
seismic exploration that is included in a plan of exploration
or a plan of development for any unit in the state at the time
the expense is incurred.
Senator B. Stevens additionally asked whether the credit applies to
expenses associated with the purchase of a lease that establishes a
new unit.
Mr. Dickinson responded that lease acquisition costs are not
included in the credit calculation.
Mr. Myers responded to Senator Stevens' question by explaining that
this credit "is designed to stimulate activity that would not occur
otherwise." He continued that, "a unit is an aggregate of leases
put together for common exploration or development." He recounted
that the State forms an agreement with the lessees who are
obligated to perform certain activities in order to extend a lease
beyond the primary term. He stated that these "reasonable"
conditions and activities could include such things as specifying
that a certain number of wells must be driven as well as a
commitment to shoot seismic. He stated that a typical unit term
might be three to five years, and were the conditions unmet, the
State could cancel the lease and reissue it to another entity.
Mr. Myers clarified that the costs associated with upholding the
extension conditions do not qualify for the exploration credit
incentive, as they are recognized as a requirement of the lease
extension. He continued that additional exploration work could
occur and he asserted, that this is, in fact, the goal of the
exploration credit program. He continued that once a unit is
established and exploration occurring, the next step, upon
discovery of a field, would be the development of the
infrastructure to enable production to begin. He noted that rather
than shooting separate seismic surveys, some companies shoot
seismic surveys both inside and outside of the perimeter of a unit
for economic reasons and that credits could be issued for the
seismic work conducted outside of the unit.
Senator B. Stevens summarized, therefore, that a unit does not need
to exist to qualify for a tax credit.
Mr. Myers agreed and furthered that allowance of the exploration
credit for seismic surveys conducted outside of a unit could lead
to the development of new units for production as, he conveyed, the
natural evolution after something is discovered is to form a unit
for development. He stated that, while a typical lease term for a
unit is seven to ten years, a lease could be extended for up to
thirty years.
Senator B. Stevens commented that the credits should be referred to
as unit exploration credits rather than oil exploration credits.
Senator Taylor noted that the Department of Revenue fiscal note
explanation specifies that were the State successful in doubling
the amount of exploration that is currently being conducted, the
credit program would cost the State $100 million in revenue in the
next fiscal year.
Mr. Dickinson responded that, based on estimates, that amount
"would be the ceiling." He stated that while this figure might be a
little high, the possibility "is in that order of magnitude."
Senator Taylor voiced that it is difficult to support legislation
that might result in a revenue reduction of $100 million when the
State's current revenue and expense projections might result in a
$400 million draw on the Constitutional Budget Reserve (CBR). He
pointed out that the fiscal note additionally states that there is
little likelihood that the State would garner offsetting revenues
as a result of this legislation until the year 2007. He stated that
this is a "major" concept and that the Committee should not make a
quick decision on it.
Co-Chair Wilken agreed; however, he stated that this discussion is
providing information that would assist the Committee in
understanding "this big legislation."
STEVE PORTER, Deputy Commissioner, Department of Revenue, stated
that "the amount of drilling it would statistically take" to cost
the State $100 million in revenue would need to be "substantial."
He continued that the fiscal note's "high numbers" are
conservatively presented to reflect the range that might be
possible. Additionally, he noted that to incur this level, most of
the drilling must occur outside of the 25-mile zone as compared
with current practice whereby the majority of the wells being
drilled this year are located within the three to 25-mile zone with
only one well being drilled outside of the 25-mile zone.
KEVIN TABLER, Land and Government Affairs Manager, Unocal Oil,
testified via teleconference from offnet site to stress that the
discussion not lose, "the importance of the primary purpose of the
bill" which is "the royalty reduction aspect in the Cook Inlet," He
opined that this "would be a wonderful thing to have." He voiced
concern that the focus is now exploration on the North Slope when,
he attested, the focus should be on furthering exploration on a
statewide basis.
Mr. Tabler commented on language in Section 3(c)(2) which reads as
follows.
c) To be eligible for a 20 percent production tax credit,
exploration expenditures must
(1) qualify under (b) of this section; and
(2) be for an exploration well that is located and
drilled in such a manner that neither the bore hole nor any
part of the bore hole is at any time located less than three
miles away from any part of a bore hole of a preexisting
suspended, completed, or abandoned oil or gas well.
Mr. Tabler stated that while he understands the intent of this
language, he voiced the concern that were a three-mile arc drawn
around every bore hole in Cook Inlet that has been drilled, there
would be no place for a new exploratory well. He stated that this
negates the incentive to drill in the area.
Mr. Tabler voiced that in addition to the density concern, there is
an issue regarding the depth component. He exampled that were a
company to drill a 15,000 foot or 19,000 foot test well from an
existing platform, this, in essence could meet the three-mile
criteria. Therefore, he suggested that language be changed to
specify, "certified" rather than pre-existing oil or gas well and,
in addition, insertion of the language "producing from a formation
or certified capable to produce from the same formation in the
exploration well." He reemphasized that the discussion "should not
lose sight of the royalty component" of the bill.
Mr. Myers voiced that "the focus should be on what you are trying
to incentiveize." He stated that exploration for deeper wells and
step-out wells is occurring in existing fields, and that true
wildcat exploration is occurring in areas that are removed from
existing infrastructure and that have more uncertainty and less
mapping accumulations. He stated that all of this could be
characterized as exploration, but he attested, the goal is to focus
"on what you wish to incentiveize." He stated that the three-mile
limit would promote wildcat exploration that involves more risk and
expense. He reemphasized that this type of development is the
intent of the credit program.
Co-Chair Wilken echoed Senator Taylor's comments that "this is
significant legislation." He noted that the bill would be held in
Committee, and he continued, that upon completion of testimony,
further technical changes could be entertained. He noted that a new
committee substitute would be forthcoming.
Senator Taylor voiced concern that as "the pool of participants and
producers has diminished," the State might be "being manipulated"
by corporations that leverage exploration in one area against
another, specifically playing the State's budget deficit situation
in their favor. He stated that these corporate decisions might
influence legislation that could provide the industry with
additional incentives. He voiced concern that this might be a
factor behind this legislation.
Commissioner Corbus stressed that, while the aforementioned chart
comparing Alaska's incentives against other countries might have
been some influence, Governor Murkowski and the Administration
presented the exploration credit legislation.
Mr. Porter assured the Committee that this legislation was
initiated by the Governor rather than by the industry. He
communicated that the oil industry currently "has a substantial
amount of production" in the State; however, he continued that the
benefits of that asset could be taken and invested either in Alaska
or in another area of the world. He stated that an oil company
could decide to invest 20-cents or 65-cents of that dollar in the
State or elsewhere. He stated that the industry would invest in an
area where "they would get the most bang for their buck," and he
contended, the intent of this legislation is to draw some of that
dollar back to the State.
At Co-chair Wilken's request, Mr. Porter shared with the Committee
his professional experience, which includes twenty-one years in the
oil and gas industry and incorporated such things as community
relations and negotiations, specifically dealing with issues
pertaining to the North Slope.
Mr. Myers further explained that the bill specifies that seismic
data that would be collected would have "clear value" as it would
be "released after ten years." He noted that this information would
"help everyone across the board." Furthermore, he clarified that
the exploration tax credits would be available to both independents
as well as producers although, he specified that the independents
would be required to sell the credits at a discount in order to
receive that benefit.
SFC 03 # 93, Side A 06:17 PM
Mr. Myers continued that while the legislation might not address
all the issues, it does further exploration efforts.
Senator Taylor shared that he has consistently supported measures
that could assist independent operators as, he attested, having a
multitude of entities operating in the State "was the only way that
we as a State could find out what the value of our resource really
was." He noted that 30-percent of the Lower 48's oil is produced
either by wildcats or independents, and he stressed that he would
like to see those percentages in Alaska. He voiced support for this
type of legislation in addition to legislation that "would reduce
environmental costs to enable the State to be more competitive with
the rest of the oil producing world." Yet, he continued, he is
disappointed that this legislation is being presented late in the
Legislation session as it deters the ability "to have a greater
opportunity to explore it;" however, he voiced "faith" in the
information being provided.
Senator B. Stevens asked the source of the "Cost of Exploration"
comparison chart information that has been provided to the
Committee.
Mr. Dickinson replied that a private consultant renown for
producing annual summaries pertaining to world fiscal regimes,
supplied the information to the State.
Senator B. Stevens clarified that the consultant was hired by the
State.
Mr. Dickinson clarified that the individual was hired by the State;
however, he noted that the information was not compiled at the
direction of the State, as this information is commutated from
information the consultant compiles on an on-going basis.
Co-Chair Wilken asked whether this legislation differentiates
between royalties and severance taxes for production on private
land as compared to those in place on State or federal land.
Mr. Dickinson stated that work conducted on private land is treated
in the same manner as State or federal land. He stated that
property and income taxes occur regardless of the ownership status
of the land; however, he reminded that royalties apply only to
production on State land and that royalties on production on
federal land are negotiated with the federal government. He
specified that a severance tax is applicable to all oil and gas
produced in the State based on the size of the accumulation.
Therefore, he noted that while every pool on the North Slope pays
the State, the rates vary. Nonetheless, he concluded, "more oil in
the pipeline" is the focus of this legislation, and he stressed
that the royalty and severance taxes could be addressed once that
occurs.
Co-Chair Wilken ordered the bill HELD in Committee.
AT EASE 6:21 PM / 6:22 PM
SENATE BILL NO. 100
"An Act making capital appropriations and reappropriations;
capitalizing a fund; making appropriations under art. IX, sec.
17(c), Constitution of the State of Alaska, from the
constitutional budget reserve fund; and providing for an
effective date."
This was the fifthteenth hearing for this bill in the Senate
Finance Committee.
Amendment #17: This amendment adds a new "Ketchikan Gateway Borough
- Ketchikan Shipyard (ED 1)" component and $1,500,000 Alaska
Industrial Development and Export Authority (AIDEA) Corporate
Receipts appropriation to the Grants to Municipalities (AS
37.05.315) Budget Request Unit (BRU) on page 3, lines 21 and 22.
Accompanying explanatory language reads as follows.
This funding will match an additional $7.5 million currently
available ($5.0 million of federal receipts, $2.5 million in
local Borough funding, and $1.0 million in general funds
previously appropriated.)
Senator Taylor moved to withdraw Amendment #17 from consideration
as he explained that a funding source has not been identified to
support the amendment.
There being no objection, Amendment #17 was WITHDRAWN from
consideration.
Senator Taylor moved to report the bill, as amended, from Committee
with attached fiscal notes and individual recommendations.
Co-Chair Wilken objected to request that his staff in conjunction
with the Division of Legislative Finance and Legislative Legal
Services be authorized "to make appropriate technical changes while
drafting the committee substitute in order to conform to amendments
that have been adopted."
Senator Taylor offered a friendly amendment to his motion to
authorize Co-Chair Wilken's staff to make technical changes.
There being no objection, CS SB 100, 23-GS1003\Q, as amended, was
REPORTED from Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 06:25 PM
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