Legislature(2003 - 2004)
05/07/2003 03:37 PM Senate RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
May 7, 2003
3:37 p.m.
MEMBERS PRESENT
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Fred Dyson
Senator Ralph Seekins
Senator Ben Stevens
Senator Georgianna Lincoln
MEMBERS ABSENT
Senator Kim Elton
COMMITTEE CALENDAR
APPOINTMENT OF MR. RUPERT ANDREWS TO THE ALASKA BOARD OF
FISHERIES
CONFIRMATION ADVANCED
CS FOR HOUSE BILL NO. 61(FIN)
"An Act establishing an exploration and development incentive
tax credit for operators and working interest owners directly
engaged in the exploration for and development of gas for sale
and delivery without reference to volume from a lease or
property in the state; and providing for an effective date."
HEARD AND HELD
CS FOR HOUSE BILL NO. 118(RES) am
"An Act relating to the transportation and sale of certain
commercially caught fish by an agent of a commercial fishing
permit holder and to the sale of fish; and providing for an
effective date."
SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
HB 61 - No previous action to record.
HB 118 - See Labor and Commerce minutes dated 4/8/03 and
4/15/03.
WITNESS REGISTER
Mr. Rupert Andrews
Juneau, Alaska
POSITION STATEMENT: Alaska Board of Fisheries nominee
Representative Mike Chenault
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HB 61
Mr. Mark Graber
Tax Audit Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered questions about CSHB 61(FIN)
Mr. Chuck Logsdon
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered questions about CSHB 61(FIN) and
said the Administration takes no position on CSHB 61(FIN)
Mr. Kevin Tabler
Manager, Land and Govt. Affairs
Union Oil Company of California (Unocal)
909 W. 9th Ave
Anchorage, Alaska 99501
POSITION STATEMENT: Supports CSHB 61(FIN)
Mr. John A. Barnes, P.E.
Alaska Business Unit Manager
Marathon Oil Company
PO Box 196168
Anchorage, AK 99519
POSITION STATEMENT: Supports CSHB 61(FIN)
ACTION NARRATIVE
TAPE 03-42, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 3:37 p.m. All members were present except
Senator Elton, who was excused.
CONFIRMATION: BOARD OF FISHERIES
CHAIR OGAN invited Mr. Andrews to come before the committee and
asked him why he wanted to serve on the Board of Fisheries.
MR. RUPERT ANDREWS, nominee to the Alaska Board of Fisheries,
asked to first read the following statement.
First and foremost, being on the Board of Fisheries, I
see that product quality should be improved and
enhanced in all commercial fisheries, [that] high
recreational resource experience values are preserved
and fish stocks are maintained for both subsistence
and personal use through what we call the sustained
yield principle. Many Alaskans rely on fish and fish
products for their nutritional, social, economic and
cultural well being. Whether the use is subsistence,
personal, commercial or recreational, the
responsibility of [indisc.] harvest and allocation to
meet all of these needs is the mission of the Board of
Fisheries.
For over 40 years, the fish and game department and
the Board of Fisheries have penalized the efficient
fishermen in the use of efficient technology as tools
of management. The world globalization has defined a
new competitive economy that Alaskans must recognize
to participate and compete with other nations for a
share of the world market.
To be a member of the Board of Fisheries is a constant
learning process and can be both serious and rewarding
at the same time: serious in that allocation decisions
impact many Alaskans. There is no other state in the
Union that has an equal democratic system for
fisheries resource use and allocation as Alaska. We
have 82 advisory committees in the state. It is this
system that requires large time segments for board
members, user publics, and the professional staff to
satisfy human needs along with the needs of other
wildlife species that rely on fish stocks.
I've had a lifetime career in Alaska's fisheries, both
as a biologist, an administrator, and I concur with
the concept of orderly and wise management practices,
most importantly, prudent application where these
animals live and they reproduce. Public renewable
resources, by their very nature, evoke political
rhetoric over allocation - who gets what and how much.
There are no simple answers to difficult allocation
questions but there are rules - in other words to be
fair to all concerned, to gather and use the best
information available, and be guided by sound judgment
values.
My commitment to you, members of the Senate Resources
Committee, the Administration, and all Alaskans,
includes my promise to listen carefully and
respectfully to all members of the public before
making a decision. To the best of my ability, my
decisions will always be based on sound science, a
need for conservation and sustained yield management.
Once these concerns have been addressed, I will
certainly do my best to make fair allocation decisions
that are in the best interest of the State of Alaska.
That completes my statement, Mr. Chairman.
SENATOR LINCOLN asked Mr. Andrews what he views as the Board's
role in carrying out the state's mandate for a subsistence
priority.
MR. ANDREWS said that answer is easy: the Board must follow
Alaska statutes and the Alaska Constitution.
SENATOR LINCOLN asked Mr. Andrews if he supports a
constitutional amendment for rural subsistence and said the
choice to answer the question is his.
MR. ANDREWS said he certainly supports the public's right to
vote on a constitutional referendum, which it has done several
times.
SENATOR LINCOLN noted that Mr. Andrews, when he spoke about
allocation decisions, said he would use the best information
available and sound science. She maintained that sometimes the
best information is not available and that the Board must often
"dig" for it. She asked him to describe what he means by "sound
science."
MR. ANDREWS said the brief answer is that sound science consists
of those principles of investigation: analysis [and] research.
He said it is true that the Board does not have all of the
information and must rely on the best information it has. He
said the business of fisheries management is not an exact
science. He attended the very first Board of Fisheries meeting
in November 1959 and has watched the Board and its
responsibilities grow and change. When he started with the State
of Alaska in 1959, there were no geoduck or sea urchin
fisheries. The fisheries problems have grown and become
international in scope so the Board is now guided in part by
international treaties, such as the Pacific Salmon Treaty. The
fisheries issue is a complex and time consuming one and a
learning process. He said he feels honored to be appointed by
Governor Murkowski and he sees serving on the Board as the best
way to culminate his fisheries career. He noted, regarding
improvement of Alaska's marketing position, Alaska has an
advantage. Alaska fish are wild and come from a pristine
environment. He said when the Copper River sockeye hit Seattle
every summer, banners go up in all of the stores in the city. He
said that is the kind of marketing effort he envisions doing
more of.
CHAIR OGAN asked Mr. Andrews if he was the director of the
Division of Sport Fish in the Alaska Department of Fish and Game
(ADF&G).
MR. ANDREWS said yes, for the last 13 years of his service.
CHAIR OGAN noted that Mr. Andrews attended a symposium on
rainbow trout in Yellowstone and asked his opinion of a
subsistence fishery for rainbow trout. He pointed out the
federal subsistence board recently created one.
MR. ANDREWS said, speaking as a biologist, he believes it is a
bad idea, particularly westward, where rainbow trout are 8 to 12
years old. That is the reproduction and replacement time for
that species and there are not that many of them. They are
vulnerable to gillnets. He said they are too valuable to be
caught only once. He said in his view, subsistence should be
focused on stocks of large numbers because subsistence has been
an opportunistic situation since long before statehood. The
subsistence salmon fin fisheries have been for the high
population fisheries.
CHAIR OGAN said he has heard from a number of people about that
issue. He also has some concerns about the federal subsistence
board's decision. He asked if rainbow trout can live up to 20
years.
MR. ANDREWS said he has never seen a scale that goes up to 20
years but he has seen scales up to 12 years.
SENATOR WAGONER indicated the federal [subsistence board] has
just announced a subsistence halibut fishery that allows a catch
of 20 fish per day. He said commercial fishermen don't often
catch that many. That decision is starting to worry him quite a
bit because if the state does not get a handle on subsistence
and the federal management of our fisheries, we'll be looking at
an allowable subsistence catch of 150 red salmon per day. He
asked Mr. Andrews what actions the Board can take to address
this problem and help bring it to closure.
MR. ANDREWS said Alaska law makes for legal uses of fisheries,
subsistence being a priority. Personal use has no priority. The
Board must follow the law in this case.
SENATOR WAGONER said in this case, the federal government made
the decision, not the Alaska Board of Fisheries.
MR. ANDREWS said there are subsistence statutes governing state
lands and state waters. He believes the Board of Fisheries needs
to do a lot more with its federal counterparts to get a better
management perspective and rationalization. He said, as an
example, the federal subsistence board allows subsistence trout
fishing in the standing waters and lakes in the Tongass National
Forest by hook and line. For 40 years, that was the Alaska
statutory definition of sport fishing. Therefore, for
enforcement purposes, it will be hard to tell who is subsistence
fishing and who is sport fishing, creating a serious enforcement
problem. He said prior to the passage of ANILCA, subsistence
fishing was always done with the most efficient gear - gillnets,
traps, or spears.
CHAIR OGAN said he agrees the state and federal boards need to
talk more and he hopes Mr. Andrews spearheads that effort.
SENATOR LINCOLN commented that the solution to the subsistence
issue is in the legislature's court.
SENATOR SEEKINS asked Mr. Andrews what criteria the Board of
Fisheries used in overturning the customary and traditional
(C&T) designation for the Chitina dipnet fishery and whether Mr.
Andrews agreed with that finding.
MR. ANDREWS said the vote to overturn the C&T designation was 4
to 3. He was one of the three who voted against the change. He
said the rationale behind the vote was that the Attorney General
advised the Board there had to have been an error in the legal
handling of the 1999 decision. The Attorney General felt there
was no error. The Attorney General also said that in applying
the eight criteria, the Board needed to raise the bar when
changing a subsistence fishery to a personal use fishery. The
Board would actually be downgrading that fishery because
subsistence has priority. The other criterion used was whether
new information was available. He said he listened to Dr. Hall's
report and did not believe there was any additional information
that warranted a change. He is aware the Chitina fishery is an
important one to a large number of people, particularly in the
Interior where residents do not have the same opportunities to
get salmon as coastal residents. He said the public owns the
resource and the people in Fairbanks and the Interior need the
opportunity to obtain the resources. He subscribes to the notion
that the best place for an Alaskan salmon is on an Alaskan
dinner table.
SENATOR SEEKINS said people are now limited to one king salmon
per family from the Copper River while the commercial fishery
shipped out a record tonnage of commercially caught king salmon.
He asked, in terms of allocation, whether that is an issue the
Board of Fisheries needs to address.
MR. ANDREWS said it is. The Board is on a three-year cycle and
the allocation issue should be coming up within the next two
years.
SENATOR SEEKINS said he is pleased to see that Mr. Andrews would
not abrogate the people's right to vote on any kind of a
constitutional amendment. He said he believes Alaskans have the
right to vote on any properly introduced constitutional
amendment and he would find it hard to vote for anyone who does
not support that constitutionally guaranteed provision.
SENATOR SEEKINS then noted that Mr. Andrews said Alaska law
places subsistence use as the highest priority and says the
state cannot discriminate against a subsistence user based on
where he or she lives. He asked, "I'm wondering where you put,
in terms of priority then, personal use versus commercial use in
harmony with the Constitution."
MR. ANDREWS replied, "Mr. Chairman, I don't think you want to go
there on that one - in other words priority one, priority two,
priority three."
SENATOR SEEKINS said that many people tell him they want to feed
their family and question whether there should be a higher
priority for personal use than fish sold in the market.
MR. ANDREWS commented that he thinks allocation decisions are
made between commercial and recreational fisheries based on the
ability to harvest. 140 million salmon are harvested in the
state each year; the recreational fisheries do not have that
capacity. It is in the best interest of the state to give the
commercial fisheries some priority.
SENATOR SEEKINS said he views a recreational fishery as a catch
and release fishery. He is referring to the personal use fishery
- providing for one's family. He said the line between that and
subsistence is vague at times.
MR. ANDREWS told members that about 25 years ago, an Inupiat man
sat on the Board of Fish and Game when a proposal on catch and
release was put forward. He said Inupiats release fish that are
too small to eat; that was his idea of catch and release.
CHAIR OGAN thanked Mr. Andrews for his time.
SENATOR WAGONER moved to forward Mr. Andrews' name to the full
body for a confirmation vote.
CHAIR OGAN announced that without objection, the motion carried.
He then called an at-ease and, upon reconvening, announced the
committee would take up HB 61.
CSHB 61(FIN)-OIL & GAS TAX CREDIT FOR EXPLORATION/DEV
REPRESENTATIVE MIKE CHENAULT, sponsor of HB 61, told members
this legislation creates a new income tax credit to encourage
increased exploration and development for natural gas reserves
south of the Brooks Range. He explained that to qualify for the
credit, operators must successfully drill and develop new
reserves and produce natural gas for sale and delivery. He
described HB 61 as a "successful efforts" bill, meaning that no
credits will be given for dry holes or for wells that are
capped. He said the Cook Inlet and other areas in Alaska have
great potential but face high development costs and exploration
risk. By providing the credit for the successful efforts, more
exploration will occur, leading to much needed new natural gas
reserves. This will benefit the residents and businesses at no
direct cost to the state. Increased drilling will also aid the
general economic status of areas such as the Kenai Peninsula,
and Anchorage. In his opinion, the increased tax revenue from
additional gas production will more than offset any fiscal
impact from the proposed credit.
SENATOR SEEKINS referred to Version S and noted the definition
of a binding payment agreement on line 5. He asked whether that
is essentially an IOU.
MR. MARK GRABER, Department of Revenue (DOR), said he interprets
a binding payment agreement to mean a contract for a future
purchase.
SENATOR SEEKINS asked if DOR would consider a contract for a
future purchase as an expenditure in the exploration of natural
gas.
MR. CHUCK LOGSDON, DOR, said the binding agreement would be a
contractual obligation to make a payment.
CHAIR OGAN asked if there would have to be a contracted
expenditure for developing that particular field.
MR. LOGSDON said, "Yes, exactly."
SENATOR BEN STEVENS noted the bill refers to expenditures under
(a)(1) [page 2, line 5], in the amount of 10 percent of the
taxpayer's qualified capital investments; cash expenditures of
binding payment agreements. He said he would interpret that to
be a binding payment agreement, which would be, for example, the
interest on a 10-year note for $10 million that an investor
borrowed, or the cost of borrowing capital.
SENATOR SEEKINS said he understands that but he could read this
to say that before he went into production, during the time
frame when he could use the capital expenditures to get a 10
percent tax credit, if he were to have a binding payment
agreement down the line, he could ask for a 10 percent tax
credit on expenditures he had not yet made. He questioned
whether that was the intent.
SENATOR BEN STEVENS said he interprets that clause to say 10
percent of the total investments can be applied to the tax
credit. Therefore, the total investment would be some cash plus
borrowed money. The tax credit does not come into effect until
that investment begins to produce revenue. In other words, the
cost of borrowing capital is included in the investment cost
because one can forecast what the total payments will be for the
investment. He said he understands Senator Seekins' point that
the company will be taking a credit on something it has not yet
paid, but that is the cost of the investment.
SENATOR SEEKINS said he would consider it to be the cost of the
investment up until the point that a well began producing.
However, if the money borrowed also included the cost of
something for the development after the well began to produce,
that is outside the original intent.
SENATOR WAGONER said another point is that a company will have
financing for other aspects of the development, not just the
well.
CHAIR OGAN asked Mr. Logsdon his interpretation of that language
on page 2, line 1, regarding future contracts.
MR. LOGSDON responded, "I think the discussion that preceded -
there's something different than a cash expenditure, the intent
is to cover the cost of acquiring the assets that allow the
development of the gas field."
MR. KEVIN TABLER, manager of Union Oil Company, thanked members
for considering this legislation and informed them that the
qualified capital investments are listed in (i)(1) on page 3,
line 23. He then gave the following testimony.
Although [Union Oil] recognizes this bill may improve
the economics of marginal oil reservoirs discovered or
defined while exploring for gas, it is the
identification and development of new gas reserves in
Cook Inlet which are desperately needed if we're going
to sustain our local economy in Southcentral Alaska.
Without new gas reserves, value-added businesses and
industrial exporters will suffer cutbacks in
production, yielding to the ever-present Southcentral
utility needs. These disruptions and supplies, left
unchecked, will lead to a lower tax base,
unemployment, underemployment and loss of the monetary
cycling effect as dollars change hands throughout the
community.
I place an emphasis on Cook Inlet as Cook Inlet is
where Unocal's infrastructure base and manpower is
best [indisc.] Although we do have working interests
in fields on the North Slope, our ownership interest
there is such that we have a minor role in the
exploration and development of the operation of those
fields. While we recognize that incentives available
to North Slope explorers and producers will have a
beneficial impact on Unocal, the beneficial impact of
incentive legislation in Cook Inlet is magnified when
applied to the marginal nature of the mature fields
and the declining gas reserve base in Cook Inlet. For
this reason, incentive legislation such as HB 61 will
help achieve that desired effect of identifying new
gas reserves by providing a predictable and
quantifiable credit to help lessen the inherent risk
of costly exploration. The increased tax revenue from
additional hydrocarbon production will more than
offset the initial financial impact from the tax
credit. The objective is not to shift the larger share
of the existing pie to industry; rather the objective
is to increase the size of the pie for everyone.
Unocal's considerable stake in its Cook Inlet
infrastructure, manpower, and capital investments is
continually threatened by internal global competition
for investment dollars. Evidence of this vulnerability
is confirmed by the recent drilling of three dry holes
on the Kenai Peninsula by Unocal in an effort to meet
the growing demand of the natural gas market. Although
we were rewarded by a discovery in our Ninilchik unit
with our partner, Marathon, an uncertainty of success
has reduced our capital budget from $75 million last
year down to $35 million in 2003. Providing us credits
for successful efforts will definitely improve the
attractiveness of our Alaskan exploration projects.
Not only will HB 61 create an incentive for companies
currently active in gas exploration in Cook Inlet, the
attractiveness of such credit will act as an industry
incentive to those thinking of investing in
exploration south of the Brooks Range. If you think of
the credit as costing the state $1 for every $10
invested by someone else and paid out only in a
success scenario, the risk to the State of Alaska is
negligible when compared with the ancillary benefits
of new reserve identification.
In conclusion, Unocal believes this bill will add
certain attractive parameters to the companies during
the investment decision-making process with very
little exposure to the State of Alaska. Therefore, we
encourage your passage of this bill out of your
committee. Thank you for the opportunity to speak and,
if I can, I will answer any questions you may ask.
CHAIR OGAN noted that members had no questions. He then
continued taking testimony.
MR. JOHN BARNES, production manager of Marathon Oil Company's
Alaskan operations, thanked members for the time they spent
earlier with him discussing the bill. He clarified that
Marathon's view of the definition of binding payment agreements
is that they could include two types of situations. The first
would be for progress payments for a major facility
installation, which often extend beyond the date of initial
production. He pointed out that one of the changes to the bill
made by a previous committee was on page 2, line 8. The
provision "through the date the reserves produce gas for sale
and delivery;" is a trigger point in the bill. If a company had
a binding progress that came up after the initial gas, the
intent was to include that cost. Also, if a small operator is
unable to self-finance a project and seeks financing elsewhere,
the bill recognizes the payment scheme. He then gave a
Powerpoint presentation, the highlights of which follow.
· Marathon believes HB 61 will draw more exploration and
production investments to the State of Alaska. The primary
focus is on the Cook Inlet, but it would apply to other
Alaska sedimentary basins that are south of the Brooks
Range. The focus is on natural gas for which there is
competition for funds on an international basis. The intent
is to tilt the playing field toward Alaska's direction.
· HB 61 applies to 10 percent of qualified capital investment
and 10 percent of qualified expenses. Looking at a
timeline, a producer must explore and find gas, develop it,
and put it in initial production - four significant
hurdles. The producer cannot apply for the credit until all
four hurdles have been overcome. This incentive can be
factored into project economics. When a company is looking
at investment opportunities, HB 61 lays out a tax credit,
allowing a company to see in black and white the cost of
doing business in Alaska.
TAPE 03-42, SIDE B
SENATOR LINCOLN interrupted to note that Marathon Oil describes
HB 61 as only applying to successful efforts and asked how it
defines "successful." She then asked what would happen if a
discovery ends up being very small and would not otherwise be
economical to get to market.
MR. BARNES said the tax credit does not apply until the gas is
brought to market so, while a company can accumulate the costs
of the funds expended up to the point of first production, if
the gas does not go to market, the state will not be impacted at
all. He said "successful efforts" is defined as at the point at
which gas is produced into the marketplace.
SENATOR LINCOLN asked if the quantity does not matter, the only
thing that does matter is getting the gas to market.
MR. BARNES said the presumption would be that a company would
not invest in a non-economic project. The risk on capital is
much higher than the 10 percent credit. A company would make
incremental decisions during each step of the exploration
development process, based on the belief it will have a
successful project. If, at some point, the project looks like an
unsound return, the company will most likely decide not to
proceed.
CHAIR OGAN asked if a company drilled four wells off of one
platform and only found gas in one of the wells, whether the
company could take the investment credit for the four wells.
MR. BARNES said the intent is to find new gas so if the platform
was a new installation, the entire cost cycle would be subject
to the tax credit for funds spent until first production. If the
well was a new discovery from an existing facility, credit would
only be given for the cost of that well.
CHAIR OGAN asked about workovers.
MR. BARNES said workovers are unlikely to be new reserves.
SENATOR DYSON asked if 10 wells are drilled from a jack-up rig
and one well produces commercial quality gas, whether a company
would get credit for the other nine.
MR. BARNES said that most often in offshore production, a
company does a significant amount of forward spend prior to
first production, the reason being that a company wants to come
on production at the highest rate possible. At the same time, a
company is making efforts to accelerate production. As written,
HB 61 would include all expenditures up until the point of first
production. Therefore, if a company drilled three wells before
it put in an offshore pipeline, then the credit would include
all of those expenditures. He said although the state would
spend 10 percent, the company would be spending 90 percent.
SENATOR DYSON asked if that would include the wells that don't
produce.
MR. BARNES said he does not believe so.
SENATOR DYSON said Mr. Barnes could get back to him with a
definitive answer later. He asked, if Mr. Barnes determines the
state will not give credit for the non-producing wells, whether
the cost of the jack-up rate would be prorated.
MR. BARNES said that is probably an unlikely event because a
jack-up will come in and drill the exploration well and leave.
The company would then put a facility on the property for full
development. A jack-up typically drills one or two wells on a
structure to explore and delineate so those would be included.
He stated:
This is probably a policy decision that would
basically say if you drill a top [indisc.] structure
well and you find something and you drill down below
and you don't, a company would see that as the cost of
development. The State of Alaska might not. I think,
after looking at it, I guess I struggle - I think it's
an interpretive issue right now. I don't know that
it's clearly defined in here.
SENATOR DYSON said the intent of HB 61 is to give credit for
expenditures that lead to production.
MR. BARNES agreed.
SENATOR DYSON stated, "If I may, and this is back to Senator
Lincoln, I think what she was getting at, the intention is here
that you get credit for expenditures that lead to production."
MR. BARNES said that is correct.
SENATOR DYSON continued:
I want it on the record that it is my understanding of
what you said that all expenditures that don't lead to
production, you would not get a tax credit for and if
we ended up with an interpretation here or a court
case in the future, that certainly would be the basis
on which I'm going to vote for your bill.
MR. BARNES asked to clarify and stated:
Just trying to scan through my recollection of this
bill and then answer the questions as they come up -
in actuality, on page 3 of [CSHB 61(FIN)- Version S]
that you should have in front of you, line 25 through
about 27 probably aligns with Senator Dyson's comment
that it says, 'for real property or tangible personal
property used in this state in the exploration and
development of gas reserves in a gas reservoir....'
So, 'and development' would imply that it's probably
only the successful wells so I would imagine that -
and again perhaps the Department of Revenue might
comment but if I were in their shoes those would be
comments - would line up with your words, so maybe
it's not so silent.
SENATOR LINCOLN said she reads that language to mean a company
would receive the tax credit on the total tax liability in the
state, regardless of how small the producing gas is. She asked
for verification or clarification.
MR. GRABER, DOR, explained that the Alaska corporate net income
tax is not calculated on a field or reservoir basis so the
credit would apply to a corporation's overall Alaska tax
liability. He said that DOR could not apply it [to a field] even
if it wanted to because a corporation's net income liability in
Alaska is based on a percentage of its profits from its
worldwide operations.
CHAIR OGAN referred to the list of write-offs on page 4, and
asked if those items must be new or whether it applies to
existing items.
MR. GRABER said his understanding, according to the language on
page 2, line 7, is that the credit applies to new assets first
placed in service in Alaska.
MR. BARNES continued his presentation.
· HB 61 is needed because Alaska does not have much
exploration and production activity compared to other areas
in the world. Natural gas reserves in the Cook Inlet are
continuing to decline. He referred to a chart of Cook Inlet
proven gas reserves for the last 13 years from the
Department of Natural Resources (DNR) and said that proven
reserves are defined as those reserves in the ground that
have the highest confidence with enough supporting data to
book those reserves through the Securities and Exchange
Commission. In 1990, there was about 3500 bcf of gas in the
Cook Inlet basin. From 1995 to 1997, the reserves increased
but only due to a recalculation based on data on
performance on existing reservoirs. After that
recalculation was done, the reserves continued to decline
to 2000 bcf last year.
· Deliverability is the rate at which gas can be produced. A
chart on slide 7 compares supply and demand for the Cook
Inlet gas production. In 1997, Cook Inlet could produce
about 900 mcf per day - a world-class volume. By 2003,
production declined to 663 mcf per day. The demand is just
over 800 mcf per day so there is now a shortfall.
· Supply and demand rationalization is occurring due to the
fact there is not enough gas to feed the low price
consumer. The gas price is increasing, which has caused
further issues with industrial consumers.
SENATOR DYSON asked for the definition of WACOG.
MR. BARNES explained WACOG is an acronym for the weighted
average cost of gas. That is the average price that Enstar pays
to purchase gas from producers. Right now, the WACOG is about
$2.55 per mcf. The Henry Hub price is a mark-up price for the
Lower 48 gas markets. That price fluctuates; recently it was
$9.00 per mcf. He said that Enstar has contracted to purchase
gas with a floor of $2.75 with an upside price of a rolling
average. He assumes other contracts will reflect that same price
regime.
SENATOR DYSON asked if some customers were unable to get gas in
2003 because of the shortfall.
MR. BARNES said in 2003 there were industrial curtailments. The
average consumer comes first and then there is a hierarchy based
on price and contracts for utilities.
SENATOR DYSON asked who did not get gas.
MR. BARNES replied, "Agrium."
CHAIR OGAN asked if LNG is tied to the Henry Hub.
MR. BARNES replied:
LNG is tied to a landed price in Japan. There's a
contract there. And then there's the State of Alaska
royalty formula that calculates the netback for which
royalties are paid. So the LNG does fluctuate based on
a world market price scenario - not Henry Hub though.
CHAIR OGAN asked if the rough split of who gets what gas is
about one-third LNG, one-third Agrium, and one-third consumer.
MR. BARNES said that is a rough approximation.
CHAIR OGAN asked if the consumer price is about $2.55 and
everyone else's price is lower.
MR. BARNES said that is correct and is a function of legacy
contracts. He explained the Cook Inlet has a family of contracts
in place. When there was an oversupply of gas 20 years ago, gas
was signed for long-term commitments at very low prices. The
industrials, Enstar and Chugach Electric signed some contracts.
Supply and demand has shifted. There is a contract opening and
Enstar has an unmet requirement that was not previously
contracted. They are signing incremental contracts and,
reflective of price conditions, new contracts are at higher
prices.
SENATOR LINCOLN referred to the supply and demand chart and
commented that she expected to see a fluctuation in demand
during the time period from 1997 to 2003. She asked why demand
remained consistent over six years.
MR. BARNES said that represents the peak requirement that occurs
on the coldest day of the year. That is when Enstar, Chugach
Electric and the industrials take their maximum daily
requirements. He said there has been a small amount of growth in
the Anchorage economy. Enstar typically forecasts about 1 to 2
percent growth per year. The average demand is going up but it
peaks seasonally so the total requirement on the graph
represents what happened on the coldest day of the year.
CHAIR OGAN noted other areas of the country warehouse gas to
meet peak demands but no one is doing that in Alaska.
MR. BARNES said no one currently has gas storage available,
although that possibility has been discussed.
He then continued with his presentation.
· The current proven reserves in Cook Inlet are 2000 bcf,
with a 10-year production life that will decline over time.
Market forces will affect rate declines but, on an absolute
basis, the production life is typically represented as 10
years. Various government entities and private groups have
estimated the probable reserves at 1050 bcf and the
possible reserves at 2100 bcf. The chance of finding
probable reserves is less than 50 percent; the chance of
finding possible reserves is less than 10 or 20 percent.
Therefore, a potential opportunity of 3150 bcf exists.
CHAIR OGAN asked who provided those figures.
MR. BARNES said the Potential Gas Committee, an industry group,
provided the numbers. That committee looks at natural gas
resources across various basins in the United States; it is
funded by private and public dollars. The Minerals Management
Service has done other studies. The numbers typically range from
1000 to 3000 bcf. He believes that number excludes non-
conventional resources, such as coal bed methane or other
alternatives that may be there. He said he does not recall
seeing any numbers from DNR.
CHAIR OGAN asked if there are any bookable proven reserves at
this point.
MR. BARNES said there are not. He then continued.
· Regarding the impacts of HB 61 on the State of Alaska, it
should stimulate Cook Inlet and other basin exploration. It
will aid in maintaining the Cook Inlet 200+ bcf/year
production, the equivalent of a 13th month of North Slope
production. He said the state is proud of North Slope
production but should also be proud of Cook Inlet gas
production. HB 61 should provide gas for the Cook Inlet
utilities, industrials, jobs, royalties, and taxes.
· Marathon believes the fiscal impact to the State of Alaska
will be positive. Both fiscal notes show a zero fiscal
impact but discuss the difficulty of estimating the outcome
of discoveries. Some of the factors that make the positive
impact difficult to estimate are the number of developments
that will be "incentivized," what new work will happen, how
much gas will be discovered, the royalty value, and how
much will be spent for exploration and development.
· The table entitled Fiscal Impact to State of Alaska is
based on the following assumptions: a varied field size
from zero to 500 bcf, development cost of 50 cents per mcf,
royalty at 12.5 percent, severance tax at 7.5 percent, ad
valorem tax at 2.7 percent, and a gas sales price at $2.50
per mcf. For example, if an operator were to find a field
size of 50 bcf, the operator would spend about $25 million.
The tax credit would amount to $2.5 million. The gross
revenue to the state would be $125 million. Royalty on a
state lease at 12.5 percent would equal $15.6 million. The
severance tax at 7.5 percent would equal $9.3 million and
the ad valorem tax would amount to about $1 million. The
total tax take would equal $26 million. Therefore, an
operator would spend $25 million to find, develop and sell
gas. That operator is eligible for a $2.5 million credit.
The state would ultimately receive $26 million. Therefore,
$25 million was originally invested in the state and $26
million is received later.
MR. BARNES said based on his conceptual model, the State of
Alaska could receive from $3 to $10 of additional revenue for
each $1 of tax credit. The $3 amount is the lowest amount for a
discovery not on state leased property. The state would still
receive severance tax and other funds. Marathon believes this
credit is needed now. There is not enough exploration in the
Cook Inlet right now to meet demand. If the Cook Inlet burns 200
bcf per year at 50 cents per mcf, at least $100 million per year
needs to be consistently spent on natural gas development. A lot
of money is spent on offshore oil operations in the Inlet. Other
areas of the state would also benefit from exploration and
development, for example the Nenana Basin. Finally, new
discoveries take about 3 to 5 years to bring gas to market.
MR. BARNES told members that to measure whether HB 61 has been a
success, the state should look to see whether lease activity,
drilling activity, construction activity and production
increased. The credits apply to income tax so they will only
apply to companies already in business and paying taxes in the
state. He repeated that for every $1 spent by the state, $10
will be spent to find and develop new reserves.
CHAIR OGAN asked Mr. Barnes to suggest a timeframe for measuring
success.
MR. BARNES said it will take time for industry to react. He said
if a company already has a lease, the company will have to do
seismic testing. Then it will have to progress the project
through the corporation to get it funded. He said most companies
are now multinational; projects are judged against other
worldwide investment opportunities. He hoped the state would
begin to see early indicators in the next year or two. Some
companies are already exploring but not on a high, sustained
level. He said he hopes, after three to five years, the state
could see increased activity.
CHAIR OGAN said he has considered adding a sunset provision to
the bill to require the legislature to review whether the
program has been successful.
MR. BARNES said 10 years equals about two to three investment
cycles for a company. He said if no activity is occurring after
five years, the state might review whether this is the correct
incentive to use. Marathon believes a 10-year cycle is best
because it takes three years from discovery to first gas, and
the lease work, seismic, and permit approvals take a few years.
He believes five years would not be long enough.
SENATOR BEN STEVENS said the committee was provided information
about collective ownership of various fields in Cook Inlet. He
noted that Marathon owns 100 percent of several fields and is a
partner in a few multiple and joint ownership fields. He asked
how the tax credit would be delineated when multiple owners
invest in a field.
MR. BARNES explained that most field productions are not held in
limited liability corporations. They operate under a joint
operating agreement controlled by the State of Alaska in most
cases. In that agreement, ownership is defined by percentage.
Funds are invested along those percentages, earnings are made
along those percentages and then royalty is paid. In this type
of an ownership model, companies would pay taxes individually
and invest individually. They know how much money they spent in
a field that would qualify.
SENATOR BEN STEVENS asked if that would be part of the component
mentioned in subsection (d) on page 2, line 24, which addresses
a subscribed form designed by the department. He asked if that
form exists now.
MR. LOGSDON said documentation of the joint operating agreement
would substantiate the amount of the investment. Whether that
would be concluded in the form is something DOR would examine.
SENATOR BEN STEVENS asked if Mr. Logsdon's office would be
developing that form.
MR. LOGSDON said it would. DOR will develop this form associated
with this tax credit for inclusion with the tax return.
SENATOR BEN STEVENS asked if DOR approves the operating
agreements.
MR. LOGSDON said DNR would approve the operating agreements,
which would also be subject to the Alaska Oil and Gas
Conservation Commission's technical production compliance
requirements.
CHAIR OGAN thanked Mr. Barnes. He then asked Mr. Logsdon to
brief the committee on DOR's fiscal note.
MR. LOGSDON stated the Administration neither supports nor
opposes the bill. DOR prepared a fiscal note because there are
some uncertainties. He pointed out that HB 61 is not exactly the
same as the federal investment tax credit but it provides a 10
percent credit on qualified capital investment. It also includes
qualified services, which are defined in the bill. He said one
question that was addressed in the fiscal note is that the
corporate income tax liability in the State of Alaska is not
specific to an apportioned amount of federal net income. He said
the main uncertainty is the number of credits that will be taken
and to what extent market forces alone will affect activity. In
balancing the two, DOR elected to calculate a zero fiscal note.
CHAIR OGAN cited the last two sentences in the fiscal note,
which reads, "A risk to the state is high if gas prices spur
development on their own regardless of the tax credit. The state
could be in the position of providing a tax credit that is no
longer necessary to promote development." He asked if DOR has
had an opportunity to review the models provided by Mr. Barnes
in which the state would receive $10 for every $1 spent.
MR. LOGSDON said he has and that Mr. Barnes' calculations of the
potential benefits are correct. His point was that the only real
risk, which applies to any tax credit, is that the amount of
activity attributed to the incentives might have happened anyway
due to market forces.
SENATOR LINCOLN said, in her mind, a neutral position on
legislation implies problems with the bill. She asked if the
Chair plans to hold the bill in committee.
CHAIR OGAN said he plans to recess to the call of the Chair and
let members consider the legislation over night. He asked
members to consider placing a sunset provision in the bill based
on the department's fiscal note. He said he would rather let the
market drive development. He pointed out that artificially low
prices on contracts are affecting the Cook Inlet market right
now. He believes the Regulatory Commission's action to tie the
price to the Henry Hub was helpful.
In response to Senator Lincoln's comment, SENATOR BEN STEVENS
said his position is that CSHB 61(FIN) is a major policy call
for the legislature to make, not the implementers. He thinks
this policy call should be based on whether it will create
incentives for investment. To do that, the legislature must
weigh the positives and negatives of the incentive. It will
provide a 10 percent credit against the investment cost only to
an investment that will generate revenue. Therefore, the
positive of the incentive is that it creates a royalty stream, a
severance tax, and additional property tax. The incentive will
only be provided if a company produces revenue.
TAPE 03-43, SIDE A
SENATOR BEN STEVENS said he strongly supports movement of the
bill. He views the fiscal note as indeterminate on the up side.
CHAIR OGAN said he too supports investment tax credits. He
decided to expand his own business based on a federal tax
credit. He supports this legislation and would like to see it
pass as soon as possible. He then recessed the meeting to the
call of the Chair at 5:17 p.m.
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