Legislature(2011 - 2012)BUTROVICH 205

02/28/2011 03:30 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Bills Previously Heard/Scheduled
+= SB 85 TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT TELECONFERENCED
Heard & Held
Presentation by Departments
+= SB 91 SPORT FISHING GUIDING SERVICES TELECONFERENCED
Moved SB 91 Out of Committee
Public Testimony
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 28, 2011                                                                                        
                           3:35 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bert Stedman                                                                                                            
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Cathy Giessel                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 91                                                                                                              
"An Act amending the termination date of the licensing of sport                                                                 
fishing operators and sport fishing guides; and providing for an                                                                
effective date."                                                                                                                
                                                                                                                                
     - MOVED SB 91 OUT OF COMMITTEE                                                                                             
                                                                                                                                
SENATE BILL NO. 85                                                                                                              
"An Act providing for a tax credit applicable to the oil and gas                                                                
production tax based on the cost of developing new oil and gas                                                                  
production; and providing for an effective date."                                                                               
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB  91                                                                                                                  
SHORT TITLE: SPORT FISHING GUIDING SERVICES                                                                                     
SPONSOR(s): SENATOR(s) MCGUIRE                                                                                                  
                                                                                                                                
02/16/11       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/16/11       (S)       RES, FIN                                                                                               
02/25/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/25/11       (S)       Heard & Held                                                                                           
02/25/11       (S)       MINUTE(RES)                                                                                            
02/28/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
BILL: SB  85                                                                                                                  
SHORT TITLE: TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                           
SPONSOR(s): SENATOR(s) WAGONER                                                                                                  
                                                                                                                                
02/07/11       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/07/11       (S)       RES, FIN                                                                                               
02/25/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/25/11       (S)       Heard & Held                                                                                           
02/25/11       (S)       MINUTE(RES)                                                                                            
02/28/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MIKE PAWLOWSKI                                                                                                                  
Staff to Senator McGuire                                                                                                        
Alaska State Legislature                                                                                                        
Juneau, AK                                                                                                                      
POSITION STATEMENT: Commented on SB 91.                                                                                       
                                                                                                                                
KEVIN BANKS, Director                                                                                                           
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Juneau, AK                                                                                                                      
POSITION STATEMENT: Commented on SB 85.                                                                                       
                                                                                                                                
KATHY FORESTER, Commissioner                                                                                                    
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Commented on SB 85.                                                                                       
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:35:42 PM                                                                                                                    
CO-CHAIR THOMAS WAGONER called the Senate Resources Standing                                                                  
Committee meeting to order at 3:35 p.m. Present at the call to                                                                  
order were Senators French, McGuire, Wagoner and Paskvan.                                                                       
                                                                                                                                
             SB  91-SPORT FISHING GUIDING SERVICES                                                                          
                                                                                                                                
3:36:18 PM                                                                                                                    
CO-CHAIR WAGONER announced SB 91 to be up for consideration.                                                                    
                                                                                                                                
MIKE  PAWLOWSKI, staff  to  Senator McGuire,  sponsor  of SB  91,                                                               
recapped  that  this  measure  is   this  just  a  pure  one-year                                                               
extension of the existing program.                                                                                              
                                                                                                                                
CO-CHAIR WAGONER found no public testimony and closed it.                                                                       
                                                                                                                                
CO-CHAIR  PASKVAN  moved to  report  SB  91 from  committee  with                                                               
individual  recommendations and  attached  fiscal note(s).  There                                                               
were no objections and it was so ordered.                                                                                       
                                                                                                                                
3:37:35 PM                                                                                                                    
At ease from 3:37 to 3:39 PM.                                                                                                   
                                                                                                                                
3:39:23 PM                                                                                                                    
        SB  85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                     
                                                                                                                                
CO-CHAIR  WAGONER announced  SB  85 to  be  up for  consideration                                                               
mainly for questions of the  administration. From the AOGCC Cathy                                                               
Foerster and  John Norman, from  Department of  Natural Resources                                                               
(DNR)  Kevin Banks,  and  from the  Department  of Revenue  (DOR)                                                               
Jerry Burnett were present.                                                                                                     
                                                                                                                                
3:40:14 PM                                                                                                                    
He said he  had distributed nine issues that he  and his chief of                                                               
staff  came up  with  while  talking to  various  members of  the                                                               
administration staff  - AOGCC, DNR  and DOR. But, before  they go                                                               
there, he asked if there were any other questions.                                                                              
                                                                                                                                
SENATOR  FRENCH asked  what it  costs to  get a  field ready  for                                                               
production.                                                                                                                     
                                                                                                                                
CO-CHAIR WAGONER remarked that was question number 7.                                                                           
                                                                                                                                
3:41:20 PM                                                                                                                    
KEVIN BANKS,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural  Resources (DNR),  said  he didn't  have  those kinds  of                                                               
figures before him at the  moment. Some information may have been                                                               
published  along with  the development  of the  Nakiachuk project                                                               
and   the  Oooguruk   project,  which   are  two   fairly  recent                                                               
developments and he  remembered those numbers to be  in excess of                                                               
$1 billion.  He said his  information will  be based on  what has                                                               
been published in the trade papers and the Anchorage press.                                                                     
                                                                                                                                
SENATOR FRENCH said that would be very helpful.                                                                                 
                                                                                                                                
CO-CHAIR WAGONER  said he  asked a couple  of people  today about                                                               
prices of  just drilling a  well on the  North Slope and  found a                                                               
range from $12 million to $300  million depending on the well and                                                               
its location.                                                                                                                   
                                                                                                                                
CO-CHAIR  PASKVAN asked  what the  administration might  think is                                                               
the correct parameters  for a sunset and then  what the interplay                                                               
of this  credit would be  with the  other credits. He  also asked                                                               
about the ring fence issue.                                                                                                     
                                                                                                                                
MR.  BANKS responded  to his  first question,  how long  it takes                                                               
some  projects to  get  off the  ground and  said  some start  up                                                               
within four  years, but the  average since Alpine started  in the                                                               
early 90's is around seven years.                                                                                               
                                                                                                                                
3:44:15 PM]                                                                                                                   
SENATOR WIELECHOWSKI joined the committee.                                                                                      
                                                                                                                                
CO-CHAIR WAGONER said the problem with  Cook Inlet is that it has                                                               
no production  tax now,  so SB 85  wouldn't be  applicable there,                                                               
although it would apply in the rest of the state.                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI asked  if someone did develop  in Cook Inlet                                                               
could they write that off of  their production taxes on the North                                                               
Slope.                                                                                                                          
                                                                                                                                
SENATOR  FRENCH said  he thought  that any  company operating  in                                                               
Alaska would be able to do that.                                                                                                
                                                                                                                                
MR.  BANKS agreed  that  it was  also his  impression  that if  a                                                               
company  was doing  some  work  in the  NPRA  and accruing  these                                                               
credits  over  the  time  it  took  to  go  from  exploration  to                                                               
production,  credits could  apply  to taxes  paid anywhere  else.                                                               
However, at least the bill does limit how long that may be done.                                                                
                                                                                                                                
CO-CHAIR WAGONER said  AOGCC was on line earlier  and they talked                                                               
about them being the agency  to certify the production instead of                                                               
DNR.                                                                                                                            
                                                                                                                                
3:47:43 PM                                                                                                                    
KATHY  FORESTER, Commissioner,  Alaska Oil  and Gas  Conservation                                                               
Commission (AOGCC),  answered that would be  consistent with what                                                               
the  agency   already does  and  that wouldn't  require a  fiscal                                                               
note.                                                                                                                           
                                                                                                                                
CO-CHAIR  WAGONER stated  that AOGCC  certifies statewide,  while                                                               
DNR does it only on state lands.                                                                                                
                                                                                                                                
MS. FORESTER said that is a good point.                                                                                         
                                                                                                                                
CO-CHAIR  WAGONER asked  her to  speak a  little bit  about their                                                               
earlier  discussion  on  the  "pool"   as  it  applies  to  shale                                                               
production.                                                                                                                     
                                                                                                                                
MS.  FORESTER  explained  that  these  shales  tend  to  be  just                                                               
regional trends that  cover large areas. While  the drainage area                                                               
for one well may not impact  other wells, they have the expertise                                                               
to be able it say if  there is continuity and contiguity, then it                                                               
really is one  reservoir. Then the onus would be  on the operator                                                               
to scientifically prove it is a new discovery.                                                                                  
                                                                                                                                
3:49:49 PM                                                                                                                    
SENATOR WIELECHOWSKI  said the committee just  had a presentation                                                               
by Great  Bear on Saturday  where they talked about  the Shugalik                                                               
Formation  that appeared  to run  the whole  length of  the North                                                               
Slope west to east. Would that be considered one pool?                                                                          
                                                                                                                                
MS.  FORESTER replied  that the  operator would  have to  provide                                                               
clear proof  of an area  being a separate  pool like a  big fault                                                               
and seismic data  showing a break in contiguity.   In the absence                                                               
of that proof the agency would say it is one pool.                                                                              
                                                                                                                                
SENATOR  WIELECHOWSKI  said  they  also hear  that  the  Shugalik                                                               
Formation flows into Prudhoe. He  asked if the Kuparuk and Alpine                                                               
are flowing from the same reservoir.                                                                                            
                                                                                                                                
MS. FORESTER  replied that  Kuparuk, Alpine  and Prudhoe  are all                                                               
separate pools,  but they are all  fed by the deeper  shales. So,                                                               
as the shale goes east to west  it would be the source that feeds                                                               
all of those pools.                                                                                                             
                                                                                                                                
SENATOR PASKVAN  said he understands  that three layers  of shale                                                               
in Alaska are  considered the shale source rocks.  Would each one                                                               
of  those layers  in the  east/west "Fairway"  be considered  one                                                               
pool?                                                                                                                           
                                                                                                                                
MS.  FORESTER  answered  no.  If  they  are  not  continuous  and                                                               
contiguous with  one another, if  they are at  different vertical                                                               
depths they wouldn't be considered one pool.                                                                                    
                                                                                                                                
CO-CHAIR  PASKVAN said  he understands  that  those three  source                                                               
rocks are on  top of one another and asked  if an individual pool                                                               
can run for 300-500 miles.                                                                                                      
                                                                                                                                
MS. FORESTER answered yes.                                                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI  said they  heard testimony that  Great Bear                                                               
could drill  down and  hit the  HRZ, the  Shublik and  the Kingak                                                               
pools. So, the  way this bill is written would  they get separate                                                               
tax credits  or would  they possibly  get additional  tax credits                                                               
for one drill that went through three different pools?                                                                          
                                                                                                                                
MS. FORESTER  replied that she  didn't know the answer.  They are                                                               
three separate  pools. If one  well drilled through all  three of                                                               
them  that would  be the  discovery well  for all  three. Whether                                                               
Great Bear chose to develop  the three simultaneous or separately                                                               
would be their call. They  could develop them separately but they                                                               
would  have one  discovery  well  and each  pool  would have  its                                                               
trigger start when that pool produces.                                                                                          
                                                                                                                                
3:54:27 PM                                                                                                                    
SENATOR  PASKVAN   asked  if  the   first  producer   accesses  a                                                               
particular pool - the three layers  of source rock as she defines                                                               
it  - could  other  potential  developers be  able  to claim  the                                                               
credit if Great Bear were to penetrate all three pools.                                                                         
                                                                                                                                
MS.  FORESTER  replied  if  the  first  operator  penetrates  and                                                               
discovers all three, then they  get the credit for the discovery.                                                               
The next  trigger is when  they complete  the first well,  and if                                                               
they complete a well in all  three, then that starts the clock on                                                               
all three.  But what  she said  earlier still  holds -  those are                                                               
three separate pools,  but if another operator comes  in 50 miles                                                               
away and provides data that  says their discovery and development                                                               
is not in  communication with theirs, then they could  get it. It                                                               
would have  to be a  geological barrier that wouldn't  allow them                                                               
to communicate.                                                                                                                 
                                                                                                                                
MR. BANKS  added if the  goal of  this legislation is  to provide                                                               
credits for  multiple penetrations in  either one of  those shale                                                               
horizons,  then obviously  they will  need some  work. Everything                                                               
Ms. Forester  said is correct.  If the idea  is to provide  for a                                                               
set  of development  credits for  the first  discovery of  a well                                                               
that is capable of producing  in paying quantities, if there were                                                               
no faulting or  discontinuities in the shale layer  that had been                                                               
penetrated by  that discovery  well, it would  mean that  no more                                                               
credits  would  be offered  to  the  other  players that  may  be                                                               
drilling into the shale prospect.                                                                                               
                                                                                                                                
CO-CHAIR WAGONER said  that is what he was starting  to think and                                                               
he had  gotten past where he  wanted to go, because  his idea was                                                               
to  generate activity  to fill  up the  TAPS pipeline.  He didn't                                                               
want  to  be  concerned  over  the pool  issue  because  this  is                                                               
entirely different  than a  pool of  oil caused  by a  trap. They                                                               
must look  more at  the language  he concluded.  He asked  him to                                                               
talk about unitization.                                                                                                         
                                                                                                                                
3:58:13 PM                                                                                                                    
MR.  BANKS responded  that  typically  they want  to  see a  unit                                                               
formed  by DNR  (the AOGCC  can do  it, too)  to assure  that the                                                               
resources are  developed and conserved in  that development. They                                                               
also want  to make  sure correlative  rights are  protected where                                                               
there may  be different ownership  of adjoining leases.  The idea                                                               
behind  unitization  is  conservation,  correlative  rights,  and                                                               
DNR's  interest  in  the economic  development  of  the  resource                                                               
without  duplicative  facilities  on  the  surface.  If  you  can                                                               
imagine a  conventional pool of oil  or gas, the idea  is to make                                                               
sure that all of the lease  tracts that may overlay parts of that                                                               
pool that  contribute to production  get their fair share  of the                                                               
cost and the revenues from its development.                                                                                     
                                                                                                                                
Oil  and gas  shale may  be  more complicated  because the  wells                                                               
produce from  a fairly  limited distance from  the well  bore and                                                               
don't necessarily  drain the oil  or gas from  another lease/well                                                               
nearby. So,  the issue surrounding  unitization with  shale would                                                               
be  a  little  bit  more complicated  and  they  are  considering                                                               
whether or  not unitization  is even necessary  for a  shale play                                                               
since each  lease can be  developed from  a set of  wells without                                                               
concern that they may drain the adjoining leases.                                                                               
                                                                                                                                
CO-CHAIR WAGONER  said it  really depends more  on the  acres per                                                               
well than unitization.  In other words they  are talking dropping                                                               
down to a  surface size of about 80 acres  and if you're drilling                                                               
into an  80-acre spot  - the department  showed a  perspective of                                                               
what would  happen - it  was kind  of a checkerboard.  Would that                                                               
not be the case?                                                                                                                
                                                                                                                                
MR. BANKS  responded that was most  of the story. In  places like                                                               
North Dakota  the average  well spacing  was something  under 160                                                               
acres. But  it's also how close  to the lease boundary  the wells                                                               
are drilled and that's under the purview of the AOGCC.                                                                          
                                                                                                                                
CO-CHAIR PASKVAN asked if essentially  the lease boundaries would                                                               
be sufficient in and of themselves  to define access it the money                                                               
from that well for a shale  play - because it's not draining from                                                               
across the lease boundary.                                                                                                      
                                                                                                                                
MR. BANKS  responded that is  where he  is headed with  this, and                                                               
while his understanding of other  jurisdictions like North Dakota                                                               
and Texas is limited, he  didn't think unitization is common with                                                               
shale plays  because there  isn't a  concern about  drainage from                                                               
one lease to another.                                                                                                           
                                                                                                                                
4:02:57 PM                                                                                                                    
MS. FORESTER  said the only  time unitization might  be warranted                                                               
in this kind of development is  if there are economies that could                                                               
encourage  greater ultimate  recovery  to be  gained  - in  other                                                               
words stopping competition between checkerboard small leases.                                                                   
                                                                                                                                
CO-CHAIR   WAGONER   directed   the  discussion   to   commercial                                                               
production.                                                                                                                     
                                                                                                                                
MR. BANKS said he was  looking at "commercial production" on page                                                               
2, line 24,  and thought about using an  expression like "capable                                                               
of  production in  paying quantities"  in terms  of "expenditures                                                               
that are incurred after the  completion of the first well drilled                                                               
that  discovers a  pool capable  of  commercial production."  The                                                               
department  has definitions  in its  regulations for  purposes of                                                               
defining  what  the expression  means  that  they could  use  for                                                               
production  in   paying  quantities.   He  also  wanted   to  see                                                               
"sustained  production"  on  line  25  as  a  requirement  before                                                               
commencement  of production  in  "paying  quantities". Again,  he                                                               
said  the  DNR uses  regulatory  language  for "unitization"  and                                                               
"sustained production" that the committee might want to look at.                                                                
                                                                                                                                
SENATOR  FRENCH  asked him  to  walk  the committee  through  the                                                               
timeline  or typical  stages of  development that  will help  him                                                               
better understand what they are  potentially putting the state on                                                               
the hook for  - before getting to paying  quantities. The seismic                                                               
and  exploration work  has been  done, an  area has  been located                                                               
where they think  it's worth money to drill -  all of those costs                                                               
are excluded by this because they haven't drilled a well yet.                                                                   
                                                                                                                                
4:06:21 PM                                                                                                                    
MR. BANKS  replied they are  basically talking about a  period of                                                               
time that could  be as little as 4  years to as long as  11 or 12                                                               
years, which  is what is seen  in conventional plays in  the last                                                               
15 years or  so. Any seismic and other work  that might have been                                                               
done prior to  the drilling of the exploration well  would not be                                                               
entitled to a credit in this  bill. In fact, the exploration well                                                               
itself  would not  be entitled  to these  credits. They  actually                                                               
begin when  expenditures are  being made to  go through  the next                                                               
stages and he  defined those as basically  two: delineation where                                                               
further wells  are drilled to  get a better understanding  of the                                                               
extent of the prospect that  has been discovered. The exploration                                                               
well tells you that  oil is there; now you need  to know just how                                                               
well this  area can be  defined and how much  eventual production                                                               
can be produced from it.                                                                                                        
                                                                                                                                
And, after delineation, a company  would be making commitments to                                                               
begin development.  This stage includes the  construction of many                                                               
of  the surface  facilities and  roads, pipelines/flow  lines and                                                               
processing  facilities.  Finally  it  gets  to  the  point  where                                                               
production  begins   and  the  commencement  of   "sustained"  or                                                               
"production in  paying quantities"  would occur  when all  of the                                                               
kit  is  in place  and  ready  to  go.  The period  between  this                                                               
delineation  and  development  stage  can be  anywhere  from  4-7                                                               
years. Folks at  Great Bear think they can get  their shale plays                                                               
into production  must faster, but  that depends on  their ability                                                               
to access  the wells  365/days a  year in order  to move  the oil                                                               
into a pipeline.                                                                                                                
                                                                                                                                
4:09:30 PM                                                                                                                    
SENATOR  FRENCH asked  where Alaska  is in  this process  - where                                                               
they  know  there is  a  pool  capable of  commercial  production                                                               
because a  well has  been drilled there,  but they  haven't begun                                                               
the surface  development. Is there  a "perfect poster  child" for                                                               
this bill?                                                                                                                      
                                                                                                                                
MR.  BANKS  replied  that  he could  think  of  situations  where                                                               
exploration wells have  been drilled and the first  question - is                                                               
oil there  - has  been answered. Now  the delineation  process is                                                               
beginning. He  just recently  unitized the  Dewline Unit  and the                                                               
Beechey Point  Unit north of  Prudhoe Bay.  A couple of  units in                                                               
NPRA  have had  exploration  wells drilled,  but the  delineation                                                               
still needs to  occur. The bill as it is  now looks for prospects                                                               
that  haven't  been  explored  and  exploration  drilling  hasn't                                                               
occurred. He  didn't know  if they  have a  lot of  candidates in                                                               
line for that.                                                                                                                  
                                                                                                                                
MS.  FORESTER  added an  example  of  something that  is  already                                                               
discovered that  operators are playing  with but have  never made                                                               
commercial and  that would  be the Ugnu.  That throws  in another                                                               
question: do you  want to incentivize that sort  of production as                                                               
well?                                                                                                                           
                                                                                                                                
CO-CHAIR WAGONER said that is something to think about.                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN asked  where Sag  River would  fit in  with the                                                               
exploration delineation development timeline.                                                                                   
                                                                                                                                
MS. FORESTER  said she wasn't  familiar with the details  of that                                                               
project.                                                                                                                        
                                                                                                                                
MR. BANKS replied  that Sag River is a tight  sand formation that                                                               
has been under production at Milne  Point. He didn't know to what                                                               
extent this type of play exists in a lot of other places.                                                                       
                                                                                                                                
4:12:39 PM                                                                                                                    
CO-CHAIR  WAGONER asked  Ms. Forester  about  the possibility  of                                                               
overproducing  a field  to get  the high  credits to  offset gold                                                               
plating development  costs. The  result would  be to  deplete the                                                               
fields.                                                                                                                         
                                                                                                                                
MS.  FORESTER  asked   if  he  was  talking   about  an  operator                                                               
discovering the pool  and then completing the first  well but not                                                               
establishing production until he had put in all the wells.                                                                      
                                                                                                                                
CO-CHAIR  WAGONER  replied no.  He  is  talking about  a  company                                                               
getting high  credits for its  tax liability  with overproduction                                                               
which would  deplete the wells.  Would a  cap help them  get away                                                               
from the risk of gold plating?                                                                                                  
                                                                                                                                
MS.  FORESTER said  if he  meant they  couldn't recover  any more                                                               
than their liability and that  would prevent them from gaming the                                                               
system,  her   answer  is  that   she  never   underestimates  an                                                               
operator's ability to get "cagey."                                                                                              
                                                                                                                                
CO-CHAIR WAGONER said they are just trying to be careful.                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI said one concern  he had was that production                                                               
curves  typically spike  up and  then slope  downward, and  since                                                               
they have companies that will go  out and spend maybe hundreds of                                                               
millions  of  dollars  developing  the  well,  he  asked  if  she                                                               
foresees a situation  where a company tries to take  out more oil                                                               
and having that potentially damage  the field or cause waste down                                                               
the line.                                                                                                                       
                                                                                                                                
MS.  FORESTER answered  that  existing  statutes and  regulations                                                               
require  operators to  come to  the AOGCC  for pool  rules before                                                               
they begin production and they  have to demonstrate how they plan                                                               
to  drill  the  field,  plumb  up the  wells  and  produce  them.                                                               
Prevention of waste is one of  the primary things AOGCC does. So,                                                               
if an operator  came in with a  plan that in some  way looks like                                                               
it would be causing waste, they would deny it.                                                                                  
                                                                                                                                
CO-CHAIR  PASKVAN  said he  didn't  understand  how gold  plating                                                               
development costs fit in.                                                                                                       
                                                                                                                                
CO-CHAIR WAGONER  gave an example  of when a company  would spend                                                               
money that  they don't necessarily  have to spend to  achieve the                                                               
goal -  like using a  bigger machine  than necessary just  to get                                                               
more money back on the credit side.                                                                                             
                                                                                                                                
SENATOR  FRENCH  said he  had  a  flip-side question  to  Senator                                                               
Wielechowski's one about  accelerated production: what incentives                                                               
might be in the bill  to delay commencement of production because                                                               
a  company  would  be  getting  a  credit  for  every  nickel  of                                                               
development costs they incur.                                                                                                   
                                                                                                                                
4:16:54 PM                                                                                                                    
SENATOR STEVENS joined the committee.                                                                                           
                                                                                                                                
MS. FORESTER responded that is  something an operator would do if                                                               
the credit  wasn't capped  at their tax  liability for  any given                                                               
year as well  as capping the number of years  in which the credit                                                               
can be used, which a sunset would accomplish.                                                                                   
                                                                                                                                
MR. BANKS  added that section  (c) on page  3, line 2,  creates a                                                               
tension because it says a company  is not entitled to cash in its                                                               
credits until  production begins.  The other  factor is  that any                                                               
delay in  receiving the  cash for credits  will play  against the                                                               
net present value of that delay.                                                                                                
                                                                                                                                
4:19:58 PM                                                                                                                    
CO-CHAIR WAGONER  emphasized that  the credit  is limited  by how                                                               
much a company's production is per year.                                                                                        
                                                                                                                                
CO-CHAIR PASKVAN asked again where  these credits fit in with all                                                               
the other credits the state offers.                                                                                             
                                                                                                                                
MR. BANKS responded  that a company might be entitled  to some of                                                               
the AS  43.55.025 credits  for the  exploration well  during this                                                               
development state -  post discovery - and is not  entitled to any                                                               
other kind of  credit, the capital credits for  example. And then                                                               
post production  the tax is calculated  on the basis of  just the                                                               
normal deductions  and then  as the chairman  has pointed  out on                                                               
page 3,  line 23,  of SB 85  this credit that  is limited  by the                                                               
production  attributable to  this  particular  property. So,  the                                                               
taxpayer has to  make some kind of judgment about  whether or not                                                               
this bill is  more valuable because they are  getting 100 percent                                                               
of their  development costs paid  for but  they have to  wait for                                                               
the  cash and  they also  have a  cap on  how much  they can  get                                                               
versus just the  normal 20 percent capital  credits allowed under                                                               
AS 43.55.023.                                                                                                                   
                                                                                                                                
4:23:07 PM                                                                                                                    
SENATOR WIELECHOWSKI  said he  had two  concerns with  the credit                                                               
issue:  potentially delaying  well completion  and gold  plating.                                                               
For instance,  maybe Jeeps are  the standard on the  North Slope,                                                               
but then they  start using Humvees which are twice  the price. He                                                               
wasn't sure they had fully addressed either concern.                                                                            
                                                                                                                                
MR. BANKS  said he  would have  to think  about the  gold plating                                                               
issue and commented  that whenever the state is paying  a part of                                                               
the cost  it represents  some concern and  the larger  the credit                                                               
the bigger  the problem. Here,  even though the state  is willing                                                               
to cover 100  percent of the costs during  the development stage,                                                               
whether or not a company  could get enough production to generate                                                               
a tax  liability against  which the credit  will apply  remains a                                                               
question. So,  taking a chance that  you will somehow be  able to                                                               
artificially  inflate your  credits against  potential production                                                               
in the  first five years of  the field seems to  be an offsetting                                                               
incentive. If  you don't think you  are going to get  all of your                                                               
credits back  you might  not be willing  to artificially  pump up                                                               
the cost.                                                                                                                       
                                                                                                                                
4:25:24 PM                                                                                                                    
MS.  FORESTER added  that  the risk  of gold  plating  is low  on                                                               
Senator Wielechowski's example because  the operator still has to                                                               
get a return on his investment. If  he buys a Humvee he still has                                                               
to  get a  return on  that Humvee.  If he  could make  more money                                                               
buying a Jeep he's  not going to try "to screw  the state" with a                                                               
little tax credit. But she  thought the gold plating could become                                                               
an issue if  the operator says he only has  the potential to have                                                               
20,000  barrels/day  of  production  for  10  years  on  what  he                                                               
currently  has leased,  but he  thought  he could  expand in  the                                                               
future  and wants  to put  in a  huge facility  right now  (to be                                                               
ready to  handle all  of that extra  production). And  she wasn't                                                               
sure they don't want to encourage  an operator to hope he can get                                                               
80,000 barrels/day instead of 20,000.                                                                                           
                                                                                                                                
4:27:14 PM                                                                                                                    
SENATOR MCGUIRE said on the  unitization issue she has heard that                                                               
the downside of  ACES has really fallen on the  satellites in the                                                               
unit,  and  that  areas  in  Kuparuk and  Prudhoe  Bay  would  be                                                               
developed but  for the tax system.  She wondered if they  want to                                                               
talk about  that at  some point because  this new  credit applies                                                               
only to areas that haven't been within a unit.                                                                                  
                                                                                                                                
CO-CHAIR WAGONER  said the  bill currently  excludes them  and he                                                               
wanted someone to  "work that portion of it"  and volunteered her                                                               
to  do it.  Several plays  in  currently unitized  areas are  not                                                               
commercially feasible to produce because  of the tax structure or                                                               
a  couple of  other  items,  and they  hadn't  come  up with  any                                                               
recommendations yet.                                                                                                            
                                                                                                                                
CO-CHAIR  PASKVAN asked  if  one system  would  be preferable  to                                                               
another  system for  either an  unconventional or  a conventional                                                               
oil play.                                                                                                                       
                                                                                                                                
MS. FORESTER  stated that he  should ask the operators  for their                                                               
advice on  that because  they are much  more familiar  with their                                                               
economic situations that she is.                                                                                                
                                                                                                                                
MR. BANKS offered that it comes  down to the two issues they have                                                               
already talked about: how much of  the 100 percent credit will be                                                               
realized in  the first five  years of production given  that sort                                                               
of caps the size  of the cash flow one would  get from the state,                                                               
and  also the  fact that  you have  to wait  between the  time of                                                               
making  those expenditures  and the  start of  production. Having                                                               
said that, if  you have a prospect that  will require significant                                                               
challenges in terms of what the  development might look like - it                                                               
might  be something  like an  offshore prospect  or something  on                                                               
federal land  that may be  fraught with permitting issues  - that                                                               
means you're going to be waiting  a long time before you are able                                                               
to realize any  kind of benefits from the credits.  Shale oil has                                                               
high initial  rates of  production, but  then very  quickly drops                                                               
down to a  more steady rate - Bakken  1,000 barrels/day initially                                                               
but within  two years or so  it dropped down to  a couple hundred                                                               
barrels a  day. Depending on how  many wells fit under  some kind                                                               
of  project like  this  it  may be  defined  as  a property  that                                                               
qualifies for  this kind of  tax, but  an operator may  find that                                                               
the amount  of tax  liability he  is accruing  in the  first five                                                               
years  of production  might  not be  enough to  make  up for  the                                                               
initial investment, and  the 100 percent credit  is less valuable                                                               
for that reason.                                                                                                                
                                                                                                                                
CO-CHAIR WAGONER stated  that this credit isn't meant  to pay 100                                                               
percent  of their  costs, but  it's supposed  to incentivize  and                                                               
help a company get financing to do a project.                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI  said they should  be very careful  in terms                                                               
of expansion. He  said he had pulled up an  old presentation from                                                               
the Department of  Revenue that showed the  state currently picks                                                               
up 76  percent of the costs  of an exploration well.  If they are                                                               
now going  to pick up  100 percent  of the development  costs, at                                                               
what point  do they say let's  just pick up the  other 24 percent                                                               
and end  up socializing the  entire risk and privatizing  all the                                                               
profits.                                                                                                                        
                                                                                                                                
He asked  Mr. Banks how  to define "sustained production"  in the                                                               
context  of Point  Thomson that  is supposed  to start  producing                                                               
10,000 barrels  of condensate per  day; would that  be considered                                                               
sustained production?                                                                                                           
                                                                                                                                
MR. BANKS answered  that he had suggested  earlier using language                                                               
from   the   department's   unitization  regulations   that   say                                                               
"sustained unit production" means,  "continuing production of oil                                                               
or  gas from  a reservoir  in the  unit area  into a  pipeline or                                                               
other means  of transportation  to market,  but does  not include                                                               
testing, evaluation  or pilot production."  So, depending  on how                                                               
they  view  the 10,000  barrel/day  project  in the  Exxon  Point                                                               
Thomson case,  that may almost  be regarded as  pilot production,                                                               
but that determination hasn't been made yet.                                                                                    
                                                                                                                                
4:36:41 PM                                                                                                                    
SENATOR WIELECHOWSKI said  they hear testimony on  wells that are                                                               
marginal and he wanted to get  as much data as possible about why                                                               
that is so. So  he asked the DOR to provide as  much data as they                                                               
could on  why are the fields  marginal. What lever can  the state                                                               
pull  to get  them in  production? Roads?  Royalty relief?  A tax                                                               
break? He didn't feel they had the  data that is needed to make a                                                               
lot of these decisions.                                                                                                         
                                                                                                                                
4:37:34 PM                                                                                                                    
Finding no  further comments,  Co-Chair Wagoner  thanked everyone                                                               
for coming and adjourned the meeting at 4:37 p.m.                                                                               

Document Name Date/Time Subjects