03/11/2015 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HJR7 | |
| Overview: Middle Earth Oil & Gas Development | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | HJR 7 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 11, 2015
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bert Stedman
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
CS FOR HOUSE JOINT RESOLUTION NO. 7(FSH)
Opposing the proposed designation of an Aleutian Islands
National Marine Sanctuary.
- MOVED CSHJR 7(FSH) OUT OF COMMITTEE
OVERVIEW: MIDDLE EARTH OIL & GAS DEVELOPMENT
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: HJR 7
SHORT TITLE: OPPOSE ALEUTIAN NATIONAL MARINE SANCTUARY
SPONSOR(s): REPRESENTATIVE(s) EDGMON
01/21/15 (H) READ THE FIRST TIME - REFERRALS
01/21/15 (H) FSH, RES
02/05/15 (H) FSH AT 10:00 AM CAPITOL 120
02/05/15 (H) Moved CSHJR 7(FSH) Out of Committee
02/05/15 (H) MINUTE(FSH)
02/06/15 (H) FSH RPT CS(FSH) 7DP
02/06/15 (H) DP: HERRON, FOSTER, MILLETT, JOHNSON,
ORTIZ, KREISS-TOMKINS, STUTES
02/27/15 (H) RES AT 1:00 PM BARNES 124
02/27/15 (H) Moved CSHJR 7(FSH) Out of Committee
02/27/15 (H) MINUTE(RES)
03/02/15 (H) RES RPT CS(FSH) 6DP 1NR
03/02/15 (H) DP: HERRON, HAWKER, OLSON, TARR,
SEATON, TALERICO
03/02/15 (H) NR: JOSEPHSON
03/04/15 (H) TRANSMITTED TO (S)
03/04/15 (H) VERSION: CSHJR 7(FSH)
03/06/15 (S) READ THE FIRST TIME - REFERRALS
03/06/15 (S) RES
03/09/15 (S) RES AT 3:30 PM BUTROVICH 205
03/09/15 (S) Scheduled but Not Heard
03/11/15 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
REPRESENTATIVE EDGMON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Sponsor of HJR 7.
ERNIE WEISS, Director
Natural Resources
Aleutians East Borough
Anchorage, Alaska
POSITION STATEMENT: Supported HJR 7.
JAMES MERY, Senior Vice President
Lands and Natural Resources
Doyon Limited
POSITION STATEMENT: Provided an overview of Middle Earth oil &
gas development from Doyon's perspective.
JOE BOVEE, Vice President
Land and Resources
Ahtna Incorporation
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of Middle Earth oil &
gas development from Ahtna's perspective.
GRETA SCHUERCH, Corporate and Public Policy Liaison
External Affairs
NANA Regional Corporation, Inc.
Kotzebue, Alaska
POSITION STATEMENT: Provided an overview of Middle Earth oil &
gas development from NANA's perspective.
PAUL DECKER, Acting Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of the state's Middle
Earth oil & gas leasing structures.
JOHN LARSON, Audit Master
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Clarified the state's oil and tax
exploration and development credits under AS 43.55.023 and AS
43.55.025.
ACTION NARRATIVE
3:30:07 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Costello, Stedman, Wielechowski and Chair
Giessel.
HJR 7-OPPOSE ALEUTIAN NATIONAL MARINE SANCTUARY
3:30:39 PM
CHAIR GIESSEL announced HJR 7 to be up for consideration [CSHJR
7(FSH) was before the committee].
SENATOR STOLTZE joined the committee.
REPRESENTATIVE EDGMON, Alaska State Legislature, Juneau, Alaska,
sponsor of HJR 7, said this resolution expresses the
legislature's opposition to the formation of what would have
been called an "Aleutian Islands National Marine Sanctuary"
brought forward by a Washington, D.C., group called the Public
Employees for Environmental Responsibility that took it upon
themselves through a couple of their Alaskan members to submit
an application to form a sanctuary that would have encompassed
Alaska in and around the Aleutian Islands and the Alaska
Peninsula area.
This application was done without any consultation or any
involvement of the local entities and it was rejected by the
West Coast Office of the National Oceanic Atmospheric
Administration (NOAA) in late January, because of that.
The resolution also argues that there is essentially a
scrupulously managed emergency fisheries regime already in place
through the North Pacific Fisheries Management Council (NPFMC),
the Alaska Department of Fish and Game (ADF&G), the National
Marine Fisheries Service (NMFS), and the Board of Fisheries, and
there has been a recently completed Aleutian Islands risk
assessment study, a multi-dimensional study of all the shipping
hazards along the Great Circle trade route.
3:33:10 PM
SENATOR COGHILL joined the committee.
REPRESENTATIVE EDGMON said there was no support from any of the
communities or tribes for this designation.
CHAIR GIESSEL noted the NOAA application, the letter to the
Public Employees for Environmental Responsibility and numerous
letters of support for HJR 7 in their packets.
SENATOR WIELECHOWSKI asked if he was aware of any opposition to
HJR 7.
REPRESENTATIVE EDGMON answered no, but rather that everyone
supported it up and down the Coast.
SENATOR COSTELLO said that all members of Congress need to be
educated on Alaska issues and this communication was a nice one
to send to them. She suggested a friendly amendment on page 3,
line 16, to add an "s" to "U.S. Representative".
3:35:44 PM
REPRESENTATIVE EDGMON said his version reads "and the Honorable
Don Young, U.S. Representative" and asked if that wasn't
correct.
CHAIR GIESSEL explained that the two Senators are listed there
and "U.S. Senators" refers to them, then there is "Don Young,
U.S. Representative."
SENATOR COSTELLO thanked her for the clarification.
3:37:28 PM
ERNIE WEISS, Director, Natural Resources) Aleutians East
Borough, said they are one of the many entities, municipalities
and tribes that publicly oppose the Aleutian Island National
Marine Sanctuary by letter or resolution. There are two main
problems with it. One, the sheer size; it encompasses 554,000
nautical square miles and would have completely encompassed
their borough, and, two, there is zero community support. His
borough wasn't even consulted or notified of the nomination.
SENATOR STOLTZE wondered if listing oil and gas leasing was a
gratuitous gesture, because he wants resolutions, in general, to
be meaningful.
REPRESENTATIVE EDGMON said that it is not included to be
gratuitous, but to factually say that the President withdrew
that area from oil and gas leasing in December and asks why a
marine sanctuary would be needed.
CHAIR GIESSEL, finding no further comments, closed public
testimony.
SENATOR COSTELLO moved to report CSHJR 7(FSH), version 29-
LS9368\E, from committee with individual recommendations and
attached zero fiscal note. There were no objections and it was
so ordered.
3:42:35 PM
At ease from 3:42 to 3:44 p.m.
^OVERVIEW: Middle Earth Oil & Gas Development
OVERVIEW: Middle Earth Oil & Gas Development
3:44:23 PM
CHAIR GIESSEL announced the overview of Middle Earth oil and gas
development and welcomed Mr. James Mery with Doyon Limited.
3:44:46 PM
JAMES MERY, Senior Vice President, Lands and Natural Resources,
Doyon Limited, said his entire 35-year career with Doyon has
been involved with natural resource development.
He said a large number of Frontier Basins still exist they as
part of what is generally known as "Middle Earth" that consists
of all areas outside of Cook Inlet and south of the Brooks
Range. Today he would focus on two basins where Doyon had been
active: the Nenana Basin, which is where 100 percent of their
efforts over the past three years have been, including drilling
a fairly deep well and two seismic programs (one 3D seismic in
2014) in the Yukon Flats area.
3:46:56 PM
Both basins have the presence of all the elements of a
potentially prolific hydro-carbon system and an extensive column
of wet gas. He said the exploration credits were and are
important in bringing Doyon to this point. Their leases in the
Nenana Basin are mostly on State of Alaska lands and lands on
the Yukon Flats that are all owned by Doyon and village
corporations.
He said Doyon holds about 400,000 acres of leases from the State
of Alaska for seven-year terms that will end in 2019/20 and it
pays yearly rentals of about $1.2 million. Doyon owns about
42,000 acres of subsurface lands with the Toghotthele
Corporation (the Nenana Village Corporation) in conjunction with
surface owners. No federal ownership is nearby, however the
northern third of the leases are in the Minto Flats State Game
Refuge where oil and gas is allowed conditionally. It's tougher
to permit there, but they have done seismic programs that have
worked out okay.
Yukon Flats, in contrast, is a much larger prospective area that
is where they own Alaska Native Claims Settlement Act (ANCSA)
lands. It has three separate sub-basins that have no time
constraints or holding costs as there are with state lands. In
part, that is what drives their current strategy of focusing on
the Nenana and Minto areas where they are closer to
infrastructure. If their efforts are successful at Nenana, it
will blow the doors open on the whole Yukon Flats area, because
of their geological similarities.
MR. MERY said they work with three villages in the Yukon Flats:
Stevens Village, Beaver and Birch Creek. The adjacent area is a
National Wildlife Refuge, which doesn't allow anything.
SENATOR STOLTZE asked him to talk about transportation
infrastructure in the Nenana Basin.
MR. MERY said an upcoming slide would show that. He continued
that the two basins have similar geology in terms of age and
style of deposition. Things that work at Nenana should also work
at Yukon Flats. They believe it is an oily system and oil is
their primary target.
3:50:58 PM
MR. MERY said prior exploration was done by the majors in the
1960s and 80s, but they left for different reasons. More
recently, Doyon conducted three seismic programs and drilled two
wells, one down to 11,000 feet and one to a little over 9,000
feet. In addition, a lot of oil is seen in surface seeps
indicating that both basins have oil. The big question is how
much.
Doyon had partners earlier in 2010, but without them the pace of
exploration has accelerated. Doyon does oil field support
services and creates new markets for all of the oil field
service companies they have. So, the money stays here in Alaska.
3:53:15 PM
MR. MERY said the planned North Slope gasline route comes right
next to their leases in case they discover gas. They are next to
the Parks Highway, the Intertie and the Alaska Railroad; they
are close to Fairbanks and refineries; Pump Station 7 is a little
to the north. There are access points to the TAPS at the
refineries, as well. They have also built a road out to both
well sites along an existing right-of-way (ROW) that the city
has wanted to develop for many years. The bridges over some of
the slews were deeded to the city and the road it is a public
asset.
3:55:31 PM
MR. MERY explained that the Nenana Basin petroleum system has
excellent source rocks. It's very deep, long and narrow. They
have seen "plenty" of migrated wet gas in a well bore over very
thick packages of sands. A wet gas system is generally
indicative of an oily system. It is a "world-class" reservoir
with 24 percent porosity rock, clean quartz sands and good
shales above the sands.
A lot of permits were needed for the Nunivak Number 2 well (N2),
but they worked closely with the state agencies to get them.
3:59:05 PM
SENATOR WIELECHOWSKI asked what kind of oil he is finding in
that area.
MR. MERY answered all conventional oil and wet gas, propanes and
butanes with a lot of methane (80-90 percent). He added that
Doyon has a good relationship with the city and has community
support.
4:00:28 PM
MR. MERY said that Doyon thinks the hydrocarbon system is
extensive and can be recovered. Even though they are convinced
it is a robust system, because they are so close to
infrastructure, big accumulations aren't need. But more seismic
is needed to better define areas that may be worth drilling.
4:03:07 PM
CHAIR GIESSEL asked him to describe "trap failure."
MR. MERY described a recent trap failure that was a three-way
closure up against a fault (half of an inverted teacup up
against a fault). Because the fault didn't close, there wasn't
adequate sealing. "Plenty" of wet gas was seen, but it was not
under pressure and had too much water. The reservoir looked
depleted. The chance for success in the next well given all the
work they have done to date is somewhere between 1:5 and 1:10
for oil, but gas is a head scratcher. It could be stranded for
quite a while and no one knows what the Fairbanks market will be
then. However, commercial gas discoveries are so de-risked in
the Nenana Basin that chance of success in the next well is 1:2.
He concluded thanking the legislature and the people who
administer the laws on the exploration credits that are
essential to hydrocarbon exploration in Interior Alaska. Middle
Earth exploration would not have happened without state support.
The Frontier Basin Credits program, which is Middle Earth
specific, is not used on the drilling piece, because even though
it is an 80 percent credit, it comes out closer to 60-65 percent
and no one has used it at all. It sunsets next year and maybe it
could be extended and made a little more workable.
4:08:52 PM
SENATOR WIELECHOWSKI said he appreciated the update and what
Doyon is doing out there. One of the big reasons legislators
supported this is because they were trying to get gas to the
Interior and it seems like that is no longer an option.
4:09:31 PM
SENATOR MICCICHE joined the committee.
MR. MERY responded that gas was their focus initially, but in
2009 there started to be a lot of noise about gas getting
trucked from the North Slope. Doyon saw that it would get locked
out of that market potentially because they wouldn't be able to
deliver gas fast enough and would have walked away then, but for
the fact that in that 2009/10 well they saw evidence of an oil
opportunity. That is what has kept them going.
SENATOR WIELECHOWSKI said he didn't represent Fairbanks, but he
was a huge supporter of Fairbanks getting gas. Maybe state
resources need to be redirected to make sure gas comes out of
this project, because it seems a lot more economic than trucking
gas off the North Slope.
SENATOR MICCICHE joined the committee.
4:12:29 PM
JOE BOVEE, Vice President, Land and Resources, Ahtna
Incorporation, Anchorage, Alaska, said Ahtna means "The People
of the River." Their Alaska Native Claims Settlement Act (ANCSA)
boundaries extend from Canada west almost all the way into and
through parts of Denali National Park. They are located 150
north of Valdez, 180 miles from Anchorage and 250 miles
southwest of Fairbanks.
He said the State of Alaska (SOA) established six oil and gas
basins in Alaska referred to as Middle Earth. Glennallen is the
area they are now exploring. The New Frontier Basin Tax credit
allows 75 percent of seismic and 80 percent of exploration wells
in Middle Earth for tax credit purposes. Certain things in the
credit regulations work better than others and Ahtna recommended
merging the .025 credits with .023 credits for faster recovery
of the credits. Now it takes over a year to get .025 credits
versus half that time for getting the .023 credits. Also, the
Middle Earth tax credits are going to expire on June 30, 2016
and they would support a couple-year extension. Without the
current tax credits, they would not be where they are today.
SENATOR WIELECHOWSKI asked how much in tax credits the state has
paid out for Middle Earth so far.
4:15:37 PM
MR. BOVEE suggested asking Paul Decker for that information. He
said the geological structure of Copper River Valley is
currently under state land and $100 million had been invested in
exploration over the past 30 or 40 years exploring it. The
geological data and past exploration give strong natural gas
indications and to a lesser amount for some conventional types
of oil. Their project is focused strictly on natural gas
development. The formation is accessible to southcentral
population centers, the state highway road system and 115 miles
from Valdez (tidewater).
He said that some technical drilling challenges due to high
water pressure were identified in the previous wells and they
will compensate for that in the next exploration phase of
drilling a new well.
4:16:40 PM
The Copper River Basin has eight oil and gas exploration wells;
all are on state land except for two or three that are on Ahtna
land. They have identified porous, permeable, and hydrocarbon-
bearing lower Cretaceous, several large fault-bounded geologic
structures that may hold economic accumulations of natural gas,
and a highly pressurized water zone with natural gas at 1,100
feet with pressure of 1,000 PSI.
4:17:55 PM
SENATOR MICCICHE said there is a big difference between
commercially viable and residential use and asked if he had
investigated the potential of locally available gas tax credits
versus commercially viable production.
MR. BOVEE answered no, because their whole emphasis at this
point is on finding enough natural gas to supply the local
community. The .023 and .025 credits are production credits and
a certain amount of royalty to the state, because they are on
state-owned land.
SENATOR MICCICHE commented that at some point they will have to
separate locally available gas from commercially producible gas.
MR. BOVEE related Ahtna's current prospects as follows:
-In December 2013 Ahtna was awarded an Exploration License on
44,000 acres of State land.
-In early 2014 Ahtna partnered with two exploration partners:
Rutter & Wilbanks-Midland, Texas and Santa Petroleum-Welland,
Australia.
-Later in 2014, they reprocessed 90-miles of pre-existing
seismic from the 1970's-1980's and 1990's. All that data is
being turned over to the state as conditions of the license
agreement.
-Identified a structure within the license area and conducted an
additional 40-miles of new seismic. It was finished in December
and was fairly successful except that they had trouble getting
their equipment over some lowlands.
-Preliminary data shows outline of crest of gas structure 14-
miles west of Glennallen and 2-miles from the Richardson Hwy.
4:22:06 PM
SENATOR MICCICHE asked if any targets are deeper than 1,300
feet.
MR. BOVEE answered yes; the Moose Creek and Ahtna 119 wells have
been drilled to about 6,000 feet. They think the exploration
target on state land will be similar, 5,000-7,000 feet, but they
aren't real sure yet.
4:22:53 PM
Ahtna's range of market opportunities:
-If there are only thousands of BTUs/day there would be no
development.
-If there's millions of BTUs/day their foremost priority is to
develop the local market with the utilities companies, which
would mean cost savings in terms of tax credits back to the
explorers and investors, but also some reduction in the power-
cost-equalization credits, and some help to the school district
and local communities.
-If the best happens and billions of BTUs/day available they
would look at some sort of pipeline to in-state or international
markets.
4:23:42 PM
Ahtna's development options:
The local market is viable; diesel fuel is $4/gallon and the
estimate natural gas market delivered is about $1.67; so, a 50-
60 percent savings.
Ahtna Gas Development timeline:
Completed in Dec. 2014:
-$3 Million in Seismic/Contractual Preliminary Work,
-Procured Additional Investors
-Acquired existing seismic data Well Location restrictions
-DNR Meetings
Permitting needs:
-Seismic Permitting
-Bonding/License
-Seismic
-Define new lines
Over the next 6-8 months they will invest $1.3-$1.5 Million in:
-Drilling Planning Schedule
-Procuring Drilling Rig
-Procuring Sub-Contractors
-Permit Process
-Pad/Construction design & Schedule
-Well Design & Drilling Schedule
After this preliminary work they are anticipating spending
another $10-12 million to drill another well on state land.
4:25:10 PM
Conclusions and next steps:
-Engineer and design a new well with completion prior to June -
2016 dependent on tax credit scenarios.
-Finalize RCA application for local gas distribution. He
explained that they have a fallback plan, but the first one is
to develop the local natural gas (pipeline). The second, is
trucking LNG, such as a micro-Fairbanks natural gas plant for
the hub around Glennallen. The RCA permit is required to do
either and they are a year into that process.
-Determine and develop markets depending on the size, quality
and quantity of the gas. Or an electric Intertie could be
cheaper. His initial assessment is that it is probably cheaper
to ship electricity than it is to build a small 6 or 8 inch gas
pipeline.
4:26:47 PM
GRETA SCHUERCH, Corporate and Public Policy Liaison, External
Affairs, NANA Regional Corporation, Inc., Kotzebue, Alaska, At
NANA, said:
Our mission is to improve the quality of life for our
more than 13,500 Iñupiat shareholders by maximizing
economic growth, protecting and enhancing our lands,
and promoting healthy communities with decisions and
behaviors guided by our Iñupiat Ilitquisiat, which is
our traditional value system.
They believe that working to lower the cost of energy in their
communities will help achieve this mission, and, therefore, NANA
has a keen interest in the natural gas potential.
MS. SCHUERCH said the Kotzebue Basin is very similar to the Cook
Inlet Basin in gas potential. Their main targets are onshore and
on NANA land. NANA shares Doyon and Ahtna's position on the
Middle Earth tax credits, because of the dire need for
affordable energy in Northwest Alaska where residents are paying
from $6-11/gallon for gasoline and heating fuel. In addition to
the 11 communities in the NANA Region, the Red Dog Mine is a
potential anchor customer for natural gas.
4:29:16 PM
She presented the Kotzebue Basin Oil and Gas Project History:
Chevron
-Extensive regional seismic studies, 1970-1974
-Two wells drilled in 1974 & 1975,
-Chevron lost interest once it determined it was a gas prone
basin (oil was the company's focus)
NANA Consultant - Intera Report - 1993-1995
-Postulated oil prone sources and potential for gas
-Relatively high risk for exploration for relatively small field
sizes ignoring local market needs
-Yet showed gas potential
Trio Petroleum
-Exploration Agreement and Option to lease dated 2008
-Firm well commitments in every year commencing April 1, 2010
-No wells drilled agreement terminated 2011 after failing to
fund drilling
NANA Consultant - Moyes & Co.
-Retained August 2012 to provide technical and commercial
assistance
-Assembled existing data, Reprocessed seismic data
-Evaluating technical and commercial issues
-Attracted company for on-site reviews in 2014
MS. SCHUERCH said the two wells drilled in the 70's were on
Baldwin Peninsula near Kotzebue and the other near Cape
Espenberg. Her map indicated prospect areas for natural gas in
tan.
MS. SCHUERCH said that NANA's efforts have led to signing five
confidentiality agreements in 2014 and one in 2015. The 2015
company that visited twice deemed the basin was too high of a
geological risk to fund the exploration in total and there is no
deal with them yet. Because of this, NANA is continuing to
evaluate how they can help fund the seismic work to help de-risk
the geology and technical aspects of the Kotzebue Basin.
4:31:34 PM
Getting more information will help them find more targets for
drilling. The state incentives have definitely helped in the
exploration and NANA appreciates the work and support the
legislature has given them to help decrease the cost of living
and energy in their communities.
SENATOR MICCICHE commented that she captured something perfectly
in the slide that says: "Relatively high risk for exploration
for relatively small field sizes ignoring local market needs"
and said everyone who has looked in the past looked for
commercial viability, but he hoped NANA would continue focusing
on the value of the local market.
4:33:08 PM
PAUL DECKER, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR), Anchorage, Alaska,
launched into the page 2 schematic rendering of the main
sedimentary basins in Alaska. It indicated the vast resources
and reserves north of the Brooks Range that have been producing
for a long time now, Cook Inlet and other "yellow areas" that
are still in "Frontier Basin" exploration status. The onshore
ones, exclusive of the North Slope and Cook Inlet, were
typically referred to as "Middle Earth." Slide 3 compiled
statewide oil and gas resource assessments viewed by the U.S.
Geological Survey (USGS) and the Bureau of Ocean Energy
Management for the offshore OCS waters into five regions.
He pointed out that the Interior Basins are not fully assessed,
even by the federal government. One quantitative assessment has
been done for the Yukon Flats and Kandik Basins. The Nenana,
Kotzebue, Copper River, Holitna, and Susitna Basins don't have
quantitative assessments. The other southern Alaska basins are
mostly assessed in federal OCS waters, but not in the Alaska
Peninsula onshore area. The point of this slide is that they
really aren't necessarily "elephant hunting" in the Frontier
Basins.
SENATOR MICCICHE noted a typo for mean gas estimates on slide 3:
the 23 BCF should be 23 TCF.
4:37:27 PM
MR. DECKER explained that the terms "Middle Earth" and "Frontier
Basins onshore" are mostly synonymous and cover the Alaska lands
south of 68 degrees north latitude and outside of Cook Inlet.
Frontier Basins can be construed to include any of those areas
outside of Cook Inlet and the North Slope.
When they talk about the frontier exploration status they mean
the most significant oil or gas discoveries made to date that
are not producing, are definitely underexplored and, therefore,
lack proven petroleum systems, meaning economically producible
oil or gas has not been discovered. Many of these basins have
positive indications, but so far they are not considered
"proven" petroleum systems with economic fields.
Middle Earth (versus Frontier Basin) tax credits are the credits
in AS 43.55.024(a) that allow up to $6 million in production
credits. Frontier Basin credits under AS 43.55.025(a)(6) are for
exploration: drilling the first four exploration wells in the
Frontier Basin areas defined by the circles in paragraph (o) of
the statute. Credits in AS 43.55.025(a)(7) apply to acquiring
the first four seismic programs in those areas. The wells would
come with an 80 percent credit up to $25 million per well and
the seismic credit would pay for 75 percent up to $10 million
per survey.
SENATOR WIELECHOWSKI asked him if the .025(a)(6) credits are for
exploration wells in total or four exploration wells per
company, and the same question would apply to .025(a)(7).
MR. DECKER answered that the .025(a)(6) credit is for the first
four wells in any of the Frontier Basins spelled out in (o), no
more than two of which can be within the seamed area. The
seismic credit would be the first four seismic surveys total, no
more than one of which can be within one of the circles.
SENATOR WIELECHOWSKI followed up asking the maximum liability
the state would have for four exploration wells as follows: 80
percent of $25 million is $20 million times four. So, the
maximum (a)(6) liability would be $20 million times four for $80
million and the maximum (a)(7) liability would be $10 million
times four which equals $40 million, multiplied by 75 percent
would be $30 million?
MR. DECKER answered that was correct.
SENATOR WIELECHOWSKI asked how much the state has paid out in
tax credits so far.
MR. DECKER answered it appears that $7.5 million has been paid
out for one seismic program. The well credits have not been used
to date.
4:42:33 PM
SENATOR WIELECHOWSKI said he had heard about people exploring
and maybe they just hadn't submitted their bill for the credits
yet and asked why they hadn't heard about them.
MR. DECKER answered that some drilling had been conducted under
other credits. Doyon had used the .023 credits, which include
other provisions. He couldn't say for certain that they have not
applied for the .025(a)(6) credit on any of those wells.
4:43:24 PM
MR. MERY clarified that Doyon has used different programs for
different projects. They have only used one of the credits for
one seismic program. They figured out that they would actually
get as much money back under .023 and get it three times faster
than under the .025 credits. That is why they went with the .023
credits.
SENATOR WIELECHOWSKI wanted someone to explain how much the .023
credits are and what they apply to and explain why the .025
credits were passed up.
MR. MERY answered that there was a lack of understanding on a
lot of peoples' parts, including theirs, because they had never
operated a project when that bill passed. When you start
operating and moving the numbers around, it becomes clear.
SENATOR WIELECHOWSKI asked if the .023 credits are also 80
percent.
MR. MERY answered that they are an aggregation of different
types of credits amounting to about 65 percent.
CHAIR GIESSEL asked Mr. Larson if he had further comments.
4:45:57 PM
JOHN LARSON, Audit Master, Department of Revenue, Anchorage,
Alaska, clarified that the 65 percent under the .023 credits is
a combination of the well lease expenditure credits and the AS
43.55.023 (l), 40 percent of well lease expenditures. Added onto
that is .023 (b) carry forward loss credit of 25 percent.
SENATOR WIELECHOWSKI asked what the tax rate would be if a find
was brought to production.
MR. LARSON replied that the gross value reduction (GVR) applies
only to oil, so it would depend on whether the find was gas or
oil.
MR. MERY commented that there are special tax rates for the
Interior Frontier Basins, a 4 percent flat gross well-head value
tax for the first seven years of production on new fields. Then,
depending on whether it is oil or gas, after seven years, it
would flip to the North Slope rate.
SENATOR WIELECHOWSKI asked if the deductions could be below 4
percent.
MR. MERY answered no.
SENATOR WIELECHOWSKI asked after seven years if that would be
eligible for a GVR.
MR. LARSON answered that the GVR credit would apply for oil
production after the seven-year period. [Mr. Larson wrote in an
email later that day that he was incorrect; the GVR cannot apply
to the basin in question.]
4:48:48 PM
SENATOR WIELECHOWSKI asked if these have 12.5 percent royalty.
MR. MERY answered yes.
4:49:05 PM
MR. DECKER took up his presentation on page 6 that described the
coordinates for the AS 43.55.025(o) areas in circles, the method
for defining some of the criteria for where the Frontier Basin
tax credits could apply. He said they have to be within a
sedimentary basin as well as within the circle. Both Nenana and
Yukon Flats are within the large circle around Fairbanks, the
Kotzebue Selewick Basin is within reach of the Kotzebue circle
and the Copper River Basin is within reach of the circle around
Glennallen. A couple of other areas were also intended to help
stimulate exploration in the Yukon River Delta and the Alaska
Peninsula.
Page 8 had to do with exploration licensing as an alternative to
area-wide lease sales (like what happens on the North Slope, in
Cook Inlet and on the Alaska Peninsula). Some areas of the state
are not as easy to get leases where people can apply for
exploration licenses; five are listed as active and two are
pending.
4:52:55 PM
MR. DECKER said the Nenana has been entirely converted to lease.
Susitna has one large area that has been converted to lease as
well as two adjoining areas that are still in the active
exploration license stages. There is a proposed exploration
license near Houston/Willow, presumably for coalbed methane, and
a recent one in southwest Cook Inlet with oil shales. He said
the individual companies have been active, Doyon being the most
active.
4:55:07 PM
SENATOR MICCICHE said looking at the locations in AS
43.55.0.025(o), that there was some focus on providing local gas
to communities and asked if those were from previous exploration
or was there now a focus on providing credits for residential
use in that subsection.
MR. DECKER replied that was one of the criteria the statute the
DNR commissioner needs to evaluate: "the proximity to a
community in need of a local energy source" in determining
whether a project qualifies for this credit.
CHAIR GIESSEL thanked the participants.
4:56:51 PM
CHAIR GIESSEL adjourned the Senate Resources Standing Committee
meeting at 4:56 p.m.