HOUSE BILL NO. 71 "An Act relating to a credit for certain exploration expenses against oil and gas properties production taxes on oil and gas produced from a lease or property in the state; relating to the deadline for certain exploration expenditures used as credits against production tax on oil and gas produced from a lease or property in the Alaska Peninsula competitive oil and gas area wide lease sale area after July 1, 2004; and providing for an effective date." SUZANNE CUNNINGHAM, STAFF, CO-CHAIR MEYER, explained that the new CS, version P addresses concerns about the ability to potentially collect 80 percent of incentives. The new CS clarifies incentives in Section 1, page 1, where it discusses 20 percent of the total exploration expenditures that qualify only under (c) of this section. Subparagraph (2) deals with 20 percent of the total exploration expenditures that qualify only under (d) of this section. Subparagraph (3) addressed 40 percent of the total exploration expenditures that qualify under both (c) and (d) of this section. Co-Chair Chenault MOVED to adopt the work draft to HB 71, version 24-GH1040\P, Chenoweth, 4/15/05. There being NO OBJECTION, it was so ordered. 1:49:31 PM Ms. Cunningham continued to explain that subparagraph (4) deals with 40 percent of the total exploration expenditures that qualify only under (e) of this section and pertain to seismic exploration. This prohibits layering and reaching 80 percent. The new CS also incorporates the Cook Inlet area for work performed on or after July 1, 2005, and before July 1, 2010. The House Resources version of the bill added Nenana Basin, and there was discussion about adding the Healy and Red Dog areas. Areas south of 68 degrees, 15 minutes are eligible for incentives for exploration and production, which takes the North Slope and ANWR off the table. Co-Chair Meyer clarified that it includes the Red Dog area. 1:51:37 PM STEVE PORTER, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE, addressed principles of the tax credit. Tax credits look at reservoirs that need assistance. For those that are not getting good exploration in a particular area, but there are decent prospects, an incentive may be appropriate. That decision should happen in the Department of Natural Resources. Once that discussion occurs, then the Department of Revenue determines the level of incentive to provide. It is designed to benefit the taxpayer. There is currently a discussion as to whether or not to incentivize new areas in the North Slope. He suggested working with the Department of Revenue to decide, and he encouraged exploration there. He also suggested that the committee get an exploration manager to tell them what kind of benefit those incentives are to exploration programs. 1:54:58 PM Co-Chair Meyer expressed confusion because HB 71 was the governor's bill and it dealt with the Bristol Bay area. Now other areas have been added. From a policy standpoint the committee wants to encourage exploration and production. He related that he does not know what areas to add to the bill and has to rely on the department and the governor's office for advice. Mr. Porter responded that from Department of Revenue's point of view, the expansion is a policy call based on conversations with the Department of Natural Resources. He agreed if incentives are needed, then it is fine to go ahead with the expansion. 1:56:58 PM JERRY BURNETT, LEGISLATIVE LIAISON, DEPARTMENT OF REVENUE, clarified that Section 8 in the new CS says that provisions of this section do not apply to taxes applicable under this chapter, attributable to production from oil and gas produced from an oil and gas lease, or gas produced from a gas only lease, located north of 68 degrees, 15 minutes, North latitude, or on the ANWR. He asked if the intent for this section is to take away credit immediately, or if the credit is meant to be for exploration or production. This a major change in how the tax incentive works. Co-Chair Chenault replied that it is not the intent to take away from any tax credit currently available. The intent is to provide for credit in a specific area. 1:59:08 PM Ms. Cunningham said that is correct. The intent is not to adversely impact areas that would have incentives expire in 2007. It is to extend the areas south of 68 degrees, 15 minutes, to 2010. She suggested that a conceptual amendment would be in order. 2:00:05 PM DAN DICKINSON, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, ANCHORAGE, (via teleconference) said the point raised is correct. It will not apply to north of 68 degrees. He agreed that a conceptual amendment is in order. He asked if the discussion is about exploration or production in this area. 2:01:19 PM Representative Croft requested clarification from Mr. Dickinson regarding Section 8. He inquired if anything North of 68 degrees, 15 minutes expires in 2007. Mr. Dickinson replied yes and suggested that there needn't be any limitation on exploration. The only way the credit can be modified is by selling to someone who does not pay production tax. He stressed focusing on exploration. Co-Chair Meyer asked how it impacts the production side. Mr. Dickinson replied that it does not need to impact the production side. He explained that the credit could be taken by someone who has production tax and is producing, or by someone who is not producing or lacks sufficient production tax. There is no intent to restrict the market for selling the credit. 2:04:26 PM Co-Chair Meyer noted that the committee would return to Section 8 to make the necessary amendments. Co-Chair Chenault informed the committee about provisions in the new CS for Cook Inlet oil and gas credit. The dates for the Cook Inlet Basin incentive credits would be extended from 2003 until 2010. It provides language that allows exploration wells in the Cook Inlet to be within the 3-mile limit, subject to review and approval by the commissioner. That would provide a 20 percent credit. It provides language that decreases the 25-mile boundary limit to 10 miles, which also provides a 20 percent credit. 2:06:15 PM Mr. Dickinson added that there is a $20 million limit for the amount of credits granted in the Cook Inlet under these rules. Co-Chair Meyer set HB 71 aside. Representative Kelly asked how requirements in Cook Inlet were lessened. Co-Chair Chenault responded that the 3-mile limit is one area that the commissioner would look at, and the 10-mile limit would be statutory. 2:08:38 PM HOUSE BILL NO. 71 "An Act relating to a credit for certain exploration expenses against oil and gas properties production taxes on oil and gas produced from a lease or property in the state; relating to the deadline for certain exploration expenditures used as credits against production tax on oil and gas produced from a lease or property in the Alaska Peninsula competitive oil and gas area wide lease sale area after July 1, 2004; and providing for an effective date." SUZANNE CUNNINGHAM, STAFF, REPRESENTATIVE KEVIN MEYER, noted that two amendments have been drafted to HB 71. Amendment 1 is to page 2, Lines 13-17. Co-Chair Meyer MOVED to ADOPT Amendment 1: Page 2, lines 13-17  Delete All Material  Insert New Material  (b) To qualify for the production tax credit under (a) of this section, an exploration expenditure must be incurred for work performed on or after July 1, 2003, and before July 1, 2007, except that an exploration expenditure, in whole or in part, south of 68 degrees, 15 minutes, North latitude must be incurred for work performed before July 1, 2010, and except that an exploration expenditure for a Cook Inlet prospect must be incurred for work performed on or after July 1, 2005, and before July 1, 2010, and Page 6, line 12  Following: "do not apply to" Delete: "taxes applicable under this chapter attributable to production from oil and gas produced from an oil and gas lease, or to gas produced from a gas only lease, located north of 68 degrees, 15 minutes, North latitude or on" Representative Hawker OBJECTED. Ms. Cunningham explained the two parts of Amendment 1. Co-Chair Meyer inquired about the reference to 68 degrees, 15 minutes. Ms. Cunningham clarified that it is south of the Brooks Range. 3:27:28 PM Representative Hawker questioned the wording on page 6, line 12 "the provisions of this section do not apply to". Ms. Cunningham clarified that the language is correct. Co-Chair Chenault referenced lines 13-17 on page 2, the new language in Amendment 1. He voiced concerned that the added language would allow credits for work from 2003 retroactively. He questioned if that would change the legislation from the 25-mile to the 10-mile, and also possibly within the 3-mile, with the commissioner's approval. He emphasized that it was not the original intent for work already performed to be included. 3:30:08 PM Ms. Cunningham replied that there would need to be an exemption for Cook Inlet for July 1, 2005 to 2010. DAN DICKINSON, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, ANCHORAGE, (via teleconference) spoke to the proposed change. The current language existing on page 2, after the 2010 date, should be there. The new language should only change lines 13-15. Ms. Cunningham responded that on line 15, 2010 should be deleted because the current program goes until 2007. Mr. Dickinson explained that if the amendment were used to replace all the language, through and including 2010, then the clause that starts with "except" would accomplish the intent. Representative Croft asked what would happen on page 6 if the provisions do not apply. He suggested eliminating Section 8. Ms. Cunningham replied that the rewrite on page 6, would not apply to ANWR. Representative Croft acknowledged his mistake. 3:34:16 PM Co-Chair Chenault restated the potential conceptual amendment. Representative Kelly noted that the termination date would change. 3:35:00 PM Co-Chair Chenault MOVED to ADOPT a Conceptual Amendment to Amendment 1 that adds back the language that expiration expenditures for Cook Inlet prospect must be incurred for work performed on or after July 1, 2005, and before July 1, 2010. Representative Hawker WITHDREW his OBJECTION to adopt Amendment 1, as amended. There being no further OBJECTION, Amendment 1 was adopted. 3:35:54 PM Co-Chair Meyer MOVED to ADOPT Amendment 2: Page 2, lines 1, 3, and 9  Following: "under" Delete" [(b) AND] Insert: (b) and Page 2, line 7  Following: "under" Insert: (b), Representative Hawker OBJECTED for discussion purposes. Ms. Cunningham explained that the amendment reinserts subsections (b) and (c) and clarifies that in order to get the credit, a company has to meet the qualifications under (b) which sets out the timeframes that exploration work occurs and (c), which is the 3-mile limit. Representative Croft noted that it is not the 40/80 issue; it is a timing issue. Ms. Cunningham replied that is correct. She elaborated on the timeframe. 3:38:21 PM Representative Hawker WITHDREW his OBJECTION to adopt Amendment 2. There being NO OBJECTION, Amendment 2 was adopted. 3:39:13 PM Representative Kelly asked for an opinion from Department of Revenue. 3:39:40 PM JERRY BURNETT, LEGISLATIVE LIAISON, DEPARTMENT OF REVENUE, stated that the bill preserves the intent of the statute. Co-Chair Meyer declared a potential conflict of interest. Representatives Kelly and Hawker objected. 3:41:25 PM Representative Hawker also declared a conflict of interest. Representative Kelly objected. 3:42:05 PM Representative Foster MOVED to report CSHB 71 out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CSHB 71 (FIN) was REPORTED out of Committee with a "do pass" recommendation and with a zero fiscal impact note by the Department of Revenue and with a new indeterminate fiscal impact note by the Department of Natural Resources. 3:44:19 PM