00 HOUSE BILL NO. 311 01 "An Act relating to oil and gas leases; imposing a limit on the Department of Natural 02 Resources that relates to the issuance or extension of oil and gas leases containing 03 natural gas that is capable of production in paying quantities; and establishing tax 04 exemptions related to oil and the recovery of oil from oil and gas leases; and providing 05 for an effective date." 06 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 07  * Section 1. AS 38.05.180(m) is amended to read: 08 (m) An oil and gas lease must cover a reasonably compact area not exceeding 09 5,760 acres, and may be for a maximum period of 10 years, except that the 10 commissioner may issue a lease for a period not less than five years upon a finding 11 that it is in the best interests of the state. An oil and gas lease shall be automatically 12 extended if and for so long thereafter as oil and [OR] gas are [IS] produced in paying 13 quantities from the lease or if the lease is committed to a unit approved by the 01 commissioner, but the commissioner shall deny an automatic extension of the  02 lease and may not extend the lease unless the lessee agrees to an amendment of  03 the lease to include a provision by which the lessee is required to contract to sell  04 the gas that is produced from the lease and delivered, in good and merchantable  05 condition and pipeline quality, on the lease or at another mutually agreed  06 location to a qualified bona fide purchaser. A lease issued under this section 07 covering land on which there is a well capable of producing oil and [OR] gas in 08 paying quantities does not expire because the lessee fails to produce oil and [OR] gas 09 unless the lessee is allowed reasonable time to place the well on a producing status. A  10 lease issued under this section on which there is a well capable of producing oil  11 and gas in paying quantities must include a provision by which the lessee is  12 required to contract to sell the gas that is produced from the lease and delivered,  13 in good and merchantable condition and pipeline quality, on the lease or at  14 another mutually agreed location to a qualified bona fide purchaser. Upon 15 extension, the commissioner may increase lease rentals so long as the increased rental 16 rate does not exceed 150 percent of the rate for the preceding year. If drilling has 17 commenced on the expiration date of the primary term of the lease and is continued 18 with reasonable diligence, including such operations as redrilling, sidetracking, or 19 other means necessary to reach the originally proposed bottom hole location, the lease 20 continues in effect until 90 days after drilling has ceased and for so long thereafter as 21 oil and [OR] gas are [IS] produced in paying quantities. An oil and gas lease issued 22 under this section that [WHICH] is subject to termination by reason of cessation of 23 production does not terminate if, within 60 days after production ceases, reworking or 24 drilling operations are commenced on the land under lease and are thereafter 25 conducted with reasonable diligence during the period of nonproduction. For  26 purposes of this subsection,  27 (1) a "qualified bona fide purchaser" is a public or private entity  28 that enters into a gas purchase agreement or agreements with a lessee or lessees  29 and has obtained the requisite rights-of-way, licenses, and permits to construct  30 and operate a natural gas transmission system; and  31 (2) if two or more qualified bona fide purchasers offer to purchase  01 the gas, the commissioner shall issue or extend the lease only if the lessee enters  02 into an agreement with the qualified bona fide purchaser that, in the judgment of  03 the commissioner, provides the greatest long-term return to the state. 04  * Sec. 2. AS 43.20 is amended by adding a new section to article 1 to read: 05 Sec. 43.20.046. Exemption for business income of certain taxpayers  06 engaged in the production of oil. The provisions of this chapter do not apply to the 07 business income from the production of oil of a taxpayer engaged in the production of 08 oil from a lease or property in this state 09 (1) for a period of 10 years following the first date of production for 10 income based on the production that qualifies for an exemption under this section; 11 (2) if the taxpayer earns the income on or after the effective date of this 12 section; 13 (3) if the taxpayer is a new producer; for purposes of this paragraph, a 14 taxpayer 15 (A) is a new producer if the taxpayer does not, at the time of 16 the taxpayer's first claim of the exemption under this section, produce more 17 than 5,000 barrels of oil a day from the taxpayer's leases or properties; 18 (B) may not be allowed an exemption for the production 19 activity of 20 (i) a person acquired by the taxpayer by merger or 21 acquisition unless the production activity independently qualifies for an 22 exemption under (A) of this paragraph; or 23 (ii) a taxpayer qualifying under this section that is sold 24 or transferred to a producer that does not qualify for the exemption 25 authorized by this section; and 26 (4) if the taxpayer increases production from a lease or property by not 27 less than 25 percent and maintains production at not less than that amount of 28 production; if, during the 10-year period allowed for an exemption under (1) of this 29 section, the production falls below the amount of production required under this 30 paragraph to maintain the exemption, the taxpayer may not claim and obtain the 31 exemption under this section for any portion of the production for that or any later tax 01 year. 02 * Sec. 3. AS 43.55.011 is amended by adding new subsections to read: 03 (e) Except as limited by (f) of this section, if the total amount of oil produced 04 by the producer from a lease increases 05 (1) between the previous tax year and the current tax year, 50 percent 06 of the increase in the total amount of oil produced from the lease during the current tax 07 year is exempt from taxation under this chapter; 08 (2) between the second preceding tax year and the current tax year, 50 09 percent of the increase in the total amount of oil produced from the lease during the 10 current tax year is exempt from taxation under this chapter; 11 (3) between the third preceding tax year and the current tax year, 50 12 percent of the increase in the total amount of oil produced from the lease during the 13 current tax year is exempt from taxation under this chapter; 14 (4) between the fourth preceding tax year and the current tax year, 25 15 percent of the increase in the total amount of oil produced from the lease during the 16 current tax year is exempt from taxation under this chapter; and 17 (5) between the fifth preceding tax year and the current tax year, 25 18 percent of the increase in the total amount of oil produced from the lease during the 19 current tax year is exempt from taxation under this chapter. 20 (f) Exemption from taxation authorized under (e) of this section 21 (1) may be claimed and allowed for each lease only once and for not 22 more than five successive tax years; and 23 (2) may not be computed based on production of an amount of oil from 24 the lease that is less than the amount produced during the first tax year in which the 25 exemption under (e) of this section is claimed and allowed. 26  * Sec. 4. AS 43.55 is amended by adding a new section to read: 27 Sec. 43.55.022. Exemption for certain producers engaged in the  28 production of oil. (a) The provisions of this chapter do not apply to the production 29 of oil from a lease or property in this state by a producer 30 (1) for a period of 10 years following the first date of production that 31 qualifies for an exemption under this subsection; 01 (2) for oil production from a lease or property on or after the effective 02 date of this section; 03 (3) if the producer is a new producer; for purposes of this paragraph, 04 (A) a producer is a new producer if the producer does not, at 05 the time of the producer's first claim of the exemption under this section, 06 produce more than 5,000 barrels of oil a day from the producer's leases or 07 properties; 08 (B) may not be allowed an exemption for the production 09 activity of 10 (i) a person acquired by the taxpayer by merger or 11 acquisition unless the production activity independently qualifies for an 12 exemption under (A) of this paragraph; or 13 (ii) a taxpayer qualifying under this section that is sold 14 or transferred to a producer that does not qualify for the exemption 15 authorized by this section; and 16 (4) if the producer increases production from a lease or property by not 17 less than 25 percent and maintains production at not less than that amount of 18 production; if, during the 10-year period allowed for an exemption under (1) of this 19 subsection, the production falls below the amount of production required under this 20 paragraph to maintain the exemption, the producer may not claim and obtain the 21 exemption under this subsection for any portion of the production for that or any later 22 tax year. 23 (b) A producer may not be allowed an exemption under this section for 24 production for which the producer obtains an exemption under AS 43.55.011(e) and 25 (f). 26  * Sec. 5. The uncodified law of the State of Alaska is amended by adding a new section to 27 read: 28 APPLICABILITY OF AMENDMENT TO AS 38.05.180(m). The provisions of 29 AS 38.05.180(m), as amended by sec. 1 of this Act, apply to an oil and gas lease entered into 30 (1) on or after the effective date of sec. 1 of this Act; and 31 (2) before the effective date of sec. 1 of this Act and in effect on that date to 01 the extent permitted under the United States Constitution and the Constitution of the State of 02 Alaska. 03  * Sec. 6. Sections 2 - 4 of this Act take effect January 1, 2003.