00CS FOR HOUSE BILL NO. 325(O&G)                                                                                          
01 "An Act authorizing exemption from payment of royalty for initial production of                                         
02 a portion of the heavy oil produced from wells on the Arctic Slope; and                                                 
03 providing for an effective date."                                                                                       
04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA:                                                                
05    * Section 1.  AS 38.05.180 is amended by adding a new subsection to read:                                            
06  (dd)  Notwithstanding any other provision of this section or any provision in                                         
07 a lease, unit agreement, or other agreement between a lessee and the state that                                         
08 establishes an obligation to pay royalty on production, royalty is not payable, under the                               
09 conditions and to the extent described in this subsection, for the production of heavy                                  
10 oil that is removed or sold from a lease or leases located north of the Umiat baseline.                                 
11 For purposes of this subsection, "heavy oil" means oil having a weighted average equal                                  
12 to or less than 20 degrees API gravity as the term "API gravity" is defined in                                          
13 AS 43.55.900.  Under this subsection, the exemption from payment of royalty applies                                     
14   (1)  only to the portion of the value at the wellhead, net of eligible field                                         

01 cost deductions, as calculated for the month of production, for the first 500 barrels of                                
02 daily production of heavy oil from the well, that, for the period beginning on                                          
03   (A)  the effective date of this section and until December 31,                                                      
04 1996, does not exceed $15 per barrel; and                                                                               
05   (B)  the first day of the calendar year during each calendar year                                                   
06 beginning January 1, 1997, does not exceed the amount specified under (A) of                                            
07 this paragraph as adjusted for inflation or deflation; in making the adjustment, the                                    
08 department shall, not later than February 15 of each calendar year, calculate and                                       
09 apply to the amount set out in (A) of this paragraph a change in the dollar                                             
10 amount to the extent of the change in the producer price index for finished goods                                       
11 compiled by the United States Department of Labor; the index for January 1996                                           
12 is the reference base index;                                                                                            
13   (2)  only if the actual drilling of the well from which the heavy oil is                                             
14 produced began on or after July 1, 1996, and before July 1, 2006;                                                       
15   (3)  only to heavy oil produced during the first 1,825 days of well                                                  
16 operation after the start of production of oil from the well, as reported to the Alaska Oil                             
17 and Gas Conservation Commission; and                                                                                    
18   (4)  for a well only if the lessee                                                                                   
19   (A)  submits with its royalty report for the first month for which                                                  
20 the exemption from royalty payment under (1) - (3) of this subsection is claimed                                        
21 and with subsequent royalty reports at quarterly intervals for so long as the                                           
22 exemption continues, oil gravity test results performed during the period for                                           
23 which the royalty report is filed demonstrating that the oil tested is heavy oil; the                                   
24 report must be in accordance with the standards for measurement and testing set                                         
25 out in the regulations of the Alaska Oil and Gas Conservation Commission; and                                           
26   (B)  maintains, for a period of at least two years after the last day                                               
27 of the royalty payment exemption authorized by this subsection, records of                                              
28 production that show the actual date that drilling of the well started, the daily                                       
29 production from the well, and the API degree gravity data, and allows the                                               
30 department to inspect the records during regular business hours.                                                        
31    * Sec. 2.  This Act takes effect immediately under AS 01.10.070(c).