CSHB 71(FIN) am: "An Act providing standards for the interpretation of certain terms in state oil and gas leases and unit agreements, requiring development, production, processing, and marketing of gas that is determined to meet those standards, and setting a maximum time limit on that activity; extending and amending the requirements applicable to the credit that may be claimed for certain oil and gas exploration expenses incurred in Cook Inlet against oil and gas properties production (severance) taxes, and amending the credit against those taxes for certain exploration expenditures from leases or properties in the state; and providing for an effective date."
00 CS FOR HOUSE BILL NO. 71(FIN) am 01 "An Act providing standards for the interpretation of certain terms in state oil and gas 02 leases and unit agreements, requiring development, production, processing, and 03 marketing of gas that is determined to meet those standards, and setting a maximum 04 time limit on that activity; extending and amending the requirements applicable to the 05 credit that may be claimed for certain oil and gas exploration expenses incurred in Cook 06 Inlet against oil and gas properties production (severance) taxes, and amending the 07 credit against those taxes for certain exploration expenditures from leases or properties 08 in the state; and providing for an effective date." 09 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 10 * Section 1. The uncodified law of the State of Alaska is amended by adding a new section 11 to read: 12 LEGISLATIVE FINDINGS REGARDING AMENDMENT OF AS 38.05.180. The
01 legislature finds that 02 (1) oil and gas leases issued by the state grant to the lessee certain 03 rights in state land and resources for the purposes of exploration, development, 04 production, processing, and marketing oil and gas from state land; 05 (2) those oil and gas leases require the reasonable development of state 06 land for oil and gas as the facts may justify; 07 (3) those oil and gas leases further mandate reasonable diligence in 08 producing oil and gas from state land; 09 (4) those leases also obligate the lessee to act with due regard for the 10 interests of not only the lessee but also the state as lessor; 11 (5) many of those leases have been extended beyond their primary 12 terms by commitment to an oil and gas unit agreement; 13 (6) unit agreements may vary from unit to unit and so do not contain 14 uniform language but generally reinforce the obligations of lessees to timely develop 15 oil and gas resources and to act to protect not only their own interests but also the 16 interests of the state as lessor; 17 (7) unit agreements also require that lessees periodically file their 18 proposed plans for future development of a unit and allow the state, as lessor, to 19 determine the rate of development of the unit and rate and quantity of production from 20 the unit in acting on proposed plans or otherwise; 21 (8) oil and gas leases are interpreted by courts sitting in oil-and-gas- 22 producing states to require that lessees develop and market oil and gas when those 23 lessees could do so for a reasonable profit; 24 (9) the executive branch of state government, under the authority of 25 AS 43.82 (Alaska Stranded Gas Development Act) and with the assistance of outside 26 experts, consultants, and counsel, has developed a sophisticated model that forecasts 27 future gas prices based on the best information currently available to the state; 28 (10) that model incorporates the costs estimated by the state's largest 29 oil and gas producers and others for the construction of an Alaska natural gas pipeline 30 and for upstream facilities required to produce and treat natural gas from the Prudhoe 31 Bay and Point Thomson Units for transportation through an Alaska natural gas
01 pipeline to markets inside and outside the state; 02 (11) the model calculates estimated rates of return on capital invested 03 for the total project, and for separate elements of the project, such as production from 04 the Prudhoe Bay Unit, production from the Point Thomson Unit, and the pipeline 05 itself; 06 (12) the model calculates estimated rates of return on capital invested 07 under a wide range of future gas prices, including a price considered a stress gas price, 08 the mean estimated gas price, and prices considered to have as low as a 10 percent 09 probability and as high as a 90 percent probability; 10 (13) rates of return from the model can be compared to various 11 measures of profitability, including, without limitation, rates of return historically 12 allowed by the Federal Energy Regulatory Commission on gas pipelines, the cost of 13 capital, rates of return on shareholder equity and capital employed for natural gas 14 pipeline companies, and rates of return on shareholder equity and capital employed for 15 oil and gas companies; 16 (14) the oil and gas resources of the state are to be developed for the 17 maximum benefit of the people of the state; and 18 (15) the state's best interests require the earliest reasonable date for 19 construction of an Alaska natural gas pipeline on terms that are both in the best 20 interests of the state and estimated to be reasonably profitable to the state's oil and gas 21 lessees. 22 * Sec. 2. AS 38.05.180 is amended by adding a new subsection to read: 23 (hh) The provisions of this subsection clarify and interpret the obligations of 24 an oil and gas lessee or unit operator where an explicit or implied term of a state oil 25 and gas lease or unit agreement requires the development, production, processing, or 26 marketing of gas meeting economic standards such as "reasonable profit," 27 "economically recoverable," "reasonable development as the facts may justify," 28 "reasonable diligence," "covenant to develop as a reasonably prudent operator in a 29 reasonably prudent manner," "good and diligent oil and gas production practices," 30 "economically feasible," or "having due regard for the interests of lessor as well as the 31 interests of lessee." If the terms of the lease or unit agreement so provide,
01 (1) the standards shall be interpreted to require, at a minimum, 02 development, production, processing, and marketing of gas from the lease or unit area 03 as part of a project placing gas into one or more commercial markets if the 04 commissioner determines, after review of relevant information then available to and in 05 the possession of the department, that the estimated revenue from the project, based on 06 the department's mean gas price forecast for that project, minus the currently estimated 07 new costs of that project, appears sufficient to allow for a rate of return on new capital 08 invested 09 (A) in the portions of the project regulated as to tariffs by either 10 the Federal Energy Regulatory Commission or the Regulatory Commission of 11 Alaska; the rate of return allowed under this subparagraph must be equal to or 12 greater than the department's estimate of the rate of return that would be 13 approved by the governing regulatory body; and 14 (B) in the portions of the project that are not subject to tariff 15 regulation; the rate of return allowed under this subparagraph must be equal to 16 or greater than the most recent 10-year simple average of overall company 17 returns on capital employed for a sample group of oil and gas companies; in 18 this subparagraph, the sample group of oil and gas companies may include, 19 without limitation and subject to the availability of publicly reported 20 information, the four largest international petroleum companies and the parent 21 companies of the three largest petroleum companies operating in the state; 22 (2) whenever the commissioner determines that development, 23 production, processing, or marketing of gas is required from a lease or unit area, the 24 lessee or unit operator shall develop, produce, process, or market the gas, as 25 determined by the commissioner, from the lease or unit area by a date determined by 26 the commissioner, but in no event may that compliance date be later than seven years 27 after the commissioner's initial determination; if a lessee or unit operator fails to 28 comply with the commissioner's order, approval, decision, or determination, the 29 remedies for the failure shall be as provided for in the controlling lease, unit 30 agreement, other agreement, or operative document, or as provided by law. 31 * Sec. 3. AS 43.55.025(a) is amended to read:
01 (a) Subject to the terms and conditions of this section, on oil and gas produced 02 on or after July 1, 2004, from an oil and gas lease, or on gas produced from a gas 03 only lease, [ON OR AFTER JULY 1, 2004,] a credit against the production tax due 04 under this chapter is allowed for exploration expenditures that qualify under (b) of 05 this section in an amount equal to one of the following: 06 (1) 20 percent of the total exploration expenditures that qualify only 07 under (b) and (c) of this section; 08 (2) [,] 20 percent of the total exploration expenditures that qualify only 09 under (b) and (d) of this section [, OR BOTH, FOR A TOTAL CREDIT THAT DOES 10 NOT EXCEED 40 PERCENT OF THE TOTAL EXPLORATION 11 EXPENDITURES]; 12 (3) 40 percent of the total exploration expenditures that qualify 13 under (b), (c), and (d) of this section; or 14 (4) [(2)] 40 percent of the total exploration expenditures that qualify 15 only under (b) and (e) of this section [, FOR A TOTAL PRODUCTION TAX 16 CREDIT THAT DOES NOT EXCEED 40 PERCENT OF THE TOTAL QUALIFIED 17 EXPLORATION EXPENDITURES]. 18 * Sec. 4. AS 43.55.025(b) is amended to read: 19 (b) To qualify for the production tax credit under (a) of this section, an 20 exploration expenditure must be incurred for work performed on or after July 1, 2003, 21 and before July 1, 2007, except that an exploration expenditure for a Cook Inlet 22 prospect must be incurred for work performed on or after July 1, 2005, and 23 before July 1, 2010, and except that an exploration expenditure, in whole or in 24 part, south of 68 degrees, 15 minutes, North latitude, and not part of a Cook Inlet 25 prospect must be incurred for work performed on or after July 1, 2003, and 26 before July 1, 2010, and 27 (1) may be for seismic or geophysical exploration costs not connected 28 with a specific well; 29 (2) if for an exploration well, 30 (A) must be incurred by an explorer that holds an interest in the 31 exploration well for which the production tax credit is claimed;
01 (B) may be for either an oil or gas discovery well or a dry hole; 02 and 03 (C) must be for goods, services, or rentals of personal property 04 reasonably required for the surface preparation, drilling, casing, cementing, 05 and logging of an exploration well, and, in the case of a dry hole, for the 06 expenses required for abandonment if the well is abandoned within 18 months 07 after the date the well was spudded; 08 (3) may not be for testing, stimulation, or completion costs; 09 administration, supervision, engineering, or lease operating costs; geological or 10 management costs; community relations or environmental costs; bonuses, taxes, or 11 other payments to governments related to the well; or other costs that are generally 12 recognized as indirect costs or financing costs; and 13 (4) may not be incurred for an exploration well or seismic exploration 14 that is included in a plan of exploration or a plan of development for any unit on 15 May 13, 2003. 16 * Sec. 5. AS 43.55.025(c) is amended to read: 17 (c) To be eligible for the [A] 20 percent production tax credit authorized by 18 (a)(1) of this section or the 40 percent production tax credit authorized by (a)(3) 19 of this section, exploration expenditures must 20 (1) qualify under (b) of this section; and 21 (2) be for an exploration well, subject to the following: 22 (A) for an exploration well other than a well that is 23 described in (B) of this paragraph, the well must be [THAT IS] located and 24 drilled in such a manner that the bottom hole is located not less than three 25 miles away from the bottom hole of a preexisting suspended, completed, or 26 abandoned oil or gas well; in this subparagraph [PARAGRAPH], 27 "preexisting" means a well that was spudded more than 150 days but less than 28 35 years before the exploration well was spudded; 29 (B) for an exploration well that explores a Cook Inlet 30 prospect, the well must be located at least three miles from any other well 31 drilled for oil and gas with all distances measured as the horizontal
01 distance between exploration targets, except that the exploration well that 02 is located within three miles of a well drilled for oil and gas qualifies for 03 the tax credit authorized by this subsection if the exploration well tests 04 potential hydrocarbon traps that the commissioner of natural resources 05 determines, after analyzing evidence submitted by the explorer and from 06 other information that the commissioner of natural resources determines 07 relevant, constitute a distinctly separate exploration target. 08 * Sec. 6. AS 43.55.025(d) is amended to read: 09 (d) To be eligible for the [AN ADDITIONAL] 20 percent production tax 10 credit authorized by (a)(2) of this section or the 40 percent production tax credit 11 authorized by (a)(3) of this section, an exploration expenditure must 12 (1) qualify under (b) of this section; and 13 (2) be for an exploration well that is located not less than 25 miles 14 outside of the outer boundary, as delineated on July 1, 2003, of any unit that is under a 15 plan of development, except that for an exploration well for a Cook Inlet prospect 16 to qualify under this paragraph, the exploration well must be located not less 17 than 10 miles outside the outer boundary, as delineated on July 1, 2003, of any 18 unit that is under a plan of development. 19 * Sec. 7. AS 43.55.025(e) is amended to read: 20 (e) To be eligible for the 40 percent production tax credit authorized by 21 (a)(4) [IN (a)] of this section, the exploration expenditure must 22 (1) qualify under (b) of this section; 23 (2) be for seismic exploration; and 24 (3) have been conducted outside the boundaries of a production unit or 25 an exploration unit; however, the amount of the expenditure that is otherwise eligible 26 under this subsection is reduced proportionately by the portion of the seismic 27 exploration activity that crossed into a production unit or an exploration unit. 28 * Sec. 8. AS 43.55.025(f) is amended to read: 29 (f) For a production tax credit under this section, 30 (1) an explorer shall, in a form prescribed by the department and 31 within six months of the completion of the exploration activity, claim the credit and
01 submit information sufficient to demonstrate to the department's satisfaction that the 02 claimed exploration expenditures qualify under this section; 03 (2) an explorer shall agree, in writing, 04 (A) to notify the Department of Natural Resources, within 30 05 days after completion of seismic or geophysical data processing, completion of 06 a well, or filing of a claim for credit, whichever is the latest, for which 07 exploration costs are claimed, of the date of completion and submit a report to 08 that department describing the processing sequence and providing a list of data 09 sets available; if, under (c)(2)(B) of this section, an explorer submits a 10 claim for a credit for expenditures for an exploration well that is located 11 within three miles of a well already drilled for oil and gas, in addition to 12 the submissions required under (1) of this subsection, the explorer shall 13 submit the information necessary for the commissioner of natural 14 resources to evaluate the validity of the explorer's claim that the well is 15 directed at a distinctly separate exploration target, and the commissioner 16 of natural resources shall, upon receipt of all evidence sufficient for the 17 commissioner to evaluate the explorer's claim, make that determination 18 within 60 days; 19 (B) to provide to the Department of Natural Resources, within 20 30 days after the date of a request, specific data sets, ancillary data, and reports 21 identified in (A) of this paragraph; 22 (C) that, notwithstanding any provision of AS 38, information 23 provided under this paragraph will be held confidential by the Department of 24 Natural Resources for 10 years following the completion date, at which time 25 that department will release the information after 30 days' public notice; 26 (3) if more than one explorer holds an interest in a well or seismic 27 exploration, each explorer may claim an amount of credit that is proportional to the 28 explorer's cost incurred; 29 (4) the department may exercise the full extent of its powers as though 30 the explorer were a taxpayer under this title, in order to verify that the claimed 31 expenditures are qualified exploration expenditures under this section; and
01 (5) if the department is satisfied that the explorer's claimed 02 expenditures are qualified under this section, the department shall issue to the explorer 03 a production tax credit certificate for the amount of credit to be allowed against 04 production taxes due under this chapter; however, notwithstanding any other 05 provision of this section, the department may not issue to an explorer a 06 production tax credit certificate if the total of production tax credits submitted 07 for Cook Inlet production, based on exploration expenditures for work 08 performed during the period described in (b) of this section for that production, 09 that have been approved by the department exceeds $20,000,000. 10 * Sec. 9. AS 43.55.025(k) is amended to read: 11 (k) In this section, 12 (1) "Cook Inlet production" means oil or gas production from the 13 Cook Inlet sedimentary basin, as that term is defined by regulation adopted to 14 implement AS 38.05.180(f)(4); 15 (2) "Cook Inlet prospect" means a location within the Cook Inlet 16 sedimentary basin, as that term is defined by regulation adopted to implement 17 AS 38.05.180(f)(4); 18 (3) "explorer" means a person who, in exploring for new oil or gas 19 reserves, incurs expenditures. 20 * Sec. 10. AS 43.55.025 is amended by adding a new subsection to read: 21 (l) The provisions of this section do not apply to the Arctic National Wildlife 22 Refuge. 23 * Sec. 11. This Act takes effect immediately under AS 01.10.070(c).