Legislature(2003 - 2004)
04/23/2003 01:36 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 61
"An Act establishing an exploration and development
incentive tax credit for persons engaged in the
exploration for and development of less than 150
barrels of oil or of gas for sale and delivery without
reference to volume from a lease or property in the
state; and providing for an effective date."
Representative Chenault MOVED to ADOPT Committee Substitute,
Work Draft 23-LS0270\Q (4/15). There being NO OBJECTION it
was so ordered.
REPRESENTATIVE MIKE CHENAULT, SPONSOR, provided information
about the bill. He read from a shortened Sponsor Statement
as follows:
HR 61 creates a new income tax credit to encourage
increased exploration and development of natural gas
reserves south of the Brook Range. To qualify for
the credit, operators must successfully drill and
develop reserves that produce natural gas for sale
and delivery. This is a successful efforts bill,
which means that no credits will be given for dry
holes or for exploration that is not developed.
Currently, the Cook Inlet continues to have great
potential for additional natural gas development
Other Alaska basins outside of the North Slope have
similar potential. However, the combination of
exploration risk, high development costs and
historic low natural gas prices has created a
disincentive to drill for new reserves as compared
to other areas of the world. By providing a credit
for successful efforts, more exploration will occur
in Southern Alaska leading to much needed new
natural gas reserves. This will benefit all
residents and businesses at no direct cost to the
state.
In addition to the benefit of developing new gas
reserves, increased Cook Inlet drilling will also
aid the general economic status on the Kenai
Peninsula and in Anchorage as well as other areas of
Alaska. Moreover, increased tax revenue from
additional hydrocarbon production will more than
offset any fiscal impact from the proposed credit.
JOHN A. BARNES, ALASKA BUSINESS UNIT MANAGER, MARATHON OIL
Discussed slides from a power point presentation as follows:
HB 61 - What does it Do?
•Draws more E&P Investments to Alaska
•Creates income tax credit to encourage exploration and
development of gas reserves south of Brooks Range
•Primary focus is on Cook Inlet, but applies to other
Alaska basins
•Focus is on natural gas.
•Levels the playing field somewhat with other
exploration opportunities around the world.
HB 61 - How Does it Work?
•Applies to 10% of Qualified Capital Investment
•Applies to 10% of Qualified Expense
•May offset no more than 50% of corporate income tax in
any one year (up to five additional years)
•Only applies to successful efforts.
•Incentive can be factored into project economics.
HB 61 - Why is it needed?
•Currently there is not enough Alaska E&P Activity
•Natural Gas Reserves have been and are continuing to
decline in the Cook Inlet.
-Current Cook Inlet proven natural gas reserves are
estimated at 2 TCF
•(Based on DNR DOG 2002 report, less 2002 production)
•Despite recent increase in Cook Inlet exploration
activity, reserves are not being replaced on an annual
basis
•Cook Inlet deliverability has declined over last
several years.
Mr. Barnes referred to a graph illustrating the relationship
between Cook Inlet supply and demand (copy on file).
•Supply and demand rationalization is occurring.
-Not enough gas to feed low price consumer.
-Gas price increasing
•Enstar average gas cost (WACOG) $2.55/mcf
•Most recent Enstar contract gas price $2.75 to Henry
Hub
•Henry Hub recently over $9.00/mcf
Cook Inlet Reserves & Resources
•Current proven reserves - 2000 BCF
-Approximately 10 year production life, assuming no
decline.
•Potential Gas Committee Resource Estimates
-Probable Reserves - 1050 BCF
-Possible Reserves - 2100 BCF
Impacts to the State of Alaska
•Stimulates Cook Inlet, and potentially other basin
exploration.
•Aids in maintaining Cook Inlet 200+ BCF/year
production.
th
-Equivalent to a 13 month of North Slope Production.
•Provides gas for Cook Inlet utilities, industrials,
jobs, royalties, taxes.
Fiscal Impact to the state of Alaska
•Incentive will be clearly positive to State of Alaska,
factors are...
-How many developments will be incentivized?
-How much gas will be discovered?
-What will be the gas sales price (royalty value)?
-How much will be spent for exploration and
development?
-Successful efforts driven - no incentives for dry
holes
•Conceptual Estimate of Impact, assumptions:
-Varied field size from 0 to 500 BCF
-Development Cost $0.50/mcf
-Royalty - 12.5%
-Severance Tax - 7.5%
-Ad valorem - 2.7%
-Gas sales price - $2.50/mcf
Mr. Barnes referred to a table on page 13 (copy on file),
which illustrates the relationship between field size (BCF),
tax credit, gross revenue, royalties, and severance tax.
The table gives total tax per field size.
Conclusions
•Based on conceptual model, State of Alaska receives
from $3 to $10 additional revenue for each $1 of tax
credit.
•Credit is needed now!
-Not enough exploration in Cook Inlet to meet demand.
-Other areas of state need exploration and development.
-New discoveries will take a minimum of 3 years to
bring to first gas
-
Success Measures
•Increased Lease Activity
•Increased Drilling Rig Activity
•Increased Construction Activity
•Increased Production and Deliverability
•Credits Applied to Income Tax
-For every dollar of credit approximately ten dollars
were spent successfully developing new reserves, and
ultimately paying new taxes!
Representative Croft referred to the sponsor statement that
noted "historic low natural gas prices". He then compared
this with page 8 of the presentation, which noted "gas price
increases". He asked why the increased prices would not
create a natural incentive for exploration.
Mr. Barnes acknowledged that price increases provided some
incentive. He noted that exploration was a risky business,
and offered no guarantees of success. He pointed out that
the time lag between price shifts and discovery of new
supplies could cause potential damage to local industry. He
drew the analogy that stores run sales to encourage
activity.
Representative Croft acknowledged the potential benefit of
the bill if it created activity that would not occur without
it. He observed that it was difficult to determine whether
the company would have increased exploration without the
incentive, but conceded that if only one out of ten new
reserves were developed due to the bill, the state would
"break even".
Representative Stoltze asked if a "double dip" was possible
if a company took a reduction for royalties and also for
Agrium [Company].
Representative Chenault maintained that the bill did not
allow for multiple incentives.
Representative Croft asked for clarification, and observed
that a producer might qualify for the tax credit, and then
not have to pay the royalty that they would have passed on
to Agrium.
Representative Whitaker suggested that any double credit
would be very minimal.
Co-Chair Harris referred to sub section (g) "A taxpayer who
obtains a credit under this section may not claim a tax
credit or royalty modification provided for under any other
title." He observed that the bill pertained to corporate
income tax, no more than 50 percent of the tax owed to the
State in any year, and that to qualify a project must be
producing gas or oil for the state of Alaska. He speculated
that the potential risk for the State might be a portion of
corporate income tax, but that this would be offset by a
greater amount of royalties and severance. He asked whether
the risk was minimal compared to the potential gain.
Mr. Barnes concluded that successful exploration would
reward the producer with corporate tax credit, and the
higher production level would reward with additional
revenue.
Co-Chair Harris noted that the bill provided incentive for
producers to invest into Alaska as opposed to other areas or
countries.
Representative Hawker referred to the successful efforts
restriction in the bill and asked whether the proposed
investment tax credit would apply to expenditures that were
for an existing reserve, rather than a new reserve.
Mr. Barnes commented that the intent was to qualify
expenditures for bringing to production new reservoirs. He
defined those new reservoirs as those in which no sales had
previously occurred, whether a new or existing reserve.
In response to a question by Representative Hawker, Mr.
Barnes confirmed that if a producer found product in an
existing well, those development expenditures would qualify.
Representative Hawker referred to the qualifying
expenditures language. He asked if the bill accommodated a
situation when money was expended in a particular year and
the reserve produced after the end of that tax year. He
suggested that an accounting problem might exist in the
language.
Mr. Barnes observed that this accounting question had not
been previously addressed. He assumed that, in such a
progressive project, expenditures were held in aggregate and
accounted for when product was sold.
Representative Hawker referred to page 2, line 7, stating
that qualifying expenditures must be "made for assets first
placed in service in the state during the tax year in which
the credit is claimed". He speculated that if a credit
could not be claimed until a reserve was proven, it would
exclude any expenditures made in the exploration process
prior to the year in which the reserve was proven.
In response to a question by Representative Whitaker, Mr.
Barnes reiterated that the credit would apply to production
from either an existing well or a new reserve that produced
new gas sales.
Representative Whitaker referred to page 2, line 7, and
asked if Mr. Barnes was satisfied with the existing
language.
CHUCK LOGSDON, CHIEF PETROLEUM ECONOMIST, DEPARTMENT OF
REVENUE testified via teleconference. He was not able to
comment on the language. He stated that he assumed the
credit could be taken after an asset was placed in service,
but noted that this may not be the correct interpretation.
MARK MEYERS, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES concurred with Mr. Logsdon's
interpretation of the credits being transportable.
Representative Croft noted that the language made a
distinction between qualified capital investments and
qualified services. He maintained that qualified capital
investment could be carried over, whereas qualified services
(such as labor) were in question. He noted that a
distinction was made between expenditures for capital
investment, and for the services that could apply only to
the specific tax year.
HB 61 was HEARD and HELD for further consideration.
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