Legislature(2011 - 2012)HOUSE FINANCE 519
04/06/2012 09:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB276 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 276 | TELECONFERENCED | |
HOUSE BILL NO. 276
"An Act providing for a credit against the oil and gas
production tax for costs incurred in drilling certain
oil or natural gas exploration wells in the Nenana
Basin."
9:47:29 AM
Vice-chair Fairclough MOVED to ADOPT proposed committee
substitute, work draft 27-LS1193\G, (Nauman/Bullock,
3/27/12).
Co-Chair Stoltze OBJECTED for the purpose of discussion.
REPRESENTATIVE STEVE THOMPSON, SPONSOR, spoke in support of
the proposed committee substitute (CS). He observed that
the bill was originally conceived to provide tax credits
that were meaningful enough to attract exploration in the
Nenana Basin in order to alleviate the staggering energy
costs in Fairbanks. He observed that $660 million was spent
last year for space heating with an average kilowatt per
hour cost of 23 cents. Heating oil was over $4.00 per
gallon and natural gas was at $23 per thousand cubic feet
(Mcf) and only available to 1,100 customers due to
shortages of supplies.
Representative Thompson observed that many people were
burning wood or coal due to the high costs of energy, which
was not helping Fairbanks meet the Environmental Protection
Agency's (EPA) [air quality] standards of 2.5 parts per
million. He asserted that some residents had to choose
between paying for necessities or keeping warm during the
winter.
Representative Thompson stressed that the lack of adequate
gas supplies had also created a stumbling block for
economic development; businesses were struggling and
development had been curtailed. He pointed out that the
Nenana Basin lay just 50 miles north of Fairbanks. The
basin held exciting potential for gas and possibly oil
situated adjacent to roads, the rail road and power
transmission systems.
Representative Thompson noted that the bill was developed
after working with the House Resources Committee,
Department of Natural Resources (DNR), Department of
Revenue (DOR), Department of Law (DOL), and other
communities interested in the concept. The bill was
expanded to include drilling in other
unexplored/underexplored basins or areas, and expanded to
additionally include seismic exploration. He emphasized
that the original concept of the bill was preserved, which
was to serve Alaskans, not only by providing incentives
that could lead to commercialization of hydrocarbons for
export, but also to promote exploration for oil and gas
resources in frontier basins where there was a possibility
for local regional use.
9:50:48 AM
Representative Thompson observed that ever present in these
discussions was how to balance the elements of the bill as
a public policy:
· The State's Priority to inspire exploration and
development;
· The level of Risk that was reasonable for the state to
carry;
· The total financial contribution the state was willing
to make; and
· The potential for a return on the state's investment.
JANE PIERSON, STAFF, REPRESENTATIVE THOMPSON, explained the
changes between HB 276, Version E and Version G. The major
change occurred in section 2, which provided for a 4
percent production tax for the first seven years following
the commencement of commercialization or production taxes
levied under AS 43.55.011(e), whichever is less, for a
production before 2022, should there be a commercial find
of oil or gas produced south of 68 degrees North latitude,
other than the Cook Inlet.
Ms. Pierson explained that under the draft, section 2 was
subject to subsection (j), which referred to Cook Inlet gas
or subsection (k), which related to Cook Inlet oil. She
explained that new production in Cook Inlet after 2012 and
before January 2020 could fall into the four percent tax.
She observed that if "kitchen lights" came on board in 2020
there would be two years under the (j) tax rate and then a
switch to the four percent tax rate. The change was not
within the original intent of the legislation to fence out
the North Slope and Cook Inlet and to offer the tax break
in "middle earth". She suggested that the unintentional
change could be easily fixed by the committee.
Ms. Pierson noted that federal on shore lands were added
after discussions with the Department of Revenue. The tax
consequence would be equal to that on private lands. Many
of the basins were composed of a combination of federal,
private and state lands.
Ms. Pierson observed that conforming amendments relating to
the four percent tax were made in Sections 7 and 8.
Production tax would be subject to the same benefits and
taxes available to other taxes under AS 43.55.011.
9:55:09 AM
Ms. Pierson discussed Section 6, which included six
geologic areas for exploration (map on file). All these
areas were identified by Department of Natural Resources as
having potential for discovery of hydrocarbons and with
some proximity to existing communities struggling with high
energy costs.
· Kotzebue and Selawick Basins
· Nenana and Yukon Flats
· Emmonak
· Glannallen and Cooper River area
· Egegik - Northern Alaska Peninsula
· Port Moller - Southern Alaska Peninsula
Ms. Pierson observed that with the addition of these other
five areas, the potential cost and risk to the state rose.
To address this HB 276 limited the number of exploration
wells and seismic exploration eligible for credits and
limited the credits. Exploration well credits were limited
to four wells in one of the areas identified on the map
with no more than two wells in any one area. The tax
credit for drilling was 80 percent of the total exploration
expenditures for work performed or $22.5 million, whichever
was less. (The credit was 15 percent more than what would
currently be available in existing statute, unless the
total cost was 20 percent over 22.5 million; then 65
percent was better). The total maximum credit was $90
million.
Ms. Pierson concluded that the increase was slightly more
than the current amount.
Ms. Pierson spoke to seismic credits. Seismic credits were
created in the bill to attract new geophysical analysis.
The seismic credits could be allotted for up to four
projects, with no more than one in any of the areas
identified on the map. The credit amount was 75 percent of
the total exploration expenditures, or $7.5 million,
whichever is less (i.e. 10 percent more than what was
available in existing statute, unless the total was 35
percent over 7.5 million). The total maximum credit that
would be available was $90 million. Seismic projects were
subject to the same pre-qualification criteria as drilling.
Credits apply to work performed after June 1, 2012 and like
other production tax credits in AS 43.55.025, would expire
in 2016. The tax credit was also stackable with other
credits provided under AS 43.55.025 or AS 43.55.023. It
was the intent of the bill that the quick window for these
credits would create a frontier basin stampede.
Ms. Pierson explained that Section 6 was created to ensure
the state's investment was warranted, and exploration
projects were sound, with DNR's input, prequalification
criteria were created that must be satisfied before any
project commenced. DNR has broad discretion to weigh these
factors within 60 days or as soon as practicable before
approving or denying exploration well or seismic
exploration credits under the bill. The pre-qualification
criteria can be found for drilling on page 7, line 21
through page 8, line 2 and for seismic on page 8, lines 24
through page 9, line 2.
Ms. Pierson also key in discussions, was how the state gets
a return on its investment. More geological data for state
use and public release helped to expand our knowledge of
the potential resources in these remote areas. Geological
data assisted present and future explorers, and seismic
data that could very well attract new investment and
development in the state, bringing the potential to
increase production, tax revenues and royalties.
Added as qualification for the credits under HB 276 was a
requirement that all exploration drilling and seismic data
collected must be turned over to the state and made
available for public release within two years of receiving
the credit under this bill.
9:59:11 AM
Ms. Pierson reviewed Section 2. The final consideration
that arose was what if an explorer in one of the remote
areas of Alaska was successful. The remote frontier areas
were difficult to reach, face logistical obstacles, and
challenges getting hydrocarbons to market. Yet producers
in these areas would pay the same production tax as
companies on the North Slope that already has
infrastructure and access to markets. She reported that
another component was added to address the situation. She
read the following:
"For those explorers who reach commercial production
in a frontier basin, we gave them a break on their
production tax rate of 4 percent or taxes under
43.55.011(e), whichever is less, for seven years
following commencement of commercial production, in an
area that did not have oil or gas production prior to
January 1, 2013. After seven years, the tax rate
reverts back to what is in existing statute. The tax
rate was crafted only to apply to new production south
of 68 degrees latitude for oil and gas not subject to
(j) or (k) of this section. This bill gives no breaks
on Royalty, corporate income tax, or property taxes.
What it does, is give explorers willing to take the
risk to explore in these remote areas some
predictability for the first seven years of
hydrocarbon commercialization. This will assist these
companies obtain financing for infrastructure and
other costs associated with remote areas."
Ms. Pierson observed that discussions with Doyon indicated
problems with financing due to these factors.
Co-Chair Thomas understood a bridge was needed to access
the Nenana Basin. Representative Thompson explained that an
ice bridge was built and did not know if another bridge
would be funded.
Co-Chair Thomas questioned what would occur in the case of
a dry hole. Representative Thompson explained that the
producer was eligible for a credit in the case of a dry
hole conditioned on the due diligence paper work.
Representative Joule announced that he intended to offer an
amendment raising the exploration cap from $22.5 million to
$25 million; the same credit available for Cook Inlet.
Co-Chair Stoltze WITHDREW his OBJECTION, There being NO
OBJECTION, work draft 27-LS1193\G was adopted.
Co-Chair Stoltze OPENDED public testimony.
10:05:22 AM
ELIZABETH HENSLEY, NANA REGIONAL CORPORATION (via
teleconference), testified in support of HB 276. She
stressed the high cost of energy in the NANA Region, which
averaged $7.92 per gallon for gas. She believed the
legislation would incentivize exploration in the region.
LANCE MILLER, VICE PRESIDENT RESOURCES, NANA REGIONAL
CORPORATION (via teleconference), testified in favor of HB
276. He shared that two stratigraphic wells were drilled in
the Kotzebue Basin in 1974. The corporation utilized the
data to target oil and gas development in the area. The
challenge has been to attract risk capital. He felt the
legislation would help attract investment. The Kotzebue
Basin was untested and untapped, but he felt it held great
potential.
JAMES MERY, SENIOR VICE PRESIDENT, LANDS AND NATURAL
RESOURCES, DOYON LTD (via teleconference), spoke in support
of HB 276. He explained that Doyon LTD was a regional
corporation formed under the Alaska Native Claims
Settlement Act with over 18,000 shareholders, and was the
largest private land owner in Alaska with holdings of over
12.5 million acres in the interior of Alaska. Doyon
primarily operated oil field support, tourism, and utility
businesses with over 1,500 employees.
Mr. Mery informed the committee that Doyon engaged in
exploration activity in the Nenana Basin and Yukon Flats.
He spoke to Doyon's business model. He expounded that Doyon
had invested money in exploration precipitated by credits
offered in the past. The corporation's goal was to attract
new investors as the project developed. He emphasized that
Doyon was truly a "local" company reflected in its hiring
practices and providing opportunities for local communities
through the oil field support services. He noted the
multiplier effect that successful exploration would bring
encouraged by the credits in HB 276. Seismic exploration
demonstrated that there was oil, but the geologic and
project investment carried very high risk and proved
difficult to attract new investment. The conventional
producers were not interested in the area. A different tax
regime for the area was necessary. The legislation offered
assurance for limited tax exposure during the initial,
highest risk phase for capital recovery and additional
credits (expected to cost the state approximately $20
million) on early exploration. Both pieces were essential
to attract new capital.
Co-Chair Stoltze stressed the importance of the activities
of the smaller Alaskan oil related companies, such as
Doyon, to the economy of his district and the state.
10:16:11 AM
Co-Chair Stoltze CLOSED public testimony.
Representative Neuman referred to Page 2, Section 2 of the
committee substitute (CS). He questioned the seven year
period [that a four percent tax would be levied on the
gross value]. Ms. Pierson answered that seven years was
deemed necessary after discussions with Doyon LTD.
Ms. Pierson clarified, in response to a question by
Representative Neuman that Section 2 defined that the seven
year period began after the point of commercial production.
Representative Neuman wondered what the composition of oil
and gas was. Ms. Pierson responded that there have been
positive indications that both oil and gas existed.
Representative Neuman expressed the desire to maximize the
value of the legislation.
10:20:38 AM
Representative Costello asked what would happen to the
seismic information if development did not produce
hydrocarbons. Ms. Pierson clarified that the information
belonged to the state.
BOB SWENSON, STATE GEOLOGIST, DEPARTMENT OF NATURAL
RESOURCES (via teleconference), confirmed that after two
years the data would be made public and owned by the state.
10:21:50 AM
Representative Costello understood that the state separated
exploration and production credits in statute. She
referenced to language in the bill on Page 13, line 15 that
read, "producer" includes "explorer." She asked why the CS
contained the language.
SUSAN POLLARD, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, explained that the language was not a change from
current law. The language related to the determination of
production tax values. Some producers also perform
exploration. She clarified that the language provided for
instances when a producer can collect the credit while in
exploration mode. She concluded that the situation was
provided for in current law and did not change the statute.
10:24:33 AM
Representative Joule MOVED to ADOPT Amendment 1:
Page 5, Line 14, following "of"
Delete [$22,500,000] insert "$25,000,000"
Co-Chair Stoltze OBJECTED for purpose of discussion.
Representative Joule explained that the amendment would
raise the level of credits to $25 million to match the
current level allowed in Cook Inlet.
Representative Neuman questioned what statute specified the
$25 million tax credit. Ms. Pierson replied that the
provision was contained in AS 43.55.025 (b).
Amendment 1 was HELD in Committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Sponsor Statement revised 4.5.12.pdf |
HFIN 4/6/2012 9:30:00 AM |
HB 276 |
| Sectional House Bill 276 version G 4.5.12.pdf |
HFIN 4/6/2012 9:30:00 AM |
HB 276 |
| Explanation of changes version E to version G 4.5.12.pdf |
HFIN 4/6/2012 9:30:00 AM |
HB 276 |
| HB276 CS WORDKDRAFT 27-LS1193G.pdf |
HFIN 4/6/2012 9:30:00 AM |
HB 276 |
| HB276 AMENDMENT 1 JOULE.pdf |
HFIN 4/6/2012 9:30:00 AM |
HB 276 |