Legislature(2011 - 2012)SENATE FINANCE 532
04/14/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB276 | |
| HCR23 | |
| HB56 | |
| HB146 | |
| HB279 | |
| HB304 | |
| HB337 | |
| HB365 | |
| HB261 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 56 | TELECONFERENCED | |
| + | HB 146 | TELECONFERENCED | |
| + | HB 279 | TELECONFERENCED | |
| + | HB 304 | TELECONFERENCED | |
| + | HB 337 | TELECONFERENCED | |
| + | HB 365 | TELECONFERENCED | |
| += | HB 261 | TELECONFERENCED | |
| + | HB 196 | TELECONFERENCED | |
| = | HB 276 | ||
| = | HCR 23 | ||
| + | TELECONFERENCED |
CS FOR HOUSE BILL NO. 276(FIN)
"An Act providing for a credit against the oil and gas
production tax for costs incurred for conducting
seismic exploration and drilling certain oil or
natural gas exploration wells in certain basins;
relating to the determination of the production tax
value of oil and gas production; and relating to a
special tax rate for new oil or gas production south
of 68 degrees North latitude."
9:28:12 AM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for HB 276, Work Draft 27-LS1193\W (Nauman,
4/13/12) as a working document.
9:28:28 AM
Co-Chair Stedman OBJECTED for the purpose of discussion.
DARWIN PETERSON, STAFF, SENATOR BERT STEDMAN, discussed the
changes in the new committee substitute, version W. He
shared that the following sectional analysis described how
the legislation arrived at a 30 percent allowance on new
production from new fields, which were not in existing
units.
Section 1: AS 43.55.011(e) is the 25% base tax. In
order to calculate the base tax for a new lease or
property, you take the production tax value and
subtract 30% gross value at the point of production
for new fields and multiply by 25% to get the base
tax.
Section 2: As 43.55.011(g) is the progressivity
calculation. You calculate the production tax value as
you normally would and use that to come up with the
progressivity percentage. Then you take the
production tax value and subtract the incentive
allowance which is 30% of the gross value at the point
of production for new fields. That gives you your
adjusted production tax value you will pay.
Section 4: AS 43.55.020(a) is the calculation of a
producer's installment payments. It just says that
once you figure out what the tax will be, you pay 1/12
of that amount monthly.
Section 8: AS 43.55.160(a) is the calculation of
production tax value. It simply says you have to
adjust the production tax value based on the new
allowance in AS 43.55.162.
Section 10: This section sets up the new 30% allowance
for the first 10 years of sustained production or the
first ten years after January 1, 2013, whichever is
later. In order to qualify, a development must be in
a new lease or property that is north of 68 degrees
north latitude and was not part of a unit or did not
have commercial production prior to January 1, 2008.
9:31:13 AM
Co-Chair Stedman WITHDREW his OBJECTION. There being NO
FURTHER OBJECTION, Work Draft 27-LS1193\W was ADOPTED.
Co-Chair Stedman discussed a fiscal impact note from the
Department of Natural Resources in the amount of $211,400
in general funds for two new full-time positions and an
indeterminate fiscal note from the Department of Revenue
(DOR). He added that an updated fiscal note was forthcoming
from DOR.
JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMSON, provided
some background for the bill.
BACKGROUND:
This bill was originally conceived to provide tax
credits meaningful enough to attract exploration
in the Nenana Basin. Fairbanks is suffering from
staggering energy costs.
1. $660 million last year for space heating
2. Average KwH is 23 cents
3. Heating oil is over $4.00 per gallon and
4. And Natural Gas is at $23 Mcf and only
available to 1100 customers due to
shortages of supplies.
Because of the high costs of energy, many people
are burning wood or coal which is not helping
Fairbanks meet PM 2.5, EPA standards.
Some residents have had to choose between paying
for necessities or keeping warm, especially
during this long, cold winter.
The lack of adequate gas supplies has also
created a stumbling block for economic
development, businesses are struggling and
development has been curtailed.
Yet, just 50 miles north of Fairbanks lays the
Nenana Basin:
1. Where there is an exciting potential for gas
and possibly oil
2. Situated adjacent to roads, the rail road and
3. Power transmission systems
After working with the House Resources committee,
DNR, DOR, DOL, and other communities interested
in this concept the bill was developed. The bill
was expanded to include drilling in other
unexplored/underexplored basins or areas, and
expanded to additionally include seismic
exploration.
Yet the original concept of the bill was
preserved, which is 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 is a
possibility for local regional use.
Ever present in these discussions was how to
balance the elements of this bill as a public
policy:
1. The State's Priority to inspire exploration
and development
2. The level of Risk that is reasonable for the
state to carry
3. The total financial contribution the state is
willing to make
4. And the potential for a return on the state's
investment
THE SPECIFICS OF THE BILL:
P.7, [Section 6 AS 43.55.025(p)] In the bill
before you includes six geologic areas for
exploration. (See map provided). All these
areas were identified by DNR as having potential
for discovery of hydrocarbons and all with some
proximity to existing communities struggling with
high energy costs.
1. Kotzebue and Selawick Basins
2. Nenana and Yukon Flats
3. Emmonak
4. Glannallen and Cooper River area
5. Egegik - Northern Alaska Peninsula
6. Port Moller - Southern Alaska Peninsula
(DNR can address questions on how we got to these
6 areas and Representatives from Nana and Doyon
can address the importance of the Nenana and
Kotzebue areas)
P. 4, [Section 4] With addition of these other
5 areas, the potential cost and risk to the
state rose. To address this HB 276 limits the
number of exploration wells and seismic
exploration eligible for credits and limits the
credits.
1. Exploration well credits - limits the number
of wells to 4 wells in one of the areas
identified on the map with no more than 2
wells in any one area. The tax credit for
drilling is for 80% of the total exploration
expenditures for work performed or $25
million, .whichever is less. (This is 15%
more than what would currently be available
in existing statute, unless the total cost
is 20% over 25 million - then 65% is
better). The total credit exposure is $90
million or $30 mm more than what is
currently available.. However, only 15%
above credits that are currently, available.
2. Seismic credits were created in this bill
to attract new geophysical analysis. The
seismic credits are for 4 total projects,
with no more than one in any of the areas
identified on the map. The credit amount is
75% of the total exploration expenditures,
or $7.5 million, whichever is less. (i.e.
10% more than what is available in existing
statute, unless the total is 35% over 7.5
million). The total maximum credit that
would be available is $30 million. However,
this is 10% more than what might be
currently available. Seismic projects are
subject to the same pre-qualification
criteria as drilling.
These credits apply to work performed after June 1,
2012 and like other production tax credits in AS
43.55.025, expires in 2016. The credit is also not
stackable with other credits provided under AS
43.55.025 or AS 43.55.023. It is the intent of this
bill that the quick window for these credits will
create a frontier basin stampede.
[Section 6] To ensure the state's investment is
warranted, and exploration projects are sound, with
DNR's input, prequalification criteria were created
that must be satisfied before any project commences.
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 this bill. These 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.
Also key in discussions on the bill, was how the
state gets a return on its investment. More
geological data for state use and public release
helps to expand our knowledge of the potential
resources in these remote areas. It assists present
and future explorers, and seismic data could very
well attract new investment and development in the
state, bringing the potential for increased
production, tax revenues and royalties.
Added as qualification for the credits under HB276
is 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.
[Section 2] The final consideration that arose was
what if an explorer in one of these remote areas of
Alaska is successful?
These remote frontier areas are 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.
Therefore, another component was added:
For those explorers in these frontier basins who
reach commercial production, we gave a break on
production taxes. New producers in "middle earth",
commencing production after January 1, 2013 and
prior to January 1, 2022, are eligible for a rate of
4% on the gross value at the point of production, or
taxes under 43.55.011(e), whichever is less, for
seven years following the start of commercial
production.
After 7 years, the tax rate reverts back to what is
in existing statute. This tax rate is crafted only
to apply to new production south of 68 degrees
latitude and not within the Cook Inlet. 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 in obtaining financing for
infrastructure and other costs associated with
remote areas.
This completes my presentation and I would be happy
to answer any of the questions committee members may
ask.
9:40:42 AM
GERALD KEPES, PARTNER, HEAD OF UPSTREAM AND GAS, PFC
ENERGY, began a PowerPoint presentation (copy on file). He
explained that the presentation examined the changes to HB
276 that impacted exploration and production activities. He
related that the legislation proposed a gross revenue
allowance that would impact new oil development or new
development as stipulated. He concluded that the
presentation was intended to show the impact or difference
between the proposed gross revenue allowance and the
current policy for new oil under ACES.
Mr. Kepes discussed slide 1 titled "ACES ($25/bbl Capex New
Development)." He related that the slide represented a
stylized new development with capital expenditures (CAPEX)
of approximately $17 per barrel in a 70 million barrel
field; the field would have a peak production of 10,000
barrels per day (bbl/d). He explained that at an oil price
of $100 per barrel, the slide's scenario had a net present
value (NPV) of $112 million and generated an internal rate
of return (IRR) of 16 percent.
Mr. Kepes spoke to slide 2 titled "ACES with 30 % Gross
Revenue Allowance ($17/bbl Capex New Development)" and
stated that it depicted the result of applying the gross
revenue allowance to the same new development as slide 1.
He shared that slide 2's NPV had nearly doubled in
comparison to the previous slide and that the IRR had also
increased to 20 percent. He concluded that the 30 percent
gross revenue allowance represented a substantial
difference for the low-cost new developments and reiterated
that the slide showed the difference between adding the
allowance versus the current treatment for new oil.
Mr. Kepes discussed slide 3 titled "ACES ($25/bbl Capex New
Development)." He shared that the slide stepped up the cost
scale and had a CAPEX of $25 per barrel for the stylized
new development. He stated that a CAPEX of $25 per barrel
was more reflective of the costs for new developments in
Alaska, which were away from existing infrastructure and
were higher cost. He reiterated that the slide represented
a 70 million barrel field with a peak production level of
about 10,000 bbl/d. The slide generated an NPV of
approximately $24 million and an IRR of about 11 percent.
Mr. Kepes addressed slide 4 titled "ACES with 30% Gross
Revenue Allowance ($25/bbl Capex New Development)." He
stated that slide 4 added the 30 percent gross revenue
allowance to the same development as the previous slide. In
comparison to the previous slide, the IRR rose to 14
percent and the NPV also increased by about $100 million to
$121 million. He related that the slide showed the impact
of adding the new gross revenue allowance at higher costs
versus the current treatment of oil in the ACES regime.
9:45:14 AM
Mr. Kepes discussed slide 5 titled "ACES ($34/bbl Capex New
Development)." He shared that the slide's development
represented the highest cost range examined and that it had
a CAPEX of $34 per barrel. He opined that under ACES, this
sort of investment was unattractive and generated a
negative NPV and a fairly low IRR.
Mr. Kepes explained slide 6 titled "ACES with 30% Gross
Revenue Allowance ($34/bbl Capex New Development)" and
stated that it applied the gross revenue allowance to the
same development as the previous slide. In comparison to
previous slide, the NPV on slide 6 had moved into the
positive and the IRR had increased to about 10 percent. He
reiterated that the intent of the slides was to demonstrate
the specific difference created by applying the 30 percent
gross revenue allowance to a range of low-cost, medium-
cost, and high-cost new developments of oil that were
outside and away from existing infrastructure and
production.
Co-Chair Stedman gave a brief explanation of the 30 percent
gross revenue allowance and pointed out that the concept
had arisen from previous work on enhancing new oil
production with gross progressivity calculations. If the
committee could not go to a gross calculation and
restructure ACES, enhancements for new oil needed to be
addressed within the current ACES structure. He explained
that the 30 percent gross revenue allowance was designed to
replicate the returns of prior legislation that the
committee had spent a month or so working on. He offered
that if ACES was restructured in the future, the gross
revenue allowance would probably also be restructured. He
explained that he wanted the public to be informed as to
the background and numbers surrounding the concept.
ELIZABETH HENSLEY, NANA REGIONAL CORPORATION, JUNEAU (via
teleconference), testified in support of the legislation
and expressed appreciation for the aspects of the bill that
incentivized exploration in the Kotzebue and Selawick
Basins.
9:48:52 AM
Co-Chair Hoffman MOVED to report SCS CSHB 276(FIN) out of
committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
9:49:12 AM
SCS CSHB 276(FIN) was REPORTED out of committee with a "do
pass" recommendation and with a previously published
indeterminate fiscal note: FN3(REV) and a previously
published fiscal impact note: FN4(DNR).