Legislature(2023 - 2024)ADAMS 519
04/04/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB233 | |
| HB387 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 223 | TELECONFERENCED | |
| + | HB 387 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 387
"An Act relating to a tax credit for certain oil and
gas equipment in the Cook Inlet sedimentary basin; and
providing for an effective date."
2:25:25 PM
REPRESENTATIVE TOM MCKAY, SPONSOR, explained that HB 387
attempted to help oil and gas development in the Cook
Inlet. He realized that a "jack-up" rig would be required
if drilling activity in the inlet were to be increased. The
current rig in the inlet was being fully utilized drilling
wells for Hilcorp. He explained that it was not possible to
drill year-round in Cook Inlet but it was possible to drill
from approximately May through October with a jack-up rig.
He thought the rig was needed in order to increase
production. He read the sponsor statement (copy on file):
As we face the reality of a shortage in natural gas
production in Cook Inlet, the backbone of Southcentral
Alaska's energy supply, the urgency to act has never
been more critical. Cook Inlet gas has been an
invaluable resource as an affordable, reliable energy
source that has powered homes, businesses, and
industry for decades. Projections indicate a rapid
decrease in gas supply in the coming years under the
current market conditions, a scenario that threatens
the energy security of over half of Alaska's
population and could lead to our reliance on imported
Liquefied Natural Gas (LNG), which is likely to be
significantly more expensive.
Jack-up rigs are specialized offshore drilling rigs
necessary for developing Cook Inlet gas reserves.
Currently the state has only one rig available, a
handcuff on any significant increase in drilling
activity. The bill proposes a targeted incentive that
will increase the project economics for investing in
another jack-up rig to be used in Cook Inlet to
explore for and extract natural gas by providing a
carry-forward tax credit equal to the costs associated
with purchasing and transporting the rig to Alaska. HB
387 has a clear goal: to increase exploration and
production activities, thereby enhancing Cook Inlet
gas reserves and increasing gas production.
I urge my colleagues of the 33rd Legislature and the
people of Alaska to support, HB 387 as a step towards
energy development, economic resilience, and the long-
term prosperity of our great state.
2:28:58 PM
TREVOR JEPSEN, STAFF, REPRESENTATIVE TOM MCKAY, introduced
the PowerPoint presentation "HB 387 Cook Inlet Jack-Up Rig
Credit" dated April 4, 2024 (copy on file), and began on
slide 2. He relayed the projected Cook Inlet gas shortage
would threaten the energy security of the Southcentral
region of the state and there could be a potential
shortfall as early as 2027. A public opinion poll from July
of 2023 suggested that 72 percent of residents reported a
high level of opposition to importing natural gas and 60
percent of residents supported incentives for oil and gas
companies to find and produce more Cook Inlet gas. He noted
that residents' opposition to imports decreased markedly in
the unlikely scenario that liquified natural gas (LNG)
imports would be cheaper. Many stakeholders, such as the
Alaska Energy Authority (AEA), believed that LNG imports
would be significantly more expensive than locally produced
Cook Inlet gas. He argued that the legislature owed
Alaskans a solution to help incentivize more Cook Inlet gas
exploration, production, and development. He relayed that
figure 1 on the slide showed the projected fuel costs for
coal, natural gas, LNG, and diesel over the next 16 years.
The information was compiled by AEA. The actual price of
gas to the consumer was unknown and the numbers were
projections, but it was worth considering the projections
when making policy decisions.
Mr. Jepsen continued to slide 3 and explained that jack-up
drilling rigs were specialized rigs in the mobile offshore
drilling unit class and were intended for relatively
shallow waters up to roughly 500 feet. The rigs consisted
of a floating hole that could either be self-propelled or
pulled by a barge to a drilling location. The rigs had
extendable legs that provided the support for the rig on
the sea floor. He stressed that jack-up rigs were necessary
to develop offshore Cook Inlet gas. The slide included a
drawing of the different mobile offshore drilling classes,
not drawn to scale, and the jack-up rig was circled in red.
Mr. Jepsen continued to slide 4 and relayed that there was
presently one jack-up rig in Cook Inlet. The bill was
solely focused on implementing a second rig in the inlet,
which was required in order to adequately explore and
develop gas reserves. The current jack-up rig in Cook
Inlet, Spartan 151, would be fully utilized by Hilcorp for
the foreseeable future. He explained that any new major
developments would require a second rig. The decline in the
Cook Inlet gas shortage projections did not account for a
potential second rig in the inlet. In addition to
developing known reserves in Cook Inlet on state land,
there were federal leases in Cook Inlet which were too deep
below the surface for the Spartan rig to operate in and a
more capable jack-up rig was needed. Market interest had
shown that investing in Cook Inlet exploration and
production was not a highly popular option. The primary
factors came down to risk and rate of return. The high cost
nature of oil and gas exploration and development
operations in Cook Inlet directly impacted both risk and
rate of return. The state fully or partially subsidizing
the purchase or transfer of another jack-up rig to develop
Cook Inlet offshore reserves would offset the risk and
increase the rates of return for a potential project. There
was some risk to the state, but a "silver bullet" solution
to address Cook Inlet did not exist. He reiterated that
Alaskans wanted incentives to be offered and HB 387
represented a strong incentive to implement a second rig in
Cook Inlet.
Mr. Jepsen continued to slide 5 and explained that the bill
would introduce a Title 43 tax liability reduction credit,
which was not a cash credit. The credit was equal to 100
percent of the cost of purchasing and transporting a jack-
up rig to Alaska limited to a maximum credit value of $75
million. The credit would only apply to jack-up rigs for
Cook Inlet and included language that would ensure the rigs
were used for at least three years, which would disallow
the credit to be used as a pass-through in order to move
the rig to a different location. He thought that the risk
to the state was not as large as it may seem because the
new rig would benefit Alaskans if the rig was used in
Alaska for three years. There would be no cost to the state
if the credit was not utilized and the state did not
acquire a second jack-up rig.
2:34:37 PM
Mr. Jepsen relayed that there was an old jack-up rig credit
which was a drilling credit that was only applicable to
drilling costs for a rig exploration well that was drilled
with the jack-up rig. The only possible recipients of the
old credit were oil and gas companies. The new credit
proposed by the bill was for any Title 43 tax liability and
would not be limited to oil and gas companies' drilling.
Co-Chair Foster invited Mr. Jepsen to review the sectional
analysis.
Mr. Jepsen reviewed the sectional analysis on slide 6 (copy
on file):
Section 1: Amends AS 43.98 by adding a new section
(43.98.080) which introduces a tax credit for persons
installing a jack-up rig in the Cook Inlet sedimentary
basin.
Section 2: Repeals a prior jack-up rig drilling credit
Section 3: Provides for an immediate effective date.
Representative Galvin asked why the jack-up rig was chosen
to be in federal waters as opposed to state waters.
Representative McKay responded that the intent was to allow
the rig to be utilized in state waters or federal waters.
He explained that jack-up rigs were typically leased from
the Gulf of Mexico or Southeast Asia. There were three
important elements of jack-up rig drilling: the depth of
the water, the desired drilling depth, and configuration of
the drilling platform. If a drilling platform was set at a
location with known gas, the important information to know
was the water depth, the platform height, and the depth of
the wells to be drilled. The appropriate jack-up rig could
then be acquired with the known specifications. He
reiterated that the intention was for the rig to work in
state or federal water.
Representative Galvin asked if there was a reason why a
project on the water was chosen over a project on the land.
She understood that there was gas available everywhere and
wondered if there was a reason that the focus was on Cook
Inlet.
2:38:43 PM
Representative McKay responded that there were already land
rigs on the shore and some of the bigger gas prospects were
offshore.
Representative Galvin asked how the bill would be an
improvement upon what had already been done in the past.
She was aware that the state had spent hundreds of millions
of dollars in the past on new rigs and the efforts were
unsuccessful. She asked why Representative McKay thought
the bill would be more successful than past efforts.
Representative McKay responded that in many of the energy
focused bills he was sponsoring, he was trying to leverage
reserves that were in the ground already instead of taking
funds out of the treasury. He thought leveraging existing
reserves would have a different result than past efforts.
He did not want to criticize what was done in the past and
he was certain the intentions were good. He relayed that
there was gas in the ground that may not be produced unless
the state leveraged and incentivized operators to monetize
it for the benefit of all Alaskans. He explained that his
energy bills were all structured to leverage reserves
rather than utilize cash from the treasury. He suggested
that Mr. Jepsen could add more details.
Mr. Jepsen clarified that the bill was not specifically
targeting federal waters or state waters. He continued that
the older version of the jack-up grid credit was
specifically for drilling costs associated with exploration
wells. The credit would only apply for the first three
exploration wells with a jack-up rig and it was limited to
$25 million for the first well, $22.5 million for the
second, and $20 million for the third. The credit proposed
by HB 387 intended to keep the jack-up rig in the state for
three years with the assumption that it would be drilling
nonstop. The rig could be drilling exploration wells or
development wells. The bill would ensure that the three-
year drilling contract was in place and that the rig would
be working nonstop to meet the gas demand.
2:42:24 PM
Representative Galvin understood that the credits would not
be displacing revenue.
Mr. Jepsen replied that the state would be reimbursing oil
companies and gas companies, but there was a benefit to
Alaskans because the rig would be in the state for three
years and it would be drilling nonstop. The payout of the
credit would be a reimbursement, but it would still be
leveraging gas in the ground because both exploration wells
and development wells would be eligible. He argued that the
drilling of the wells for a significant period of time
would benefit the state.
BRANDON SPANOS, ACTING DIRECTOR, TAX DIVISION, DEPARTMENT
OF REVENUE (via teleconference), explained that the way the
tax credit was structured was that the credit could be
applied against the taxpayers' tax revenue in the year in
which the credit was claimed. The credit would first need
to be earned, which would generally line up with the
taxation time period. For example, if a taxpayer brought a
rig up to Alaska in 2026 and also had production tax due in
2026, the taxpayer could apply the credit in 2026. If there
were any credits left over, the taxpayer could apply the
credits in subsequent years.
Representative Galvin understood that the credit would only
be earned if the tax bill was over $75 million. She asked
for confirmation that a company would be receiving the
credit in exchange for a promise that it would drill for at
least three years.
Mr. Jepsen responded in the affirmative.
Representative McKay commented that everyone had seen the
projection that showed there would be a gas gap in
approximately 2027 or 2028 and the earliest date LNG would
be imported was 2030. The intended purpose of the bill was
to bridge the gap to ensure that the state had sufficient
gas supplies at least until the state had the ability to
import LNG.
2:46:31 PM
Representative Cronk asked how long it would take for gas
to be utilizable if the second jack-up rig was drilling and
hit gas. He understood the process would not only involve
finding the gas, but also building the pipeline. He asked
how long the entire process would take.
Representative McKay responded that there would be a
certain amount of pressure to take action quickly to allow
the industry to react and plan. He explained that it would
take two to three years to procure a new platform. Any new
platform would need a subsea gas pipeline to shore and tie
the gas into the NSTAR gas line. He noted that the process
would take time and none of the steps could happen quickly.
There could hypothetically be around 30 new wells after
three years between two different platforms. Offshore work
was time intensive, but it had been done before in Cook
Inlet and could be done again.
Representative Cronk understood that if there was a new
field in the water, a new platform would need to be built
before any drilling could occur.
Representative McKay responded in the affirmative. He
explained that subsea developments were the only
developments that did not need a platform because the
wellheads were on the sea floor. Most scenarios that would
work for Cook Inlet were centered around building a new
platform. The platform would likely be built in Korea or
Japan and transported to the state and then the platform
would be anchored to the sea floor. The jack-up rig could
then drill the wells and begin production. The process had
been employed in the inlet for decades.
2:49:34 PM
Representative Cronk asked how long a jack-up rig would
take to get to Alaska in the best case scenario.
Representative McKay responded that the jack-up rig would
likely come from the Gulf of Mexico and could either be
towed up or hauled up to the state. The rig would be
mobilized in summer or early spring. He acknowledged that
it was a substantial operation and required supply vessels,
materials, and manpower, among other resources.
Representative Coulombe commented that she liked the bill.
She referred to slide 3 which detailed the various types of
drilling rigs. She asked why the bill would not be expanded
to other types of rigs for future drilling purposes.
Representative McKay responded that jack-up rigs were the
most efficient and the most economical. There had been
drill ships used in Cook Inlet in the past, but the rigs
had to be dynamically positioned, which required a
significant amount of power. The ships were designed to sit
in the tides without moving, which required a tremendous
amount of fuel.
Representative Coulombe understood that there was only one
jack-up rig in the inlet currently and it was being fully
utilized by Hilcorp. She asked Representative McKay how
confident he was that there would be enough drilling
opportunities to keep the two jack-up rigs busy.
Representative McKay responded that determining the scope
was up to the private sector. There were two gas reservoirs
that could be exploited and two platforms, which would take
at least two years to drill to completion. He noted that it
was a hypothetical situation at the moment. He thought the
legislature was responsible for setting up the environment
and the industry was responsible for deciding how to
proceed. The projects would likely proceed if the
legislature was able to ensure that the projects would be
economically viable. He pointed out that none of his energy
bills required that the state take action, but instead
offered opportunities to the private sector. He thought
that the private sector knew how to operate drilling
projects better than the state. The role of the state was
to offer incentives and put forth appropriate legislation.
The owner of the potential jack-up rig in the Gulf of
Mexico or Southeast Asia would likely not likely bring the
rig to Alaska for an abbreviated program, but for a two-
year or three-year contract to ensure that there would be a
return on investment.
2:55:06 PM
Representative Josephson understood that the credit was not
limited to oil and gas companies. He asked which party
would receive the tax credit in the following hypothetical
situation: a jack-up rig drilling in the Gulf of Mexico was
not producing oil and the owner of the rig decided to enter
into a contract with an oil or gas producer in the Cook
Inlet. He assumed that the producer would receive the
credit and the producer would enter into an independent
contract with the owner of the jack-up rig.
Mr. Jepsen responded that the tax credit was structured to
apply to any Title 43 tax liability. The intent was to open
up the credit eligibility to Alaska Native corporations
that do not drill for oil or a transportation company with
a high corporate income tax liability. The credit would
make it easier to transport the rig to Alaska, lease the
rig, and become the owner of the rig, which would make the
rig an asset to Alaska. He explained that the overall idea
was not to limit the credit to oil and gas companies and
allow other corporations or entities in the state to
potentially become an owner of a rig.
Representative McKay added that Representative Josephson
had described a typical scenario. He explained that an oil
and gas company would contract with a drilling contractor
and pay the contractor to lease the rig, then the oil and
gas company would receive the tax credit.
Representative Josephson provided a hypothetical example
where the Northwest Alaska Native Association (NANA)
initiated the development. He asked if the corporate taxes
would be written off against NANA's assets or if the credit
would belong to the ultimate developer. In the example
scenario, NANA would be the general contractor.
Representative McKay responded that he would offer a
different example. He relayed that Doyon Incorporated would
be considered the parent company, and beneath the parent
would be Doyon Drilling. The two were considered separate
divisions. He noted that Doyon could contract or purchase a
jack-up rig which would become part of its fleet, but it
would have nothing to do with Doyon's other divisions and
their other businesses.
Representative Josephson asked if Mr. Spanos could respond
to the question.
2:59:18 PM
Mr. Spanos responded that he understood that the question
was how the credit would be applied if a non-producer were
to take on the cost of bringing up a jack-up rig to the
state. He relayed that it would depend upon the company. If
the company was a C corporation, the credit would apply
against its AS 43.20 C corporation taxes, which were net
income taxes. If the company was another entity with a
different type of tax, such as a fishing company, the
company could bring up a jack-up rig and apply the credit
against its fish taxes.
Representative McKay thanked the committee for its time.
HB 387 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the agenda for the following day's
meeting.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 223 Sponsor Statement.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 223 |
| HB0223 CS(RES) Summary of Changes B to U.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 223 |
| HB0223 CS(RES) Sectional Analysis.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 223 |
| HB387 Sectional Analysis ver U 3.28.24.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 387 |
| HB387 Summary of Changes (B to U) 3.28.24.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 387 |
| HB387 Sponsor Statement ver U 3.28.24.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 387 |
| HB 223 DNR DOG Presentation to HFIN 04.04.2024.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 223 |
| HB 387 Presentation ver. U.pdf |
HFIN 4/4/2024 1:30:00 PM |
HB 387 |