Legislature(2023 - 2024)BARNES 124
03/06/2024 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB387 | |
| HB223 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 387 | TELECONFERENCED | |
| *+ | HB 388 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 92 | TELECONFERENCED | |
| += | HB 223 | TELECONFERENCED | |
HB 387-OIL & GAS TAX CREDIT: JACK-UP RIG
1:38:17 PM
CHAIR MCKAY announced that the first order of business would be
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."
1:39:01 PM
CHAIR MCKAY, on behalf of the House Resources Standing
Committee, sponsor, presented the sponsor statement for HB 387
[included in the committee packet], which read as follows
[original punctuation provided]:
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.
CHAIR MCKAY added that this legislation would result in a large
increase in local job creation.
1:41:06 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the House Records Standing Committee,
sponsor, presented a PowerPoint [hard copy included in the
committee packet], entitled "HB 387 - Cook Inlet Jack-Up Rig
Credit." He covered the information on slide 2, which read as
follows [original punctuation provided]:
Cook Inlet Gas Shortage
.notdef South Central will face an increasing gas production
shortage in the coming years
.notdef Fallback solution to Cook Inlet gas is LNG imports
.notdef LNG imports estimated to be significantly more
expensive, however exact increase is currently
speculative
1:41:46 PM
MR. JEPSEN explained that the results of a July 2023 public
opinion poll of Southcentral residents showed a 72 percent
opposition to importing natural gas and a nearly 60 percent
level of support for incentives to find and produce more Cook
Inlet gas. If liquified natural gas (LNG) imports were
significantly cheaper, there would be more support, but that
likely will not be the case. Many reliable stakeholders in the
state such as Enstar and the Alaska Energy Authority (AEA)
expect LNG imports to be more expensive than what is produced
with Cook Inlet gas. To avoid the potential economic impacts of
rapidly increasing energy costs and to take public opinion into
account, the legislature owes it to Alaskans to find solutions
and incentivize more Cook Inlet gas exploration, production, and
development. He explained that figure 1 on slide 2 showed the
AEA's projected costs of coal, natural gas, and LNG over the
next 16 years.
1:43:04 PM
MR. JEPSEN moved to slide 3, which read as follows [original
punctuation provided]:
Jack-Up Drilling Rigs 3
.notdef Specialized rig for relatively shallow offshore
drilling in the mobile offshore drilling unit (MODU)
class of drill rigs
.notdef Consists of floating hull and extendable legs
.notdef Necessary for exploration, development, and
production of Cook Inlet gas
MR. JEPSON called the committee's attention to figure 2, which
illustrated types of drilling rigs and pointed out the jack-up
rig, the type of drill rig used for offshore shallow waters.
1:43:48 PM
MR. JEPSON explained that there was only one jack-up rig in Cook
Inlet and HB 387 was solely aimed at getting a second rig and
then potentially a third in the future. He showed slide 4,
which read as follows [original punctuation provided]:
Why HB 387?
.notdef Second jack-up rig in Cook Inlet will be required to
adequately explore for and develop gas reserves
.notdef Current jack-up rig in Cook Inlet (Spartan 151) will
be drilling for the foreseeable future; any new major
development (Cosmopolitan, Kitchen Lights) will
require the presence of a second rig.
.notdef Federal leases in Cook Inlet require a rig with
longer reach capabilities
MR. JEPSEN explained that the decrease in production from Cook
Inlet is due in part to the lack of a second rig, so the
development of additional gas reserves is not possible. In
addition to developing the known reserves available on state
land, there are federal leases which are in deeper water and
will need upgraded drilling equipment to develop those southern
Cook Inlet leases. Market interest regarding investing in Cook
Inlet development is currently not a popular option due to risk
and rate of return. The high cost of operation in Cook Inlet
impacts both these factors. If the state subsidized the
purchase or the fixing up of a rig specifically for development
of Cook Inlet offshore reserves, it would partially offset both
risk and rate of return for a potential project. There would be
risk to the state because potentially it could cost $50 million.
He pointed out that there is not a silver bullet solution to the
gas conundrum the state is in. Alaskans want incentives for
development rather than having to pay for importing LNG.
1:46:34 PM
MR. JEPSEN moved to slide 5, which read as follows [original
punctuation provided]:
Jack-Up Rig Credit Details
.notdef Title 43 tax liability reduction credit, not cash
credit
.notdef Applies only to jack-up rigs for Cook Inlet
.notdef Adding language to ensure rigs will be used in Cook
Inlet
.notdef No significant risk to the state; either Alaska
benefits from a second rig & increase drilling, or
credit is not utilized
MR. JEPSEN pointed out that the current language in the bill
would not ensure the rigs would be used for drilling in Alaska.
This would be addressed in a proposed amendment. Additionally,
a three-year drilling contract would be required to receive the
credit to provide incentives to drill in Alaska rather than just
to transport the rigs.
1:47:58 PM
CHAIR MCKAY commented that it is highly likely the rig would be
leased rather than purchased.
MR. JEPSON responded that he has had conversations with people
in the industry, and there was potential interest in purchasing
a rig as well as leasing.
1:48:34 PM
REPRESENTATIVE MEARS asked about the limitations of the jack-up
rigs to reach other federal leases and whether there would be
interest in another type of rig.
1:49:08 PM
MR. JEPSON explained that it was particular to that type of rig.
The Spartan Rig has a capability of 150 to 200 feet, so a second
rig would need to reach another couple hundred feet. The second
jack-up rig would be more expensive but more capable of
operating in deeper water. At this point in time, there is no
particular interest in the federal deep-water leases.
CHAIR MCKAY pointed out that different jack-ups have different
leg heights so that they can work in deeper water. After
determining the drilling location, the appropriate size jack-up
would be chosen to reach those ocean water depths.
1:49:56 PM
REPRESENTATIVE MEARS inquired about the cost to own or lease and
the transportation for a jack-up. She pointed out that the
previous statute that dealt with jack-up rigs had a $20-million
limit.
MR. JEPSON responded that the cost to purchase and transport a
rig would be $50-$75 million. He explained that credit referred
to by Representative Mears was under AS 43.55.425. That credit
was a direct cash payout based on the cost of an exploration
well. By contrast, HB 387 incentivizes purchasing and getting a
rig to Cook Inlet. The previous credits were focused on
exploration drills, and there was less risk because if a company
drilled a dry hole, they were still covered. The earlier credit
was aimed at the first three wells being drilled for a jack-up
rig. The requirements for the credits under this bill are
significantly different from those mentioned by Representative
Mears.
REPRESENTATIVE MEARS requested additional information regarding
the tax credits and how long they would be on the books.
MR. JEPSON responded that HB 387 was written to be relatively
broad and applied to all of Title 43 which deals with corporate
income tax to all oil and gas taxes. It was structured in that
manner in order not to limit the credits to oil and gas
companies that might bring a rig to Alaska. It would also apply
to other entities such as a Native corporation or a
transportation company that might want to invest in a jack-up
rig. The previous jack-up rig credits were only for oil and gas
companies that were drilling a well. The specifics of the tax
credits and the length of time they would be on the books would
depend on whether the credits would be used by a large company
or a smaller entity.
1:53:35 PM
REPRESENTATIVE SADDLER asked whether the tax credit could be
applied against any Title 43 tax, whether it is a corporate
income tax or an oil and gas tax.
MR. JEPSON answered that is correct.
REPRESENTATIVE SADDLER asked who would qualify. He also
requested a break-down of rig purchase and transportation costs.
MR. JEPSON explained there is not full cost analysis but
reiterated that the total costs would range between $50 and $75
million.
REPRESENTATIVE SADDLER wanted to know whether the credits would
extend beyond the initial purchase and transportation costs.
MR. JEPSON responded that an amendment had been drafted which
would be presented as a committee substitute. It would require
the rig to be used in Alaska for a minimum of three to five
years.
REPRESENTATIVE SADDLER asked whether a second jack-up rig would
devalue the rig currently operating.
MR. JEPSON explained that that was difficult to answer.
However, meeting energy needs would require two rigs going full
time. Overall, the bill would target a jack-up rig, but the
overarching idea would be to increase project economics for a
large-scale development project.
1:56:44 PM
CHAIR MCKAY explained where some of the rigs might come from. A
company that wanted to make an investment could bring a jack-up
rig on a heavy lift vessel from the Gulf of Mexico through the
Panama Canal or from Southeast Asia which would avoid going
through the Panama Canal.
1:57:28 PM
MR. JEPSON completed the presentation with the sectional
analysis, which read as follows [original punctuation provided]:
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: Provides for an effective date.
1:58:16 PM
REPRESENTATIVE MEARS asked whether been an economic analysis
which would show the cost/benefit to the State of Alaska.
MR. JEPSON explained that would be a highly speculative economic
analysis because it would be based on the belief that LNG
imports would be significantly more expensive. If gas prices
doubled and tripled over the next 10 to 15 years, then a $50 to
$100 million credit would far offset the cost to the ratepayers
over that period of time, which would be hundreds of millions or
billions of dollars in extra fuel costs in that same time
period. From a high-level extrapolation, it seemed pretty clear
the credit would be worth it if those costs could be avoided.
However, it would come back to the level of risk the state is
willing to take.
CHAIR MCKAY commented that the state would be leveraging oil and
gas that is in the ground which might never be produced, and if
it doesn't get produced, then it has no value. There would be
no cash out of the treasury unlike the old oil tax credit
program of the previous decade.
1:59:35 PM
REPRESENTATIVE MEARS described some of her research into the
economics of purchasing LNG and found a reference to purchased
LNG at $12 per one thousand cubic feet (MCF). She suggested
that might be helpful in a cost analysis.
MR. JEPSON offered clarification by referring to data showing
that LNG would likely come in at $16 per MCF and there would be
strong upward pressure for that to increase in the following
years.
2:00:56 PM
REPRESENTATIVE SADDLER asked whether the tax credits would
provide the most incentives for companies that had property or
who were already producers rather than new entrants into the
market that would have to purchase, transport, and drill and
would probably be in the red for a number of years.
MR. JEPSON agreed that it would probably not be economical for
new entrants. However, if a non-oil and gas company were to
bring the rig here with the idea of leasing it out, it would
help new entrants because there would be a second jack-up rig
available to lease, and there would be a downstream effect.
2:02:51 PM
CHAIR MCKAY announced that HB 387 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB387 Sponsor Statement 3.06.24.pdf |
HRES 3/6/2024 1:00:00 PM |
HB 387 |
| HB387 ver B 3.06.24.pdf |
HRES 3/6/2024 1:00:00 PM |
HB 387 |
| HB387 Sectional Analysis ver B 3.06.24.pdf |
HRES 3/6/2024 1:00:00 PM |
HB 387 |
| HB387 Presentation 3.06.24.pdf |
HRES 3/6/2024 1:00:00 PM |
HB 387 |
| HB387 Fiscal Note DOR 3.06.24.pdf |
HRES 3/6/2024 1:00:00 PM |
HB 387 |