03/26/1996 08:10 AM Senate FIN

                                                                               
  SENATE BILL NO. 112                                                          
                                                                               
       An Act establishing a discovery royalty credit for                      
       the  lessees of  state  land drilling  exploratory                      
       wells and making the first discovery of oil or gas                      
       in commercial quantities.                                               
                                                                               
  Co-chairman Halford  directed that SB 112 be  brought on for                 
  discussion.  ANNETTE  KREITZER, aide to Senator  Leman, came                 
  before committee.   She explained  that changes within  CSSB
 (Res) address  problems with terms contained  within the                 
  original bill.  Concern relates to:                                          
                                                                               
       1.   What constitutes first discovery?                                  
       2.   What are commercial quantities?                                    
       3.   What is the geologic structure?                                    
       4.   What is the discovery date?                                        
       5.   Does the discovery royalty apply to all zones in a                 
            lease?                                                             
                                                                               
  As  introduced, the bill would allow  new discovery rules to                 
  apply  to the exploration  licensing program (Sec.  1).  The                 
  bill is ultimately to encourage  early exploration through a                 
  reduced royalty.   Language within  subsection (3) (page  2,                 
  lines 2  through 11)  narrows the  scope to  the Cook  Inlet                 
  sedimentary basin.                                                           
                                                                               
  Directing  attention to  page 4  of the  bill, Ms.  Kreitzer                 
  noted that the  legislation includes non-unitized  leases as                 
  well as  non-producing leases.   Language  also states  that                 
  leases  that carry  the former  discovery  royalty provision                 
  cannot apply under the new program.                                          
                                                                               
  In her  closing remarks,  Ms. Kreitzer  reiterated that  the                 
  royalty  program applies  only to leases  in the  Cook Inlet                 
  sedimentary basin  (effective  on  all  non-producing,  non-                 
  unitized  leases)  and  future  leases  certified  as  first                 
  discovery by the commissioner six months after the effective                 
  date of the act.                                                             
                                                                               
  Senator Rieger  asked if discovery  royalty provisions  were                 
  known  at the time  of the sale  of original leases  or were                 
  they enacted after  the lease sale.   Ms. Kreitzer said  she                 
  would obtain an answer.                                                      
                                                                               
  Senator  Sharp  voiced  his  understanding  that Cook  Inlet                 
  leases  on  which  there  has  been no  discovery  would  be                 
  entitled to  a 5 percent  royalty on future  discoveries for                 
  ten years.  Ms. Kreitzer noted  that the royalty would apply                 
                                                                               
                                                                               
  to discoveries in  the Cook Inlet  sedimentary basin.  If  a                 
  non-producing,  non-unitized lease  is  involved, the  owner                 
  could apply for first discovery (one per lease).                             
                                                                               
  Senator Sharp  voiced his understanding that  all production                 
  from the lease, regardless of the  number of wells, would be                 
  subject to the 5 percent royalty.  In response to a question                 
  from Senator Sharp concerning the number of leases involved,                 
  Ms. Kreitzer directed attention to backup  materials (copies                 
  on file in the original Senate Finance Committee file for SB
) and  referenced a  list of  leases as  well as  a legal                 
  decision outlining problems with the previous program.                       
                                                                               
  Discussion followed  regarding the proposed  royalty program                 
  and the existing exploration incentive credit.  Ms. Kreitzer                 
  noted that the exploration license is separate and unrelated                 
  to  discovery  royalty  credits.     One  working  under  an                 
  exploration  license could  apply  for a  discovery royalty.                 
  Ms. Kreitzer  next spoke  to situations  surrounding earlier                 
  passage of the exploration license  program.  She voiced her                 
  understanding  that  regulations for  the program  were only                 
  recently promulgated by the department.                                      
                                                                               
  Senator Sharp asked if the proposed  bill would allow one to                 
  pyramid discovery  benefits or exploration  credits to where                 
  the  "state  would be  receiving less  than  a minimum  of 5                 
  percent on  oil production."   Ms.  Kreitzer responded  that                 
  while that is  not the intent  of the proposed  legislation,                 
  she would review the situation to  determine whether it is a                 
  possibility and whether there is need for limiting language.                 
                                                                               
                                                                               
  END:      SFC-96, #52, Side 1                                                
  BEGIN:    SFC-96, #52, Side 2                                                
                                                                               
  Senator Sharp  directed attention  to page 3,  line 25,  and                 
  expressed need for clarification of new  language commencing                 
  there and continuing to  the next page.  Ms.  Kreitzer asked                 
  if it  was the  intent of  the committee  that the  bill not                 
  allow  opportunity  for one  to  apply under  more  than one                 
  program,  resulting  in  more  than   a  5  percent  royalty                 
  reduction.    Senator Sharp  again voiced  concern regarding                 
  opportunity, through the proposed  bill in combination  with                 
  other programs, for  the state  to receive less  than the  5                 
  percent minimum.  Ms. Kreitzer said she did not know whether                 
  bill  language  needed  to  be  clarified to  preclude  that                 
  opportunity.    Co-chairman  Halford  acknowledged  need  to                 
  answer that question and  directed that the bill be  held in                 
  committee pending receipt of additional information.