03/11/1996 03:37 PM Senate RES

                                                                               
                SB 112 DISCOVERY ROYALTY CREDIT                               
                                                                              
 SENATOR PEARCE moved to adopt the F version Chenoweth 3/9/96 work             
 draft for SB 112.  There were no objections and it was so ordered.            
                                                                               
 ANNETTE KREITZER, Staff to the Senate Resources Committee,                    
 explained the changes in version F.  The substantive change begins            
 on page 2, line 30.  She worked with the administration to create             
 language acceptable to the committee regarding definition of pools.           
                                                                               
 SENATOR PEARCE moved to adopt amendment #1.  MS. KREITZER explained           
 that AS38.05.134 speaks to the exploration licensing program that             
 was passed by the legislature a couple of years ago.  The Cook                
 Inlet Basin is a very large sedimentary basin and some of the area            
 especially in the northern part is open to licensing and they                 
 didn't mean to exclude that part of the basin.                                
                                                                               
 KEN BOYD, Director, Division of Oil and Gas, said it was unlikely             
 that they would have any objection to it unless it had some strange           
 definition of the Cook Inlet Sedimentary Basin.                               
                                                                               
 There were no objections to amendment #1 and it was adopted.                  
                                                                               
 MS. KREITZER explained the second proposed amendment which                    
 clarified which production is actually getting the royalty                    
 reduction.                                                                    
                                                                               
 TAPE 96-27, SIDE B                                                            
 Number 580                                                                    
                                                                               
 SENATOR LEMAN noted that this amendment was Mr. Boyd's suggestion.            
 MR. BOYD agreed and said it eliminated ambiguity. The way the                 
 language is now, for instance he said, if the pool was on all six             
 of the leases, their intention was to reward the initial discovery            
 on that one lease in that pool.                                               
                                                                               
 MS. KREITZER noted to be consistent the same change would have to             
 be made on page 3, lines 5 and 6.                                             
                                                                               
 SENATOR PEARCE moved to adopt amendment #2, there were no                     
 objections and it was adopted.                                                
                                                                               
 MR. BOYD had a concern with "commercial quantities," but he said              
 the last amendment had changed the absolute need for a dimension              
 and he wanted to work with the committee on that issue.  He said              
 the point was that the well had to be capable of producing                    
 commercial quantities.                                                        
                                                                               
 SENATOR PEARCE asked when they certify a well producable what                 
 language to they use.  MR. BOYD replied they certify capable of               
 production in paying quantities.  SENATOR PEARCE asked if they                
 should just use that language.  MR. BOYD replied no, that he                  
 thought it was a different standard.  In paying quantities does not           
 really say that it will be produced.                                          
                                                                               
 SENATOR LEMAN asked if line 8 would have to be changed also.  MR.             
 BOYD answered that it would have to be changed anywhere "commercial           
 quantities" appeared would have to have "capable of producing"                
 added.                                                                        
                                                                               
 SENATOR PEARCE moved to adopt that amendment.  There were no                  
 objections and it was so ordered.  MS. KREITZER noted that language           
 was used throughout amendment #1 and on page 3, lines 1 - 12.                 
                                                                               
 SENATOR TAYLOR moved amendment #4.  SENATOR LEMAN objected for                
 purposes of explanation.  SENATOR TAYLOR explained the effect of              
 this amendment would be to set it up so that current lease holders            
 in the Cook Inlet Basin would fall within this royalty bill.                  
                                                                               
 SENATOR HALFORD asked if the royalty was being made retroactive               
 with regard to investment decisions that were made five years ago             
 and rewarding those decisions with the credit?  He said that any              
 kind of a credit bill is supposed to encourage marginal activity.             
 Going back in a lease term so they can put the money in now is                
 still a prospective reward for activity that might not otherwise              
 occur.  But going back and picking up activity that occurred in               
 1992 and applying that to the terms the effect is a retroactive tax           
 credit and it's hard to argue that that credit has encouraged                 
 marginal activity retroactively.                                              
                                                                               
 SENATOR TAYLOR agreed and explained that without doing so this                
 would be applicable against new leases.                                       
                                                                               
 SENATOR HALFORD said there are two questions; one is going back to            
 the leases is the right thing to do; the second question is are               
 they talking about investments made from the time of the effective            
 date of the bill forward on leases that were already held before              
 that or are they talking about going backward in both cases.                  
                                                                               
 SENATOR TAYLOR replied that his desire would be to go backward on             
 those leases already held for new discoveries, but he thought this            
 goes beyond that.  However, he would rather err in going beyond               
 that than in not accomplishing it at all.                                     
                                                                               
 SENATOR LEMAN said he was concerned with how they recover those               
 lease payments that have already been made and whether that's done            
 as a credit to future royalties.                                              
                                                                               
 SENATOR FRANK asked if they considered that in the formation of               
 their committee substitute.  SENATOR LEMAN answered they considered           
 it and there is one other approach, Senator Halford's, which he               
 thought merited discussion.  Applying it to leases that have not              
 been explored would create an incentive and the down side of that             
 is that you change the value of leases.  SENATOR FRANK commented              
 that the value of a lease changes every time the price of oil goes            
 up or down, as well as every time they pass a law concerning                  
 worker's compensation or the environment.  He supported Senator               
 Taylor's concept and Senator Halford's desire to fine tune it.  He            
 thought Senator Taylor's amendment went a little too far.                     
                                                                               
 SENATOR HALFORD said he didn't think retroactive credits worked the           
 way they are intended to work.  But he didn't think they should               
 exclude leases because they were already out there.  He wanted                
 those leases to be eligible.                                                  
                                                                               
 SENATOR LEMAN asked if there was any objection to incorporating the           
 conceptual amendment.  There was no objection and it was so                   
 ordered.  SENATOR LEMAN noted that the bill would be back in                  
 committee on March 13.