05/10/1995 01:07 PM Senate RES

              SB 114 HIGH COST MARGINAL OIL WELLS                             
                                                                              
 Number 190                                                                    
                                                                               
 SENATOR LEMAN brought  SB 114  before the committee as the next order         
 of business, noting there was a proposed Resources CS.  He said his           
 intent was to adopt the committee substitute, but to not move the             
 legislation out of committee so that it can be worked on during the           
 interim.                                                                      
                                                                               
 SENATOR PEARCE moved that CSSB 114(RES) be adopted as a working               
 document.  Hearing no objection, the motion carried.                          
                                                                               
 Number 214                                                                    
                                                                               
 ANNETTE KREITZER, staff to the Senate Resources Committee,                    
 explained that changes were made in the legislation in response to            
 previous industry testimony and ideas put forth in previous                   
 hearings by the committee.                                                    
                                                                               
 An earlier draft of the bill required a six-month period for which            
 the certificate is sought and the well being in production for at             
 least 120 days before it could be certified as a high cost marginal           
 well.  The new committee substitute changes it to one month and 20            
 days in production.                                                           
                                                                               
 Also, the credit of $2.00 per barrel has been decreased to $.25 per           
 barrel of production.  The credit may not exceed the lower of                 
 $125,000 per well or $500,000 per producer.  The credit must now be           
 used within one year as opposed to the previous five years.                   
                                                                               
 The committee substitute also contains a new section that relates             
 to North Slope test or development wells.  It provides that the               
 credit would be allowed on the production of the first 100 barrels            
 per well and the credit cannot be combined with other credits.  It            
 also provides that the weighted average has to less than 15 degrees           
 API.  It is for wells where drilling began on or after July 1, and            
 the well has to be located north of the Umiak baseline.                       
                                                                               
 Number 245                                                                    
                                                                               
 SENATOR LEMAN commented that right now if it is $.25 per barrel of            
 production and if there is a one-eighth royalty, that is equivalent           
 to a $2.00 per barrel of royalty oil.  There has been discussion on           
 another piece of legislation of a royalty reduction in the order of           
 $.50 to $.80 a barrel.  This is a greater one, and even that may              
 exceed the value of the state's royalty share at $2.00 a barrel.              
                                                                               
 SENATOR FRANK asked if this was referring to royalty, or was this             
 for other taxes.  ANNETTE KREITZER responded that for the Cook                
 Inlet wells the credit could be applied against oil or gas rental,            
 royalty payments, or taxes that are due, or oil and gas bonus                 
 payments.  For the North Slope development wells the credit can be            
 taken against the production tax.                                             
                                                                               
 Number 275                                                                    
                                                                               
 JIM EASON, Contractor, Senate Resources Committee, responding to              
 Senator Leman's comment on the reduction exceeding the value of the           
 state's royalty share, said it is unlikely that the well-head value           
 of the oil would be so low that a $2.00 credit against it would               
 zero out the royalty.                                                         
                                                                               
 SENATOR LEMAN noted that previous testimony was that two wells on             
 the North Slope would have qualified under the previous definition            
 of "high cost marginal wells" and he didn't know if this would                
 change the number of wells that would qualify.  All of the wells,             
 with the exception of those two, would have been in Cook Inlet.               
 JIM EASON agreed, and he added that as things currently are on the            
 North Slope, he's not sure that any wells would qualify for that              
 particular provision, but as time passes, it is likely that they              
 will.                                                                         
                                                                               
 Number 340                                                                    
                                                                               
 JON TILLINGHAST, representing Occidental Petroleum, introduced Ed             
 Behm, Alaska Asset Manager for the company.  He noted there were a            
 number of OXY USA officials present in the Capital City to talk               
 with legislators and executive branch officials on the challenge of           
 encouraging heavy oil production on the North Slope.                          
                                                                               
 Mr. Tillinghast thanked the committee for raising the issue of how            
 to encourage heavy oil production on the slope.  He referred to the           
 West Sak Sands Schrader Bluff Field, which is the largest known and           
 delineated but undeveloped field in North America, and said one of            
 the state of Alaska's greatest challenges over the next two or                
 three years is to figure out how to encourage development of that             
 field in the relatively near future while there is still a pipeline           
 to ship that oil through.  He added that CSSB 114(RES), for the               
 first time, raises that issue and they want to work with the                  
 committee on the legislation in the interim, as well as during the            
 next session.                                                                 
                                                                               
 Number 357                                                                    
                                                                               
 SENATOR LEMAN asked Mr. Tillinghast if he saw any problem on timing           
 of passage of the legislation if the committee works through the              
 interim to try to get the bill into a position where it can be                
 moved fairly early next session.  JON TILLINGHAST answered that it            
 was not a problem.                                                            
                                                                               
 SENATOR LEMAN asked Mr. Tillinghast if they see the bill as                   
 something workable that could provide some benefit.  JON                      
 TILLINGHAST answered that he thinks there will be testimony and               
 research work done on specific numbers, but, in terms of                      
 encouraging a new field and encouraging capital investment, the "             
 royalty holiday approach" is the best way to influence initial                
 capital investment.                                                           
                                                                               
 Number 400                                                                    
                                                                               
 There being no further witnesses to testify on SB 114, SENATOR                
 LEMAN stated it is likely the committee will hold its first interim           
 hearing in September.  He then adjourned the meeting at 1:35 p.m.