Legislature(2003 - 2004)
05/14/2003 09:40 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 185(RES)
"An Act providing for a reduction of royalty on certain oil
produced from Cook Inlet submerged land."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken directed attention to a draft committee substitute.
Senator Taylor moved for adoption of CS SB 185, 23-LS0926\S, as a
working document.
Co-Chair Wilken objected for an explanation.
DAN DICKINSON, Director, Tax Division, Department of Revenue,
detailed the changes in the committee substitute. He stated this
legislation relates to an oil and gas exploration tax credit. He
noted the committee substitute provides that this credit could be
taken any time after July 1, 2004. He clarified that although
credits could be accrued for expenses occurred before that date,
the credit could not be received until FY 04. He indicated the
credit is either 20 percent or 40 percent.
Mr. Dickinson spoke of the expenses that qualify for the credit and
pointed out they must be incurred between July 1, 2003 and July 1,
2007. He stated this would encourage exploration during this time
period. He furthered that the committee substitute "created a very
narrow base of just those expenses traditionally associated with
exploration." He asserted that and once a well is successful, the
State would stop "recovering the cost", because it is assumed that
a producer would continue development.
Mr. Dickinson pointed out an error with in the committee substitute
in that the practice of "cementing" qualifies for the credit on
page 6, line 16, however is disallowed on line 20. He recommended
deleting "cementing" from line 20, as the expense should be
allowable.
Mr. Dickinson next noted that if wells or work on wells has already
been committed to the State as a plan of development, the credit
could not be taken. He remarked this is to prevent producers from
delaying activities.
Mr. Dickinson stated that the 20 percent credit would apply to
exploration that is done more than three miles from a preexisting
well. He characterized this as small accumulations that would be
close to current infrastructure and in which development would
progress rapidly. He pointed out the three-mile requirement was
changed from the location of the "blow holes", as specified in
Version "Q" adopted at the previous hearing, to the location of the
"bottom holes." He also noted that the specification of
"preexisting" was inserted in the committee substitute Version "S"
to allow developers to pursue additional exploration near other
areas explored utilizing the proposed credit. He stated this would
allow developers to utilize a single drilling pad and would cover a
"drilling pad".
Mr. Dickinson next described the wildcat exploration activities
that would qualify for a 40 percent credit, which he compared to
the recent Alpine discovery. He explained that these activities
must occur at least 25 miles from a lease boundary, or
infrastructure. He clarified these explorations could be located
within 25 miles from another wildcat location. He also noted that
seismic exploration would also qualify for the 40 percent credit.
Mr. Dickinson outlined the procedure whereby information learned
during these exploration activities would be submitted to the
Department of Natural Resources and then made public after a period
of ten years. He stated this would provide opportunity for
explorers to develop their discoveries and also allow others to
"build on that knowledge base" after ten years has passed.
Co-Chair Green asked if ten years is the standard length of time in
which to make this information available to the public.
Mr. Dickinson replied it is standard in some places, although the
time period is two years in other areas. He surmised the existing
Department tax credit program has not been utilized because of the
two-year period.
Senator Taylor asked the benefit to the State for the ten year time
period. He noted the exploration credit would be valid for four
years and suggested the proprietary information should be made
public after four years as well.
Mr. Dickinson responded that the ten-year provision would benefit
the State in that commercial transactions in areas near these
drilling sites should not be interrupted because of proprietary
information gleaned from the exploration activities.
Senator Taylor expressed concern over the "vast amount of acreage"
the State has leased, upon which no activity has occurred for "an
extensive period of time".
Mr. Dickinson understood the leases have a seven-year term and the
contracts require a plan for development.
Senator Taylor asked whether the terms of the lease agreements are
enforces and if the State has terminated leases for lack of
development.
Co-Chair Wilken directed the witness to complete his explanation of
the committee substitute.
Mr. Dickinson noted that credits earned by a company that does not
have a production tax liability, could be transferred or sold. He
informed that a market exists for these credit certificates and
that this provision would encourage "nontraditional" and
independent explorers.
Senator Hoffman asked the difference between transfer, convey and
sell, as related to the certificates.
Mr. Dickinson responded this is legal terminology to cover the
situations in which a company could utilize the credit earned by a
subsidiary.
Mr. Dickinson continued that the committee substitute also contains
a provision allowing the purchaser of a certificate to pay less
than the full value of the credit, yet receive the full credit from
the State. He explained this is to maintain the value of the
certificates for the explorers and to provide incentive for
explorers.
Mr. Dickinson indicated other language in the committee substitute
addresses confidentiality and definitions.
Co-Chair Wilken moved for adoption of CS SB 185, 23-LS0926\S, as a
working draft.
The committee substitute, Version "S" was ADOPTED without
objection.
Amendment #1: This amendment deletes "cementing" from page 6 line
20 in Section 3 of the committee substitute. The amended language
of Sec.43.55.025 (b)(3) reads as follows.
(b) may not be for testing, stimulation, or
completion costs; administration, supervision, engineering, or
lease operating costs; geological or management costs;
community relations or environmental costs; bonuses, taxes, or
other payments to governments related to the well; or other
costs that are generally recognized as indirect costs or
financing costs; and
Co-Chair Green moved for adoption.
There was no objection and the amendment was ADOPTED.
Senator Taylor restated his earlier question relating to
maintenance of leases, acknowledging the subject is not directly
related to this legislation. He asked the number of exploratory
wells were drilled three years prior when the price of oil was
$8.56 per barrel.
Mr. Dickinson informed of the disappointment to the Department that
when the prices were "covered" in 1999 and 2000, similar recovery
in exploration did not occur. He relayed the theory that the higher
prices of the past three years have been a "bubble" sustained for
"various reasons" rather than due to a "fundamental shift in the
underlying price." Therefore, he stated projects were evaluated
based on a per barrel price of $14.00, despite the actual prices of
ten dollars higher.
MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources furthered that seven exploration drills have
occurred on the North Slope over the past year, as well as "quite a
bit of activity" in Cook Inlet. He informed that companies base
expenditures on a production forecast and therefore plan several
years in advance and he detailed the statistical methods utilized
to determine exploration activities.
Senator Taylor asked why this program was not done four or five
years ago.
Mr. Meyers answered, "The state of Alaska's oil industry has been
in tremendous flux, largely due to the massive mergers and
acquisitions." He explained that it would have been difficult for
the large companies to invest in exploration in the midst of
merging with other companies.
Debate continued between Senator Taylor and Mr. Myers relating to
the reserves not under exploration or development. Mr. Myers
assured that no large known reserves were idle. He told of
exploration activities underway across the State facilitated by a
licensing program.
Senator B. Stevens asked whether an explorer retains rights to
seismic data submitted to the Department of Natural Resources after
it has sold the tax credit certificate earned from activities at
the claim in which the information was generated.
Mr. Myers responded that the State would be required to maintain
the confidentiality of this data for ten years. He furthered that
any other company wishing to obtain this data must purchase it
through the explorer.
Senator B. Stevens clarified that the explorer could sell both the
tax credit and the data collected.
Mr. Myers affirmed.
Senator B. Stevens asked whether this occurs often.
Mr. Myers stated that most seismic data "shot" is not collected for
speculation purposes and explained the existing practices of
sharing and selling data.
Senator B. Stevens asked whether a party could "shoot" seismic data
in an area it does not own a lease on.
Mr. Myers replied that seismic shot on State land is done by
permit, independent of ownership of mineral rights. He stated that
issuance of such permits is common practice for the Department.
Senator Hoffman asked whether this legislation would apply to the
National Petroleum Reserve - Alaska (NPR-A).
Mr. Dickinson replied it would.
Senator Hoffman asked the importance to this bill of the provisions
relating to the sale, transfer and conveyance of the tax credits,
and the consequences of deleting the provisions.
Mr. Dickinson stressed the intent to not create this credit only
for parties with current tax liabilities. He listed four companies
with current tax liabilities and stated the goal is to encourage
exploration to additional entities.
Senator Hoffman asked if other states allow these sales and
transfers and whether the credits are discounted according to the
sale price of the credit.
Mr. Dickinson understood that in other locations in the world where
this practice is employed, purchasers are allowed to retain the
full value. He remarked the intent is to protect the interest of
the explorers.
Senator Hoffman suggested the matter should be considered from the
best interest of the State.
Mr. Dickinson expressed the purpose is to promote exploration and
to generate revenue from income taxes once the oil is produced.
Senator Taylor clarified testimony that the oil industry is basing
exploration decisions on a model based on a price of approximately
$14.50 per barrel.
Mr. Dickinson responded that $14.00 is the "stress price", i.e.
"the low end price in the cycle". He stated this is one factor
utilized by industry, although the companies have complex models.
Mr. Meyers furthered the models vary by company and would be a
"netted back price". He listed factors considered in determining
exploration and production activities, including differential in
transportation cost, whether the oil would be sold interstate or
intrastate, pipeline tariffs, incremental facilities costs, whether
existing infrastructure would be available, the commercial
arrangement for infrastructure, potential productivity rates of the
reservoir, etc.
Senator Taylor commented on the large profits of oil companies and
the need for those funds to be reinvested in Alaska. While he
supported providing $500 million of anticipated revenue to induce
additional exploration, he questioned the amount of revenue the
State would receive, given the testimony regarding the "bubble" in
oil prices. He predicted that significant exploration would occur
as a result of the tax incentives but that actual production would
not.
KEVIN TABLER, Land and Government Affairs Manager, Union Oil
Company, testified via teleconference from an offnet location to
express disappointment that concerns he expressed to the Committee
at the previous hearing were not addressed in the committee
substitute. He pointed out that this bill initially related to
royalty reduction necessary for continuation of exploration and
infrastructure in the Cook Inlet area, and that the committee
substitute adds another component at significant expense that could
subsequently jeopardize the original provision. He emphasized the
new provision relates to activities in the North Slope but would
not benefit activities in Cook Inlet.
Mr. Tabler spoke of wells drilled in the 1960s and 1970 that did
not contain oil but could contain natural gas and were ranked as
wildcat exploration. He stated that these are located close to
existing infrastructure and would therefore not qualify for the tax
credit, although there is no guarantee they contain natural gas. He
spoke of the current shortage of natural gas. He suggested a
provision to clarify the intent for increased production, as the
current language of the bill provides no incentive for independent
explorers operating in Cook Inlet.
Mr. Tabler proposed amending Section 3, Sec. 43.55.025 (c)(2), on
pages 6, line 30 through page 7, line 4 of the committee substitute
to read as follows.
(2) be for an exploration well that is located and
drilled in such a manner that the bottom hole is located not
less than three miles away from the bottom hole of an
abandoned oil or gas well certified by the AOGCC [Alaska Oil
and Gas Conservation Commission] as capable of producing from
the same formation in the exploration well;
SFC 03 # 94, Side B 10:27 AM
Mr. Tabler continued this would allow parties to explore for gas in
areas that had been explored for oil. He spoke to the different
formations and horizons of oil and gas exploration. He remarked the
proposed amendment would allow drilling utilizing the existing
infrastructure, as intended by the original version of the bill.
Mr. Meyers addressed the proposed amendment, noting the "many
different flavors of oil exploration", including "rank wildcats",
located far from infrastructure and with little geologic data and
increased risk. He stated that with increased known data available,
the exploration risk generally decreases. He titled areas within
existing production as "extension explorations", noting these
typically have significantly more data than the rank wildcat
explorations.
Co-Chair Wilken asked if the Department favors or opposes the
suggested amendment.
Mr. Meyers replied that the matter needs further discussion and the
Department would oppose the amendment until that time. He remarked
that the fiscal note would be difficult to quantify, although it
would be in a significantly larger amount based on the number of
wells that would qualify. He admitted he was unaware of the
relationship of AOGCC certification to exploration risk.
STEVE PORTER, Deputy Commissioner, Department of Revenue, testified
that if this if bill passes, the Department would review the
impacts to Cook Inlet.
Mr. Tabler remained concerned recalling HB 207, of 1995, relating
to royalty reduction in Cook Inlet. He asserted the final version
incorporated the North Slope and subsequently, "made that bill
unusable for us and unworkable." He reiterated the current bill
could fail to pass as a result of the increased fiscal note cost.
He understood the comments about exploration risk, but disagreed
with the Department. He supported the concept proposed in the
committee substitute, but warned that it does not apply equably to
both "oil provinces".
Co-Chair Wilken applauded the witness's presentation of arguments.
He assured that before this bill could pass into law, additional
opportunities would be available to address the witness's concerns.
He furthered that the Department has committed to review the
matter.
Senator Bunde added that dry holes incur a substantial cost and
would be a considerable risk.
Mr. Tabler affirmed. He spoke of "pleading for capital" to drill
those wells.
Senator Hoffman asked if the July 1, 2007 deadline for this
legislation would be in effect if the Alaska National Wildlife
Reserve (ANWR) were opened for oil exploration before that date.
Mr. Dickinson answered the credits would still apply.
Senator Hoffman asked whether the provision of this bill should
apply to potential activities in ANWR.
Mr. Dickinson responded the intent is to encourage drilling
presently and that the legislature could extend the provisions to
apply to ANWR.
Senator Hoffman noted that it is known that considerable oil
reserves exist in ANWR, and that the State is depending upon an
opening.
Senator Hoffman referenced the spreadsheet detailing the cost of
exploration and asked about oil development occurring in the other
countries listed and the incentives offered in those locations. He
expressed the need for a benchmark.
Mr. Dickinson replied that exploration is one factor and that
development, transportation, and marketing are also factors. He
stated that each fiscal regime is different in the incentives
offered.
Senator Hoffman asked what areas exploration is concentrated.
Mr. Dickinson listed areas in the former Soviet Union, noting that
although there have been difficulties these areas offer the most
enticing incentives.
Co-Chair Wilken appreciated the Committee discussion on this issue.
Senator Taylor offered a motion to report the committee substitute,
Version "S", as amended, from Committee with individual
recommendations and new fiscal notes.
Senator Taylor then objected to his motion to comment that this
legislation is "very brave" on the part of the Murkowski
Administration to deny $100 million to the general fund each year
for the next four years and provide that as an investment for
future administrations and future legislatures that hopefully would
realize a return.
Senator Taylor removed his objection.
Co-Chair Wilken pointed out the maximum exposure is $100 million
annually and would not be realized until FY 05. He shared Senator
Taylor's concern, but clarified that $400 million is not the
correct amount of lost revenues because of increased production
revenues.
Co-Chair Green commented that the competition has changed from five
years prior and that the State must adjust accordingly to
participate.
Co-Chair Wilken added that with regard to oil exploration, Alaska
"is sitting still while others are leapfrogging ahead of us with
exploration credits."
Senator Hoffman concurred with the comments, but expressed concern
th
that this is monumental legislation considered in the 114 day of
the legislative session. He asked why this bill was not introduced
two months ago, given that the governor campaigned about resource
development. He was unsure that he had adequate time to consider
the ramifications, whether this would benefit the State and whether
it would actually result in increased exploration activities. He
asserted that the Committee has a responsibility to fully consider
matters, and he questioned whether moving this legislation He
remarked that despite his concerns, he would not object to this
bill moving from Committee.
Co-Chair Wilken countered that legislation should have been
introduced two years ago. He informed that he became aware four
weeks ago that this legislation was being prepared. He surmised
that the Administration has researched the matter and understands
the importance and the risks and benefits. He asserted, "finally we
have a governor that has the courage to bring this to this table
because the prior governor did not."
Without objection, CS SB 185 (FIN) MOVED from Committee with a
fiscal noted dated 5/11/03 for $107,900 from the Department of
Revenue, and a zero fiscal note dated 5/9/03 from the Department of
Natural Resources.
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