04/06/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 208                                                                                                           
                                                                                                                                
     "An Act requiring the Department of Natural Resources                                                                      
     to   evaluate   current    incentives   and   recommend                                                                    
     additional   incentives   that   would   increase   gas                                                                    
     exploration, development, and production in the Cook                                                                       
     Inlet sedimentary basin; and requiring the Department                                                                      
     of Natural Resources to evaluate the means by which                                                                        
     the department may explore for, purchase, and sell                                                                         
     natural gas from newly proved gas reserves in the Cook                                                                     
     Inlet sedimentary basin."                                                                                                  
                                                                                                                                
9:28:46 AM                                                                                                                    
                                                                                                                                
SENATOR  BILL WIELECHOWSKI,  SPONSOR, introduced  SB 208  to                                                                    
the committee:                                                                                                                  
                                                                                                                                
     SB 208 calls on the departments of Natural Resources                                                                       
    and Revenue to complete two tasks by December 1 of                                                                          
     this year.                                                                                                                 
                                                                                                                                
     The first is to evaluate the effectiveness of existing                                                                     
    incentives designed to increase exploration for and                                                                         
     production of natural gas in Cook Inlet.                                                                                   
                                                                                                                                
     The second is to identify and evaluate additional                                                                          
     steps the legislature could take to increase                                                                               
     production of gas in Cook Inlet.                                                                                           
                                                                                                                                
     It is well known that reserves of natural gas in Cook                                                                      
     Inlet are declining.                                                                                                       
                                                                                                                                
     You have probably all seen this chart - known as the                                                                       
     "waterfall chart" - which depicts a precipitous                                                                            
     decline in the known reserves of Cook Inlet gas.                                                                           
                                                                                                                                
     The chart and testimony indicate that as early as                                                                          
     2012, homes and businesses in Southcentral Alaska                                                                          
     could be without sufficient supplies of natural gas.                                                                       
                                                                                                                                
     Earlier this year, we received encouraging news about                                                                      
    this looming gas shortage when DNR completed a new                                                                          
     assessment of known, possible, and probably reserves                                                                       
     in the Inlet.                                                                                                              
                                                                                                                                
     This review concluded that if sufficient investment in                                                                     
     Cook Inlet exploration were made, supplies could last                                                                      
     a great deal longer.                                                                                                       
                                                                                                                                
     While the new assessment provides welcome news, the                                                                        
     challenge remains - What actions can and should the                                                                        
     state take to encourage producers to invest more in                                                                        
     the Inlet?                                                                                                                 
                                                                                                                                
     Which incentives are likely to work and which simply                                                                       
     transfer revenue from the state treasury to companies                                                                      
     which may already have sufficient incentive to drill,                                                                      
     given proper market conditions.                                                                                            
                                                                                                                                
     Are there steps the state can take other than lowering                                                                     
    tax rates or increasing credits which might have a                                                                          
     greater effect on private sector behavior?                                                                                 
                                                                                                                                
     This question is particularly compelling in light of                                                                       
    the very modest tax rates and generous tax credits                                                                          
     that producers in the Inlet already enjoy.                                                                                 
                                                                                                                                
     The legislature has already gone to lengths to                                                                             
     encourage more production in Cook Inlet.  To what                                                                          
     extent are these incentives working?                                                                                       
                                                                                                                                
    This bill seeks to answer this question and others.                                                                         
    For example, what are other jurisdictions doing to                                                                          
     promote more investment?                                                                                                   
                                                                                                                                
     If the small size of the market in Alaska is an                                                                            
     impediment to new exploration and production - which                                                                       
     we have heard - are there steps the state can take to                                                                      
    "enhance" the market to ensure that producers see a                                                                         
     return on their investment in a reasonable timeframe?                                                                      
                                                                                                                                
     For instance, could the state commit to buying a                                                                           
     percentage of newly proven reserves upfront so                                                                             
     investors don't have to wait decades to reap the                                                                           
     benefits of their investment?                                                                                              
                                                                                                                                
    Earlier this session, you heard testimony that the                                                                          
     state already reimburses companies for 45-65% of their                                                                     
     exploration costs.  Given this, how can the state                                                                          
     partner more effectively with industry to ensure that                                                                      
     the needs of Alaskans for a long-term, affordable and                                                                      
     reliable source of gas are met?                                                                                            
                                                                                                                                
     This bill calls for a quick analysis of these                                                                              
     questions.                                                                                                                 
                                                                                                                                
    It asks DNR and DOR to assess the effectiveness of                                                                          
     existing fiscal inducements, propose new incentives it                                                                     
    believes would be useful, and then look broadly at                                                                          
     what other strategies the state might employ to make                                                                       
     sure Alaskans down tumble over the cliff depicted in                                                                       
     DNR's "waterfall chart."                                                                                                   
                                                                                                                                
    Most importantly, it calls for this work to be done                                                                         
     expeditiously - by December 1 - so that the                                                                                
     legislature can act swiftly next year once the                                                                             
     foundation for a more informed decision has been laid.                                                                     
                                                                                                                                
9:32:14 AM                                                                                                                    
                                                                                                                                
KEVIN BANKS, DIRECTOR, DIVISION OF  OIL & GAS, DEPARTMENT OF                                                                    
NATURAL RESOURCES,  explained that a couple  months ago, the                                                                    
sponsor's staff asked if such  a project was feasible and if                                                                    
it could  be implemented in  a short time.  The department's                                                                    
first recommendation was to make  the bill with an immediate                                                                    
effective date. He  informed the committee that  there was a                                                                    
firm already  under contract by  the department  which might                                                                    
be able  to undertake this  task. He suggested  that Gaffney                                                                    
Cline &  Associates' contract could  be modified  to provide                                                                    
the information needed.                                                                                                         
                                                                                                                                
9:34:34 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked if there  is any need to  change the                                                                    
time constraint  in order to  meet the December  1 deadline.                                                                    
Mr. Banks  thought the immediate effective  date, along with                                                                    
using the existing contract, would work.                                                                                        
                                                                                                                                
Co-Chair  Stedman  spoke  of a  concern  about  making  good                                                                    
public policy  calls instead of reactionary  calls regarding                                                                    
the natural gas  supply in the Railbelt. He  said that there                                                                    
are  currently many  bills that  offer  incentives, some  of                                                                    
which seem  to be a  little "detached" from a  public policy                                                                    
process,   which  would   define   the   issue  and   target                                                                    
governmental action to  solve the problem of  running out of                                                                    
gas. He requested an opinion  from Mr. Banks about finding a                                                                    
solution in Cook Inlet.                                                                                                         
                                                                                                                                
Mr. Banks  believed that  most tax  policy, with  respect to                                                                    
incentives, either by reducing tax  or by providing a credit                                                                    
is "like  pushing a  string". He  further stated  that there                                                                    
are  contractual relationships  with  lessees that  somewhat                                                                    
limit  what the  department can  encourage producers  to do.                                                                    
This  bill  asks the  department  to  use creative  thinking                                                                    
about whether the  state can have a more active  role in the                                                                    
market  place, in  exploration,  and in  the development  of                                                                    
resources  in the  Cook  Inlet. He  maintained  that it  was                                                                    
worth examining the state's role using a measured approach.                                                                     
                                                                                                                                
Co-Chair Stedman explained  that Cook Inlet does  not have a                                                                    
tax structure  like the North  Slope does. The  credits have                                                                    
been  increased  and  broadened   in  the  past  years.  The                                                                    
legislature  ensured that  Cook  Inlet was  not impacted  by                                                                    
ACES.  There  is  no  direct   connection  between  the  tax                                                                    
structure in  the Arctic  and in Cook  Inlet. He  reported a                                                                    
concern that the taxes in  Cook Inlet were approaching zero.                                                                    
He stressed that he is encouraged by this legislation.                                                                          
                                                                                                                                
9:38:51 AM                                                                                                                    
                                                                                                                                
Mr.  Banks said  he  would consider  those  comments as  the                                                                    
department moves forward on the study,  if it is the will of                                                                    
the legislature.                                                                                                                
                                                                                                                                
Senator   Huggins   complimented   the   sponsor   for   the                                                                    
legislation.  He  questioned  why it  takes  legislation  to                                                                    
produce common  sense action. He  asked what  the department                                                                    
would do  if the bill did  not exist. Mr. Banks  reported on                                                                    
actions taken in the past.  The department has tried to make                                                                    
sure  the  markets  are sustained.  There  were  discussions                                                                    
about the sale of royalty-in-kind gas.                                                                                          
                                                                                                                                
9:40:41 AM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman  asked   if  the   study  would   include                                                                    
regulations  and   involve  the  Regulatory   Commission  of                                                                    
Alaska.  Mr.  Banks  thought  the  instructions  were  broad                                                                    
enough to  consider regulations.  "The marketing  of" allows                                                                    
for the  inclusion of the Regulatory  Commission of Alaska's                                                                    
involvement.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman suggested  looking  at a  broader view  of                                                                    
Cook Inlet. Mr. Banks agreed.                                                                                                   
                                                                                                                                
9:42:40 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted  two   fiscal  notes;  one  by  the                                                                    
Department  of Natural  Resources  for  $200,000 in  general                                                                    
funds  to hire  outside consultants  to complete  the study,                                                                    
and a zero fiscal note by the Department of Revenue.                                                                            
                                                                                                                                
Senator  Wielechowski  commented  on the  challenge  of  the                                                                    
issue. He agreed with Senator  Huggins' comments. He thought                                                                    
the bill would help in the long term.                                                                                           
                                                                                                                                
9:43:54 AM                                                                                                                    
                                                                                                                                
SB  208  was  heard  and   HELD  in  Committee  for  further                                                                    
consideration.