Legislature(2003 - 2004)
02/27/2003 03:21 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 61-OIL & GAS TAX CREDIT FOR EXPLORATION/DEV Number 2816 CHAIR KOHRING announced that the final order of business would be HOUSE BILL NO. 61, "An Act establishing an exploration and development incentive tax credit for persons engaged in the exploration for and development of less than 150 barrels of oil or of gas for sale and delivery without reference to volume from a lease or property in the state; and providing for an effective date." Number 2795 LEONA OBERTS, Staff to Representative Mike Chenault, Alaska State Legislature, presented the sponsor statement for HB 61 on behalf of Representative Chenault, as follows: HB 61 creates a new income tax credit to encourage increased exploration and development of natural ... gas reserves south of the Brooks Range. While focused primarily on natural gas reserve development, the bill also provides an incentive for the development of marginal oil reserves, should they be discovered. For the purpose of this bill, marginal oil production is defined as that which initially produces 150 barrels of oil per day or less. To qualify for the credit, operators must successfully drill and develop hydrocarbon reserves that produce natural gas for sale and delivery. The credit may offset no more than 50 percent of an operator's annual income tax liability, and remains in effect for a period of 10 years. The tax credit would amount to 10 percent of qualified investments - and 100 percent of services associated with said investment - for each year. For example, an operator who spends $20 million in a given year successfully developing natural gas reserves would receive an income tax credit of $2 million - applicable to up to one-half of its income tax liability for that year. Credits in excess of 50 percent of the operator's income tax liability can be carried over to future years. This is a "successful efforts" bill, which means that no credits will be given for dry holes. The Cook Inlet continues to have great potential for additional natural gas development. Other Alaska basins outside of the North Slope have similar potential. However, the combination of exploration risk, high development costs, and historic low natural gas prices has ... created a disincentive to drill for new reserves as compared to other areas of the world. By providing a credit for successful efforts, more exploration will occur in southern Alaska, leading to much-needed new natural gas reserves. This will benefit all residents and businesses, at no direct cost to the state. In addition to the benefit of developing new gas reserves, increased Cook Inlet drilling will also aid the general economic status on the Kenai Peninsula and in Anchorage, as well as other areas of Alaska. Moreover, increased tax revenue from additional hydrocarbon production will more than offset any fiscal impact from the proposed credit. MS. OBERTS informed members that there were experts available to answer questions. CHAIR KOHRING opened the public hearing. Number 2626 JOHN A. BARNES, P.E., Alaska Business Unit Manager, Marathon Oil Company ("Marathon"), came forward to provide a presentation on why Marathon believes HB is needed [handout in packets]. The committee took an at-ease from 4:20 p.m. to 4:22 p.m. to address technical difficulties. [The recording didn't begin immediately; however, the handout contained all material discussed, with page 1 being a cover sheet.] Page 2 of the handout read as follows, with some punctuation and formatting changes, and with abbreviations spelled out in brackets: HB 61 - What Does it Do? Creates income tax credit to encourage exploration and development of gas reserves south of Brooks Range. Primary focus in on Cook Inlet, but applies to other basins. Primary focus is on natural gas, but applies to smaller oil as well (less than 150 bopd [barrels of oil per day]). Levels the playing field somewhat with other exploration opportunities around the world. Draws more E&P [exploration and production] capital to Cook Inlet. Page 3 read in part as follows, with some punctuation and formatting changes: HB 61 - How Does it Work? Applies to 10% of Qualified Capital Investment. Applies to 100% of Qualified Expense. [Recording began again at this point.] Number 2580 MR. BARNES, noting that this bill allows an offset of no more than 50 percent of corporate income tax in any one year, explained that any amount left over could be carried forward for up to five additional years. He emphasized that this [incentive] only applies to successful efforts. Another key point is that it could be factored into economic analyses as a company analyzes various opportunities. Currently, he noted, the State of Alaska has some other incentive programs that are attractive, but often those only kick in at the discretion of the commissioner of the Department of Natural Resources (DNR). Thus there is uncertainty, until after the investment is made, as to whether those would be applicable in any one case. MR. BARNES discussed page 4 of the handout, which addressed why HB 61 is needed. He said this is probably the most salient point: natural gas reserves have been declining and continue to do so in Cook Inlet. The current estimate of proven natural gas reserves is about 2 trillion cubic feet (Tcf) or 2,000 billion cubic feet (Bcf), based on the most recent DNR report. Despite recent increases in [exploration] activity there, reserves aren't being replaced on an annual basis. He explained, "You will only have a sustainable business if you replace what you produced in any one year; otherwise, you are in a declining business." Number 2486 MR. BARNES referred to page 5, a graph labeled "Cook Inlet Proven Gas Reserves" that looks at the years 1990-2002 [with DNR cited as the source]. He pointed out that in 1990 reserves were in decline and totaled about 3,500 Bcf. From 1995 to 1997, there was an increase of just over 1 Tcf, a result of recalculations rather than drilling new wells; he said if that incremental number were put on the front of the curve, it would show a decline. He pointed out that [as of 2002] about 2,000 Bcf or 2 Tcf of gas was left in Cook Inlet. MR. BARNES referred to page 6 of the handout, further addressing why HB 61 is needed. He said Cook Inlet deliverability - "the rate at which you could produce natural gas" - has been declining over the last several years. MR. BARNES turned to page 7, a graph titled "Cook Inlet Peak Supply/Demand." He explained that the part labeled "Total Requirement" would be what is required if "every contract peak requirement" occurred at the same moment on the same day: if ENSTAR [Natural Gas Company ("ENSTAR")] needed the maximum gas for heating homes, if Chugach [Electric Association, Inc.] needed the maximum for generating electricity, and if "the industrials" that use gas [needed the maximum as well]. He pointed out that the amount shown is more than 800 million cubic feet a day of natural gas. In 1997, he reported, Cook Inlet could produce about 900 million cubic feet a day; current estimates are about 667 million cubic feet a day. He emphasized that there is a shortfall - that Cook Inlet isn't producing what would be required to fulfill the needs of every consumer. Number 2383 MR. BARNES addressed page 8 of the handout, noting that "supply and demand rationalization" will occur because the free market works. He said the first occurrence is that not enough gas is produced to "feed the low-price consumer"; he suggested members had heard testimony previously about that. Another result of scarcity is that the price of gas rises. He suggested ENSTAR is probably a good measure of the cost of gas in Cook Inlet because it is the local heating utility; its weighted average cost of gas (WACOG), the price it pays to acquire gas from "a family of contracts," now is about $2.55 per Mcf [thousand cubic feet]. He said the most recent ENSTAR gas contract was signed at a price that has a floor of $2.75 but can range upward to a "rolling average of Henry Hub." He pointed out that the recent Henry Hub price of $15 or more per Mcf is an aberration in the marketplace; in reality, the Henry Hub price has been averaging $4 to $5 per Mcf. Mr. Barnes told members that the marketplace works, that natural gas prices are rising, and that "there's an impact of higher prices." Number 2307 MR. BARNES addressed page 9 of the handout, "Cook Inlet Reserves & Resources." He reiterated that current proven reserves are estimated at 2,000 Bcf. At an annual consumption rate of 200 Bcf per year, which he said is what is burned in Cook Inlet, the reserve life there is about 10 years. Beyond reserves - gas known to be in the ground - he explained that there is a category called "resources" - gas that technologists, geophysicists, and geoscientists estimate could be found. Speaking of unspecified committees, he said: The most recent that I'm aware of is the estimate by a potential gas committee of two resources: a probable reserves, which is about a 50 percent chance that you'll find it, of about 1,050 Bcf of gas; and possible reserves, which is less than a 50 percent probability, of about 2.1 Tcf [or] 2,100 billion cubic feet. Number 2245 MR. BARNES addressed page 10 of the handout, impacts to the State of Alaska from HB 61. He said that first and foremost, Marathon believes [the bill] would stimulate activity in Cook Inlet and potentially other basins, and would aid in maintaining Cook Inlet's current production of 200-plus Bcf a year. He said 200 Bcf a year is a significant number. If converted on an "energy basis" to equivalent barrels of oil a day, it would be roughly 33 million barrels, about one month's worth of North Slope production; he therefore suggested viewing Cook Inlet [production] as a thirteenth month's worth of North Slope production for the state. He pointed out that it provides gas for the Cook Inlet utilities; provides feedstock for "industrials"; and would result in jobs, royalties, and taxes. Number 2195 MR. BARNES turned to page 11 of the handout. He reported that Marathon believes the incentive clearly would be positive for the State of Alaska. He listed factors when thinking about impacts: how many developments might be incentivized; how much gas will be discovered; what the price of the gas will be when it is sold, which affects royalty and severance tax value; and how much money will be spent in efforts to explore for and ultimately develop reserves. He called it "successful efforts- driven," since no incentives for dry holes are included in HB 61. MR. BARNES addressed page 12 of the handout, which includes a conceptual estimate of fiscal impacts to the State of Alaska under HB 61. He clarified that the assumptions he'd used included the following: the field size of the discovery was varied from 0 Bcf to 500 Bcf; and he'd used a development-cost estimate of $.50 per Mcf, a royalty of 12.5 percent, severance tax at 7.5 percent, ad valorem at 2.7 percent, and a gas sales price of $2.50 per Mcf. He noted that other parties might vary these assumptions for their own analyses. Number 2132 MR. BARNES turned attention to page 13, a table labeled "Fiscal Impact to State of Alaska." Choosing a discovery with a field size of 50 Bcf as an example, he explained that the development cost for that field - what the operator would spend to drill wells and probably put in facilities - would be around $25 million. The tax credit proposed in the bill, at 10 percent of [the taxpayer's qualified capital investment], would be about $2.5 million. The gross revenue generated by the field would be about $125 million. The royalty received [at 12.5 percent] would be about $15.6 million. The severance tax [at 7.5 percent] would be $9.3 million. And the ad valorem would be estimated at about $1 million. Therefore, the total tax generated through this discovery would be about $26 million, about 10 times the value of the tax credit. MR. BARNES turned to page 14, a graph illustrating [the information on page 13]. He pointed out that the tax credit is rather low on the curve, but that the lines showing the total development cost and total tax take are about the same. He said it means, on average, that the money an operator spends finding and developing a field is [about the same] as what the state might ultimately receive in royalty and other tax payments. Number 2025 MR. BARNES discussed conclusions on page 15 of the handout. He noted that there might be a question of how many of these fields truly need incentives. Based on this conceptual tax model, he said, if only one field were incentivized, that tax credit would generate enough other taxes to pay for the "incentivization" that the state might lose, so to speak, from ten other fields of roughly the same size. MR. BARNES told members Marathon believes the credit is needed now, and that he believes there isn't enough exploration and development activity in Cook Inlet now to meet demand. Providing an example, he reported that recently [Marathon] advertised to hire four production operators, and received more than 90 applications from people looking for work in the gas fields there. He also pointed out that new discoveries take about three years to bring to "first gas" because of permitting and other issues. He said Marathon is very appreciative and supportive of efforts underway to look at the permitting process; he suggested that would be good for the state as well. Number 1958 MR. BARNES addressed the final page of the handout, page 16, suggesting someone would look for the following to determine the success of this legislation: increased lease activity by those looking to acquire leases; increased drilling rig activity; increased construction activity; increased production; increased deliverability; and that credits are being applied for, which is "the measure that new gas is being found." He pointed out that under the economic scenario he'd proposed, approximately $10 would be spent successfully to develop new reserves, and about $10 would come to the state as new tax revenue. CHAIR KOHRING commended Mr. Barnes for presenting such a compelling argument. Number 1901 REPRESENTATIVE CRAWFORD referred to page 3 of the handout, which said this would apply to 100 percent of qualified expenses. He asked, when Mr. Barnes had explained the figures on page 13, whether those included the qualified expenses. MR. BARNES answered that it is intended to be included. He suggested perhaps it is a problem of wording or misunderstanding between how an oil and gas company might present the economics and how the state might draft the bill. He said the 100- percent-of-service charge would be intended to represent "the intangibles for labor costs that might be associated with putting the tangible - the iron - in the ground, so to speak, or to build a facility." He suggested this committee or a subsequent one might want to discuss a language change in this regard, but said it is intended that it be represented in that 10 percent of the cost. Number 1834 REPRESENTATIVE ROKEBERG said he was glad to hear Mr. Barnes talk about the fact that Cook Inlet [is estimated to have] 10 years for proven reserves and perhaps 15 for probable reserves. He expressed concern about ensuring that the resource is available for economic development and growth there. Referring to testimony by Mr. Barnes about gas prices, he asked whether supply and demand wouldn't go a long way towards solving the problem if, in fact, the reserves were there. MR. BARNES responded: My view would be that if you could depend solely on market conditions, ... probably ... you'd see prices increase until there was sufficient stimulation for activity. And then you'd have activity, and then ... you might find enough gas for supply-demand to drive it down again. ... That would be ... one model; you're correct. Alternatively, if sufficient drive was created soon enough, you might actually see sufficient activity to find gas that might moderate that supply- demand marketplace action you were talking about. Number 1711 REPRESENTATIVE ROKEBERG asked whether it is whatever [Marathon] expends in exploration and production for new production that would qualify [under the bill]. MR. BARNES answered: It's intended to represent -- into the pot of funds that would qualify would be those funds expended towards the exploration and development of new - and that's ... the critical term, "new" - gas reserves or oil, if you found oil and it was a small enough field. So it's not your ongoing, day-by-day expenses associated with your current activities. It's expenses associated with finding and then bringing to production ... that new field. Number 1585 REPRESENTATIVE ROKEBERG surmised that it wouldn't be for an existing oil well, then. He asked, "Does it occur geologically in Cook Inlet that you can ... drill a well maybe for gas and then have some incidental production of oil?" MR. BARNES replied, "Not very often. But, again, if you did find a marginal oil well by happenstance, I don't know what the probability would be, but the intent would be to try to recognize that those economics are difficult as well." REPRESENTATIVE ROKEBERG suggested that if a $20-million well only produced 150 barrels a day, the company would get a tax credit anyway. He asked whether that was what Mr. Barnes was saying. MR. BARNES said a company could produce a 150-barrel-a-day well, but if it cost $20 million to get there, it would be a very risky proposition and a company might not choose to operate it. He indicated that the intent is, should somebody find it, that [this incentive] would provide an opportunity [for production]. REPRESENTATIVE ROKEBERG asked, if there were an areawide lease for which the company had a bonus bid, whether that dollar amount also would be part of the qualified capital investment because of its being real property. MR. BARNES replied, "Probably so. I would think so." Number 1512 REPRESENTATIVE ROKEBERG suggested "everything but the kitchen sink" is included, and mentioned cost accounting. He expressed concern about the 150 barrels a day [as a limit] and how that would work out. Furthermore, he said, the legislature has passed bills previously under which certain fields have been designated for special royalty treatment; he also mentioned the "180(j) sections" for royalty, which have never been used, as well as a bill he and Chair Kohring are working on as an incentive for marginal fields. He asked how these different programs fit together. MR. BARNES agreed that there is a "family" of royalty-reduction programs and policies from legislation that has passed. He said one is specific to certain fields, which to his belief must begin production by the end of this year. There also is a royalty reduction available for a marginal field, but that doesn't stimulate new activity; it only maintains production in an older field. Furthermore, a "discovery royalty" [incentive] is at the discretion - ultimately, to his belief - of the commissioner of DNR; to his understanding, he said, no field has actually qualified under that. Mr. Barnes offered Marathon's view that those are more difficult to predict with regard to economics, whereas this could be "run through your calculator" and is not discretionary; it is easier to analyze economically and easier to propose to management. He added, "Discretionary ones are more difficult, obviously." Number 1303 REPRESENTATIVE ROKEBERG offered his understanding that the Division of Oil & Gas has indicated a producer or operator on the North Slope could "come to the Cook Inlet and buy existing production or invest in an existing well," which would provide some offset against North Slope tax obligations to the state. He asked whether Marathon has looked at that. MR. BARNES noted that the bill clearly says it is for the exploration and development of new reserves. He said he didn't understand how it would apply to buying existing production. REPRESENTATIVE ROKEBERG again asked whether a tax credit developed in Cook Inlet could be used to offset [tax obligations relating to the North Slope]. MR. BARNES indicated that if a company positioned itself to offset $10 million of North Slope-derived corporate income tax, the company would have spent $100 million in Cook Inlet successfully finding and developing natural gas. He said he would think that was great, because that 10-to-1 multiplier would indicate that the $100 million spent by the company ought to generate new taxes. He added, "I would believe that an offset of tax from another ... basin would not be as important as the fact that you did find ... new gas reserves." REPRESENTATIVE ROKEBERG clarified his point: it isn't specific to a particular project. He suggested the company would have to prove that expenditures which met the qualification under the statute occurred only [south of the Brooks Range]. MR. BARNES said it would be "project-derived" and that perhaps there would be a way to qualify what the 100 percent of expenses means. He suggested it is meant to represent costs directly applicable to that activity, rather than overhead for corporate offices and so forth. That wouldn't be the intent, he said. Number 1035 CHAIR KOHRING informed members that Mark Myers [director of the Division of Oil & Gas, DNR] and Chuck Logsdon [of the Department of Revenue] were available via teleconference to answer questions or offer technical expertise. Number 1012 PAUL RICHARDS, Lobbyist for VECO Corporation, testified in support of HB 61. He said: VECO believes efforts which incentivize exploration and development in Alaska are crucial to the long-term fiscal viability of this great state and the overall welfare of its citizens. VECO is a multi-national corporation that provides services - project management, engineering, procurement, construction, operations, and maintenance - to the energy, resource, and process ... industries [and] to the public sector. VECO's mission is to make our clients successful while creating stakeholder value and providing [a] safe and rewarding place to work. VECO is an Alaskan company founded in 1968 with their first project in Cook Inlet, and has built on existing Alaskan expertise to provide added value to its clients. The results are many long-term working partnerships, well-trained teams, and a network of regional offices around the world, which use integrated, state-of-the-art project management and communication systems to provide local solutions for the smallest to the large mega-projects. Values are important to VECO. They have built the corporation on several premises, which are the keys to our continuing success. VECO employees work every day to ensure that every job reflects those building stones. VECO strives to ensure that more Alaskans are given an opportunity for employment in Alaska. And with your help today in passing HB 61, this can continue to be a reality. Number 0880 MR. RICHARDS continued: This being said, VECO has reviewed the proposed legislation and [finds] HB 61 creates an incentive for operating companies to explore for and develop new sources of natural gas in Alaska, and particularly the Cook Inlet. What does this mean for VECO? Most importantly, it means new construction, maintenance, and operating jobs for our employees. It also means continued economic stimulus for local communities where employees live, work, and shop. As most of you recognize, Alaska's economy has a cycle of boom and bust. Unfortunately, all too often this cycle is driven by outside forces. VECO is strongly supportive of efforts by this legislature and the administration to create an environment where Alaska controls its own fate. Encouraging and incentivizing development through your support of HB 61 accomplishes this. It is particularly important to remember, this incentive applies ... only to successful efforts. For this incentive to be applicable, an operating company must have or acquire leases. It must then run seismic to identify exploration targets. Then it must drill one or more wells. If a discovery is made, production facilities must be installed, and potentially pipelines must be laid. This represents a lot of work - a lot of jobs for Alaskans. After the field is on production, it provides more jobs, royalty, and severance taxes. Finally, the incentive is only applied to state income tax, meaning the company is already making money in Alaska and supporting the state and its economy. This is all good news. The Cook Inlet natural gas business is an important part of Alaska's economy. It is important for local citizens who heat and light their homes through natural gas. It is important to those industries which use natural gas. VECO believes HB 61 can be important as well, and supports it. Number 0681 CHAIR KOHRING commended VECO Corporation for its Alaskan investment and optimism about the future. He said he supports this legislation as well, characterizing it as "win-win" legislation that will be good for the industry, the state, and the general public. The committee took an at-ease from 4:55 p.m. to 4:58 p.m. CHAIR KOHRING informed listeners that during the at-ease members had indicated the desire to hear more testimony from Mr. Myers or Mr. Logsdon, particularly with regard to royalties lost or gained. He announced that the committee would continue to take testimony and then hold the bill over. Number 0514 LARRY HOULE, General Manager, Alaska Support Industry Alliance ("Alliance"), informed members that the Alliance is a nonprofit, statewide trade association with chapters in Anchorage, Fairbanks, and Kenai. It comprises more than 420 member companies that derive their livelihood from Alaska's oil and gas industry; at any given time, its employment base exceeds 25,000 Alaskans. Specifying that the Alliance membership is fully supportive of HB 61, he suggested that in this time of fiscal uncertainty the state needs to promote as much exploration and development of oil and gas as possible. He said the incentive proposed in HB 61 seems especially suited for the mature Cook Inlet basin, which serves important gas market on the Kenai [Peninsula], in Anchorage, and in the Matanuska-Susitna area. He also suggested that passing legislation like HB 61 is a proper role for government. MR. HOULE offered that one outstanding feature of HB 61 is that the tax credits apply only to successful efforts. He suggested the bill will promote the drilling of new wells, and said in the oil industry it is a simple mathematical equation: "the more holes we drill, the more gas and oil that will be produced." Noting that state tax-incentive programs of this nature come in many shapes and sizes and are common throughout the country, he acknowledged that they vary in "quantifiable effectiveness." He said, however, that HB 61 seems to have the right combination to be workable in a mature basin like Cook Inlet. Referring to comments by Representative Rokeberg, Mr. House suggested it might be worthwhile for the legislature to explore incentive programs that include tax relief for low-volume, economically marginal wells or idle wells. He reiterated support for HB 61 on behalf of the 25,000 Alaskans represented by the Alliance. Number 0299 TADD OWENS, Executive Director, Resource Development Council (RDC), testified in support of HB 61 as follows: RDC supports House Bill 61, and we ask the House Oil and Gas Committee to move the legislation forward. HB 61 provides a tax credit for exploration and development of natural gas reserves and small oil deposits south of the Brooks Range. The legislation will have a major positive impact - specifically, on natural gas exploration and development in Cook Inlet. As the committee has already heard, this legislation is needed to help offset the continuing decline in Cook Inlet's proven natural gas reserves. At this time, reserves in Cook Inlet are not being replaced on an annual basis. In fact, rising natural gas prices in Cook Inlet threaten to greatly increase both the cost of living and the cost of doing business in Southcentral Alaska. As with all of Alaska's resource industries, Cook Inlet oil and gas projects compete for capital investment with other projects around the globe. HB 61 would stimulate additional exploration and development activity in Cook Inlet by leveling the playing field with other worldwide business opportunities. Attracting additional private-sector investment capital to Alaska is exactly what the state needs to encourage a market sustainable economy - one that relies primarily on growing our exports and replacing our imports, as opposed to one that depends on state and federal transfer payments and low-paying, low-skill jobs. The tax credit defined by HB 61 would apply, as you've heard, to 10 percent of a company's qualified capital investment and 100 percent of the expenses associated with that capital investment. However, in any given year the credit is capped at 50 percent of a company's corporate income tax liability. And, perhaps most importantly - and also as you've heard before - the credit will only apply to successful exploration and development projects, and no reward is granted to dry holes. By providing incentives for successful exploration and development, Cook Inlet natural gas reserves should increase, meaning additional royalty, severance, and ad valorem income to the State of Alaska. Increased natural gas reserves in Cook Inlet will also ensure an adequate supply for Southcentral communities, utilities, and industrial operations, meaning stable jobs and tax revenues for the region. Number 0069 MR. OWENS concluded his testimony as follows: The bottom line is this: current exploration activity in Cook Inlet is not sufficient to meet future demand for low-priced natural gas. House Bill 61 will help provide an attractive business environment for companies looking to increase leasing, drilling, and construction activities in Cook Inlet. Our members believe it is a timely piece of legislation, and we hope the committee will see fit to support the legislation. Number 0003 KEVIN TABLER, Manager of Land and Government Affairs, Union Oil Company of California (Unocal), began his testimony, indicating he holds the manager position for Unocal in Alaska. TAPE 03-12, SIDE A Number 0001 MR. TABLER, speaking in support of HB 61, expressed appreciation for consideration of the bill as a vehicle to stimulate gas exploration and development south of the Brooks Range. He told members: Although we recognize this bill may serve to improve the economics of marginal oil reservoirs discovered or defined while exploring for gas, it is the identification and development of new gas reserves in Cook Inlet which are needed if we are ... to sustain our local economy in Southcentral Alaska. Without ... new gas reserves, value-added businesses and industrial exporters will suffer cutbacks in production, yielding to the ever-present Southcentral utility needs. These disruptions in supply, if left unchecked, will lead to a lower tax base, unemployment and underemployment, and loss of the monetary cycling effect as dollars change hands throughout a community. I place an emphasis on Cook Inlet, as Cook Inlet is where Unocal's infrastructure base and manpower are best defined. Although we do have working interests in the fields on the North Slope, our ownership interest is such that we play a minor role in the exploration and development operations of these fields. While we recognize that incentives available to North Slope explorers and producers will have a beneficial impact on Unocal, the beneficial impact of incentive legislation in Cook Inlet is magnified when applied to the marginal nature of the mature fields and the declining gas-reserve base in Cook Inlet. For this reason, incentive legislation such as HB 61 will help achieve the desired effect of identifying new gas reserves by providing a predictable and quantifiable credit to help lessen the inherent risk of costly exploration. The increased tax revenue from additional hydrocarbon production will more than offset the initial financial impact from the tax credit. The objective is not to shift a larger share of an existing pie to industry; rather, the objective is to increase the size of the pie for everyone. Number 0215 MR. TABLER continued: For the last several years, Unocal has consolidated and restructured its Alaskan operations and focused on becoming the safest, lowest-cost producer in Cook Inlet. We have, either through purchase and/or exchange of properties, positioned ourselves to have the most cost-effective operation possible. The Cook Inlet, with its mature and declining fields, low margin properties, high operating costs, and regulatory uncertainty, is a very challenging environment in which to stay profitable, let alone risk ... capital. Cost cutting, in and of itself, is only a temporary fix. The only sustainable solution is to increase the reserve base. Unocal's considerable stake in its Cook Inlet infrastructure, manpower, and capital investments are continually threatened by internal global competition for investment dollars. Evidence of this vulnerability is confirmed by the recent drilling of three dry holes on the Kenai Peninsula in an effort to meet the growing demand of the natural gas market. Although we were rewarded by a discovery of the Ninilchik Unit with our partner Marathon, the expense, risk, and uncertainty of success has reduced our Alaskan capital budget from $70 million last year down to $35 million for 2003. Providing a credit for successful efforts will definitely improve the attractiveness of our Alaskan exploration projects. Number 0330 MR. TABLER continued: Not only will HB 61 create an incentive for companies currently active in gas exploration in Cook Inlet, the attractiveness of such a credit will act as an ... industry incentive to those thinking of investing in exploration south of the Brooks Range. If you think of the credit as costing the state $1 for every $10 invested by someone else, and paid out only in a success scenario, the risk to the State of Alaska is negligible when compared with the ancillary benefits of new reserve identification. In conclusion, we believe this bill will add certain attractive parameters to companies during the investment decision-making process, with very little exposure to the State of Alaska. Therefore, we encourage passage out of your committee. Number 0480 CHAIR KOHRING told Mr. Tabler he'd made some excellent points with which he concurred. He also thanked Mr. Myers and Mr. Logsdon for standing by on teleconference. He announced that HB 61 would be held over.
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