Legislature(2005 - 2006)CAPITOL 124

03/16/2006 05:00 PM OIL & GAS


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05:14:38 PM Start
05:14:53 PM HB386
05:40:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 386 EXTEND NORTH SLOPE SEVERANCE TAX CREDIT TELECONFERENCED
Moved CSHB 386(O&G) Out of Committee
+= HB 372 EXPLORATION INCENTIVE CREDITS TELECONFERENCED
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 386-EXTEND NORTH SLOPE  SEVERANCE TAX CREDIT                                                                               
                                                                                                                                
5:14:53 PM                                                                                                                    
                                                                                                                                
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE BILL NO.  386, "An Act making uniform  throughout the state                                                               
the  deadline  for  certain   exploration  expenditures  used  as                                                               
credits against the  production tax on oil and  gas produced from                                                               
a lease  or property in the  state by extending to  July 1, 2010,                                                               
the  deadline  for those  expenditures  on  leases or  properties                                                               
located  north  of  68  degrees,  15  minutes,  North  latitude."                                                               
Speaking as  the sponsor,  he explained that  HB 386  extends the                                                               
production  tax  credits in  existing  statute,  which expire  in                                                               
2007, by  three years to  2010.   He further explained  that he's                                                               
[proposing to] extend [the production  tax credits] at this time,                                                               
as opposed  to next year, to  present those in the  industry with                                                               
interest in [the production tax  credits] the opportunity to plan                                                               
in advance.  He is proposing  this bill in order that the credits                                                               
are more  uniform across  the state,  all expiring  in 2010.   He                                                               
noted  that  the verbiage  of  HB  386 is  a  section  of the  CS                                                               
proposed [for HB  488] in the House  Resources Standing Committee                                                               
today.  He  expressed his belief that it's still  prudent to move                                                               
this  bill  forward  because  HB  488 has  the  potential  to  be                                                               
"volatile."  Therefore, he would like  to have HB 386 on a stand-                                                               
by basis  in the event that  the provisions in this  bill are not                                                               
ultimately contained in  HB 488.  He acknowledged  that there are                                                               
substantial risks  involved for  companies and opined  that these                                                               
credits will help  mitigate those risks.  He  remarked that [this                                                               
bill]  will  encourage  "independent" companies  which  are  more                                                               
marginal in terms of their bottom  line to develop.  He mentioned                                                               
that  if the  existing tax  credits weren't  in statute,  certain                                                               
wells wouldn't have been drilled,  notably one in Glennallen.  He                                                               
expressed his  belief that this  program has been  beneficial and                                                               
has a lot of potential for the  future.  He noted that there have                                                               
been 12 applications thus far,  seven of which have been granted,                                                               
in  terms   of  the  credits,   and  there  are   currently  five                                                               
applications being processed.  The  total credits which have been                                                               
authorized by the State of Alaska  totals nearly $15 million.  He                                                               
further  remarked  that  the  program  is  in  fact  working  and                                                               
attracting companies, and thus capital in the state.                                                                            
                                                                                                                                
5:18:06 PM                                                                                                                    
                                                                                                                                
CHARISSE  MILLETT, Staff  to Representative  Vic Kohring,  Alaska                                                               
State Legislature, explained that the  changes in [Version F] are                                                               
regarding  the  use  of  credits.   Currently,  the  credits  are                                                               
authorized  to  be  used  against  production  tax.    [The  bill                                                               
proposes to] expand  the credits in order that  they be available                                                               
for use for  bonus bids, lease rental  [payments], state property                                                               
tax, and corporate  [income] tax.  In  response to Representative                                                               
Rokeberg, she noted that the changes  made in the [Version F] are                                                               
located on page 2, lines 15-17.                                                                                                 
                                                                                                                                
5:18:54 PM                                                                                                                    
                                                                                                                                
CHAIR  KOHRING clarified  that the  original version  of HB  386,                                                               
which reflects  existing statute,  would provide a  credit toward                                                               
production tax credits,  and [Version F] expands  that to include                                                               
the aforementioned by Ms. Millett.                                                                                              
                                                                                                                                
REPRESENTATIVE ROKEBERG inquired  as to whether HB  386 takes the                                                               
sunset date off of Cook Inlet.                                                                                                  
                                                                                                                                
MS. MILLETT responded  no and added that [Version  F] extends the                                                               
North Slope credits in order that they're all uniform.                                                                          
                                                                                                                                
5:20:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS,  in response to  Representative Rokeberg,                                                               
clarified that  last year,  the legislation that  began as  HB 71                                                               
and  ended up  as HB  286,  originally extended  credits for  the                                                               
Alaska Peninsula  and ended up  doing so for everything  south of                                                               
the  Brooks  Range.   He  added  that  the  North Slope  was  not                                                               
included.                                                                                                                       
                                                                                                                                
MS. MILLETT  reiterated that all  of the credits will  be uniform                                                               
until 2010.  In response  to Representative Rokeberg, she further                                                               
added that  last year,  the Cook Inlet  credits were  extended to                                                               
2007 and HB 386 would extend them again.                                                                                        
                                                                                                                                
REPRESENTATIVE  ROKEBERG expressed  his  confusion regarding  the                                                               
title.  He noted that [HB 386] applies to all forms of taxation.                                                                
                                                                                                                                
CHAIR  KOHRING noted  letters  of support  from  Davis Keane,  BG                                                               
North America;  Mark Hanley, Anadarko Petroleum  Corporation; and                                                               
Pioneer Natural Resources Company.                                                                                              
                                                                                                                                
5:22:32 PM                                                                                                                    
                                                                                                                                
MARK  HANLEY,  Manager,  Public   Affairs  for  Alaska,  Anadarko                                                               
Petroleum   Corporation  ("Anadarko"),   relayed  that   Anadarko                                                               
believes  that these  incentives are  important and  are working.                                                               
By  adding some  of these  incentives and  credits, the  State of                                                               
Alaska is  encouraging investment and  trying to help  reduce the                                                               
risk [involved].   He noted  that Anadarko supports  the credits,                                                               
particularly with the existing tax  system.  Anadarko had pitched                                                               
that [the  credits] be  extended this  year, rather  than waiting                                                               
until [the sunset date], because  companies are making more long-                                                               
term  decisions.   The addition  of the  ability to  utilize [the                                                               
credits]   against  other   sources  of   income  is   important,                                                               
particularly for companies which  Anadarko is partnering with who                                                               
don't have existing production.                                                                                                 
                                                                                                                                
5:26:17 PM                                                                                                                    
                                                                                                                                
BILL VAN DYKE,  Acting Director, Central Office,  Division of Oil                                                               
&  Gas,  Department of  Natural  Resources  (DNR), expressed  his                                                               
belief that the exploration incentive  credit program has finally                                                               
"taken off."   He added that  it takes a few  years for companies                                                               
to  "roll" [such  programs] into  their economics.   He  remarked                                                               
that it makes perfect sense for  the State of Alaska to invest in                                                               
its future by extending the program.                                                                                            
                                                                                                                                
CHAIR KOHRING noted  that [the committee] is dealing  with a bill                                                               
which has a proven track record  of reasonable success.  He added                                                               
that  it  makes  it  that  much more  important  to  extend  this                                                               
legislation.                                                                                                                    
                                                                                                                                
5:27:24 PM                                                                                                                    
                                                                                                                                
RICHARD  TREMAINE,   Economist,  Department  of   Revenue  (DOR),                                                               
relayed  that companies  have benefited  economically.   The  DOR                                                               
expects  the  State  of  Alaska to  benefit  economically  as  it                                                               
accrues property taxes, royalties, and severance taxes.                                                                         
                                                                                                                                
5:28:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked, "Could  you refresh my  memory of                                                               
what revenues  we received  for on the  federal leases  in NPR-A,                                                               
from  the  State's  perspective,  and the  applicability  of  the                                                               
credits here to those particular lease activities?"                                                                             
                                                                                                                                
MR. VAN  DYKE informed the  committee that the State  [of Alaska]                                                               
substantially  benefits  from [oil  and  gas]  activities in  the                                                               
National  Petroleum  Reserve-Alaska  (NPR-A).     [The  State  of                                                               
Alaska] shares  in 50 percent  of the royalty  revenues, although                                                               
those  revenues don't  go directly  into the  general fund  (GF).                                                               
[The  funds] go  through a  separate process  and a  lot of  that                                                               
money ends  up in the  communities on  the North Slope,  which is                                                               
how it  was designed by  the federal  government.  He  added that                                                               
[the State of  Alaska] will share in production  taxes when there                                                               
is production  from NPR-A.   In addition,  [the State  of Alaska]                                                               
shares in 50 percent of the bonuses and rents.                                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG  surmised that  the corporate  income tax                                                               
is included.                                                                                                                    
                                                                                                                                
MR. TREMAINE stated  that corporate income tax  is increased with                                                               
corporate revenues  in the  state.  The  DOR's models  don't have                                                               
severance tax under  the current ELF system for NPR-A.   He added                                                               
HB 488,  or a substitute  bill that deals with  production taxes,                                                               
would generate revenue for the State.                                                                                           
                                                                                                                                
5:30:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG asked, "Would that  be 100 percent of the                                                               
production tax  applicable to  the State, or  is there  a sharing                                                               
with the federal government or any other entity?"                                                                               
                                                                                                                                
MR.  TREMAINE  responded that  he's  not  familiar with  how  the                                                               
severance tax  coming out of  NPR-A is.   In further  response to                                                               
Representative  Rokeberg, he  confirmed that  the bonus  bids are                                                               
50/50.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  ROKEBERG  added, "We'd  get  100  percent of  the                                                               
corporate tax because they pay a federal tax separately."                                                                       
                                                                                                                                
MR.  TREMAINE  confirmed,  "We do,  after  deductions  for  other                                                               
things."                                                                                                                        
                                                                                                                                
5:31:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said,  "As much as the  tax credits under                                                               
this  are applicable  to Cook  Inlet,  we have  the bottom  whole                                                               
restrictions still applying."   He asked, "Is  that correct where                                                               
we have the differential between  the 20 percent and 40 percent?"                                                               
He  expressed  his concern  regarding  this  bill impacting  Cook                                                               
Inlet offshore  development.   He said  that it  seems as  if the                                                               
majority  of areas  of  interest  would be  excluded  from a  tax                                                               
credit under this particular provision.                                                                                         
                                                                                                                                
5:33:12 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE responded that it's  very difficult to get  that 20                                                               
mile  distance in  Cook Inlet.   He  stated that  the 20  percent                                                               
credit still  applies and the  geophysical credits still  apply -                                                               
the seismic  credits, which are  at 40  percent.  He  said, "It's                                                               
pretty difficult in Cook Inlet to  drill a real rank wildcat well                                                               
and get that 40 mile distance."                                                                                                 
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked,  "What  about  25  miles?"    He                                                               
surmised that  nearly all  of Cook Inlet  is under  a development                                                               
plan, or at least within 25 miles of a boundary.                                                                                
                                                                                                                                
MR. VAN  DYKE confirmed that  Representative Rokeberg  is correct                                                               
and added that it's pretty difficult  to get 25 miles away from a                                                               
boundary.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG  surmised  that  this  bill  would  have                                                               
little or no impact in Cook Inlet.                                                                                              
                                                                                                                                
MR. VAN DYKE  responded that it effects  the geophysical activity                                                               
and  added that  some  of the  wells in  Cook  Inlet are  earning                                                               
credits, but not at the higher rate.                                                                                            
                                                                                                                                
5:34:57 PM                                                                                                                    
                                                                                                                                
MR. TREMAINE, in response to  Representative Rokeberg, noted that                                                               
of the  seven sets of  credits that  have been granted  thus far,                                                               
three were in Cook Inlet - two for  seismic and one for well.  He                                                               
clarified that was for work in fiscal year (FY) 2006.                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG  inquired as  to whether the  granting of                                                               
an application is confidential.                                                                                                 
                                                                                                                                
MR. TREMAINE  clarified that  the location of  the well  would be                                                               
confidential.                                                                                                                   
                                                                                                                                
5:36:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DAHLSTROM moved  to adopt  CSHB 386,  Version 24-                                                               
LS1510\F,  Chenoweth, 3/7/06,  as  the working  document.   There                                                               
being no objection, Version F was before the committee.                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG  expressed  his  concern  regarding  the                                                               
problems in sharing of NPR-A  revenues.  Under the current impact                                                               
funding, the  North Slope Borough  gets the first  opportunity to                                                               
ask for impact  aid.  He further expressed  his concern regarding                                                               
the applicability of this credit on the Cook Inlet basin.                                                                       
                                                                                                                                
CHAIR KOHRING  expressed his concern  regarding the effect  of HB
488 and his  hope that there will be substantial  benefits in the                                                               
form of credits.                                                                                                                
                                                                                                                                
5:39:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DAHLSTROM moved to report CSHB 386, Version 24-                                                                  
LS1510\F,  Chenoweth, 3/7/06,  out of  committee with  individual                                                               
recommendations and  the accompanying fiscal notes.   There being                                                               
no  objection,  CSHB  386(O&G)  was reported  out  of  the  House                                                               
Special Committee on Oil and Gas.                                                                                               

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