Legislature(2005 - 2006)CAPITOL 124

04/19/2006 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 1:00 PM on 04/20/06 --
Heard & Held
Moved CSHB 378(RES) Out of Committee
Heard & Held
Moved CSHB 306(RES) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 498-TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                    
CO-CHAIR SAMUELS announced that the  next order of business would                                                               
be HOUSE  BILL NO. 498,  "An Act authorizing tax  credits against                                                               
the production tax on oil  and gas for qualified expenditures for                                                               
challenged  or  nonconventional  oil  or gas  and  for  qualified                                                               
expenditures for  nonconventional or renewable  energy resources;                                                               
giving the Act contingent effect;  and providing for an effective                                                               
CO-CHAIR RAMRAS moved to adopt  committee substitute (CS) HB 498,                                                               
labeled 24-LS1817\I,  Chenoweth, 4/18/06, as a  working document.                                                               
Hearing no objections Version I was before the committee.                                                                       
REPRESENTATIVE   NORMAN  ROKEBERG,   Alaska  State   Legislature,                                                               
presented HB  498 as sponsor.   He said heavy oil  will receive a                                                               
15 percent  tax credit on top  of the 20 percent  credit given to                                                               
the industry in the  proposed HB 488.  He said  HB 498 also gives                                                               
the  Alaska  oil  industry  a  25  percent  tax  credit  for  the                                                               
development of  alternate energy.   He has worked on  [heavy oil]                                                               
issues for over a decade.   Alaska has over 20 billion barrels of                                                               
heavy oil,  and the potential  for maintaining production  on the                                                               
North Slope  is dependent  on the  industry's ability  to develop                                                               
it.   He  said the  motive  for the  bill  is to  offset the  oil                                                               
production tax rate contemplated by the legislature.                                                                            
1:26:34 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  said there  are  policy  issues in  the                                                               
legislation.    He  drew  the committee's  attention  to  page  3                                                               
regarding research of  challenged oil and if it  should be called                                                               
a qualified capital  expenditure.  If the  research was underdone                                                               
in  Houston, but  it related  to  Alaska's oil,  the question  is                                                               
whether that cost should be allowed.                                                                                            
1:28:33 PM                                                                                                                    
REPRESENTATIVE ROKEBERG said  the definition of heavy  oil in the                                                               
bill is 25 API  gravity for areas to the north.   The viscous oil                                                               
is shallow and  thicker, he stated, but there is  debate as to an                                                               
appropriate  measure.   He  asked  the drafter  to  go below  the                                                               
standard  to 18  API or  less in  some areas  of the  state.   He                                                               
suggested  the bill  either maintains  that  gravity standard  or                                                               
just identifies the formations that would get the credit.                                                                       
CO-CHAIR  SAMUELS said  ConocoPhillips  Alaska, Inc.  and BP  are                                                               
present and can discuss the techniques and definitions.                                                                         
REPRESENTATIVE  ROKEBERG pointed  out that  page 5  indicates the                                                               
Ugnu  formation or  West Sac  formations-or a  formation that  is                                                               
similar.   There has been  a discussion between the  industry and                                                               
the Division  of Oil and  Gas that naming the  formations instead                                                               
of naming the  gravity standard is "another way to  go."  He said                                                               
enhanced recovery  methodologies were  in the original  bill, and                                                               
it may be redundant, and it might  be able to be deleted from his                                                               
bill.   His  opinion  is that  anything that  is  related to  the                                                               
development of heavy oil should be a qualified capital expense.                                                                 
1:32:09 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD  asked  what  Representative  Rokeberg's                                                               
reasoning was for the section about renewable [energy].                                                                         
REPRESENTATIVE ROKEBERG said  there has been a  dearth of funding                                                               
"to move out in  this area."  He said he made  a judgment call to                                                               
get funding  from the private  sector to jumpstart some  of these                                                               
projects, because that's  been the biggest problem.   The funding                                                               
for these projects should be  limited to petroleum producers.  He                                                               
said the  producers are trying  to look kinder and  "greener," so                                                               
"they could put up and shut up and move forward on it."                                                                         
1:34:35 PM                                                                                                                    
CO-CHAIR  SAMUELS noted  that  only the  oil  producers would  be                                                               
eligible for alternative energy money.                                                                                          
REPRESENTATIVE ROKEBERG  said yes;  it is  not meant  for general                                                               
1:35:22 PM                                                                                                                    
BRIAN  WENZEL,   Vice  President,  Finance   and  Administration,                                                               
ConocoPhillips Alaska,  Inc., thanked  the committee  for helping                                                               
with this  and for looking  at it this late  in the session.   It                                                               
will only work, however, with the right fiscal structure.                                                                       
JEFF SPENCER,  Supervisor, Heavy Oil  Development, ConocoPhillips                                                               
Alaska, Inc., said the North  Slope has large heavy-oil resources                                                               
sitting  above  the  light  oil reservoirs  of  Prudhoe  Bay  and                                                               
Kuparuk.   The  five fields  where viscous  oil is  predominantly                                                               
found  are West  Sac,  Kuparuk, Schrader  Bluff  at Milne  Point,                                                               
Orion,  and Polaris.    He  estimates that  there  are  23 to  24                                                               
billion barrels  of heavy  oil on the  North Slope  split between                                                               
the West  Sac Schrader  Bluff formation  and the  Ugnu formation.                                                               
He  said there  are approximately  16 billion  barrels of  oil in                                                               
Conoco's Kuparuk River Unit.                                                                                                    
1:39:15 PM                                                                                                                    
CO-CHAIR SAMUELS asked if it is  true that certain areas are only                                                               
heavy oil.  "If we give you  a credit for drilling to 5,000 feet,                                                               
do you  use the same  drill rig and  the same costs...to  go down                                                               
further, but  now we're giving  you a higher credit  on something                                                               
you've got," or is West Sac all heavy oil?                                                                                      
MR. SPENCER said West Sac oil is heavy.                                                                                         
CO-CHAIR SAMUELS asked  him to consider giving a  credit based on                                                               
the weight of  the oil versus basing it on  the geography and the                                                               
methods of development.                                                                                                         
MR. SPENCER  said heavy  oil is below  the permafrost  in shallow                                                               
reservoirs with low reservoir temperature.   The low temperatures                                                               
result in  high viscosity.  The  oil must go through  small pores                                                               
in the rocks, giving low rates of  recovery.  He showed a net pay                                                               
map that extends north into  the BP-operated Milne Point area and                                                               
east into Prudhoe  Bay satellites.  The West Sak  reservoir was a                                                               
pilot project in  the early 1980s and development  started in the                                                               
1990s.    Vertical  wells  were  used first  and  by  2004,  long                                                               
multilateral  wells were  used to  access heavy  oil.   There are                                                               
about 80 wells making 16,000 barrels a day in West Sac, he said.                                                                
1:43:05 PM                                                                                                                    
MR. SPENCER  said the  company has to  operate under  North Slope                                                               
conditions, the reservoirs are geologically  complex, and the oil                                                               
is  viscous.     He  said  the  company  tries   to  protect  the                                                               
environment.   Because the viscous  oil is at shallow  depths and                                                               
under   permafrost,  they   are  unconsolidated   and  have   low                                                               
temperatures.  It is difficult  to produce and harder to separate                                                               
once it gets to the surface.                                                                                                    
CO-CHAIR SAMUELS asked how much more it costs.                                                                                  
MR.  SPENCER  said  it  ranges  from two  to  six  times  higher,                                                               
depending on the reservoir, for direct lease operating costs.                                                                   
REPRESENTATIVE SEATON asked the production costs at Kuparuk.                                                                    
MR. SPENCER said he doesn't know  the lift operating costs, so he                                                               
can't comment on the exact value.                                                                                               
REPRESENTATIVE SEATON wants  a range.  "Are we  talking about ten                                                               
bucks?"  He surmised it won't be a multiple.                                                                                    
The committee took an at-ease from 1:46 p.m. to 1:47:40 PM.                                                                   
MR. SPENCER said he doesn't know.                                                                                               
MR. WENZEL said he will try to see what he can disclose.                                                                        
1:48:20 PM                                                                                                                    
MR. SPENCER said  many heavy oil fields would be  idle if not for                                                               
the  rapid  advances  in  horizontal  drilling  and  multilateral                                                               
technology  in the  last several  years.   He noted  that a  well                                                               
estimated to cost $8 million actually cost Conoco $12 million.                                                                  
REPRESENTATIVE GATTO asked  about oil that is too  heavy to flow.                                                               
"That stuff on top of Prudhoe."                                                                                                 
MR. SPENCER said that would have to be mined, like tar sands.                                                                   
REPRESENTATIVE ROKEBERG  said the  bill is structured  to include                                                               
tar sands and tar mats.  He  said there is a distinction based on                                                               
depth  and gravity  in  the bill  now.   He  spoke  about oil  in                                                               
Alberta where a dump truck picks it up.                                                                                         
REPRESENTATIVE GATTO said  he knew that but wondered  "if we went                                                               
beyond  that."    The  stuff  on   top  of  Prudhoe  Bay  is  not                                                               
technologically available at this time, he surmised.                                                                            
1:51:56 PM                                                                                                                    
MR. SPENCER asked what reservoir he is speaking of.                                                                             
REPRESENTATIVE  GATTO  he said,  "There's  Prudhoe  Bay and  then                                                               
higher, there's" oil in a solid form that doesn't flow.                                                                         
MR. SPENCER  said he  doesn't know what  formation he  is talking                                                               
about.   He said the  Ugnu oils can  be in the  range of 8  to 12                                                               
degrees  API.   Less than  10 is  considered to  be bitumen.   He                                                               
showed a  slide of  the 1e  and j developments.   He  said limits                                                               
were pushed  on the  1j development, and  noted there  are longer                                                               
wells in  the world,  but not  multilateral wells.   A  90 degree                                                               
turn increases the complexity, he said.                                                                                         
CO-CHAIR SAMUELS asked if that technology is used for light oil.                                                                
1:54:32 PM                                                                                                                    
MR. SPENCER  said the company  uses the same type  of directional                                                               
drilling at  Alpine; the  rock is more  competent and  deeper and                                                               
easier to  drill.  He  added that longer-reach wells  used around                                                               
the  world  are  drilled  with  large rigs,  but  to  reduce  its                                                               
footprint on the North Slope, Conoco doesn't use them.                                                                          
REPRESENTATIVE SEATON  said shallow natural gas  uses directional                                                               
drilling, and he asked if it is the same technology.                                                                            
1:55:49 PM                                                                                                                    
MR. SPENCER  said the  oil industry  is global,  and technologies                                                               
developed in one area are used elsewhere.                                                                                       
REPRESENTATIVE ROKEBERG  asked what  the production was  from the                                                               
pads where spider drilling is used.                                                                                             
MR. SPENCER  said Conoco's average  well is 400 barrels  per day,                                                               
and some trilateral  wells produce 1,500 to 2,000  barrels a day.                                                               
He showed  the Alaska extended-reach drilling  envelop, which "is                                                               
not only  the length out  from the surface location  that creates                                                               
that difficulty  in drilling a well,  it's also how deep  it is."                                                               
He said the  aspect ratio is the  horizontal displacement divided                                                               
by the  vertical depth.   A well  12,000 feet out  at a  depth of                                                               
4,000 feet  would have a 3:1  ratio, and as that  ratio increases                                                               
there are more  frictional forces.  Prior to 1990,  there were no                                                               
wells in Alaska with over a 2:1 aspect.                                                                                         
1:58:32 PM                                                                                                                    
REPRESENTATIVE GATTO  asked the aspect  with big rigs  outside of                                                               
MR. SPENCER said he  thinks it may be a 7:1  ratio but without 90                                                               
degree turns.                                                                                                                   
REPRESENTATIVE  GATTO said  technology changes,  and he  surmised                                                               
that in ten years, the aspect may be higher in Alaska.                                                                          
MR. SPENCER said,  "We currently are at the limit."   He said the                                                               
industry will  try to push  the limit, but physics  will prevail.                                                               
A  trilateral producer  is three  horizontal  wells drilled  into                                                               
three different sands.  "In  a-sands we sometime undulate between                                                               
the two  sands, if  there's enough  sand there  that we  think is                                                               
profitable to  dip into, and it  saves us from having  to drill a                                                               
quad-lateral," he said.   From 1998 to 2004,  everything in well-                                                               
design  and   development  plans  changed,  including   going  to                                                               
multilateral  wells, increasing  the reach,  recovery mechanisms,                                                               
sand control, well-spacing, and production [indeciph.] programs.                                                                
CO-CHAIR  SAMUELS   asked  if  Conoco  has   been  successful  in                                                               
decreasing costs by implementing those changes.                                                                                 
MR. SPENCER said, "The jury is still out" for some changes.                                                                     
2:02:16 PM                                                                                                                    
CO-CHAIR SAMUELS asked if Conoco  has changed the methods for the                                                               
recovery of oil other than heavy oil.                                                                                           
MR. SPENCER said  the trend is for horizontal  wells, whether for                                                               
heavy oil  or not.   He  said Alpine  is the  first field  in the                                                               
world that was drilled completely with horizontal wells.                                                                        
CO-CHAIR RAMRAS  asked where  else in the  world is  Conoco doing                                                               
heavy oil extraction.                                                                                                           
MR. SPENCER answered, "Venezuela, Canada, China, Russia."                                                                       
CO-CHAIR RAMRAS  said a constituent  asked why not leave  the oil                                                               
alone and wait until it is less expensive to extract it.                                                                        
MR. SPENCER  said the more oil  that is produced, the  cheaper it                                                               
will be to the  consumer.  "If you leave more  oil in the ground,                                                               
that's reducing the  supply, so then, therefore,  the price would                                                               
go up."  He said there is  infrastructure on the North Slope at a                                                               
fixed  cost, but  production is  declining.   He  noted that  the                                                               
Trans-Alaska Pipeline System  was built for 2  million barrels of                                                               
oil a day, and it is down to 1 million barrels.                                                                                 
2:05:24 PM                                                                                                                    
CO-CHAIR RAMRAS  said the question  is more specific to  the cost                                                               
of extraction.                                                                                                                  
MR. WENZEL said it is a  policy call of the legislature to decide                                                               
on extracting  oil.   If Alaska doesn't  need to  stem production                                                               
decline, that  would be  an option; but  "we would  not recommend                                                               
it."   He said  there are  charts showing  a dramatic  decline in                                                               
production and Alaska's revenues have  only been saved because of                                                               
the  high price  of oil.   The  high prices  are the  only reason                                                               
Alaska has sufficient oil-related tax revenues.                                                                                 
MR. SPENCER said, "There's also  no guarantee it will get cheaper                                                               
in the future with new technology."                                                                                             
REPRESENTATIVE  SEATON said  if  it is  the  same technology  and                                                               
production of  heavy oil is up  to 2,000 barrels a  day, where is                                                               
this cost  that requires  the additional 15  percent credit?   He                                                               
asked if  it is the gas  lift-back, which is being  done on light                                                               
oil fields.  He asked for the difference in the economics.                                                                      
2:08:54 PM                                                                                                                    
MR. SPENCER said there is lower  recovery from a heavy oil field,                                                               
for  example  Prudhoe  Bay  and Alpine  are  getting  50  percent                                                               
recovery  and West  Sac  may  be providing  a  15  to 20  percent                                                               
recovery.  He said Ugnu, "if we  develop it at all," will be more                                                               
like 5 to 8 percent recovery.  So it is less efficient, he said.                                                                
2:09:52 PM                                                                                                                    
REPRESENTATIVE SEATON noted it would  be dependent on field size.                                                               
A large  field of heavy  oil at  20 percent recovery  may produce                                                               
more oil than a small field with a 50 percent recovery.                                                                         
MR. SPENCER  said that could be  the case.  A  company might have                                                               
to drill more wells to get the same  amount of heavy oil out.  He                                                               
showed   a   slide   of   horizontal   displacement,   which   is                                                               
technologically complex.   Once the  well is drilled  and brought                                                               
to the surface,  there are difficulties.  He said  the water from                                                               
"cpf1" contains more oil and  requires more heat and chemicals to                                                               
separate.   But if that is  not bad enough, viscous  crude plucks                                                               
out solids and  brings them to the surface and  must be separated                                                               
out, he stated.                                                                                                                 
CO-CHAIR SAMUELS asked if that had to done for light oil.                                                                       
MR. SPENCER  said the  frequency is  higher for  heavy oil.   The                                                               
equipment has  been installed just  since West Sak  was produced,                                                               
he stated.  It increases wear on the equipment, he added.                                                                       
2:13:29 PM                                                                                                                    
MR.  SPENCER  said  Conoco  has  to  operate  under  geologically                                                               
complex arctic  conditions with viscous  oil and a  lower product                                                               
price.   The West Sak development  has been confined to  the core                                                               
"sweet spot," which encompass sites 1b, 1c, 1d, 1e, and 1j.                                                                     
CO-CHAIR  SAMUELS  asked  if  seismic  information  provides  the                                                               
viscosity level of the oil before the well is drilled.                                                                          
2:14:47 PM                                                                                                                    
MR. SPENCER  said the company has  an idea based on  offset wells                                                               
and  depths of  the reservoirs,  but it  will not  know until  it                                                               
"gets the bits to it."                                                                                                          
CO-CHAIR SAMUELS  asked if DNR  can access the information.   How                                                               
will the state know if it is not heavy oil once Conoco drills?                                                                  
MR. SPENCER said he doesn't know  if the state has access to that                                                               
information,  but heavy  oil cannot  be  determined from  seismic                                                               
CO-CHAIR SAMUELS  asked if  heavy oil needs  a different  type of                                                               
well.  He  asked if Conoco will use different  equipment if heavy                                                               
oil is suspected.                                                                                                               
2:17:19 PM                                                                                                                    
MR. SPENCER  said the same drilling  rig is used, but  there is a                                                               
tool called the "NDT" that works  for light oil but "not so good"                                                               
for heavy  oil.   An additional  step is needed  to get  the same                                                               
data that could be gotten in a light oil reservoir, he added.                                                                   
MR. SPENCER  said the  well is  planned, but  it may  be modified                                                               
depending on  if it is heavy  or light oil.   An exploratory well                                                               
has  an extensive  data gathering  log  to try  to determine  the                                                               
various formations, he told the committee.                                                                                      
REPRESENTATIVE SEATON surmised that  an exploratory well has data                                                               
no matter what kind of oil is being targeted.                                                                                   
MR. SPENCER  said he  doesn't understand the  question.   He said                                                               
the company did  appraisal wells for the West  Sac reservoir, and                                                               
it got cores, logs, and  fluid samples to evaluate the potential.                                                               
It can  be variable between fault  blocks, he noted, and  the oil                                                               
within  a  fault   can  be  different  or  it   could  be  water.                                                               
Information is  needed before developing  it.  Conoco  would like                                                               
to  continue  developing  the  eastern West  Sac  area,  and  the                                                               
strategy is to develop the easy  oil first.  With a stable fiscal                                                               
environment and  improved technology,  Conoco would like  to move                                                               
forward with  developments on the  northeastern West Sac  area, a                                                               
series of projects  that could be more than $1  billion and could                                                               
be developed in the next five  to seven years.  Conoco would also                                                               
like to develop the shallow Ugnu if it ever becomes economic.                                                                   
2:21:41 PM                                                                                                                    
MR.  SPENCER said  he  hopes  Conoco can  move  forward in  these                                                               
projects because  the size of  the prize is  so large.   "Even if                                                               
we're successful in  pushing the limits on  technology to develop                                                               
the  "news" area,  which at  this point  we envision  essentially                                                               
just  expanding   current  technology   even  beyond   what  it's                                                               
currently  capable  of doing.    It  still leaves  a  substantial                                                               
target for the  future.  The western West Sac  and Ugnu resources                                                               
will certainly take new  technology development and modifications                                                               
to  existing  technology  to allow  development...in  our  unique                                                               
operating conditions on the slope."                                                                                             
REPRESENTATIVE GATTO said he has  read that it is uneconomical to                                                               
operate less  than 300,000 barrels  per day through  the pipeline                                                               
at which  point the  industry would  quit producing,  "but that's                                                               
Prudhoe Bay  oil, which we  call light oil."   He asked  if heavy                                                               
oil would require  more than 300,000 barrels.  "What  is going to                                                               
be  the motivation  for pushing  for heavy,  if indeed,  we don't                                                               
have enough to push through the pipeline?"                                                                                      
2:23:43 PM                                                                                                                    
MR. SPENCER said  he doesn't know what the threshold  is for TAPS                                                               
being  economic for  heavy  oil, but  it  will become  uneconomic                                                               
sooner without the heavy oil, he stated.                                                                                        
REPRESENTATIVE GATTO said  if that is the only oil  [on the North                                                               
Slope], it  may not be  worth it.  Perhaps  the mix of  heavy and                                                               
light oil will move better through the pipeline, he surmised.                                                                   
MR.  SPENCER  said  heavy  oil  development  would  be  good  for                                                               
everyone.  He summarized his presentation.                                                                                      
2:26:37 PM                                                                                                                    
The committee took an at-ease from 2:27 p.m. to 2:27:45 PM.                                                                   
CO-CHAIR  SAMUELS  said  [credit for]  research  and  development                                                               
concerns  him.   He asked  if Conoco  has patents  on techniques.                                                               
"If  we're going  to pay  for  something that's  used around  the                                                               
world, I  want to know who  else is paying  for it."  It  will be                                                               
difficult to audit research and development credits, he stated.                                                                 
MR. WENZEL said his company  is open with sharing technology with                                                               
competitors,  "so I  don't  know  that there's  a  lot of  patent                                                               
activity going  on."  He said  he understands the concern  of the                                                               
state on  how much to  fund Conoco's research, but  this research                                                               
will get done  somewhere by someone, and it will  get shared.  He                                                               
said, "Alaska  should be on the  leading edge of that."   He said                                                               
the  language  in  HB  498  is broader  than  just  research  and                                                               
development, it  is also feasibility  studies and  development of                                                               
heavy oil  projects to  the point  of commercialization.   Conoco                                                               
has a research center  in the lower 48, "where a  lot of our blue                                                               
sky R&D is done."  He  said, "In recent years we actually started                                                               
allocating those costs  out to upstream and downstream  just at a                                                               
very high level,  even though it's blue sky."   It gets allocated                                                               
out to force the regions to recognize the value of the research.                                                                
2:30:40 PM                                                                                                                    
MR. WENZEL said the DOR can  see what projects should be included                                                               
and how they relate to the North Slope.  He said:                                                                               
     We do  have the  ability, if we  identify a  project up                                                                    
     here, we don't  want to develop what we  think is going                                                                    
     to be new technology.  We  need some real help.  We can                                                                    
     go  to  our  technology services  group,  commission  a                                                                    
     project, there will  be a scope, it  will get approved,                                                                    
     it'll have a  finite scope, as I say, that  can then be                                                                    
     checked against what we actually  expend.  And so, yes,                                                                    
     there could  be costs in  that sense coming out  of the                                                                    
     lower 48, which  would be very definitely  related to a                                                                    
     project  here  in Alaska,  which  I  know, as  this  is                                                                    
     drafted  right  now, it's  out  of  state it  would  be                                                                    
     covered, but I  guess my point is that I  think you can                                                                    
     overcome   maybe  some   of   your   fears  about   R&D                                                                    
     expenditures  by  focusing  on ...  approved  projects.                                                                    
     Again recognize that a lot  of this resource is a known                                                                    
     resource,  it's in  an area  that's already  covered by                                                                    
     joint ventures, where we're going  to have partners who                                                                    
     have  to  approve  this,  it's not  going  to  be  just                                                                    
     ConocoPhillips coming  up with a bunch  of expenditures                                                                    
     on  R&D that  we're  going  to sneak  in  here and  get                                                                    
     credits  for through  Alaska, rather  it's going  to be                                                                    
     approved  by  our partners,  who  again,  are going  to                                                                    
     provide a very high level  of scrutiny and diligence to                                                                    
     that process.                                                                                                              
2:32:09 PM                                                                                                                    
 [HB 498 was taken up later in this meeting.]                                                                                   
HB 498-TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                    
CO-CHAIR SAMUELS  announced that  the committee would  again take                                                               
up HOUSE  BILL NO. 498,  "An Act authorizing tax  credits against                                                               
the production tax on oil  and gas for qualified expenditures for                                                               
challenged  or  nonconventional  oil  or gas  and  for  qualified                                                               
expenditures for  nonconventional or renewable  energy resources;                                                               
giving the Act contingent effect;  and providing for an effective                                                               
The committee took an at-ease from 3:29 p.m. to 3:30:22 PM.                                                                   
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
said HB  498 allows  qualified expenditures  for credit  with the                                                               
intention to  piggyback the allowable  credits with HB 488.   She                                                               
noted  that her  advice  to change  the  title of  HB  498 to  be                                                               
consistent has been done.   There have been two definitions added                                                               
for  qualified capital  expenditures,  which  are different  from                                                               
each other and from what is in HB 488, she pointed out.                                                                         
The committee took an at-ease from 3:32 p.m. to 3:32:58 PM.                                                                   
REPRESENTATIVE   ROKEBERG  said   there  is   a  definition   for                                                               
challenged oil  and a  different definition  for [indecipherable]                                                               
energy.  He said the sections are fundamentally different.                                                                      
3:34:32 PM                                                                                                                    
MS.  WILSON  said they  can  be  made  consistent, but  they  are                                                               
different from the definition in  the PPT, so she suggested using                                                               
different  terms.   "One  could  call  it a  qualified  renewable                                                               
energy expenditure  for the one that  is in 028, and  for the one                                                               
in  026,  qualified  challenging  oil  expenditure."    She  said                                                               
Representative  Rokeberg  should  have  a different  name  for  a                                                               
different expenditure.   The bill is not clear on  the reason for                                                               
differentiating  challenged oil  with  non-conventional oil,  she                                                               
The committee took an at-ease from 3:35 p. m. to 3:36:46 PM.                                                                  
MS. WILSON said she sees overlap  in the terms challenged oil and                                                               
non-conventional  oil, and  she does  not see  a purpose  for the                                                               
differentiation.  Subsection (f) has  a lot of overlap, including                                                               
the carbonate  section.  She  tried to  do a flowchart  to figure                                                               
out what would be subject to the  credit in this bill, and it was                                                               
difficult.  She  suggested that the first cut be  the API [Alaska                                                               
Petroleum Institute]  gravity.   She reorganized  the provisions,                                                               
she said.   She noted that oil  with API gravity less  than 18 is                                                               
given a  credit no matter where  it is.  With  gravity between 18                                                               
and 25,  it appears  it has  to be on  the North  Slope and  at a                                                               
certain depth.   It appears  that oil  less than 5,500  feet deep                                                               
qualifies for  a credit under  HB 498, she said.   If any  oil is                                                               
taken up by  "EOR" techniques, it doesn't  add any understanding,                                                               
she  noted.   Once the  API  is greater  than 25,  then the  bill                                                               
refers to different sources, including tar sands, she surmised.                                                                 
3:40:12 PM                                                                                                                    
CO-CHAIR SAMUELS asked  about a credit on a  formation instead of                                                               
basing the allowance on the gravity of the oil.                                                                                 
MS. WILSON  said she  just doesn't  like overlap.   She  said she                                                               
would need access to the data in order to audit that system.                                                                    
CO-CHAIR SAMUELS  asked if  there is  an allocation  problem when                                                               
the  state must  test the  weight of  the oil.   The  entire idea                                                               
should take care of the added  costs, "if it costs more, you have                                                               
more costs recovery before you start paying a tax anyway."                                                                      
MS. WILSON said the PPT  already recognizes the costly heavy oils                                                               
because the  tax is on  net-profits, and that was  the governor's                                                               
approach.  That was the purpose of  taxing on net, she said.  "We                                                               
believe  that  HB  488  is  a  complete  package  and  adequately                                                               
recognizes [the higher cost of developing heavy oil]."                                                                          
3:43:47 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  said  he  wants to  give  the  industry                                                               
additional incentives.   The application  could be  narrowed down                                                               
to  new technology,  to clarify  the status  of that  investment.                                                               
The measurement of gravity versus  formation is a technical issue                                                               
that  may  have  merit,  and  he  spoke  of  DNR  certifying  the                                                               
standards.  A pool could have  different API levels, he said, "so                                                               
you have to take the average  API to make sure it would qualify,"                                                               
which demands testing.   The question is if 25  is the right API,                                                               
he stated.   There have been  some discussions of not  going with                                                               
the API tests but identifying formations.                                                                                       
3:46:21 PM                                                                                                                    
MS.  WILSON said  Page 2,  lines 18-28,  has similar  language to                                                               
Page 6,  and both  deal with  the 90 percent  safe harbor  in the                                                               
PPT.  She  said this language includes  consideration of budgeted                                                               
expenses that  are inconsistent  with the  PPT.   Budget expenses                                                               
are a  really difficult audit  target, and she  suggests deleting                                                               
those subparagraphs on pages 2 and 6.                                                                                           
REPRESENTATIVE ROKEBERG said, "I think we could just delete it."                                                                
MS. WILSON said both sections have the problems.                                                                                
REPRESENTATIVE GATTO asked about  conflicting language and if the                                                               
taxpayer gets to pick the one to use.                                                                                           
3:50:46 PM                                                                                                                    
MS. WILSON said she is not qualified to answer that question.                                                                   
REPRESENTATIVE ROKEBERG  said the PPT  has to pass for  this bill                                                               
to be enacted.  The intention is to conform to it, he stated.                                                                   
MS. WILSON said  page 3, line 19, allows credits  for research in                                                               
the state, but the phrase "in the  state" does not modify it.  It                                                               
is fine if  the committee wants to credit activities  done out of                                                               
the state, but the bill needs to reflect it.                                                                                    
CO-CHAIR SAMUELS asked  if she knows of any  credits for research                                                               
and  development and  how the  state would  audit such  a credit.                                                               
These expenditures could be enormous, he stated.                                                                                
3:53:38 PM                                                                                                                    
MS.  WILSON  said  she  knows  of no  credits  for  research  and                                                               
development, and she doesn't know if there is a federal credit.                                                                 
REPRESENTATIVE ROKEBERG spoke  of a U.S. tax  code provision that                                                               
made elections of capital versus deductible expenses.                                                                           
MS. WILSON said  in terms of a specific credit  for research, she                                                               
has no recollection of such.   In the same paragraph, the term of                                                               
art is  "research and  development", and she  asked why  the word                                                               
"or"  was  in there.    On  line  21,  the language  of  existing                                                               
technology is  not clear, and  the phrase containing it  does not                                                               
make  grammatical sense.   Page  5,  line 4,  deals with  average                                                               
gravity, and it is not clear how to calculate that.                                                                             
3:57:33 PM                                                                                                                    
MS. WILSON said  that section is confusing where  is says "except                                                               
as provided," and she provided a suggestion.                                                                                    
3:58:34 PM                                                                                                                    
MS. WILSON said she is not sure what page 3, line 12 means.                                                                     
REPRESENTATIVE  ROKEBERG  said  he  was trying  to  avoid  double                                                               
dipping, but  the whole concept  of the  PPT is double  or triple                                                               
dipping.   He asked if  any tax  credit qualified as  a deduction                                                               
and as a credit.                                                                                                                
MS.  WILSON said  yes; a  single  expenditure can  qualify for  a                                                               
deduction and a credit.                                                                                                         
REPRESENTATIVE  ROKEBERG  said  he  was trying  to  avoid  double                                                               
MS. WILSON said a taxpayer can  pick credits under 025 or 024 for                                                               
the same expenditure, but it can't get both.                                                                                    
4:01:04 PM                                                                                                                    
MS. WILSON said the same language is on page 7, line 8.                                                                         
REPRESENTATIVE ROKEBERG asked about correcting it.                                                                              
MS. WILSON said, "For a  particular expenditure, we know it would                                                               
get a deduction under the PPT,  would get a credit under the PPT,                                                               
and, if  the intention then is  to add this 15  percent credit on                                                               
top, then,  I believe that  what we need  to do is  simply delete                                                               
the 'more than once'."                                                                                                          
CO-CHAIR SAMUELS said  there would be only one  deduction, but it                                                               
would be bigger.                                                                                                                
REPRESENTATIVE  ROKEBERG  said  drilling at  Ugnu,  for  example,                                                               
would provide the oil company with a 35 percent credit.                                                                         
MS. WILSON  said, "If the producer  incurred exploration expenses                                                               
and  they qualified  for 025,  the 40  percent, then  potentially                                                               
you're adding 15 percent on top of 40."                                                                                         
REPRESENTATIVE ROKEBERG  said most  formations would  not qualify                                                               
for those credits.                                                                                                              
4:03:44 PM                                                                                                                    
MS. WILSON  said on Page  3, it says exploration  expenditure and                                                               
it doesn't say anything about heavy oil.   In fact, it says it is                                                               
made for  exploration expenditures under AS  43.55.025, she said.                                                               
"So  this  bill provides  potentially  a  15 percent  credit  for                                                               
exploration that qualifies for a 40 percent credit."                                                                            
CO-CHAIR SAMUELS said, "But there's  nothing with heavy oil, just                                                               
on top of a 40 percent credit.   If the producer then chose to go                                                               
that way, because of the distance from Prudhoe and Kuparuk."                                                                    
MS. WILSON said, "025 has  specific distance requirements for the                                                               
40  percent,  but this  15  percent  credit  does not  make  that                                                               
contingent  on exploring  in  heavy oil  areas  or anything  like                                                               
CO-CHAIR  SAMUELS said  that gets  back to  being able  to access                                                               
information from the industry on what they find.                                                                                
REPRESENTATIVE ROKEBERG  said, "We're  getting wrapped  around an                                                               
axle  about something  that  won't even  happen,  I don't  think,                                                               
because of the  location of the viscous."  He  said he will check                                                               
on it.                                                                                                                          
4:05:57 PM                                                                                                                    
MS. WILSON said  she is unclear on language for  the credit under                                                               
025.  Page 5,  lines 17-19, allows a credit for  oil that is non-                                                               
conventional as  certified by the department,  but the department                                                               
is given  no criteria on  judging what non-conventional is.   She                                                               
told Representative Rokeberg to describe it.                                                                                    
REPRESENTATIVE  ROKEBERG said  he  is  not sure  he  can do  that                                                               
because it's nonconventional.                                                                                                   
MS.  WILSON said  the transfer  of the  credit "to  an affiliate"                                                               
calls established regulation into  question.  She suggests making                                                               
the credits fully transferable or not.                                                                                          
4:08:57 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  said the  known deposits of  viscous oil                                                               
would  only be  extracted by  the three  big producers  who would                                                               
hold  the  credits  for  themselves.   He  suggested  making  the                                                               
credits non-transferable.                                                                                                       
CO-CHAIR SAMUELS asked about Anadarko Petroleum Corporation.                                                                    
REPRESENTATIVE  ROKEBERG said  Anadarko would  just have  to keep                                                               
the credit if it qualified.                                                                                                     
MS. WILSON said page 2, lines  5-8, was added because of the lack                                                               
of clarity  of the order  of the credits  taken.  The  first part                                                               
establishes that  this credit would  be taken last, but  the next                                                               
part changes the ordering.   She said it is less  of a problem if                                                               
the transferability is gone, and she will check into it further.                                                                
4:12:18 PM                                                                                                                    
MS. WILSON  said page 2  says the  credit can be  applied against                                                               
any and  all taxes,  but it  adds a  conservation surcharge.   It                                                               
sets up the  question if that is different from  "all taxes due".                                                               
She suggested deleting that language to make it consistent.                                                                     
CO-CHAIR SAMUELS asked about property and income tax.                                                                           
MS. WILSON said line  13 is where the problem is.   She said, "We                                                               
have a  focus on exploration,  research or development,  but then                                                               
the  description  of  "challenged   oil"  talks  about  "produced                                                               
[oil]".  She  said, "I'm not sure we should  be offering a credit                                                               
for  oil that's  already  been  produced."   She  asked what  the                                                               
intention is.  The bill allows  for exploration costs on any oil,                                                               
not just  challenged oil, she pointed  out.  On page  5, line 24,                                                               
the  bill allows  the credit  for "development"  or "use"  in the                                                               
state, and "that looks pretty big to us."                                                                                       
4:16:33 PM                                                                                                                    
REPRESENTATIVE SEATON  asked about a  sunset date or if  the bill                                                               
would be rolled into the gas contract.                                                                                          
REPRESENTATIVE  ROKEBERG said  there is  a ten-year  sunset.   He                                                               
said  the "EOR"  provisions can  be deleted  because it  would be                                                               
redundant.   He said the policy  call is using a  gravity test or                                                               
just identifying the formation for the credit.                                                                                  
CO-CHAIR  SAMUELS said  Version I  is before  the committee.   He                                                               
warned that research and development is difficult to audit.                                                                     
REPRESENTATIVE   ROKEBERG  said   the  bill   would  be   limited                                                               
substantially  and the  industry benefit  would be  substantially                                                               
reduced if that happened.   He said, "The other way  to go is you                                                               
allow it for  all heavy oil, but then you  restrict the amount of                                                               
CO-CHAIR  SAMUELS  said  Mr. Wenzel  asked  for  project-specific                                                               
credit.  He suggested getting input from the industry.                                                                          
4:21:11 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  said  DNR drafted  regulations  but  60                                                               
percent of the applications have not  been acted on.  He said the                                                               
bureaucracy is stiff-arming applications for [SB 185].                                                                          
REPRESENTATIVE  SEATON asked  if it  goes against  constitutional                                                               
laws of general application to give tax credits by fields.                                                                      
REPRESENTATIVE  ROKEBERG said  he doesn't  think that  will be  a                                                               
problem because there will be a qualifying determination.                                                                       
[HB 498 was held over.]                                                                                                         

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