Legislature(2005 - 2006)CAPITOL 124

04/20/2006 01:00 PM House RESOURCES

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01:10:06 PM Start
01:12:13 PM HB498
03:38:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued from 04/19/06 --
Heard & Held
Scheduled But Not Heard
HB 498-TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                    
CO-CHAIR SAMUELS announced that the  only 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                                                               
REPRESENTATIVE  ELKINS moved  to adopt  the committee  substitute                                                               
(CS) for  HB 498,  Version 24-LS1817\L,  Chenoweth 4/20/06,  as a                                                               
working  document.   There  being  no  objection, Version  L  was                                                               
before the committee.                                                                                                           
[Due to technical difficulties the  aforementioned motion was not                                                               
REPRESENTATIVE   NORMAN  ROKEBERG,   Alaska  State   Legislature,                                                               
speaking on  behalf of  the sponsor  of HB  498, the  House Rules                                                               
Standing  Committee  that  he chairs,  directed  the  committee's                                                               
attention  to the  memorandum from  Robynn Wilson,  Director, Tax                                                               
Division,  dated April  19,  2006.   He  said  that  he has  went                                                               
through  that  memorandum  and  decided  which  of  Ms.  Wilson's                                                               
recommendations to accept and incorporate into Version L.                                                                       
1:12:13 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  turned  attention to  item  number  one                                                               
regarding the  renewable energy credit, which  addresses AS .028.                                                               
The  term   "qualified  capital   expenditure"  was   changed  to                                                               
"qualified  renewable  energy expenditure"  in  order  to make  a                                                               
distinction.   The term "qualified  capital expense" was  left in                                                               
the   legislation  in   regard   to   the  heavy/challenged   oil                                                               
[provisions].   Ms. Wilson's item  number two regarding  the need                                                               
to change the  name wasn't accepted, although  the definitions of                                                               
those  will be  revisited.   Representative Rokeberg  highlighted                                                               
the deletions  of the  safe harbor provisions  or the  90 percent                                                               
rules in order to be consistent with  the language in HB 488.  In                                                               
regard  to  the specified  page  and  line numbers  for  changes,                                                               
Representative  Rokeberg explained  that Ms.  Wilson's memorandum                                                               
was in reference to Version Y.                                                                                                  
1:13:50 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG said  [the deletion  of the  language on                                                               
page 2, lines 8-18  and page 6, lines 7-17 of  Version Y] are the                                                               
safe harbor provisions.                                                                                                         
CO-CHAIR SAMUELS  surmised, "That's  the budgeted amount  so that                                                               
you're not trying to audit against somebody's budget."                                                                          
REPRESENTATIVE ROKEBERG replied yes.                                                                                            
1:14:33 PM                                                                                                                    
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
clarified  that item  five of  the April  19th memorandum  is now                                                               
located on page 2, lines 25-27 of Version L.                                                                                    
CO-CHAIR SAMUELS recalled that there  was discussion of numbering                                                               
that  in  order to  eliminate  any  confusion regarding  in-state                                                               
research.  He  related his understanding that "all of  it must be                                                               
in-state, not just the research."                                                                                               
MS. WILSON noted  her agreement.  Depending  upon the committee's                                                               
intention,  Ms. Wilson  suggested  that  inserting small  numbers                                                               
would be helpful.                                                                                                               
REPRESENTATIVE ROKEBERG,  continuing his  review of  the changes,                                                               
turned to the  deletion of the "more than once"  language on page                                                               
3, line 12 of Version Y.                                                                                                        
1:16:57 PM                                                                                                                    
MS. WILSON,  referring to her  item number six regarding  how the                                                               
average  is calculated,  opined  that it  has  been addressed  in                                                               
Version L on  page 3, line 26.   She mentioned that  she had some                                                               
concern with regard to the  phrasing of sub-subparagraphs (i) and                                                               
MS. WILSON,  returning to  the deletion of  the "more  than once"                                                               
language,  pointed out  that subsection  (e)  no longer  includes                                                               
paragraphs (1) and (2).                                                                                                         
REPRESENTATIVE SEATON  asked if  removing that language  means it                                                               
can be taken more than once.                                                                                                    
MS. WILSON reminded  the committee that she had  raised a concern                                                               
with regard to  what the language "more than once"  meant.  Under                                                               
the  PPT,  for  a  qualified   capital  expenditure  there  is  a                                                               
deduction and  a credit for the  20.  Alternatively, if  it's for                                                               
exploration, a  credit can be taken  under AS .025.   "In effect,                                                               
there is sort of the set up  where its taken more than once," she                                                               
said.  Therefore, this legislation  envisions a 15 percent credit                                                               
on top of the 20 percent  credit under the PPT, and thus deleting                                                               
the  phrase "more  than once"  is consistent  with the  sponsor's                                                               
REPRESENTATIVE SEATON surmised then that  this can be in addition                                                               
to the 40 percent.                                                                                                              
MS. WILSON said that is her understanding.                                                                                      
CO-CHAIR  SAMUELS  explained that  one  can  qualify for  the  40                                                               
percent and  this as well,  although in reality the  .185 credits                                                               
aren't used very much.                                                                                                          
MS. WILSON replied, "That is correct."                                                                                          
1:20:19 PM                                                                                                                    
REPRESENTATIVE ROKEBERG asked  if there is an  election under the                                                               
.185 credits and thus one can only take one or the other.                                                                       
REPRESENTATIVE  SEATON opined  that  if the  language "more  than                                                               
once" is  eliminated from HB  498, then  the 15 percent  could be                                                               
used in addition  to the 40 percent.  Therefore,  it would amount                                                               
to 55  percent with a tax  rate reduction of some  20 percent and                                                               
[the state] would pick up 75 percent.                                                                                           
CO-CHAIR SAMUELS highlighted that currently it's at 60 percent.                                                                 
REPRESENTATIVE CRAWFORD asked if the  outlook would change if the                                                               
PPT has  a base credit  of 25 percent,  which is the  proposal in                                                               
the Senate.                                                                                                                     
1:21:32 PM                                                                                                                    
REPRESENTATIVE ROKEBERG explained that his  intention is to use a                                                               
20 percent baseline and add on  to it.  He further explained that                                                               
if  another version  [of the  PPT] is  passed [with  a percentage                                                               
higher than 20 percent], additional  credits would offset some of                                                               
those  increases in  taxes if  the investment  was in  heavy oil.                                                               
The testimony,  he recalled,  has been that  at $60  [per barrel]                                                               
there  would  be  a  five  to   one  ratio  of  credits  to  tax.                                                               
Therefore, each five points of  tax credit would be equivalent to                                                               
one  point of  tax.    The aforementioned,  he  said,  is why  he                                                               
selected  15 percent  and thus  it would  be equivalent  to three                                                               
points in  tax.  With  regard to Representative  Seaton's concern                                                               
regarding   adding  on,   Representative  Rokeberg   related  his                                                               
understanding  that the  PPT includes  a  cap of  20 percent  per                                                               
REPRESENTATIVE SEATON clarified  that is just in  relation to the                                                               
purchase credits.                                                                                                               
CO-CHAIR SAMUELS  mentioned that  currently [one] receives  up to                                                               
60 percent, but the 40 percent  is for true exploration and isn't                                                               
used very much.                                                                                                                 
1:24:01 PM                                                                                                                    
CO-CHAIR  SAMUELS  commented, "It  kind  of  begs the  question."                                                               
Today oil  is at  $70 per  barrel, and  he questioned  whether an                                                               
incentive  is necessary  at that  price.   He further  questioned                                                               
whether the incentives could decrease  over time or vary based on                                                               
the  price of  oil because  at  $70 per  barrel everything  makes                                                               
JEFF SPENCER,  Supervisor, Heavy Oil  Development, ConocoPhillips                                                               
Alaska, Inc.,  noted his disagreement  that $70 per  barrel makes                                                               
money, although he admitted that it helps.                                                                                      
1:25:08 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG remarked  that he  needs some  help with                                                               
policy  calls.   One of  those  is in  regard to  whether the  15                                                               
percent is appropriate with the  20/20 approach and/or the Senate                                                               
legislation.    He related  his  understanding  that one  of  the                                                               
rationales behind the Senate legislation  going to the 25 percent                                                               
credit was  to ensure there  is sufficient credit to  incent this                                                               
type of development.  If  [the 25 percent credit is established],                                                               
then the  15 percent should  be lowered  to 10 percent.   Another                                                               
important issue is regarding whether  to narrow the focus of this                                                               
legislation to  only new research  and technology, and  not apply                                                               
it to  ongoing development  in heavy oil.   The  financial impact                                                               
would be substantially decreased while  the concept and policy to                                                               
incent  such technology  would be  enhanced.   Therefore, a  more                                                               
narrow drafting that  only applies to pilot  projects could allow                                                               
one to determine  the rate of credit.  He  reminded the committee                                                               
that an earlier version of HB  498 referred to 25,000 linear feet                                                               
of extended reach drilling.   He then recalled the new technology                                                               
of spider patterns which takes a  typical 400 barrel per day well                                                               
to 1,500 barrels  per well.  Unfortunately,  [the spider pattern]                                                               
is expensive.                                                                                                                   
MR. SPENCER,  in response  to Representative  Rokeberg, specified                                                               
that the  rough investment of  1E and  1J was $8-$10  million per                                                               
million.  He noted that  excursions pushed [the cost] well beyond                                                               
1:28:59 PM                                                                                                                    
CO-CHAIR  SAMUELS posed  a  situation in  which  a more  standard                                                               
credit mechanism  is established,  and asked if  there is  ever a                                                               
situation in  which the  research and development  is said  to be                                                               
done only  for heavy oil.   Can  companies specify the  amount of                                                               
research and development they will  spend on heavy oil, he asked.                                                               
Is it  that fine  tuned, he  asked.   Furthermore, how  would the                                                               
state know what Conoco is doing.                                                                                                
1:30:59 PM                                                                                                                    
CO-CHAIR  SAMUELS  inquired as  to  how  BP allocates  money  for                                                               
FRANK PASKVAN,  Western Prudhoe  Bay Heavy  Oil Team  Leader, BP,                                                               
said that BP engages in a  number of different areas of research.                                                               
He  then related  that if  the legislation  was changed  to refer                                                               
only to research, it would  be acceptable because there are other                                                               
provisions for development credits.   It would be appropriate, he                                                               
opined,  to give  credit for  research by  Alaskan oil  companies                                                               
specifically   for  Alaska   fields  in   order  to   incentivize                                                               
activities related  to particular  fields of interest  to Alaska.                                                               
However, he noted  that BP does have activities that  can only be                                                               
performed  outside  of   Alaska  and  [some  that   can  only  be                                                               
performed] by a third party.                                                                                                    
CO-CHAIR SAMUELS  asked whether funds allocated  for research are                                                               
specifically for heavy oil.                                                                                                     
MR. PASKVAN answered that BP  does have specific research budgets                                                               
for particular fields.   Typically, there are  expense items that                                                               
would  be named  and for  which  there would  be a  collaborative                                                               
effort for the funding with  the co-owners of a particular field.                                                               
For instance,  last year  the Orion  field study  budget included                                                               
specific line items for particular areas of research.                                                                           
1:34:21 PM                                                                                                                    
CO-CHAIR SAMUELS  returned to the  notion that at $70  per barrel                                                               
there is no need to provide an incentive.                                                                                       
MR.  PASKVAN returned  to earlier  dialogue regarding  the notion                                                               
that there  isn't any particular  use of exploration  credits for                                                               
wildcatting.   The  lack of  the use  of exploration  credits, he                                                               
opined,  indicates that  [exploration] isn't  incentivized enough                                                               
by  existing   statute  or  oil   prices.     Furthermore,  these                                                               
challenged oil fields are differentially  challenged to the light                                                               
oil.   Since  the bulk  of current  development comes  from light                                                               
oil, it  may be  that current legislation  considers the  bulk of                                                               
activities and  challenged oil will always  face greater economic                                                               
1:35:58 PM                                                                                                                    
REPRESENTATIVE  SEATON surmised  then that  all oil  shouldn't be                                                               
incentivized  by  25  percent  but  rather  there  should  be  an                                                               
incentive for heavy oil in order for there to be a differential.                                                                
MR.  PASKVAN explained  that, by  definition, challenged  oil has                                                               
real  productivity and  economic  challenges.   For example,  the                                                               
Ugnu  formation  has  only  produced  17,000  barrels  since  its                                                               
discovery 40  years ago because it  is challenged.  He  said that                                                               
economically and technically it's difficult to develop.                                                                         
REPRESENTATIVE  SEATON related  his  understanding  that the  tax                                                               
rate was  zero and there  was no  production [at Ugnu]  under the                                                               
current ELF.                                                                                                                    
1:37:51 PM                                                                                                                    
MR. PASKVAN  informed the committee  that Prudhoe Bay has  had an                                                               
aggregated  ELF  since January  12,  2005.   Therefore,  any  oil                                                               
produced  within Prudhoe  Bay pays  the same  severance tax  rate                                                               
under the aggregated ELF.   In further response to Representative                                                               
Seaton,  Mr. Paskvan  confirmed that  prior to  being aggregated,                                                               
the  tax rate  was  zero for  the  last 40  years.   However,  he                                                               
pointed out that there hasn't  been much production of that which                                                               
this legislation attempts to incent.                                                                                            
REPRESENTATIVE SEATON inquired as to  whether some of that relies                                                               
on   the   technology  of   the   horizontal   wells  and   other                                                               
1:39:12 PM                                                                                                                    
MR. PASKVAN  acknowledged that BP  is making advances.   In fact,                                                               
BP's  current investments  are targeting  the Schrader  Bluff and                                                               
West  Sak  formations  in   which  multilateral  horizontal  well                                                               
drilling  is being  employed.   In the  aforementioned formations                                                               
the zones  are relatively  thin, and therefore  each zone  has to                                                               
have its own well drilled out horizontally.                                                                                     
REPRESENTATIVE  CRAWFORD recalled  that over  the past  few years                                                               
there have been  predictions regarding heavy oil  production.  He                                                               
recalled estimates  that $40-$50 per  barrel might result  in the                                                               
production  of 4-5  billion barrels  of heavy  oil while  $60 per                                                               
barrel oil  might produce 5-6 billion  barrels of oil.   He asked                                                               
how much this legislation will  change that scenario.  He further                                                               
asked  how the  floor and  production  will be  impacted.   "Does                                                               
anybody have any  idea what these incentives might get  us, or is                                                               
it really the price per barrel that's  going to get us the oil no                                                               
matter what  we do here on  the incentives?  And  where's the low                                                               
end that  this might advantage  us to  get more oil  drilled," he                                                               
asked.     Representative Crawford related that his  intent is to                                                               
get more  oil drilled, and  therefore he questioned  whether this                                                               
legislation is the way to do so.                                                                                                
1:41:58 PM                                                                                                                    
MR.  PASKVAN related  that BP  is looking  at investments  in the                                                               
Western region  development in  the amount of  $1 billion  and $2                                                               
billion  for  a  particular  project  in  the  aggregate.    What                                                               
happened with the ELF last year  placed the [project] on hold for                                                               
a  year.     Additional  changes  to  the   tax  structure  would                                                               
substantially improve the likelihood  of approval of the project,                                                               
although  BP would  need  to  meet with  its  board of  directors                                                               
before stating such.  "It will definitely help," he concluded.                                                                  
1:43:24 PM                                                                                                                    
CO-CHAIR SAMUELS inquired  as to how many places in  the world BP                                                               
is looking  at heavy oil.   Although there is the  desire for the                                                               
technology to be  present, he opined that he doesn't  want to pay                                                               
for  100 percent  of  the  research costs  in  [areas outside  of                                                               
Alaska].   He  questioned  how  much of  that  research would  be                                                               
specifically for  heavy oil and  how much of that  research would                                                               
be  used  throughout the  world  for  various  types of  oil  and                                                               
exploration.   He  then questioned:   "How  many other  heavy oil                                                               
projects do you  have around the world and how  much heavy oil do                                                               
you have in the ground that you have trouble recovering?"                                                                       
MR.  PASKVAN answered  that  BP  has a  few  heavy oil  projects,                                                               
although it's  a new technology  area for  BP.  However,  BP does                                                               
specifically  target research  activities  and tailor  them to  a                                                               
particular  field.    He  pointed  out  that  through  the  audit                                                               
function, there is a transparent audit of expenditures.                                                                         
1:45:44 PM                                                                                                                    
MR.  SPENCER returned  to the  discussion regarding  research and                                                               
development,  and commented  that  he wasn't  sure  that was  the                                                               
correct  terminology.    He  explained  that  there  are  company                                                               
experts  in  Texas  and  Oklahoma with  whom  the  company  often                                                               
contracts to  perform a study  specifically for an  Alaska asset.                                                               
The aforementioned  are legitimate expenses for  an Alaska asset,                                                               
which is  charged to co-owners.   "That's the kind of  stuff that                                                               
...  should be  covered in  a bill  like this  because its  stuff                                                               
that's directly tied to an Alaska asset," he opined.                                                                            
1:47:04 PM                                                                                                                    
MS. WILSON,  recalling a question  regarding federal  credits for                                                               
research,  said there  is  a  federal credit  of  20 percent  for                                                               
research.  Of interest is  that activities outside of the country                                                               
aren't creditable.                                                                                                              
1:47:53 PM                                                                                                                    
CO-CHAIR SAMUELS asked  if BP and Conoco take  advantage of those                                                               
MR. SPENCER said that he didn't know.                                                                                           
MR. PASKVAN said, "I sure hope so."                                                                                             
CO-CHAIR  SAMUELS posed  a situation  in which  the seismic  data                                                               
from the  industry and  the state's  perspective showed  that the                                                               
oil  in  a  particular  area  will be  heavy.    Once  the  first                                                               
exploratory  well  is  drilled,   is  that  information  publicly                                                               
available, he asked.   He said he would hate to  give a credit to                                                               
heavy oil when it really isn't.                                                                                                 
BILL VAN DYKE,  Director, Division of Oil and  Gas, Department of                                                               
Natural Resources, answered that if  the well is located on state                                                               
land, the  state would have access  to the data once  the well is                                                               
drilled.  However, the information  would be confidential for the                                                               
first two  years and wouldn't  be public.   On federal  land, the                                                               
state would not have access to  that data.  That doesn't mean the                                                               
companies couldn't share that data,  it would just mean that they                                                               
would have to volunteer to do so.                                                                                               
1:50:07 PM                                                                                                                    
REPRESENTATIVE  SEATON  posed a  situation  in  which the  Senate                                                               
legislation has  a 25 percent tax  credit, a 22.5 tax  rate, a 15                                                               
percent credit  for heavy oil,  a 20 percent federal  credit, and                                                               
deductibility  from  federal  income  tax of  35  percent.    The                                                               
aforementioned amounts  to 117 percent.   Therefore, even without                                                               
this 15  percent, the credits  and tax rate deductions  amount to                                                               
102 percent.                                                                                                                    
MS. WILSON said that she hasn't  done the math for those [credits                                                               
and  deductions].   She further  said  that she  hasn't done  the                                                               
federal  credit  for research  because  often  federally when  an                                                               
entity takes  a credit  for an  expenditure, that  entity doesn't                                                               
necessarily receive a  deduction as well.   Although the enhanced                                                               
oil  recovery (EOR)  federal credit  and deduction  are received,                                                               
they are limited, she mentioned.                                                                                                
1:52:05 PM                                                                                                                    
REPRESENTATIVE  SEATON  opined  that  at high  oil  prices,  [the                                                               
credits and  deductions] don't make  any difference  because it's                                                               
economic and  should be  sufficient incentive.   However,  at low                                                               
oil prices,  the state is  at risk  because there is  no downside                                                               
1:52:52 PM                                                                                                                    
CO-CHAIR SAMUELS asked  Mr. Van Dyke if he  has any philosophical                                                               
thoughts on heavy  oil tax credits or any  thoughts regarding how                                                               
to administer this proposal.                                                                                                    
MR.  VAN   DYKE  acknowledged   that  although  viscous   oil  is                                                               
challenging to  develop and  produce, it  isn't impossible  to do                                                               
so.    In  fact,  there  is  a  relatively  large  project  being                                                               
considered  at  Prudhoe  Bay.    He opined  that  there  will  be                                                               
additional  viscous  oil  development   and  production  with  or                                                               
without these additional tax credits.   Therefore, he highlighted                                                               
the need to determine what  the [incentives] are trying to change                                                               
because the incentives should be  designed to change the behavior                                                               
of the  lessees in a  specific way.  Mr.  Van Dyke said  he would                                                               
focus on  changing behavior, incentivizing,  with respect  to the                                                               
development of  the known viscous  oil on  the North Slope.   For                                                               
the 20  billion-plus barrels of  viscous oil on the  North Slope,                                                               
there  has  basically  been no  development  in  relative  terms.                                                               
Therefore, he  preferred listing  the units and  formations where                                                               
these credits  might be  applied and  include a  catch-all phrase                                                               
for future accumulations.                                                                                                       
1:55:49 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired as to whether  the specified 2016                                                               
date in HB 498 is reasonable or should it be sooner.                                                                            
MR. VAN DYKE  specified that he wouldn't make it  any longer than                                                               
10 years.  However, development takes three to five years.                                                                      
1:57:22 PM                                                                                                                    
REPRESENTATIVE SEATON said he is  interested in how it works with                                                               
the  corporate structure.   He  asked whether  a change  to seven                                                               
years would  make the  corporations move more  quickly.   He then                                                               
related his  understanding that the research  and development and                                                               
capital expenditures would occur at the beginning.                                                                              
MR. VAN DYKE said he agreed, adding  that it will take a while to                                                               
get through  the formal  approval process  because these  will be                                                               
large  expenditures.    In  further  response  to  Representative                                                               
Seaton, Mr.  Van Dyke  surmised that companies  could get  a fair                                                               
amount  of  work done  in  the  next  seven  years if  they  were                                                               
motivated to do so.                                                                                                             
1:59:11 PM                                                                                                                    
MR. SPENCER used Ugnu as an  example.  He explained that it would                                                               
take a couple of  years of study and a pilot  project to test the                                                               
concepts  of  the  recovery  process.    Furthermore,  the  pilot                                                               
project  would need  to  be run  for several  years  in order  to                                                               
understand  the productivity  of the  reservoir.   Then it  would                                                               
take at least five years to  build a new plant and begin drilling                                                               
the well.   "So, the time  horizons are fairly long  so I believe                                                               
10 years is an appropriate timeframe  and would help move some of                                                               
those projects even faster," he opined.                                                                                         
MR. PASKVAN informed the committee  that he returned to Alaska in                                                               
1998 and began  planning the project that is  moving ahead today.                                                               
The first oil,  he said he anticipated will arrive  in 2010.  The                                                               
aforementioned amounts  to a  12-year time span.   He  noted that                                                               
this project  develops the  reservoir in which  there was  a West                                                               
Sak pilot  in 1988.   Therefore, the lifecycle on  these projects                                                               
is long.   For instance, when  Alberta did its oil  sands project                                                               
some 20  years ago, it seemed  laughable because of the  price of                                                               
oil.   This illustrates the need  to take a longer  view and that                                                               
BP may turn to the legislature asking for an extension.                                                                         
2:01:09 PM                                                                                                                    
CO-CHAIR SAMUELS posed  a scenario in which this  wasn't a credit                                                               
just for  research.  If  that were the  case, would there  be the                                                               
need to include  research, he asked.  He then  inquired as to the                                                               
ability to  audit that.  He  then posed a scenario  in which West                                                               
Sak is  designated as a heavy  oil field, and inquired  as to how                                                               
the audit would work.                                                                                                           
2:02:39 PM                                                                                                                    
MS.  WILSON,  regarding  the auditability  of  the  API  gravity,                                                               
deferred to Mr. Van Dyke.   With regard to research, she recalled                                                               
testimony  yesterday about  pre-approving projects  for research,                                                               
and said  that makes sense  as long as criteria  are articulated.                                                               
In addition to approving a  project for that purpose, the federal                                                               
government could audit  it precluding any foreign  research.  She                                                               
agreed  with  earlier mention  that  perhaps  a dollar  limit  on                                                               
research would limit the state's exposure.                                                                                      
2:04:56 PM                                                                                                                    
CO-CHAIR SAMUELS  posed a  situation in  which an  expenditure is                                                               
made to  drill a well  and the heavy  oil tax credit  isn't given                                                               
until it's proven at a specific  gravity.  He then inquired as to                                                               
what  would occur  if  it's incorrect  or  fluctuates around  the                                                               
specified gravity.   He asked if the gravity of  oil changes over                                                               
MR. VAN  DYKE explained that some  of these wells have  layers of                                                               
oil that are different viscosity.   The physics of it is that the                                                               
lighter oil  flows easier  and first while  the heavier  oil will                                                               
flow  later.   Therefore, the  viscosity of  the oil  leaving the                                                               
well could change over time,  although it wouldn't change day-to-                                                               
day.   Certainly, the viscosity  could change over the  course of                                                               
years.  Mr.  Van Dyke related, "That's why I  think if you decide                                                               
to give some credits for viscous  oil, I could just live with the                                                               
idea of  saying ... in  a given number  of units we'll  just give                                                               
the credit, if  that's the policy call.  And  then you don't have                                                               
to measure the viscosity and ... API gravity ...," he said.                                                                     
2:08:00 PM                                                                                                                    
REPRESENTATIVE  SEATON  recalled   the  microbial  research,  and                                                               
opined that it  seems there are attempts to  stimulate and change                                                               
the  viscosity of  the  oil  in order  to  enhance the  recovery.                                                               
Therefore, it wouldn't  be eligible for the credit.   He asked if                                                               
incenting the technology being sought  to reduce the viscosity of                                                               
the oil could be problematic.                                                                                                   
2:08:42 PM                                                                                                                    
MR. VAN DYKE said that is correct.                                                                                              
REPRESENTATIVE  SEATON  surmised  that the  aforementioned  would                                                               
lend  itself to  the suggestion  of  naming a  field [to  receive                                                               
credits] rather than a field with a specific gravity.                                                                           
2:09:31 PM                                                                                                                    
MR.  VAN DYKE  said  he agreed  with  that in  the  context of  a                                                               
reasonable sunset of which could be 10 years.                                                                                   
CO-CHAIR SAMUELS inquired  as to the industry's  perspective in a                                                               
situation in  which a company plans  on a certain tax  credit for                                                               
an expenditure and then suddenly the  oil is the measurement.  He                                                               
further inquired  as to whether  a measurement, if that  is used,                                                               
should change over time.                                                                                                        
MR. PASKVAN said the reservoir  doesn't change much but processes                                                               
do  increase the  API gravity  above the  threshold on  occasion.                                                               
"By pool inclusion would be  sufficient because ... as it started                                                               
we  can  characterize  its distribution  for  viscosity  for  API                                                               
gravity.  If  it meets those criteria,  then it's in.   And we do                                                               
have to do  special techniques to get the oil  out because of its                                                               
original characteristics."                                                                                                      
MR.  SPENCER echoed  Mr. Van  Dyke's  comments that  over a  long                                                               
period of time there might be  some slight degradation in the oil                                                               
quality because  lighter oil flows  first, which might  drop over                                                               
2:12:08 PM                                                                                                                    
MS.  WILSON   acknowledged  that  the  API   [gravity]  would  be                                                               
problematic  from a  timing  aspect.   Additionally,  there is  a                                                               
chance  that  differential  credits  could  be  a  constitutional                                                               
problem.   However, if the state  has a clear business  reason to                                                               
target a certain area, it can be easily overcome.                                                                               
CO-CHAIR  SAMUELS opined  that if  "we're  going to  go down  the                                                               
road,"  it would  make more  sense to  have designated  heavy oil                                                               
areas  and  thus  methods  of discovery  can  be  overlooked  and                                                               
research and development can be discussed separately.                                                                           
2:14:03 PM                                                                                                                    
REPRESENTATIVE SEATON  commented that it makes  sense because the                                                               
state is  encouraging techniques to  change the viscosity  of the                                                               
2:16:37 PM                                                                                                                    
REPRESENTATIVE  SEATON related  his belief  that basically  pilot                                                               
projects  are  being established  [if  DNR  specifies what  areas                                                               
would receive  a credit] and  any [new  areas] will have  to come                                                               
back to  the legislature  in order to  determine whether  it will                                                               
receive a credit.                                                                                                               
REPRESENTATIVE  ROKEBERG  highlighted  that  Version  L  includes                                                               
monthly  averaging  in order  to  measure  the monthly  viscosity                                                               
levels to deal with  that.  He said his concern  is that there is                                                               
application for  credits for that,  which have only  been granted                                                               
for some  40 percent.   Elimination of  the API  gravity standard                                                               
makes  him a  bit nervous,  he remarked.   However,  the industry                                                               
recommends  a new  definition of  challenged oil,  which includes                                                               
the   API  standard   as  well   as   geographic  and   formation                                                               
2:18:35 PM                                                                                                                    
REPRESENTATIVE SEATON asked  if Representative Rokeberg disagrees                                                               
with specifying the fields [that would receive a credit].                                                                       
REPRESENTATIVE ROKEBERG  replied no, adding that  the legislation                                                               
already does so.   However, he acknowledged  that the legislation                                                               
also includes  the 25  and 18  standards and  thus there  is some                                                               
redundancy.  One of the  recommendations of industry is in regard                                                               
to  identifying the  marker by  calling  out the  formation.   He                                                               
specified that his only concern  is in regard to the commissioner                                                               
having too much discretion.                                                                                                     
2:19:30 PM                                                                                                                    
CO-CHAIR SAMUELS  related his  view that  certain areas  could be                                                               
designated as heavy oil and  other areas with a specified gravity                                                               
would have to apply to  the commissioner to determine whether the                                                               
credit would apply to that area.                                                                                                
MR. VAN  DYKE said he supported  such an approach.   He specified                                                               
that  the  following  areas  could be  designated  as  heavy  oil                                                               
receiving the  credit:   Prudhoe Bay,  Kuparuk River  Unit, Milne                                                               
Point Unit, Tuvaaq Unit, Nakaitchuq Unit, and Rock Flour Unit.                                                                  
REPRESENTATIVE  ROKEBERG  inquired as  to  the  fate of  Princess                                                               
Creek, which is  south of Kuparuk River Unit.   He asked if there                                                               
would be a provision to allow the commissioner to decide.                                                                       
REPRESENTATIVE  SEATON  clarified  that  his intent  is  for  the                                                               
division and the commissioner [upon  receiving an application] to                                                               
come to  the legislature.   The legislature would  decide whether                                                               
to designate another area as heavy oil to receive the credit.                                                                   
2:22:08 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  noted his disagreement.   He highlighted                                                               
that  Version  L  includes  the   following  language:    "future                                                               
participating areas  formed to develop West  Sak, Schrader Bluff,                                                               
Ugnu  formation or  their  stratigraphic  equivalents within  the                                                               
boundaries  of  the  units  named above  or  within  these  other                                                               
units".  He expressed concern  because Chevron Unocal just took a                                                               
large acreage  position south of  the Kuparuk River Unit  for the                                                               
exploration  of  heavy  oil.    He  opined  that  Chevron  Unocal                                                               
shouldn't be  restricted if it's  strictly a heavy  oil prospect.                                                               
Therefore,  he questioned  why they  would  have to  come to  the                                                               
legislature for approval of something  in which they have made an                                                               
investment.    "I don't  think  we  should  be that  strict,"  he                                                               
further opined.                                                                                                                 
CO-CHAIR SAMUELS highlighted,  "The flip side of that  is you say                                                               
that oil  produced of  API gravity of  18 or less  so we  were at                                                               
18.5 ... or  18.1 and you're on  the bubble area ...  do you have                                                               
to go in there  and test all the time?"  In  such a scenario, the                                                               
company wouldn't  know whether it'll  receive the credit  or not.                                                               
In  fact, he  related his  understanding that  the company  won't                                                               
know whether the oil is heavy until the well is drilled.                                                                        
MR.  SPENCER  noted  his agreement,  although  he  mentioned  the                                                               
company  would  have  a  good  idea whether  the  oil  is  heavy.                                                               
However, he said that he didn't  believe it would be a huge issue                                                               
because if there  was any thought that the oil  may be borderline                                                               
heavy,  then  that  would've  been  factored  into  the  economic                                                               
analysis.   Many  times, he  opined, the  oil will  be below  the                                                               
heavy oil criteria listed  in HB 498 and thus it  won't be a real                                                               
2:25:13 PM                                                                                                                    
CO-CHAIR SAMUELS  returned to Representative  Rokeberg's question                                                               
regarding Chevron  Unocal's situation  and whether it  would have                                                               
to come to the legislature [regarding the credit for heavy oil].                                                                
MR.  VAN  DYKE expressed  his  hope  that the  legislation  would                                                               
include a catchall provision that  would provide the commissioner                                                               
some discretion to add areas.                                                                                                   
REPRESENTATIVE ROKEBERG  said that would  be his preference.   He                                                               
related his  understanding that  Representative Seaton  is trying                                                               
to  ensure that  there's  not an  abuse of  the  discretion.   He                                                               
suggested that a  sunset may be the salvation in  the future.  He                                                               
indicated that the suggested language still falls short.                                                                        
REPRESENTATIVE SEATON  clarified, "My only problem  is that we're                                                               
talking  about  giving  the commissioner  $200  million  or  $300                                                               
million  option ...  to  a  company."   He  reiterated that  such                                                               
decisions should come before the legislature.                                                                                   
2:27:22 PM                                                                                                                    
REPRESENTATIVE ROKEBERG related his  belief that the commissioner                                                               
would  lean toward  caution,  and therefore  may  result in  less                                                               
development rather  than more.  Clearly,  Representative Seaton's                                                               
suggestion offers  the company some  remediation if it  runs into                                                               
difficulties  with the  department.   In fact,  he quipped,  it's                                                               
easier to get legislation through versus a suit.                                                                                
CO-CHAIR SAMUELS said  that the remaining issues  are in relation                                                               
to research and  development and whether it should  remain in the                                                               
legislation and how  it would be audited.  There  are also issues                                                               
remaining  in regard  to  the PPT  rate,  designating areas,  and                                                               
addressing new areas.                                                                                                           
2:29:12 PM                                                                                                                    
REPRESENTATIVE  SEATON  referred  to  page 2,  line  2,  and  the                                                               
language "may  be applied against  any and all taxes",  and asked                                                               
if that's more than production taxes.                                                                                           
CO-CHAIR SAMUELS pointed out that  the language in that provision                                                               
goes  on  to  refer  to  "the  producer's  taxable  oil  and  gas                                                               
production."   He asked  if an  income tax would  count as  a tax                                                               
[for that provision].                                                                                                           
MS. WILSON specified, "It identifies  under this chapter, so that                                                               
would  be Chapter  55,  which would  cover  production tax  only.                                                               
Within the Title  43, it is true that Chapter  20 is income tax."                                                               
She  opined  that  the  language   "under  this  chapter  on  the                                                               
producer's taxable  oil and gas  production" restricts it  to the                                                               
production tax.   Furthermore,  on page 2,  line 7,  the language                                                               
"any tax due under this chapter" would make this okay.                                                                          
2:30:31 PM                                                                                                                    
REPRESENTATIVE ROKEBERG asked if  the legislation should refer to                                                               
new  technology  and  research  or   should  it  be  broader  and                                                               
applicable to  all heavy oil  activity.    Once that  decision is                                                               
made, he opined,  some of the other decisions will  be easier and                                                               
fall  into place.   For  example, if  the legislature  develops a                                                               
consensus for a  baseline of 25 percent as a  tax credit, then HB
498 has  less value  in it's  current form  and may  benefit from                                                               
being narrower in scope.                                                                                                        
CO-CHAIR  SAMUELS   posed  a  scenario   in  which   research  is                                                               
eliminated from  HB 498,  but specified  that the  development of                                                               
West Sak  would receive a  credit.  He  then posed a  scenario in                                                               
which  the  legislation  incentivized   research  in  order  that                                                               
companies can  come to West Sak  on their own.   He indicated his                                                               
interest in which legislation Mr. Spencer would prefer.                                                                         
MR. SPENCER opined  that the real issue is  trying to incentivize                                                               
development  of these  heavy oil  resources rather  than research                                                               
and development of  new technology.  He further  opined that it's                                                               
desirable to apply  the technology to Alaskan fields  in order to                                                               
extract the  oil out of  the ground  and through the  pipeline in                                                               
order for everyone to benefit.   Therefore, Mr. Spencer said that                                                               
from  his perspective  the research  and  development portion  is                                                               
minimal because  it occurs around the  world.  The real  value is                                                               
actually using the [technology] to  develop an Alaska asset.  The                                                               
industry needs help in this realm.   Since these fields have been                                                               
known  for 30  years,  any incentives  would be  a  big boost  to                                                               
Alaska's economy.                                                                                                               
MR. PASKVAN said  he would concur.  He reminded  the committee of                                                               
his  submitted testimony  last week  that the  current investment                                                               
decisions are on  higher viscosity fields.  The hope  is to apply                                                               
what's  learned  today  on  tomorrow's   oil  fields.    However,                                                               
development today  should continue in  order to get to  reach the                                                               
huge prize of the Ugnu.                                                                                                         
2:34:12 PM                                                                                                                    
MR. SPENCER  highlighted that  tax incentives  were a  real boost                                                               
with the use  of the Section 29 tax credits  for coal bed methane                                                               
development in  the San Juan  Basin.  Now  the San Juan  Basin in                                                               
northwest New Mexico is one  of the largest gas-producing regions                                                               
in North America.  The  technology developed because there was an                                                               
incentive to  invest in that area.   He opined that  the original                                                               
intent of this legislation was to incentivize development.                                                                      
2:35:31 PM                                                                                                                    
REPRESENTATIVE   SEATON   said   that  another   area   requiring                                                               
discussion  is whether  there is  a  dollar per  barrel price  at                                                               
which this credit will apply.                                                                                                   
REPRESENTATIVE  ROKEBERG  opined  that  much  of  that  is  being                                                               
absorbed  into  the PPT  legislation  by  creating all  standards                                                               
based on  net profits.  The  argument can be made  that heavy oil                                                               
incentives aren't  necessary because  "they will get  it anyway."                                                               
On the  other hand,  he opined  that there will  be some  type of                                                               
progressivity.   He then  opined that  the sunset  and a  time in                                                               
which there  is an incentive has  merit.  "So, I  don't have that                                                               
concern as much there" he said.                                                                                                 
2:37:28 PM                                                                                                                    
MR. SPENCER reminded  the committee that it was not  so long ago,                                                               
1998, when  oil was  $10 a  barrel.   One must  keep in  mind, he                                                               
said, that the oil industry  is a very capital intensive industry                                                               
during which much  money is spent up-front and  the payout occurs                                                               
over  30   years.    Therefore,  having   these  incentives  will                                                               
hopefully result in a sustainable heavy oil future for Alaska.                                                                  
REPRESENTATIVE  ROKEBERG related  his  agreement that  investment                                                               
cycles of  things of this nature  are so long that  there will be                                                               
some volatility  of pricing  throughout.  He  inquired as  to the                                                               
timeframe undertaken  by the industry  in the  newer developments                                                               
of Polaris and Orion.                                                                                                           
2:38:49 PM                                                                                                                    
MR.  PASKVAN answered  that the  Polaris  and Orion  developments                                                               
were learned  about in 1988 through  the West Sak fields.   Since                                                               
that time,  work has  proceeded on the  Polaris oil  field, while                                                               
work began  a year  or two  later on  Orion.   Still, significant                                                               
investment decisions are  being made with respect  to projects to                                                               
be  developed in  2010.   He  then suggested  that the  committee                                                               
recognize  that the  incentives  placed in  this legislation  are                                                               
associated with the  production tax, which is one  portion of the                                                               
state's take  and "we'd all  be pretty  happy with those  kind of                                                               
prices on royalty oil as well."                                                                                                 
MR. SPENCER  interjected that the  West Sak J pilot  was actually                                                               
in the early 1980s.                                                                                                             
CO-CHAIR SAMUELS advised the committee  that he would like to get                                                               
through all  the large issues  today and then tomorrow  make some                                                               
of the policy choices to be placed in a CS, perhaps, for Monday.                                                                
REPRESENTATIVE SEATON referred to page  2, line 16, of Version L.                                                               
He posed  a scenario  in which  the legislation  goes to  a field                                                               
designation, and asked if those are  "already tied up so we don't                                                               
have to worry about any new  players."  He reminded the committee                                                               
that  part of  the PPT  are the  transferable credits  that would                                                               
allow new  players to  benefit, while  under this  legislation it                                                               
would seem  that only  three or four  players would  benefit from                                                               
these credits.                                                                                                                  
2:42:19 PM                                                                                                                    
MR. VAN DYKE  pointed out that if  Kerr-McGee [Corporation] moves                                                               
forward  with  its  development,   it  would  qualify  from  some                                                               
Schrader  Bluff credits.    Kerr-McGee would  have  to use  those                                                               
credits themselves  and given the  other credits they  would earn                                                               
under the PPT  from a new development project,  the company would                                                               
have  to  sit  on  these  credits before  they  could  use  them.                                                               
Therefore, these credits  [in HB 498] would  have some diminished                                                               
2:42:57 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  inquired as  to the  Chevron lease  in a                                                               
new areawide sale  and whether it would be covered  in any of the                                                               
[specified] units or would it be an additional unit.                                                                            
MR. VAN DYKE specified that it would be a new area.                                                                             
REPRESENTATIVE ROKEBERG said that is  of concern.  He related his                                                               
understanding  that anything  [a  company] picks  up  in a  North                                                               
Slope areawide lease  sale wouldn't qualify unless it  was in one                                                               
of those  units.   The aforementioned is  why the  discretion [of                                                               
the  commissioner]  has  to  be   included.    He  then  directed                                                               
attention  to page  2,  subsection (f),  which  discusses what  a                                                               
qualified  capital  expenditure  is  and expressed  the  need  to                                                               
clarify that.                                                                                                                   
MR. VAN  DYKE, referring to page  2, line 22, explained  that the                                                               
exploration expenditure  identified would be for  anywhere in the                                                               
state and  not just  for challenged oil.   Furthermore,  it would                                                               
include  things  like  seismic  activity.    Mr.  Van  Dyke  then                                                               
suggested that the committee may want  to review the title of the                                                               
bill because the aforementioned  expenditure isn't for challenged                                                               
oil or  nonconventional oil.   He characterized  it as  a generic                                                               
statewide exploration incentive credit.                                                                                         
2:44:57 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  questioned whether  the  aforementioned                                                               
may need to be deleted.                                                                                                         
MS. WILSON pointed  out that the title has been  changed and thus                                                               
it  should work.   However,  page 2,  subsection (f)  hasn't been                                                               
changed and  the definition doesn't  match the  qualified capital                                                               
expenditure  in  the  PPT.     Therefore,  it  should  either  be                                                               
consistent  or reference  the definition  or  the [definition  in                                                               
Version L] needs  to be changed.  She highlighted  that, in fact,                                                               
nothing  in the  definition  embodies capital  but rather  merely                                                               
targets an ordinary expense.                                                                                                    
2:46:19 PM                                                                                                                    
REPRESENTATIVE   ROKEBERG  remarked   that  the   scope  of   the                                                               
legislation will drive the redraft  of the legislation.  He noted                                                               
his agreement with  Ms. Wilson.  He then related  his belief that                                                               
this  legislation should  be  consistent with  the  PPT unless  a                                                               
different area is being carved out.                                                                                             
MS. WILSON opined  that the main problem is on  page 2, lines 25-                                                               
27, which is the main departure  from the PPT.  Still, she agreed                                                               
that once  the policy is  set, drafting the language  will easily                                                               
2:47:40 PM                                                                                                                    
REPRESENTATIVE  SEATON surmised  then that  the policy  decisions                                                               
are whether [the  proposed tax credit in HB 498]  will be limited                                                               
to  capital expenditures  that may  or may  not include  research                                                               
expenditures  and  whether  [the  tax  credit]  will  be  allowed                                                               
statewide or for only those fields specified in the legislation.                                                                
MS. WILSON suggested that in  addition to those policy calls, the                                                               
committee  should review  the  definition  [of qualified  capital                                                               
expenditure] in  the PPT, which  includes exploration  and things                                                               
that  are  capitalized under  the  Internal  Revenue Code.    She                                                               
expressed the need  to be certain that the  language reflects the                                                               
REPRESENTATIVE  SEATON  related  his understanding  that  another                                                               
policy  call  is  in  regard to  whether  this  legislation  will                                                               
address only heavy oil or include [other types of energy].                                                                      
REPRESENTATIVE   ROKEBERG  opined   that  the   renewable  energy                                                               
expenditures have to have a  different definition.  He noted that                                                               
there are no windmills in the PPT.                                                                                              
MS.  WILSON noted  her agreement,  although she  highlighted that                                                               
the PPT  does specify  that it  would cover  capital expenditures                                                               
that  have  been capitalized  under  the  Internal Revenue  Code.                                                               
Therefore,  it's not  the source  of the  expense but  rather how                                                               
it's treated.   In further  response to  Representative Rokeberg,                                                               
Ms.  Wilson specified  that  on  page 5,  lines  12-16, the  only                                                               
restriction is that  it be ordinary and necessary,  which is true                                                               
of  all business  expenses under  the Internal  Revenue Code  and                                                               
that includes  things that  are capitalized.   Therefore,  if the                                                               
intention is to restrict it  to capitalized items, the definition                                                               
needs  some work.   However,  if the  intention is  to apply  any                                                               
expenditure  with   regard  to  that  energy   source,  then  the                                                               
definition is appropriate.                                                                                                      
2:51:22 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG surmised,  "Using  the current  language                                                               
here and  the way the  PPT is drafted,  using the 25  percent tax                                                               
credit as  expressed in  the bill.   If we left  it this  way, it                                                               
would be both a deduction and a capex credit too."                                                                              
MS. WILSON explained that the  definition on page 5 would include                                                               
things that were  expensed under the Internal Revenue  Code.  For                                                               
example,  a purchase  of biodiesel  that  was used,  it would  be                                                               
expensed  in the  federal  income  tax return  and  subject to  a                                                               
credit.   However,  since it's  not capitalized,  it wouldn't  be                                                               
subject to  a credit  under the  PPT whereas  an investment  in a                                                               
windmill would be  a capitalized expenditure.  She  said that the                                                               
difference [with the definition in HB 498] is the expense items.                                                                
2:52:38 PM                                                                                                                    
REPRESENTATIVE  SEATON related  his discomfort  with this  entire                                                               
section  because   it  provides   credits  for   development  [of                                                               
alternative energy] only to oil companies.                                                                                      
REPRESENTATIVE  ROKEBERG  highlighted   that  oil  companies  are                                                               
energy  companies.    He  opined that  an  energy  company  could                                                               
develop  another energy  source  with a  tax  credit against  the                                                               
specific revenue generator.                                                                                                     
REPRESENTATIVE CRAWFORD  asked if  anyone developing  Fire Island                                                               
could  take  advantage  of  oil   company  credits  by,  perhaps,                                                               
purchasing them in some way.                                                                                                    
REPRESENTATIVE   ROKEBERG   noted   that   the   credits   aren't                                                               
2:54:41 PM                                                                                                                    
CO-CHAIR   SAMUELS  indicated   that  allowing   such  would   be                                                               
MS. WILSON,  regarding the topic of  transferability, pointed out                                                               
that the  previous problem of  transfer to an affiliate  has been                                                               
fixed  on  page  2,  line  17,  which  now  specifies  that  it's                                                               
nontransferable.   However, the  same change  wasn't made  to the                                                               
renewable energy portion  of the legislation on page  5, lines 2-                                                               
REPRESENTATIVE ROKEBERG characterized it as an oversight.                                                                       
2:56:44 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested  that Ms.  Wilson  provide  the                                                               
committee with  scenarios regarding the amount  of cumulative tax                                                               
credit under [HB 498] and HB 488, including federal credits.                                                                    
MS. WILSON,  recalling her  testimony last  week, said  she noted                                                               
that  under the  PPT  there is  the potential  for  a 20  percent                                                               
credit,  a  20 percent  deduction,  and  a potential  35  percent                                                               
federal  deduction.    Furthermore,  depending  on  the  type  of                                                               
expenditure, say for an EOR there  would be a 15 percent [credit]                                                               
and  this  would provide  an  additional  15 percent.    Although                                                               
Version L  doesn't include  the provisions  for EOR  methods, she                                                               
suggested that  some of  the oil recoveries  could be  subject to                                                               
that   15  percent   federal  credit   even  though   that's  not                                                               
specifically targeted in HB 498.   Therefore, it depends on which                                                               
piece of  HB 498 is  being reviewed.   In fact, the  research can                                                               
receive a 20  percent federal credit.  After  reading through the                                                               
code section  for that, Ms.  Wilson said  that she didn't  find a                                                               
requirement to not count it  for a federal reduction.  Therefore,                                                               
if  it's research  that's being  discussed, there  would be  a 20                                                               
percent  federal   credit  and  perhaps  a   35  percent  federal                                                               
3:00:20 PM                                                                                                                    
MS.  WILSON, in  response to  Representative Rokeberg,  explained                                                               
that if  a deduction is  taken and a company  is at a  35 percent                                                               
marginal tax  rate, then there is  the potential of a  35 percent                                                               
benefit.   The state corporate  income tax is a  factor, although                                                               
she  suggested  that  it's fairly  small  because  for  corporate                                                               
income  tax purposes  the federal  credits times  18 percent  are                                                               
factored in  and an apportionment  factor is also included.   She                                                               
further  explained that  the worldwide  combination is  reviewed.                                                               
Therefore,  if  a company  did  10  percent  of its  business  in                                                               
Alaska, 18 percent of the federal  credit would be taken and then                                                               
10 percent of  that would taken, which is the  benefit that would                                                               
be listed  on the state  income tax.   "So, it's diluted  quite a                                                               
bit," she said.                                                                                                                 
REPRESENTATIVE SEATON inquired as to  the corporate tax rate that                                                               
is going to be paid on the income earned in Alaska.                                                                             
3:02:09 PM                                                                                                                    
MS. WILSON  posed a situation  in which  a company has  income of                                                               
$100 million with  a 10 percent apportionment factor.   In such a                                                               
situation the taxable  Alaska income would amount  to $10 million                                                               
and a  graduated tax  system with  the top  marginal rate  of 9.4                                                               
percent  of the  $10  million.   Therefore,  the [cumulative  tax                                                               
credit]  takes into  account [a  company's] worldwide  [earnings]                                                               
and the  amount of  which was  earned in  Alaska.   Therefore, it                                                               
depends on the company.                                                                                                         
REPRESENTATIVE SEATON  posed a  scenario in  which a  company has                                                               
earned  $100  million   in  income  in  Alaska   and  $1  billion                                                               
worldwide.   The apportionment  factor would  be 10  percent, and                                                             
therefore it  [the cumulative tax  credit] would be  $100 million                                                               
because it's 10 percent of  the company's worldwide income.  Then                                                               
the 9.4 percent would be applied to the $100 million.                                                                           
MS. WILSON noted her agreement.                                                                                                 
REPRESENTATIVE SEATON surmised then  that with the apportionment,                                                               
it should amount to about 9 percent.                                                                                            
MS.  WILSON said,  "Again, if  the apportionment  factor is  much                                                               
less, then  if you're asking  what the  effective tax rate  is on                                                               
worldwide income;  it's a  little bit apples  and oranges."   She                                                               
offered to  work with  Representative Seaton  on a  scenario that                                                               
the division could present.                                                                                                     
3:04:23 PM                                                                                                                    
MS. WILSON  continued with  comment 8  regarding the  criteria to                                                               
judge nonconventional.   She related  her understanding  that the                                                               
language remains, although there may  be some ideas regarding how                                                               
to define "nonconventional."                                                                                                    
REPRESENTATIVE ROKEBERG  said he left the  definition [in Version                                                               
L]  because  it  included  oil  produced  or  recovered  from  or                                                               
associated with tar sands and oil shale.                                                                                        
CO-CHAIR SAMUELS reminded  the committee that the  question as to                                                               
whether to just use geography or not remains.                                                                                   
MR.   SPENCER   pointed   out   that   the   Energy   Information                                                               
Administration provides  some definition as to  what it considers                                                               
nonconventional oil, which the committee  may want to consider to                                                               
REPRESENTATIVE  ROKEBERG recalled  that the  Red Dog  shallow gas                                                               
prospect  is a  shale  prospect.   Oil  shale  isn't an  uncommon                                                               
geological  formation in  North  America,  although there  aren't                                                               
many in Alaska.                                                                                                                 
3:06:38 PM                                                                                                                    
MS. WILSON  moved on to comment  10 regarding the use  of credits                                                               
and  the order.   She  recalled the  sponsor asking  whether that                                                               
language  is still  necessary.   Since the  transfer problem  has                                                               
been fixed,  it is fine.   Comment  11, she continued,  refers to                                                               
page  2, line  22 of  Version L.   The  concern was  addressed by                                                               
adding the language "as defined  under".  Continuing with comment                                                               
12,  Ms. Wilson  referred the  committee to  page 2,  line 7,  in                                                               
which  the language  "taxes and  surcharges" was  and changed  to                                                               
"any tax  due under this  chapter" in order to  remain consistent                                                               
with  the language  used  in  that provision.    She related  her                                                               
understanding that the  [the same language] has  been utilized in                                                               
the provision addressing nonrenewables.                                                                                         
REPRESENTATIVE  ROKEBERG referred  to subsection  (d) on  page 5,                                                               
line 2,  was left in  because of the desire  not to run  afoul of                                                               
transfers  to  affiliates.    He   surmised  that  as  a  policy,                                                               
qualified   renewable   energy   expenditures  should   be   made                                                               
nontransferable  and   the  provision  regarding   the  affiliate                                                               
MS.  WILSON  confirmed that  such  would  be her  recommendation,                                                               
which was accomplished in the "first section."                                                                                  
REPRESENTATIVE  ROKEBERG surmised,  "So, we  needed to  replicate                                                               
what we did there by making it nontransferable."                                                                                
MS. WILSON noted her agreement.                                                                                                 
REPRESENTATIVE ROKEBERG  then referred  to page  5, line  15, and                                                               
recalled that Ms. Wilson had felt the language was too broad.                                                                   
MS. WILSON replied yes, and  pointed out that similar language is                                                               
used on page 4, line 15.                                                                                                        
3:10:50 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG indicated  that  he may  need help  with                                                               
drafting on this matter.                                                                                                        
MS.  WILSON  explained that  she  was  concerned with  regard  to                                                               
whether  the  language  reflected  the intent  of  the  committee                                                               
because "development and use" could include many expenses.                                                                      
REPRESENTATIVE  ROKEBERG asked  if deletion  of the  language "or                                                               
use" would resolve the matter.                                                                                                  
MS. WILSON answered yes.                                                                                                        
REPRESENTATIVE SEATON  related his understanding that  these [tax                                                               
credits]  could  be  applied  to  gas  production.    He  further                                                               
related, "Everything only is going to  be in heavy oil and it can                                                               
just be  offset against taxes that  are incurred on your  PPT for                                                               
oil and  gas.  I just  want to make  sure that we don't  have any                                                               
slips where  we get into  gas production at all  ....  Or  are we                                                               
giving credits for gas production in a heavy oil field?"                                                                        
3:13:38 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  recalled BP's  testimony with  regard to                                                               
its  Lisburne prospect,  which is  carbonate and  has significant                                                               
gas  production.   The  preference  [of BP]  is  to maintain  the                                                               
carbonate in  Lisburne and in  fact, Lisburne carbonate  field is                                                               
included in  the legislation.    Therefore,  there would  be some                                                               
gas production associated with the lift in Lisburne.                                                                            
CO-CHAIR SAMUELS interjected  that it wouldn't occur  in the next                                                               
10 years  because gas wouldn't  be produced on the  [North] Slope                                                               
without a pipeline.   The big question is whether  there is heavy                                                               
oil at Point Thomson.                                                                                                           
MR. PASKVAN said the Lisburne field  is an oil field and although                                                               
it does have  gas associated with it, he  acknowledged that there                                                               
wouldn't be a sales market until  the pipeline is built.  "In the                                                               
envisioned life span  of this bill, Lisburne is  a challenged oil                                                               
field," he said.                                                                                                                
3:15:29 PM                                                                                                                    
REPRESENTATIVE  SEATON opined  that he  doesn't want  to be  in a                                                               
situation in  which in an area  some heavy oil can  be identified                                                               
and given a  15 percent credit on all  the expenditures, although                                                               
it's mainly  a gas producing  field.   He further opined  that he                                                               
didn't believe  it's the  sponsor's intent to  give a  15 percent                                                               
tax credit  on the development  gas in  Bristol Bay as  any heavy                                                               
oil can be associated with it.                                                                                                  
3:16:29 PM                                                                                                                    
CO-CHAIR SAMUELS  said he  wasn't as  concerned with  Bristol Bay                                                               
because of  the 10-year  timeframe.   However, he  reiterated his                                                               
question  with regard  to  Point Thomson  and  whether there  are                                                               
heavy oil  fields within  the entire leased  area that  is mostly                                                               
controlled by Exxon.                                                                                                            
MR. VAN DYKE confirmed that there  are oil resources in the Point                                                               
Thomson  unit  of  which  some  of the  oil  is  fairly  viscous.                                                               
Therefore, depending  upon how viscous  oil/heavy oil  is defined                                                               
some of the development [in Point Thomson] could qualify.                                                                       
CO-CHAIR SAMUELS  interjected, "But  not if  we don't  name Point                                                               
REPRESENTATIVE   ROKEBERG   opined    that   the   aforementioned                                                               
illustrates one  of the benefits  to specifying the sites  in the                                                               
REPRESENTATIVE SEATON  related, "But  that's one of  the benefits                                                               
of having to  come back to the legislature instead  of having the                                                               
commissioner  be  able to."    Representative  Seaton then  asked                                                               
whether the  legislation should specify that  "it doesn't include                                                               
gas development."                                                                                                               
CO-CHAIR SAMUELS  inquired as to  what type of  development could                                                               
be used for both oil and  gas, not including reinjecting the gas.                                                               
"If  there was  a gas  pipeline built,  what could  you get  a 15                                                               
percent credit for and  then use it for gas also  ... when and if                                                               
the gas pipeline gets built?"                                                                                                   
3:18:11 PM                                                                                                                    
MS. WILSON said:                                                                                                                
     I'm looking  now on page 2,  line 26.  And  when you're                                                                    
     talking    about   development    of   challenged    or                                                                    
     nonconventional  oil, ...  one  of the  things I  think                                                                    
     about is  what is the  purpose of whatever it  is we're                                                                    
     doing  ....   And  when  we  talk  about it's  for  the                                                                    
     development of  heavy oil, we  start getting  into sort                                                                    
     of intent.   And  I think that  brings up  exactly your                                                                    
     point  about  really  the   primary  purpose  of  Point                                                                    
     Thomson is  ... the  gas.  And  so, that's  the intent,                                                                    
     but then  ... during audit  two years later do  I hear:                                                                    
     "Oh well,  our intention was  to get heavy oil."  ... I                                                                    
     would reiterate  your observation that  if you go  to a                                                                    
     field ...  or reservoir  specific allowance,  that does                                                                    
     away with all that intention.                                                                                              
CO-CHAIR SAMUELS announced, "We will  not be naming Point Thomson                                                               
in this bill."                                                                                                                  
REPRESENTATIVE SEATON asked if gas  development is a potential in                                                               
fields such  as West Sak.   He opined, "We're just  talking about                                                               
physical areas  now in which we  could be at much  greater depths                                                               
for gas.  And do we have that same criteria here?"                                                                              
3:19:53 PM                                                                                                                    
MR.  PASKVAN   specified  that  the   Schrader  Bluff   and  Ugnu                                                               
formations  have   very  little   gas,  which   is  one   of  the                                                               
characteristics that make those heavy [oil].                                                                                    
CO-CHAIR  SAMUELS restated  his  earlier  question regarding  the                                                               
type  of facilities  that  could be  used for  both  oil and  gas                                                               
extraction at a field such as Point Thomson.                                                                                    
3:20:46 PM                                                                                                                    
MR. PASKVAN said  that he doesn't know that much  about the Point                                                               
Thomson field.   However, he said  that he could speak  about the                                                               
Prudhoe Bay accumulation, which has  the following layers of gas,                                                               
oil, heavy oil, and  water.  If one were to  try and produce gas,                                                               
he/she  would be  best served  to  drill a  well or  take a  well                                                               
originally drilled for oil and completing  it up into the gas cap                                                               
in order  to obtain dry  gas rather  than developing the  oil and                                                               
the gas  jointly.  He informed  the committee that the  volume of                                                               
the heavy oil  tarmat in Prudhoe Bay is about  a billion barrels.                                                               
However, it  sits on  top of  water, which  is highly  mobile and                                                               
thus  fairly  specialized  techniques  to drill  wells  would  be                                                               
required  to produce  tarmat.   "I  can't say  as we're  actually                                                               
having too much luck producing that yet," he said.                                                                              
3:22:27 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked if  any  gas  is associated  with                                                               
heavy oil  production in a typical  formation.  He then  asked if                                                               
there could  be a situation  in which a  company is doing  an EOR                                                               
that could result in the generation of gas and heavy oil.                                                                       
MR. PASKVAN  answered that typically the  heavy oil accumulations                                                               
don't have  significant volumes of  associated gas.   For example                                                               
the Ugnu might have 100 standard  cubic feet of gas while Prudhoe                                                               
Bay might have  1,000 standard cubic feet of gas  dissolved in it                                                               
per barrel.   Again, the  main target for  gas sales is  the free                                                               
gas  that's  standing in  a  gas  cap, as  may  be  found in  the                                                               
original Prudhoe  Bay gas  cap.  He  stated that  typically there                                                               
isn't a gas cap associated with Schrader Bluff or Ugnu.                                                                         
3:23:55 PM                                                                                                                    
REPRESENTATIVE SEATON highlighted that  the legislation refers to                                                               
Lisburne as  a participating  area in the  Prudhoe Bay  unit, and                                                               
therefore  it   would  available  for  the   15  percent  credit.                                                               
Furthermore,  if  the  gas  was   associated  with  Lisburne  and                                                               
facilities  such as  a compressor  station  for reinjection  were                                                               
built, those  would also be  available for the 15  percent credit                                                               
for gas handling if gas comes on line.                                                                                          
REPRESENTATIVE ROKEBERG said that  the legislation could prohibit                                                               
any credits against gas.                                                                                                        
3:25:14 PM                                                                                                                    
CO-CHAIR SAMUELS opined that the  economics of everything changes                                                               
if a gas line is built.                                                                                                         
REPRESENTATIVE SEATON  indicated interest in  eliminating credits                                                               
for gas.                                                                                                                        
REPRESENTATIVE ROKEBERG  questioned how  gas used to  develop oil                                                               
would be handled.   He further questioned  how miscible injectant                                                               
would be handled.                                                                                                               
REPRESENTATIVE  SEATON pointed  out that  if the  [intent] is  to                                                               
refer to produced gas, then it isn't used for that purpose.                                                                     
REPRESENTATIVE ROKEBERG countered,  "But if it was,  ... a credit                                                               
might be applicable if we define it that way."                                                                                  
3:26:30 PM                                                                                                                    
REPRESENTATIVE SEATON  related that under the  definitions of gas                                                               
that isn't produced.                                                                                                            
REPRESENTATIVE  ELKINS recalled  that  there was  a lawsuit  over                                                               
that a  few years back because  BP wasn't paying any  tax when it                                                               
took  out the  resource and  put  it back  into the  ground.   He                                                               
further  recalled that  former Governor  Knowles  settled out  of                                                               
court on that case for $3 billion.                                                                                              
CO-CHAIR SAMUELS clarified:                                                                                                     
     Is  there a  compressor  station that  is  going to  be                                                                    
     built that  the state is  essentially going to  pay ...                                                                    
     another 15 percent  of on top of all  the other credits                                                                    
     because  it will  be very  truthfully said  [that] this                                                                    
     ... is  a heavy oil  facility or piece of  equipment or                                                                    
     whatever it  is.  And  then a  gas line gets  built and                                                                    
     now  we'd  paid  15  percent for  something  which  was                                                                    
     essentially there for the gas.                                                                                             
3:28:13 PM                                                                                                                    
MS. WILSON utilized the example of  a road being built to a well.                                                               
The road is  being built to develop the well  from which both oil                                                               
and  gas  will  come.    If  specific  areas  or  reservoirs  are                                                               
identified  as heavy  oil and  a credit  is given  for everything                                                               
that  happens  with  that,  it   simplifies  matters  because  no                                                               
judgments are  being made with  regard to the primary  purpose of                                                               
building the  road.  However,  if the  decision is to  not credit                                                               
investments  that are  gas specific,  she  questioned what  would                                                               
occur  with  regard to  allocating  costs  for expenditures  that                                                               
brought  up both  oil and  gas.   The  aforementioned is  another                                                               
reason to specify specific areas or leases.                                                                                     
MR. PASKVAN  reminded the committee  that about  100-200 standard                                                               
cubic feet per barrel of oil may be dissolved in a heavy oil.                                                                   
CO-CHAIR SAMUELS  said that alleviates his  concern because there                                                               
isn't that much gas present.                                                                                                    
MR.   PASKVAN,  returning   to  the   discussion  regarding   gas                                                               
facilities  associated  with  oil production,  said  the  project                                                               
being  reviewed in  western  Prudhoe Bay  is  an oil  development                                                               
project.  However, BP uses recycled  gas to lift the oil from the                                                               
wells.   The aforementioned  requires the  installation of  a gas                                                               
compressor to handle the gas lift  gas and recycle it through the                                                               
compressor,  into   the  wells,   back  through   the  production                                                               
facility, and  to the  compressor all of  which produces  the oil                                                               
from the well.  In that case,  in order to develop the oil filed,                                                               
the company  has to  invest in  water handling,  water injection,                                                               
and gas compression facilities to develop the oil field.                                                                        
3:31:32 PM                                                                                                                    
MR. SPENCER  clarified that  the aforementioned  is using  gas to                                                               
artificially lift the heavy oil from the ground.                                                                                
CO-CHAIR SAMUELS said he doesn't  have any problem with that, but                                                               
he reiterated that  he didn't want to pay for  another 15 percent                                                               
of a gas treatment plant.                                                                                                       
REPRESENTATIVE SEATON  pointed out  that under the  definition of                                                               
challenged  oil it  refers to  5,500 feet  or less,  but now  the                                                               
discussion is revolving around specifying  a geographic area.  He                                                               
surmised that if  the definition [of heavy oil]  referred to both                                                               
5,500 feet or less and  specific geographic areas, there would be                                                               
no concern in regard to producing conventional gas.                                                                             
3:32:39 PM                                                                                                                    
MR.  SPENCER, regarding  the  proposed  definition of  challenged                                                               
oil, explained  that subparagraph  (C) attempts  to list  the oil                                                               
pools  that  would  meet  the  challenged  oil  definition  while                                                               
subparagraphs  (A) and  (B) remain  the same  as in  the original                                                               
legislation as  they would provide  some guide to  the department                                                               
regarding  what would  qualify as  a viscous  oil project  in the                                                               
future.   Subparagraph (D) provides the  department discretion to                                                               
decide that an oil field  is challenged beyond the reasons stated                                                               
in subparagraphs (A) and (B).                                                                                                   
REPRESENTATIVE  SEATON requested  that Mr.  Van Dyke  provide the                                                               
committee with  a list of  the geographic areas he  would propose                                                               
be classified as  challenged oil, realizing that there  is only a                                                               
10-year horizon.                                                                                                                
MR. VAN DYKE agreed to do so.                                                                                                   
REPRESENTATIVE ROKEBERG  noted his agreement that  some standards                                                               
in   the  definition   of  challenged   oil   have  some   merit,                                                               
particularly  the  vertical  depth  of   5,500  feet.    He  then                                                               
highlighted  that  there  is an  ongoing  debate  regarding  what                                                               
constitutes  heavy oil.   Therefore,  he  expressed concern  with                                                               
regard  to a  definition without  some standard,  particularly in                                                               
regard to future situations.                                                                                                    
MS. WILSON  indicated that although  including some  standards in                                                               
the definition  section would  be helpful,  it will  require some                                                               
careful drafting.                                                                                                               
[HB 498 was held over.]                                                                                                         

Document Name Date/Time Subjects