Legislature(2003 - 2004)
05/12/2003 09:12 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE CS FOR CS FOR HOUSE BILL NO. 61(RES)
"An Act establishing an exploration and development incentive
tax credit for operators and working interest owners directly
engaged in the exploration for and development of gas for sale
and delivery without reference to volume from a lease or
property in the state; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill, "allows a tax credit equal
to ten percent of qualified capital investment as well as annual
labor, seismic and associated costs related to gas exploration and
development south of the Brooks Range."
REPRESENTATIVE MIKE CHENAULT testified that this bill creates a new
income tax credit to encourage increased exploration and
development of natural gas reserves south of the Brooks Range. He
informed that to qualify for the tax credit, operators must
successfully drill and develop new reserves that produce natural
gas for sale and delivery. He pointed out that no credits would be
given for "dry holes."
Representative Chenault remarked that Cook Inlet and other areas of
the State have "great potential" for additional natural gas
development; however, the combination of exploration risk and high
development costs have created a disincentive to drill for new
reserves compared to other areas of the world. He predicted that
providing this tax credit more exploration would occur in southern
Alaska, leading to "much needed" new natural gas reserves, which
would benefit residents of those communities as well as all
residents of the State and businesses.
Representative Chenault furthered that in addition to the benefits
of developing new gas reserves increased drilling would also aid
general economic status of the Kenai Peninsula, Anchorage and other
areas of Alaska.
Representative Chenault opined that increased revenues from gas
production would offset any fiscal impact of the proposed credit.
Senator Bunde noted the fiscal note indicates zero fiscal impact of
this legislation, and asked how this would be possible given the
proposed tax credit.
CHARLES LOGSDEN, Chief Petroleum Economist, Tax Division,
Department of Revenue, testified via teleconference from an offnet
location, that the tax credit requires successful discovery and
development. He informed that the Cook Inlet produces approximately
210 billion cubic feet (bcf) annually and hypothetically a new
discovery of an additional 100 bfc would generate approximately $50
million per year in general fund revenue. He stated that the
unknown amount of gas that would be discovered is an uncertainty
for the Department of Revenue in estimating the fiscal impact of
this bill. He explained the tax credit would be the "State's
participation" in the risk of exploration and development, which
would only be realized if the exploration were successful. He
qualified that the proposed tax credit is not risk free for the
State, in that the marketplace could become such as to provide
incentive for exploration and development.
Co-Chair Wilken referenced a handout titled, "House Bill No. 61,
Gas Exploration and Tax Credit" prepared by Marathon Oil Company
[copy on file], which details the matter further on pages 13 and
14.
Senator Bunde stated for the record that the tax credit would not
be extended without successful discovery. However, he stressed that
after discovery, the State could receive less revenue than if the
tax credit were not enacted, although "it may be a very good
bargain." He predicted the impact would be beneficial as
exploration would occur in new areas and because the State would
receive no revenue without exploration efforts. He opined that the
fiscal note should reflect negative revenue.
Senator B. Stevens relayed that Representative Hawker and a
representative from Marathon Oil Company gave a presentation on
this bill before the Senate Resources Committee, on which Senator
B. Stevens serves. He directed attention to page 13 of the
aforementioned handout, a spreadsheet titled "Fiscal Impact to
State of Alaska". He detailed a hypothetical project with $100
million development costs that discovered a producible reserve,
which would generate $500 million in gross revenues, 12.5 percent
royalty of $62,500,000, a 7.5 percent severance tax of $37,500,000,
and a property tax increase of $4.2 million, totaling $104 million
in taxes collected by the State. He emphasized this revenue would
only be generated if the $100 million exploration and development
investment were made. He clarified the ten percent tax credit would
be applicable to the corporate tax income.
Senator B. Stevens continued that after review by the Senate
Resources Committee, he concluded this legislation provides a
"success tax credit". He furthered that the tax credit would have
no negative impacts because if the exploration is unsuccessful and
new revenue is not generated the tax credit would not apply.
Senator Bunde stated that a $10 million impact would be realized.
He surmised that a $100 million return on a $10 million investment
is "wise" and emphasized he does not oppose the program. However,
he disagreed that "there is a free lunch" and he questioned the
zero fiscal note.
Senator B. Stevens and Senator Bunde continued to debate the point.
DOUG THEIRWECHTER, Marathon Oil Company, testified via
teleconference from an offnet location in Houston, Texas, to answer
questions.
JOHN BARNES, Manager of Alaska Operations, Marathon Oil Company,
testified via teleconference from an offnet location that the
proposed tax credit is an opportunity to "level the playing field"
in favor of the State of Alaska. He explained that corporations
have the ability to invest funds around the world and that this
legislation would "draw more capital" to Alaska. He pointed out
that corporations participating in the exploration and development
efforts would expend ten times the amount received in tax credit
and the State should receive up to ten times the amount in
additional revenues. Therefore, he remarked that Marathon Oil
Company supports this legislation.
Senator Taylor asked why the tax credit is necessary for gas
exploration when that is the "business" of Marathon Oil Company. ,
Mr. Barnes agreed that part of every producer's business is to
explore for oil and gas in various parts of the world. However, he
stressed that Alaska "is disadvantaged in many areas when it comes
to seeking investment opportunities, or drawing other companies in
to invest in the State of Alaska." He gave an analogy of a sale at
a retail store to provide incentive to attract customers.
Mr. Barnes reported that although the need exists for additional
gas exploration "has been noted in the marketplace", industry
activity has been insufficient in Cook Inlet to replace the
declining reserves.
Senator Taylor asked if the witness were asserting that Alaska's
tax structure "is so high" as to impede industry investment and
that a ten percent discount would guarantee investment.
Mr. Barnes testified that investments are not occurring for various
reasons, including the tax structure, and that this credit would
"hopefully be seen as a positive sign by industry and result in
additional activities south of the Brooks Range in Alaska."
Co-Chair Wilken asked if Alaska currently has "a zero exploration
tax credit" and whether any other government has the same.
Mr. Logsden clarified that two exploration tax credits currently
exist in Alaska. He explained that the commissioner of the
Department of Revenue could issue a tax credit to cover up to 50
percent of the cost of an exploration well, which could be applied
to royalties, severance tax or corporate income tax. He qualified
that this provision has not been invoked for the past eight years.
Senator Hoffman asked if the Kenai Peninsula Borough has considered
granting a property tax credit as well.
Representative Chenault had not discussed the issue with Borough
officials. He pointed out however, that the Borough assesses
approximately 11 mils of the 20 mils collected, allowing the
remainder to be paid to the State. He compared this to other
communities, specifically the North Slope Borough, which collects
the entire 20 mils.
Amendment #1: This amendment inserts, "east of meridian 156
degrees" into Section 1, Sec. 43.20.043. Gas exploration and
development tax credit. The amended language on page 3, lines 10
through 14 reads as follows.
(f) A taxpayer is not entitled to a credit under this
section for expenditures that are made or incurred for the
qualified capital investment or for qualified services made
for exploration and development of gas that occur in the area
of Alaska lying north of 68 degrees North latitude and east of
meridian 156 degrees or that are made or incurred to transport
gas from reserves located in the area of Alaska lying north of
68 degrees North latitude and east of meridian 156 degrees.
Senator Olson moved for adoption, asserting that this prevents
one area of the State from being "singled out". He opined, "If
it's good for the rest of Alaska it ought to be good for places
like Point Hope, Point Lay, Wainright."
Co-Chair Wilken requested an explanation of the areas included in
the provisions of the amendment.
Senator Olson directed attention to a map showing the areas west of
th
the 156 meridian, which includes the aforementioned villages plus
Cominco."
Co-Chair Wilken asked for an explanation of the amendment itself.
Senator Olson stated the amendment would extend the tax credit to
the additional areas, although not to the entire State.
SFC 03 # 89, Side A 10:48 AM
Co-Chair Wilken and Senator Olson established the locations that
would receive the credit.
th
Co-Chair Wilken asked whether the 156 meridian has been used as a
line of demarcation in other legislation or matters relating to oil
and gas.
Senator Olson was unsure.
Co-Chair Wilken requested the sponsor's comments on the amendment.
Representative Chenault relayed concerns about the possibility of
shallow gas located near the Red Dog Mine. He stated that
previously adopted legislation relating to taxation of oil and gas
development utilized 68 degrees latitude as a delineation.
Co-Chair Wilken interjected to ask if the sponsor favors or opposes
the amendment or whether it should be addressed in separate
legislation.
Representative Chenault indicated it should be addressed in
different legislation.
Senator Taylor commented that this amendment raised the question of
the need for a ten percent tax credit to stimulate the economy in
one geographic region of the State, although other locations where
gas reserves have been identified are not developed because
producers are unwilling to construct a pipeline to transport the
gas to tidewater.
Co-Chair Wilken ordered the bill HELD in Committee. [The motion to
adopt Amendment #1 was subsequently TABLED.]
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