Legislature(2009 - 2010)BUTROVICH 205
03/31/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB255 | |
| HB162 | |
| Overview by Dnr and Dor on Cook Inlet Incentives | |
| SB309 | |
| SB290 | |
| HB280 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 309 | TELECONFERENCED | |
| *+ | SB 290 | TELECONFERENCED | |
| + | HB 280 | TELECONFERENCED | |
| = | SB 255 | ||
| = | HB 162 | ||
SB 309-GAS EXPLORATION\DEVELOPMENT TAX CREDIT
4:20:46 PM
CO-CHAIR WIELECHOWSKI announced SB 309 to be up for
consideration.
4:20:53 PM
MIKE PAWLOWSKI, Staff to Senator McGuire, clarified that the
legislation was offered at the request of the Senate Energy
Committee and Senator McGuire. He started off on the incentive
sheet they were just working off of. SB 309 deals with the area
under the exploration tax credit in AS 43.20.043, which is a tax
credit that specific to below the 68th parallel. It cannot be
taken in conjunction with other credits or royalty
modifications. So, it's specific to exploration within the Cook
Inlet or south of the 68th parallel and is not stackable with
the other credits.
He explained that SB 309 makes substantive changes to the
existing credit on page 3, line 25, that gets towards the NDR
Cook Inlet study and the recent Petro Technical Resources
assessment that the utilities prepared. He explained that one of
the principles underlying SB 309 is that the best place to look
for gas is probably within a gas field. In that the old
exploration incentive tax credit had to be on land that had not
been under production or had not been explored for, this
actually frees it up so that wells that are drilled within an
existing field can qualify for this incentive as well. The
incentive is further modified on page 2, lines 6-18, where new
language was added that increases the credit from 10 percent to
25 percent. This credit is against corporate income tax and is
not against production taxes.
MR. PAWLOWSKI said the third substantive change is on page 3,
lines 10-20. He explained that originally this credit was only
applicable against 50 percent of taxpayer's corporate income tax
obligation and SB 309 removes that 50 percent cap and allows the
credit to be claimed against the total tax liability.
Finally, he said, Sections 7 and 8 extend the sunset. This
particular exploration incentive tax credit is set to expire in
2013 and the bill extends it to 2020 with a transitional sunset
to 2024 for any carry-forward credit against a future tax
obligation.
4:24:40 PM
SENATOR HUGGINS asked what makes him think these incentives will
have an effect.
MR. PAWLOWSKI answered that the issue in Cook Inlet is related
to the production tax, which isn't very big. On the other hand,
corporations that are operating in Cook Inlet might have
substantial corporate income tax; so designing this tax credit
to apply against that tax exclusively provides a tool that might
work for a corporation that might not want to use one of the
other credits. Further, allowing development of an existing
field rather than looking outside of the existing fields really
is what gets to the heart of the bill because that is where gas
is likely to be found in the near term.
CO-CHAIR WIELECHOWSKI asked why he needs six lines on page 2,
lines 13-18 rather than just changing the 10 to a 25.
MR. PAWLOWSKI answered that the language has to be mirrored from
lines 4-9 in transitioning from the original 10 percent credit
to 25 percent credit.
CO-CHAIR WIELECHOWSKI asked what Section 2 does.
MS. DAVIS, Deputy Commissioner, Department of Revenue (DOR),
explained that Section 2 is simply trying to accommodate the
split in the two different tax years, pre-2010 and post-2010
era. One of the things that is sort of hidden is you've got the
split of the credit being for capital investment - taxpayer's
qualified capital investment and qualified services, both of
which are defined at the back of this tax section.
4:29:37 PM
CO-CHAIR WIELECHOWSKI asked why "reserves" is changed to "wells"
on line 29.
MS. DAVIS answered that this happened before she became
associated with the bill, but one of the attempts was made that
relates to an effort to change the credit from one that is
success oriented to one that gave a credit for the action of
drilling the well and doing the exploration regardless of
whether they ended up with a successful commercial producing gas
well. They are moving away from reserves to simply the well
being drilled.
MR. PAWLOWSKI said his understanding is that clerically reserves
are produced, but it is a well that actually produces gas. The
language was trying to get towards that concept, as well as get
away from the success concept.
MS. DAVIS said she understood that Legislative Legal was trying
to remove "per" from wherever they see it. That was the line 7
change and then line 8 removes the 50 percent cap of the income
tax liability. So, now this credit can draw down the income tax
liability entirely.
CO-CHAIR WIELECHOWSKI asked if a producer produces in Cook Inlet
and also has exploration on the North Slope, is there is a way
of writing off these taxes on North Slope production.
MS. DAVIS answered yes; under the corporate income tax they do
not look at different parts of the state; it's all combined.
4:31:41 PM
MS. DAVIS said deleting the language in Section 4 simplifies the
concept that a taxpayer is not entitled to a credit for capital
expenditures or qualified services made for activities related
to gas on the North Slope. The original draft specifically
excluded gas from the North Slope going to Valdez, which seemed
to suggest that gas from the North Slope going to Canada was
okay. It became more problematic to fix it than to eliminate it.
CO-CHAIR WIELECHOWSKI asked if this whole bill only applies to
south of 68 degrees.
MS. DAVIS answered that is correct.
CO-CHAIR WIELECHOWSKI asked if that includes Gubik.
MR. BANKS answered that Gubik is significantly north of the 68th
parallel.
CO-CHAIR WIELECHOWSKI asked if any significant development or
exploration going on south of 68 degrees.
MR. BANKS answered that he knew of proposals for exploration
activities in the Yukon region.
MS. DAVIS went to section 5 that adds language that deals with a
failure leg. It adds "if the exploration and development
activity touch on gas reserves regardless of whether there has
been commercial production in the area" - in other words they
can go back into a previously explored area - "or whether the
exploration and development activity results in the production
of a well, gas or well not capable of commercial production" -
meaning that they could end up having a mediocre well and it
could still be covered. Because of the use of the phrase "gas
reserve" throughout, from the administration's stand point, they
will probably have to lean heavily on DNR, because she is left
with the impression that if a rank wildcat-type gas exploration
well has no indication of gas reserves and they drill a dry
hole, the bill and the original statute is written such that
they are not accessing or touching gas reserves. So, in that one
instance this bill would not seem to apply.
4:35:43 PM
She said that section 5 also defines what is considered to be
the qualified capital investment. There is concern about
including "topping plant" in the list of properties breakdown
within (c). That was cleaned up because that is a crude oil
process for refining and it simply doesn't belong in a gas bill.
Concern was also expressed about processing units and whether
that included an LNG plant. Technically from an engineering
standpoint it would, and so the House cleaned that up by re-
referencing that as gas processing and gas treatment plants
(both downstream and upstream gas processing that would be
normal things), but excluding LNG or other manufacturing plants.
Another concern was about a power plant that powered
Southcentral being subsidized by the corporate income tax
credit. So, that was limited to power plants necessary for field
operation.
4:37:15 PM
MS. DAVIS said Section 6 clarifies when the timing of the credit
is being filed that was missing from the original section.
Sections 7 and 8 clean up the last dates the corporate income
tax credits can be used from 2017 to 2024 and from 2013 to 2020
(for the credit expiration).
She said one question was raised on HB 229 about whether this
credit could be used in lieu of the other credits. And she made
a misstatement there. When she read the current law, AS
43.20.043(g) it states "a taxpayer who obtains a credit under
this section may not claim a tax credit or royalty modification
provided under any other title." That begs the question that
since this is contained in AS 43.20, and since the production
tax is in AS 43.55, technically it is not in another title. She
didn't think the drafter intended to alter the assumption that
this is not an additive credit and so "this or any other title"
was inserted. And likewise for the benefit of the taxpayer, the
second line "however a taxpayer may at the taxpayer's election
forego a credit under this section in order to continue to
qualify for a credit provided for in another title" was
inserted.
4:39:44 PM
CO-CHAIR WIELECHOWSKI asked if the administration has a position
on the bill.
MS. DAVIS replied that she didn't know.
4:40:16 PM
KAREY LOCKHART, Production Manager, Alaska Operations, Marathon
Oil Corporation, said Marathon's operations are limited to Cook
Inlet and they have been operating there for over 55 years.
Marathon sells 87 mmcf/day to all of the current markets
available to them including the utilities, Tesoro, the
Department of Defense, and the LNG plant that is co-owned with
ConocoPhillips.
She explained that in 2003 several bills were passed directing
the state to provide incentives for new exploration and
development activities. Marathon was particularly interested in
HB 61, which was intended to incentivize exploration and
development of natural gas reserves in Cook Inlet. Regarding SB
309, she said, one might ask the need to provide incentives for
natural gas development in Cook Inlet and the answer is found by
considering the long-term decline in natural gas reserves and
deliverability which Cook Inlet has experienced. What must be
addressed is whether there is currently sufficient exploration
development activity to address such decline and reserves and
deliverability not just ask simply if Cook Inlet is running out
of gas. At the current level of activity, it is unlikely that
Cook Inlet reserve additions will replace annual production on a
long-term ongoing basis. This is the key.
Such natural gas reserves and deliverability are at risk for
continued decline resulting in exposure to unmet utility needs
which would impact everyone. The lack of activity is an artifact
of historic oversupply of natural gas. With prices well below
Lower 48 index prices create a lack of incentive for additional
drilling and further regulatory processes and deterioration in
market availability have added to project uncertainty. The
project economics and market uncertainties make it difficult for
projects to compete effectively for finite money.
4:42:38 PM
MS. LOCKHART asked what can be done to ensure the reliability,
and said the answer is not simple, and includes several things
that are being discussed today - storage, market access,
uncertainty and economic projects.
Alaska projects are not considered solely on their absolute
merits. They are compared on a relative scale in comparison to
other world-wide opportunities in which companies such as
Marathon may invest. SB 309 intends to level the playing field
of investment opportunities around the world. It is one part of
a three-part puzzle that needs to be fixed in order to ensure
natural gas reliability. She reiterated that in order to qualify
for this investment tax credit, the producer must make capital
investments adding to some level of value back to the state and
industry just to cross the value chain, which is necessary to
meet the overall deliverability needs of Southcentral.
4:44:06 PM
MARK LAND, Executive Vice President, Land and Administration,
Renaissance Alaska, LLC, and Vice President, Land and Business
Development, Buccaneer Energy Limited Alaska, said he had
prepared remarks specifically related to an amendment that he
heard was going to be added to SB 309 related to the repeal of
the future spend requirements under the existing tax credits.
CO-CHAIR WIELECHOWSKI said the amendment hadn't been introduced
yet, but he could still comment on it.
MR. LAND said Renaissance is headquartered in Houston, Texas,
and Buccaneer is a subsidiary of Buccaneer Energy Limited, a
publicly traded company in Australia with an operating office in
Houston. Renaissance was formed in November 2006 and completed
the initial funding of a business plan that solely focuses on
growth in Alaska, in particular Umiat Oil Field on the North
Slope. Buccaneer Alaska is a newly formed subsidiary of
Buccaneer Energy Limited and was just formed last week to solely
focus on growth in Alaska, particularly oil and gas
opportunities in Cook Inlet. They have over 80 years of
experience worldwide. The team members have identified, captured
funding, and developed oil and gas projects resulting in
cumulative recoverable reserves of over 1 billion barrels
equivalent. Since its formation, Renaissance has acquired BLM
and state oil and gas leases on 19,000 acres located on the
Umiat Oil Field, the National Petroleum Reserve and the Gubik
Gas Field on the North Slope. Buccaneer has entered into a
custom sale agreement with Stellar Oil and Gas to acquire 58,000
acres located in the Cook Inlet and Kenai Peninsula. Since 2006
Renaissance has spent in excess of $40 million completing
exploration evaluation operations in the state. A significant
amount of these funds were focused on evaluating the existing
oil field at Umiat with a modern 3-D seismic survey.
The tax credit under ACES is a significant reason why
Renaissance remains in Alaska, he said, and they believe the
availability of those credits will play a critical role in
attracting the required investment to develop the Umiat Oil
Field. The tax credits are also a significant reason for the
entry of Buccaneer into the Cook Inlet. To date, Renaissance has
applied for a total of $19.2 million in tax credits and has
received $1.3 million from the state of Alaska, $7.45 million
from the North Slope tax payers in the sale of the certificate,
and has approximately $7.6 million in certificates that they
have been unable to monetize.
MR. LAND repeated that Umiat is a known oil accumulation with
potential near-term development. It has real potential and is
one of the best opportunities to supply up to 50,000 barrels per
day to TAPS in the near term. Based on the work completed by
Renaissance and the state on the road to these resources, they
believe they are on a path to commercializing this gas.
He said it is common for these types of developments to have a
two-to-three lull in spending as they incur pre-engineering and
permitting of the project. In summary, they both support the
increased access, the capital credits for the new explorers, the
repeal of AS 43.55.028 (e)(2)(3) as set out in the amendment to
Section 8 of SB 309. They support the repeal that provides
greater certainty for new investors in Alaska, and levels the
playing field between new and existing operators in Alaska and
eliminates the unfair double standard that they believe exists
with the North Slope producers.
4:49:49 PM
STACY SHUBERT, Director, Intergovernmental Affairs, Mayor
Sullivan, Anchorage, said she was testifying in support of SB
309 at the request of Mayor Dan Sullivan. She said the
Municipality of Anchorage remains concerned about the declining
production of natural gas in the Cook Inlet specifically as it
relates to decreased deliverability through the gas system. One
of the first orders of business the Mayor acted on after taking
office was to create an Energy Task Force to address the serious
energy issues Railbelt consumers are faced with today. These
deliverability challenges will escalate in the next one to five
years, and if not addressed could result in rolling black outs
or worse. Both the Task Force and the Mayor applaud the
legislature's efforts to address these critical pieces of
legislation that address both incentives for storage and natural
gas exploration and production. The mayor also acknowledges the
work of the Railbelt utilities who have been working with the
administration on the Energy Watch Program, a green, yellow, red
system that informs customers to adjust their behavior in the
event of an impending energy crisis. "Conservation can be a
critical component that helps us to help ourselves in the event
of an immediate threatened energy crisis," she said.
In 2009 she said Anchorage almost experienced a catastrophic
event, and that is why the Mayor asked her to testify today in
support of the concepts proposed in SB 309 and HB 280, the Cook
Inlet Recovery Act that supports storage efforts. Gas storage is
the key to smoothing out the challenges posed by deliverability
peaks on cold winter days.
4:52:10 PM
CO-CHAIR WIELECHOWSKI closed public testimony and set SB 309
aside.
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