Legislature(2005 - 2006)BUTROVICH 205

03/02/2005 03:30 PM Senate RESOURCES

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Heard & Held
Heard & Held
        SB  53-AK PENINSULA OIL & GAS LEASE SALE; TAXES                                                                     
CHAIR THOMAS WAGONER announced SB 53 to be up for consideration.                                                                
DAN DICKERSON,  Director, Tax Division,  said the intent of  SB 53                                                              
is to extend  the Alaska Peninsula  as part of the active  oil and                                                              
gas province  in Alaska. It takes  an exploration credit  that was                                                              
passed  two  years ago  and  says  if the  Department  of  Natural                                                              
Resources (DNR) is  contemplating a sale on the  Alaska Peninsula,                                                              
a four-year  window will  be opened.  "If any exploration  occurs,                                                              
the state  will bear some  of that risk."  The Governor  and folks                                                              
in Bristol Bay support this bill.                                                                                               
MARK  MYERS,  Director,  Division   of  Oil  and  Gas,  noted  the                                                              
division's preliminary  best interest findings that  were just put                                                              
out  for public  comment  on  the  recent Alaska  Peninsula  lease                                                              
sale.  He hoped  to  issue  final  findings and  a  commissioner's                                                              
approval soon; the  sale would actually occur in  October 2005 and                                                              
has significant potential  for natural gas and oil.  The sale will                                                              
cover onshore state  lands and waters out to  the three-mile limit                                                              
with onshore drilling only.                                                                                                     
The  basin has  20 or  so  wells that  were  drilled before  1985.                                                              
After that,  there was  only leasing and  drilling on  federal and                                                              
submerged lands  on the  Outer Continental  Shelf (OCS),  but this                                                              
was discontinued  over environmental  concerns. The  community has                                                              
had  a change  of heart  and it  now wants  an oil  and gas  lease                                                              
MR. MYERS said the  companies hadn't really looked  at the area in                                                              
any great detail  since about 1985 when  it left and a  big gap in                                                              
oil  and gas  exploration data  exists. This  incentive credit  is                                                              
strategically  placed  to  accelerate the  acquisition  of  modern                                                              
seismic data and  the potential early exploration  drilling in the                                                              
basin. The credit  is available for the first  five years. Because                                                              
there are no  active leases in the  area, a credit like  this gets                                                              
factored into the  bid if people come to the sale at  all. It is a                                                              
frontier  basin  without  data  or  oil  and  gas  infrastructure.                                                              
"There is significant geologic and economic risk."                                                                              
The credit is up  to 40% and if it is accepted,  the state will be                                                              
allowed  to release  the  data in  10  years.  Generally, data  is                                                              
released after 25  months unless confidentiality  is extended, but                                                              
seismic   data  is   never  released.   This   bill  provides   an                                                              
opportunity  to get  data  out there  faster.  He  thinks it  will                                                              
bring more companies  to participate in the sale  and increase the                                                              
size of their bids. It will be seen very positively by industry.                                                                
SENATOR GUESS arrived at 3:42.                                                                                                  
SENATOR  ELTON  asked  if  he  could  quantify  if  the  increased                                                              
activity that has  taken place in other oil and  gas regimes since                                                              
the passage of the original bill in 2003.                                                                                       
3:45:56 PM                                                                                                                    
MR.  MYERS replied  that  he hadn't  seen  any increased  spending                                                              
activity. He  has eight  applications under  the program  and most                                                              
of them are on  the North Slope; two are on the  NPRA. There is no                                                              
way to  quantify whether  it has led  to incremental  bids because                                                              
the program is too  young. Much of the perspective  acreage on the                                                              
North  Slope  is  already  under lease.  However,  the  value  and                                                              
number  of the  bids  have  increased as  well  as  the number  of                                                              
companies  bidding in the  last two  years.   He pointed  out that                                                              
oil prices have been higher, too.                                                                                               
The  increased number  of  applications  indicates  the credit  is                                                              
being used.  But he  didn't know  in basins  like the  North Slope                                                              
whether the  credit was bringing  the companies in or  whether the                                                              
companies   using  it  were   already  planning   on  making   the                                                              
investment. There  is an up-tic  of interest in using  this credit                                                              
in some  of the exploration  license areas  like Copper  River and                                                              
Nenana.  Revenues  will  not  increase  until  production  beings,                                                              
3:47:28 PM                                                                                                                    
GARY ROGERS,  Revenue Auditor,  Tax Division,  said he  audits the                                                              
exploration tax  credits. Drilling  an exploration well  more than                                                              
three  miles  from  a  preexisting  well  receives  20%  allowable                                                              
expenses.  An exploration  well drilled  more than  25 miles  from                                                              
the unit receives  20% of exploration drilling costs.  If the well                                                              
is both  more than three  miles from a  preexisting well  and more                                                              
than 25 miles from  the unit, it gets 40% credit  for the drilling                                                              
costs.  The credit  also  provides  for a  40%  credit in  seismic                                                              
exploration costs.                                                                                                              
3:49:37 PM                                                                                                                    
Once the  credit application has  been audited and the  credit has                                                              
been  issued,  the  explorer  can  either use  it  to  offset  his                                                              
production  tax  liability  or  sell or  transfer  the  credit  to                                                              
another party  that has  a production  tax liability.  In general,                                                              
allowable  expenses are  directly  related to  the work;  excluded                                                              
are administration,  environmental, overhead  indirect costs.   SB
53 extends  the provisions  of last year's  credit program  to the                                                              
Alaska Peninsula lease sale area and extends its deadline.                                                                      
SENATOR ELTON  asked if  the bill  extends the  tax credit  in the                                                              
Bristol  Bay  area  to  2010  and they  are  given  based  on  the                                                              
distance the new wells are from existing wells.                                                                                 
MR. ROGERS  responded that there  actually are some old  wells out                                                              
SENATOR ELTON sought to clarify:                                                                                                
     If you  go out  and drill  two wells  in a season,  say,                                                                   
     right  next to  each other,  the first  well won't  turn                                                                   
     around  and disqualify  the second.  We'll look at  that                                                                   
     as a  project. Then  the other point,  which I  think is                                                                   
     made, I  think when Mark said  there have been  20 wells                                                                   
     drilled  up to  1985,  there's a  cut  off.... The  ones                                                                   
     that   were   done   back...   at  the   turn   of   the                                                                   
     century...some  very old  ones, won't  be considered.  I                                                                   
     think the  cut off is roughly  30 years. Ones  that were                                                                   
     drilled  as  recently as  1985,  you  would have  to  be                                                                   
     three  miles  from  that  well to  get  your  total  40%                                                                   
3:51:41 PM                                                                                                                    
CHAIR  WAGONER  said the  state  might  already  have all  of  the                                                              
information from that well.                                                                                                     
MR.  MYERS responded  that the  information from  those old  wells                                                              
are  public  knowledge.  But  wells   like  the  Amoco  Pitcherov,                                                              
drilled around 1985,  would disqualify other wells  drilled within                                                              
a three-mile radius.                                                                                                            
     There's  two components.  The 20% credit  applies for  -                                                                   
     any  well gets  at least  20%  if it's  more than  three                                                                   
     miles away  from an existing  well post 1979.  There's a                                                                   
     second  criteria that  it has  to  be 25  miles from  an                                                                   
     existing oil and  gas unit as of 2003. There  are no oil                                                                   
     and gas  units; so, if a  well qualifies in  the Bristol                                                                   
     Bay  area,  at  least  for the  first  season,  it  will                                                                   
     qualify for a  full 40% credit.... There may  be four or                                                                   
     five  wells that  are post  '79;  the rest  of the  area                                                                   
     would qualify at the full 40%.                                                                                             
3:53:37 PM                                                                                                                    
SENATOR SEEKINS  asked if every  new well would qualify  unless it                                                              
was within  three miles of a  preexisting well from back  then; so                                                              
if  there is  a really  hot  strike, every  other  well around  it                                                              
qualifies for the 40% credit no matter what.                                                                                    
MR. DICKERSON replied that is correct.                                                                                          
3:55:25 PM                                                                                                                    
SENATOR  ELTON said  he  understood that  happened  for the  first                                                              
year,  but would  the credit  only be  for new  wells outside  the                                                              
three miles in the second year.                                                                                                 
MR. DICKERSON replied that is correct.                                                                                          
CHAIR  WAGONER noted  a large  number of  supporting letters  from                                                              
municipal   and   tribal  governments,   which   represented   the                                                              
communities  in the  area, but  commercial  fishing groups  hadn't                                                              
commented  yet. He  announced that  the bill  would be held  until                                                              
the next meeting.                                                                                                               

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