Legislature(2005 - 2006)BUTROVICH 205

04/13/2005 03:30 PM RESOURCES

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
Heard & Held
Heard & Held
Moved CSSCR 6(RES) Out of Committee
Moved SCR 7 Out of Committee
             SB 163-COOK INLET OIL & GAS TAX CREDIT                                                                         
CHAIR   THOMAS  WAGONER   announced   SB  163   to   be  up   for                                                               
3:44:15 PM                                                                                                                    
SENATOR KIM ELTON joined the committee.                                                                                         
MARY   JACKSON,  staff   to  Senator   Wagoner,  explained   that                                                               
exploration incentive credits were  extended to regions in Alaska                                                               
in previous  legislation, but not  in the Cook Inlet  region. She                                                               
was instructed  to work on credits  that would apply to  the Cook                                                               
Inlet and that's what SB 163  does. She provided a map to explain                                                               
positioning for credits and said  that the old bill provided that                                                               
exploration wells must  be outside of three miles  from the first                                                               
drill  to receive  the  first 20  percent  incentive credit.  Any                                                               
wells  outside of  25 miles  would  receive a  second 20  percent                                                               
credit. "None of it fits the Cook Inlet."                                                                                       
3:46:32 PM                                                                                                                    
MS. JACKSON explained  that SB 163 says the drill  must be within                                                               
the three  miles for the first  20 percent credit and  outside of                                                               
ten miles  for the  second 20 percent.  However, she  pointed out                                                               
that  even the  10  mile is  too  big and  very  little would  be                                                               
applicable  there. It  also  provides that  the  producer has  to                                                               
apply for the  credits and the department must  respond within 60                                                               
days, although the  department would like 90 days.  The credit is                                                               
capped at $20 million.                                                                                                          
3:47:40 PM                                                                                                                    
SENATOR KIM  ELTON asked  how much incentive  would be  needed in                                                               
terms  of  making  production  efficient in  Cook  Inlet  at  the                                                               
current price levels.                                                                                                           
3:47:56 PM                                                                                                                    
MARK MYERS,  Director, Division  of Oil and  Gas and  Division of                                                               
Geological  and Geophysical  Surveys, replied  that the  chairman                                                               
asked him  what could  be done  in terms  of incentives  for Cook                                                               
Inlet that already  has a large number of wells.  There are still                                                               
some legitimate exploration targets that have not been explored.                                                                
He  explained  why  saying  that  the  earlier  tax  EIC  used  a                                                               
mechanical  mechanism that  defined an  exploration well  via its                                                               
distance  from other  wells. That's  only  one test  that may  be                                                               
relevant and  while it is  simple, it's really artificial.  It is                                                               
irrelevant  to the  geological and  economic risk  taken on  by a                                                               
producer  or an  explorer.  A  lot of  the  plays  are in  deeper                                                               
horizons  near  existing infrastructure,  but  they  are no  less                                                               
risky geologically than  a frontier area or wildcat  in the sense                                                               
of  the  geologic risk.  The  question  is  in  a basin  that  is                                                               
relatively  mature, how  to define  viable exploration  plays and                                                               
how to  provide incentives for  them. Recognizing  the three-mile                                                               
distance  criteria doesn't  really  define  an exploration  play.                                                               
This presupposes  a geological test  - that a company  would make                                                               
its case  to the department with  seismic and well data  or other                                                               
geological  and  geophysical  data  and  the  commissioner  would                                                               
predetermine  if  it  is  a  separate   target  or  if  it  is  a                                                               
development well of an existing discovery.                                                                                      
     If  they  can  demonstrate   that  it  is  geologically                                                                    
     distinct or  reasonably estimated  with the data  to be                                                                    
     distinct, the commissioner  would pre-certify that they                                                                    
     would be eligible for the credit for the well.                                                                             
The  Cook Inlet  is seen  by the  majors as  a relatively  mature                                                               
asset  and  the  credit   should  encourage  smaller  independent                                                               
companies  to   explore.  It  would  assist   in  their  drilling                                                               
relatively expensive wells  or bringing in the  expensive jack up                                                               
rigs  or other  infrastructure needed  to drill  in the  offshore                                                               
areas.  Capping the  amount at  $20 million  limits the  downside                                                               
potential to the state.                                                                                                         
SENATOR ELTON  said he  didn't think there  was a  perfect answer                                                               
because it's highly speculative.                                                                                                
3:52:00 PM                                                                                                                    
SENATOR DYSON joined the committee.                                                                                             
SENATOR ELTON asked what the status  of the shallow gas leases in                                                               
the  southern Kenai  Peninsula are  and if  this credit  would be                                                               
applicable there.                                                                                                               
MR. MYERS  replied there is no  restriction on the credits  as to                                                               
where they  would apply in  Cook Inlet - any  well as long  as it                                                               
meets the standards would qualify.                                                                                              
3:53:49 PM                                                                                                                    
SENATOR SEEKINS  commented that a  dry hole  is still a  dry hole                                                               
regardless of the price of oil.                                                                                                 
3:54:28 PM                                                                                                                    
LISA  PARKER,  Agrium  Inc.,  Kenai,  said  she  appreciated  the                                                               
legislature's  efforts to  encourage development  in Cook  Inlet.                                                               
With  respect to  SB  163,  she said  section  1  would apply  to                                                               
activity after  July 1, 2005  only and she  asked if that  is the                                                               
intent or a typing error.                                                                                                       
She said section  4 and the five-year program in  Cook Inlet with                                                               
the $20 million limit would mean  that five or six wells could be                                                               
drilled or  one, if it is  offshore. She asked them  to reexamine                                                               
the limit.                                                                                                                      
The programs  still contain the usual  exclusions, which diminish                                                               
the  attractiveness of  the incentive  program. These  exclusions                                                               
include  administration,  supervision,  engineering,  geological,                                                               
management  and  the  environmental  costs -  all  of  which  are                                                               
significant components  and reduce  the actual incentive  from 20                                                               
percent to  around 10  percent. With the  incentive being  at the                                                               
discretion  of the  commissioner  who usually  decides after  the                                                               
work is incurred, potentially these  would have little impacts on                                                               
an oil company's economics.                                                                                                     
3:56:33 PM                                                                                                                    
CHAIR WAGONER said  the July 1, 2005 date was  wanted in the bill                                                               
and  that the  $20  million  limit could  at  least get  activity                                                               
started and could be revisited.                                                                                                 
     At this time I think the $20 million laying out there                                                                      
     gives some certainty to a lot of people that sometimes                                                                     
     question an open-ended incentive....                                                                                       
DAN  DICKINSON, Director,  Tax  Division,  Department of  Revenue                                                             
(DOR),  echoed Mr.  Myers' and  Ms. Jackson's  comments. He  said                                                             
this is a  production tax credit that is more  attuned to what is                                                               
going on  in Cook Inlet.  He corrected  Ms. Parker who  said that                                                             
the credit is  capped at $20 million per well,  saying that it is                                                             
not per  well, but  each well  getting 20  percent credit  not to                                                             
exceed $20 million  total. But, he thought who  actually gets the                                                             
credit could be clarified.                                                                                                      
CHAIR WAGONER  noted that there  was no further  public testimony                                                               
and set SB 163 aside.                                                                                                           

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