Legislature(2005 - 2006)CAPITOL 124
04/20/2006 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB498 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 498 | TELECONFERENCED | |
| += | HB 501 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 20, 2006
1:10 p.m.
MEMBERS PRESENT
Representative Ralph Samuels, Co-Chair
Representative Jim Elkins
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
MEMBERS ABSENT
Representative Jay Ramras, Co-Chair
Representative Mary Kapsner
COMMITTEE CALENDAR
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 date."
- HEARD AND HELD
HOUSE BILL NO. 501
"An Act relating to the possession of horns or antlers of big
game animals."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 498
SHORT TITLE: TAX CREDITS NONCONVENTIONAL OIL/GAS
SPONSOR(s): RULES
04/03/06 (H) READ THE FIRST TIME - REFERRALS
04/03/06 (H) O&G, RES, FIN
04/11/06 (H) O&G AT 8:00 AM CAPITOL 120
04/11/06 (H) Moved Out of Committee
04/11/06 (H) MINUTE(O&G)
04/12/06 (H) O&G RPT 2DP 1NR 3AM
04/12/06 (H) DP: ROKEBERG, KOHRING;
04/12/06 (H) NR: SAMUELS
04/12/06 (H) AM: GUTTENBERG, DAHLSTROM, MCGUIRE
04/12/06 (H) LETTER OF INTENT WITH O&G REPORT
(FORTHCOMING)
04/19/06 (H) RES AT 1:00 PM CAPITOL 124
04/19/06 (H) Heard & Held
04/19/06 (H) MINUTE(RES)
04/20/06 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE NORMAN ROKEBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 498, Version L, on behalf of
the House Rules Standing Committee, sponsor, that he chairs.
ROBYNN WILSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding HB 498.
JEFF SPENCER, Supervisor
Heavy Oil Development
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Answered questions regarding HB 498.
FRANK PASKVAN, Western Prudhoe Bay Heavy Oil Team Leader
BP
POSITION STATEMENT: Answered questions regarding HB 498.
BILL VAN DYKE, Director
Division of Oil and Gas
Department of Natural Resources
POSITION STATEMENT: Answered questions regarding HB 498.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 1:10:06 PM. Representatives
Olson, Elkins, LeDoux, Gatto and Samuels were present at the
call to order. Representative Crawford arrived as the meeting
was in progress.
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
date."
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
recorded.]
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
(ii).
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
intent.
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
annum.
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
money.
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
that.
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
research.
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
challenges.
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
[technology].
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
credits.
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
protection.
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
time.
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
time.
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
oil.
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
identification.
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
issue.
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
value.
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
follow.
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
intent.
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
transferable.
2:54:41 PM
CO-CHAIR SAMUELS indicated that allowing such would be
complicated.
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-
9.
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
deduction.
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
use.
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
deleted.
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
Thomson."
REPRESENTATIVE ROKEBERG opined that the aforementioned
illustrates one of the benefits to specifying the sites in the
definition.
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.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:38:00
PM.
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