CS FOR SENATE BILL NO. 309(FIN) "An Act amending and extending the exploration and development incentive tax credit under the Alaska Net Income Tax Act for operators and working interest owners directly engaged in the exploration for and development of gas from a lease or property in the state; relating to interest on certain underpayments or overpayments of the oil and gas production tax; providing a credit against the tax on the production of oil and gas for drilling certain exploration wells in the Cook Inlet sedimentary basin; relating to the use of the oil and gas tax credit fund to purchase certain tax credit certificates; providing for an effective date by amending the effective date for sec. 2, ch. 61, SLA 2003; and providing for an effective date." 9:55:24 PM Senator Lesil McGuire stated that the bill had been vetted in multiple committees in both bodies. The Cook Inlet region had been facing shortages of gas, the main electrification method in the area for the last 40 years. The gas was affordable because it was a bi-product of oil drilling in the region. She cited a Petro technical Resources of Alaska report which revealed that 187 oil wells would need to be drilled between now and 2020; in order to maintain supply and demand, and to avoid importing the product from Indonesia. She stated that due to a provision put into place in 2003, under title 43 of the tax code, the Gas Exploration and Development tax credit could be used to incentivize companies. The tax credit applied to all areas outside of the North Slope Borough. The bill would allow for a qualified credit against corporate income taxes for up to 25 percent of the corporations expenditures, specifically in Cook Inlet exploration. She stated that the Senate Finance Committee had agreed to allow for the credit to be taken against 75 percent of the tax liability for qualified expenditures. The bill would also allow credits to be applied against exploration efforts in existing known reservoirs. The bill included a sunset extension, which had been moved back from 2017 to 2016 by the Senate Finance Committee. The original statutory frame work for the gas exploration and development tax credit would have expired in 2013. The second part of the bill allowed for three different corporations to drill in the Cook Inlet area at different percentages. Changes had been incorporated in the production tax system with respect to ACES. Producers had recommended the reduction of progressivity from .4 to .2. The department would be allowed to waive interest on the underpayment of taxes due to a retroactive regulation change. The agreed upon rate was roughly 11 percent. The bill would permit small explorers to sell their credits back to the state without making an investment equivalent to the credits within 24 months. The change would have no effect on the treasury, but would help ensure that the benefits of the credits were going to small explorers. 10:02:35 PM Senator McGuire stressed that the intent of the legislation was to stimulate activity in Cook Inlet and the areas south of 68 degrees, and to make modifications in the ACES structure. She thought that the current system hindered development. For example, this year marked the first time in 49 years that Conoco Phillips had not drilled an oil well in the state. 10:04:46 PM Mr. Powlowski referred to the sectional analysis: Section 1 amends AS 43.20.043 (a) by increasing the gas exploration and development tax credit to 25% on qualifies capital expenditures and annual costs from 10% for investments made after December 31, 2009. Section 1 changed the gas exploration and development tax credit under AS 43.20. The change was for corporate income taxes and not the production tax. Page 2, Line 16 and Line 18 illustrated the change in the taxed percentage. Co-Chair Hawker requested confirmation that the language of the bill had previously vetted in committee in HB 229. Mr. Powlowski continued to Section 2:   Section 2 amends AS 43.20.043 (b) to conform to the changes made in section 1. Section 2 was similarly from HB 229. Section 3 amends AS 43.20.043 (c) to replace the 50% cap on the application of the gas exploration and development tax credit against the Alaska Net Income Tax with a cap of 75%. Section 4 amends AS 43.20.043 (e) to ensure that the value of a credit under AS 43.20.043 is passed through to consumers in a rate base submitted to a regulatory agency. Section 5 amends AS 43.20.043 (g) to clarify that if a taxpayer elects to take a credit under AS 43.20.043 the taxpayer may not also claim a tax credit or royalty modification under other identified sections of Alaska law. Mr. Powlowski explained that Section 3, Page 3, included similar language from 229, but with the change to the percentage of taxpayer liability. Section 4 was an amendment to HB 229, and was meant to ensure that the benefits of a credit flow to the consumer. Section 5, Page 4, Lines 8- 16, clarified that if corporations elected to take the 25 percent corporate income tax credit, the taxpayer would forgo the right to take other credits. 10:08:17 PM Co-Chair Hawker clarified that the provision had been rewritten for the sake of lucidity. Mr. Powlowski replied in the affirmative. Mr. Powlowski continued with the sectional analysis: Section 6 amends AS 43.20.043 (i)(1) to allow a taxpayer to claim a credit under AS 43.20.043 for development in an existing field and for an expenditure that does not lead to production. Section 6 also clarifies that topping plants, treatment or liquefied natural gas and other manufacturing plants are not qualified expenditures. Section 7 amends AS 43.20.043 to clarify that a credit under AS 43.20.043 may be taken in the year in which the expenditure is made or cost is accrued, or in the following tax year. Section 8 amends AS 43.55.020 by adding a new subsection that allows the department to waive interest on the underpayment or overpayment of a tax liability if the underpayment or overpayment was due to a retroactive regulation change. Section 9 amends AS 43.55.025 (a) to create a special tiered exploration tax credit of 80, 90 or 100 percent of total exploration expenditures. Section 10 amends AS 43.55.025 by adding a new subsection (m) to clarify that the special credit established in section 10 is for the first three unaffiliated wells drilled into the pre-Tertiary strata in Cook Inlet using a jack-up drill rig. Also caps credits; lesser of 100% credit or $25 million, lesser of 90% credit or $22.5 million; lesser of 80% credit or $20.0 million. Only one credit per person may not include cost to construct or manufacture a jack-up rig and must be for work performed after June 30, 2010. If exploration results in sustained production of oil or gas, 50 percent of credit received shall be repaid. Taxpayer obtaining credit in this section may not claim credit under AS 43.55.023 or another provision in this section for the same exploration expenditure. Provides definitions for "jack-up rig", "reservoir" and "sustained production". Mr. Powlowski stated that Page 4, Section 6, included language from HB 229, redefining property as it related to the qualified capital investment. The bill allowed for a credit for fields where there had already been discovery of gas, as the most readily available areas that gas would be found was in established gas fields. Page 5 reflected a change made by the committee in HB 229, removing topping plants, liquefied natural gas, or manufacturing plants from the list of qualifying facilities. Section 7 contained timing language regulating when a taxpayer could elect to take the credits. Section 8 marked the division of work that was done in HB 229 and the governor's initiatives. Page 5, Line 23 through Page 6, Line 20, was related to the under or overpayment of taxes due to retroactive regulation change and the interest rate applied to the payment. Section 9 marked another diversion, and was originally written into SB 290, establishing a new tiered credit system within the exploration incentive credit of 80, 90, or 100 percent, or the lesser amount described in Section 10. Section 10, Page 7, Line 7, established that the first 3 unaffiliated persons that drill an off-shore exploration well for the purpose of discovering oil and gas in Cook Inlet, that penetrates at least 3,000 feet below the Tertiary strata, would receive special credits. If the exploration leads to a discovery, the value of 50 percent of the credit would be repaid to the state. Mr. Powlowski cited the sectional analysis: Section 11 amends the uncodified law related to the carry forward of credits accrued under AS 43.20.043 beyond the sunset date of the credit. Section 12 repeals AS 43.55.028 (e) (2) and (e) (3) which requires a small producer accessing the oil and gas tax credit fund to make additional expenditures within 24 months of claiming the credit. Section 13 amends the uncodified law of the state of Alaska to add transition language for the changes made in section 8. Section 14 amends the uncodified law of the state of Alaska to make section 8 retroactive to January 1, 2006. Section 15 amends the uncodified law of the state of Alaska to conform the retroactive application of regulations under section 8 to other retroactive regulations issued by the department.   Section 16 extends the sunset of the tax credit under AS 43.20.043 to 2016 from 2013. Section 17 adds an effective date of July 1, 2010 for section 12. Section 18 adds an immediate effective date for all sections other than section 17. Mr. Powlowski stated that Section 12 would ensure that the small producers could access the benefit of the credits as they were designed. Section 13 was transition language for the changes made in Section 8. The same followed for Sections 14 and 15. Section 16 was the sunset for the corporate income tax. Section 17 was an effective date for Section 12 of the bill, which was the repealer section, and needed to be different than Section 18, because the repealers needed to be related to the fiscal year. 10:13:13 PM Co-Chair Hawker informed the committee that a significant amount of the sectional analysis had been debated in committee under HB 229; except Section 8, which was a new section from the governor. Sections 9 and 10 were new and had not yet been vetted by the committee. SENATOR THOMAS WAGONER stated that the bill outlined the exploration and drilling incentive in the amount of 100, 90, and 80 percent, for three wells that would be drilled off shore in Cook Inlet. The first well would be 100 percent of exploration expenditures, up to $25 million. The second well would be 90 percent of exploration expenditures up to $22.5 million. The third well would be 80 percent, not to exceed $20 million. He understood that in the industry, producers would share the cost of mobilization and demobilization of the jack-up rig used by several parties. It was required in the legislation that the wells be dug by three, unaffiliated companies, in an effort to spread the wells throughout the inlet. The Kitchens Unit was 85 thousand square acres. Another unit was the old ARCO Sunfish, which sits beneath the area ConocoPhillips was currently producing gas out of. A clause was included in the legislation stating; if producers make hydrocarbons commercially, 50 percent of the allowed exploration cost would be paid back to the state. 10:17:36 PM Co-Chair Hawker asked what was unique about the jack up rig that made the use of it good public policy. Senator Wagoner replied that the jack up rig was mobile. Stationary platforms had limited drilling depth because the rigging on them was not reinforced to allow for deeper drilling. He explained that drillers were required to drill down to the Cretaceous area and ideally into the Jurassic area. He noted the success of the gas and oil production that had occurred in the inlet but stressed that Cook Inlet had been underexplored. Co-Chair Hawker shared that the Alaska Oil and Gas Conservation Commission was eager to know what was at the depths of the inlet. Senator Wagoner stated that geologists maintained that there was an abundant source of oil in the depths of the inlet. He added that XTO, a subsidiary of ExxonMobil, had been looking at drilling into the Jurassic area of the inlet, but had not had support from its corporate office. The proposed tax credits would be incentive for the corporate office of XTO to lend its support to the endeavor. 10:21:13 PM Representative Gara asked if the bill limited the number of jack up rigs in the inlet. Senator Wagoner responded that the state would incentivize the first three wells built by unaffiliated people. He believed that more than one jack up rig would be unlikely. Two years ago, Escopeta Oil received a waiver of the Jones Act for the transportation of the jack up rig in and out of the inlet. The waiver was still current. Representative Gara queried the potential cost to the state and remained unclear about the total number of wells that would be incentivized. Senator Wagoner repeated that only three wells would be incentivized. Senator McGuire interjected that the cap was $67,500,000 and included just the three wells. Co-Chair Hawker pointed out to the committee that gross exposure to the state was the $67,500,000, but provisions written into the bill would ensure the recovery of 50 percent of the expense. 10:25:16 PM Co-Chair Hawker stated that sharing the exploration risk should be the role of the state. Subsequently, if the efforts were successful, the state should share in the rewards, in addition to the ordinary royalty and tax structure. He commended the philosophy behind the legislation. Representative Joule asked about the depths needed to reach the Jurassic area. Senator Wagoner replied 20,000 feet and below. He furthered that in areas of the inlet the basin was shaped like a letter "U", which would allow for side drilling and faster access to the Jurassic area. 10:27:31 PM Co-Chair Hawker opened public testimony. PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, testified that the provisions in the bill that stem from the administration's tax credit bill were identified in the sectional analysis. One was the elimination of the current requirement of the demonstration of further investment in the state by the taxpayer in order to receive a state purchase of a credit certificate. The change was beneficial to new exploration ventures that were seeking partners, primarily investors. The second provision would waive the interest that would be calculated against an underpayment of taxes due solely to a retroactive application of a regulation. 10:31:48 PM Commissioner Galvin stated that the department recognized the value of providing the tax credits. The application of the production tax system was varied because there were different tax systems for the separate areas of Cook Inlet, "Middle Earth" (the area between Cook Inlet and the North Slope), and the North Slope. The provision took the existing credit program in the income tax section that was exclusive to gas exploration activity, and expanded it from 10 percent to 25 percent. The application was expended to the existing units that had production, but were ripe for exploration. Erecting a jack up rig in Cook Inlet had been a goal of the state for over a decade. The upfront cost of the project had been the barrier, and the state had been in search of a funding source for the mobilization and demobilization costs. There is no single intently with sufficient interest in exploration opportunities in Cook Inlet to economically justify the investment. The bill highlights the credits up front for perspective players, which could pave the way for a jack up rig in the inlet. The state expects multiple years of wells to be drilled from the rig once it was established in the inlet. The $67,500,000 was the maximum amount to be paid if each well costs $25 million. Each well is not expected to cost $25 million, which would limit the states exposure. Most of the taxpayers would be able to write between 45 and 65 percent off of the state tax system. Co-Chair Hawker needed clarification on the jack-up credit. He asked if the department was comfortable placing sidebars around the expenditures that would qualify for the credit. Commissioner Galvin replied yes. He added that the credit was built around the law and used the existing definition of eligible costs. The department was comfortable that it had defined eligible expenditures and the limits of the stampede credit. 10:38:05 PM Representative Fairclough wondered if royalties in-kind from the rigs could be stored for security in the event of a state emergency. She hoped that the issue could be discussed into the future. 10:39:27 PM Representative Gara asked if the jack up rig credit was exclusive of other credits. Commissioner Galvin replied yes. Representative Gara asked if the language of the bill specified that the income tax credit was also exclusive. Commissioner Galvin responded in the affirmative. Representative Gara commented that the state currently charged a very minimal tax, just 2 percent on the gross. He expressed skepticism that it was the tax rate that was hindering production in Cook Inlet. He asserted that the gas in the inlet was difficult to find and that companied would not explore until there was a utility ready to buy new gas. How wondered how the tax rate change was a motivating factor. Commissioner Galvin agreed that lack of drilling in the inlet was not exclusive to the economic return for the driller. He said that within the inlet, the system was inefficient, because the market was capped and limited and the available reserves had been exhausted. The amount of investment necessary to justify the next well was significant. The credits provided would bring down the initial costs in order to justify the investment for the monetary return provided by the market. He said that the production of Cook Inlet gas was not exclusively a revenue source for state government, but an issue of providing energy to the people of the area. 10:47:09 PM ANDREE MCLEOD stated that on July 10, 2009, the state awarded new oil and gas explorers $193 million. She queried where the tax credits were. She stated that she had requested the names of the 15 new oil and gas explorers that had received the $193 million, and was told the information was not available to the public. She asked the public would be made privy as to where the money from the credits was going. Commissioner Galvin replied that the request of the names of the companies that received credits, and the amount of the credits awarded, was denied because the taxpayer information was confidential. Her recent modified request for only the names would be considered after the Department of Law had examined the extent of the confidentiality provisions under the tax law. Co-Chair Hawker stressed that individual taxpayer data was confidential. Co-Chair Hawker Closed public testimony. Representative Gara referred to the expansion of the corporate income tax tax credit to 25 percent. A benefit of the credit was that the well data was kept confidential. He assumed that the Department of Natural Resources (DNR) had resistance to providing state money and receiving no data. The data would be necessary in order to expand Cook Inlet production. Commissioner Galvin replied that DNR was not his department. 10:53:12 PM Co-Chair Stoltze MOVED to ADOPT Amendment 1, 26-LS1629\S.1. Bullock, 4/16/10, by request: Page 7, lines 8-9: Delete "at least 3,000 feet below the base of the tertiary-aged strata" Co-Chair Hawker OBJECTED for the purpose of discussion. Mr. Polowski explained that the "3,000 feet" specificity had been deemed unnecessary. Co-Chair Hawker WITHDREW his OBJECTION. There being no further OBJECTION, it was so ordered. Co-Chair Hawker MOVED Amendment 2 by request: To Pages 8, line 24: Delete "2024 and insert "2020 Co-Chair Stoltze OBJECTED for the purpose of discussion. Mr. Polowski explained the sunset for the corporate income tax credit in the original bill was 2020. The amendment would make the commensurate 4 year difference on Page 8, Line 24 to the sunset change on Page 9, Line 15. 10:55:46 PM Representative Gara wondered if the corporate income tax credit had a sunset date. Representative McGuire replied the sunset date was 2017, with a carry forward meant to sunset in 2024. Representative Gara asked if the 25 percent credit would revert back to 10 percent in 2017, except for the carry forward. Mr. Polowski believed that the credit disappeared entirely upon the sunset date. Vice-Chair Thomas withdrew his OBJECTION. There being no further OBJECTION, Amendment 2 was ADOPTED. 10:57:16 PM Representative Gara WITHDREW Amendment 4: Page 4, line 6 following "chapter": Insert"; (4) shall agree, in writing, to the  applicable provisions of AS 43.55.025(f)(2) and shall  submit to the Department of Natural Resources all data that  would be required to be submitted under AS 43.55.025(f)(2)  for a credit under AS 43.55.025"  Co-Chair Hawker addressed the fiscal notes. Both reflected zero fiscal impact. Revenue projections were indeterminate. He wondered if an indeterminate expense fiscal note existed. Commissioner Galvin said that there were no expenditures to be noted on a fiscal note. Co-Chair Hawker thought that an indeterminate fiscal note would be needed because the bill offered a credit that would need to be accepted by another party. Commissioner Galvin stated that the determination of potential credits was a revenue issue. The department had not projected the expenditures of the program into the future, and had decided to deem the expenditures indeterminate for the time being. Co-Chair Hawker said that the legislature was under no obligation to add money to 2011 budget as a result of passing the legislation. Co-Chair Stoltze MOVED to REPORT SB 309 (FIN), 26-LS1629\S, as amended, from committee with attached fiscal note and individual recommendations. Representative Gara OBJECTED for the purpose of discussion. He pointed out to the committee the provision on Page 4, which originally was a new well credit designed for new production in new wells. Not only was the credit being expanded to 25 percent, but it was being expanded to be used in fields and existing wells. He expressed concern with the change in policy. Representative Gara WITHDREW his OBJECTION. There being no further OBJECTION, HCS CSSB 309(FIN), as amended, was MOVED out of Committee with individual recommendations and the accompanying fiscal notes. HCS CSSB 309(FIN) was REPORTED out of Committee with "no recommendation" and attached new indeterminate note by the Department of Revenue and previously published fiscal note: FN2 (DNR). 11:02:30 PM RECESSED 12:44:12 AM RECONVENED Co-Chair Stoltze noted that the amendment