Number 441 SB 151 - OIL & GAS EXPLORATION CREDITS REP. JOE GREEN, testified that SB 151 is a companion bill to HB 199, which was the exploration licensing bill; this being a companion bill in that it is another encouragement to get some sort of delineation, or discoveries in remote areas of the state. This bill would allow the commissioner of Natural Resources to grant relief on taxes to a company or companies that spent money that would be acceptable to the commissioner as exploration dollars, up to a limit, against either their existing production taxes or against the development of something that they might find in the areas they are looking at. I have for the committees review a handout which could help explain the differences between this tax incentive and an existing tax incentive program that has been on the books since statehood. Rep. Green further testified that this bill applies to unleased state land and private land as well and does not just confine itself to taxes from state land. The dollar limit under the current program is five million allowable per company for each operation. The concept there is that five million is a pretty small amount in relation to the total program. SB 151 would have a sunset in ten years. The concept there is to get some activity in a close time frame so that the time it takes from discovery to development would ensure the solvency. The confidentiality provision in the existing credits is that a person can drill an exploratory well where there is unleased land around that well, he can request the commissioner hold the material confidential so it does not become a benefit to people who might bid on adjacent land. That provision has been in law for some time. SB 151 puts a maximum cap of two years on the confidentiality provisions. This is a credit allowance and all the dollars have to be approved by the commissioner. If this bill is passed there would be a maximum of fifty percent of the expenses, not to exceed five million, done on state land, and up to twenty-five percent of that done on private land. Number 573 REP. PHILLIPS inquired on page 2, line 30, section E, the amount of the exploration explained there is determined by the commissioner. Is that a normal procedure, he asked, and how they will develop those guidelines as far as limits that normally occur? Number 580 REP. GREEN responded that the commissioner determines what is eligible and quite often, what is negotiated before hand is a situation like, "I'm going to go out and drill on this land and I'm going to have these kinds of costs." Number 582 REP. PHILLIPS inquired whether other states have these kind of incentive credits. Number 589 REP. GREEN responded that there are incentive credits in other states which are to a greater or lesser extent. In Texas, they don't have the undrilled land that we do in Alaska. Number 595 CHAIRMAN PORTER inquired as to whether, for the record, it could be explained the difference between the state benefits from drilling on and discoveries on private land verses state land. Number 598 REP. GREEN responded that the benefit would be is that where they are adjacent, and the well is in close proximity, say within a lease of two by two square miles, there would be a significant interest to the state because the field might be large enough to extend on state land. But in the other areas, let's say this is on Native land, but perhaps several miles from the nearest state border, it would be relative small value. There would still be value because there would be an area you could tie seismic work to. Number 626 CHAIRMAN PORTER inquired into the revenue differences to the state from producing on state land versus private land. Number 628 REP. GREEN responded we wouldn't have any royalties from private land. We would have severance and ad valorem taxes. Number 630 REP. NORDLUND inquired as to what the credits that would apply towards payments and obligations, would that be for any obligations that might be due on that particular project or would it be overall taxes or obligations owed by the company to the state. Number 640 REP. GREEN responded that it could be either. Number 644 REP. NORDLUND responded that we are diminishing some of the resources available to the state to encourage companies to drill on private land. Number 647 REP. GREEN responded that that is why it is reduced to twenty-five percent as opposed to fifty percent. This only means that the commissioner has the right to do this. He could go as high as fifty percent, but he never has. Number 664 REP. NORDLUND expressed his concern regarding Natural Resources commissioners having discretion over the credits and whether the commissioner would have the best interests of the state in mind when granting credits. Number 667 REP. GREEN responded that the commissioner must show cause why he would think that this particular case be granted credits. Number 672 KEN BOYD, Deputy Director, Division of Oil and Gas, testified that Representative Green pretty much covered SB 151 and he would respond to questions, if any. He further added that the fifty million was a total over the life of the bill. Number 691 REP. PHILLIPS inquired why there was a ten year sunset in this legislation. Number 700 MR. BOYD responded that the rationale was to try the program and see if it works and whether this type of incentive would lead to increased exploration. Number 711 REP. PHILLIPS inquired about the two year confidentiality provision. Number 713 MR. BOYD responded that right now on state land the confidentiality provision is guaranteed for two years. At the end of that period of time a company can come in and ask for an extension of the confidentiality period. Number 732 REP. PHILLIPS responded that in light of the ten year sunset provision, the two year confidentiality provision was probably okay. Number 736 REP. NORDLUND inquired whether the fiscal note, which is a zero fiscal note that definitely has a fiscal impact, would actually result in a revenue loss to the state. Number 747 CARL MEYER, Income and Excise Division, Department of Revenue, testified that the fiscal note was put together on the basis that it would be difficult to determine what type of credit might be granted. He further stated that there was no way to be absolutely certain what types of credits would be granted. He felt that it would probably be around twenty-five million. So the top would be twenty-five million, but it could in fact be less than that. Number 766 REP. NORDLUND felt that a cost/benefit analysis should be conducted to determine if the state comes out in balance. Number 775 REP. KOTT responded that while there is a cost to the exploration credit, there would be future revenue which would offset or balance out the cost. Number 782 REP. GREEN further responded that even if you select an arbitrary number of wells, that still doesn't mean that there's twenty-five million at which fifty percent is applied. It is still up to the commissioner to grant what he will. Number 789 CHAIRMAN PORTER inquired whether any credit would be given if no oil was found. Number 793. REP. GREEN responded that that was not necessarily true. An oil company could drill a dry hole and still get credit if they have other producing activity. Number 795 REP. PHILLIPS inquired whether the passage of SB 151 would positively further exploration in Alaska. Number 799 REP. GREEN responded yes. This is the kind of legislation that is more valuable to the industry than the number of dollars that are included. It sends a very positive message that the state of Alaska is saying they truly want to compete for industry dollars, along with third world countries, etc. Number 810 REP. NORDLUND again expressed concern over a commissioner granting a credit without having the best interest of the state in mind. He doesn't see this provision in SB 151 and that it would be appropriate to require that in this legislation. Number 820 MR. BOYD responded that it would be very difficult to mandate such a provision. Our current state law has provided a benefit to the state, he said, but it is hard to substantiate it. The benefit to the state is immediate because at the very least the state would gain valuable information as to the mineral content of the land. REP. NORDLUND inquired whether an oil company would drill a well anyway, even without an exploration credit. Number 846 Mr. BOYD responded that there is no way to determine whether they would or not. But without SB 151, if they did, the state would not get the data on the land. Number 853 REP. PHILLIPS informed the committee that during her last national Energy Council meeting, the energy minister for Alberta reported to our body that she had approved nine thousand last year alone and on her desk as of January 1, 1994, she had application permits for ten thousand additional exploratory wells. In the United States 569 permits were offered for wells and in Alaska 11 were offered. She felt SB 151 was bound to help. Number 872 REP. NORDLUND informed the committee he didn't oppose this legislation, but he wanted some of his concerns addressed. Number 878 REP. KOTT motioned that CSSB 151 be moved from committee with individual recommendations and a zero fiscal note. Number 884 CHAIRMAN PORTER, hearing no objection, declared CSSB 151 moved from committee.