HB 276-OIL/GAS PRODUCTION TAX CREDITS: NENANA  2:41:32 PM CO-CHAIR FEIGE announced that the next order of business would be HOUSE BILL NO. 276, "An Act providing for a credit against the oil and gas production tax for costs incurred in drilling certain oil or natural gas exploration wells in the Nenana Basin." [Before the committee was Version M, the proposed committee substitute (CS) labeled 27-LS1193\M, Bullock, 1/18/12, adopted on 1/30/12.] CO-CHAIR FEIGE said Mr. Bill Barron participated in a recent discussion between the co-chairs and their staff regarding the issues around oil and gas exploration credits and incentives associated with HB 276 and that Mr. Barron will be addressing the committee. Co-Chair Feige explained that the proposed bill would put forward some Cook Inlet-style credits by incentivizing the first, second, and third exploration drill holes in the Nenana Basin. At the same time, there is the question of whether other exploration incentives should be considered and whether this bill could serve as a template for other basins in addition to the Nenana Basin. 2:43:19 PM WILLIAM C. BARRON, Director, Division of Oil & Gas, Department of Natural Resources, stated that providing incentives for exploration in remote areas is probably something that needs to be considered very strongly. Currently, only a handful of areas in the state have had much of any exploration and even fewer have had development. He said that part of the aforementioned discussion was about the process of exploration licenses, leases, and units. MR. BARRON explained that for the areas of the state and state lands that are not part of the existing area-wide lease sale program, there is the opportunity to establish exploration licenses. If a party or parties want to explore in a certain area, they can come to the state and nominate the land and the area for that license. The state would then conduct a best interest finding (BIF) for that area, which takes about two years. Upon completion of that finding, the state would open up that area for a competitive bid process for its exploration license term. The license is granted on a dollar commitment rather than a work commitment. The term of the license is typically 10 years. During that timeframe the party or parties awarded the license are required to expend 25 percent of their commitment within the first four years, but have the remainder of the term to spend the rest of their money. At the end of the license term, the land or any portion of the land that was part of the license can be extended into a lease, at which time the state would gain $3 per acre lease fees for the designated area. The five- to ten-year term of the lease is negotiated between the state and the party or parties, and is typically ten years. During that timeframe the parties are encouraged to do additional exploration work, driving the property closer and closer toward development and production. 2:46:35 PM MR. BARRON addressed what happens if there is a failure at either the license period or the lease period, a failure meaning that nothing is found or nothing worth continuing the work is found. On the license side, the property is just returned to the state. On the lease side, if work is not done the property is returned to the state after the lease period. If there is a success - someone drills a discovery well and proves hydrocarbon and proves closure - a unit is then formed, which is done in conjunction with the Department of Natural Resources (DNR). Forming a unit secures the land for an additional term, typically five years, unless the property is developed and producing and then it is on until the property no longer produces hydrocarbon. He said the reason he wanted to make the distinctions between a license, a lease, and a unit, is because there are very definite timeframes, processes, and procedures that the state follows for everyone's protection in terms of the property, the land, and the resource development. MR. BARRON, regarding the proposed language he has seen to date, said he thinks that the credits need to be for state lands and probably for Native land as well. Federal property is a whole different issue. He maintained that properties for this type of tax credit should exclude the lands that are currently in the area-wide lease sale because those areas already have a very robust process, credits, tax programs, and so forth. He said his understanding of HB 276 is that it is intended to encourage exploration activities in areas that have never really been explored before. 2:49:16 PM CO-CHAIR FEIGE, in regard to including Native corporation lands along with state lands, asked how Alaska Mental Health Trust lands and private mineral holdings should be handled. MR. BARRON replied he would have to give that more thought. In concept, they could be rolled in in the same manner. There are some subtleties relative to Native land, he added. At this juncture there would need to be some very clear definition of the acquisition of information and data and sharing that data either to the state or publicly. Right now that is not the typical format for Native land exploration; that information is typically not made public. So, that would have to be adjusted in some manner if the intent is to encourage exploration and the intent is for the state to gain data and then share that data with other parties. 2:50:20 PM CO-CHAIR FEIGE inquired what an appropriate timeframe would be for release of that data when moving from an exploration license to a lease. MR. BARRON said that in a license a single group has exclusivity for 10 years. Having that data made available before then is really of no value to anybody, unless for the securing of those credits the party agrees that the license term be shortened. For example, if the statute reads that to be eligible for the credit seismic data is released to the public in four years, then the license term should also be truncated along those lines for the reason being that people would want to be able to use that data to encourage more exploration. If the license is truncated, then there needs to be an immediate move toward leasing of that area for the protection of the party that did the work. There needs to be a strike of balance between releasing the data and ensuring that the parties that have taken a risk are also balanced with their ability to retain rights to do more exploration during the leasing program. CO-CHAIR FEIGE understood Mr. Barron to be saying that if a party is given four years for an exploration license, then that party should have first rights on leases before the expiration and before the data is made public. MR. BARRON answered that that would be one way to look at it. 2:52:36 PM CO-CHAIR SEATON recollected that in testimony the other day the party with the license said that it did not mind releasing the data early because it had the license. He asked whether Mr. Barron has a different position. MR. BARRON replied not necessarily. The party that made that claim might have that opinion; another party might have an issue. He said he does not have a counter opinion. Intuitively, if a party has a 10-year license and that license is then rolled to a lease, at which time the party has another 10 years, releasing the data probably does no harm. However, there is the question that if there are areas within that general area where seismic data is secured by one party, another party might interpret that data differently or see something that the first party did not see or understand. So, there is a balance in terms of when the data is made public and the unintended consequences to a player that strode up first. CO-CHAIR SEATON commented that the state is heavily investing in that project because it wants to get development and that might help get development that is outside of the leased or licensed area. It would be a choice that the party applying to the state for the credit could make. MR. BARRON agreed that that would be their choice. 2:54:43 PM REPRESENTATIVE FOSTER noted that the committee is also looking at the possibility of whether a template could be set up so that this could be applied to other basins in addition to Nenana Basin. He related that there has been some interest in including credits for Kotzebue Basin and Norton Sound Basin. He related that Mr. Bob Swenson of the Division of Geological & Geophysical Surveys said that there is nothing significant enough for even local use and this would mean having to look to offshore. He asked how far out the federal offshore waters are. MR. BARRON responded that state water is up to three miles. REPRESENTATIVE FOSTER requested Mr. Barron to expand on possible options for encouraging exploration in federal waters. MR. BARRON answered that the federal outer continental shelf (OCS) program is a program all to its own and he would have to think about how to involve state credits in a federal program where there are not the same mechanisms for return of the state's investment. 2:56:35 PM REPRESENTATIVE MUNOZ inquired whether Mr. Barron thinks the approach of legislating one basin at a time is best or should a bill like this be a template. MR. BARRON replied the conundrum is that having a template is a good idea, but trying to figure out where to target those in specific areas might actually be a deferral of the activity. Even though there are some reasonably good ideas for guiding the state in terms of where those areas should be, having it one step at a time might actually encourage the exploration rather than delay it, whereas it is delayed because it had to be thought about too much. Areas that are known might be included early and as more is learned programs could be added. 2:57:59 PM CO-CHAIR FEIGE presented a hypothetical example of incentivizing a seismic job where something promising is found, an exploratory well is then drilled, and then another to delineate a find, and something is found that is potentially developable. The party goes through the process of wells, facilities, transportation of the product to market and now the party is making money. By way of subsidization the state has invested a significant dollar amount at this point. He asked whether it would be seen as an incentive or disincentive that the party taking the credits is obligated to pay back a certain amount until the state's investment is paid back. MR. BARRON responded that the payback requirement is very typical of what is in the Cook Inlet sale. He said he does not know that he would make any adjustment. In philosophy, what [the committee] is trying do is reasonable, just as the current Cook Inlet bill is reasonable in asking for that return. CO-CHAIR FEIGE inquired whether, in addition to the jack-up rig, there are other payback requirements in other parts of that particular body of law. MR. BARRON said not that he recalls, but he would defer to the Department of Revenue to provide a more clear response. 3:00:19 PM CO-CHAIR FEIGE, at the request of Co-Chair Seaton, related that the co-chairs have discussed that these projects are essentially broken into phases: data collection, exploratory well, production, and commercialization. As a prerequisite for receiving a state subsidy the co-chairs feel it is appropriate in between each of these phases for the Department of Natural Resources and all its divisions to have some say as a check and balance, rather than rash commercialization utilizing state money. He asked whether Mr. Barron feels the department can handle that and has the expertise to handle that or would it need to be contracted out. He further asked whether Mr. Barron thinks that that would be an appropriate mechanism. MR. BARRON replied that right now he will not necessarily address the manpower requirements and whether the department would do that in-house or contract it out. He said he thinks that having that pre-qualification meeting and setting the standards of location and direction and goals and objectives is very critical in this process. It is very important for the state, if it is going to be issuing these credits, to have that discussion up front and early and everybody agree with what the targets are. [HB 276 was held over.]