HB 280-OIL & GAS TAX CREDITS: KOTEZBUE/SELAWIK  2:21:42 PM CO-CHAIR FEIGE announced that the next order of business would be HOUSE BILL NO. 280, "An Act providing for a credit against the oil and gas production tax for costs incurred in drilling certain oil and gas exploration wells in the Kotzebue Basin or the Selawik Basin; and providing for an effective date." 2:22:13 PM BRODIE ANDERSON, Staff, Representative Reggie Joule, Alaska State Legislature, speaking on behalf of the prime sponsor, Representative Joule, explained that HB 280 proposes an oil and gas exploration tax credit for the underexplored area of the Kotzebue/Selawik Basin. The legislation incentivizes exploration drilling as past indicators have shown that exploration and development in the Kotzebue Basin is possible. However, due to its remote location exploration, economic growth, and development has been difficult. Furthermore, the lack of reliable energy supplies and high energy prices has made exploration and development in the area even more difficult. Therefore, this legislation will strongly encourage companies to invest in this frontier basin such that rural Alaska can be provided with lower cost energy and provide opportunities for exploration and in-state use. Mr. Anderson then reviewed the sections of HB 280. He explained that Section 1 adds the Kotzebue Basin to the actual production tax credit. Sections 2 and 3 remove the definition of the Cook Inlet from the previous section and Section 3 creates a new set of definitions in its own subsection. Section 4 is the actual language establishing the Kotzebue Basin tax credit. Section 5 specifies an effective date. 2:24:19 PM MR. ANDERSON, referring to Section 4, pointed out that the tax credit would be applicable for anyone drilling the first three holes down to 2,000 feet for the purpose of exploration of oil and gas. The first [exploration well] is entitled to a 100 percent tax credit of its exploration well expenditures or $30 million, whichever is less. The second [exploration well] is entitled to a credit in the amount of 90 percent of the exploration well expenditures or $27 million, whichever is less. The credit for the third [exploration well] would be in the amount of 80 percent of the exploration well expenditures or $24 million, whichever is less. If these exploration wells move to production, 50 percent of the tax credit is required to be paid back. 2:25:22 PM REPRESENTATIVE KAWASAKI observed that HB 280 is similar to legislation for the Nenana Basin. He inquired as to why the drilling depths are very different between HB 280 and HB 276. MR. ANDERSON informed the committee that the state needs to look at frontier basin exploration as the next step to provide for the state's economy. When looking at the Kotzebue Basin there were indications that there could be shallow gas reserves that might be producible. Therefore, the legislation was drafted with the shallower ceiling in order to capture some potential reserves that wouldn't otherwise qualify because the cost to get the rig to the Kotzebue Basin will remain the same regardless of the depth of the well. 2:27:18 PM REPRESENTATIVE MUNOZ inquired as to why the credit proposed in HB 280 is so much greater than the credit in the Nenana Basin legislation, HB 276. MR. ANDERSON explained that the credit in HB 280 was modeled after the Cook Inlet jack-up rig credit and then considered the cost of transportation, the remoteness of the site, and other factors. Therefore, the cost of transporting materials to the site was added to the [base] credit. 2:28:12 PM CO-CHAIR SEATON, referring to the jack-up rig, asked if this legislation refers to onshore or offshore. MR. ANDERSON said that it's the expectation that this would at least begin onshore. In further response to Co-Chair Seaton, Mr. Anderson related his understanding that the language used was for the purpose of oil and gas, but he wasn't sure about the definition of wells. He offered to speak with the drafters to ensure that the clarifying language would only include wells and rigs that would classify for oil and gas. 2:30:04 PM REPRESENTATIVE P. WILSON pointed out that the language in Section 2 on page 2, lines 18-19, specifies that "a person drilling an exploration well is not entitled to a credit for more than one exploration well under this subsection." However, the language in Section 4 on page 4, lines 6-8, specifies that "A person or an affiliate of a person may qualify for a drilling credit for more than one exploration well under this subsection." MR. ANDERSON related his understanding that the language in Section 2 was referring to the Cook Inlet directly, while the language in Section 4 is the new language for the Kotzebue Basin. He offered to review whether there is a conflict and get back to the committee. 2:32:23 PM LANCE KILVAGUIQ MILLER, PhD, Vice President - Resources, NANA Regional Corporation, Inc., began by clarifying that the Kotzebue/Selawik Basin is essentially the same area. He then expressed excitement for this proposal in terms of the potential for energy independence for rural Alaska as well as the state. The map on the slide entitled "Kotzebue Basin Location" illustrates that the basin goes offshore and is part of the Chukchi Hope Basin system. However, the onshore potential is what's being considered. The basin is a fairly significant size that is about 20,000 feet thick with some Tertiary and Cretaceous sediments, which refers to the geologic age of the strata. He then moved on to the slide entitled "Basin Comparison" that provides an aerial view of the Kotzebue Basin in comparison to the Cook Inlet Basin. Although the two basins are similar in size, it doesn't mean the Kotzebue Basin will reach the same production as the Cook Inlet Basin. For perspective, Mr. Miller informed the committee that 40 years ago 2 wells were drilled by Chevron in the Kotzebue Basin as opposed to the numerous wells that have been drilled in the Cook Inlet Basin. He then directed attention to the slide entitled "Local Geography" that presents a map specifying the location of the two wells drilled in the Kotzebue Basin. This map illustrates the size of the Kotzebue Basin, which is 140 miles by 75 miles. This map also specifies the prospects that have been defined based on the geology of the region. 2:34:49 PM MR. MILLER then moved on to the slide entitled "Exploration History and Data." He stressed that the Kotzebue Basin is an exploration play for which there has been some work. In 1972 Chevron approached NANA Regional Corporation and some seismic work led to the aforementioned two wells being drilled. In the course of that time, the companies wanted to look at the base, the rocks, and the basin [which resulted in the drilling of] stratigraphic holes rather than looking at the best potential geologic targets. The next slide, entitled "Primary Reservoir Targets" is a [60-mile] cross section between the two wells [drilled by Chevron in 1974]. The Nimuiuk Point well was drilled to 6,315 feet while the Cape Espenberg well was drilled to 8,360 feet. The geology of the area matched well as there were good source rocks and host rocks for hydrocarbon plays across the 60 miles of basin [between the two wells]. Although it's a geologist's best guess, it's definitely dated efficient. The slide entitled "Basin Overview" highlights the two basins and the good sources for hydrocarbon potential. The green lines are the faults, which when combined with the folding of the rocks combine to what are hopefully good traps for drilling. 2:37:03 PM MR. MILLER pointed out that the slide entitled "2 of the 30 Prospects" highlights two of the potential targets, Cape Espenberg Prospect and Amaouk Creek Prospect, in relation to the wells drilled by Chevron in 1974. NANA Regional Corporation had an agreement, which has now lapsed, with California Independent to evaluate and drill some holes. Although the deal was signed in 2008 when gas prices began to decrease, the result was a lot of reinterpretation of the work. The tan areas of the aforementioned slide are the areas NANA Regional Corporation would like to drill. He then directed attention to the slide entitled "Amaouk Creek Prospect," which is just a seismic line in the Amaouk Creek prospect. To a geophysicist, this represents about a 10,000 foot cross section of the earth. The interpretation of the folds and closures is that the rock units are folded and some of the domes capped by reservoir seals could be good potential for hydrocarbons. The little map inset in the upper right is an illustration of a dome closure of the Amaouk Creek prospect; the blue line running through it is the cross section presented on the slide. Although this is old data from the 1970s, it has been reinterpreted. Referring to the slide entitled "Amaouk Creek Prospect", he pointed out that the data relates that there is coal, shale, and sand. The next component would be to find the proper structure, either folds or faults as illustrated on the prior slide. Therefore, Mr. Miller said that the Amaouk Creek Prospect is a fairly large sized dome with a 27 square mile closure that has potential for hydrocarbon accumulation. Again, Mr. Miller said he's not trying to say there will be 2 trillion cubic feet (tcf) of gas in this closure, but he directed attention to the slide entitled "Amaouk Creek Prospect: Comparison to Partial Analogues" that relates what the Kenai and Beluga River Gas Fields in the Cook Inlet has produced. The comparison illustrates that the Amaouk Creek Prospect has some fairly significant large structures showing per the geology and geophysics in the region. 2:40:27 PM MR. MILLER, referring to the slide entitled "Key Points", reiterated that over 40 years ago two wells were drilled into this deep basin, which is similar in size to Cook Inlet and San Joaquin-Sacramento Basins. There are many indications of a significant hydrocarbon system. Although it remains to be seen whether the hydrocarbons are gas prone or oil prone, it's likely to be more of a gas play. As was discussed, it has been difficult to attract financing. In the past, the majors performed the [exploration] work for oil, but now the hand full of majors leave the high risk work to the independents. Mr. Miller stressed that [Amaouk Creek prospect] is an exploration, wildcat play. Certainly, there are local needs in the region and Red Dog is a potential user. Although he hesitated to say it, Mr. Miller said that ideally the prospect could be large enough to export, which is specifically why he didn't include anything about commercialization as there is the need to be careful about expectations. 2:43:37 PM CO-CHAIR SEATON recalled that part of the reason for the incentive in the Cook Inlet was that people had tapped into the upper levels and never gone to the lower areas. This proposal seems to only go to 2,000 feet and doesn't even reach the cap. With the Cook Inlet proposal the intent was to develop in order to gain information all the way to the tertiary level. Therefore, he inquired as to why the proposal for [Amaouk Creek] would be to drill relatively shallow wells and not assess. With the Nenana Basin, the [goal] has been to obtain information that would be applicable and beneficial to the state. MR. MILLER clarified that NANA Regional Corporation isn't tied to the 2,000 feet. Of interest, Mr. Miller related that in the 1950s a water well was drilled near Kotzebue and it blew out mud and water for about 12 hours. Additionally, there are some targets located at levels less than 2,000 feet. Therefore, there is the potential for shallow gas. However, the reality is the desire to drill deeper. He noted that the maximum basement is likely about 10,000 feet and that is likely the intent. He further mentioned that the matter must also be vetted by DNR, which would thwart merely drilling a water well. In further response to Co-Chair Seaton, he stated that NANA Regional Corporation would be fine using the Nenana language. 2:46:56 PM CO-CHAIR SEATON stated that the [committee] is trying to develop geologic information and resource assessment because producing the first thing that is hit doesn't give the state the information regarding the full potential of the basin. 2:47:41 PM CO-CHAIR FEIGE related his assumption that NANA Regional Corporation wants to service Kotzebue and the local market with a heating source. He asked if it would make sense to balance the risk and reward and drill a shallower well that is perhaps more likely to payout. He then asked if NANA Regional Corporation's main objective to find development suitable for export or for serving the local [energy] need. MR. MILLER answered that it's really both. Certainly, there is incredible support for onshore drilling. 2:48:44 PM ELIZABETH SAAGULIK HENSLEY, JD, Corporate & Public Policy Liaison, NANA Regional Corporation, interjected that it is one of the top four priorities of the Northwest Arctic leadership team, which consists of NANA Regional Corporation, the Northwest Arctic Borough, the Northwest Arctic Borough School District, and Maniiliq Association. 2:49:08 PM CO-CHAIR FEIGE inquired as to how much of Kotzebue Sound is state waters versus federal waters. MR. MILLER, referring to the earlier question, the goal is both to export oil and to provide it for local use. As the case with most resource projects in Alaska, it needs to be significant in order to make it economic and thus a goal of the project would be for it to be exportable. Mr. Miller couldn't specifically provide the amount of land in the Kotzebue Basin that's state land, but he did characterize it as a significant amount of state land in the water. He offered to obtain that information for the committee. 2:50:36 PM REPRESENTATIVE GARDNER asked whether NANA Regional Corporation has spoken with any explorers regarding interest in this approach. Since this area is only a few miles from the coast, she asked if the water is deep enough to use tankers. MR. MILLER informed the committee that NANA Regional Corporation has been fairly active in terms of explorers. In fact, even in the 1990s, NANA Regional Corporation engaged geologists who used to work with Chevron and the majors. More recently, NANA Regional Corporation has spoken with a fair number of independents. He related that there is interest and noted that people were unaware of the existing credits, and thus as the word spreads more will be attracted. Still, the location is remote and a drill would be tied up for a year. With regard to the tanker question, Mr. Miller said that right outside of Kotzebue a tanker would have to be litered. MS. HENSLEY confirmed that a tanker would have to liter. Although a tanker can get near Kotzebue, items would have to be barged. She noted that there is also a port at Red Dog. She then reminded the committee that the Northern Waters Task Force did recommend that the state consider more options in the Arctic north of Nome. There has been discussion and in fact, the port bond includes funds for a port at Kotzebue. 2:53:16 PM REPRESENTATIVE GARDNER related her understanding that without a coastal zone management program, the state can't construct a deep water port in the Arctic. She asked if that's true for Kotzebue as well. MS. HENSLEY said she is not sure about that, although she recalled hearing the same question. She opined that more research has to be performed on that matter, and thus she offered to provide the committee more information on that after more analysis is done. 2:53:53 PM REPRESENTATIVE KAWASAKI, recalling Mr. Miller's comments regarding the difficulties of exploration in this location and Alaska, questioned how one can be sure gas will be produced even if it's found and the state subsidizes 100 percent of it. 2:54:53 PM MR. MILLER said that if [the play] is large enough, liquefied natural gas (LNG) has been looked at conceptually which would be for Asian markets. Although the discussion is in terms of gas, the hope is that there will also be oil, which would change the game. What the true hydrocarbon system is, is still being evaluated, he highlighted. He agreed that commercialization needs to be significant to get it to markets, which is part of exploration. MS. HENSLEY added that the Red Dog Mine is actively exporting. In fact, Red Dog is one-quarter of the $4 billion in the [state's exports]. She emphasized, "So, if we do have the amount, then ... we can find a way ...; we've done it with Red Dog." 2:56:26 PM CO-CHAIR FEIGE cautioned that this is still speculation and depends upon how much information is available. The more information there is the more the risk is reduced for investors. He said that NANA Regional Corporation already seems to have a fair amount of seismic data that defines a lot of the area. He asked if more seismic information or seismic information with newer technology is needed. MR. MILLER clarified that he isn't a petroleum geologist, but those he knows have provided mixed reviews. Some have said it's drill ready while others say that it would be nice to perform more 3-D [seismic]. He opined that he would leave it up to the person putting up the money. 2:58:10 PM CO-CHAIR FEIGE asked if it's important for the company to have a stake in the game to keep them honest and tighten up their own decision making. MR. MILLER replied yes, it's always good to have some skin in the game. 2:59:03 PM REPRESENTATIVE KAWASAKI pointed out that one of the differences between the Nenana legislation and HB 280 is that HB 280 has an immediate effective date. He asked if that immediate effective date is in anticipation of folks drilling in the next season. MR. MILLER related that the thought was that as this moves ahead if folks get interested this year, they probably wouldn't drill until the next year. He opined that it's already too late to drill in 2012-2013. The idea is that if it all worked out, a rig would be tied up and that would amount to $5-$6 million. Therefore, costs could be incurred well before drilling commenced. [HB 280 was held over.]