HB 276-OIL/GAS PROD. TAX CREDITS/RATES/VALUE  2:23:38 PM CO-CHAIR SEATON 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 labeled 27-LS1193\M, Bullock, 1/18/12, adopted as the working document on 1/30/12.] The committee took an at-ease from 2:23 p.m. to 2:28 p.m. 2:28:33 PM CO-CHAIR FEIGE moved to adopt the proposed committee substitute, version 27-LS1193\D, Nauman/Bullock, 3/2/12, as the working document. There being no objection, Version D was before the committee. 2:29:07 PM REPRESENTATIVE STEVE THOMPSON, Alaska State Legislature, said he is before the committee to present Version D of HB 276 and that the bill is a policy call for the legislature. He said the bill would provide incentives that will hopefully spur investments leading to seismic and drilling exploration in unexplored frontier basins located in close proximity to communities in need of a local energy source. He noted that his staff has worked closely with the Department of Natural Resources (DNR) to identify six areas within the state that represent unexplored basins located in close proximity to energy challenged communities. The bill would incentivize exploration by offering four tax credits for seismic exploration within the [six] different basins. Explorers seeking the credit would agree to the data becoming public within two years of receiving the credit. The seismic credit would be 75 percent of the seismic exploration cost or $7.5 million, whichever is less. The bill would also provide a drilling credit for the first four exploration wells drilled within the identified areas with no more than two wells in any single area. The drilling credit would be 80 percent of actual drilling cost or $22.5 million, whichever is less. Both credits under the bill would be for work performed between June 1, 2012, and July 1, 2016. REPRESENTATIVE THOMPSON pointed out that economic growth and development in Interior Alaska is crippled by high energy prices and the lack of renewable energy supplies, and said HB 276 would strongly encourage companies to invest in potential frontier basins. During the committee's discussion of the bill it became evident there were more communities across Alaska that were experiencing similar energy challenges and were looking for possible solutions in their own backyard. The bill originally dealt with drilling incentives in the Nenana Basin only. The Nenana Basin is located 50 miles from Fairbanks and has road, rail, and power access nearby. As drafted, HB 276 has the potential to benefit not only the Interior but all Alaskans on the Railbelt and beyond. 2:31:45 PM JANE PIERSON, Staff, Representative Steve Thompson, Alaska State Legislature, provided a sectional analysis of Version D of the bill on behalf of joint prime sponsor, Representative Thompson. She explained that Section 1 would [amend AS 43.55.025(a) to]: make a conforming amendment to new section (q); provide a new frontier basin drilling credit at the lesser of 80 percent of the total drilling expenditures or $22.5 million described in (n) of this section and that qualify under (b), (c), and (p) of this section; and provide a new frontier basin seismic credit at the lesser of 75 percent of the total seismic exploration expenditures described in (o) of this section and that qualify under (b), (c), and (p) of this section. She offered her belief that a friendly amendment will be forthcoming to remove (c) from the qualifications for seismic credits because (c) deals exclusively with drilling credits. Addressing Section 2, she said it would make a conforming amendment to include new subsections created in AS 43.55.025(a). 2:32:56 PM MS. PIERSON outlined Section 3, which proposes to add four new subsections - (n), (o), (p), and (q) - to AS 43.55.025. Subsection (n) describes the new frontier basin exploration drilling credits. A person drilling the first four exploration wells in an area described in subsection (p) of the bill on state or private lands would be eligible for credits described in subsection (a)(6) of the bill. The proposed credit could not be taken for more than two exploration wells in any single area described in subsection (p) of the bill. Subsection (n) would further require that written consent be obtained from the owner of oil and gas interests on private land for full public release of all well data within two years after receiving a credit. Data submission requirements would need to be in compliance with the requirements in (f)(2) of this statute. A person planning to drill an exploration well would be required to get approval from the Department of Natural Resources (DNR) commissioner prior to spudding the well. The DNR commissioner would have to make an affirmative finding that the exploration well is in the best interest of the state based on the well location, the proximity to a community in need of a local energy source, the proximity to existing infrastructure, the experience and safety record of the explorer in conducting operations in remote or roadless areas, the projected cost schedule, whether seismic data sufficiently identifies a particular tract for exploration, whether targeted depth and range are designed to penetrate and fully evaluate the hydrocarbon potential below which hydrocarbon reservoirs are likely to be found, and whether the exploration plan provides for full evaluation of the well. Credits under this subsection would be for work performed after June 1, 2012. The drilling and exploration would need to be in an area with a basin described under (p) of this section. If this credit is claimed, no other credits could be claimed under this section or AS 43.55.023 for the same expenditures. 2:35:16 PM MS. PIERSON said proposed new subsection (o) describes the new frontier basin seismic credit. It would provide that a person conducting the first four seismic exploration projects in the areas described in proposed new subsection (p) for the purposes of discovering oil or gas in a basin is eligible for the credit. A credit could not be taken for more than one seismic exploration project in an area described in subsection (p). Exploration credits would be available for work performed after June 1, 2012. The person conducting seismic exploration on private land would have to obtain written consent from the owner of the oil or gas interest for full release of geophysical data in compliance with the submission requirements of (f)(2). The commissioner of DNR would have to give approval before the commencement of seismic exploration activities and would have to make an affirmative finding that the seismic project is in the best interest of the state based on location, project cost, schedule, data acquisition and data processing plan, the reason for choosing the area for exploration, and the experience and safety record of the person doing the exploration in a remote or roadless area. A taxpayer obtaining a credit under this subsection could not claim a tax credit under AS 43.55.023 or another provision of this section for the same exploration expenditure. She added that these credits would go to the person doing the drilling, not the individuals holding an interest within a multiple party, so a partner still could get the credit. 2:37:09 PM MS. PIERSON said proposed new subsection (p) states that credits under (a)(6), (n), (a)(7), and (o) must be for exploration of a basin within the following areas whose criteria points are determined by using the World Geographic System of 1984 datum. These six locations - Fairbanks, Kotzebue, Emmonak, Glennallen, Egegik, and Port Moller - were identified by DNR as potential frontier basins and they were further defined by proximity to communities that are suffering from high energy cost and supply issues. MS. PIERSON explained that subsection (q) was added to HB 276 in response to a problem identified by [oil and gas consultant] Pedro van Meurs, which was that if a current producer with a tax liability at high prices would offset the full marginal rate, plus the expanded exploration tax credit, the state could end up paying more than the 65 percent that is intended for exploratory work. This can be seen as an inequity in the design of the current tax credit wording. The intent is to set the amount for exploration credits at 65 percent and not dependent on particular companies or other operators. The limitations are not applied to the Cook Inlet or frontier basin credits since they are credits geared for creating a stampede of exploration in certain areas of the state that will produce benefits for the state and its residents. 2:38:39 PM CO-CHAIR SEATON understood that this, unlike the Cook Inlet credit, was not for a single entity drilling three wells. This is multiple persons could either do the multiple seismics, or multiple persons, meaning multiple companies, could qualify for the tax credit by drilling in one basin and someone else in another basin. It is not restricted to the same person, it is persons. MS. PIERSON confirmed this understanding to be correct and apologized for misspeaking earlier. 2:39:24 PM REPRESENTATIVE KAWASAKI understood that Section 3 identifies the way in which an explorer can apply for drilling credits. Regarding the best interest finding on page 4, line 15, he presumed that the DNR commissioner would have to have submitted a best interest finding and agreed that the [exploration well] was qualified for the credit prior to the drilling actually being done. MS. PIERSON confirmed this understanding to be correct. REPRESENTATIVE KAWASAKI inquired whether a best interest finding is something that can readily be done and asked how much time it would take. He understood that a lot would go into a best interest finding before a credit could be applied for. MS. PIERSON offered her belief that (f)(2) of the statute, which the committee does not have before it, provides 30 days after the date of request, unless a longer period is provided. REPRESENTATIVE KAWASAKI, regarding the condition under the best interest finding about the explorer's experience and safety record, inquired whether that record is for Alaska or other states, or would be up to the commissioner to decide. MS. PIERSON offered her belief that it would be left for the commissioner to decide, but added that she believed it would also be whether the explorer's agents who are actually conducting the drilling or seismic have had some experience in remote and roadless areas. 2:41:43 PM REPRESENTATIVE HERRON offered his appreciation for how the bill has changed and where the proposed committee substitute (CS) is going. Noting the map shows six basins, he asked about the criteria used [for their selection] such that there are not seven or eight basins. MS. PIERSON replied that DNR provided the initial basins and the sponsor looked at them in regards to being close to communities that could actually use the resources and that had a need for the resources, which is how these six areas were chosen. The other three areas provided by DNR were either not in close proximity to a community that would need them or were in such close proximity to the Cook Inlet that they were already being taken care of. REPRESENTATIVE HERRON surmised, then, that there is no need to have a trigger built into the statutes to open up another basin without going back to the legislature. MS. PIERSON responded that extending this credit until 2022 was talked about at one time, along with adding some other things discussed in this committee. However, due to the lateness of the session, she said she created what she hopes is a good framework and offered her belief that if this works it will be looked at again before 2016. 2:43:39 PM REPRESENTATIVE GARDNER related she has an ongoing theme of letting Alaskans and legislators know what the state is buying and spending and who is getting and claiming credits. She asked which elements of HB 276 are completely available to the public and which are not. For example, if the commissioner made a best interest finding, she presumed the public could read that and be able to estimate what the credit would be. She said she would like to see, in principle, that whenever a tax credit is given to someone the information is available to all Alaskans so they know who the beneficiaries are, along with the amount. MS. PIERSON answered that the sponsor tried to do this by requiring the data discovered be made public within two years. Whether the explorer actually has a lease or has an exploration area, it is almost like advertising. If there is something good going on the explorer is protected by its exploration area or its lease. If something is found it may bring investors into these areas, something that has been problematic. Therefore, in making any data discovered for this credit public and available, the sponsor is trying to give the state more knowledge and something it can sink its teeth into. REPRESENTATIVE GARDNER offered her appreciation for the aforementioned. 2:45:45 PM CO-CHAIR SEATON pointed out that under existing programs any explorer can qualify for the 65 percent credit without sharing data. He therefore understood that someone wishing to take the enhanced credits for exploration in the proposed areas under HB 276 would have to go through the best interest finding and would have to agree to release the data. MS. PIERSON confirmed that this is correct. 2:46:26 PM CO-CHAIR FEIGE understood the DNR commissioner and his staff would approve where the seismic projects or the exploratory drilling occurs. He asked whether there is a time constraint from when the credit is approved and when the work must start. MS. PIERSON replied that to qualify for the [proposed] credit an exploration expenditure would have to incurred for work performed after [June 1, 2012] and before July 1, 2016. 2:47:20 PM CO-CHAIR SEATON understood that under the bill's provisions the person qualifying for and receiving the credit would be the one actually turning the drill bit first. MS. PIERSON responded "that is true and that is really belt and suspenders," but as was seen with Cook Inlet that became very important. 2:47:52 PM REPRESENTATIVE FOSTER noted that the second paragraph of the sponsor statement states that the drilling credit would be for the "first four exploration wells in an area described in the bill with no more than two wells in any single area." He inquired whether that means a total of four wells or means six areas times no more than two wells in each area, which would be twelve. MS. PIERSON, noting that this has been a hard one to nail down in legal writing, said it would be four total. 2:48:31 PM CO-CHAIR SEATON opened public testimony on HB 276. After ascertaining that no one wished to testify, but that the Resource Development Council had submitted written testimony in favor of the bill, he announced that HB 276 would be held over for public testimony on 3/14/12 and that people could submit written testimony as well. 2:49:29 PM CO-CHAIR SEATON moved to adopt Conceptual Amendment 1, written as follows: Page 2, Line 14: Delete (c) CO-CHAIR SEATON pointed out that this is the amendment talked about by the sponsor that would delete the reference to (c). CO-CHAIR FEIGE objected for discussion purposes. CO-CHAIR SEATON explained that lines 12-14 on page 2 talk about seismic exploration activities. However, (c) specifically references only exploration wells, so reference to (c) is probably inappropriate. CO-CHAIR FEIGE withdrew his objection. There being no further objection, Conceptual Amendment 1 was adopted. 2:51:10 PM REPRESENTATIVE KAWASAKI recalled Ms. Pierson's statement that the proposed tax credits would not be stackable. He noted that the research and development tax credit is not in Title 43, but under a different title. He requested clarification on which credits are stackable and which are not stackable. MS. PIERSON said she will have to get back to the committee with an answer. CO-CHAIR SEATON pointed out that the two fiscal notes are for the original bill and said new fiscal notes are anticipated for Version D. 2:53:04 PM REPRESENTATIVE KAWASAKI said he will submit written questions through the co-chair about the dynamics of the best interest findings, the proximity to a community in need, the definition of proximity to existing infrastructure, and how those would be objectively looked at by the commissioner in a best interest finding. CO-CHAIR SEATON offered his belief that the bill actually lays out mileage around the points. MS. PIERSON said this can be found in subsection (p) on page 6, beginning on line 2. CO-CHAIR SEATON added that the aforementioned language describes the areas the basins would have to be in. He recalled that DNR had previously said a best interest finding would be based on the prospectivity because the state did not want to spend a lot of money if there was not much prospectivity. He asked whether this language is adequate for Representative Kawasaki. 2:55:47 PM REPRESENTATIVE KAWASAKI commented that this was originally a Nenana Basin bill and now a number of different communities have been added. He recollected a discussion led by Co-Chair Feige in which there was talk about whether a community would be able to take advantage of a potential find. For example, Fairbanks is close to the road system and has a need, but in rural areas with a need it might not be cost effective to pay for the credits; therefore, it is a policy call that must be made. MS. PIERSON offered her belief that that is the reason for the best interest finding. She said a problem of these being frontier basins is that they have never been actually solidified in their definitions, which is the reason for the circles [on the map depicting the six areas]. She imagined that if somebody wanted to drill in an area within the circle but not in the basin, there would be a problem with that, and that is the best interest finding. The Department of Natural Resources was concerned that there be a development plan. CO-CHAIR SEATON offered his appreciation for the colored map depicting the proposed areas that are defined in the bill by latitude and longitude. 2:57:45 PM CO-CHAIR SEATON understood that the bill does not include outer continental shelf (OCS) or federal land; thus the credits would be available for either state or private land. MS. PIERSON confirmed that this is correct. CO-CHAIR SEATON said his previous statement was to clarify that the state credit would not apply to any work occurring off the Aleutian Islands in the OCS. [HB 276 was held over.]