SENATE BILL NO. 112 An Act establishing a discovery royalty credit for the lessees of state land drilling exploratory wells and making the first discovery of oil or gas in commercial quantities. Co-chairman Halford directed that SB 112 be brought on for discussion. ANNETTE KREITZER, aide to Senator Leman, came before committee. She explained that changes within CSSB 112 (Res) address problems with terms contained within the original bill. Concern relates to: 1. What constitutes first discovery? 2. What are commercial quantities? 3. What is the geologic structure? 4. What is the discovery date? 5. Does the discovery royalty apply to all zones in a lease? As introduced, the bill would allow new discovery rules to apply to the exploration licensing program (Sec. 1). The bill is ultimately to encourage early exploration through a reduced royalty. Language within subsection (3) (page 2, lines 2 through 11) narrows the scope to the Cook Inlet sedimentary basin. Directing attention to page 4 of the bill, Ms. Kreitzer noted that the legislation includes non-unitized leases as well as non-producing leases. Language also states that leases that carry the former discovery royalty provision cannot apply under the new program. In her closing remarks, Ms. Kreitzer reiterated that the royalty program applies only to leases in the Cook Inlet sedimentary basin (effective on all non-producing, non- unitized leases) and future leases certified as first discovery by the commissioner six months after the effective date of the act. Senator Rieger asked if discovery royalty provisions were known at the time of the sale of original leases or were they enacted after the lease sale. Ms. Kreitzer said she would obtain an answer. Senator Sharp voiced his understanding that Cook Inlet leases on which there has been no discovery would be entitled to a 5 percent royalty on future discoveries for ten years. Ms. Kreitzer noted that the royalty would apply to discoveries in the Cook Inlet sedimentary basin. If a non-producing, non-unitized lease is involved, the owner could apply for first discovery (one per lease). Senator Sharp voiced his understanding that all production from the lease, regardless of the number of wells, would be subject to the 5 percent royalty. In response to a question from Senator Sharp concerning the number of leases involved, Ms. Kreitzer directed attention to backup materials (copies on file in the original Senate Finance Committee file for SB 112) and referenced a list of leases as well as a legal decision outlining problems with the previous program. Discussion followed regarding the proposed royalty program and the existing exploration incentive credit. Ms. Kreitzer noted that the exploration license is separate and unrelated to discovery royalty credits. One working under an exploration license could apply for a discovery royalty. Ms. Kreitzer next spoke to situations surrounding earlier passage of the exploration license program. She voiced her understanding that regulations for the program were only recently promulgated by the department. Senator Sharp asked if the proposed bill would allow one to pyramid discovery benefits or exploration credits to where the "state would be receiving less than a minimum of 5 percent on oil production." Ms. Kreitzer responded that while that is not the intent of the proposed legislation, she would review the situation to determine whether it is a possibility and whether there is need for limiting language. END: SFC-96, #52, Side 1 BEGIN: SFC-96, #52, Side 2 Senator Sharp directed attention to page 3, line 25, and expressed need for clarification of new language commencing there and continuing to the next page. Ms. Kreitzer asked if it was the intent of the committee that the bill not allow opportunity for one to apply under more than one program, resulting in more than a 5 percent royalty reduction. Senator Sharp again voiced concern regarding opportunity, through the proposed bill in combination with other programs, for the state to receive less than the 5 percent minimum. Ms. Kreitzer said she did not know whether bill language needed to be clarified to preclude that opportunity. Co-chairman Halford acknowledged need to answer that question and directed that the bill be held in committee pending receipt of additional information.