SENATE BILL NO. 208 "An Act requiring the Department of Natural Resources to evaluate current incentives and recommend additional incentives that would increase gas exploration, development, and production in the Cook Inlet sedimentary basin; and requiring the Department of Natural Resources to evaluate the means by which the department may explore for, purchase, and sell natural gas from newly proved gas reserves in the Cook Inlet sedimentary basin." 9:28:46 AM SENATOR BILL WIELECHOWSKI, SPONSOR, introduced SB 208 to the committee: SB 208 calls on the departments of Natural Resources and Revenue to complete two tasks by December 1 of this year. The first is to evaluate the effectiveness of existing incentives designed to increase exploration for and production of natural gas in Cook Inlet. The second is to identify and evaluate additional steps the legislature could take to increase production of gas in Cook Inlet. It is well known that reserves of natural gas in Cook Inlet are declining. You have probably all seen this chart - known as the "waterfall chart" - which depicts a precipitous decline in the known reserves of Cook Inlet gas. The chart and testimony indicate that as early as 2012, homes and businesses in Southcentral Alaska could be without sufficient supplies of natural gas. Earlier this year, we received encouraging news about this looming gas shortage when DNR completed a new assessment of known, possible, and probably reserves in the Inlet. This review concluded that if sufficient investment in Cook Inlet exploration were made, supplies could last a great deal longer. While the new assessment provides welcome news, the challenge remains - What actions can and should the state take to encourage producers to invest more in the Inlet? Which incentives are likely to work and which simply transfer revenue from the state treasury to companies which may already have sufficient incentive to drill, given proper market conditions. Are there steps the state can take other than lowering tax rates or increasing credits which might have a greater effect on private sector behavior? This question is particularly compelling in light of the very modest tax rates and generous tax credits that producers in the Inlet already enjoy. The legislature has already gone to lengths to encourage more production in Cook Inlet. To what extent are these incentives working? This bill seeks to answer this question and others. For example, what are other jurisdictions doing to promote more investment? If the small size of the market in Alaska is an impediment to new exploration and production - which we have heard - are there steps the state can take to "enhance" the market to ensure that producers see a return on their investment in a reasonable timeframe? For instance, could the state commit to buying a percentage of newly proven reserves upfront so investors don't have to wait decades to reap the benefits of their investment? Earlier this session, you heard testimony that the state already reimburses companies for 45-65% of their exploration costs. Given this, how can the state partner more effectively with industry to ensure that the needs of Alaskans for a long-term, affordable and reliable source of gas are met? This bill calls for a quick analysis of these questions. It asks DNR and DOR to assess the effectiveness of existing fiscal inducements, propose new incentives it believes would be useful, and then look broadly at what other strategies the state might employ to make sure Alaskans down tumble over the cliff depicted in DNR's "waterfall chart." Most importantly, it calls for this work to be done expeditiously - by December 1 - so that the legislature can act swiftly next year once the foundation for a more informed decision has been laid. 9:32:14 AM KEVIN BANKS, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF NATURAL RESOURCES, explained that a couple months ago, the sponsor's staff asked if such a project was feasible and if it could be implemented in a short time. The department's first recommendation was to make the bill with an immediate effective date. He informed the committee that there was a firm already under contract by the department which might be able to undertake this task. He suggested that Gaffney Cline & Associates' contract could be modified to provide the information needed. 9:34:34 AM Co-Chair Stedman asked if there is any need to change the time constraint in order to meet the December 1 deadline. Mr. Banks thought the immediate effective date, along with using the existing contract, would work. Co-Chair Stedman spoke of a concern about making good public policy calls instead of reactionary calls regarding the natural gas supply in the Railbelt. He said that there are currently many bills that offer incentives, some of which seem to be a little "detached" from a public policy process, which would define the issue and target governmental action to solve the problem of running out of gas. He requested an opinion from Mr. Banks about finding a solution in Cook Inlet. Mr. Banks believed that most tax policy, with respect to incentives, either by reducing tax or by providing a credit is "like pushing a string". He further stated that there are contractual relationships with lessees that somewhat limit what the department can encourage producers to do. This bill asks the department to use creative thinking about whether the state can have a more active role in the market place, in exploration, and in the development of resources in the Cook Inlet. He maintained that it was worth examining the state's role using a measured approach. Co-Chair Stedman explained that Cook Inlet does not have a tax structure like the North Slope does. The credits have been increased and broadened in the past years. The legislature ensured that Cook Inlet was not impacted by ACES. There is no direct connection between the tax structure in the Arctic and in Cook Inlet. He reported a concern that the taxes in Cook Inlet were approaching zero. He stressed that he is encouraged by this legislation. 9:38:51 AM Mr. Banks said he would consider those comments as the department moves forward on the study, if it is the will of the legislature. Senator Huggins complimented the sponsor for the legislation. He questioned why it takes legislation to produce common sense action. He asked what the department would do if the bill did not exist. Mr. Banks reported on actions taken in the past. The department has tried to make sure the markets are sustained. There were discussions about the sale of royalty-in-kind gas. 9:40:41 AM Co-Chair Stedman asked if the study would include regulations and involve the Regulatory Commission of Alaska. Mr. Banks thought the instructions were broad enough to consider regulations. "The marketing of" allows for the inclusion of the Regulatory Commission of Alaska's involvement. Co-Chair Stedman suggested looking at a broader view of Cook Inlet. Mr. Banks agreed. 9:42:40 AM Co-Chair Stedman noted two fiscal notes; one by the Department of Natural Resources for $200,000 in general funds to hire outside consultants to complete the study, and a zero fiscal note by the Department of Revenue. Senator Wielechowski commented on the challenge of the issue. He agreed with Senator Huggins' comments. He thought the bill would help in the long term. 9:43:54 AM SB 208 was heard and HELD in Committee for further consideration.