SB 309-GAS EXPLORATION\DEVELOPMENT TAX CREDIT  4:20:46 PM CO-CHAIR WIELECHOWSKI announced SB 309 to be up for consideration. 4:20:53 PM MIKE PAWLOWSKI, Staff to Senator McGuire, clarified that the legislation was offered at the request of the Senate Energy Committee and Senator McGuire. He started off on the incentive sheet they were just working off of. SB 309 deals with the area under the exploration tax credit in AS 43.20.043, which is a tax credit that specific to below the 68th parallel. It cannot be taken in conjunction with other credits or royalty modifications. So, it's specific to exploration within the Cook Inlet or south of the 68th parallel and is not stackable with the other credits. He explained that SB 309 makes substantive changes to the existing credit on page 3, line 25, that gets towards the NDR Cook Inlet study and the recent Petro Technical Resources assessment that the utilities prepared. He explained that one of the principles underlying SB 309 is that the best place to look for gas is probably within a gas field. In that the old exploration incentive tax credit had to be on land that had not been under production or had not been explored for, this actually frees it up so that wells that are drilled within an existing field can qualify for this incentive as well. The incentive is further modified on page 2, lines 6-18, where new language was added that increases the credit from 10 percent to 25 percent. This credit is against corporate income tax and is not against production taxes. MR. PAWLOWSKI said the third substantive change is on page 3, lines 10-20. He explained that originally this credit was only applicable against 50 percent of taxpayer's corporate income tax obligation and SB 309 removes that 50 percent cap and allows the credit to be claimed against the total tax liability. Finally, he said, Sections 7 and 8 extend the sunset. This particular exploration incentive tax credit is set to expire in 2013 and the bill extends it to 2020 with a transitional sunset to 2024 for any carry-forward credit against a future tax obligation. 4:24:40 PM SENATOR HUGGINS asked what makes him think these incentives will have an effect. MR. PAWLOWSKI answered that the issue in Cook Inlet is related to the production tax, which isn't very big. On the other hand, corporations that are operating in Cook Inlet might have substantial corporate income tax; so designing this tax credit to apply against that tax exclusively provides a tool that might work for a corporation that might not want to use one of the other credits. Further, allowing development of an existing field rather than looking outside of the existing fields really is what gets to the heart of the bill because that is where gas is likely to be found in the near term. CO-CHAIR WIELECHOWSKI asked why he needs six lines on page 2, lines 13-18 rather than just changing the 10 to a 25. MR. PAWLOWSKI answered that the language has to be mirrored from lines 4-9 in transitioning from the original 10 percent credit to 25 percent credit. CO-CHAIR WIELECHOWSKI asked what Section 2 does. MS. DAVIS, Deputy Commissioner, Department of Revenue (DOR), explained that Section 2 is simply trying to accommodate the split in the two different tax years, pre-2010 and post-2010 era. One of the things that is sort of hidden is you've got the split of the credit being for capital investment - taxpayer's qualified capital investment and qualified services, both of which are defined at the back of this tax section. 4:29:37 PM CO-CHAIR WIELECHOWSKI asked why "reserves" is changed to "wells" on line 29. MS. DAVIS answered that this happened before she became associated with the bill, but one of the attempts was made that relates to an effort to change the credit from one that is success oriented to one that gave a credit for the action of drilling the well and doing the exploration regardless of whether they ended up with a successful commercial producing gas well. They are moving away from reserves to simply the well being drilled. MR. PAWLOWSKI said his understanding is that clerically reserves are produced, but it is a well that actually produces gas. The language was trying to get towards that concept, as well as get away from the success concept. MS. DAVIS said she understood that Legislative Legal was trying to remove "per" from wherever they see it. That was the line 7 change and then line 8 removes the 50 percent cap of the income tax liability. So, now this credit can draw down the income tax liability entirely. CO-CHAIR WIELECHOWSKI asked if a producer produces in Cook Inlet and also has exploration on the North Slope, is there is a way of writing off these taxes on North Slope production. MS. DAVIS answered yes; under the corporate income tax they do not look at different parts of the state; it's all combined. 4:31:41 PM MS. DAVIS said deleting the language in Section 4 simplifies the concept that a taxpayer is not entitled to a credit for capital expenditures or qualified services made for activities related to gas on the North Slope. The original draft specifically excluded gas from the North Slope going to Valdez, which seemed to suggest that gas from the North Slope going to Canada was okay. It became more problematic to fix it than to eliminate it. CO-CHAIR WIELECHOWSKI asked if this whole bill only applies to south of 68 degrees. MS. DAVIS answered that is correct. CO-CHAIR WIELECHOWSKI asked if that includes Gubik. MR. BANKS answered that Gubik is significantly north of the 68th parallel. CO-CHAIR WIELECHOWSKI asked if any significant development or exploration going on south of 68 degrees. MR. BANKS answered that he knew of proposals for exploration activities in the Yukon region. MS. DAVIS went to section 5 that adds language that deals with a failure leg. It adds "if the exploration and development activity touch on gas reserves regardless of whether there has been commercial production in the area" - in other words they can go back into a previously explored area - "or whether the exploration and development activity results in the production of a well, gas or well not capable of commercial production" - meaning that they could end up having a mediocre well and it could still be covered. Because of the use of the phrase "gas reserve" throughout, from the administration's stand point, they will probably have to lean heavily on DNR, because she is left with the impression that if a rank wildcat-type gas exploration well has no indication of gas reserves and they drill a dry hole, the bill and the original statute is written such that they are not accessing or touching gas reserves. So, in that one instance this bill would not seem to apply. 4:35:43 PM She said that section 5 also defines what is considered to be the qualified capital investment. There is concern about including "topping plant" in the list of properties breakdown within (c). That was cleaned up because that is a crude oil process for refining and it simply doesn't belong in a gas bill. Concern was also expressed about processing units and whether that included an LNG plant. Technically from an engineering standpoint it would, and so the House cleaned that up by re- referencing that as gas processing and gas treatment plants (both downstream and upstream gas processing that would be normal things), but excluding LNG or other manufacturing plants. Another concern was about a power plant that powered Southcentral being subsidized by the corporate income tax credit. So, that was limited to power plants necessary for field operation. 4:37:15 PM MS. DAVIS said Section 6 clarifies when the timing of the credit is being filed that was missing from the original section. Sections 7 and 8 clean up the last dates the corporate income tax credits can be used from 2017 to 2024 and from 2013 to 2020 (for the credit expiration). She said one question was raised on HB 229 about whether this credit could be used in lieu of the other credits. And she made a misstatement there. When she read the current law, AS 43.20.043(g) it states "a taxpayer who obtains a credit under this section may not claim a tax credit or royalty modification provided under any other title." That begs the question that since this is contained in AS 43.20, and since the production tax is in AS 43.55, technically it is not in another title. She didn't think the drafter intended to alter the assumption that this is not an additive credit and so "this or any other title" was inserted. And likewise for the benefit of the taxpayer, the second line "however a taxpayer may at the taxpayer's election forego a credit under this section in order to continue to qualify for a credit provided for in another title" was inserted. 4:39:44 PM CO-CHAIR WIELECHOWSKI asked if the administration has a position on the bill. MS. DAVIS replied that she didn't know. 4:40:16 PM KAREY LOCKHART, Production Manager, Alaska Operations, Marathon Oil Corporation, said Marathon's operations are limited to Cook Inlet and they have been operating there for over 55 years. Marathon sells 87 mmcf/day to all of the current markets available to them including the utilities, Tesoro, the Department of Defense, and the LNG plant that is co-owned with ConocoPhillips. She explained that in 2003 several bills were passed directing the state to provide incentives for new exploration and development activities. Marathon was particularly interested in HB 61, which was intended to incentivize exploration and development of natural gas reserves in Cook Inlet. Regarding SB 309, she said, one might ask the need to provide incentives for natural gas development in Cook Inlet and the answer is found by considering the long-term decline in natural gas reserves and deliverability which Cook Inlet has experienced. What must be addressed is whether there is currently sufficient exploration development activity to address such decline and reserves and deliverability not just ask simply if Cook Inlet is running out of gas. At the current level of activity, it is unlikely that Cook Inlet reserve additions will replace annual production on a long-term ongoing basis. This is the key. Such natural gas reserves and deliverability are at risk for continued decline resulting in exposure to unmet utility needs which would impact everyone. The lack of activity is an artifact of historic oversupply of natural gas. With prices well below Lower 48 index prices create a lack of incentive for additional drilling and further regulatory processes and deterioration in market availability have added to project uncertainty. The project economics and market uncertainties make it difficult for projects to compete effectively for finite money. 4:42:38 PM MS. LOCKHART asked what can be done to ensure the reliability, and said the answer is not simple, and includes several things that are being discussed today - storage, market access, uncertainty and economic projects. Alaska projects are not considered solely on their absolute merits. They are compared on a relative scale in comparison to other world-wide opportunities in which companies such as Marathon may invest. SB 309 intends to level the playing field of investment opportunities around the world. It is one part of a three-part puzzle that needs to be fixed in order to ensure natural gas reliability. She reiterated that in order to qualify for this investment tax credit, the producer must make capital investments adding to some level of value back to the state and industry just to cross the value chain, which is necessary to meet the overall deliverability needs of Southcentral. 4:44:06 PM MARK LAND, Executive Vice President, Land and Administration, Renaissance Alaska, LLC, and Vice President, Land and Business Development, Buccaneer Energy Limited Alaska, said he had prepared remarks specifically related to an amendment that he heard was going to be added to SB 309 related to the repeal of the future spend requirements under the existing tax credits. CO-CHAIR WIELECHOWSKI said the amendment hadn't been introduced yet, but he could still comment on it. MR. LAND said Renaissance is headquartered in Houston, Texas, and Buccaneer is a subsidiary of Buccaneer Energy Limited, a publicly traded company in Australia with an operating office in Houston. Renaissance was formed in November 2006 and completed the initial funding of a business plan that solely focuses on growth in Alaska, in particular Umiat Oil Field on the North Slope. Buccaneer Alaska is a newly formed subsidiary of Buccaneer Energy Limited and was just formed last week to solely focus on growth in Alaska, particularly oil and gas opportunities in Cook Inlet. They have over 80 years of experience worldwide. The team members have identified, captured funding, and developed oil and gas projects resulting in cumulative recoverable reserves of over 1 billion barrels equivalent. Since its formation, Renaissance has acquired BLM and state oil and gas leases on 19,000 acres located on the Umiat Oil Field, the National Petroleum Reserve and the Gubik Gas Field on the North Slope. Buccaneer has entered into a custom sale agreement with Stellar Oil and Gas to acquire 58,000 acres located in the Cook Inlet and Kenai Peninsula. Since 2006 Renaissance has spent in excess of $40 million completing exploration evaluation operations in the state. A significant amount of these funds were focused on evaluating the existing oil field at Umiat with a modern 3-D seismic survey. The tax credit under ACES is a significant reason why Renaissance remains in Alaska, he said, and they believe the availability of those credits will play a critical role in attracting the required investment to develop the Umiat Oil Field. The tax credits are also a significant reason for the entry of Buccaneer into the Cook Inlet. To date, Renaissance has applied for a total of $19.2 million in tax credits and has received $1.3 million from the state of Alaska, $7.45 million from the North Slope tax payers in the sale of the certificate, and has approximately $7.6 million in certificates that they have been unable to monetize. MR. LAND repeated that Umiat is a known oil accumulation with potential near-term development. It has real potential and is one of the best opportunities to supply up to 50,000 barrels per day to TAPS in the near term. Based on the work completed by Renaissance and the state on the road to these resources, they believe they are on a path to commercializing this gas. He said it is common for these types of developments to have a two-to-three lull in spending as they incur pre-engineering and permitting of the project. In summary, they both support the increased access, the capital credits for the new explorers, the repeal of AS 43.55.028 (e)(2)(3) as set out in the amendment to Section 8 of SB 309. They support the repeal that provides greater certainty for new investors in Alaska, and levels the playing field between new and existing operators in Alaska and eliminates the unfair double standard that they believe exists with the North Slope producers. 4:49:49 PM STACY SHUBERT, Director, Intergovernmental Affairs, Mayor Sullivan, Anchorage, said she was testifying in support of SB 309 at the request of Mayor Dan Sullivan. She said the Municipality of Anchorage remains concerned about the declining production of natural gas in the Cook Inlet specifically as it relates to decreased deliverability through the gas system. One of the first orders of business the Mayor acted on after taking office was to create an Energy Task Force to address the serious energy issues Railbelt consumers are faced with today. These deliverability challenges will escalate in the next one to five years, and if not addressed could result in rolling black outs or worse. Both the Task Force and the Mayor applaud the legislature's efforts to address these critical pieces of legislation that address both incentives for storage and natural gas exploration and production. The mayor also acknowledges the work of the Railbelt utilities who have been working with the administration on the Energy Watch Program, a green, yellow, red system that informs customers to adjust their behavior in the event of an impending energy crisis. "Conservation can be a critical component that helps us to help ourselves in the event of an immediate threatened energy crisis," she said. In 2009 she said Anchorage almost experienced a catastrophic event, and that is why the Mayor asked her to testify today in support of the concepts proposed in SB 309 and HB 280, the Cook Inlet Recovery Act that supports storage efforts. Gas storage is the key to smoothing out the challenges posed by deliverability peaks on cold winter days. 4:52:10 PM CO-CHAIR WIELECHOWSKI closed public testimony and set SB 309 aside.