Legislature(2003 - 2004)

05/18/2003 11:15 AM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB 185-ROYALTY REDUCTION ON CERTAIN OIL/TAX CRED                                                                              
[Contains discussion  of HB  198, which was  included in  the new                                                               
House committee substitute]                                                                                                     
Number 0079                                                                                                                     
CHAIR KOHRING  brought before  the committee  CS FOR  SENATE BILL                                                               
NO. 185(FIN),  "An Act  providing for a  reduction of  royalty on                                                               
certain oil  produced from Cook  Inlet submerged land, and  for a                                                               
credit  for  certain exploration  expenses  against  oil and  gas                                                               
properties production taxes on oil  and gas produced from a lease                                                               
or property in the state."                                                                                                      
CHAIR  KOHRING requested  a motion  to adopt  the proposed  House                                                               
committee substitute (HCS).                                                                                                     
[There was  a motion to  adopt Version  U, the version  passed by                                                               
the Senate previously.]                                                                                                         
The committee  took an at-ease from  11:28 a.m. to 11:29  a.m. in                                                               
order to distribute copies of Version X.                                                                                        
Number 0132                                                                                                                     
REPRESENTATIVE FATE moved to adopt  the proposed HCS, Version 23-                                                               
LS0926\X, Chenoweth,  5/17/03, as a  work draft.  There  being no                                                               
objection, Version X was before the committee.                                                                                  
CHAIR  KOHRING explained  that Version  X  includes the  original                                                               
HB 198, which  relates to platform  royalty-reduction provisions;                                                               
the governor's  tax-severance credit provisions that  were put in                                                               
on  the  Senate  side;  and   new  amendments  requested  by  the                                                               
Number 0224                                                                                                                     
The  committee took  an at-ease  at 11:30  a.m. that  lasted less                                                               
than a minute.                                                                                                                  
CHAIR   KOHRING  explained   that   rather   than  dealing   with                                                               
amendments, he'd rolled  the changes into one package.   He asked                                                               
that the sponsor provide details.                                                                                               
Number 0263                                                                                                                     
SENATOR  THOMAS WAGONER,  Alaska  State  Legislature, sponsor  of                                                               
SB 185, thanked Chair Kohring for his  work on the bill.  He then                                                               
told members  SB 185 provides  for reduction of royalty  [on] oil                                                               
produced in certain Cook Inlet  fields and platforms as they near                                                               
the  end  of their  production  capability.    The intent  is  to                                                               
provide a  monetary incentive  in the form  of royalty  relief to                                                               
maximize production from  oil fields and extend  the longevity of                                                               
Cook  Inlet oil  platforms; in  return, there  will be  continued                                                               
employment in the  area, rather than loss of jobs  because of the                                                               
abandonment of those fields.   Senator Wagoner said that, to him,                                                               
this  is  about  saving  onshore  and  offshore  jobs,  including                                                               
maintenance  and  operations,  if  only  for a  few  years.    He                                                               
stressed the importance of this to the community in Kenai.                                                                      
SENATOR WAGONER  explained that the bill  also offers exploration                                                               
severance-tax  credits  to explorers  for  work  performed on  or                                                               
after July 1, 2003, and before  July 1, 2007.  Presently, maximum                                                               
tax credits for  exploration in Alaska result in a  cost of about                                                               
65 cents  per dollar, which  compares poorly with the  credits of                                                               
Northwest  Territories, Alaska's  nearest  competitor in  Canada,                                                               
where the cost is 10 cents [per dollar].  He told members:                                                                      
     Alaska  is  at the  bottom  of  the  list in  terms  of                                                                    
     exploration credits;  basically, the world's  passed us                                                                    
     by.   And  to  catch  up with  that,  the governor  has                                                                    
     offered  this amendment  to the  bill to  give the  ...                                                                    
     exploration  credits.   This bill  will result  in some                                                                    
     cases  in a  20 percent  tax  credit ...  for any  hole                                                                    
     that's drilled  in a  radius from  an existing  well, 3                                                                    
     miles  from  that well  out  to  25  miles.   Any  well                                                                    
     drilled in a radius 25  miles from an existing well and                                                                    
     further out  will get a  40 percent tax  credit; that's                                                                    
     very  substantial.   And that  credit  will be  applied                                                                    
     against severance  taxes and  would reduce the  cost in                                                                    
     Alaska to some 39 cents.                                                                                                   
     That'd put us  in about the mid-range  again, and being                                                                    
     in the mid-range and being  in the United States, being                                                                    
     a stable  entity, having stable  taxes, should  ... put                                                                    
     us  back  in  good  stead for  the  oil  companies  for                                                                    
     exploration and drilling.                                                                                                  
Number 0576                                                                                                                     
REPRESENTATIVE  HOLM surmised  that Section  3 is  the governor's                                                               
proposed language.                                                                                                              
SENATOR WAGONER affirmed that.                                                                                                  
REPRESENTATIVE  HOLM   asked,  when   moving  out   farther  from                                                               
established fields, what happens when there are adjacent fields.                                                                
REPRESENTATIVE ROKEBERG suggested those are units, not "fields."                                                                
SENATOR WAGONER agreed and said,  "The specific thing is the well                                                               
- out from an existing well."                                                                                                   
AN UNIDENTIFIED SPEAKER said, "Or unit - a lease unit."                                                                         
Number 0651                                                                                                                     
REPRESENTATIVE  ROKEBERG asked  Senator  Wagoner  to explain  the                                                               
differences  between  [CSSB  185(FIN),  labeled  Version  U]  and                                                               
Version X.                                                                                                                      
The committee took an at-ease from 11:34 a.m. to 11:36 a.m.                                                                     
Number 0673                                                                                                                     
CHAIR KOHRING brought attention to  two additional lines that had                                                               
been inserted in  Version X, page 7,  lines 21 and 27.   He asked                                                               
whether anyone wanted an explanation.                                                                                           
REPRESENTATIVE ROKEBERG  asked whether  it narrows  the timeframe                                                               
and sets the timeframe for applying for the credit.                                                                             
CHAIR KOHRING affirmed that.  He then opened the public hearing.                                                                
Number 0745                                                                                                                     
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources (DNR),  said he  believed the  legislation had                                                               
been  accurately summarized,  but emphasized  that there  are two                                                               
significantly different portions to  the bill with very different                                                               
purposes.     The   first   looks  at   the   aging  Cook   Inlet                                                               
infrastructure  and platforms,  providing royalty  relief modeled                                                               
on  when   operating  costs  exceed  the   profitability  of  the                                                               
platform; he  mentioned a  $20 netback oil  price.   He explained                                                               
that  this was  modeled  in  clusters or  groups  for Cook  Inlet                                                               
platforms.   It triggers automatic  royalty relief:   rather than                                                               
having  to go  to  an  application, it  drops  the  royalty to  5                                                               
percent,  with the  goal of  extending  the platform  life up  to                                                               
perhaps 14 months' additional time.                                                                                             
MR. MYERS noted  that in addition to the  purpose of "incremental                                                               
oil   production,"  this   will  maintain   intact  the   inlet's                                                               
infrastructure.  He  explained that as platforms  are yanked out,                                                               
the use  of the  infrastructure by  the remaining  platforms goes                                                               
up;  this  increases  operating  costs,  and  it  may  accelerate                                                               
abandonment of the offshore production,  perhaps prematurely.  He                                                               
told the committee:                                                                                                             
     So, by reducing  royalty ... we believe we  can have an                                                                    
     effect  on  extending  the  life   of  the  Cook  Inlet                                                                    
     platforms in  general.  And  on specific  platforms, by                                                                    
     triggering royalty  relief slightly  ahead of  ... that                                                                    
     operating-costs-exceeding-profits    point,   we    can                                                                    
     hopefully   stimulate    additional   exploration   and                                                                    
     development off the platforms.                                                                                             
MR.  MYERS  concluded   the  "platform"  part  of   the  bill  by                                                               
explaining that  the platforms are  clustered into  three groups,                                                               
based  on their  operating costs  and reservoir  characteristics;                                                               
this is fairly easy to quantify  because there are about 30 years                                                               
of production data  for most of these platforms.   He offered his                                                               
belief  that   this  has  been  modeled   reasonably  accurately.                                                               
Furthermore, if production increases  from these platforms beyond                                                               
certain thresholds,  the royalty rate  goes back up  gradually to                                                               
the   original  12.5   percent;   this   provides  some   "upside                                                               
protection" for the state as well.                                                                                              
Number 0906                                                                                                                     
MR.  MYERS explained  that  the  second part  of  the  bill is  a                                                               
"stimulus for  exploration" credit.   Noting that  the Department                                                               
of  Revenue worked  extensively on  these credits,  he said  this                                                               
credit is  for deposits  that haven't yet  been discovered.   The                                                               
exploration must occur  outside of [existing] oil  and gas units.                                                               
He  explained  that this  bill  isn't  intended to  "incentivize"                                                               
activity  within   the  units,  and  said   units  generally  are                                                               
aggregations of  leases that are  in production.  For  "leases in                                                               
production  with  a  planned development,"  he  said  exploration                                                               
inside  that  unit boundary  does  not  receive the  credit,  but                                                               
outside it does.   If it's more than three miles  from a well, it                                                               
would receive a 20 percent credit;  if less than three miles from                                                               
a well, it would receive no credit.  He told members:                                                                           
     With the  exception of  certain timing  restrictions on                                                                    
     wells, ...  the amendment to  the bill that you  see on                                                                    
     page 7, ... [lines] 3 and  4, says that two cases where                                                                    
     wells really  aren't considered  wells for  purposes of                                                                    
     [the] three-mile limit.  The  first is that if the well                                                                    
     is less than 150 days old,  it doesn't count as a well.                                                                    
     And  that,  I think,  allows  for  two purposes.    One                                                                    
     purpose is, someone  goes out and explores  [and] a ...                                                                    
     second  company  is  exploring  nearby  to  them;  both                                                                    
     companies  would be  eligible  for  the credit  because                                                                    
     you'd have to base  that well's existence, without this                                                                    
     kind  of language,  on the  first  well to  spud or  to                                                                    
     start drilling.   The  second part  is, ...  under this                                                                    
     kind  of credit,  delineation wells  of an  exploration                                                                    
     prospect would qualify as well.                                                                                            
MR. MYERS said  the second part is that  15-year-old wells aren't                                                               
considered  wells for  this  purpose.   He  remarked, "The  logic                                                               
there, I guess, is to allow the  credit to be used in areas where                                                               
earlier  exploration  occurred  but   there  hasn't  been  recent                                                               
exploration."  He said that is the major change to the bill.                                                                    
Number 1057                                                                                                                     
MR. MYERS  noted another major  issue:   when DNR gets  the data,                                                               
there is a  six-month window during which the  company can decide                                                               
whether  to take  the credit.   If  it doesn't  take the  credit,                                                               
there is  no obligation to  give the data to  DNR to use;  if the                                                               
company uses the credit, it must  give the data to DNR within six                                                               
months of  completion of the  data.  This broad-based  credit for                                                               
exploration   drilling,    particularly   away    from   existing                                                               
infrastructure,  is for  costs  incurred in  the  early parts  of                                                               
exploration:    the drilling  of  the  well; the  first,  initial                                                               
logging  of  the well;  and  certain  costs incurred  because  of                                                               
drilling.   However,  it doesn't  allow for  costs incurred  from                                                               
testing  a well.   "Again,  basically, you're  trying to  get the                                                               
company out  there," he  told members.   Offering  his experience                                                               
that once  there is success  in exploration, a company  will test                                                               
the  well, Mr.  Myers said  the state  doesn't need  to subsidize                                                               
that activity.                                                                                                                  
Number 1124                                                                                                                     
MR. MYERS  specified that this  bill applies equally  to private,                                                               
state,  and federal  lands.    Finally, it  allows  a 40  percent                                                               
credit  for seismic  data  that is  shot outside  of  units.   He                                                               
     One  of  the  benefits  of the  data,  in  addition  to                                                                    
     spurring the explorer to shooting  that data - or ... a                                                                    
     seismic company  to shoot it  "on spec" - is  that that                                                                    
     data  becomes public  in  ten years.  ...  And I  think                                                                    
     that's a  very important  concept in  this bill.   It's                                                                    
     been one  of our issues  with new companies  coming up,                                                                    
     is it's very  hard to get a hold of  seismic data.  Ten                                                                    
     years, I think, allows a  long period of protection for                                                                    
     the initial investors in that  seismic data, but at the                                                                    
     ten-year  time point,  the data  still  has some  value                                                                    
     It  also [corresponds]  to the  longest  lease term  we                                                                    
     have.  So  you'd be fully protected ... at  or near the                                                                    
     time of  leasing, for  the entire  time you  held those                                                                    
     leases.   And another  company with  surrounding leases                                                                    
     couldn't ... use that data ... that you had paid for.                                                                      
Number 1202                                                                                                                     
MR. MYERS  summarized by saying  there are two  distinct programs                                                               
under the bill.   Referring to DNR's fiscal note,  he pointed out                                                               
that  it is  the same  as  for [HB]  185 and  just addresses  the                                                               
platform parts of  the bill, whereas the one  from the Department                                                               
of  Revenue  addresses  fiscal impacts  from  the  severance  tax                                                               
incentive.   He  urged members  to get  a more  complete briefing                                                               
from the Department of Revenue on that second part.                                                                             
Number 1237                                                                                                                     
REPRESENTATIVE   ROKEBERG  referred   to  Representative   Holm's                                                               
earlier  questions and  asked what  happens when  multiple units,                                                               
such as  at Prudhoe Bay,  are "bounded  together."  He  asked how                                                               
that boundary is  accounted for if there are  multiple units that                                                               
may or may not be contiguous.                                                                                                   
MR. MYERS answered:                                                                                                             
     Basically,  it uses  the outside  boundary of  the unit                                                                    
     ... under a  plan of development as of  a certain date.                                                                    
     So  ...  the  units  have  a  geographically  described                                                                    
     outside  boundary,   normally  referring  to   a  lease                                                                    
     boundary, sometimes a  segregated part of a  lease.  So                                                                    
     you'd  be 25  miles  from the  aggregate  of all  those                                                                    
     units that have a plan of development.                                                                                     
REPRESENTATIVE ROKEBERG surmised that this  must be 25 miles away                                                               
from any unit, then.                                                                                                            
MR.  MYERS said  that  is  for the  40  percent  credit, for  the                                                               
additional  20  percent; it  isn't  the  case  for the  first  20                                                               
REPRESENTATIVE ROKEBERG asked, "It's not  less than 25 miles from                                                               
the  outer boundary;  is  that because  if it  was  more than  25                                                               
miles,  we'd be  getting in  the area  of the  exploration credit                                                               
that already exists?  Or what's  the reason there?"  He specified                                                               
that he was asking about the 40 percent credit.                                                                                 
MR. MYERS responded that closer  than 25 miles, the economics are                                                               
clearly  better;  there's  more  incentive naturally  to  do  it.                                                               
Also, 25  miles is  about the distance  that untreated  oil, gas,                                                               
and  water  mixed  together  can be  sent  through  a  production                                                               
facility currently  on the North Slope.   So [the 25  miles] is a                                                               
rough  number   that  approximately  represents  the   change  in                                                               
economics  - from  using  the  shared-facility infrastructure  to                                                               
having  to  build   at  least  partial  facilities   out  on  the                                                               
exploration  site.   That  changes  the  size  and scope  of  the                                                               
discovery and  its economics quite  dramatically.  He  noted that                                                               
the unit is where the production facilities reside.                                                                             
Number 1389                                                                                                                     
REPRESENTATIVE ROKEBERG offered his  understanding, then, that if                                                               
it  is less  than 3  miles from  the bottom  hole, there  is zero                                                               
credit.  From 3  to 25 miles, there is a 20  percent credit.  And                                                               
beyond 25 miles, there is a 40 percent credit.                                                                                  
MR. MYERS affirmed  that.  He added that the  wells are described                                                               
as wells less than 15 years old but more than 150 days old.                                                                     
REPRESENTATIVE ROKEBERG asked  whether an oil or gas  well in the                                                               
Copper  River  basin  automatically  would  qualify  for  the  40                                                               
percent credit because there are no units there.                                                                                
MR.  MYERS answered  that  there are  no wells  or  units in  the                                                               
Copper River basin; therefore, he  affirmed that well and seismic                                                               
data  in the  Copper River  basin would  allow for  a 40  percent                                                               
REPRESENTATIVE ROKEBERG  asked about the proposed  exploration in                                                               
Minto Flats.                                                                                                                    
MR. MYERS said that's an  exploration license, which is different                                                               
from a unit.                                                                                                                    
Number 1503                                                                                                                     
STEVE  PORTER,   Deputy  Commissioner,  Department   of  Revenue,                                                               
informed members that also available  on teleconference to answer                                                               
questions was Dan Dickinson, who'd worked on the fiscal note.                                                                   
REPRESENTATIVE  ROKEBERG referred  to  page 8  [lines 15-16]  and                                                               
said the production  tax credit certificate is for  the amount of                                                               
credit  allowed  against  production  taxes.   He  asked  whether                                                               
"production taxes" means severance taxes or something else.                                                                     
MR. PORTER said it means severance taxes and nothing else.                                                                      
REPRESENTATIVE ROKEBERG  asked about  impacts and noted  that the                                                               
bill mentions the National Petroleum  Reserve-Alaska (NPR-A).  He                                                               
said, "We  currently receive  little or nothing  in terms  of the                                                               
general  fund   in  NPR-A  monies   because  of   federal  impact                                                               
legislation and so forth, and state  statute."  He asked, "Are we                                                               
giving away nothing, or could  you explain that to the committee?                                                               
Are we  going to receive  anything from  NPR-A, even in  spite of                                                               
MR. PORTER  said he would ask  [Mr. Dickinson] to talk  in detail                                                               
about  this, but  answered  that there  are  basically three  tax                                                               
types  that [the  state] still  receives  from NPR-A.   He  said,                                                               
"You're  basically  looking  at  severance  taxes  and  corporate                                                               
income taxes  - and depending  on the size  of the field  that is                                                               
discovered,  those  can be  substantial  -  as well  as  property                                                               
[Mr. Dickinson was not available on teleconference.]                                                                            
Number 1617                                                                                                                     
REPRESENTATIVE  ROKEBERG referred  to severance  taxes and  asked                                                               
whether  there  is  minimum  production   required  in  order  to                                                               
MR. PORTER  answered that this  becomes an economic  limit factor                                                               
(ELF) issue.   He said that in a highly  prolific field, there is                                                               
an ELF of, say, 0.9, which  would be multiplied against the 12.25                                                               
or  15  percent.    In  a   field  with  many  wells  but  little                                                               
production, the ELF could be close to zero.                                                                                     
REPRESENTATIVE  ROKEBERG asked  about  Alpine  or Northstar,  for                                                               
MR. PORTER  answered that Alpine  actually pays a very  high ELF,                                                               
about  8.4 to  his recollection.   It's  very productive,  with a                                                               
small number of wells.                                                                                                          
Number 1683                                                                                                                     
REPRESENTATIVE ROKEBERG suggested  that there would need  to be a                                                               
relatively high  producing, commercialized  well for the  ELF and                                                               
the  credit to  kick  in.   He  proposed  that  if something  was                                                               
marginal,  it   perhaps  could  be  produced   and  yet  wouldn't                                                               
necessarily qualify  for the credit  unless it was  sufficient in                                                               
production to generate a qualification under the ELF.                                                                           
MR.  PORTER  referred to  the  exploration  tax credit  and  said                                                               
Section 3  [of the  bill] applies  to the  exploration well.   It                                                               
doesn't matter whether it is a dry  hole or a producing well.  It                                                               
is truly to provide an incentive for exploration.                                                                               
REPRESENTATIVE  ROKEBERG   asked,  "You  could  use   the  credit                                                               
generated  by the  dry hole  against other  income that  would be                                                               
under an ELF generation?"                                                                                                       
MR. PORTER said that is for the total severance tax liability.                                                                  
REPRESENTATIVE  ROKEBERG offered  his  understanding, then,  that                                                               
the quality of the new well is not in play here.                                                                                
MR. PORTER said that is correct.                                                                                                
REPRESENTATIVE ROKEBERG added that  this [assists if the company]                                                               
is paying other corporate taxes on production.                                                                                  
The committee took a very brief at-ease.                                                                                        
Number 1796                                                                                                                     
REPRESENTATIVE  ROKEBERG moved  to report  HCS CSSB  185 [Version                                                               
23-LS0926\X,   Chenoweth,   5/17/03]   out  of   committee   with                                                               
individual recommendations and the accompanying fiscal note(s).                                                                 
Number 1818                                                                                                                     
MR.  PORTER informed  members  that the  changes  [in Version  X]                                                               
don't  modify  the fiscal  notes.    He  clarified that  DNR  had                                                               
produced  the fiscal  note  for  Sections 1  and  2, whereas  the                                                               
Department  of   Revenue  had  produced   the  fiscal   note  for                                                               
Section 3.                                                                                                                      
Number 1836                                                                                                                     
CHAIR  KOHRING  asked whether  there  was  any objection  to  the                                                               
motion.    There  being  no  objection,  HCS  CSSB  185(O&G)  was                                                               
reported from the House Special Committee on Oil and Gas.                                                                       

Document Name Date/Time Subjects