Legislature(2009 - 2010)BARNES 124

03/15/2010 01:00 PM House RESOURCES

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* first hearing in first committee of referral
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-- Continued at 5:30 pm Today --
Heard & Held
<Bill Held Over from 03/12/10>
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 280(RES) Out of Committee
         HB 229-GAS EXPLORATION\DEVELOPMENT TAX CREDIT                                                                      
1:03:02 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that  the first  order of  business is                                                              
HOUSE  BILL   NO.  229,  "An   Act  amending  and   extending  the                                                              
exploration  and  development  incentive   tax  credit  under  the                                                              
Alaska  Net Income  Tax  Act for  operators  and working  interest                                                              
owners directly  engaged  in the exploration  for and  development                                                              
of gas  for delivery  and sale  from a  lease or  property in  the                                                              
state; providing  for an effective date by amending  the effective                                                              
date  for  sec.  2,  ch.  61,  SLA  2003;  and  providing  for  an                                                              
effective date."                                                                                                                
CO-CHAIR NEUMAN  moved to adopt the proposed  committee substitute                                                              
(CS)  for HB  229,  Version 26-LS0900\E,  Bullock,  2/18/10, as  a                                                              
work draft.                                                                                                                     
CO-CHAIR JOHNSON objected for discussion purposes.                                                                              
1:03:58 PM                                                                                                                    
REPRESENTATIVE  MIKE  CHENAULT,  Alaska State  Legislature,  prime                                                              
sponsor  of  HB  229,  paraphrased   from  the  following  written                                                              
sponsor statement [original punctuation provided]:                                                                              
     House Bill  229 amends and  extends the exploration  and                                                                   
     development  incentive tax  credit  that was  originally                                                                   
     enacted  in  the  23rd legislature  in  2003  as  [House                                                                   
     Bill]  61.   This tax  credit continues  to apply  under                                                                   
     the  Alaska  Net  Income  Tax   Act  for  operators  and                                                                   
     working   interest  owners   directly  engaged  in   the                                                                   
     exploration   for  and   development   of  natural   gas                                                                   
     primarily in the Cook Inlet area.                                                                                          
     To   more  strongly   encourage   companies  to   invest                                                                   
     additional capital  in exploring for and  developing new                                                                   
     natural  gas   reserves,  this  legislation   makes  the                                                                   
     following changes to current law:                                                                                          
        1. Increasing the amount of the credit from 10% to                                                                      
          25% of the amount of qualified capital investment                                                                     
          and qualified services spending.                                                                                      
        2. Removes the 50% limitation on the amount of                                                                          
          credits that can apply in a single year                                                                               
          increasing the "time-value of money" for the                                                                          
        3. Removes the "successful efforts" requirement that                                                                    
          disallows the credit for wells that are drilled,                                                                      
          with all the same costs, but end up being non-                                                                        
        4. Clarifies that the credits can be taken on a                                                                         
          current  tax return, on  a timely filed  tax return                                                                   
          or  on  a timely  filed  tax  return for  the  year                                                                   
          immediately   following  the  year   the  qualified                                                                   
          capital investment is made.                                                                                           
        5. Clarifies that the credits can be applied to a                                                                       
          gas reserve regardless of whether or not there                                                                        
         has been previous gas production in the area.                                                                          
        6. Clarifies that the credits do not apply to North                                                                     
          Slope gas that is brought into Southcentral.                                                                          
        7. Extends the sunset date of the investment tax                                                                        
          credit from January 1, 2013 to January 1, 2020.                                                                       
     This  legislation makes  no  changes  to definitions  of                                                                   
     qualified capital investment or qualified services.                                                                        
     Annual  natural gas  production and  supply in the  Cook                                                                   
     Inlet area  have been declining  for a number  of years.                                                                   
     During  the  same  time,  demand   has  been  increasing                                                                   
     steadily.   Therefore, a sharp  increase in  drilling to                                                                   
     find new reserves  is drastically needed.   The original                                                                   
     Investment  Tax Credit enacted  in 2003, while  modestly                                                                   
     successful  in stimulating  new  drilling,  needs to  be                                                                   
     made a  much more effective  incentive to developers  to                                                                   
     increase  capital spending  in  a large  manner.   These                                                                   
     changes will go a long way to achieving that goal.                                                                         
1:06:42 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  understood  that HB  229  is needed  to                                                              
increase exploration,  but asked why  it is necessary  to continue                                                              
giving  these tax breaks  to the  producers once  they have  found                                                              
the new gas.                                                                                                                    
REPRESENTATIVE CHENAULT  responded he  does not believe  there are                                                              
any  big  pockets  of  gas  left  in Cook  Inlet.    Most  of  the                                                              
remaining  gas is in  small pockets  that are  harder to  find and                                                              
require lateral drilling  or jack-up rigs.  This  gas is expensive                                                              
to  find, and  many  more dry  holes  are drilled  than  producing                                                              
holes.  He said  the bill is intended to encourage  exploration in                                                              
areas  that  have not  yet  been  drilled  and  to look  at  newer                                                              
drilling   technology  for   more  drilling   in  the   formations                                                              
currently producing gas.                                                                                                        
1:09:54 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  asked how  much credit  would be  given                                                              
under HB 229.                                                                                                                   
REPRESENTATIVE  CHENAULT  replied the  bill  would  change the  10                                                              
percent tax credit to a 25 percent tax credit.                                                                                  
1:11:31 PM                                                                                                                    
REPRESENTATIVE  SEATON recalled  that in  the past, testimony  has                                                              
indicated  that the  lack  of exploration  in  the  Cook Inlet  is                                                              
because the  Regulatory Commission  of Alaska  (RCA) has  kept the                                                              
price of  gas so low that  it is unprofitable to  explore further.                                                              
He understood that  recent gas finds were in  conjunction with oil                                                              
REPRESENTATIVE  CHENAULT  replied  that  while  he  could  address                                                              
this,  it would  be better  to have  the Cook  Inlet producers  to                                                              
speak the question.                                                                                                             
1:13:15 PM                                                                                                                    
REPRESENTATIVE  SEATON understood this  proposed tax  credit would                                                              
be written off against corporate tax instead of production tax.                                                                 
REPRESENTATIVE   CHENAULT   answered  yes,   capital   investment,                                                              
qualified services.                                                                                                             
REPRESENTATIVE SEATON,  in regard to  page 2, lines  4-9, surmised                                                              
that qualified  services  would include any  expenditure,  as well                                                              
as the drilling cost, that is made on any gas reserve.                                                                          
REPRESENTATIVE CHENAULT responded yes.                                                                                          
1:15:16 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  that  in the  Cook  Inlet basin  the                                                              
production tax  on oil is zero and  the gas tax is  extremely low.                                                              
He offered  his belief that there  are exploration tax  credits in                                                              
addition to  the zero  or low tax  rates.  He  said it  seems that                                                              
absorbing  a  25 percent  tax  credit  for qualified  services  is                                                              
making a  subsidy investment  in the  companies instead  of trying                                                              
to stimulate  a certain  behavior,  so he is  trying to  determine                                                              
how all of these inter-relate.                                                                                                  
REPRESENTATIVE  CHENAULT replied the  intention is to  incentivize                                                              
more  drilling.   The current  tax  credit system  does help,  but                                                              
drilling  is not happening  in Cook  Inlet.   He allowed  that one                                                              
reason why is  the low price for  the gas.  He related  that other                                                              
people have  stated it is hard  to get capital  investment dollars                                                              
when  competing   worldwide  for   money  because  the   basin  is                                                              
expensive to drill.                                                                                                             
1:17:56 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  noted that  House  Bill  61, the  bill                                                              
that HB  229 is  amending, called  for a report  on the  effect of                                                              
exploration and  development tax  credit no later  than 2008.   He                                                              
asked whether this report was completed.                                                                                        
REPRESENTATIVE  CHENAULT answered  he does  not know and  deferred                                                              
to the administration.                                                                                                          
REPRESENTATIVE GUTTENBERG  said he is asking the  question because                                                              
he is wondering  whether the report is the impetus  for increasing                                                              
the tax credit.                                                                                                                 
MARCIA  DAVIS, Deputy  Commissioner, Office  of the  Commissioner,                                                              
Department  of Revenue,  said  she believes  the  report has  been                                                              
done and will have it distributed to the members.                                                                               
1:20:42 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG inquired  what  qualifies as  qualified                                                              
services, qualified costs, and capital investments.                                                                             
MS.  DAVIS  responded  that  HB  229  does  not  modify  qualified                                                              
services.     According   to  statute,   qualified  services   are                                                              
expenditures  for  labor, seismic,  and  other services  that  are                                                              
directly  applicable to  the qualified  investment, and  qualified                                                              
investment  is addressed  by  HB  229.   However,  she is  puzzled                                                              
because  it  has  a  subsection   that  excludes  lease  operating                                                              
expenditures.   Clearly, the expenses  that should be  covered are                                                              
the labor  services involved  with leasing  and operating  a drill                                                              
rig,  building the  infrastructure,  such  as roads,  docks,  port                                                              
facilities, and  bringing in  and operating maintenance  equipment                                                              
and facilities,  maintenance camps,  and so  forth.  She  deferred                                                              
to  Robynn Wilson  as to  whether  the Department  of Revenue  has                                                              
interpreted  a definition  of  lease operating  expenditure  under                                                              
existing law.                                                                                                                   
ROBYNN  WILSON, Income  Audit Manager,  Tax Division-Income  Audit                                                              
Group,  Department of  Revenue, stated  she does  not believe  the                                                              
definition   of  lease   operating   expenditure   has  yet   been                                                              
interpreted by the department.                                                                                                  
1:22:28 PM                                                                                                                    
MS.  DAVIS said  her  reason for  asking  Ms.  Robynn Wilson  this                                                              
question  is that  lease operating  expenses  are generally  those                                                              
that are  charged back  to owners  and are  ordinary and  typical.                                                              
However,  this credit provision  is targeted  at new  development.                                                              
She explained  that development  happens in  phases:   the seismic                                                              
phase  involves   labor  and   possibly  some  qualified   capital                                                              
expenditure,  both of  which would  be covered;  if prospects  are                                                              
discovered,  the  next  phase  is   the  exploration  phase  which                                                              
involves costs for  exploratory wells, labor, waste  disposal, and                                                              
transport  where  there are  not  roads,  all  of which  would  be                                                              
covered;  the development  phase is the  major construction  phase                                                              
where the gathering  centers, compressors, and so  forth are built                                                              
for operating the  facility, but production of oil  or gas has not                                                              
yet been  produced for sale.   The qualified expenditures  in this                                                              
buildup are  what would be  targeted by  HB 229.   Once production                                                              
begins,  labor and  capital  investments  for maintenance  and  so                                                              
forth  fall under  what is  typically  called operating  expenses,                                                              
and she believes  that that is what this exclusion  is intended to                                                              
1:24:51 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG inquired whether  the state  has access                                                              
to  the seismic  work once  a well  is abandoned,  given that  the                                                              
seismic work is a qualified expense.                                                                                            
MS. DAVIS replied  that since these are state oil  and gas leases,                                                              
she is confident  the State of Alaska requires the  sharing of the                                                              
seismic  information.    She  deferred  to  Mr.  Kevin  Banks  for                                                              
confirmation of her answer.                                                                                                     
KEVIN  BANKS,  Director, Division  of  Oil  & Gas,  Department  of                                                              
Natural Resources,  said Ms.  Davis is correct.   When  seismic is                                                              
shot  over state  land,  whether it  is under  lease  or not,  the                                                              
State of  Alaska acquires the  seismic data.   The state  does not                                                              
receive the information  for seismic that is shot  over private or                                                              
federal land.                                                                                                                   
MS.  DAVIS added  that an  exploration incentive  credit is  built                                                              
into  the production  tax.   Production tax  is owed  on all  land                                                              
within state boundaries,  so private, state, and  federal land are                                                              
included.   A consequence  of accepting  that  credit is that  the                                                              
seismic  information must  be  shared with  the  State of  Alaska.                                                              
However, that would not be the structure under HB 229.                                                                          
1:27:03 PM                                                                                                                    
REPRESENTATIVE  SEATON asked whether  someone previously  claiming                                                              
a credit  can also receive a  credit for production  and operating                                                              
expenses under the provision on page 2, lines 6-9, Version E.                                                                   
MS.  DAVIS  deferred  an  answer  until she  receives  a  copy  of                                                              
Version E.                                                                                                                      
1:30:02 PM                                                                                                                    
REPRESENTATIVE  SEATON reiterated  his earlier question  regarding                                                              
the interaction of  the exploration tax credits in  Cook Inlet and                                                              
this qualified service tax credit against corporate income tax.                                                                 
MS. DAVIS  surmised Representative  Seaton is  asking how  the gas                                                              
exploration  and   development  tax  credit  under   AS  43.20.043                                                              
interfaces with the exploration incentive credit.                                                                               
REPRESENTATIVE  SEATON  responded   yes,  as  well  as  any  other                                                              
credits or deductions that would be allowed.                                                                                    
MS.  DAVIS  deferred an  answer  until  she  has talked  with  Ms.                                                              
Robynn Wilson because  there are two other bills  currently in the                                                              
legislature  that  propose  additional   Cook  Inlet-targeted  tax                                                              
credits against  the corporate  income tax.   On first  blush, the                                                              
credit  under HB  229 would  be  dominant and  applied before  any                                                              
other  credits  in this  chapter.    This  credit removes  the  50                                                              
percent cap, so  presumably if the credits exceeded  the corporate                                                              
income  tax  there   would  be  no  interaction   with  any  other                                                              
corporate  income  tax  credit.    To  the  extent  there  is  any                                                              
remaining  corporate income  tax liability,  the corporate  income                                                              
tax  payer would  then  drop  down the  list  to the  next  credit                                                              
available  and  apply the  amount  of  that credit  against  those                                                              
income taxes.   She  presumed the expenditure  could only  be used                                                              
once  should it  also qualify  elsewhere,  but she  would like  to                                                              
verify that with Ms. Robynn Wilson.                                                                                             
1:33:31 PM                                                                                                                    
REPRESENTATIVE   P.  WILSON   inquired  whether   it  is   a  good                                                              
probability that the producer would not have to pay any taxes.                                                                  
MS.  DAVIS replied  she must  answer  hypothetically because  each                                                              
taxpayer's information  is confidential.  She said  most taxpayers                                                              
in Cook  Inlet are smaller  companies targeting exploration  plays                                                              
that do not have  much ongoing production elsewhere  in the state.                                                              
These companies  may not  have a  significant amount of  corporate                                                              
income tax,  so the amount of  expenditures incurred on  the front                                                              
end associated  with seismic,  exploration, and development  would                                                              
be  expected  to  swamp  their  corporate  income  tax  liability.                                                              
However,  these  companies  are  relatively new  players  and  not                                                              
currently  contributing to  the state general  fund through  their                                                              
corporate  income   tax.    For   large  producers   with  ongoing                                                              
production  elsewhere  in  the  state,  the  proposed  Cook  Inlet                                                              
credits may  not significantly  dampen their  overall income  tax.                                                              
Thus, it  would depend on the  entity and would range  from wiping                                                              
out  the   corporate  income  tax   altogether  to   dampening  it                                                              
1:36:48 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  asked whether  HB 229  is enough  of an                                                              
incentive for companies that are not now exploring to start.                                                                    
MS.  DAVIS answered  that several  factors  affect investment  and                                                              
the bill  goes as far  as it can  to ensure that  corporate income                                                              
tax is  not a disincentive  and provides some financial  incentive                                                              
to  incur  costs and  move  forward.    However, the  bill  cannot                                                              
affect factors such as market prices.                                                                                           
1:38:06 PM                                                                                                                    
MS.  ROBYNN   WILSON,  in   response  to  Representative   Edgmon,                                                              
explained that  the Department of  Revenue calculates  the taxable                                                              
corporate  income on  a combined  basis that  includes the  income                                                              
for  the  whole corporate  group.    The  first question  is  what                                                              
amount  of  the   group's  activity  happened  in   Alaska  versus                                                              
everywhere else;  so, in effect,  the state  taxes a slice  of the                                                              
pie.  Of  that slice, it is  a graduated rate with a  top marginal                                                              
rate of 9.4 percent.                                                                                                            
1:40:07 PM                                                                                                                    
CARRI  LOCKHART,  Production Manager,  Marathon  Oil  Corporation,                                                              
spoke  in support of  HB 229  by paraphrasing  from the  following                                                              
written testimony [original punctuation provided]:                                                                              
     By  way of  background,  Marathon Oil  Company's  Alaska                                                                   
     operations  are   focused  on  natural   gas  production                                                                   
     operations,  limited  to  Cook  Inlet.    In  2009,  our                                                                   
     natural  gas  sales  from   Alaska  averaged  87  mmcf/d                                                                   
     [million cubic  feet per day].   We sold to  essentially                                                                   
     every natural  gas market available including  the local                                                                   
     utilities  - Enstar  and Chugach  Electric, Tesoro,  and                                                                   
     the  Department of Defense.   We  also provided  natural                                                                   
     gas   to   the   ConocoPhillips/Marathon    LNG   plant.                                                                   
     Marathon has  been in business  in AK for over  55 years                                                                   
     and  we remain  committed  to  serving the  natural  gas                                                                   
     needs   of   SouthCentral   AK   through   our   various                                                                   
     contractual commitments.                                                                                                   
     As you  are aware, in  2003 the Legislature  passed, and                                                                   
     the   Governor   signed  several   bills   directed   at                                                                   
     providing   incentives    for   new   exploration    and                                                                   
     development  activities.     Marathon  was  particularly                                                                   
     interested  in  House Bill  61,  which was  intended  to                                                                   
     incentivize the  exploration and development  of natural                                                                   
     gas  reserves  in  the  Cook  Inlet.    The  bill  under                                                                   
     consideration  by this  committee, HB  229, will  merely                                                                   
     strengthen  the incentives provided  for by the  earlier                                                                   
     One might ask  about the need to provide  incentives for                                                                   
     natural gas  development in the Cook Inlet.   The answer                                                                   
     to this question  is found by considering  the long-term                                                                   
     decline  in  natural  gas  reserves  and  deliverability                                                                   
     which  the Cook  Inlet has  experienced.   What must  be                                                                   
     addressed  is  whether  there  is  currently  sufficient                                                                   
     exploration  and development  activity  to address  such                                                                   
     decline in  reserves and deliverability, and  not simply                                                                   
     to ask  whether the  Cook Inlet is  running out  of gas.                                                                   
     At the current  minimal level of Cook Inlet  activity it                                                                   
     is  unlikely  that  Cook Inlet  reserve  additions  will                                                                   
     replace  annual  production   on  an  ongoing  long-term                                                                   
     basis.      As   such,   natural    gas   reserves   and                                                                   
     deliverability  are  at risk  for continued  decline  in                                                                   
     the  Cook Inlet,  resulting  in  the exposure  to  unmet                                                                   
     utility needs in the future.                                                                                               
1:42:28 PM                                                                                                                    
     The   lack   of   Cook   Inlet    activity   (especially                                                                   
     exploration) is  an artifact of the  historic oversupply                                                                   
     of natural  gas which  kept prices  well below  lower-48                                                                   
     indexed  prices,  creating   a  lack  of  incentive  for                                                                   
     additional   drilling.     Furthermore  the   regulatory                                                                   
     processes  and  deterioration   in  market  availability                                                                   
     have  added   to  project  uncertainty.     The  project                                                                   
     economics   and  market  uncertainties   have  made   it                                                                   
     difficult  for  projects  to  complete  effectively  for                                                                   
     finite funding.                                                                                                            
     So how will HB 229 help?                                                                                                   
     As  we   are  all   painfully  aware,  Alaskan   project                                                                   
     economics  are not considered  solely on their  absolute                                                                   
     merit.   They are also  scrutinized on a relative  scale                                                                   
     in  comparison  to  other   worldwide  opportunities  in                                                                   
     which  companies  such  as  Marathon may  invest.    The                                                                   
     intent  of HB  229 is to  help level  the playing  field                                                                   
     between   Alaskan   projects    and   other   investment                                                                   
     opportunities around the world.                                                                                            
     HB 229 is  intended to continue to provide  an incentive                                                                   
     to oil  and gas exploration  and development  activities                                                                   
     through  an  investment tax  credit.   You  should  have                                                                   
     before  you   the  committee   substitute  for   HB  229                                                                   
     (version  E).  Since  this is the  first hearing  for HB
     229, let  me walk  through the main  points of  this new                                                                   
     legislation:   This  legislation  makes six  significant                                                                   
     changes to current law:                                                                                                    
1:43:57 PM                                                                                                                    
CO-CHAIR JOHNSON removed his objection to adopting the proposed                                                                 
committee substitute as the work draft.  There being no further                                                                 
objection, Version E was before the committee.                                                                                  
MS. LOCKHART continued her testimony:                                                                                           
          1. Section 1 increases the amount of the credit                                                                       
              from  10% to  25% of  the  amount of  qualified                                                                   
              capital   investment  and  qualified   services                                                                   
              spending   as  well  as  clarifying   that  the                                                                   
              credits can  apply to costs incurred  for a gas                                                                   
              reserve  for  which   the  taxpayer  previously                                                                   
              elected to claim a credit.                                                                                        
          2. Section 2 adjusts the dates for when qualified                                                                     
              expenditures  must be made  to qualify  for the                                                                   
              old 10%  and new 25% credits.  It  also changes                                                                   
              the term "reserves"  to "wells" to clarify that                                                                   
              "wells"  produce  gas  whereas  "reserves"  are                                                                   
              what is being produced.                                                                                           
          3.  Section  3 removes  the 50%  limitation on  the                                                                   
              amount  of credits that  can apply in  a single                                                                   
              year,  increasing the time  value of  money for                                                                   
              the credits.                                                                                                      
          4.  Section  4 clarifies  that the  credits do  not                                                                   
              apply to  North Slope gas that is  brought into                                                                   
          5.  Section  5  removes  the  "successful  efforts"                                                                   
              requirement  that  developers   must  find  and                                                                   
              deliver new gas resources  to market to qualify                                                                   
              for  the credit.   It also  clarifies that  the                                                                   
              credits  can  be  applied   to  a  gas  reserve                                                                   
              regardless  of whether  or not  there has  been                                                                   
              previous gas production in the area.                                                                              
          6.  Section  6 clarifies  that the  credits can  be                                                                   
              taken  on a  current  tax return,  on a  timely                                                                   
              filed  tax  return or  on  a timely  filed  tax                                                                   
              return for  the year immediately  following the                                                                   
              year the qualified capital investment is made.                                                                    
          7.  Section 7  adjusts the date the  credits expire                                                                   
              from 2017 to 2024.                                                                                                
          8.  Section  8  extends  the  sunset  date  of  the                                                                   
              investment  tax credit from January 1,  2013 to                                                                   
              January 1, 2020.                                                                                                  
          9.  Section   9  is  gives   this  legislation   an                                                                   
              immediate effective date.                                                                                         
     In  summary, Marathon  Oil  Company believes  HB 229  is                                                                   
     one  part  of   the  equation  to  enhance   Cook  Inlet                                                                   
     exploration  and development  activities, attempting  to                                                                   
     create  more  certainty  in   the  overall  natural  gas                                                                   
     deliverability  in Cook Inlet.   I  would also add  that                                                                   
     timing  is  important.    It  takes  multiple  years  to                                                                   
     properly  plan and  execute  drilling  activity in  Cook                                                                   
     Inlet,  which  is  necessary   to  meet  future  overall                                                                   
     deliverability needs in SouthCentral AK.                                                                                   
MS. LOCKHART  added that  to qualify  for this investment  credit,                                                              
the producer  must make capital  investments, which have  value to                                                              
the  State  of Alaska  through  the  addition  of jobs  and  other                                                              
supporting services and activities.                                                                                             
1:47:38 PM                                                                                                                    
MS.  LOCKHART, in  response  to Representative  Seaton,  explained                                                              
that  when companies  make investments  such as  drilling a  well,                                                              
the cost  of labor  to drill  that well  is tied  up in the  whole                                                              
package of  economics which she  believes would be invested.   The                                                              
everyday  operations   year  after  year,  defined   as  operating                                                              
expenses  under the  original  House Bill  61,  would be  excluded                                                              
under  HB 229.   It  is the  one time  of drilling  the wells  and                                                              
developing  the  product  that  are  the  investments  that  would                                                              
qualify for these credits.                                                                                                      
1:49:21 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised   that  under  the  expansion  to                                                              
existing fields provided  by HB 229, the qualified  services would                                                              
exclude maintenance  and operation  costs, and the  replacement of                                                              
MS. LOCKHART  responded that  is her  understanding.   To qualify,                                                              
an investment would  have to be tied to drilling  additional wells                                                              
looking for  new reserves.  It would  not be for replacing  a line                                                              
or piece of equipment in an existing area.                                                                                      
1:50:43 PM                                                                                                                    
REPRESENTATIVE  SEATON   referenced  the  provision   on  page  3,                                                              
Section  3,   that  would  eliminate   the  50  percent   taxpayer                                                              
liability and  inquired whether  this has been  a prior  issue for                                                              
Marathon Oil Corporation.                                                                                                       
MS. LOCKHART deferred to Ms. Nicole Busey.                                                                                      
NICOLE  BUSEY, Tax  Attorney,  Marathon Oil  Corporation,  replied                                                              
no,  it  has not  been  an  issue  for  Marathon.   She  said  she                                                              
believes the change  would be in line with other  changes that are                                                              
being  proposed to  other taxes  related  to production  tax.   In                                                              
response to  Co-Chair Johnson, she  said she is not  familiar with                                                              
the  production investment  tax credit,  but she  thinks there  is                                                              
not this  present 50  percent limitation;  or,  if there is,  that                                                              
there  is some  current  legislation proposed  to  remove that  50                                                              
percent limitation.                                                                                                             
CO-CHAIR  JOHNSON   understood  this   elimination  would   be  to                                                              
maintain consistency  with other  bills working their  way through                                                              
the system.                                                                                                                     
MS. BUSEY answered yes.                                                                                                         
1:52:38 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  whether Ms.  Busey is  aware of  any                                                              
companies that have hit the 50 percent limit.                                                                                   
MS. BUSEY responded she does not know.                                                                                          
REPRESENTATIVE  SEATON,  in  regard to  Ms.  Lockhart's  statement                                                              
about   helping  with   long-term   deliverability,  requested   a                                                              
definition of long-term.                                                                                                        
MS.  LOCKHART replied  she defines  long-term  as sustainable  and                                                              
being that  when her children are  grown they will  have stability                                                              
in where  there electricity  and natural gas  are coming  from for                                                              
their homes.   Based upon the  production declines in  Cook Inlet,                                                              
she said  she does  not believe  the activity  in Cook  Inlet will                                                              
sustain the  current deliverability needs  for more than  the next                                                              
couple of years.                                                                                                                
1:54:29 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  inquired how an increase  to 25 percent                                                              
in the tax credit would play out for Marathon Oil Corporation.                                                                  
MS.  LOCKHART answered  this  is  just one  piece  of the  overall                                                              
economic and  risks that Marathon  looks at when deciding  to make                                                              
capital investments.   Projects in  Alaska must be  competitive at                                                              
the  corporate  level against  projects  in  other states  or  the                                                              
world, so  she cannot  state that HB  229 would definitely  result                                                              
in more  exploration rigs  next year;  however, it would  increase                                                              
the odds of  getting exploration and development  projects funded.                                                              
More  importantly,  it  may  enable companies  that  have  yet  to                                                              
entertain or commit  to investment in Alaska to explore  at a rate                                                              
of return  that is needed  to start the project.    She  sees this                                                              
as  one enabler  within  a whole  package that  is  reviewed as  a                                                              
company goes through its planning process.                                                                                      
1:56:37 PM                                                                                                                    
MR.  BANKS,  in response  to  Co-Chair  Johnson, stated  that  new                                                              
producers  will  be companies  like  Armstrong Alaska,  a  company                                                              
that  is currently  developing the  North  Fork gas  field on  the                                                              
lower  end of  the  Kenai Peninsula.    Armstrong  Alaska is  also                                                              
building a  gasline to  Anchor Point and  ENSTAR is  extending its                                                              
gasline from  Ninilchik to  Anchor Point,  so that  infrastructure                                                              
will  provide   incentive  to  others   that  are   interested  in                                                              
developing  resources in  that  particular area.    There is  some                                                              
potential that Escopeta  Oil & Gas will deliver on  its promise to                                                              
bring in  a jack-up rig  this year to  begin drilling  its Kitchen                                                              
Lights Unit in Cook  Inlet.  He agreed with the  bill sponsor that                                                              
smaller  gas fields  will  be the  wave  of the  future.   Of  the                                                              
current  Cook   Inlet  players,   Marathon  is  the   most  active                                                              
developer and is  in the process of exploration  developments.  He                                                              
predicted that  gas will be  seen in Cook  Inlet where it  has not                                                              
been seen before.   A tax credit  like this would reduce  at least                                                              
one of the high costs faced by these new producers.                                                                             
1:59:49 PM                                                                                                                    
MR.  BANKS,  in   response  to  another  question   from  Co-Chair                                                              
Johnson,  said  it is  anticipated  that  new development  of  gas                                                              
supplies in  the Cook  Inlet will be  more costly than  historical                                                              
gas supplies.   One  of those costs  represents the  various kinds                                                              
of income taxes  that the producers have to pay,  and HB 229 would                                                              
help  reduce   that  particular   cost  and  contribute   to  more                                                              
potential development.   In  further response,  he said  there are                                                              
lease sales proposed  for May [2010] in the Cook  Inlet, but it is                                                              
hard to  say whether  enactment of HB  229 would entice  companies                                                              
to bid  on those leases.   Much  of the best  acreage in  the Cook                                                              
Inlet  is  already under  lease  and  some  of the  other  acreage                                                              
belongs  to the  federal government.    His prediction  is that  a                                                              
company would find  a prospect slightly more attractive  and would                                                              
bid on  it should  HB 229 be  passed, but he  does not  think that                                                              
would be a very  good indicator of whether this  particular credit                                                              
was working or not.                                                                                                             
CO-CHAIR  JOHNSON said  he is  looking  for anything  that can  be                                                              
done to entice companies to come to Alaska.                                                                                     
2:02:01 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  reiterated   his  question  about  the                                                              
report that was due out in 2008.                                                                                                
MR. BANKS answered he has not seen the report.                                                                                  
MS.  LOCKHART, in  regard to  whether  HB 229  would attract  more                                                              
development,  said she  thinks  there is  some  incentive for  new                                                              
producers  as well  as  existing  players.   Many  of the  current                                                              
reservoirs  are  very  old  legacy   reservoirs  and  Marathon  is                                                              
constantly  stepping out to  try to  understand the boundaries  of                                                              
these  reservoirs.    She  pointed  out  that  this  is  a  risked                                                              
business;  for example,  even a  project in  development mode  can                                                              
end up being a  dry hole because the sand packages  being targeted                                                              
in  many of  the Cook  Inlet reservoirs  are  discontinuous and  a                                                              
step-over  can miss  the  sand completely.    This investment  tax                                                              
credit  will help  enable  projects  that may  be  viewed as  very                                                              
borderline  as companies  continue reaching  out to determine  the                                                              
extent of current reservoirs.                                                                                                   
2:03:50 PM                                                                                                                    
REPRESENTATIVE  P.  WILSON understood  that  the  average for  oil                                                              
exploratory wells  is one successful well  out of six.   She asked                                                              
what the average is for gas.                                                                                                    
MS.  LOCKHART responded  there is  not  one magical  number as  it                                                              
varies  by area.   In  exploration, the  number is  more like  one                                                              
successful well in ten, and in development the odds are better.                                                                 
MR. BANKS  added that most of  the obvious structures in  the Cook                                                              
Inlet region  have been drilled,  and now the  hunt is on  for the                                                              
much  more ephemeral  seismic kinds  of  stratigraphic traps  that                                                              
are more difficult  to locate.  The provisions proposed  by HB 229                                                              
would allow companies  with legacy fields, like  Marathon, to look                                                              
for  gas within  their  own  units  because gas  potential  within                                                              
those existing fields can still be developed with more drilling.                                                                
2:06:58 PM                                                                                                                    
CO-CHAIR  NEUMAN, in  regard to  risk  assessment, inquired  where                                                              
Marathon places Cook Inlet compared to the rest of Alaska.                                                                      
MS. LOCKHART  replied Marathon  is only active  in Cook  Inlet and                                                              
has not looked  beyond that area.   In further response,  she said                                                              
compared  to other  projects across  Marathon's portfolio,  Alaska                                                              
is  a  risky  place.    From  a  subsurface  standard,  Alaska  is                                                              
probably  more  risky  than  some, but  maybe  less  than  others.                                                              
Other  risks come into  play in  Alaska that  are not  necessarily                                                              
faced  in  other  areas,  such as  the  regulatory  risk  and,  in                                                              
particular,  the  marketing risk.    When  looking at  the  entire                                                              
package  of  risk, Cook  Inlet  and  Alaska  in its  entirety  are                                                              
fairly risky places to do business.                                                                                             
2:09:03 PM                                                                                                                    
CO-CHAIR NEUMAN  asked whether Marathon  utilizes the oil  and gas                                                              
information put out in reports by the Division of Oil & Gas.                                                                    
MS. LOCKHART  answered the information  used by the  Department of                                                              
Natural  Resources  is  the same  information  that  Marathon  has                                                              
access  to.   Because  producers  own  the information  they  have                                                              
access to  more information  than does the  department.   She said                                                              
she can  confidently say that Marathon  knows the Cook  Inlet area                                                              
better than  anyone else since it  has operated there for  over 50                                                              
years.   The  reports can  be complementary  to companies  because                                                              
they  are  an  educational  tool that  helps  people  outside  the                                                              
industry understand  the potential that  is out there.   One thing                                                              
the  report does  not  do is  assess the  economics,  and that  is                                                              
where everyone  must work  together to assess  what will  work and                                                              
what will  not.  This is  where this bill  can come into  play and                                                              
help  enable some  of  those targets  that  are  outlined in  that                                                              
report.    Whether  the  report   is  accurate  is  unknown  until                                                              
companies go out and spend money to test the concepts.                                                                          
2:11:07 PM                                                                                                                    
REPRESENTATIVE  SEATON,   in  regard  to  [the   possibility  that                                                              
Marathon's  liquefied natural  gas (LNG)  export license  for Cook                                                              
Inlet gas  may not be renewed],  inquired how much  gas production                                                              
would be left available  for Cook Inlet and how  would that amount                                                              
of gas be absorbed.                                                                                                             
MS.  LOCKHART responded  the  LNG  plant is  a  market outlet,  so                                                              
development  could  proceed  in  the event  of  a  wild  discovery                                                              
because there would  be a market for that gas.   Additionally, the                                                              
LNG   plant   is   very   important   to   the   current   overall                                                              
deliverability  in  Cook  Inlet  because storage  is  not  readily                                                              
available  to all players.   Without  storage,  a shutdown  of the                                                              
LNG plant  in 2011  would have  implications on  the wells  due to                                                              
the  large difference  between summer  demand  and winter  demand.                                                              
Without  a  home  for  the  gas,   the  wells  would  have  to  be                                                              
curtailed.   Many of the  wells in Cook  Inlet are tied  to water;                                                              
when they  are curtailed the  water rushes  in and the  gas chokes                                                              
out,   making  the   gas  unavailable   for   cold  winter   days.                                                              
Therefore, she said  she thinks there is some risk  in the overall                                                              
system  if  the  LNG  plant  shuts  down  prior  to  having  other                                                              
infrastructure developed that can take its place.                                                                               
2:12:57 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  asked  how  HB 229  would  affect  gas                                                              
development  at Red  Dog Mine,  Holitna Basin,  Nenana Basin,  and                                                              
Yukon  Flats, given  the bill  would affect  everything below  the                                                              
68th parallel, which is the Brooks Range.                                                                                       
MR. BANKS  replied that  those players  would receive  the benefit                                                              
of these credits  to the extent  that any of them are  paying some                                                              
sort of  income tax.   He said  he also  believes that  the carry-                                                              
forward feature would  provide five years for use  of the credits.                                                              
The  most likely  candidates  are  Nenana  Basin and  Yukon  Flats                                                              
because they  are currently  under active  exploration, as  is the                                                              
Red Dog Mine area.                                                                                                              
2:15:08 PM                                                                                                                    
REPRESENTATIVE SEATON  posed a scenario  in which Red Dog  Mine is                                                              
producing  gas  for  itself  and  not for  sale  to  others.    He                                                              
inquired  whether this  25 percent  credit could  be used  against                                                              
the mine's corporate income tax for mining.                                                                                     
MR. BANKS deferred  to Robynn Wilson, but said he  thinks the mine                                                              
would be able to do this.                                                                                                       
MS. ROBYNN  WILSON answered  that her  reading of  HB 229  is that                                                              
the credit would be applicable in this scenario.                                                                                
2:16:07 PM                                                                                                                    
REPRESENTATIVE  EDGMON surmised that  the value  of HB 229  is not                                                              
so much the  increases to 9.4  percent and 25 percent,  but rather                                                              
the provisions that  broaden the definition of  capital investment                                                              
and the amount of liability that can be written off each year.                                                                  
MS. BUSEY reiterated  that the 50 percent limitation  has not been                                                              
an  issue in  the past  for Marathon,  so  that is  not where  the                                                              
value is.  The  values to Marathon, when evaluating  its worldwide                                                              
projects,  are  the  increase  from   10  to  25  percent  on  the                                                              
qualified  capital investment  and the removal  of the  successful                                                              
efforts requirement.                                                                                                            
2:18:00 PM                                                                                                                    
MS.  LOCKHART, in  response to  Representative  Edgmon, said  each                                                              
provision has  a small amount  of value  and it is  the collective                                                              
package that makes  HB 229 attractive for enabling  projects.  She                                                              
likes  the provision  that  would allow  both  successful and  dry                                                              
holes to  qualify because Marathon  does not intentionally  try to                                                              
drill dry  holes.   Extending the sunset  provision to  2020 makes                                                              
sense  because   exploration  activities   are  long-lead   items.                                                              
Exploration  planning  can  take  four  to  six  years,  which  is                                                              
already beyond the current sunset provision [of 2013].                                                                          
2:20:00 PM                                                                                                                    
REPRESENTATIVE EDGMON  commented that HB 229 would  make the state                                                              
a  bigger partner  in  terms of  sharing in  the  upfront risk  of                                                              
drilling, given that gas is not always found.                                                                                   
MS. LOCKHART  said  one could  look at  it that way.   However,  a                                                              
company must  make the investments  to qualify;  it is not  like a                                                              
company is  getting something  just for producing.   It  creates a                                                              
win-win situation.                                                                                                              
2:21:14 PM                                                                                                                    
REPRESENTATIVE  P.   WILSON  asked  what  would  be   more  of  an                                                              
incentive than HB  229, given that both Ms. Robynn  Wilson and Ms.                                                              
Lockhart have stated  that the bill's provisions are  just a small                                                              
part of the overall picture.                                                                                                    
MS.  LOCKHART  responded  she  does   not  want  to  downplay  the                                                              
importance of  HB 229, but  it is a  package of other  things that                                                              
Marathon looks  at.  In  an ideal world  there would  be unlimited                                                              
market  access,  limited  regulations,   sufficient  storage,  and                                                              
infrastructure to  move gas at any  time to any place,  as well as                                                              
investment credits.   Various  aspects of the  bills that  are now                                                              
going  through the  legislature  can help  solve  the problems  in                                                              
Cook Inlet and are all pieces that need to come together.                                                                       
2:23:05 PM                                                                                                                    
CO-CHAIR JOHNSON  stated that HB  229 sends a message  to industry                                                              
that the State of  Alaska is willing to work with  industry and is                                                              
open for business.                                                                                                              
CO-CHAIR  NEUMAN said  there are  so many up-front  costs  in Cook                                                              
Inlet  that  a small  company  cannot  get  started, and  that  is                                                              
coupled with the risk.                                                                                                          
MS. LOCKHART  replied there  are a lot  of up-front costs  for any                                                              
location,  but what  hurts Alaska  is the lack  of competition  in                                                              
some of the providers,  which raises a company's  costs.  Drilling                                                              
a well  in Alaska is  significantly more  costly than  drilling in                                                              
Oklahoma.   In addition to the  higher costs, the  regulations are                                                              
more  stringent, although  they  are the  right thing  to do  when                                                              
drilling in environmentally sensitive areas.                                                                                    
CO-CHAIR JOHNSON  pointed out that gas  is down 14 cents  today to                                                              
$4.28 [per  thousand cubic  feet].   The lower  the gas  price the                                                              
more imperative  it is for the  state to spur  development through                                                              
incentives to  make Alaska  competitive and to  keep the  heat and                                                              
lights on within the state.                                                                                                     
2:26:19 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that  the credit on  corporate income                                                              
tax  can only  be  used after  making  a profit  and  can only  be                                                              
carried  forward for  five years.   However,  the potential  for a                                                              
new player  having development  and profits  within five  years is                                                              
minimal.   He inquired whether  HB 229  would have more  impact on                                                              
current gas  producers that  have corporate  income tax  liability                                                              
than it would on those that do not.                                                                                             
MS. LOCKHART  said her guess is  that it depends on what  is found                                                              
and how fast it  takes to get to production.   The bill would help                                                              
existing players  and could help players currently  in Alaska that                                                              
want  to expand  into Cook  Inlet, such  as someone  on the  North                                                              
Slope;  so, it  may not  be a  company that  does not  yet have  a                                                              
presence in Alaska.                                                                                                             
CO-CHAIR  JOHNSON added  the jack-up  rig that  may be brought  to                                                              
Alaska,  as mentioned  by  Kevin Banks,  could  potentially be  of                                                              
value  to the  other producers.   A  jack-up rig  would drill  for                                                              
more than  one company, so it  could promote more  exploration and                                                              
this kind of credit would help further that along.                                                                              
2:28:26 PM                                                                                                                    
MS. DAVIS  addressed the issue  of gas transportation  by pointing                                                              
out  that Section  4, page  3, Version  E,  expressly disallows  a                                                              
credit  for  North  Slope gas  exploration  and  development,  and                                                              
expressly disallows  the cost  of gas  transport from  North Slope                                                              
reserves  to tidewater.    This provision  thus  implies that  for                                                              
Cook  Inlet  gas,  qualified  capital   expenditures  do  pick  up                                                              
transportation  cost  to  the  extent they  are  included  in  the                                                              
allowed  property description  on  page 4,  subparagraph  (C)(ii),                                                              
which   lists  gathering   lines,   transmission  lines,   pumping                                                              
stations,  and  compressor  stations.   So,  conceivably,  to  the                                                              
extent a  taxpayer is  an active  explorer or  operator of  an oil                                                              
and  gas lease,  there  would be  some  additional  boost to  Cook                                                              
Inlet  deliverability through  the  transportation  aspects.   She                                                              
said  she  is  thinking  specifically   about  new  entrants  like                                                              
Armstrong  Alaska, a  company that  is developing  gas leases  and                                                              
which  she  believes engaged  with  the  gas utility,  ENSTAR,  to                                                              
share the cost of  transmission lines for moving the  gas from the                                                              
leases to ENSTAR.                                                                                                               
MS.  DAVIS cautioned  that  when looking  at  language the  courts                                                              
assume  that everything  was put  in for a  specific purpose,  and                                                              
the  wording  in  Section  4  is  confusing.    The  first  clause                                                              
excludes investment  associated  with exploration and  development                                                              
of  North Slope  gas and  the second  clause excludes  any of  the                                                              
cost to  transport gas  from the  North Slope.   Therefore,  it is                                                              
unclear why the  third clause would be needed  if costs associated                                                              
with  transporting gas  from  the North  Slope  have already  been                                                              
excluded regardless  of where it goes, because  this would suggest                                                              
that only  the delivery of North  Slope gas to tidewater  is being                                                              
excluded.   This then begs the  question of whether it  means that                                                              
the cost  of delivery  of North  Slope  gas to Canada  would  be a                                                              
covered cost.   She  said she is  confident the  intent is  not to                                                              
pick up a corporate  income tax waiver for the  large-scale Alaska                                                              
Gasline Inducement Act  (AGIA) gas line.  While she  does not want                                                              
to lose sight  of what HB 229  does for Cook Inlet  gas transport,                                                              
she does not want to see a problem created by this one clause.                                                                  
2:32:18 PM                                                                                                                    
CO-CHAIR JOHNSON said  he is not sure he reads Section  4 the same                                                              
way as Ms. Davis.                                                                                                               
CO-CHAIR NEUMAN said  he finds that HB 229 would  absolutely be of                                                              
benefit  in assisting  with the  drilling and  development of  gas                                                              
wells.   Help is needed in  the development of  infrastructure for                                                              
gas  transmission and  he  thinks  it is  good  the bill  includes                                                              
this.   Additionally, should  gas go  down even  lower it  will be                                                              
difficult   to   encourage   gas   development   without   further                                                              
2:33:48 PM                                                                                                                    
REPRESENTATIVE P. WILSON  asked how Section 4 could  be changed to                                                              
ensure an unintended consequence.                                                                                               
MS. DAVIS responded  that the clause to exclude  qualified capital                                                              
investment  and qualified  services for  North Slope  gas is  good                                                              
because  it  locks down  the  upstream  side  of North  Slope  gas                                                              
development.   The second  clause, "or that  are made  or incurred                                                              
to  transport gas  from reserves  located  in the  area of  Alaska                                                              
lying north  of 68  degrees North latitude",  means that  any cost                                                              
to transport  gas from the  North Slope  will be disallowed.   She                                                              
said  she  thinks the  third  clause  is  already covered  by  the                                                              
second clause.   Unless there is a specific concern  that could be                                                              
explained  to her,  she would suggest  that the  second clause  be                                                              
changed  by  deleting  from  page  3,  line  22-24,  "or  for  the                                                              
delivery of Alaska  North Slope natural gas to  tidewater below 68                                                              
degrees  North   latitude",  and  inserting  "regardless   of  the                                                              
destination".    That language  would  disallow  all  destinations                                                              
from the North  Slope and would  make it very clear that  the cost                                                              
to transport gas  from North Slope reserves to  any destination is                                                              
not covered.                                                                                                                    
CO-CHAIR  JOHNSON said  he  thinks  that was  the  intent, so  the                                                              
committee could entertain Ms. Davis's recommendation.                                                                           
2:37:08 PM                                                                                                                    
REPRESENTATIVE  TUCK  inquired whether  Marathon  Oil  Corporation                                                              
currently has operations in Oklahoma.                                                                                           
MS. LOCKHART replied yes.                                                                                                       
REPRESENTATIVE  TUCK asked what  percent of Marathon's  operations                                                              
are in Alaska versus the Lower 48, in regard to exploration.                                                                    
MS. LOCKHART answered  that over the past several  years, Marathon                                                              
has had very  little true exploration in Alaska  versus elsewhere.                                                              
In further  response,  she said  it is correct  that Marathon  has                                                              
had a lot of  true exploration in the Lower 48.   That exploration                                                              
has occurred in the shale plays, Gulf of Mexico, and Oklahoma.                                                                  
2:39:08 PM                                                                                                                    
REPRESENTATIVE  TUCK inquired  whether  Marathon would  preference                                                              
exploration in Alaska  over the other areas should  HB 229 pass as                                                              
currently written.                                                                                                              
MS.  LOCKHART  answered  that  HB   229  would  provide  for  both                                                              
exploration and  development.  On  the development side,  the bill                                                              
would  enable   projects  that   are  on   borderline.     On  the                                                              
exploration  side,  Marathon  would   have  to  take  its  current                                                              
portfolio and make  a comparison based on the new  numbers.  Since                                                              
that decision making  would be part of the normal  annual planning                                                              
process, she said  she cannot state at this hearing  that it would                                                              
drive  wild  exploration  for  Marathon  in Cook  Inlet,  but  she                                                              
thinks it would help projects compete.                                                                                          
2:40:31 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired   whether  expenses  written  off                                                              
against the  25 percent  credit in  HB 229 could  also be  used to                                                              
write-off against  the 40 percent  exploration tax credit  in Cook                                                              
Inlet or any other tax credits.                                                                                                 
MS.  ROBYNN WILSON  said AS  43.20.043(g) states  that a  taxpayer                                                              
obtaining a credit  under this section may not claim  a tax credit                                                              
or royalty modification  provided for under any other  title.  She                                                              
interpreted  this to mean  that the  expenditures, the  subject of                                                              
which  is this  credit,  cannot then  be used  for  any other  tax                                                              
credit,  such  as  Chapter  55   production  tax  or  the  royalty                                                              
2:42:19 PM                                                                                                                    
REPRESENTATIVE SEATON  requested future  witnesses to state  why a                                                              
company would  apply for  the 25 percent  corporate tax  credit in                                                              
Cook Inlet  when it could receive  a greater corporate  tax credit                                                              
available under other  provisions.  He further  requested that the                                                              
Department  of Natural  Resources  provide  the committee  with  a                                                              
definition  of  qualified  services  and  whether  the  department                                                              
believes this provision  would apply only to new  well exploration                                                              
and development  or would  also extend to  ongoing work  within an                                                              
existing field.                                                                                                                 
MS. DAVIS,  given the language would  be contained in  the state's                                                              
corporate  income tax  code, offered  to  work with  Mr. Banks  in                                                              
interpreting the  qualified expenditures for the  services side as                                                              
well as the for  the capital side.  She said  the original version                                                              
only covered  expenditures  associated with  a gas reservoir  that                                                              
had  not   yet  produced  gas.     However,  Version  E   makes  a                                                              
significant  change by allowing  a gas  well to  be drilled  in an                                                              
existing  reservoir, tapping  gas reserves.   It  will be  a finer                                                              
distinction  for the  Department  of Revenue  to  ensure that  the                                                              
labor services  and the  expenses being  charged against  that new                                                              
well  are not  actually  associated with  the  adjacent wells  and                                                              
their ongoing operating expenses.                                                                                               
2:46:29 PM                                                                                                                    
MS. DAVIS,  in response  to Co-Chair Johnson,  said she  is unsure                                                              
that  anything  the   department  would  be  able   to  say  would                                                              
necessarily  require  language   differences  as  she  thinks  the                                                              
language  in Version  E  is really  all  about  what an  operating                                                              
expense  is and  the  department's  ability to  distinguish  that.                                                              
She  said she  and Mr.  Banks will  look  at the  language to  see                                                              
whether any  additional guidance  is needed  from the  legislature                                                              
in assisting  the Department of  Revenue in interpreting  what the                                                              
scope of the operating expense exclusion is.                                                                                    
2:47:29 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG understood that  House Bill  61 applied                                                              
to new  oil or gas.   He inquired whether  a well drilled  into an                                                              
existing field  that does  not change the  production level,  or a                                                              
well  that  is defined  as  stopping  decline, would  be  eligible                                                              
under HB 229.                                                                                                                   
MS. DAVIS responded  she believes that under the  current language                                                              
of Version  E the  Department of  Revenue would  use the  criteria                                                              
that the well  produce development of any gas  reserve, regardless                                                              
of  whether  there  is  commercial  production  in  the  area  and                                                              
regardless   of   whether  the   outcome   is  a   successful   or                                                              
unsuccessful  well.   There is  no requirement  the well  increase                                                              
overall  production or  stem decline,  it  is simply  a well  that                                                              
taps into gas reserve.                                                                                                          
2:49:00 PM                                                                                                                    
CO-CHAIR  NEUMAN, in regard  to page  4, line  22, noted  that the                                                              
line for  68 degrees  North latitude  goes through  the middle  of                                                              
Red  Dog Mine  as well  as  some other  areas  that are  currently                                                              
being  explored.   He  requested Ms.  Davis  to work  with him  to                                                              
ensure there  is no interference  with this development,  since he                                                              
believes  the sponsor's intent  is that  HB 229  not cover  an in-                                                              
state pipeline to Southcentral Alaska or a pipeline to Canada.                                                                  
MS. DAVIS replied  there should be some kind of  a descriptor that                                                              
would provide  a geographic zone around  that area that  up to now                                                              
has no gas  exploration so as to  make it clear that  would not be                                                              
part of the excluded area.                                                                                                      
CO-CHAIR JOHNSON  opened public  testimony, but  no one  wished to                                                              
testify at this time.  He kept public testimony open.                                                                           
2:51:27 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that  the property provision  on page                                                              
4 has a lot  of breadth in that it includes  power plants, topping                                                              
plants,  compressor stations,  and  so forth.   He  said he  would                                                              
like  to know  how expansive  this write-off  of corporate  income                                                              
tax could  be on these  issues if it  involves gas.   For example,                                                              
if some gas went  through a port facility or  power station, would                                                              
all of that then qualify for the 25 percent tax credit.                                                                         
MS. DAVIS agreed to be the lead regarding this question.                                                                        
CO-CHAIR JOHNSON  held over HB 229  and recessed the meeting  to a                                                              
call of the chair.                                                                                                              

Document Name Date/Time Subjects
CS HB 229 v. E.pdf HRES 3/15/2010 1:00:00 PM
HB 229
CS HB 229 v. E Sectional.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Additional Information.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Fiscal Note.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Report from DOR 3.15.10.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB229 Testimony 3.15.10.pdf HRES 3/15/2010 1:00:00 PM
HB 229