Legislature(2009 - 2010)SENATE FINANCE 532

04/15/2010 09:00 AM Senate FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
Scheduled But Not Heard
Heard & Held
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Heard & Held
Heard & Held
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 309                                                                                                           
     "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 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 Stedman  noted this  was the  first hearing  of the                                                                    
bill. He said that amendments would be allowed today.                                                                           
9:12:12 AM                                                                                                                    
SENATOR LESIL  MCGUIRE, SPONSOR,  explained that SB  309 has                                                                    
become an  amalgamation of  a variety  of bills  designed to                                                                    
incentivize oil  and gas exploration  efforts, both  in Cook                                                                    
Inlet and in  Prudhoe Bay. The first part of  the bill deals                                                                    
with Southcentral  Alaska which is suffering  from a decline                                                                    
in  drilling and  exploration activities  in the  Cook Inlet                                                                    
area.  Research  indicates  that  by 2013,  at  the  current                                                                    
drilling rate, there is a  very real possibility that Liquid                                                                    
Natural Gas  would need to  be imported from  Indonesia. The                                                                    
goal is to increase drilling  activity in the area, which is                                                                    
unique and has many challenges.                                                                                                 
Senator  McGuire  addressed  the  first part  of  the  bill.                                                                    
During the interim,  time was spent talking  with Cook Inlet                                                                    
explorers  in an  attempt to  develop  incentives. The  bill                                                                    
amends   and  extends   the   exploration  and   development                                                                    
incentive tax  credits that were originally  enacted in 2003                                                                    
under the  Alaska Net Income  Tax Act. The current  bill, SB
309 changes the 10 percent amount  to 25 percent of a credit                                                                    
against  state   income  tax   liability.  The   50  percent                                                                    
limitation on the  amount of credits allowed to  be taken in                                                                    
a single year was eliminated in  SB 309. Now, 100 percent of                                                                    
all qualified  credits for  exploration and  development can                                                                    
be taken in a single year.                                                                                                      
9:14:35 AM                                                                                                                    
Senator McGuire explained  that the second part  of the bill                                                                    
would extend  the sunset date  of the investment  tax credit                                                                    
from  January 1,  2013,  to January  1,  2020, allowing  the                                                                    
companies to make longer-term business decisions.                                                                               
Senator  McGuire  related  that  another part  of  the  bill                                                                    
addresses infield  drilling vs.  new pockets of  drilling in                                                                    
Prudhoe Bay. The bill would  allow infield drilling to occur                                                                    
and credits taken for that, as well.                                                                                            
Co-Chair  Stedman  asked  for   an  explanation  of  infield                                                                    
drilling. Senator McGuire explained  that under the original                                                                    
legislation, drilling had to be  done outside of an existing                                                                    
well.  Infield drilling  is done  near  an existing,  proven                                                                    
well   reserve.    Previously,   high   risk    areas   were                                                                    
incentivized;   however,  this   bill  allows   for  infield                                                                    
drilling, as  well. The state is  willing to take a  risk to                                                                    
move into higher risk activities.                                                                                               
9:17:03 AM                                                                                                                    
Senator  McGuire highlighted  the  second part  of the  bill                                                                    
called  the  "Stampeder   Provision",  provisions  added  by                                                                    
Senator  Wagner. The  main idea  is to  bring a  jack-up rig                                                                    
(Section 11)  into Cook Inlet.  The provision  would provide                                                                    
credits  for  the first,  second,  and  third drillings.  It                                                                    
would mean a state investment  of between $24 million to $54                                                                    
million. She termed it high risk activity.                                                                                      
Senator McGuire  informed the committee  about the  fixes to                                                                    
Alaska's  Clear and  Equitable Share  (ACES) production  tax                                                                    
included  in the  bill.  Small companies  are  asking for  a                                                                    
reduction  in  the  progressivity  rate,  the  allowance  of                                                                    
capital credits to be taken in  one year, and the ability to                                                                    
access  the oil  and gas  tax credit  fund. Senator  McGuire                                                                    
pointed  out that  there are  more companies  using the  tax                                                                    
credits than originally was envisioned.                                                                                         
Senator  McGuire   stated  support  for  the   two  proposed                                                                    
9:20:13 AM                                                                                                                    
MIKE PAWLOWSKI,  STAFF, SENATOR  LESIL MCGUIRE,  reported on                                                                    
the sectional analysis:                                                                                                         
Section 1 amends  AS 43.20.043  (a)  by  increasing the  gas                                                                  
          exploration and  development tax credit to  25% on                                                                    
          qualifies  capital expenditures  and annual  costs                                                                    
          from 10%  for investments made after  December 31,                                                                    
Section 2 amends AS 43.20.043 (b) to  conform to the changes                                                                  
          made in section 1.                                                                                                    
9:21:14 AM                                                                                                                    
Section 3 amends AS 43.20.043  (c) to repeal the  50% cap on                                                                  
          the  application   of  the  gas   exploration  and                                                                    
          development  tax  credit  against the  Alaska  Net                                                                    
          Income Tax.                                                                                                           
Co-Chair  Stedman   asked  for  clarification  of   the  tax                                                                    
liability. Mr.  Pawlowski said it  was the  corporate income                                                                    
tax liability.                                                                                                                  
Section 4 amends AS  43.20.043 (e) to ensure  that the value                                                                  
          of a  credit under AS 43.20.043  is passed through                                                                    
          to  consumers  in  a  rate  base  submitted  to  a                                                                    
          regulatory agency.                                                                                                    
Section 5 amends  AS  43.20.043 (g)  to  clarify  that if  a                                                                  
          taxpayer  elects   to  take  a  credit   under  AS                                                                    
          43.20.043 the  taxpayer may not  also claim  a tax                                                                    
          credit   or  royalty   modification  under   other                                                                    
          identified sections of Alaska law.                                                                                    
Section 6 amends AS 43.20.043 (i)(1) to  allow a taxpayer to                                                                  
          claim a credit under  AS 43.20.043 for development                                                                    
          in an  existing field and for  an expenditure that                                                                    
          does  not  lead  to  production.  Section  6  also                                                                    
          clarifies  that   topping  plants,   treatment  or                                                                    
          liquefied  natural  gas  and  other  manufacturing                                                                    
          plants are not qualified expenditures.                                                                                
9:23:46 AM                                                                                                                    
Section 7 amends  AS  43.20.043  to clarify  that  a  credit                                                                  
          under AS  43.20.043 may  be taken  in the  year in                                                                    
          which the expenditure is made  or cost is accrued,                                                                    
          or in the following tax year.                                                                                         
Section 8 amends  AS 43.55.023  (a) to  allow  a tax  credit                                                                  
          taken against  a capital investment under  ACES to                                                                    
          be realized  in the  year in  which the  credit is                                                                    
Co-Chair Stedman  asked if the  credit applies  statewide or                                                                    
just to Cook Inlet. Mr.  Pawlowski said it applied statewide                                                                    
under ACES. All previous sections apply to Cook Inlet.                                                                          
Section 9 amends AS  43.55.023 (d) to conform  to the change                                                                  
          in section 8.                                                                                                         
Section  10 amends  AS  43.55.025 (a)  to  create a  special                                                                  
          tiered  exploration tax  credit of  80, 90  or 100                                                                    
          percent of total exploration expenditures.                                                                            
Section 11  amends AS 43.55.025  by adding a  new subsection                                                                  
          (m)   to   clarify   that   the   special   credit                                                                    
          established in  section 10 is for  the first three                                                                    
          unaffiliated wells  drilled into  the pre-Tertiary                                                                    
          strata in  Cook Inlet  using a jack-up  drill rig.                                                                    
          Also caps  credits; lesser of  100% credit  or $25                                                                    
          million, lesser  of 90%  credit or  $22.5 million;                                                                    
          lesser of 80%  credit or $20.0 million.   Only one                                                                    
          credit  per  person,  may   not  include  cost  to                                                                    
          construct or  manufacture a  jack-up rig  and must                                                                    
          be for  work performed  after June  30, 2010.   If                                                                    
          exploration  results  in sustained  production  of                                                                    
          oil or  gas, 50  percent of credit  received shall                                                                    
          be  repaid.   Taxpayer  obtaining  credit in  this                                                                    
          section may  not claim  credit under  AS 43.55.023                                                                    
          or another provision in this  section for the same                                                                    
          exploration expenditure.  Provides definitions for                                                                    
          "jack-up   rig",    "reservoir"   and   "sustained                                                                    
9:26:37 AM                                                                                                                    
Mr.  Pawlowski explained  that Section  12 is  language that                                                                    
          extends the sunset date.                                                                                              
Section 13  amends the uncodified  law related to  the carry                                                                  
          forward  of  credits  accrued under  AS  43.20.043                                                                    
          beyond the sunset date of the credit.                                                                                 
Section 14  repeals AS 43.55.028  (e) (2) and (e)  (3) which                                                                  
          requires a  small producer  accessing the  oil and                                                                    
          gas   tax   credit   fund   to   make   additional                                                                    
          expenditures  within  24  months of  claiming  the                                                                    
Section 15  extends the  sunset of the  tax credit  under AS                                                                  
          43.20.043 to 2020 from 2013.                                                                                          
Section 16 adds an immediate effective date.                                                                                  
9:28:18 AM                                                                                                                    
Co-Chair Stedman asked  for a definition of  jack-up rig and                                                                    
the stampede concept.                                                                                                           
SENATOR  THOMAS WAGONER,  SPONSOR,  related  the history  of                                                                    
units in  Cook Inlet  which have made  it more  appealing to                                                                    
use jack-up rigs. He stated  that almost every place drilled                                                                    
contains gas. He recalled that  during the Murkowski era the                                                                    
use of jack-up rigs was  proposed to incentivize Cook Inlet.                                                                    
This bill allows  for the drilling of three  wells off shore                                                                    
using jack-up rigs.                                                                                                             
Senator Wagoner  explained that  a jack-up  rig is  used for                                                                    
drilling  in  shallow or  deep  water.  Of the  three  wells                                                                    
listed in the  bill, the first would be  incentivized at 100                                                                    
percent  of drilling  costs up  to $25  million, the  second                                                                    
well would  be at 90  percent up  to $22.5 million,  and the                                                                    
third well  would be at 80  percent up to $20  million. If a                                                                    
company  hits a  commercially  sized deposit,  then once  it                                                                    
goes  into production,  over the  next 10  years, the  state                                                                    
would receive 50  percent of the credits  back. He predicted                                                                    
that the state would make money from this provision.                                                                            
9:33:01 AM                                                                                                                    
Senator  Wagoner related  that  there are  currently two  or                                                                    
three small  independent companies set to  take advantage of                                                                    
the provision.                                                                                                                  
Co-Chair Stedman asked  if one entity could  qualify for all                                                                    
three incentives.  Senator Wagoner said  it had to  be three                                                                    
different   companies  with   three   different  wells.   In                                                                    
addition,  going below  the pre-Tertiary  level should  give                                                                    
the state new, valuable geological information.                                                                                 
9:34:40 AM                                                                                                                    
Senator  Thomas  asked if  the  tax  credits are  consistent                                                                    
throughout the bill. Senator Wagoner  replied that under the                                                                    
stampede provision  information is  available to  the state.                                                                    
Senator McGuire clarified  that as the bill  sits now, there                                                                    
is  no requirement  of disclosure  of broader  provisions to                                                                    
DNR, such as income tax  relief. The companies reported that                                                                    
they  would not  take the  credit  if forced  to share  that                                                                    
data. If  the income tax  relief is taken, the  company does                                                                    
not qualify  for other  exploration and  development credits                                                                    
which  are much  more  valuable. Companies  are required  to                                                                    
provide data,  except for when  it is related to  income tax                                                                    
Senator Wagoner  added that there are  "corner shooters". If                                                                    
drilling data  is made available, competing  companies would                                                                    
take  advantage of  the proximity  to wells  on land  leases                                                                    
with corners.                                                                                                                   
Senator Thomas  thought that a data-collecting  aspect could                                                                    
be added later.                                                                                                                 
9:38:38 AM                                                                                                                    
Co-Chair Stedman requested  that Commissioner Galvin explain                                                                    
the bill's components.                                                                                                          
PAT GALVIN,  COMMISSIONER, DEPARTMENT OF  REVENUE, suggested                                                                    
the  bill be  broken  down into  three  segments. The  first                                                                    
segment  would  be  targeted  credits  for  gas  exploration                                                                    
everywhere south  of the  North Slope.  This section  of the                                                                    
bill  provides  an  alternative   to  using  production  tax                                                                    
credits in  the form of a  corporate income tax credit  - 25                                                                    
percent  of  expenditures  for   gas  exploration.  It  also                                                                    
enhances  an  existing  program by  increasing  it  from  10                                                                    
percent to 25 percent.                                                                                                          
Commissioner  Galvin explained  that the  second area  deals                                                                    
with jack-up  rigs, an  area DNR has  focused on  for years.                                                                    
There  is an  economic hurtle  to overcome  to get  these in                                                                    
place. He opined that they  would be used by many companies.                                                                    
The bill  provides for a  creative way to  attract companies                                                                    
to explore and drill new wells.                                                                                                 
Commissioner   Galvin  related   that  the   third  category                                                                    
enhances the overall production  tax system; capital credits                                                                    
allowed  the   first  year  and   the  elimination   of  the                                                                    
requirement  to  make  additional investments  in  order  to                                                                    
qualify   for   a   state   purchase   of   capital   credit                                                                    
certificates.  Existing companies  take  advantage of  these                                                                    
companies;  however,  new  companies   don't  know  if  they                                                                    
qualify for  full value. The  bill eliminates a  barrier and                                                                    
allows companies to purchase certificates.                                                                                      
9:43:50 AM                                                                                                                    
Co-Chair  Stedman  recalled  past dialogue  about  splitting                                                                    
credits or  postponing them. He requested  information about                                                                    
why the credits are allowed to be taken in one year.                                                                            
Commissioner  Galvin  explained  the reasoning  behind  that                                                                    
provision. It  would enhance  the value  of the  credits. It                                                                    
would be an  economic driver for the companies  and not have                                                                    
a  large  impact  on  the   state.  From  an  administrative                                                                    
viewpoint, it is  less cumbersome to give the  credit at one                                                                    
Co-Chair Stedman  asked if that  reason overrides  the issue                                                                    
of   predictability  to   the  state.   Commissioner  Galvin                                                                    
appreciated  the question.  He  said that  during the  50/50                                                                    
discussion  there was  merit to  spreading the  credits over                                                                    
two years.  It was  discovered that  the information-sharing                                                                    
part has proven to be more valuable.                                                                                            
Co-Chair Stedman  asked about  the timing  of the  change to                                                                    
one  year. Commissioner  Galvin explained  that the  bill is                                                                    
currently   written  so   that  the   changes  take   effect                                                                    
immediately, which  is problematic. He thought  an amendment                                                                    
would  clean  up  the  effective   date  and  make  the  two                                                                    
provisions retroactive to January 1, 2010.                                                                                      
9:48:01 AM                                                                                                                    
Co-Chair  Stedman noted  two fiscal  notes, one  zero fiscal                                                                    
note  from  the Department  of  Natural  Resources, and  one                                                                    
indeterminate fiscal note from the Department of Revenue.                                                                       
Senator Huggins MOVED to ADOPT New Amendment 1:                                                                                 
     Page 1, line 4, following "in the state;":                                                                                 
     Insert "relating to interest on certain underpayments                                                                      
     or overpayments for the oil and gas production tax;"                                                                       
     Page 1, line 7, following "basin;":                                                                                        
     Insert "relating to the use of the oil and gas tax                                                                         
     credit   fund   to    purchase   certain   tax   credit                                                                    
     Page 5, following line 21, insert a new section that                                                                       
     reads: *Sec. 8.  AS 43.55.020 is amended by adding a                                                                       
     new subsection to read:                                                                                                    
          (i)  Notwithstanding any contrary provision of AS                                                                     
     43.05.225 or (g) or (h) of this section, if the amount                                                                     
     of  a tax  payment, including  an installment  payment,                                                                    
     due under (a)(1)  - (4) of this section  is affected by                                                                    
     the  retroactive application  of  a regulation  adopted                                                                    
     under  this  chapter,  the department  shall  determine                                                                    
     whether the  retroactive application of  the regulation                                                                    
     caused an underpayment or an  overpayment of the amount                                                                    
     due  and  adjust  the  interest  due  on  the  affected                                                                    
     payment as follows:                                                                                                        
          (1)if an underpayment of the amount due occurred,                                                                     
     the   department  shall   waive  interest   that  would                                                                    
     otherwise accrue for the  underpayment before the first                                                                    
     day of  the second month  following the month  in which                                                                    
     the regulation became effective, if                                                                                        
           (A) the    department    determines   that    the                                                                    
              producer's underpayment resulted because the                                                                      
              regulation was not in effect when the payment                                                                     
              was due; and                                                                                                      
           (B) the producer demonstrates that it made a                                                                         
              good faith estimate of its tax obligation in                                                                      
              light of the regulations then in effect when                                                                      
              the payment was due and paid the estimate tax;                                                                    
                (2)if  an  overpayment  of  the  amount  due                                                                    
     occurred  and   the  department  determines   that  the                                                                    
     producer's overpayment resulted  because the regulation                                                                    
     was  not  in  effect  when the  payment  was  due,  the                                                                    
     obligation for  a refund for  the overpayment  does not                                                                    
     begin to  accrue interest  earlier than  the following,                                                                    
     as applicable:                                                                                                             
               (A)except as otherwise  provided under (B) of                                                                    
               this paragraph,  the first day of  the second                                                                    
               month  following  the   month  in  which  the                                                                    
               regulation became effective;                                                                                     
               (B)90 days  after an amended  statement under                                                                    
               AS   43.55.030(a)  and   an  application   to                                                                    
               request a  refund of  production tax  paid is                                                                    
               filed, if  the overpayment  was for  a period                                                                    
               for  which  an  amended  statement  under  AS                                                                    
               43.55.030(a) was required  to be filed before                                                                    
               the regulation became effective.                                                                                 
     Renumber accordingly.                                                                                                      
     Page  9, following  line 11,  insert new  sections that                                                                    
     *Sec. 15. The uncodified law  of the State of Alaska is                                                                    
     amended by adding a new section to read:                                                                                   
          TRANSITION: APPLICABILITY OF SEC. 8 OF THIS ACT.                                                                      
     Section  8  of this  Act  applies  to taxes,  including                                                                    
     installment payments of estimated  tax, due on or after                                                                    
     January 1, 2006.                                                                                                           
     *Sec. 16. The uncodified law  of the State of Alaska is                                                                    
     amended by adding a new section to read:                                                                                   
          RETROACTIVITY OF SECS. 8-10 OF THIS ACT.  (a)                                                                         
     Section  8 of  this Act  is retroactive  to January  1,                                                                    
          (b) Sections 9 and 10 of this Act are retroactive                                                                     
     to January 1, 2010.                                                                                                        
     *Sec. 17. The uncodified law  of the State of Alaska is                                                                    
     amended by adding a new section to read:                                                                                   
          RETROACTIVITY OF REGULATIONS.  Notwithstanding                                                                        
     any   contrary  provision   of  AS 44.62.240,   if  the                                                                    
     Department  of  Revenue  expressly  designates  in  the                                                                    
     regulation  that the  regulation applies  retroactively                                                                    
     to  a  specific  date,  a  regulation  adopted  by  the                                                                    
     Department  of Revenue  to  implement, interpret,  make                                                                    
     specific, or otherwise  carry out secs. 8, 9,  or 10 of                                                                    
     this Act applies retroactively to that date.                                                                               
     *Sec. 18.  Section 13 of  this Act takes effect July 1,                                                                    
     Renumber accordingly.                                                                                                      
     Page 9, line 12, following "Sec. 15.":                                                                                     
          Delete "This"                                                                                                         
          Insert "Except as provided in sec. 18 of this                                                                         
     Act, this"                                                                                                                 
     Renumber accordingly                                                                                                       
Co-Chair Stedman OBJECTED.                                                                                                      
Senator Huggins  stated that  the amendment  represents fair                                                                    
play   and  prevents   unintended  consequences   from  both                                                                    
overpayment and underpayment scenarios from the taxpayers.                                                                      
Commissioner   Galvin  explained   that  the   amendment  is                                                                    
designed  to   clarify  that  when  there   are  regulations                                                                    
requiring retroactivity,  the tax penalty would  not acquire                                                                    
interest on  the underpayment. The department  currently has                                                                    
discretion to waive penalties, but not interest.                                                                                
Co-Chair Stedman asked for a  synopsis of the interest rate.                                                                    
Commissioner Galvin  explained that  the interest rate  is a                                                                    
formula; the higher of either  11 percent or 5 percent above                                                                    
the treasury rate.                                                                                                              
Co-Chair  Stedman   asked  how   often  it   is  compounded.                                                                    
Commissioner Galvin said quarterly.                                                                                             
Co-Chair  Stedman informed  the public  about a  concern the                                                                    
amendment addresses.                                                                                                            
9:51:58 AM                                                                                                                    
Commissioner Galvin  referred to  the bottom  of page  2 and                                                                    
onto  page 3,  which clarifies  the effective  dates of  the                                                                    
various sections of the bill.                                                                                                   
Co-Chair  Stedman WITHDREW  his  OBJECTION.  There being  NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
Senator Thomas WITHDREW Amendment 2.                                                                                            
AT-EASE        9:52:53 AM                                                                                                     
RECONVENED     9:54:10 AM                                                                                                     
Co-Chair Stedman  turned to the public  testimony portion of                                                                    
the hearing.                                                                                                                    
9:54:41 AM                                                                                                                    
CARRI   LOCKHART,   MARATHON  OIL,   (via   teleconference),                                                                    
testified  in  support  of the  legislation.  She  commented                                                                    
about the  need for on-going, long-term  exploration in Cook                                                                    
Inlet.  She spoke  about uncertainties  in  the market.  She                                                                    
stressed that  in order  to qualify  for the  investment tax                                                                    
credit, Marathon Oil has to  make capital investments, which                                                                    
will add some value back to the state.                                                                                          
9:58:13 AM                                                                                                                    
Senator Wagoner stated that the bill was good for Alaska.                                                                       
SB  309  was  heard  and   HELD  in  Committee  for  further                                                                    
AT-EASE        9:59:18 AM                                                                                                     
RECONVENED     10:00:08 AM                                                                                                    
Co-Chair  Hoffman  brought the  meeting  back  to order.  He                                                                    
noted  it was  the first  hearing  of HB  365; however,  the                                                                    
companion bill, SB 255, was heard on April 9.                                                                                   

Document Name Date/Time Subjects
SB 309 Amendment 1 Huggins SFIN 041510.doc SFIN 4/15/2010 9:00:00 AM
SB 309
SB 309 Royalty Sheet 041510.pdf SFIN 4/15/2010 9:00:00 AM
SB 309
SB 309 041510 SFIN Memo from DOR.pdf SFIN 4/15/2010 9:00:00 AM
SB 309
SB 309 041510 Alaska Oil and Gas Tax and Royalty Incentives.pdf SFIN 4/15/2010 9:00:00 AM
SB 309
SB 309 041510 Alaska Oil and Gas Tax Legislation Comparison .pdf SFIN 4/15/2010 9:00:00 AM
SB 309
SB 309 041510 CIWellExample_ds_20100412.pdf SFIN 4/15/2010 9:00:00 AM
SB 309