Legislature(2009 - 2010)BUTROVICH 205

03/31/2010 03:30 PM Senate RESOURCES

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Audio Topic
03:32:30 PM Start
03:33:47 PM SB255
03:36:16 PM HB162
03:41:22 PM Overview by Dnr and Dor on Cook Inlet Incentives
04:20:46 PM SB309
04:52:31 PM SB290
05:06:02 PM HB280
05:35:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview by DOR & DNR on Cook Inlet Gas TELECONFERENCED
Heard & Held
Heard & Held
Heard & Held
Bills Previously Heard/Scheduled
Moved SB 255 Out of Committee
Moved SCS HB 162(RES) Out of Committee
         SB 290-TAX CREDIT TO DRILL WELLS IN COOK INLET                                                                     
4:52:31 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  SB   290   to   be  up   for                                                               
4:52:53 PM                                                                                                                    
MARY JACKSON,  staff to Senator  Wagoner, said the tax  credit in                                                               
SB 290  is patterned after  the Oklahoma  land rush and  it deals                                                               
exclusively  with  exploration.  They  call  it  the  Cook  Inlet                                                               
Stampede.  It basically  says that  the first,  second and  third                                                               
explorer that comes  gets a good benefit starting  at 100 percent                                                               
and then going down  to 75 percent and down to  50 percent. It is                                                               
offered  under  the  alternative  tax  credit  for  oil  and  gas                                                               
exploration in Section 1.                                                                                                       
Section 2 of the bill defines  exactly what it is by defining the                                                               
first three  explorers as those drilling  into the sub-Cretaceous                                                               
zone. It  allows for  only one  credit per  explorer and  if more                                                               
than one qualifies  for one event, the  department will determine                                                               
the percentage of  the credit goes to each. A  unique twist is if                                                               
the exploration  results in production in  paying quantities, the                                                               
credits  are required  to be  repaid by  50 percent.  Finally, if                                                               
explorers  come in  and actually  start producing  it strengthens                                                               
the Basin.                                                                                                                      
MS.  JACKSON reviewed  materials  in the  packet  that include  a                                                               
sponsor  statement,   a  sectional  analysis,  a   memorandum  of                                                               
understanding  from the  Department  of  Revenue (November  2009)                                                               
that said there  was a recent review by the  department, a letter                                                               
of support  from Escopeta Oil,  a stratigraphic map  that depicts                                                               
the zones and a  recent DNR oil and gas activity  map. A March 30                                                               
DOR fiscal note  is indeterminate. She pointed out  that this new                                                               
credit,  if  it's $20  million  and  they would  have  originally                                                               
gotten a 40 percent credit; it's  a difference of 60 percent, not                                                               
the full $20 million.                                                                                                           
She said language  needed to be developed that  clarifies this is                                                               
intended  only   for  offshore  exploration.  State   leases  are                                                               
offshore  in   the  Cook  Inlet  Basin;   therefore,  information                                                               
received from  drilling of the  well becomes public and  DNR gets                                                               
to see it.                                                                                                                      
4:57:18 PM                                                                                                                    
The  DNR  recommended changing  the  sub-Cretaceous  to the  pre-                                                               
Tertiary period.  The third point  talks about the  possible need                                                               
for three credits  for jack-up rigs and  permanent platforms that                                                               
are already there. A fourth is a  question from DOR as to what is                                                               
considered transportation,  although she is  reasonably confident                                                               
that is  addressed. The last  issue was  raised by the  DOR which                                                               
was an  oversight - a 25  percent net operating loss  for capital                                                               
credits -  and nowhere was it  ever intended that anyone  get 125                                                               
percent. So that needs to be clarified.                                                                                         
4:58:50 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  read  a   statement  from  Escopeta  Oil,                                                               
because he thought it was  "pretty amazing." It predicts that the                                                               
Kitchen  Lights Unit  (KLU)  contains  approximately 440  million                                                               
barrels of recoverable  oil and 5 tcf of natural  gas. It goes on                                                               
to  say that  after  platform  and infrastructure  implementation                                                               
there could  be approximately 75,000  million barrels of  oil and                                                               
300 mmcf of gas per day from the KLU anticlinal feature alone.                                                                  
SENATOR WAGONER  added that  a portion of  the reserves  they are                                                               
talking about  are from  the Sunfish  that ARCO  discovered years                                                               
ago and  didn't produce because the  price went down to  about $9                                                               
5:00:03 PM                                                                                                                    
MS. DAVIS  said after conferring  with Kevin Banks,  she believed                                                               
SB 290 would  require DNR and DOR to work  together to administer                                                               
this particular credit. First they  want to make abundantly clear                                                               
that language on page  2, line 6, about the first  to bore a hole                                                               
either implies  that you have  spudded the well (begun  to drill)                                                               
or completed  it. The  joint recommendation would  be to  go with                                                               
the spud date for two reasons:  one, it insures that good quality                                                               
field  practices are  being  applied to  the  drilling well,  and                                                               
second, the spud  date is recorded by date and  hour in the event                                                               
there is competition  between two players. The DNR  would have to                                                               
come  up with  some  sort of  certification  or determination  on                                                               
whether a well results in production in paying quantities.                                                                      
5:02:41 PM                                                                                                                    
KEVIN BANKS,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural Resources (DNR),  explained that the notion  here is that                                                               
you drill  a well into a  target that hasn't been  discovered - a                                                               
sub-Cretaceous  or pre-Tertiary  zone. If  production comes  from                                                               
that zone,  then part of the  credit would be paid  back. He said                                                               
that typically  exploration wells are not  converted in producers                                                               
for  a number  of reasons  relating to  location of  the resource                                                               
when it comes time to produce after further field evaluations.                                                                  
CO-CHAIR  WIELECHOWSKI  asked  if  he  had  any  public  data  on                                                               
reserves in the sub-Cretaceous zone.                                                                                            
MR. BANKS answered  that they don't know very much  about what is                                                               
in  the sub-Cretaceous  zone;  possibly a  well  in the  McArthur                                                               
River that struck oil at that  depth could qualify, but he didn't                                                               
know if it had ever been produced.                                                                                              
MS. DAVIS pointed out that if  the first rig that comes into Cook                                                               
Inlet receives  100 percent of its  cost as its credit,  then you                                                               
have essentially achieved the objective  of getting a jack up rig                                                               
into   Cook   Inlet.   Under  the   current   lease   expenditure                                                               
regulations,  the cost  of mobilizing  that rig  to the  State of                                                               
Alaska is  fully allowed  as a lease  expenditure. But  once that                                                               
rig  is  in  Alaska,  they   also  allow  the  deduction  of  the                                                               
demobilization to  other parts  of Alaska, but  not if  it leaves                                                               
Alaska.  Hopefully, she  said,  the  rig should  be  put to  work                                                               
numerous times in Alaska.                                                                                                       
5:05:38 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI set SB 290 aside.                                                                                         

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