Legislature(2009 - 2010)BUTROVICH 205

03/31/2010 03:30 PM Senate RESOURCES

Download Mp3. <- Right click and save file as

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

Document Name Date/Time Subjects