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House considers gas tax credit House Bill 220, tax credit incentives for gas exploration and development south of the Umiat Meridian, opposed by state, held for further consideration Kristen Nelson PNA Editor-in-Chief
Marathon Oil Co. is supporting a bill in the House which would give tax credits for successful gas exploration and development south of the Brooks Range. Benefits of the bill, however, were questioned by both the Department of Natural Resources Division of Oil and Gas and by the Department of Revenue, and the bill was held by the House Special Committee on Oil and Gas after testimony March 5.
House Bill 220 (introduced last year by Rep. Pete Kott, R-Eagle River) would establish an exploration and development incentive tax credit for exploration and development of gas — or volumes of oil less than 150 barrels per day — south of 68 degrees north latitude, which is the southern edge of the Umiat Meridian, so the North Slope is excluded.
A statement by the sponsor said the bill creates a new income tax credit to encourage exploration and development of natural gas reserves primarily in Cook Inlet. The tax credit can offset no more than 50 percent of an operator’s annual income tax liability and would be effective for 10 years. The tax credit would be 10 percent of qualified capital investments for each year.
Credits in excess of 50 percent can be carried forward. There would be no credits for dry holes or for development of crude oil. Cook Inlet closed market until 2009 John Barnes, manager for Marathon Oil Co.’s Alaska business, told the committee that project economics are critical to getting projects approved, “and that’s the area in which House Bill 220 can have the largest impact.” Alaska projects are compared with others worldwide, and HB 220 could “level the playing field or even tip it in favor of Alaskan opportunities.”
“Technical data does suggest the high probability of finding additional Cook Inlet reserves,” he said. But the market in Cook Inlet is a closed one, with current utility needs met until about 2009, Barnes said, and that is a disincentive for investments in Cook Inlet.
The price for Cook Inlet gas has historically been “significantly below” Lower 48 gas prices, he said, and this is the area where HB 220 can probably serve as an incentive. Recent Enstar contracts are higher, but, “unfortunately not all producers can avail themselves of these prices.”
The prospects in Cook Inlet could draw investment, Barnes said, and there is some market opportunity, “but probably not at the gas sales price (the investor) could receive if he spent his money elsewhere…” HB 220 could swing the decision to invest in Alaska, he said.
Barnes said that the fiscal note for HB 220 is based on $750 million spent on exploration and development, which at 50 cents to $1 finding cost per thousand cubic feet would equate to finding 750 billion cubic feet to 1.5 trillion cubic feet. In that case, he said, the state shouldn’t be worrying about lost tax revenues, they should congratulate themselves for providing an incentive for finding gas reserves.
Asked by Rep. Gretchen Guess, D-Anchorage, if royalty reduction wasn’t a better approach, Barnes said: “That’s a negotiation and you never know how a negotiation will turn out…” It’s a difference between absolute and relative, he said, and relative doesn’t help swing an investment decision to an Alaska project.
Guess noted there was more development and wells in Cook Inlet than there has been recently, and asked why state money is needed to provide for more activity.
Barnes said that even with three or four onshore rigs running, the activity level isn’t high enough to bring the kind of discoveries you’d like to have. With three rigs running, you might have one discovery. Is that as high as the state would like it to be, he asked. High activity level Mark Myers, director of the Division of Oil and Gas, said the division is seeing a lot more activity in Cook Inlet, and with the recent formation of three new units, nine exploration wells are expected, seven looking for gas.
He questioned whether accelerated activity — in light of a gas market captive to three major users — would result in more gas being brought on line.
Chuck Logsdon, petroleum economist with the Department of Revenue, told the committee Revenue has several concerns.
There are companies with activities in both Cook Inlet and on the North Slope, he said, and most revenues come from the North Slope. Companies with activities in both areas could use the Cook Inlet credit to offset North Slope taxes.
Logsdon also questioned how much additional incentive was necessary to make a project economic. This bill, he said, allows credit without economic justification and could end up just reducing state income without increasing activity.
Logsdon said that the Department of Revenue believes that with this bill there is a very good risk you’d be giving up revenue with a fairly good risk of getting activity that would have occurred any way.
The committee held the bill for further discussion.
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