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Wanted: More wells Alaska tax credit designed to make state more competitive, boost exploration Kristen Nelson Petroleum News Editor-in-Chief
Gov. Frank Murkowski has a deal for you: drill an exploration well or shoot exploration seismic in Alaska and the state will give you a production tax credit.
The legislation, introduced in the Alaska Senate May 13 as an amendment to Senate Bill 185, provides a tax credit of 20 percent on exploration wells drilled three miles from the nearest well.
And if you really want to see the back country, there is an additional tax credit of 20 percent for wells 25 miles or more from facilities.
Exploration seismic shot in Alaska gets a 40 percent tax credit You don’t have any production against which to take a credit?
Not a problem. You can sell these tax credits to a company which does have production. The producer is probably going to offer you less than full face value, but the tax credit certificate will be worth the face value when applied to the producer’s production taxes.
Alaska’s exploration costs highest Why is the governor pushing this legislation?
One reason is that the trans-Alaska pipeline is carrying only about half the oil it is built to carry.
The other is the decline in exploration drilling in the state.
“We’re told that there are three exploration wells planned for next year, and one that is kind of a test well, it’s not exploration in the true sense of the world,” the governor told reporters May 12.
He said Alaska’s exploration costs are the highest of any oil province in the world. Murkowski said the state is consulting with Pedro van Meurs, an expert on petroleum fiscal regimes.
In a paper on the proposed tax credit van Meurs said:
“The low level of exploration for new oil fields in Alaska indicates that the fiscal terms in Alaska are generally not competitive with other jurisdictions.”
That, according to the Department of Revenue’s fiscal note on the tax credit, is what the credit would fix: the department says the credit “brings Alaska more in line with international competitive practices, removing a disincentive for exploration in Alaska relative to other oil regions.” Amendment to Cook Inlet bill The tax credit was introduced as an amendment by Sen. Tom Wagoner, R-Kenai, to Senate Bill 185, a bill to reduce royalties in Cook Inlet to keep existing facilities operating as production declines.
“We think that this tax credit could more or less prime the pump,” the governor said, “… to introduce more activity here.”
Wagoner said the goal of the incentive is to “increase the development and exploration in the state of Alaska.” Alaska is “still a revenues-driven economy,” he said: “right now we have no other place to go for revenues.”
There are very few drilling rigs active in Alaska now, he said.
“I think this incentive gives the oil companies enough incentive to start exploration here in Alaska again.”
The goal is to give them that incentive for work this winter and the bill is, accordingly, moving fast. Amended SB 185 was heard in the Senate Finance committee May 13-14. It was on the Senate calendar for third reading May 15. What qualifies? There are two models for the tax credits, Tarn and Alpine, Dan Dickinson, director of the Department of Revenue’s Tax Division, told Senate Finance.
There is a 20 percent credit “for exploration that is done more than three miles from a prior existing well: the Tarn analogy. These are going to be small accumulations that will be close to current infrastructure.” And they can get into production fast. At Tarn it took 18 months from discovery until oil hit the pipeline.
For exploration 25 miles beyond infrastructure there is an additional 20 percent tax credit. This is the Alpine model, Dickinson said, “true rank wildcat exploration,” a combined 40 percent credit, which is the same credit applied to exploration seismic.
The tax credits are for work begun after July 1, 2003, and run for four years. The credits can be used against production after July 1, 2004.
Mark Myers, director of the Department of Natural Resources’ Division of Oil and Gas, told the committee that to qualify for the tax credit, exploration has to be outside of units. It would benefit companies trying to farm out interests on properties and it will help independents who “are always searching for capital for that last 20 to 30 percent of the project that they have not been able to find.”
In exchange for the seismic credit, that seismic data would become public after 10 years, “a clear value that we don’t have now that helps everyone across the board, particularly companies that don’t have a large database of seismic,” Myers said.
The tax credit “certainly doesn’t solve all the issues independents or others have,” he said, “but I do believe a credit of this magnitude will help all size companies in their exploration efforts.” The cost? Sen. Robin Taylor, R-Wrangell, said the $100 million per year fiscal note provided by the Department of Revenue was a concern to him.
That figure comes from the Department of Revenue’s fiscal note.
Dan Dickinson, director of Revenue’s Tax Division, told Petroleum News May 14 that the $100 million is probably high for the first year.
“If you did a probability distribution, $100 million is probably on the high end for the first year. Is it the same for all four years? No, it’s probably going in grow after the first year.”
Dickinson said he thinks it will take companies some time to ramp up, get permits, etc., so he thinks there will be less of an impact in year one than later.
The discussion in the fiscal note says the department assumed that 75 percent of current exploration expenditures would be eligible for the 20 percent production credit and 30 percent would be eligible for the additional 20 percent, creating a reduction of approximately $50 million per year in revenues. If the tax credit doubles the same type of exploration, the annual reduction in oil and gas production tax revenues would be $100 million a year.
“However,” the department said, “if the exploration leads to further production, there could be additional royalties, oil production taxes, oil and gas property taxes and corporate income taxes totaling hundreds of millions of dollars in subsequent years.”
Those additional revenues would probably not occur until after the four years in which the tax credit is offered.
Concern about Cook Inlet Kevin Tabler, land and government affairs manager for Unocal in Alaska, told the committee he was concerned about losing the original purpose of the bill: royalty reduction on oil from Cook Inlet platforms to extend the economic life of those facilities.
He also said he thought the bill should address exploration statewide. The three-mile arc around existing wellbores, he said, would exempt almost all of Cook Inlet from the tax credit.
He told the committee that exploration for gas in old oil exploration areas and exploration of deeper horizons should be included. Steve Porter, deputy director of the Department of Revenue, suggested that opportunities in Cook Inlet could be addressed in other legislation.
Tabler said that in the mid-’90s there was a royalty reduction bill designed for Cook Inlet which was amended to cover North Slope issues, making the bill “unusable for us and unworkable.” He said he was afraid the same thing was happening with SB 185, a “royalty reduction bill designed for a specific purpose and I’m concerned about being rolled again on this because of the fiscal note.”
Whatever happens, Tabler said, “I don’t want to lose the component of the (Cook Inlet) royalty reduction here.”
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