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Frontier basins credits, tax cut approved ‘Middle earth’ bill started out as exploration credits for Nenana basin; expanded to include five other areas close to communities Kristen Nelson Petroleum News
Rep. Steve Thompson, R-Fairbanks, designed House Bill 276 to help solve high energy prices in Fairbanks by providing exploration credits for the Nenana basin, which could supply energy for Fairbanks.
Another of Thompson’s bills, HB 289, provided credits for construction of liquefied natural gas storage tanks.
Both measures passed the Legislature April 15, not as separate bills, but rolled into Senate Bill 23, a bill on film tax credits which passed the Senate last year.
When the House Majority held a press availability after the Legislature gaveled out April 16, Thompson described getting the bills passed as a rollercoaster ride. He said while the bills didn’t provide a near-term fix to high energy costs, he said the bills put some things in place that would bring energy relief to Fairbanks and rural areas in the mid-term.
The House Resources Committee spent considerable time on HB 276 and a committee substitute applied the exploration credits to five other unexplored or underexplored basins close enough to communities that hydrocarbons found would help reduce energy costs.
The House passed HB 276 by a vote of 35 to 2.
North Slope vehicle in Senate In the Senate Finance Committee, however, HB 276 became the vehicle for a North Slope tax reduction for new oil. This was after the Senate’s more comprehensive oil tax change, SB 192, couldn’t garner enough support in the Senate Bipartisan Working Group to be advanced to the floor.
The Senate passed the amended HB 276 by a 17 to 3 vote April 14.
Had the House concurred in the Senate amendment to HB 276 that would have meant House acceptance of the Senate’s North Slope new-oil tax reduction without a hearing.
Had the House voted not to concur, the “frontier basins stampede” credits could well have died because the Legislature was so close to gaveling out.
House Rules, meeting April 15, the last day of session, came up with another solution and Thompson withdrew HB 276 on the House floor.
The Rules Committee added the so-called “middle earth” or “frontier basins stampede” provisions of HB 276, along with HB 289, to Senate Bill 23, which started life in January of 2011 as an extension of the state’s film tax credit and had passed the Senate 18 to 1 in April 2011. The new oil tax provisions added to HB 276 in Senate Finance were not included.
The House Rules version of SB 23 — now containing frontier basin tax credits and tax credits for LNG tank storage in addition to film credits — passed the House by a vote of 37 to 2; the Senate concurred by a vote of 19 to 1.
Frontier basins The “frontier basins stampede” portion of SB 23 provides exploration credits for drilling and seismic, and a reduced production tax for the first seven years of production.
Thompson told House Rules that incentives combined in SB 23 “have been thoroughly briefed in both bodies by many committees.” He said the incentives in the bill “will encourage commerce with credits for the film industry, new oil and gas in under, unexplored regions and the commercialization of natural gas to Alaskans, quite possibly by Alaskans.”
The production tax will be reduced to 4 percent for the first seven years of commercialization or production for oil or gas produced outside the Cook Inlet sedimentary basin and not including land north of 68 degrees latitude (i.e. the North Slope) for production beginning after Dec. 31, 2012, and before Jan. 1, 2022.
The exploration drilling credit is for the lesser of $25 million or 80 percent of total exploration drilling expenditures; the seismic credit is the lesser of $7.5 million or 75 percent of total seismic exploration expenditures.
According to cost estimates for a North Nenana well prepared for Doyon Ltd. and included with House Resources Committee documents, costs for wells between 8,000 and 12,000 feet measured depth would range between $22.8 million and $27.6 million; these wells assume a summer barging operation and include the cost of barging, mobilizing and demobilizing a rig from Nenana. Petrotechnical Resources of Alaska, which prepared the estimate, said time for the drilling was based on the 2009 Nunivak No. 1 well; drilling rig costs were assumed to be $51,000 per day reflecting the current tight rig market; equipment, materials and other costs were based on the Nunivak No. 1 escalated by 12.5 percent for inflation; completion costs were based on a current Kenai drilling program with 25 percent increase for the remote operation; and a contingency was added for delays from drilling problems, fire delays or weather conditions.
Pre-approval required Before work is done the explorer must submit to the commissioner of the Department of Natural Resources “the information necessary to determine whether the geologic objective of the well is a potential oil or gas trap that is distinctly separate from any trap that has been tested by a preexisting well,” SB 23 says.
The credits are available for the first four exploration wells within the areas specified and are limited to the first two exploration wells within a single area. Work must be done between June 1, 2012, and July 1, 2016.
Seismic credits are available for the first four seismic exploration projects and are limited to one seismic exploration program per area.
In exchange for the tax credits, the recipient must agree to provide to the state specific data acquired through the project.
The frontier basin areas covered in the bill include: within 100 miles of Kotzebue; within 150 miles of Fairbanks (Nenana and Yukon Flats basins); within 50 miles of Emmonak; within 50 miles of Glennallen; within 100 miles of Egegik; and within 100 miles of Port Moller.
LNG storage credits The other oil and gas bill consolidated under SB 23, HB 289, provides a tax credit for investment in a liquefied natural gas storage facility that begins operation before Jan. 1, 2020.
The facility must be regulated as a utility and available to furnish LNG storage to customers, utilities or industrial facilities.
A sponsor statement by Thompson said HB 289 provides an incentive for the private sector delivery of lower cost natural gas to Interior Alaska by extending tax credits to an LNG trucking project for the Interior.
The bill provides tax credits to tanked storage with a minimum volume of 25,000 gallons with the credit limited to 50 percent of construction costs up to $15 million, allowing areas of Alaska which lack the depleted gas reservoirs available in Cook Inlet a monetary incentive for costs associated with constructing aboveground tanks for storing LNG. The credit also applies to expansions of existing facilities as long as the expansion is a minimum of 25,000 gallons.
The bill also provides for an exemption from land lease payments for up to 10 calendar years for lands leased from the state for LNG storage facilities.
The bill passed the House 36 to 1 April 4.
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