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Exploration incentive credits bill moves in House; Myers says needs some work HB 307 adds three years to existing program, would allow Andex Resources to apply for work it plans in Nenana basin where it has applied for an exploration license Kristen Nelson PNA Editor-in-Chief
Two financial incentives the state has used to encourage exploration — exploration incentive credits and discovery royalties — are being discussed in the Legislature this year as Andex Resources LLC looks for ways to reduce its exploration risk in the Nenana Basin. (See related story about Andex and Doyon Ltd. on page 2.)
The bills, House Bill 307, extending the state’s exploration incentive credits program for three years, and HB 308, expanding the current Cook Inlet discovery royalty program to the Tanana River drainage, were sponsored by Rep. Hugh Fate, R-Fairbanks. Jim Dodson, executive vice president of Andex, testified in support of the bills.
HB 307, exploration incentive credits, moved out of the House Special Committee on Oil and Gas Jan. 31 and out of House Resources Feb. 1 after hearings in both committees.
HB 308, discovery royalty reduction, was held in House Oil and Gas after vigorous opposition from the Division of Oil and Gas. (See sidebar to this story.)
The exploration incentive credits program was passed in 1994 for a 10-year period, state Division of Oil and Gas Director Mark Myers told the committees. The program allows the commissioner of the Department of Natural Resources to grant a credit against royalties, taxes, lease bonuses or rentals. The credit can be as much as 50 percent of the cost of geophysical information, stratigraphic test wells or exploration wells on non-leased state lands, Myers said, and up to 25 percent of the cost of the same programs on Native or federal land.
The credit was established to allow the state access to information it wouldn’t normally get and to allow it to show that information to companies who might want to bid in a state oil and gas lease sale, Myers said.
Thirty million dollars was allowed for the entire program, up to $5 million per project.
Myers said that credits of more than $50 million have been given in previous exploration incentive credit programs, but none in the current program.
The state received two applications. Anadarko Production Corp. applied for seismic in the National Petroleum Reserve-Alaska and was offered an 18 percent incentive credit, but didn’t accept because the state could show the data to other companies. Another application was received for geochemical data. Myers said the state didn’t grant that application because it already had seismic data for the area and didn’t think geochemical was important enough to help pay for. Extension the issue The exploration incentive credits program was passed in 1994 for a 10-year period, state Division of Oil and Gas Director Mark Myers told the committees. The program allows the commissioner of the Department of Natural Resources to grant a credit against royalties, taxes, lease bonuses or rentals. The credit can be as much as 50 percent of the cost of geophysical information, stratigraphic test wells or exploration wells on non-leased state lands, Myers said, and up to 25 percent of the cost of the same programs on Native or federal land.
The credit was established to allow the state access to information it wouldn’t normally get and to allow it to show that information to companies who might want to bid in a state oil and gas lease sale, Myers said.
Thirty million dollars was allowed for the entire program, up to $5 million per project.
Myers said that credits of more than $50 million have been given in previous exploration incentive credit programs, but none in the current program.
The state received two applications. Anadarko Production Corp. applied for seismic in the National Petroleum Reserve-Alaska and was offered an 18 percent incentive credit, but didn’t accept because the state could show the data to other companies. Another application was received for geochemical data. Myers said the state didn’t grant that application because it already had seismic data for the area and didn’t think geochemical was important enough to help pay for. Value to state? Myers said there is a wrinkle in the current interest in exploration incentive credits.
Rep. Fate said Andex, a privately owned independent based in Houston, Texas, was interested in exploration incentive credits for work it plans in the Nenana Basin, at least some of which will occur after the program ends in 2004.
But, Myers said, the basin is not in a traditional competitive oil and gas lease sale area. Andex has applied for a 500,000 acre exploration license in the basin and that license will preclude competitive leasing for whatever license term the state grants, plus the initial term of whatever leases Andex takes in the license area following its exploration program.
This raises the issue, Myers said, of whether the data has value to the state. The exploration incentive credit program was set up, he said, to allow the state access to data it could use in its competitive oil and gas leasing program.
Myers said DNR’s position on this legislation is neutral: “We think it’s a policy call for the Legislature.” But, he said, DNR would like the Legislature to clarify its intent for the credit in exploration license areas.
If the Legislature now intends that credits be given to reduce company risk, it needs to put that purpose in place in statute, he said, because right now the commissioner can only evaluate proposals based on the value of the data to the state.
Myers also said that the Department of Law is researching whether a credit can be given in a license area, since it applies only to areas on non-leased land. Credit just like cash Asked by House Oil and Gas Committee Chairman Ogan about the commissioner’s discretion in granting a credit, Myers said it is pretty clear that the intent of the Legislature was for the commissioner to have discretion on how much he valued the information.
Rep. Fate asked if the credit would come out of the production stream and Myers said that while it can be applied on rentals, royalties and bonus bids, it would be likely that the credit would be sold to a company with production: “It’s just like cash in essence,” he said.
A licensee doesn’t have rentals or bonuses, taxes or royalties, “so they have nothing to take” the credit off of.
Myers said the state believes the Nenana Basin is a “very attractive basin, especially for gas.” Two wells have been drilled in the basin, he said, but neither was deep. It has “very prospective reservoir rocks … gas was generated in the basin,” he said.
The state held a competitive oil and gas lease sale in the basin in 1982 and received 14 bids and ARCO Alaska Inc. drilled following the sale.
The basin is also close Fairbanks and to highway infrastructure. With gas selling at $8 a thousand cubic feet in Fairbanks, there is an incentive for exploration and Myers said the state expects to issue the exploration license this fall.
A company pays $1 an acre for the license: all other money goes into exploration. But, Myers said, the state could have gotten some $10.5 million in bonus bids and rentals in a competitive oil and gas lease sale if those 500,000 acres had received bids at $5 an acre. Andex’s Nenana plans Jim Dodson told House Oil and Gas that Andex hopes to have its exploration license for the Nenana Basin this year.
ARCO walked away from exploration in the basin because the Fairbanks gas market wasn’t a significant market for them, he said.
“It’s the right-sized project for a company our size.” No one has ever drilled to 12,000 or 14,000 feet in the basin, so “we don’t know particularly what kind of seal rock we may have in the basin,” Dodson said.
Andex hopes to get its exploration license early enough this year that it can apply to shoot seismic over the basin in the winter of 2002-2003.
The company would look at the seismic and then drill in 2003-2004. If more than one prospect was apparent from the seismic data, he said, the company could drill two wells in 2004 and hook up with gas to Fairbanks as early as 2005.
Rep. Ogan asked Dodson to elaborate on the company’s drilling plans, and Dodson said that after the company shoots seismic it would use it to generate prospects, when drill a well in 2003-2004. Andex would also want “a good set of sonic logs to tie into the seismic database” to better define information from the seismic with porosity and density information from sonic logs. That would probably happen in the summer of 2004 and then in the winter of 2004-2005 the company could drill one to three wells and then decide on a pipeline.
The seismic would probably be predominately two-dimensional, he said, although some 3-D would also be shot.
Initial costs are $500,000 for the exploration license, $6 million for seismic and $6 million per well. Dodson said Andex thinks three wells will be required, so project cost would be more than $24 million before the pipeline. Risk reduction Asked by Rep. Gretchen Guess, D-Anchorage, how the exploration license and exploration incentive credit were viewed by Andex, Dodson said that in the absence of a lease in the area, “the license was important to us because we don’t want to be out spending money on a block of land unless data we acquire will be beneficial to us.” The credit, he said, “makes the decision to drill less risky… we do see the two fitting hand and glove: In the absence of a license we wouldn’t spend money on a well.”
Dodson said Andex’s interest in the exploration incentive credit “is to help us in carrying out our exploration effort while reducing the capital risk.” The state, he said, would be promoting gas to Fairbanks.
In response to a question from Rep. Reggie Joule, D-Kotzebue, Dodson said Andex is also interested in other basins in the state: “of most interest after this would be Yukon Flats and Susitna Basin and a possible joint venture with Forest.” Who takes the risk? HB 307 was passed out of House Oil and Gas Jan. 31 and the discussion continued in House Resources Feb. 1.
Rep. Beth Kerttula, D-Juneau, asked Myers why the state would want to reduce the risk on a basin like the Nenana, which looked so good for gas.
Myers said old 2-D seismic shows the basin and there have been gas shows, but no commercial reservoir was encountered in the two wells drilled. The deepest part of the basin hasn’t been tested.
“It’s clearly not a slam dunk… The structures are there, reservoirs there, gas there. The question is, are the traps there?”
Not only do they have to find gas, they also have to find a large enough quantity to justify possible gas treatment plant and a gas transportation system, Myers said.
If the exploration incentive credit program is extended and if credits are granted in the Tanana Basin, “other basins would want equal treatment, would have similar expectations,” he said.
Rep. Joe Green, R-Anchorage, said the risk is to the company, not to the state.
“What are we giving up for what we might get back? We’re risking some amount of money we might have gotten if they’d gone in without state help… even if we pass this, it’s no guarantee … the commissioner will grant exploration incentive credit… …if we can ease some of those concerns I think the returns to the state would be huge…”
Rep. Fate said the risks to companies are huge: “they have to decide whether to spend millions for 3D seismic and millions for a well.” The state, he said, risks “not developing an environmentally clean resource” if companies don’t drill.
House Resources passed HB 307 out of committee at the end of the hearing.
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