Session: State Capitol, Room 204 Juneau, AK 99801-1182 Phone: (907) 465-3777 Fax: (907) 465-2819 Interim: 10928 Eagle River Road, Suite 141 Eagle River, AK 99577 Phone: (907) 694-8944 Fax: (907) 694-8945

Sponsor Statement for HB 220
Oil & Gas Tax Credit for Exploration/Dev

An Act establishing an exploration and development incentive tax credit for persons engaged in the exploration for and development of less than 150 barrels of oil or of gas for sale and delivery without reference to volume from a lease or property in the state; and providing for an effective date.

HB 220 creates a new income tax credit to encourage increased exploration and development of natural gas reserves, primarily in the Cook Inlet region. To qualify for the credit, operators must successfully drill and develop hydrocarbon reserves that produce gas for sale and delivery. The credit can offset no more than 50% of an operator's annual income tax liability and would be effective for a period of ten years.

The tax credit would amount to 10% of qualified capital investment for each year. For example, an operator who spends $20 million in a given year successfully developing natural gas reserves would receive an income tax credit of $2 million applicable up to one half of its income tax liability for that year. Credits in excess of 50% of the operator's income tax liability can be carried forward to future years. No credits will be given for dry holes or for development of crude oil reserves.

The Cook Inlet region continues to have great potential for additional natural gas production. However, the combination of high development costs and relatively low natural gas prices create a disincentive to drill for new gas reserves in this area compared to other places. By providing a credit for successful exploration efforts, more drilling will occur in Southern Alaska leading to much needed new natural gas reserves. This will benefit all residents and businesses at little cost to the state.

In addition to the benefit of developing new gas reserves, increased Cook Inlet drilling will also aid the general economic status on the Kenai Peninsula and in Anchorage. Moreover, increased tax revenue from additional hydrocarbon production should largely mitigate the fiscal impact of the proposed credit.

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