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HB 394: "An Act relating to adjustments to royalty reserved to the state to encourage otherwise uneconomic production of oil and gas; and providing for an effective date."

00                             HOUSE BILL NO. 394                                                                          
01 "An Act relating to adjustments to royalty reserved to the state to encourage otherwise                                 
02 uneconomic production of oil and gas; and providing for an effective date."                                             
03 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA:                                                                
04    * Section 1.  AS 38.05.180(j) is amended to read:                                                                  
05            (j)  The commissioner                                                                                        
06                 (1)  may provide for modification of [AN INCREASE OR                                                
07       DECREASE OR OTHERWISE MODIFY] royalty [, TO ALLOW FOR                                                             
08       PRODUCTION THAT WOULD NOT OTHERWISE BE ECONOMICALLY                                                               
09       FEASIBLE,] on individual leases, leases unitized as described in (p) of this section,                             
10       leases subject to an agreement described in (s) or (t) of this section, or interests                              
11       unitized under AS 31.05 [; THE COMMISSIONER MAY ACT UNDER THIS                                                    
12       SUBSECTION TO MODIFY THE ROYALTY]                                                                                 
13                      (A)  [AFTER JUNE 20, 1995 AND NOT LATER THAN                                                       
14            JULY 1, 2015, SO LONG AS THE AUTHORITY TO MODIFY ROYALTY                                                     
01            UNDER THIS SUBPARAGRAPH HAS BEEN AUTHORIZED OR                                                               
02            REAUTHORIZED BY LAW WITHIN THE TEN YEARS PRECEDING THE                                                       
03            COMMISSIONER'S ACTION TO MODIFY THE ROYALTY,] to allow for                                                   
04            production from an oil or gas field, [OR] pool, or portion of a field or pool if                     
05                           (i)  the oil or gas field, [OR] pool, or portion of the                               
06                 field or pool has been sufficiently delineated [SUFFICIENTLY] to the                        
07                 satisfaction of [ALLOW] the commissioner [TO CONDUCT THE                                            
08                 ANALYSES AND MAKE THE FINDINGS REQUIRED BY THIS                                                         
09                 SUBSECTION]; [AND]                                                                                      
10                           (ii)  the field, [OR] pool, or portion of a field or pool                             
11                 has not previously produced oil or gas for sale; and                                                
12                           (iii)  oil or gas production from the field, pool, or                                     
13                 portion of the field or pool would not otherwise be economically                                    
14                 feasible;                                                                                           
15                      (B)  to prolong the economic life of an oil or gas field, [OR]                                 
16            pool, or portion of a field or pool as per barrel or barrel equivalent costs                         
17            [PER BARREL OR BARREL EQUIVALENT] increase or as the price of oil                                        
18            or gas decreases, and the increase or decrease is sufficient to make future                              
19            production no longer economically feasible; or                                                           
20                      (C)  to reestablish production of shut-in oil or gas that would                                
21            not otherwise be economically feasible;                                                                  
22                 (2)  may not grant a royalty modification unless the lessee or lessees                                  
23       requesting the change [MODIFICATION] make a clear and convincing showing that                                 
24       a modification of royalty meets the requirements of this subsection and is in the best                            
25       interests of the state;                                                                                           
26                 (3)  shall                                                                                              
27                      [(A)] condition any royalty modification granted under this                                        
28            subsection in any way necessary to protect the state's best interests; the                               
29            commissioner shall provide for an increase or decrease or other                                          
30            modification of the state's royalty share by a sliding scale royalty or other                            
31            mechanism that shall be based on a change in the price of oil or gas and                                 
01            may also be based on other relevant factors such as a change in                                          
02            production rate, projected ultimate recovery, development costs, and                                     
03            operating costs                                                                                          
04                      [(B)  DESCRIBE,   IN  THE    FINDINGS   AND                                                        
05            DETERMINATIONS REQUIRED BY THIS SUBSECTION, THE                                                              
06            RELEVANT    FACTORS,   INCLUDING    PRICE,  PROJECTED                                                        
07            PRODUCTION RATE OR VOLUME, PREDICTED ULTIMATE                                                                
08            RECOVERY,    AND    DEVELOPMENT,    OPERATING,    AND                                                        
09            TRANSPORTATION COSTS, UPON WHICH THE MODIFICATION IS                                                         
10            BASED;                                                                                                       
11                      (C)  FOR A MODIFICATION UNDER (1)(A) OF THIS                                                       
12            SUBSECTION, SET OUT THE TERMS AND CONDITIONS, WHICH                                                          
13                           (i)  MUST INCLUDE A MECHANISM FOR                                                             
14                 ADJUSTING ROYALTY PERCENTAGE BASED ON PRICE;                                                            
15                 USING FORECASTS OF THE RANGE OF FUTURE PRICES AND                                                       
16                 THEIR PROBABILITIES, THE MECHANISM MUST PROVIDE                                                         
17                 THAT THE VALUE OF THE POTENTIAL REVENUE INCREASES                                                       
18                 RESULTING FROM ROYALTY PERCENTAGE INCREASES                                                             
19                 MUST EXCEED THE VALUE OF THE POTENTIAL REVENUE                                                          
20                 LOSSES RESULTING FROM ROYALTY PERCENTAGE                                                                
21                 DECREASES; AND                                                                                          
22                           (ii)  MAY INCLUDE, IN ADDITION TO THE                                                         
23                 ROYALTY PERCENTAGE ADJUSTMENT BASED ON PRICE,                                                           
24                 WHICH MUST MEET THE CONDITIONS SPECIFIED IN (i) OF                                                      
25                 THIS SUBPARAGRAPH, A FURTHER ADJUSTMENT BASED ON                                                        
26                 PRODUCTION RATE OR VOLUME FROM THE FIELD OR POOL;                                                       
27                 AND                                                                                                     
28                      (D)  FOR A MODIFICATION UNDER (1)(B) OR (1)(C) OF                                                  
29            THIS SUBSECTION, SET OUT THE TERMS AND CONDITIONS, WHICH                                                     
30            MAY INCLUDE SUBSTITUTION OF A SLIDING SCALE ROYALTY OR                                                       
31            OTHER MECHANISM TO MODIFY THE ROYALTY IF THERE IS A                                                          
01            CHANGE IN THE RELEVANT FACTORS, SUCH AS PRICE, PROJECTED                                                     
02            PRODUCTION RATE OR VOLUME, PREDICTED ULTIMATE                                                                
03            RECOVERY,    AND    DEVELOPMENT,    OPERATING,    AND                                                        
04            TRANSPORTATION COSTS, UPON WHICH THE MODIFICATION IS                                                         
05            BASED];                                                                                                      
06                 (4)  may not grant a royalty reduction [MODIFICATION] for a field,                              
07       [OR] pool, or portion of a field or pool                                                                      
08                      (A)  under (1)(A) of this subsection that exceeds 75 percent of                                
09            the royalty originally specified in a lease entered into under the provisions                            
10            of (f) of this section or AS 38.05.134 [IF THE ROYALTY MODIFICATION                                      
11            FOR THE FIELD OR POOL WOULD ESTABLISH A ROYALTY RATE OF                                                      
12            LESS THAN FIVE PERCENT IN AMOUNT OR VALUE OF THE                                                             
13            PRODUCTION REMOVED OR SOLD FROM A LEASE OR LEASES                                                            
14            COVERING THE FIELD OR POOL];                                                                                 
15                      (B)  under (1)(B) or (1)(C) of this subsection that exceeds 90                                 
16            percent of the royalty originally specified in a lease entered into under the                            
17            provisions of (f) of this section or AS38.05.134 [IF THE ROYALTY                                         
18            MODIFICATION FOR THE FIELD OR POOL WOULD ESTABLISH A                                                         
19            ROYALTY RATE OF LESS THAN THREE PERCENT IN AMOUNT OR                                                         
20            VALUE OF THE PRODUCTION REMOVED OR SOLD FROM A LEASE                                                         
21            OR LEASES COVERING THE FIELD OR POOL];                                                                       
22                 (5)  [MAY NOT GRANT A ROYALTY MODIFICATION UNDER                                                        
23       THIS SUBSECTION WITHOUT INCLUDING AN EXPLICIT CONDITION THAT                                                      
24       THE ROYALTY MODIFICATION IS NOT ASSIGNABLE WITHOUT THE PRIOR                                                      
25       WRITTEN APPROVAL OF THE COMMISSIONER; THE COMMISSIONER                                                            
26       SHALL, IN THE PRELIMINARY AND FINAL FINDINGS AND                                                                  
27       DETERMINATIONS, SET OUT THE CONDITIONS UNDER WHICH THE                                                            
28       ROYALTY MODIFICATION MAY BE ASSIGNED;                                                                             
29                 (6)]  shall require the lessee or lessees to submit, with the application                               
30       for the royalty reduction [MODIFICATION], financial and technical data that                                   
31       demonstrate that the requirements of this subsection are met; the commissioner                                    
01       [SHALL]                                                                                                           
02                      (A)  may require disclosure of only the financial and technical                            
03            data related to [DEVELOPMENT,] production[, AND TRANSPORTATION                                               
04            OF OIL AND GAS FROM THE FIELD OR POOL] that are reasonably                                               
05            available to the applicant [NECESSARY TO MAKE A DETERMINATION                                            
06            AS TO WHETHER OR NOT TO GRANT THE REQUEST FOR ROYALTY                                                        
07            MODIFICATION]; and                                                                                           
08                      (B)  shall keep the data [DESCRIBED IN (A) OF THIS                                             
09            PARAGRAPH] confidential under AS 38.05.035(a)(9) at the request of the                                       
10            lessee or lessees making application for the royalty modification; [THE                                      
11            CONFIDENTIAL DATA MAY BE DISCLOSED BY THE                                                                    
12            COMMISSIONER TO LEGISLATORS AND TO THE LEGISLATIVE                                                           
13            AUDITOR AND AS DIRECTED BY THE CHAIR OR VICE-CHAIR OF                                                        
14            THE LEGISLATIVE BUDGET AND AUDIT COMMITTEE TO THE                                                            
15            DIRECTOR OF THE DIVISION OF LEGISLATIVE FINANCE, THE                                                         
16            PERMANENT EMPLOYEES OF THEIR RESPECTIVE DIVISIONS WHO                                                        
17            ARE RESPONSIBLE FOR EVALUATING A ROYALTY MODIFICATION,                                                       
18            AND TO AGENTS OR CONTRACTORS OF THE LEGISLATIVE                                                              
19            AUDITOR OR THE LEGISLATIVE FINANCE DIRECTOR WHO ARE                                                          
20            ENGAGED UNDER CONTRACT TO EVALUATE THE ROYALTY                                                               
21            MODIFICATION,   IF   THEY    SIGN   AN    APPROPRIATE                                                        
22            CONFIDENTIALITY AGREEMENT;]                                                                                  
23                 (6) [(7)]  may require the lessee or lessees making application for the                             
24       royalty reduction [MODIFICATION] to retain and pay for the services of a [AN                          
25       INDEPENDENT] contractor, selected by the lessee or lessees from a list of qualified                           
26       consultants in [TO EVALUATE] hydrocarbon [DEVELOPMENT,] production[,                                          
27       TRANSPORTATION,] and economics provided by the commissioner, [WHO IS                                          
28       SELECTED BY THE COMMISSIONER] to assist the commissioner in evaluating the                                        
29       application and financial and technical data; when the commissioner requires the                              
30       lessee or lessees to retain the services of a contractor, the commissioner shall                              
31       determine the relevant scope of the work to be performed by the contractor                                    
01       [SELECTION OF AN INDEPENDENT CONTRACTOR UNDER THIS                                                                
02       PARAGRAPH IS NOT SUBJECT TO AS 36.30];                                                                            
03                 (7) [(8)] shall                                                                                     
04                      [(A)] make and publish a preliminary findings and                                                  
05            determination on the royalty reduction [MODIFICATION] application, [;IF                              
06            THE PRELIMINARY FINDINGS AND DETERMINATION CONCERNS A                                                        
07            ROYALTY MODIFICATION UNDER (1)(A) OF THIS SUBSECTION, THE                                                    
08            PRELIMINARY FINDINGS AND DETERMINATION SHALL ALSO BE                                                         
09            PRESENTED TO THE GOVERNOR FOR THE GOVERNOR'S APPROVAL                                                        
10            OR DISAPPROVAL; THE GOVERNOR MAY NOT DELEGATE A                                                              
11            DETERMINATION TO APPROVE OR DISAPPROVE A PRELIMINARY                                                         
12            FINDINGS AND DETERMINATION UNDER THIS SUBPARAGRAPH;                                                          
13                      (B)  FOR A ROYALTY MODIFICATION UNDER (1)(A) OF                                                    
14            THIS SUBSECTION, IF THE GOVERNOR APPROVES THE                                                                
15            PRELIMINARY FINDINGS AND DETERMINATION UNDER (A) OF                                                          
16            THIS PARAGRAPH,                                                                                              
17                           (i)]  give reasonable public notice of the preliminary                                        
18                 findings and determination, [;                                                                      
19                           (ii)  CONCURRENTLY WITH THE ISSUANCE OF                                                       
20                 THE PUBLIC NOTICE, UNLESS DIRECTED BY THE                                                               
21                 LEGISLATIVE BUDGET AND AUDIT COMMITTEE TO DO                                                            
22                 OTHERWISE, MAKE AVAILABLE COPIES OF THE                                                                 
23                 COMMISSIONER'S    PRELIMINARY    FINDINGS    AND                                                        
24                 DETERMINATION ON THE ROYALTY MODIFICATION                                                               
25                 APPLICATION AND THE SUPPORTING FINANCIAL AND                                                            
26                 TECHNICAL DATA, INCLUDING THE WORK PAPERS,                                                              
27                 ANALYSES,   AND    RECOMMENDATIONS     OF    ANY                                                        
28                 CONTRACTORS RETAINED UNDER (7) OF THIS SUBSECTION,                                                      
29                 TO PERSONS AUTHORIZED UNDER (6)(B) OF THIS                                                              
30                 SUBSECTION TO REVIEW THE DATA;] and                                                                     
31                           [(iii)] invite public comment on the preliminary findings                                     
01                 and determination during a 30-day period for receipt of public                                          
02                 comment;                                                                                                
03                      [(C) FOR A ROYALTY MODIFICATION UNDER (1)(B) OR                                                    
04            (C) OF THIS SUBSECTION, IF THE PRELIMINARY FINDINGS AND                                                      
05            DETERMINATION APPROVES A ROYALTY MODIFICATION,                                                               
06                           (i)  GIVE REASONABLE PUBLIC NOTICE OF THE                                                     
07                 PRELIMINARY FINDINGS AND DETERMINATION; AND                                                             
08                           (ii)  INVITE PUBLIC COMMENT ON THE                                                            
09                 PRELIMINARY FINDINGS AND DETERMINATION DURING A                                                         
10                 30-DAY PERIOD FOR RECEIPT OF PUBLIC COMMENT;                                                            
11                 (9)  SHALL ADDRESS IN ANY FINDINGS AND                                                                  
12       DETERMINATIONS REQUIRED UNDER THIS SUBSECTION THE                                                                 
13       REASONABLY FORESEEABLE EFFECTS OF THE PROPOSED ROYALTY                                                            
14       MODIFICATION ON THE STATE'S REVENUE;]                                                                             
15                 (8) [(10)]  shall offer to appear before the Legislative Budget and Audit                           
16       Committee on a day that is not earlier than 10 days and not later that 20 days                                
17       after giving public notice under (7) of this subsection, to provide the committee a                           
18       review of the commissioner's preliminary findings and determination on the royalty                                
19       reduction [MODIFICATION] application and administrative process [THE                                      
20       SUPPORTING FINANCIAL AND TECHNICAL DATA]; if the Legislative Budget                                               
21       and Audit Committee accepts the commissioner's offer, the committee shall give                                    
22       notice of the committee's meeting to all members of the legislature; [IF, UNDER                                   
23       (6)(B) OF THIS SUBSECTION, THE FINANCIAL AND TECHNICAL DATA                                                       
24       MUST BE KEPT CONFIDENTIAL AT THE REQUEST OF A LESSEE OR                                                           
25       LESSEES MAKING APPLICATION FOR THE ROYALTY MODIFICATION, THE                                                      
26       COMMISSIONER MAY APPEAR BEFORE THE COMMITTEE IN EXECUTIVE                                                         
27       SESSION;]                                                                                                         
28                 (9) [(11)] shall make copies of the preliminary findings and                                        
29       determination available to                                                                                        
30                      (A)  the presiding officer of each house of the legislature;                                       
31                      (B)  the chairs of the legislature's standing committees on                                        
01            resources; and                                                                                               
02                      (C)  the chairs of the legislature's special committees on oil and                                 
03            gas, if any;                                                                                                 
04                 (10) [(12)] shall, within 30 days after the close of the public comment                             
05       period under (7) [(8)] of this subsection,                                                                    
06                      (A)  prepare a summary of the public response to the                                               
07            commissioner's preliminary findings and determination;                                                       
08                      (B)  make a final findings and determination [AND PRESENT                                          
09            IT TO THE GOVERNOR FOR THE GOVERNOR'S APPROVAL OR                                                            
10            DISAPPROVAL; THE GOVERNOR MAY NOT DELEGATE A DECISION                                                        
11            TO APPROVE OR DISAPPROVE A FINAL FINDINGS AND                                                                
12            DETERMINATION PRESENTED UNDER THIS SUBPARAGRAPH]; the                                                        
13            commissioner's final findings and determination prepared under this                                      
14            subparagraph regarding a royalty reduction [MODIFICATION, IF                                         
15            APPROVED BY THE GOVERNOR,] is final and not appealable to the court;                                         
16                      (C)  transmit a copy of the final findings and determination                                       
17            [PREPARED UNDER (B) OF THIS PARAGRAPH] to the lessee [OR                                                     
18            LESSEES MAKING APPLICATION FOR THE ROYALTY                                                                   
19            MODIFICATION];                                                                                               
20                      (D)  with the applicant's consent [OF THE LESSEE OR                                            
21            LESSEES APPLYING FOR THE ROYALTY MODIFICATION], amend the                                                    
22            applicant's lease or unitization agreement [OF THE LESSEE OR LESSEES                                     
23            APPLYING FOR THE ROYALTY MODIFICATION] consistent with the                                                   
24            commissioner's [APPROVED] final decision [FINDINGS AND                                                   
25            DETERMINATION]; and                                                                                          
26                      (E)  make copies of the final findings and determination                                           
27            available to each person who submitted comment under (7) [(8)] of this                                   
28            subsection and who has filed a request for the copies;                                                       
29                 (11) [(13)]  is not limited by the provisions of AS 38.05.134(3) or (f) of                          
30       this section in the commissioner's determination under this subsection.                                           
31    * Sec. 2.  AS 38.05.180(p) is amended to read:                                                                     
01            (p)  To conserve the natural resources of all or a part of an oil or gas pool,                               
02       field, or like area, the lessees and their representatives may unite with each other, or                          
03       jointly or separately with others, in collectively adopting or operating under a                                  
04       cooperative or a unit plan of development or operation of the pool, field, or like area,                          
05       or a part of it, when determined and certified by the commissioner to be necessary or                             
06       advisable in the public interest.  The commissioner may, with the consent of the                                  
07       holders of leases involved, establish, change, or revoke drilling, producing, and                                 
08       royalty requirements of the leases and adopt regulations with reference to the leases,                            
09       with like consent on the part of the lessees, in connection with the institution and                              
10       operation of a cooperative or unit plan as the commissioner determines necessary or                               
11       proper to secure the proper protection of the public interest.  The commissioner may                              
12       not reduce [DECREASE] royalty on leases in connection with a cooperative or unit                              
13       plan except as provided in (j) of this section.  The commissioner may require oil and                             
14       gas leases issued under this section to contain a provision requiring the lessee to                               
15       operate under a reasonable cooperative or unit plan, and may prescribe a plan under                               
16       which the lessee must operate.  The plan must adequately protect all parties in interest,                         
17       including the state.                                                                                              
18    * Sec. 3.  AS 38.05.180(s) is amended to read:                                                                     
19            (s)  When separate tracts cannot be individually developed and operated in                                   
20       conformity with an established well-spacing or development program, a lease, or a                                 
21       portion of a lease, may be pooled with other land, whether or not owned by the state,                             
22       under a communitization or drilling agreement providing for an apportionment of                                   
23       production or royalties among the separate tracts of land comprising the drilling or                              
24       spacing unit when determined by the commissioner to be in the public interest.                                    
25       Operations or production under the agreement are considered as operations or                                      
26       production as to each lease committed to the agreement.  The commissioner may not                                 
27       reduce [DECREASE] royalty on leases in connection with a communitization or                                   
28       drilling agreement except as provided in (j) of this section.                                                     
29    * Sec. 4.  AS 38.05.180(t) is amended to read:                                                                     
30            (t)  The commissioner may prescribe conditions and approve, on conditions,                                   
31       drilling, or development contracts made by one or more lessees of oil or gas leases,                              
01       with one or more persons, when, in the discretion of the commissioner, the                                        
02       conservation of natural resources or the public convenience or necessity requires it or                           
03       the interests of the state are best served.  All leases operated under approved drilling or                       
04       development contracts and interests under them, are excepted in determining holding                               
05       or control under AS 38.05.140. The commissioner may not reduce [DECREASE]                                     
06       royalty on a lease or leases that are subject to a drilling or development contract except                        
07       as provided in (j) of this section.                                                                               
08    * Sec. 5.  AS 36.30.850(b)(33) is repealed.                                                                        
09    * Sec. 6.  This Act takes effect immediately under AS 01.10.070(c).