Legislature(1995 - 1996)
04/03/1996 02:30 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 394
An Act authorizing a program of natural gas and coal
bed methane development licensing and leasing; relating
to regulation of certain natural gas exploration
facilities and coal bed methane exploration facilities
for purposes of preparation of discharge prevention and
contingency plans and compliance with financial
responsibility requirements; amending the duties of the
Alaska Oil and Gas Conservation Commission as they
relate to natural gas exploration activities and coal
bed methane exploration activities; and amending the
exemption from obtaining a waste disposal permit for
disposal of waste produced from coal bed methane
drilling.
REPRESENTATIVE SCOTT OGAN, sponsor of HB 394, spoke in
support of the legislation. He noted that the legislation
creates a lease program that will enable independent energy
companies to develop natural gas reserves within 3,000 feet
of the surface. He emphasized that the legislation will
benefit rural Alaska.
Co-Chair Foster MOVED to adopt Committee Substitute, 9-
LS1463\R, dated 4/2/96 (copy on file). There being NO
OBJECTION, it was so ordered.
In response to a question by Representative Brown,
Representative Ogan noted that members were provided with an
analysis showing changes from the previous version
(Attachment 1).
There being NO OBJECTION, Committee Substitute, 9-LS1463\R,
dated 4/2/96 was adopted.
DAVID LAPPI, LAP RESOURCES INC., ANCHORAGE testified via the
teleconference network. He spoke in support of CSHB 394
(FIN). He emphasized the benefit to rural Alaska.
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STEVE BORREL, EXECUTIVE DIRECTOR, ALASKA MINERS'
ASSOCIATION, ANCHORAGE testified via the teleconference
network. He spoke in support of CSHB 394 (FIN). He stated
that the safe removal of methane gases is one of the primary
safety concerns of underground mining. Productivity in
underground mining is dependent on getting rid of methane
gas. If coal production is too high it is difficult to get
enough air through the entries to flush the gas. He noted
that the technology that was developed to accommodate the
use of methane gas was developed with safety issues in mind.
He emphasized that the legislation provides an incentive
for mining companies to utilize the gas resource.
EARL AUSMAN, ANCHORAGE testified via the teleconference
network. He spoke in support of CSHB 394 (FIN). He stated
that the legislation provides small communities with the
opportunity to become self reliant.
MEERA KOHLER, GENERAL MANAGER, NAKNEK ELECTRIC ASSOCIATION
testified via the teleconference network. She spoke in
support of CSHB 394 (FIN). Ms. Kohler's provided the
Committee with written testimony (Attachment 2). She noted
that the Naknek Electric Association uses 1.4 million
gallons of diesel fuel annually. She observed that Naknek
Electric Association has been interested in developing a
natural gas supply. She stated that the possibility of
natural gas in their area is high. She emphasized that
development costs have been high and discouraging. New
technology makes development more feasible. She stressed
the need for state support.
In response to a question by Representative Brown, Ms.
Kohler noted that the gas reserve would be economically
viable as far as 25 to 30 miles away.
Representative Brown noted that the legislation would lease
the gas at half of the normal royalty rate. She asked if
the difference in the royalty cost is enough to make a
project economic. Ms. Kohler stated that the Company's
preference would be to not pay more than the bare minimal in
royalties. She stated that the project would be
economically viable at a slightly higher rate depending on
the distance of delivery.
Representative Brown asked if the State would be asked to
subsidize construction of the transmission line. Ms. Kohler
stated that it is not the intent of the Company to request
additional subsides. She clarified that no specific reserve
has been identified.
Representative Brown noted that there are prohibitions on
gas and oil development on Bristol Bay tidelands. Ms.
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Kohler stated that they were not contemplating development
of tidelands. Representative Ogan stated that the Director
of the Division of Oil and Gas would have enough discretion
to follow existing oil and gas laws.
Representative Brown requested an analysis of the potential
cost demonstrating that the royalty reduction would allow
the project to be viable. Ms. Kohler stressed that it is
difficult to develop costs without a specific gas source.
In response to a question by Representative Brown, Ms.
Kohler explained that the goal of Naknek Electric
Association is to own the resource. Naknek Electric
Association would either form a partnership with or retain a
firm to drill and develop the project. The project would be
managed by the Naknek Electric Association.
Representative Ogan asked how much was paid to the Naknek
Electric Association for power cost equalization. Ms.
Kohler replied that they receive approximately $330.0
thousand dollars annually.
TUCKERMAN BABCOCK, ALASKA OIL AND GAS CONSERVATION COUNCIL
(AOGCC) testified via the teleconference network. In
response to a question by Representative Brown, Mr. Babcock
clarified that permits would be classified along the lines
as an exploratory, development, or service well. He stated
that the legislation would not reduce the standards for
safety that are currently applied to permits to drill.
Representative Ogan stated that with the exception of the
North Slope there are no known reserves of oil above 3,000
feet. The pressures associated with methane gas are low.
He emphasized that it is extremely unlikely that oil would
come to the surface. He maintained that gas can be vented
or flared
Mr. Babcock stated that there is a danger of drilling into a
gas pocket in any well.
JIM HANSEN, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL
RESOURCES testified via the teleconference network. He
observed that drilling could be done with slim hole rigs.
It would be a smaller operation and easier to contain. He
stated that CSHB 394 (FIN) incorporates changes suggested by
the Department. The Department's main concern is to assure
that leasing under the legislation does not interfere with
other oil and gas leasing.
Representative Therriault asked if one well would provide
enough gas or if a number of wells would radiate out from a
central area. He asked how coal mining could occur if pipes
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were generating out into the coal seam.
Mr. Lappi explained that a small village could be serviced
by one well drilled in the appropriate coal seam. Gas would
be removed before mining operations would begin. He noted
that underground coal mining is unlikely due to the cost.
Vertical wells would be drilled to intersect the coal seam.
Representative Therriault noted that there is no provision
for the Department to charge for lease processing. Mr.
Lappi emphasized that the legislation was developed to
reduce the regulatory cost. He noted that the application
fee for a large exploration license is $500.0 thousand
dollars.
(Tape Change, HFC 96-104, Side 1)
KEN RIGALSKY, DEPARTMENT OF ENVIRONMENTAL CONSERVATION
testified via the teleconference network. He stated that
the Department is neutral regarding CSHB 394 (FIN). He
stated that there is minimal risk involved. He did not
think contingency plans would be warranted.
Representative Brown asked the likelihood of finding gas
deposits not associated with coal bed methane in areas above
3,000 feet.
DAVE JOHNSTON, ALASKA OIL AND GAS CONSERVATION COUNCIL
testified via the teleconference network. He stressed that
the presence of gas hydrates on the North Slope must be
considered. Gas hydrates are found within 3,000 feet of the
surface.
Representative Brown asked if the legislation applies to the
North Slope. Mr. Hansen noted that the legislation excludes
any land included in an oil and gas leasing program.
Representative Brown pointed out that this exclusion could
be waived by the commissioner of the Department of Natural
Resources. Mr. Hansen stressed that it is not the intent to
offer shallow gas leases in areas of existing leases. He
stated that the exclusion would allow flexibility if
something changes in the future.
Representative Brown asked for an explanation of gas
hydrates. Mr. Johnston explained that gas hydrates are
pockets of gas associated with permafrost areas. The gas is
locked in an ice matrix. He observed that there is interest
in developing gas hydrates on the North Slope.
Mr. Hansen observed that little is known about the
subsurface geology of areas of the State. He noted that
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there are areas of high tectonic activity. It is possible
that shallow gas not associated with coal could be found in
any area. He stressed that drilling is the best way to
determine if the resource exists.
In response to a question by Representative Brown, Mr. Lappi
stated that wells could be drilled for under $100.0 thousand
dollars each with the aid of special equipment. The
exploratory well would become the production well.
Representative Brown noted that page 6, lines 15 and 16,
states that the applicant "may" conduct a title search.
"Shall" was changed to "may". She expressed concern that
individuals could stake over other interests. She
acknowledged that there will be public notice. Mr. Hansen
observed that the State normally does a title search, but
does not guarantee title in the lease. On the North Slope,
a title search will be done after the lease is issued. He
emphasized that the legislation would clarify that the title
search would not have to be done prior to the lease. He
maintained that existing statutes require that a title
search must be completed prior to drilling.
Representative Brown stressed the importance of assuring
that existing rights are maintained. Mr. Hansen stated that
the subsurface state is dominate. The federal transfer of
land to the State requires that the State retain the
subsurface rights and that they be made leasable according
to the wishes of the legislature. AS 38.05.125 addresses
this issue.
Representative Ogan noted that most of the methane leases
will be associated with rural areas and will be close to the
village that will be served. He emphasized that there will
be a public process.
Representative Brown reiterated concerns that the rights of
surface owners be protected. She noted the lack of staff
support in the Department of Natural Resources. Mr. Hansen
noted that there are bond provisions under AS 38.05.130.
The Director of Oil and Gas can require a bond to cover
potential damages.
In response to a question by Representative Brown, Mr.
Hansen stated that the general stipulation that no person
may engage in mineral exploration activity without a good
faith effort to resolve differences with the surface owner
would apply.
Representative Brown asked if the bill would apply to
offshore leases. Mr. Hansen stated that the legislation is
not designed for offshore leases. He acknowledged that the
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legislation does not prohibit offshore drilling.
Representative Brown asked how the Bristol Bay exclusion
under AS 38.05.140(f) would be interpreted. Mr. Hansen
reiterated that leases would not be issued in any area that
has been set aside, such as Bristol Bay or Kachemak Bay.
Representative Ogan stated that he did not anticipate any
offshore activity under the legislation. Representative
Brown noted that the major oil companies have expressed
interest in offshore leasing in the Bristol Bay area.
Representative Brown asked what would happen if a reserve
crossed the 3,000 feet mark. Mr. Hansen stated that the
Department of Natural Resources shares this concern. Mr.
Babcock observed that page 6, subsection (j) references an
onshore well.
Co-Chair Hanley pointed out that if an onshore well drilling
for natural gas penetrates a formation capable of producing
gas below 3,000 feet then the owner must notify the
Department and the Alaska Oil and Gas Conservation Council
and may not conduct further operations until the facility
complies with all applicable laws and regulations relating
to oil and gas production.
Representative Brown maintained that production cannot occur
above 3,000 feet without affecting the area below 3,000
feet. Co-Chair Hanley interpreted the legislation to state
that operations cannot occur until they have complied with
all the laws and regulations governing oil and gas.
Representative Ogan pointed out that subsection (j) states
that: "A lease does not give the lessee the right to
produce gas from sources that are not within 3,000 feet of
the surface." He emphasized that the legislation is
primarily pointed toward production of methane gas. He
added that the intent is not to exclude other shallow
sources of gas. The legislation is not intended as an
exploration tool to allow larger oil companies to find gas.
Mr. Babcock noted that the AOGCC will be appointed to
protect the rights of the owner of the resource which is
below 3,000 feet. Representative Brown stressed that it
will be difficult to protect the State's ownership below
3,000 feet. Mr. Babcock reiterated that AOGCC will protect
the State's ownership of the resource below 3,000 feet.
Representative Brown questioned the effect on Native lands.
She noted that the low state royalty would under cut
development on Native lands. There was no answer to
Representative Brown's question.
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