Legislature(1997 - 1998)
03/05/1998 10:03 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS Number 0059 CHAIRMAN HODGINS announced the committee would hear HB 380 "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from fields within the Cook Inlet sedimentary basin where production is commenced in fields that have been discovered and undeveloped or that have been shut in." Number 0010 REPRESENTATIVE CON BUNDE made a motion to move the proposed CSHB 380( ) before the committee. Number 0156 CHAIRMAN HODGINS asked if there was an objection. Hearing none, CSHB 380( ) was adopted before the committee for discussion purposes. Number 0175 PATRICK CARTER, Legislative Assistant to Representative Hodgins presented the changes in the committee substitute. He stated that the entire bill was rewritten and the concerns of the Division of Oil and Gas were addressed. He stated that a 40 million barrel cap was adopted on what would be subject to the 5 percent royalty reduction. It was also adopted that nothing above 35 billion cubic feet of gas production would be subject to the 12.5 percent. MR. CARTER stated that the committee substitute lists the fields that are covered to be: Falls Creek, Nicolai Creek, North Fork, Point Starichkof, Redoubt Shoal and West Foreland. Number 0454 KEN BOYD, Director, Division of Oil and Gas, Department of Natural Resources, testified via teleconference from Anchorage that CSHB 380( ) "addresses the fields that I thought would apply but I would still asked the question, why would these fields be excluded." He stated that he is still waiting to hear the analysis that lead to the numbers. He stated that the relief for oil seems to be the same for both oil fields. He stated that he would like to hear how the numbers were developed. CHAIRMAN HODGINS announced that the committee would hear from Mr. Eason. Number 0577 JAMES EASON, Independent Consultant, stated that he is speaking on the behalf of Forcenergy and is prepared to explain the issues that Mr. Boyd has listed as his concerns. He referred to his letter written to Senator Halford relating to the Division of Oil and Gas' comments on SB 256, HB 380's companion bill. In the letter he pointed out the four principle concerns that the division has raised. The first being the lack of a provision that would account for changing conditions. Another concern being why the royalty rates of 5 percent and the term of ten years, were selected. The question of which fields would apply. The question of the economic needs of all the lessees in the legislation being the same. Number 0800 MR. EASON stated that the 5 percent was chosen as a floor to provide consistency with the state's existing law in royalty reductions. It also provides the same floor established by the legislature two years ago in 1996, with the adoption of the discovery royalty legislation in the Cook Inlet basin. It assures that there is a reasonable royalty to the state regardless if these things are developed. The term of ten years are in regards to the production profiles and that any meaningful royalty relief has to occur over a set number of years because of the way the oil and gas fields are produced. Number 0910 MR. EASON stated that in response to Mr. Boyd's concerns on the production of the upside potential, CSHB 380( ) reflects what he believes is the proper approach for trying to anticipate and protect the states interest if these fields appear or turn out to be larger than expected. He explained that he understood the concern that lessees might attempt to use the legislation in a manner which the legislature did not intend the legislation to apply, he understood this concern. The only way to avoid this concern is to list the fields that the legislation applies to, those that have been discovered before 1988 and have been shut-in from that time. Number 1018 MR. EASON referred to previous testimony that in situations of royalty reduction there is no fiscal impact to the state because the presumption is the production of oil or gas would not occur. He stated that it has some merit. He stated that when he looked at the economic analysis of the fiscal impacts that the division believes this bill will have, is that in his opinion they did not rigorously follow the rules for estimating production declines nor did they consider the benefits that come to the state balanced with what they characterize as a "loss" of royalty revenue. He suggested to refer to the fiscal analysis and his letter. He stated that he assumed the most optimistic numbers from Mr. Boyd's fiscal analysis; that two oil fields have 10 wells each, and 1,000 barrels a day of production. At the starting point they would yield over 3 million barrels. The division's analysis projects that same volume for 10 years and multiplies it by an assumed $10 per barrel takes the 12.5 percent royalty and compares that to the 5 percent royalty the state would have, and shows the difference as a loss. He stated that the Cook Inlet oil field does not produce at constant rates. He stated that unless there are programs to increase and maintain the initial rates the fields begin to decline immediately. He stated that it is difficult to define the decline rate. He referred to an exhibit that the minimum decline rate would be a about 16 percent a year. He explained that he kept everything the division suggested but adjusted for the decline rate and the results is then a "loss" of royalty of 14.1 million per field rather than the Division's estimate of 27 million per field. Number 1231 MR. EASON stated that there is a critical piece of analysis missing from the Division's fiscal impact. He said "That is, they did not acknowledge the value of the 5 percent accumulated under the decline curve, that might not otherwise occur, at least based upon the fact that after 30 years it has not occurred yet. And when you do that you find, as you look at the table under the column of 5 percent, you find a 'loss' of 14.1 million under the 7.5 percent sharing for the company, and a gain of 9.4 million in royalties that the state would not otherwise receive, based upon the history of these fields." He stated that there are also other factors, including the development and extension of new infrastructure, and the prolonging of all production in Cook Inlet by the increased deliverability of oil and gas. He stated that they are important factors although difficult to quantify especially since we can't guarantee that any field on the list will be developed. However, if they are developed these benefits will happen. Number 1329 CHAIRMAN HODGINS stated that years ago on the Kenai, there were thriving industries for the oil field and in the last five years there has been a decline. The intent of the bill is to stimulate some of economic development by going into field where no income has been received. He stated that by lowering the royalty rates some of those field can get going again. He reiterated that there is of course no guarantee. Number 1394 REPRESENTATIVE BUNDE stated that he would have a concern that if this was extended to other fields that there might be the incentive for some oil companies to cease production in an attempt to fall under this bill to receive decreased royalties. He stated that it is important to limit it to certain shut-in fields. Number 1469 KATHERINE THOMAS, Owner, Construction Service Company, testified via teleconference from Kenai that this bill is of a great interest to the Kenai Peninsula. Number 1502 JIM SYKES, Representative Oilwatch Alaska, testified via teleconference from Anchorage, that Oilwatch is an non-partisan organization, that works for open government and fairness on matters of commonly owned oil and gas resources. He stated that the changes in CSHB 380( ), he feels are good. He agreed that this would have to be limited in scope so oil companies do not delay production in order to get the royalty relief. He asked what independently verifiable information is there that proves the producers really need the lower royalty rates. He stated that in the case of Cook Inlet gas, the majority of Alaskans depend on it for electricity and heat, creating the market. However, currently, two-thirds of Cook Inlet gas is exported, mostly to Japan. It is projected that Cook Inlet gas will run out in the year 2007 from the wells that are currently in production. He referred to Representative Kott's letter questioning the renewal of the export license as the "energy security of Southcentral Alaska should not be risked." He stated that this concern is in line with the federal law, Section 3A of the Natural Gas Act, prohibiting exports that cause regional shortages. He stated that the current supplies would last an additional decade if exports of Cook Inlet gas ceased. He stated that the bill does not put any restriction on the use or export of the natural gas. Number 1669 MR. SYKES stated that the number 35 million cubic feet should be reduced by a third. He suggested that there be a royalty break for five years instead of ten years and "the 7.5 percent benefit at the front end be added back in following that five year sunset, so that industry can profit from the lower rate for the five years that it takes to get the production on line." He asserted that the state should recover what is reasonably due, therefore, after five years the royalty rate should be raised to 15 percent for a period of ten years before it returns 12.5 percent. He stated that the state should not provide additional corporate welfare where there is no need. He stated that the legislature should recognize its obligation to the citizens of Alaska without commonly owned natural gas resources. Number 1784 KEN TURNAGE, General Manager, Oil Field Service Company, testified via teleconference from Kenai that CSHB 380( ) provided the incentive for industry to develop fields that are proven but not processing and will provide royalties to the state and jobs for the Kenai residents. He asserted that the resources are just laying there, and they should be developed. Number 1854 MR. BOYD stated that he would like to comment on Mr. Eason's testimony. He stated that the 5 percent is the floor for new fields in the current law but in this legislation the 5 percent is not the floor it is the only number that there is. He stated that under HB 207 there is a great flexibility and the number can vary with time. He stated he did not feel just because the fields have yet to be developed, a huge royalty relief must be provided. The technology changes have been dramatic in the past ten years as field within fields are being found. The economics of the fields have changed and the time factor is not a good criteria for a royalty reduction. He stated that the discovery royalty bill passed last year, only allows the discovery royalty in the discovered horizon and does not give a royalty relief to the entire field. Number 1926 MR. BOYD stated that in regards to the fiscal note it states that "If one adopts the division's (Indisc.) well production rate ..." but that is not what he did." He stated that he provided two numbers and the lower number 500 barrels a day number was just meant to provide a range. He stated that on page 2 of the analysis, the example shows a decline but if the numbers are averaged the production would not change at all. He questioned what the difference is, the number he is providing is exactly the same as Mr. Eason's number. He stated that he understood the issue of declining fields and does not have any idea that the Redoubt Shoal field will decline at the same rate as the Hemlock fields. He stated that the value of oil is kept constant at $10 because the future price is unknown and it could change, therefore a range of values need to be considered. He asserted that there is no requirement for anybody to build anything in this bill. Number 2009 CHAIRMAN HODGINS asked how he would suggest the legislature stimulate increased interest in Cook Inlet. MR. BOYD replied: in Cook Inlet there has been two state sales resulting in $4 million in bids, the Redoubt Shoal field and the North Middle Ground field has established their units, Forcenergy has bought all of Stewart's Petroleum's assets, Unocal proposed the formation of the pioneer unit, there are 3 coal-bed-methane wells being drilled in the Mat-su valley, there have been at least three seismic programs in Swanson River Field, Forcenergy is building a gas well at Coffee Creek and intends to build others, and Phillips has plans to drill. He stated that they have provided for a good lease-sale program, a discovery royalty program and have fair and equitable leasing terms. He stated that the new technology has provided companies the ability drill better wells. Number 2078 CHAIRMAN HODGINS asked if he would suggest that all the resources in the fields listed in CSHB 380( ), be left in the ground and that no revenue is gotten out of those wells. Number 2088 MR. BOYD stated that he has not suggested anything of the kind, he suggested that no one has shown that royalty relief is needed to develop these fields. He referred to Point Starichkof and stated that he had no reason to believe that it would not be drilled next year. He asked if there is no market for the gas, what is the point of displacing 12.5 percent gas with 5 percent gas. Number 2121 REPRESENTATIVE ROKEBERG stated that he had a few questions to re-educate himsel benefits to the state would accrue if the royalties were reduced. He asked if the severance tax would come into play. Number 2154 MR. BOYD stated that the Division of Oil and Gas does not do taxes. He stated that there would be a small severance tax but someone from the Department of Revenue could better answer that question. Number 2165 REPRESENTATIVE ROKEBERG stated that he assumed there would be some property and corporate taxes and the state would be getting some other benefits. MR. BOYD replied that he believed that to be true. Number 2180 REPRESENTATIVE ROKEBERG asked if in the history of the state of Alaska if the division has ever entered into an agreement to reduce the royalty for any oil and gas field. Number 2191 MR. BOYD stated yes. Oxidental Petroleum did and Unocal is currently looking at what can be done under HB 207. He stated that there were others, and he could provide that to the committee. Number 2226 REPRESENTATIVE ROKEBERG stated that when Oxidental Petroleum did get the royalty relief they shut the field in because of prices. Number 2236 MR. BOYD stated that they did not shut the field in, they sold it to British Petroleum, who has now tripled the production at Melody Point. REPRESENTATIVE ROKEBERG stated that there was a shut-in of the field and then it reopened. He asked if the state has granted any royalty reductions. MR. BOYD replied that the state has had one application from Unocal which would grant a partial royalty reduction on some of the fields that were applied for. Number 2270 REPRESENTATIVE ROKEBERG stated that Mr. Boyd's answer is no. MR. BOYD stated that is correct. REPRESENTATIVE ROKEBERG stated that is the point he wanted to make, because it is the perception that the legislature has granted significant royalty reductions. He asserted that they are creating statutes to provide for that, but point in fact there have not been any royalty reductions. Number 2286 REPRESENTATIVE ROKEBERG stated that he is concerned with the issue that relates to pools, horizons and fields. He asked if he could explain the differential between the three and the impact of this bill if another zone was found through a known zone. Number 2325 MR. BOYD stated that a pool can be described as having a number of different colored sponges stuck on a stick, the sponges would represent a pool, all the sponges together would be the field. He stated that zones and horizons are terms. He referred to having two colored sponges, the oil pool would be the deep sponge and the gas pool would be the shallow sponge, his question is if there were two wells drilled into that oil pool in the 1960s, would it mean that it was discovered in 1960's and would have then applied to the bill prior to the committee substitute. He stated he was asking that if a shallow gas well was opened up does that mean that both pools would get the relief. Number 2427 REPRESENTATIVE ROKEBERG stated that in the bill and in the proposed committee substitute it used the term "leases and unitized", therefore the entire field within the unit would qualify. He asked if that would be his interpretation. Number 2461 MR. BOYD responded that it would be his as well. REPRESENTATIVE ROKEBERG asked if Forcenergy wanted to go back into Redoubt Shoal field and drill through the known reserves into a new pool, would it still be eligible for the royalty reduction. MR. BOYD responded that would be his interpretation. TAPE 98-18, SIDE B Number 0049 REPRESENTATIVE ROKEBERG asked what are the proven reserves at the Redoubt Shoal field. Number 0054 MR. BOYD stated that there is older seismic data there but Forcenergy had done a 3-D survey which is better than his data. Number 0082 REPRESENTATIVE ROKEBERG asked how the use of the 40 million barrels of oil and the 35 billion cubic feet gas stacks up in terms of North American and in Cook Inlet. Number 0088 MR. BOYD replied that he could not answer for North America and he does not know the size of the oil field but the division has added up all the gas reserves and the entire amount is approximately 47 billion cubic feet. Individually, he believed the highest one to be 20 billion cubic feet. Number 0116 MR. EASON stated that he had a few comments to make. He referred to the division's fiscal note analysis. It is 3.65 million barrels per year as an initial production rate. He compared that relative to the producing oil fields in Cook Inlet. He stated that the fifth largest oil field in Trading Bay Field has reserves of about 100 million barrels. It is estimated that it only has 2 or 3 percent of its reserves left. He stated that numbers that he spoke of previously would result in a rate of 37 percent the size of Trading Bay field. Number 0167 MR. EASON referred to Mr. Boyd's comment that the bill would not require the development of any infrastructure. He stated that he could not conceive how Redoubt Shoal or Point Starichkof fields without the well, production facilities and the platform, could operate. He stated that by definition the infrastructure is guaranteed if in fact the bill has the ability to provide the incentive to develop. He stated that the legislature has done a lot to provide incentives in adopting the area wide leasing standards. He agreed that technology is changing and that there is exploration activity in Cook Inlet but there is the continued decline of oil and gas production as Cook Inlet is about 90 percent depleted of oil based on the division's estimates. He stated that somewhere between 2005 and 2007 year range, there will be a demand for gas. Number 0293 MR. EASON stated that he believed that the six fields are unique and he believes that if they can be developed the benefits will benefit both parties and attract investment into the inlet. Number 0364 REPRESENTATIVE KEMPLEN referred to the 40 million barrels of oil and the first 25 billion cubic feet of gas produced in an oil or gas field. He stated that those are relatively small fields and asked if that was correct. MR. EASON stated that small and large are relative terms in oil and gas. In West Texas they would be considered as huge fields but in respect to Cook Inlet they are not huge fields. They are not insignificant numbers, they are not fully delineated as to the potential of the fields. Number 0460 REPRESENTATIVE SCOTT OGAN asked if HB 207 was only applicable to pools of oil. Number 0471 MR. BOYD replied that it wasn't for either oil or gas but was for the discovered pool. REPRESENTATIVE OGAN asked that if there was a shut-in well in a field, would the entire field get the royalty reduction. Number 0521 MR. BOYD stated that was his interpretation. Number 0540 REPRESENTATIVE OGAN asked if there could be a list of the shut-in pools and wells in each field. He stated that maybe royalty reduction on just the pools should be looked at. Number 0570 CHAIRMAN HODGINS stated that the idea behind the bill is to stimulate someone opening the field and discovering oil and getting revenue into the state. The idea is to find more oil and bigger pools. Number 0596 MR. EASON stated that the bill is self-limiting because the field would have to be brought on to production before 2004 in order to qualify. Once the field is brought on the reduced royalty is only on what is produced for the next ten years. He stated that the incentive would be to develop the field fully and quickly. He referred to the Redoubt Shoal field and its previous attempts at drilling. Additional reserves or pools being discovered can not be ruled out but past evidence suggests that it is unlikely, in regards to the Redoubt Shoal field. Number 0737 REPRESENTATIVE RYAN stated that he would like to know who the players are, and what their economic situations are before he is comfortable with handing out this royalty. Number 0798 CHAIRMAN HODGINS stated that the information is in his committee packet. Number 0857 REPRESENTATIVE ROKEBERG stated that he wanted to offer out some questions. He stated that he was concerned with the ten-year period. Overproduction or fast production could ruin the structure and be at odds with the conservation commission. He suggested that a "right to extend provision" be looked at. He referred to AS 38.05.180(e)(4)(A) that states a second royalty reduction can not be obtained, therefore, it needs to be applied to the bill. He stated that a provision of assignability needs to be addressed. There needs to be a review of the ethicacy of a price parameter on the bill. He stated that if the committee is listing the fields in the bill then the committee needs to look at the geologic history on the fields. He stated that HB 380 is taking a provision of HB 207 and simplifying it, and the committee needs to be cautious. Number 1019 CHAIRMAN HODGINS stated that he would hold CSHB 380( ) over.
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