Legislature(2003 - 2004)

03/16/2004 03:15 PM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 531-CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                              
                                                                                                                                
[Contains discussion relating to SB  312, the companion bill, and                                                               
to SSHB 364]                                                                                                                    
                                                                                                                                
Number 0850                                                                                                                     
                                                                                                                                
CHAIR KOHRING  announced that the  final order of  business would                                                               
be  HOUSE  BILL  NO.  531,   "An  Act  relating  to  natural  gas                                                               
exploration  and  development  and to  nonconventional  gas,  and                                                               
amending the section  under which shallow natural  gas leases may                                                               
be issued; and providing for an effective date."                                                                                
                                                                                                                                
CHAIR KOHRING  invited Representative  Seaton to join  members at                                                               
the table.                                                                                                                      
                                                                                                                                
Number 0888                                                                                                                     
                                                                                                                                
REPRESENTATIVE   BEVERLY   MASEK,   Alaska   State   Legislature,                                                               
presented  HB  531 on  behalf  of  the House  Resources  Standing                                                               
Committee, which  she co-chairs.   She  brought attention  to the                                                               
new proposed committee substitute (CS), Version D.                                                                              
                                                                                                                                
Number 0923                                                                                                                     
                                                                                                                                
REPRESENTATIVE HEINZE  moved [to  adopt the proposed  CS, Version                                                               
23-LS1818\D, Chenoweth, 3/12/04,  as a work draft].   There being                                                               
no objection, Version D was before the committee.                                                                               
                                                                                                                                
REPRESENTATIVE  MASEK  explained  that the  shallow  natural  gas                                                               
program  was adopted  by the  legislature  in 1996  to provide  a                                                               
clean-burning, inexpensive  source of fuel for  rural communities                                                               
and remote locations.   This over-the-counter application program                                                               
has required the  Department of Natural Resources  (DNR) to issue                                                               
a  shallow  natural gas  lease  if  the director  determines  the                                                               
discovery  of a  local source  of natural  gas would  benefit the                                                               
residents  of an  area.    Under the  program,  no best  interest                                                               
finding has been required, however.                                                                                             
                                                                                                                                
REPRESENTATIVE MASEK said  although the program has  been used in                                                               
a few  areas for its  original intended purposes, in  other areas                                                               
it  has  been  used  for  large-scale  commercial  operations  in                                                               
nonrural  settings.   This  has  led to  a  series of  unintended                                                               
consequences; for  example, in 2003  approximately 98  percent of                                                               
shallow  natural  gas leases  and  applications  were in  higher-                                                               
population  locations such  as the  Big Delta,  Matanuska-Susitna                                                               
("Mat-Su"), and Homer areas.   Representative Masek said the lack                                                               
of  discretion given  to the  director on  issuing leases,  along                                                               
with the occurrence of applications  in higher-density areas, has                                                               
led to heightened public concern about the program.                                                                             
                                                                                                                                
Number 1055                                                                                                                     
                                                                                                                                
REPRESENTATIVE  MASEK  conveyed  her   belief  that  [Version  D]                                                               
resolves four  fundamental problems  with the  program:   lack of                                                               
public notice  and participation  prior to  issuance of  a lease;                                                               
"over-the-counter  discretion"  in  issuing   a  lease  once  the                                                               
application  is received;  use of  over-the-counter applications,                                                               
rather  than competitive  bidding; and  problems such  as pooling                                                               
once a  lease reaches production.   It  replaces over-the-counter                                                               
shallow   gas  leases   with  a   gas-only  option,   exploration                                                               
licensing,  and areawide  leasing; she  indicated the  latter two                                                               
are  existing  programs that  require  a  best interest  finding,                                                               
which involves the  public at the beginning of the  process.  She                                                               
said these  programs give the  director discretion  about whether                                                               
to issue  a lease  and whether  to exclude  certain lands  from a                                                               
lease such as those where the surface contains a school.                                                                        
                                                                                                                                
REPRESENTATIVE  MASEK  reported  that   the  bill  provides  that                                                               
nonconventional  gas developers  enjoy  the same  lower rent  and                                                               
royalty  rates  currently in  the  shallow  gas leasing  program.                                                               
Replacing over-the-counter leases  with exploration licensing and                                                               
areawide leasing provides DNR with  much greater public input, as                                                               
well  as  agency  control and  discretion  to  determine  whether                                                               
exploration  and development  are appropriate  in certain  areas.                                                               
Both leasing and licensing processes  are competitive, she noted,                                                               
ensuring maximum value to the state.                                                                                            
                                                                                                                                
REPRESENTATIVE MASEK  said the bill creates  a gas-only selection                                                               
of areawide  leasing and exploration  licensing "identified  in a                                                               
best interest  finding by DNR."   It also  differentiates between                                                               
conventional and  nonconventional gas  resources for  the purpose                                                               
of  lease  and  rent  royalties.     Furthermore,  it  encourages                                                               
exploration licenses with  a [best interest finding]  as a method                                                               
for  nonconventional  gas  exploration outside  of  the  areawide                                                               
leasing,  which  she  said  is   mainly  in  rural  Alaska.    It                                                               
recognizes  that lease  rights shouldn't  be determined  by depth                                                               
only.    Representative Masek  concluded  by  saying [Version  D]                                                               
incorporates  the   foregoing  and  that  experts   from  DNR  on                                                               
teleconference could answer technical questions.                                                                                
                                                                                                                                
Number 1316                                                                                                                     
                                                                                                                                
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources, specified  that  DNR  and the  administration                                                               
support this legislation.   Referring to public  workshops in the                                                               
Mat-Su area  and concerns  heard from Homer  and other  areas, he                                                               
reported  that one  chief public  concern about  the shallow  gas                                                               
leasing  program  has  been  an  unintended  consequence  of  the                                                               
program, that very little actual  notice occurs up front prior to                                                               
issuance  of  the lease.    One  main  concern expressed  in  the                                                               
workshops has been  the desire to have a process  that includes a                                                               
best interest finding.                                                                                                          
                                                                                                                                
MR. MYERS  explained that a  best interest finding is  a document                                                               
like an environmental  impact statement (EIS) in  which the state                                                               
weighs  the values  and looks  at the  environmental issues  as a                                                               
"major,  full public  process" with  a lot  of public  input; the                                                               
draft decision document  then is available for  public comment by                                                               
not only citizens,  but also local governments and so  forth.  In                                                               
response to that,  the final decision must  incorporate all those                                                               
comments and  answer any questions  that have been brought  up or                                                               
else modify the proposed lease sale for that area.                                                                              
                                                                                                                                
MR.  MYERS   said  that   process  has   worked  very   well;  is                                                               
established,  court-tested,  and  well  accepted;  and  has  "the                                                               
balancing  test  of  the  state's best  interests"  as  its  true                                                               
measure.   He  opined that  this  has allowed  a very  successful                                                               
program  for  areawide leasing,  and  said  a modified  but  very                                                               
similar process is used in exploration licenses.  He remarked:                                                                  
                                                                                                                                
     Through  those   two  processes,  we  believe   we  can                                                                    
     accomplish pretty much  everything that is accomplished                                                                    
     with the  shallow gas program  in terms  of encouraging                                                                    
     exploration for and development  of coal bed methane to                                                                    
     provide  that  additional   public  input  that's  been                                                                    
     sought for the public process elsewhere.                                                                                   
                                                                                                                                
Number 1460                                                                                                                     
                                                                                                                                
MR. MYERS explained  that one big thing this  legislation does is                                                               
allow  that upfront  planning process.   Acknowledging  it's more                                                               
work for the department, he  nonetheless remarked that when [DNR]                                                               
is done  with it, it will  have really taken the  public concerns                                                               
and done  a balancing test, and  will be able to  say the leasing                                                               
is  appropriate; it  also gives  [DNR]  a longer,  better-defined                                                               
process  to  put  in stipulations  and  mitigation  measures  for                                                               
environmental protection.  He reiterated  that he believes it's a                                                               
solid, time-tested process.                                                                                                     
                                                                                                                                
MR.  MYERS highlighted  advantageous provisions  for the  lessee.                                                               
For  example,  by  replacing  shallow  gas  leasing  with  either                                                               
conventional  leasing  or   exploration  licensing,  the  program                                                               
allows  applicants to  have a  much  longer period  of time;  the                                                               
three-year period for shallow gas  leases has been problematic in                                                               
that it's  hard to actually  do development work in  a three-year                                                               
period, which has led to less value for the leases.                                                                             
                                                                                                                                
MR. MYERS reported that another  problem with leases has been the                                                               
shallows  depths;  he  acknowledged   that  the  legislature  has                                                               
struggled  with whether  it should  be  3,000 or  4,000 feet,  or                                                               
should be  part of  the field  above 3,000  feet and  continue to                                                               
deeper depths.   He  remarked, "We  think the  best way  to lease                                                               
land is to  provide ... the gas potential at  all depths; in that                                                               
sense,  then,   the  correlative   rights  of  all   parties  are                                                               
protected, at least  the maximum production from the  lease."  He                                                               
mentioned that there'd potentially  be fewer facilities built and                                                               
thus less of an impact.                                                                                                         
                                                                                                                                
Number 1566                                                                                                                     
                                                                                                                                
MR.  MYERS noted  that one  concern  about those  who produce  or                                                               
explore for  shallow gas  or other  nonconventional types  of gas                                                               
has  been   the  economic  structure  of   the  leasing  program.                                                               
Conventional lease rentals  start at $1 an acre and  go up to $3.                                                               
He pointed out that exploration  costs and the economics for coal                                                               
bed methane or other nonconventional  gas such as gas hydrates or                                                               
gas-producing fractured shales are  different from those for with                                                               
conventional reservoirs.   To encourage  that activity,  he said,                                                               
this  bill provides  a mechanism  whereby if  the lessee  makes a                                                               
showing that the  gas potential on the  lease is nonconventional,                                                               
[the lessee] can  retain a $1-an-acre rental; if  the gas doesn't                                                               
compete with other  gas, the 6.25 percent royalty  share can also                                                               
be retained that is part of the shallow gas leasing program.                                                                    
                                                                                                                                
MR.  MYERS concluded  by saying  this bill  should stimulate  the                                                               
shallow gas and coal bed  methane industry; provides a balancing;                                                               
has  a mechanism  for the  state to  recognize the  difference in                                                               
economics and to give a better  lease term; is for all depths and                                                               
for  a  longer  period  of  time;  will  lead  to  more  rational                                                               
development; should bring in more  money to the state; provides a                                                               
best interest  finding and public  input; creates a  situation in                                                               
which,  to  his  belief,  the  leases  are  a  better  value  for                                                               
applicants; and deals with some  problems relating to the limited                                                               
depths of  the shallow  gas leasing program.   He  stated support                                                               
[from DNR and the administration] for those reasons.                                                                            
                                                                                                                                
Number 1686                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA asked what kind  of notice is given.  She                                                               
expressed  concern  that  there  still  isn't  direct  notice  to                                                               
landowners, although it could happen.                                                                                           
                                                                                                                                
MR. MYERS answered  that there is no notification at  the time of                                                               
leasing  to  all  residents  in  the  area,  but  there  is  full                                                               
notification to  any resident who  provides his/her name  for the                                                               
mailing  list;   to  all  municipal  governments   and  community                                                               
councils;  and   [to  the  general  public   through]  the  local                                                               
newspaper,  [notification  posted] at  the  post  office, and  so                                                               
forth.  Mr. Myers said he  doesn't know of any state program that                                                               
notifies  all residents  in an  area that  the state  is doing  a                                                               
disposal.  He explained:                                                                                                        
                                                                                                                                
     We have  difficulty because we have  no qualified lists                                                                    
     of residents.  We have  tax records in some places, but                                                                    
     that goes  to the owner, not  to the resident.   And in                                                                    
     other unorganized boroughs, we  really don't have those                                                                    
     lists.  ...   We  can  attempt   it,  but   we  haven't                                                                    
     traditionally, in our programs.                                                                                            
                                                                                                                                
MR.  MYERS said  other than  for the  shallow gas  program, [DNR]                                                               
hasn't had  this as a major  complaint.  He pointed  out, though,                                                               
that there is a requirement  before any operations occur that all                                                               
residents be notified; at that stage,  they "go on the ground and                                                               
physically require that notification."                                                                                          
                                                                                                                                
Number 1794                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA asked  how onerous it would  be to notify                                                               
the  owners  instead  of  the residents  prior  to  leasing,  and                                                               
whether a list could be obtained from the courts, for example.                                                                  
                                                                                                                                
MR.  MYERS answered  [that  DNR] has  looked  at using  available                                                               
lists  including court  lists,  tax records,  and  so forth,  but                                                               
records  in most  areas aren't  all that  good and  it would  add                                                               
costs  to  the programs.    With  the  shallow gas  program,  for                                                               
example, the estimate  is about $70,000 a  year if [notification]                                                               
is via  certified mail; he  offered to  provide a breakdown.   He                                                               
noted  that  commercial  mailing   lists  could  be  tried,  said                                                               
contracting  it  out has  been  looked  at, and  highlighted  the                                                               
substantial cost.   Although  it's possible,  he said,  he didn't                                                               
have confidence  about [the ability  to notify] all  residents of                                                               
an area,  based on the historical  quality of the data  sets.  He                                                               
added  that probably  the best  records [DNR]  has seen  are some                                                               
commercial mail-outs  for coupons, but  it costs money  and takes                                                               
time.  It also could be done under contract.                                                                                    
                                                                                                                                
Number 1870                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA asked,  "What if the list  were simply to                                                               
owners and we  figured out some fairly simple way  to do that and                                                               
it was not certified?"  She surmised this would lower the cost.                                                                 
                                                                                                                                
MR.  MYERS  answered  affirmatively,   estimating  that  for  the                                                               
shallow gas  program it  would cost  about $10,000  using regular                                                               
mail.  He  mentioned concern about being sued  if someone doesn't                                                               
get a  letter.  Indicating DNR  tries its best to  notify people,                                                               
he said  the preferred method is  to put out the  notice and have                                                               
[concerned  citizens contact  the  department]; if  there is  any                                                               
activity at  all in their area,  DNR will then notify  them, thus                                                               
ensuring  that "the  folks  that really  care  about it"  receive                                                               
notification.   He  said  notifying people  prior  to a  disposal                                                               
isn't current  state policy  on conventional  leasing, (indisc.),                                                               
or  any other  disposals of  the state;  however, it's  something                                                               
[DNR] could look into if the legislature so desires.                                                                            
                                                                                                                                
REPRESENTATIVE  KERTTULA  suggested   it's  certainly  worth  the                                                               
legislature's thinking  about it very  hard because of  events of                                                               
last year relating to shallow natural gas.                                                                                      
                                                                                                                                
Number 1970                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   recalled  seeing  a  schematic   of  a                                                               
distribution  plan for  Fort Yukon  to take  advantage of  nearby                                                               
potential  shallow  gas  to  distribute   to  that  village,  one                                                               
intention of  the original [shallow  gas] legislation.   He asked                                                               
whether HB  531 provides a  choice between  exploration licensing                                                               
or an  areawide leasing plan.   If  there were a  small, discrete                                                               
area around  that village,  for example, he  asked how  Mr. Myers                                                               
would recommend that work under this proposed legislation.                                                                      
                                                                                                                                
MR. MYERS  said that's  a good  question.   He recalled  that the                                                               
shallow  gas  legislation passed  the  same  year as  exploration                                                               
licensing; thus  there wasn't a  vehicle outside of  the areawide                                                               
sale areas to allow for leasing and development.                                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG  remarked,  "That  was  before  areawide                                                               
leasing too."                                                                                                                   
                                                                                                                                
MR.  MYERS agreed,  saying there  were  conventional sales  where                                                               
[DNR] did a  finding.  Remarking that  areawide leasing certainly                                                               
would  apply in  areas where  he thinks  the department's  intent                                                               
would  be to  extend  the current  areawide  sales, he  mentioned                                                               
north  and  south  Cook  Inlet  and at  least  looking  at  those                                                               
possibilities.                                                                                                                  
                                                                                                                                
MR.  MYERS  pointed  out  that  the  other  mechanism,  the  most                                                               
appropriate  in  rural  Alaska,  is   where  the  intent  is  for                                                               
(indisc.) energy:  either the  applicant would apply or the state                                                               
would open an  area for exploration licensing - it  has been done                                                               
both ways.   Although it  can be applicant-driven,  the applicant                                                               
has  to compete  for that  license in  terms of  dollars of  work                                                               
commitment spent  for the area.   He noted that a  license can be                                                               
for as few  as 10,000 acres, essentially two  shallow gas leases.                                                               
Also, an applicant  can request the area and [DNR]  can grant the                                                               
license  without a  competitive process,  since no  one else  has                                                               
competed  for it.    He  remarked, "We're  not  seeing  a lot  of                                                               
competition in the exploration licensing."                                                                                      
                                                                                                                                
MR. MYERS  elaborated, saying an  applicant can come  forward any                                                               
April and propose a license in  an area, and [DNR] will start the                                                               
process.  Or the  state, at any point, can decide  to "go out for                                                               
a license"  in a specific area,  often in response to  a request.                                                               
In Bristol  Bay, for example, there  was a lot of  local interest                                                               
and the state "self-proposed" it.   The mechanism in rural Alaska                                                               
would  be an  exploration  license application.   Suggesting  the                                                               
applicant's  cost would  be far  cheaper than  for a  shallow gas                                                               
lease,  with  a  longer-term  license, he  added,  "What  they're                                                               
bidding on is really a  work commitment to evaluate leases, which                                                               
is what we want anyway."                                                                                                        
                                                                                                                                
MR. MYERS  explained that at the  end of the license  period is a                                                               
right  to noncompetitively  convert  to a  conventional lease  at                                                               
12.5 percent.   Under this program,  for an area like  Fort Yukon                                                               
where  [DNR] sees  no oil  potential, a  gas-only lease  could be                                                               
applied  for and  negotiated.   For coal  bed methane,  a showing                                                               
could be  made to  [DNR] and  then the  royalty and  rental terms                                                               
would "stay at  the dollar, and it would be  the 6.25 [percent]."                                                               
Thus  economic terms  at Fort  Yukon would  be obtained  that are                                                               
similar  to those  under shallow  gas leases,  except there'd  be                                                               
better terms  because of  the 7 to  10 years  to explore  and the                                                               
exclusive right to explore before going to a lease.                                                                             
                                                                                                                                
MR. MYERS added that overall, review  of all the cases of shallow                                                               
gas  leases [has  shown that]  under this,  the applicants  would                                                               
have  been  better  off  with  actual  exploration  licenses;  he                                                               
mentioned the Red  Dog area and some other areas.   Having worked                                                               
through  the  process,  he  said,  he believes  this  is  a  more                                                               
effective way  to get unique  areas like Fort Yukon  under lease,                                                               
because there is  a best interest finding up  front that includes                                                               
the public process and will protect [lessees] from litigation.                                                                  
                                                                                                                                
Number 2280                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG noted that  the best interest finding has                                                               
to  be  completed for  both  the  exploration licensing  and  any                                                               
conventional or  areawide leasing.   He  asked Mr.  Myers whether                                                               
DNR's costs would be lower to  prepare a best interest finding in                                                               
a  rural area  with  a  relatively small  amount  of acreage,  or                                                               
whether there  is a usually a  fixed cost because of  the breadth                                                               
of any best interest finding that must be prepared.                                                                             
                                                                                                                                
MR. MYERS  said he  believes the  answer has two  parts.   If the                                                               
area is geographically small or  constrained, the finding is more                                                               
constrained; it is  easier to do a finding for  10,000 acres than                                                               
for 0.5  million acres because  of the  research needed.   It has                                                               
been found, however,  through the process of  shallow gas leasing                                                               
and  developing stipulations  and  mitigation  measures, that  it                                                               
still  requires  a substantial  amount  of  research.   Prior  to                                                               
issuing  a lease,  he said,  [DNR] goes  through the  full public                                                               
process.                                                                                                                        
                                                                                                                                
MR.  MYERS reported  that,  in retrospect,  for  the shallow  gas                                                               
leasing program more  effort has been spent than  if the findings                                                               
had been  done up  front.   He mentioned  the Holitna  basin, the                                                               
Healy-Cantwell area, and a desire  of people there to have public                                                               
input and a public process.   In reality, he said, there has been                                                               
little  discretion to  change things,  even  though there  hasn't                                                               
been a  public process.   He offered his  belief that it's  not a                                                               
whole lot  more work to  actually do the [best  interest] finding                                                               
and have public input up front.                                                                                                 
                                                                                                                                
MR.  MYERS  explained that  also  different  under the  licensing                                                               
proposal is  an ability  to negotiate  with applicants  to remove                                                               
acreage  that is  environmentally  sensitive or  that  has a  low                                                               
probability of finding  gas.  Perhaps 90 percent  of problems are                                                               
eliminated by  eliminating 5-10 percent  of the acreage,  but the                                                               
applicant doesn't necessarily  know that.  Thus  having a process                                                               
that includes  discussion with  the agency and  a shaping  of the                                                               
license area has been a huge  success; he cited a Susitna license                                                               
as an example, saying there  was little public concern because it                                                               
was  shaped  with  the  applicant   to  avoid  "hot-spot"  areas.                                                               
Returning  to  balancing, he  mentioned  the  cost of  licensing,                                                               
leasing,  and the  best interest  finding.   He pointed  out that                                                               
while it takes about  a minimum of a year to  issue a finding, it                                                               
takes [DNR] longer than that to issue shallow gas leases now.                                                                   
                                                                                                                                
Number 2443                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked what  it typically  costs to  do a                                                               
best interest finding.                                                                                                          
                                                                                                                                
MR. MYERS replied that including  staff time and depending on the                                                               
amount  of  travel,  $250,000  is   an  estimate  for  a  typical                                                               
exploration license.   For  a smaller one,  it would  probably be                                                               
considerably  less.   If [DNR]  does  multiple ones  in the  same                                                               
area, however, a  lot of basic data  is there and so  it can cost                                                               
much  less.   He reiterated  that for  shallow gas  leasing, [the                                                               
department]  isn't  spending a  whole  lot  less, or  perhaps  is                                                               
spending no less, if staff time is included.                                                                                    
                                                                                                                                
Number 2498                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked what  switching to areawide leasing                                                               
and avoiding 5-year renewals on  best interest findings saves the                                                               
department over the years.                                                                                                      
                                                                                                                                
MR.  MYERS  replied  that  the 10-year  "shelf  life"  has  saved                                                               
millions of dollars and cut  the staff for best interest findings                                                               
to perhaps 20 percent of what was required before.                                                                              
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he'd  been looking for  that answer                                                               
since introducing an areawide leasing bill a few years ago.                                                                     
                                                                                                                                
Number 2531                                                                                                                     
                                                                                                                                
REPRESENTATIVE   ROKEBERG   expressed    concern,   stating   his                                                               
understanding that  Mr. Myers  had said  one method  for handling                                                               
this  type  of  nonconventional  gas   would  be  to  extend  the                                                               
geographic boundaries of the  current areawide leasing offerings.                                                               
He asked, "If  you were to do that, would  that not either extend                                                               
them  or create  new ones  - like  in Bristol  Bay you  basically                                                               
created a new areawide lease area, as I understand it?"                                                                         
                                                                                                                                
MR. MYERS answered in the affirmative.   He said that would occur                                                               
in the  Cook Inlet  areawide findings, due  in 2007;  the 10-year                                                               
period  would be  up, so  [DNR] would  review it  anyway in  that                                                               
timeframe, would look at areas it  is aware of in the valley that                                                               
would have  coal bed  methane potential,  and would  extend those                                                               
further to the north.  He added:                                                                                                
                                                                                                                                
     In  the  meantime,  if  someone were  to  apply  for  a                                                                    
     license in the  area that's currently not,  we could go                                                                    
     through the process. ... Someone  could lease that [at]                                                                    
     this  point  in  time,  prior  to  that  finding  being                                                                    
     completed ...  or the announcement  that we  were going                                                                    
     to extend  it in  the 2007  period.   So I  don't think                                                                    
     under this program,  in the interim time,  any land ...                                                                    
     is off-limits  that isn't planned to  be off-limits for                                                                    
     areawide leasing, like in the Bristol Bay region.                                                                          
                                                                                                                                
     So  we   wouldn't  anticipate  a  mineral   closing  or                                                                    
     anything else  in the valley.   That ... would  be open                                                                    
     for  licensing; again,  it  would  provide that  public                                                                    
     process  along with  it.   And then  our ultimate  goal                                                                    
     would be, then,  to extend the areawide  further ... to                                                                    
     the  north there,  certainly,  and  that would  provide                                                                    
     that best interest finding process,  but still have ...                                                                    
     a chance to  develop the coal bed  methane resources up                                                                    
     there.                                                                                                                     
                                                                                                                                
Number 2625                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG conveyed his  understanding that when the                                                               
Cook Inlet areawide leasing was  established, the boundaries were                                                               
adjusted  during  regulatory  rule   making;  the  "Kachemak  Bay                                                               
uplands"  were excluded  and thus  became  available for  leasing                                                               
under the shallow gas [program],  which has created somewhat of a                                                               
problem by the  fact of their exclusion.  He  asked whether [DNR]                                                               
has  plans   relating  to  extension  of   the  areawide  leasing                                                               
boundaries there  or in the [Mat-Su  area].  He also  asked about                                                               
impacts relating  to the  costs and  the regulatory  rule making,                                                               
and  whether  [DNR] will  go  through  the whole  public  hearing                                                               
[process]  again when  there is  a renewal  of the  best interest                                                               
findings at the 10-year [renewal point in 2007].                                                                                
                                                                                                                                
MR. MYERS addressed  the last question first,  saying the 10-year                                                               
period starts with  a brand-new best interest  finding along with                                                               
a decision by  the commissioner on what area will  be included in                                                               
the finding.   In the  1997 finding, he  noted, then-Commissioner                                                               
Shively made a  determination that limits the area  to the south;                                                               
however, there  is no  real documentation of  the policy  call at                                                               
the time.   Mr. Myers said  those limits could be  subject to the                                                               
commissioner's discretion  at the time  the finding is done.   If                                                               
the finding didn't  include that area to the north  and south, it                                                               
would  still  be  open  for   exploration  licensing  under  this                                                               
program.                                                                                                                        
                                                                                                                                
MR. MYERS reiterated  that the major concern heard  from folks in                                                               
the [Mat-Su area] and Homer is  the lack of public process.  Even                                                               
with  a  license, he  said,  there'd  still  be a  best  interest                                                               
finding process and  the ability to "size and shape"  the area to                                                               
eliminate  areas  of  major  public   concern  "if  the  findings                                                               
reported it."  The public process  would be there in either case.                                                               
Mr. Myers went  on to say that, at this  point, he believes DNR's                                                               
intent  is to  incorporate  a "larger  areawide leasing"  because                                                               
it's  supported now  by  the  geology and  the  technology.   The                                                               
discussion of what  should or shouldn't be in the  sale, the sale                                                               
area, mitigation  measures, surface  occupancy standards,  and so                                                               
forth  would  be  worked  out through  the  public  process,  the                                                               
findings, and the weighing of the state's best interests.                                                                       
                                                                                                                                
Number 2771                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked whether  an applicant could request                                                               
a  gas-only  lease  under  this  bill  if  the  areawide  leasing                                                               
boundaries were  expanded in Cook  Inlet to the south  and north,                                                               
for example.                                                                                                                    
                                                                                                                                
MR.  MYERS  answered  that  for  those  particular  areas,  DNR's                                                               
commissioner  would  have to  make  a  determination, if  it  was                                                               
within  an areawide  sale,  as  to whether  to  issue a  gas-only                                                               
lease.  There are qualifications as  to how it would be done, but                                                               
he said the  logical implications are that the  potential and the                                                               
environmental sensitivities are what would  be looked at.  For an                                                               
area by  Homer where there  is a  lot of concern  about oil-spill                                                               
issues, for  instance, it  might be appropriate  to issue  a gas-                                                               
only   lease  because   of   environmental   sensitivity.     The                                                               
commissioner would have  to work that out; it  would be explained                                                               
and  argued in  the  findings,  and would  be  determined by  the                                                               
findings process.                                                                                                               
                                                                                                                                
MR.  MYERS explained  that the  other case  where a  commissioner                                                               
would do this is if an area really  had no oil potential.  If the                                                               
area  underneath had  a  lot  of oil  potential  as  well as  gas                                                               
potential, or had even moderate  oil potential, Mr. Myers said he                                                               
doubted  that  the commissioner  would  make  a determination  to                                                               
issue   a    gas-only   lease    unless   it    was   determined,                                                               
environmentally,  to be  the only  way to  properly lease  it, to                                                               
balance the state's best interests.                                                                                             
                                                                                                                                
Number 2858                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  inquired what the economics  would be if                                                               
there was  drilling for  shallow gas or  coal bed  methane within                                                               
areawide leasing  geography.  He  asked what the  economic impact                                                               
would be  if there was  a lower-production shallow  gas operation                                                               
versus more conventional gas.                                                                                                   
                                                                                                                                
MR.  MYERS responded  that conventional  gas  - the  kind of  gas                                                               
typically  explored for  on the  Kenai Peninsula  or most  of the                                                               
known North Slope reserves -  has superior economics and requires                                                               
fewer  wells.    The  gas   resources  are  typically  at  higher                                                               
pressure, for instance,  and the rate from an  individual well is                                                               
much higher.   The cost  of drilling a  well is also  higher, but                                                               
overall the  economics are generally  a little better.   Pointing                                                               
out that  the economics  for coal  bed methane  are very  good in                                                               
some areas, Mr.  Myers said he thinks that  determination will be                                                               
based   on   the  cost   of   drilling;   the  approximation   to                                                               
infrastructure and  the cost  of getting the  gas to  market; and                                                               
the productivity of the coals, which can vary.                                                                                  
                                                                                                                                
MR.  MYERS  provided  examples,  saying  the  [Mat-Su  area]  has                                                               
existing infrastructure  including roads, and is  much cheaper to                                                               
explore  than the  Fort Yukon  area;  most of  the economics  are                                                               
pretty  good in  the [Mat-Su  area],  and pilot  programs in  the                                                               
Pioneer  Unit  there  are  in  conventional,  competitively  bid,                                                               
standard  oil and  gas leases  held by  the Pioneer  Unit itself.                                                               
Areas to  the north of that  have shallow gas leases.   Mr. Myers                                                               
surmised that  Evergreen Resources was comfortable  drilling with                                                               
conventional  lease terms.   In  the [Mat-Su  area], he  said, he                                                               
believed it  would be a  tossup whether conventional  lease terms                                                               
would affect  the economics,  and didn't  think they'd  affect it                                                               
very negatively.   He added that the differential  in the royalty                                                               
rate, the  6.25 [percent], makes  no difference because  that gas                                                               
is  fully competing  in  the market  with other  gas.   In  rural                                                               
Alaska, however, there is a  high cost to develop infrastructure,                                                               
there are limited markets, and so forth.                                                                                        
                                                                                                                                
TAPE 04-9, SIDE B                                                                                                             
Number 2948                                                                                                                     
                                                                                                                                
MR.  MYERS  mentioned potential  for  the  lower rate  [in  rural                                                               
areas].   Turning  to Homer,  he  noted that  there are  multiple                                                               
wells  drilled in  the Homer  bench  itself, many  with good  gas                                                               
shows,  on  a trend  with  normal  gas  fields; the  shallow  gas                                                               
potential there  is actually conventional.   Mr.  Myers explained                                                               
that in  such an  area, [DNR] would  probably argue  that there's                                                               
more  conventional gas  potential; that  it shouldn't  be at  the                                                               
lower royalty rate; and that  someone could bid competitively for                                                               
those leases, successfully, and  could afford the exploration and                                                               
development program.                                                                                                            
                                                                                                                                
Number 2948                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HEINZE  noted  that  some  legislators  had  just                                                               
returned  from  the  Energy Council  [conference  in  Washington,                                                               
D.C.], where they  looked at projected gas shortages  in the U.S.                                                               
She asked, as  companies look towards Alaska and its  gas, and as                                                               
competition  increases  for  these applications,  whether  Alaska                                                               
will "have enough area for these shallow gas leases."                                                                           
                                                                                                                                
MR. MYERS  suggested looking at  Alaska's long-term  gas supplies                                                               
and basins  with large potential;  many of these areas  are under                                                               
exploration  licenses.    He  said   the  North  Slope  is  under                                                               
traditional  leasing, however,  and significant  potential exists                                                               
within  North   Slope  foothills   basins,  in   particular,  for                                                               
undiscovered, large,  conventional gas fields.   Indicating a lot                                                               
of  large  gas  producers  are  buying  those  leases,  he  cited                                                               
examples of companies with a  long history of gas exploration and                                                               
mentioned  the potential  for  a natural  gas  pipeline from  the                                                               
North Slope.                                                                                                                    
                                                                                                                                
MR.  MYERS  reported   that  further  south,  one   of  the  more                                                               
outstanding candidates is the Nenana  basin outside of Fairbanks,                                                               
where Andex  [Resources LLC] has  a license; that deep  basin has                                                               
potential  [in  the  trillions  of   cubic  feet]  but  is  under                                                               
exploration  licensing.   The  Susitna  basin  has two  different                                                               
exploration  licenses with  Forest Energy;  characterizing it  as                                                               
"sort of  an extension of  Cook Inlet  to the north,"  he offered                                                               
the belief that this area  is gas-prone, with the same formations                                                               
that produce gas in the Cook  Inlet.  Moving further south to the                                                               
northern  extension of  Cook Inlet,  he  said there  is coal  bed                                                               
methane activity in  the Pioneer Unit and the  shallow gas leases                                                               
adjoining that area to the north, and then Cook Inlet proper.                                                                   
                                                                                                                                
MR. MYERS  provided details,  concluding that there  is a  lot of                                                               
potential in the offshore Cook  Inlet area, but it's expensive to                                                               
get to and the fields would have  to be very large to support the                                                               
cost  of  development.    Onshore  there  is  a  fair  amount  of                                                               
exploration activity - more than  traditionally, on both sides of                                                               
the  inlet   -  with  some   success  for  gas;   however,  those                                                               
discoveries cumulatively will only extend  the life of Cook Inlet                                                               
[production] about another year.   Mentioning about nine years of                                                               
reserves plus  the possible one-year extension,  he suggested the                                                               
unknown exploration potential there needs  to be banked on if the                                                               
life is  to be extended.   He also indicated in  Bristol Bay it's                                                               
believed a basin  may have multiple [trillions of  cubic feet] of                                                               
conventional gas "on state lands and state waters."                                                                             
                                                                                                                                
CHAIR KOHRING noted that Mr. Myers  has a Ph.D. and speaks from a                                                               
lot of experience.                                                                                                              
                                                                                                                                
Number 2760                                                                                                                     
                                                                                                                                
REPRESENTATIVE   PAUL    SEATON,   Alaska    State   Legislature,                                                               
paraphrased    from     Version    D,    page     25    [amending                                                               
AS 38.05.180(f)(3)], which read:                                                                                                
                                                                                                                                
               (H) for nonconventional gas that will not be                                                                 
     produced  in direct  competition  with gas  on which  a                                                                
     royalty at a rate of  at least 12.5 percent is payable,                                                                
     a royalty share reserved to  the state of at least 6.25                                                                
     14  percent  in  amount  or  value  of  the  production                                                                
     removed or sold from the lease;                                                                                        
                                                                                                                              
REPRESENTATIVE  SEATON  requested   clarification,  offering  his                                                               
understanding  that gas  produced  in most  wells  in Cook  Inlet                                                               
until January of this year had a 5 percent royalty rate.                                                                        
                                                                                                                                
Number 2707                                                                                                                     
                                                                                                                                
MR. MYERS  replied that most gas  in Cook Inlet is  produced at a                                                               
12.5 percent royalty rate from  state land.  However, legislation                                                               
passed  in 1994,  which he  believed sunsetted  in January  2004,                                                               
gave a  5 percent  royalty to  certain "known  but at  that point                                                               
uneconomic"  gas  fields  to spur  development;  the  legislation                                                               
listed those fields  and gave 10 years from  the bill's effective                                                               
date for  production to  start.   Mr. Myers  recalled that  the 5                                                               
percent was  on the first 35  billion cubic feet of  gas produced                                                               
from the  field.   Corresponding was that  certain ones  were oil                                                               
fields; for example,  one platform got a 5  percent royalty until                                                               
it produced 25 million barrels.                                                                                                 
                                                                                                                                
MR. MYERS said  for this program [under HB 531],  in most of Cook                                                               
Inlet  that has  conventional oil  and gas  potential, the  lower                                                               
royalty rate for the "gas-only" wouldn't be eligible.  He added:                                                                
                                                                                                                                
     It's not eligible  for it now, and it  wouldn't get the                                                                    
     6.25  percent treatment.   What  was  designed in  this                                                                    
     bill    was    a   mechanism,    though,    recognizing                                                                    
     Representative  Rokeberg's   Fort  Yukon-type  scenario                                                                    
     where   there  was   a  mechanism,   if  the   gas  was                                                                    
     unconventional, ...  to get a 6.25  percent royalty for                                                                    
     local energy use.                                                                                                          
                                                                                                                                
Number 2595                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON noted  that page  25 doesn't  distinguish,                                                               
but  talks about  [competition] with  gas  with a  royalty of  at                                                               
least 12.5  percent.  Saying there  is a mixture in  his own area                                                               
[Homer], where  at least two  fields just  came on line  prior to                                                               
January  1, he  requested  further clarification  about how  this                                                               
will apply to his area.                                                                                                         
                                                                                                                                
MR. MYERS responded  that if gas was competing and  came from the                                                               
Falls Creek Unit  or several other units [listed  in statute], it                                                               
would have a  royalty of 12.5 percent, although in  "the one case                                                               
... in  the North Fork  Unit" it  would be 5 percent;  that isn't                                                               
changed by  this [bill].   If production  occurred on one  of the                                                               
current  shallow  gas  leases  in  the  Homer  area  and  it  was                                                               
competing  with  other gas,  the  royalty  on those  shallow  gas                                                               
leases would  be 12.5 percent;  if it wasn't competing,  it would                                                               
be 6.25  percent.  This determination  would be made at  the time                                                               
of the discovery, he added.                                                                                                     
                                                                                                                                
Number 2490                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON asked,  "So if  it's competing  with North                                                               
Fork gas, it's taxed at 5 percent?"                                                                                             
                                                                                                                                
MR. MYERS replied  that it would be 12.5 percent  because of "the                                                               
standard on the lease."                                                                                                         
                                                                                                                                
REPRESENTATIVE SEATON asked  if that's even though  page 25 talks                                                               
about  competition with  gas  with  a royalty  rate  of at  least                                                               
12.5 percent.                                                                                                                   
                                                                                                                                
MR.  MYERS affirmed  that and  explained that  in this  bill, the                                                               
royalty rate  determined on those  current shallow gas  leases is                                                               
enshrined  in  statute.   The  bill's  language doesn't  directly                                                               
apply to  the leases in the  Homer area because, he  said, "those                                                               
leases  are  established  under   the  contract  right  and  it's                                                               
enshrined   in   the   lease  under   current   statutes,   under                                                               
[AS 38.05.]177."                                                                                                                
                                                                                                                                
Number 2442                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON  sought   clarification  about  a  concern                                                               
expressed   the  previous   week  about   [SSHB  364,   which  he                                                               
sponsored], relating to  shallow gas leases in  Homer, that there                                                               
is a  problem with [DNR's]  discretion to extend those  leases if                                                               
they aren't being  actively pursued.  He asked  Mr. Myers, "Would                                                               
you have any problem putting  that same discretionary language in                                                               
this bill,  as well, so  that you  would have the  discretion and                                                               
the  guidelines for  reissuing the  current  shallow natural  gas                                                               
leases in the Homer area?"                                                                                                      
                                                                                                                                
MR. MYERS shared  his personal view, saying he'd  have no problem                                                               
with the  legislature's clarifying what  that discretion is.   "I                                                               
think the  language you presented  does it well and  stays within                                                               
...  the intent  of  the  law," he  said,  and  thus wouldn't  be                                                               
considered  the taking  of a  lease right.   Unless  activity was                                                               
occurring,  he suggested,  it probably  would  assure that  those                                                               
shallow gas leases  expired in three years; then,  if the finding                                                               
was  extended,  the  area  "currently  under  exploration,  under                                                               
shallow gas  leases, ... if  it was appropriate in  the finding,"                                                               
could be  included in an  areawide sale for, potentially,  a gas-                                                               
only lease.   He added his  belief that shortening that  term and                                                               
limiting  the discretion,  or defining  that  discretion as  that                                                               
bill [SSHB 364] does, wouldn't negatively affect this bill.                                                                     
                                                                                                                                
Number 2337                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  brought up  concerns raised by  folks at                                                               
[Teck  Cominco  Limited, at  the  Red  Dog  mine] about  a  shale                                                               
discovery; he  said they  apparently have  a current  shallow gas                                                               
lease and  concerns about how  this bill relates to  their future                                                               
operations.   He asked whether  there have been  discussions with                                                               
them, whether any  accommodation can be made  for that situation,                                                               
and whether  Mr. Myers believes  this bill is adequate  for their                                                               
purposes.                                                                                                                       
                                                                                                                                
MR.  MYERS  answered that  there  are  multiple issues  involving                                                               
their particular leases and elaborated:                                                                                         
                                                                                                                                
     I  did use  the  discretion of  the  director there  to                                                                    
     extend  their leases.   They're  past their  three-year                                                                    
     primary term, so they ... have  two years left ... on a                                                                    
     term that's actually  going to end up  being six years.                                                                    
     And  the reason  that that  determination was  made was                                                                    
     that  they were  doing a  lot of  good exploration  and                                                                    
     work on adjoining, Native-owned  leases.  And that work                                                                    
     was  directly appropriate  for the  development of  the                                                                    
     fractured shale  ... in their  reservoir.  So  ... they                                                                    
     did, in fact, get an extension ... of term.                                                                                
                                                                                                                                
     Realistically, for  them to go  into production,  in my                                                                    
     opinion,  it's  going  to  require  unitization.    And                                                                    
     through unitization,  they'd have  the right  to extend                                                                    
     those leases ... when they enter  the unit.  One of the                                                                    
     reasons  you need  to  do unitization  of  the area  is                                                                    
     because [of]  the mixture of  lease ownership,  and you                                                                    
     have to worry about  the correlative rights ... between                                                                    
     ... NANA  [Regional Corporation]  and the  state; those                                                                    
     are state lands.   So it's the  appropriate, normal way                                                                    
     to  go.    Under  unitization, those  leases  would  be                                                                    
     preserved  as  long as  they  are  under production  or                                                                    
     under a (indisc.) of exploration.   So, again, normally                                                                    
     that's what we do  with conventional leases; that would                                                                    
     follow there.  And, really,  it takes care ... of their                                                                    
     issue.                                                                                                                     
                                                                                                                                
     Barring  that, if  they decided  not to  go ahead  with                                                                    
     future  exploration,  I  think  ...  we'd  be  open  to                                                                    
     considering an exploration  license application for the                                                                    
     entire  area  that they're  talking  about.   Again,  I                                                                    
     think ...  they're sort of  the "poster  activity" that                                                                    
     you want to see encouraged,  that has local energy, ...                                                                    
     fractured shales, a nonconventional gas source. ...                                                                        
                                                                                                                                
     Through  the process  of these  bills, I  believe, they                                                                    
     would actually  end up  with a  better-quality product.                                                                    
     Some of  their resource  potential is, in  fact, deeper                                                                    
     than the  3,000 feet,  which creates  some correlative-                                                                    
     rights problems  in their  area.   That would  be taken                                                                    
     care  of if  they had  a license;  they would  have [a]                                                                    
     longer  term  for  exploration,  and  then  they  would                                                                    
     convert to a conventional lease with known terms.                                                                          
                                                                                                                                
MR. MYERS said under this scenario  he doesn't think there is any                                                               
conventional gas  potential in the  area; thus they could  end up                                                               
applying   for   and   being  granted   a   nonconventional   gas                                                               
[designation], and could get a  royalty rate and rental structure                                                               
similar to the shallow gas program.  He added:                                                                                  
                                                                                                                                
     In  either  case, ...  when  I  ran ...  through  their                                                                    
     particular  situation, I  think  they're  fine if  they                                                                    
     want to go  through the process of  unitization ... and                                                                    
     further  development of  shallow gas  leases.   They're                                                                    
     probably  in good  shape  if they  decided  not to  and                                                                    
     wanted to, again, go back  and apply for an exploration                                                                    
     license.    So  I  think  we've  worked  through  that,                                                                    
     particularly  with their  issues,  but  I don't  really                                                                    
     want  to  speak  for  them.   But  we  have  had  those                                                                    
     discussions.                                                                                                               
                                                                                                                                
Number 2157                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  whether  they could  in some  way                                                               
"top lease" it with an  exploration license to protect themselves                                                               
before their  current leases expire.   He also inquired  how that                                                               
transition would be handled so  their investment is protected and                                                               
so forth.                                                                                                                       
                                                                                                                                
MR. MYERS  agreed they  certainly could  do that.   The  one risk                                                               
would be  if someone  outbid them  for the  work commitment.   He                                                               
said  he thinks  it's  possible but  unlikely -  if  they own  or                                                               
manage the  mine operations,  have the  equipment there,  and are                                                               
actively exploring on  the surrounding lands -  that someone else                                                               
would  come  in  and bid  more  for  the  work.   He  said  [DNR]                                                               
traditionally hasn't [offered]  exploration licenses over shallow                                                               
gas  leases because  of correlative-rights  issues, for  example,                                                               
not wanting  to deal with  someone producing gas from  4,000 feet                                                               
that is geologically connected to [gas at] 3,000 feet.                                                                          
                                                                                                                                
MR. MYERS  also suggested  [the people  at Teck  Cominco Limited]                                                               
could relinquish  their shallow gas  lease at the same  time they                                                               
applied for the  exploration license, and then  there wouldn't be                                                               
a  problem.   Given the  state of  their exploration  program, he                                                               
said, it  would be  logical if  they chose to  apply for  a unit;                                                               
then  the  only cost  besides  the  demonstration of  their  work                                                               
commitment (indisc.) would be a $5,000 unit-application fee.                                                                    
                                                                                                                                
Number 2069                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG inquired  about drilling  test holes  or                                                               
having the position verified geologically.                                                                                      
                                                                                                                                
MR.  MYERS  answered  that  they've  drilled  numerous  core-hole                                                               
tests, but haven't had a long-term  production test.  He said one                                                               
reason he'd extended the lease was  because of their intent to do                                                               
that;  although the  test probably  would've  been on  adjoining,                                                               
non-state  lands,  the   information  would've  demonstrated  the                                                               
economics appropriate to the state lands.  He added:                                                                            
                                                                                                                                
     Under unitization,  ... we would  go ahead  and unitize                                                                    
     both NANA and state lands  out there, so there'd be ...                                                                    
     a  joint  unit,  in  which  case  the  work  activities                                                                    
     wouldn't have  to exclusively occur  on state  land; it                                                                    
     would have to occur on the  unit for the purpose of the                                                                    
     unitization.  So  I think, when you  work through their                                                                    
     situation,  they  are  normally  ...  where  you  might                                                                    
     expect someone to  be in ... kind of a  middle stage of                                                                    
     exploration,  and we  often form  exploration units  at                                                                    
     that  point   in  time.     Now,  [if]  the   lease  is                                                                    
     conventional or  nonconventional, it wouldn't  matter -                                                                    
     or shallow gas or conventional, areawide.                                                                                  
                                                                                                                                
CHAIR KOHRING opened public testimony.                                                                                          
                                                                                                                                
Number 1965                                                                                                                     
                                                                                                                                
PATRICIA MACK informed  members that she and her  husband live in                                                               
the Mat-Su  area.  Saying  she wished [the legislature]  would be                                                               
as creative  with that area's  residential problems  [relating to                                                               
shallow gas  leases] as with the  Red Dog mine, she  remarked, "I                                                               
thought that  was a very  clean-sounding deal."   She understands                                                               
units, she said,  but also understands that  unitization pulls in                                                               
people who are  unwilling to participate in the plan,  in what is                                                               
called "forced  pooling."  Responding to  remarks from Mr. Myers,                                                               
she clarified that  she was referring not to  exploration, but to                                                               
the decision to  actually start producing.  Noting  that the Mat-                                                               
Su situation  involves small parcels  of land, since  perhaps 800                                                               
of the  properties are one to  five acres in size,  she said more                                                               
than 12,000 families are being affected.                                                                                        
                                                                                                                                
MR. MYERS  answered that unitization  occurs with respect  to the                                                               
subsurface owner, and the owner  of the subsurface mineral rights                                                               
generally  won't  be "force  pooled"  into  that situation.    He                                                               
added, "If you did, you would not  be forced ... into the unit if                                                               
the state did not own the subsurface rights."                                                                                   
                                                                                                                                
MS. MACK  expressed concern,  however, that  "under your  oil and                                                               
gas rules, you do have that clause."                                                                                            
                                                                                                                                
MR.   MYERS  affirmed   that,   saying   it  protects   adjoining                                                               
landowners.  He explained:                                                                                                      
                                                                                                                                
     In  other words,  if  they drill  a  well within  close                                                                    
     proximity  to your  land, it's  just  possible the  gas                                                                    
     they remove from the ground  may be ... from your land,                                                                    
     even if  the well bore  isn't on  their land.   You are                                                                    
     not  compensated for  that unless  you're  part of  the                                                                    
     unit. ...                                                                                                                  
                                                                                                                                
     It's also designed to protect  your rights, so that you                                                                    
     have  ability  to petition  us  for  - in  some  cases,                                                                    
     petition   the   Alaska   Oil  and   Gas   Conservation                                                                    
     Commission  [AOGCC] -  so that  ... your  production of                                                                    
     the gas ... from  your subsurface rights are protected.                                                                    
     So it's actually  a process to protect you.  ... If you                                                                    
     don't  care,   no  one's  going   to  force   ...  your                                                                    
     subsurface acreage into that unit.                                                                                         
                                                                                                                                
Number 1673                                                                                                                     
                                                                                                                                
MS. MACK asked, "So, I wouldn't have to have a well on my                                                                       
property if I didn't want it."                                                                                                  
                                                                                                                                
MR. MYERS replied no and said it's the opposite:  "If they drill                                                                
near your land, you can actually get credit and get royalties                                                                   
off your land."                                                                                                                 
                                                                                                                                
MS. MACK turned to another concern.  She mentioned the DNR                                                                      
commissioner's fiscal year 2001 budget and said:                                                                                
                                                                                                                                
     You're using  what's called  the common  law subsurface                                                                    
     access  ...   to  minerals.    But   under  the  Alaska                                                                    
     constitution, we  were provided rights  for settlement,                                                                    
     and so  we have equal  rights to the surface;  you have                                                                    
     rights to your  subsurface.  But the  Supreme Court has                                                                    
     done  several  rulings;  one was  about  20  years  ago                                                                    
     regarding  coal  and not  coal  bed  methane, but  they                                                                    
     stated that the  state did not need to  take every drop                                                                    
     out from under somebody's property. ...                                                                                    
                                                                                                                                
     The  other statement  that they  made  recently on  the                                                                    
     East Coast, as far as  ... Pennsylvania, ... they ruled                                                                    
     that  the access  to the  property, based  on the  fact                                                                    
     that  the   state  had   watched  the   property  being                                                                    
     developed  and  had  not  set  aside  space  for  their                                                                    
     development,  ...  was  unreasonable  and  unnecessary.                                                                    
     And so  that was  what my questions  were.   In densely                                                                    
     populated areas like I live  in, just the noise and the                                                                    
     racket  and  the disturbance  is  just  going to  be  a                                                                    
     nightmare.                                                                                                                 
                                                                                                                                
Number 1582                                                                                                                     
                                                                                                                                
MR.  MYERS  responded  that  one of  [DNR's]  purposes  with  the                                                               
process in  the valley is to  work through these issues  and work                                                               
on specific  noise-abatement standards,  setbacks, and  so forth.                                                               
He indicated the department has  heard loud and clear that people                                                               
there want  more certainty on  "the regulatory framework."   From                                                               
public  meetings there,  he reported,  a lot  of information  has                                                               
been received that is being collated.  He continued:                                                                            
                                                                                                                                
     I think  ... some of  your concerns will be  taken care                                                                    
     of  in  that  regulatory  process.   In  addition,  the                                                                    
     leases have  stipulations and mitigation  measures that                                                                    
     give DNR discretion to do  that ... on our state lands.                                                                    
     We  do  not  have  that same  discretion  on  non-state                                                                    
     lands, however.   So if  the subsurface owner  is other                                                                    
     than the  state, ... we  don't have that same  level of                                                                    
     protection.  But on state  lands, we have that process,                                                                    
     and ... we're aware of the issues.                                                                                         
                                                                                                                                
     I  think   that's  one  of  the   things  that's  still                                                                    
     recognized is, there are areas  ... where if the state,                                                                    
     rather than  applicant, is driving the  process, we can                                                                    
     better  customize  what  we lease  and  what  we  allow                                                                    
     surface occupancy for  facilities on than we  can in an                                                                    
     applicant-driven process.                                                                                                  
                                                                                                                                
Number 1505                                                                                                                     
                                                                                                                                
MS. MACK  expressed disappointment in this  whole process, having                                                               
been  to  all  those  meetings;  said she  has  never  been  more                                                               
disappointed in a  group of [legislators] in her  life; and noted                                                               
how horrible it has been to have  a [shallow gas] well put in her                                                               
backyard.  She continued:                                                                                                       
                                                                                                                                
     I grew up in this state,  and I was here when it became                                                                    
     a state.   And they gave  us our land here  because ...                                                                    
     they  wrote  our constitution  the  way  that they  did                                                                    
     based  on settlement  and  resources,  because we  were                                                                    
     being taken over by monopolies.  ... And that's exactly                                                                    
     what  you've  created here,  ...  a  monster you  can't                                                                    
     control.                                                                                                                   
                                                                                                                                
CHAIR KOHRING  offered assurance to  Ms. Mack that  the committee                                                               
was trying  to address  her concerns.   He said  the constitution                                                               
also created  the situation that  allows the state to  develop on                                                               
someone's land,  although there are  rigorous rules and  hoops to                                                               
jump  through.   He voiced  confidence that  DNR will  take great                                                               
care and use  discretion to make sure that issues  such as noise,                                                               
setbacks, "visual issues," pollution,  and so forth are addressed                                                               
before permits are issued.                                                                                                      
                                                                                                                                
MS.  MACK suggested  the need  to look  at the  constitution more                                                               
closely and said people will go  to court when someone just shows                                                               
up in their yards [as happened with the shallow gas leases].                                                                    
                                                                                                                                
Number 1377                                                                                                                     
                                                                                                                                
ROBERTA  HIGHLAND,  Kachemak  Bay  Property  Owners  Association,                                                               
Homer, said  she appreciates  and supports  the intention  of the                                                               
bill, which seems  to attempt to correct bad  legislation, HB 394                                                               
and  HB 69,  that has  turned  many people's  lives upside  down.                                                               
However, she said,  HB 531 and SB 312 [the  companion bill in the                                                               
Senate] do nothing to correct  the problem of already leased land                                                               
in  some   very  inappropriate  areas  including   Homer's  water                                                               
reservoir, a  public school,  churches, heavily  populated areas,                                                               
and popular local  ski trails.  Noting how dearly  people can pay                                                               
for  bad legislation,  Ms. Highland  expressed concern  that this                                                               
current legislation  doesn't address the many  thousands of acres                                                               
leased against the will of a lot  of people.  Asking that this be                                                               
passed, she also  asked legislators to continue to  strive to fix                                                               
the ongoing problems  with the leased properties.   She mentioned                                                               
a buy-back or land trade as two options.                                                                                        
                                                                                                                                
CHAIR KOHRING  asked whether anyone  else wished to testify.   He                                                               
then closed public testimony.                                                                                                   
                                                                                                                                
Number 1228                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG requested  clarification from  Mr. Myers                                                               
about forced  pooling.   He cited  an example  of what  he called                                                               
de facto forced pooling in Oklahoma.                                                                                            
                                                                                                                                
MR. MYERS explained:                                                                                                            
                                                                                                                                
     We effectively  have the right  of forced  pooling, but                                                                    
     the cases  it's used  is ... the  opposite of  what ...                                                                    
     the public  was testifying on.   Typically what happens                                                                    
     is, it  depends on the stage  of a unit.   Early in the                                                                    
     life of  the unit, 'cause  we don't know the  size, the                                                                    
     shape,  the   accumulation,  we  have   an  exploration                                                                    
     prospect under a lot of  unitization cases. ... We look                                                                    
     at  the   geology  ...  underneath  it,   and  if  it's                                                                    
     reasonable  that there's  a  party  involved ...  whose                                                                    
     subsurface  rights seem  to be  incorporated into  that                                                                    
     prospect,  that's  in  our  ...  best  guess,  we  will                                                                    
     require  the  applicant for  the  unit  to notify  that                                                                    
     party  and  invite them  into  the  unit at  reasonable                                                                    
     terms.                                                                                                                     
                                                                                                                                
     They  do not  have to  accept that  at that  stage. ...                                                                    
     Right there,  ... the unit's operator  or the applicant                                                                    
     is required  to notify them and  give them opportunity.                                                                    
     They're not required to accept, and that's it.                                                                             
                                                                                                                                
     The  next stage  is, if  you actually  have production,                                                                    
     you  form  what's called  a  participating  area.   And                                                                    
     here's where Alaska  law kind of has  ... two branches.                                                                    
     ... Either  DNR deals with  it -- a  participating area                                                                    
     ...   is the  surface area  underlying the  area that's                                                                    
     known  to be  underlain by  the hydrocarbons,  and it's                                                                    
     reasonably estimated  to be able  to produce  in paying                                                                    
     quantities; so  it's a commercial  test that has  to be                                                                    
     estimated, and  it has to  be known  to be part  of the                                                                    
     pool.   But it's  included in the  smaller part  of the                                                                    
     unit;  it's actually  allocated production  that you're                                                                    
     talking about.                                                                                                             
                                                                                                                                
     Now,  a  parallel process  goes  on  with AOGCC  where,                                                                    
     instead  of looking  at (indisc.),  they use  -- as  in                                                                    
     Oklahoma, they use what's called  a pool, and they will                                                                    
     define the  outlines of that  pool. ... If  you picture                                                                    
     the pool pretty simplistically as  ... a big circle and                                                                    
     you  have a  component of  that circle  whose landowner                                                                    
     chooses  not  to join  that  unit,  we will  not  force                                                                    
     someone to join  that unit.  However,  ... the operator                                                                    
     will have to accord them the opportunity.                                                                                  
                                                                                                                                
     Now,  ... the  owner has  state subsurface  rights that                                                                    
     are being  developed; they're primary rights.   If they                                                                    
     don't petition  us, we won't  do anything.   If they're                                                                    
     state's rights, we will probably  make the argument for                                                                    
     forced  pooling  ...  so that  they  gets  its  royalty                                                                    
     share.   So  the cases  she  was talking  about, ...  I                                                                    
     believe,  the  state owns  either  the  surface or  the                                                                    
     subsurface, and the applicant -  the person on the land                                                                    
     - didn't want to see  ... any production or didn't care                                                                    
     if   they  got   any  royalties   allocated  to   their                                                                    
     production.  We're not going  to force a person in that                                                                    
     position to join the unit.                                                                                                 
                                                                                                                                
Number 0953                                                                                                                     
                                                                                                                                
MR. MYERS continued:                                                                                                            
                                                                                                                                
     There  are other  protections, though.   If  they drill                                                                    
     within a certain distance of  that person's lease line,                                                                    
     with  unleased  acreage,  AOGCC,   if  it's  a  certain                                                                    
     distance, has  no authority.   But if it's  closer than                                                                    
     that  distance --  and [typically],  like an  oil well,                                                                    
     for example, it's  500 feet.  If they  drill within 500                                                                    
     feet of  the lease  line, they  must get  an exception.                                                                    
     To get  that exception, they  generally have to  hold a                                                                    
     public hearing, in which case  that person can complain                                                                    
     about  it or  not.   If  that  person doesn't  complain                                                                    
     about it, they  will grant the exception  and they will                                                                    
     allow that person to be drained. ...                                                                                       
                                                                                                                                
     Generally,  it's  in  that  person's  -  who  owns  the                                                                    
     subsurface - interest to  be accredited production from                                                                    
     their acreage, and there's a  vehicle to get that.  And                                                                    
     there's  forced unitization  or forced  pooling allowed                                                                    
     to  get  to  that  point.   If  that  person  owns  the                                                                    
     subsurface and  chooses to  be drained,  essentially, I                                                                    
     don't  think  the  state  ...  would  "force  pool"  or                                                                    
     interfere.  Does that make sense?                                                                                          
                                                                                                                                
Number 0875                                                                                                                     
                                                                                                                                
REPRESENTATIVE   ROKEBERG  asked,   then,  whether   someone  can                                                               
basically opt out of forced pooling under the state's statutes.                                                                 
                                                                                                                                
MR. MYERS affirmed  that and said the opportunity  would be there                                                               
if the person elected  not to do it and the  state didn't "have a                                                               
fight."   He added, "It's  a correlative-rights issue,  where the                                                               
party chooses ... not to exercise their correlative rights."                                                                    
                                                                                                                                
Number 0839                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  whether  it's   the  geological                                                               
formation or  the unit  that will  be the  participant.   He also                                                               
inquired whether  it's usually AOGCC  that looks at the  pool and                                                               
determines the allocation of participatory rights, for example.                                                                 
                                                                                                                                
MR. MYERS characterized it as a  "black hole" that has never been                                                               
cleaned up and said there are two parallel paths.  He explained:                                                                
                                                                                                                                
     Under  DNR's  authority,  we use  participating  areas,                                                                    
     which basically are the outline  of the commercial part                                                                    
     of the reservoir, if you  think about that, the surface                                                                    
     expression  of that.  ... We  use "participating  area"                                                                    
     for that  surface expression of the  reservoir or pool;                                                                    
     AOGCC uses the  term "pool" for basically  ... the same                                                                    
     reason.  One of the  differences is, DNR typically is a                                                                    
     royalty owner,  but we still  have a  responsibility to                                                                    
     ...  prevent physical  and economic  waste.   AOGCC has                                                                    
     similar statutes under their  pool standard, which is a                                                                    
     slightly  different  but  very similar  standard.    Of                                                                    
     course,  they're  not  representing the  state  ...  as                                                                    
     royalty owner. ...                                                                                                         
                                                                                                                                
     So the process  is roughly parallel. ...  Within a unit                                                                    
     ...  if you  form  a PA  [participating area],  there's                                                                    
     often  a  parallel process  of  forming  a pool.    And                                                                    
     generally  the  pools  and the  PAs  are  identical  or                                                                    
     nearly  identical, and  often  we  hold joint  meetings                                                                    
     with  the applicant  to  do that.  ...  The process  is                                                                    
     driven by ...  the formation of the unit,  and the unit                                                                    
     is   typically  represented   by  the   unit  operator,                                                                    
     although through  the process, anybody affected  by the                                                                    
     unit is  publicly noticed and  they have ...  the right                                                                    
     to  petition us  or a  right to  a hearing,  typically.                                                                    
     And they have a similar right under AOGCC.                                                                                 
                                                                                                                                
MR. MYERS acknowledged it's confusing, and reiterated that                                                                      
they're almost parallel but slightly different processes.                                                                       
                                                                                                                                
Number 0675                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  reported  that  at  the  recent  Energy                                                               
Council meetings  a presentation addressed what  different states                                                               
have  for  damages to  surface  rights;  he recalled  that  North                                                               
Dakota   and   Oklahoma  have   some   of   the  more   stringent                                                               
requirements.  He asked whether Alaska has a statutory "damage-                                                                 
recovery claim" or how it is dealt with otherwise.                                                                              
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     It depends  on who  owns the  subsurface.   Under state                                                                    
     subsurface,  you   are  clearly  entitled   to  damages                                                                    
     statutorily, but  those damages  ... are  determined by                                                                    
     the courts. ...  So the state has not  quantified as to                                                                    
     what those  damages are, but  there's a ...  history of                                                                    
     case law to sort of  determine that. ... If the surface                                                                    
     owner and  the subsurface owner are  different and they                                                                    
     cannot  reach  a  surface-access  agreement,  then  DNR                                                                    
     holds a bond  hearing to protect the  surface owner and                                                                    
     that bond  is held.   And then if damages  are claimed,                                                                    
     it goes  to court,  and the  damages are  protected and                                                                    
     paid for out  of the bond. ... And  that is statutorily                                                                    
     based.                                                                                                                     
                                                                                                                                
     There is  no statutory base  on non-state land.   So if                                                                    
     it's  private  subsurface,  with  a  different  private                                                                    
     surface owner, there is nowhere  in state statute; it's                                                                    
     generally based on  ... court cases and case  law.  But                                                                    
     statutorily,  they're  not  entitled to  damages  under                                                                    
     current state law.                                                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG  noted  that  in the  Mat-Su  area,  for                                                               
example, there could be different  types of subsurface ownership;                                                               
therefore, the surface  estate may or may not  be protected under                                                               
the statutory scheme  here and the surface owner  could only rely                                                               
on common law.  He asked whether that's correct.                                                                                
                                                                                                                                
MR. MYERS affirmed that.                                                                                                        
                                                                                                                                
CHAIR KOHRING noted  that time was running short  for the meeting                                                               
and announced that  the bill would be held over.   He pointed out                                                               
that a possible amendment had been circulated.                                                                                  
                                                                                                                                
Number 0333                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked how  this would  work in  the rare                                                               
instances when landowners have owned  their land before statehood                                                               
and thus hold subsurface as well as surface rights.                                                                             
                                                                                                                                
MR. MYERS explained:                                                                                                            
                                                                                                                                
     When they  come to form  a unit in royalty  state land,                                                                    
     ... if  their land was  appropriate to be in  the unit,                                                                    
     as determined  by DNR, we  would require  the applicant                                                                    
     to ...  notify them and  offer them the chance  to join                                                                    
     the unit.   If they  refused to  join the unit  at that                                                                    
     point in  time and  later exploration  demonstrated the                                                                    
     actual  productive area,  and  they were  defined as  a                                                                    
     participating area - included  their land - again, they                                                                    
     would ... have to be offered  a chance to join the unit                                                                    
     to get production.                                                                                                         
                                                                                                                                
     If they  chose not to  join the  unit at that  point in                                                                    
     time,  then  if  wells  are drilled  within  a  certain                                                                    
     distance, ...  they would  have the  opportunity before                                                                    
     AOGCC to  disallow that  drilling, basically,  within a                                                                    
     full  (indisc.) of  their line,  to  prevent ...  being                                                                    
     drained.   So there's some protection  there they would                                                                    
     have.                                                                                                                      
                                                                                                                                
     But,  generally, AOGCC  would make  a ruling.  ... It's                                                                    
     like, again,  on oil:   if ... someone proposed  a well                                                                    
     within 500 feet,  AOGCC would look at it  and say, "You                                                                    
     have to get an exception."   The exception will require                                                                    
     ... that  nearby landowner  ... to  say, "I  don't want                                                                    
     that  oil because  it's going  to  drain my  property."                                                                    
     And that  would probably give  AOGCC the reason  not to                                                                    
     approve the exception, and they'd  have to set the well                                                                    
     back further,  at a distance generally  designed in the                                                                    
     statute  and regulation  to assure  that they  can't be                                                                    
     drained.                                                                                                                   
                                                                                                                                
     ... There's  multiple levels of protection  in there to                                                                    
     protect  ...  that person.    But,  again, through  our                                                                    
     process  of the  participating area,  it would  require                                                                    
     that they be offered the  opportunity ... to be part of                                                                    
     that  ...  unit  and  get  allocated  a  percentage  of                                                                    
     production, whether or  not the well is  on their land,                                                                    
     as  long  as  they're  affected  or  effectively  being                                                                    
     drained.   So  there's  multiple  levels, actually,  of                                                                    
     protection to get them into  the unit.  If they choose,                                                                    
     again,  as the  (indisc.) not  to participate,  I don't                                                                    
     think that  we would force  them -- if a  company wants                                                                    
     you  to  accept  it  for  AOGCC and  ...  it  wasn't  a                                                                    
     protest, AOGCC ... may well grant that.                                                                                    
                                                                                                                                
MR. MYERS concluded by saying there is a possibility that non-                                                                  
unitized acreage can be within a participating area, but he                                                                     
didn't recall any cases where that happened.  He added that it's                                                                
always in the applicants' interest to get their royalty share.                                                                  
                                                                                                                                
CHAIR KOHRING thanked participants.  [HB 531 was held over.]                                                                    

Document Name Date/Time Subjects