Legislature(1995 - 1996)
03/29/1995 08:15 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HRES - 03/29/95 HB 207 ADJUSTMENTS OF OIL AND GAS ROYALTIES CO-CHAIRMAN GREEN stated the committee would review comments and suggestions presented at the previous hearing. He discussed changes contained in the work draft committee substitute (CS), version U, as they relate to the work draft CS, version K. CO-CHAIRMAN GREEN said the work draft CS, version U, contains a rewritten Section 1 which is the legislative intent. He explained the word "consider" on line 6, page 1, is a change from the language in version G & K where the word "encourage" was used. He noted the commissioner had made this suggestion. He felt the word "consider" will accomplish the same purpose but not tie the hands of the commissioner on a frivolous request. CO-CHAIRMAN GREEN told committee members the next change is on page 2, line 10, of the work draft CS, version U. He said the words "for sale" are included. He stated when talking about a production from a field, it will be production that has not been offered for sale, rather than any production. He added on page 2, line 16, of the work draft CS, version U, the words "price" replace the words "sale value". He stated the price of oil is a more generic, understandable, and parallel type of description when talking about an income from the sale of oil. CO-CHAIRMAN GREEN stated on page 2, line 31, of the work draft CS, version U, the words "by making reference to a sliding scale royalty or equivalent provision that provides for adjustment of royalty" were added, which the commissioner can refer to and those things which he should consider. CO-CHAIRMAN GREEN noted for the record that Representatives OGAN and WILLIAMS had joined the committee. Number 134 CO-CHAIRMAN GREEN said on page 3, lines 8-15, of the work draft CS, version U, subsection (4) reintroduces a floor which restricts the reduction of otherwise attainable royalty to not more than 80 percent for a new, undeveloped or delineated field and not more than 90 percent of what would have otherwise been available as royalty under an economically strapped existing field at its economic limit. He noted there has been discussion about having no restriction and restriction on new fields only, and this change reintroduces restrictions on both fields. He pointed out some royalty interest remains to the state from all leases. CO-CHAIRMAN GREEN explained the next change is contained on page 4, line 31, in the work draft CS, version U. He said in prior versions of the bill, there was reference to once the commissioner's determination is final, it is not subject to litigation. He noted that language previously was a subsection by itself. Now the language is included as item (D) under subsection (8). He explained it is the same intent but is repositioned. Number 190 CO-CHAIRMAN GREEN said there has been a lot of struggling, both in the Oil and Gas Committee (OGC) and the House Resources Committee, as to the oversight of the commissioner. He noted there are varying views from one extreme of absolutely no review, to an almost rigid type of review by various departments of state government. Each suggestion has some negativism to them. He explained the commissioner would be given the opportunity to proceed, get a consultant if necessary, get a fair determination of the royalty reduction if it is in the best interest of the state, and then have a public awareness of what has happened, and provide 30 days after public notice for written comments by members of the public to the commissioner on their views of what has transpired. The commissioner then finalizes his determination, summarizes the public input, and sends both to the presiding officers of the Senate and House and Chairs of the Senate and House Resources Committee. CO-CHAIRMAN GREEN felt this change brings the public into the picture, which is worthwhile. He said if HB 207 passes, the state will be going from a conventional safety cushion of offering land for lease, knowing there is going to be a certain royalty and being assured, to looking at those accumulations of resources that are marginal at best and under existing conditions, which the state has had for 20 years, probably would not be developed, in which case the state would get nothing. He stressed HB 207 will allow the state to provide an incentive, comparable to what other countries provide, saying there is a valuable product in the state, it is marginal, but what can be done so both the state and the company can gain. He felt from that standpoint, it is worthwhile for the public to have access during the process to make their feelings known. He stressed whatever royalty reduction is determined, it is imperative that the people of the state are aware of that agreement. Number 267 REPRESENTATIVE PETE KOTT made a MOTION to ADOPT the work draft CS, version U, as CSHB 207(RES). CO-CHAIRMAN GREEN asked if there were any objections. Hearing none, the MOTION PASSED. REPRESENTATIVE SCOTT OGAN made a MOTION to AMEND CSHB 207(RES) on page 2, line 25, through page 3, line 7: Delete all material and insert: "(3) shall, if preexisting economic conditions warrant, in the findings, determinations, and agreement, [THE REVENUE FROM THE LESSEE'S SHARE OF ALL HYDROCARBONS PRODUCED FROM THE FIELD IS AND IS LIKELY TO CONTINUE TO BE INSUFFICIENT TO PRODUCE A REASONABLE RATE OF RETURN WITH RESPECT TO THE LESSEE'S TOTAL INVESTMENT IN THE FIELD. THE COMMISSIONER MAY] condition the [A] royalty reduction granted under this subsection in any way necessary to protect the state's best interests; under this subsection, the commissioner shall include provisions to increase or otherwise modify the state's royalty share by a sliding scale royalty or other mechanism; the commissioner may consider one or more relevant factors, such as a change [INTEREST, INCLUDING RESTORATION OF THE STATE'S ROYALTY SHARE IN THE EVENT OF AN INCREASE] in the price of oil or gas, the projected ultimate recovery of oil and gas, field productivity or development costs and operating costs in the oil or gas field, pool, or portion of the field or pool;". REPRESENTATIVE OGAN said this amendment would tighten up the language and give the commissioner the ability to increase or otherwise modify the state's royalty. This amendment adds the word "increase". REPRESENTATIVE KOTT OBJECTED for discussion purposes. REPRESENTATIVE NORMAN ROKEBERG explained on line 3 of the amendment, the additional words are "if preexisting economic conditions warrant". He said rather than assume there is a macro condition of necessity to move forward with an application, this added language establishes there should be preexisting conditions both on the part of the applicant and perhaps in the world market place. He explained the reason for the word "agreement" on line 4 of the amendment, is to make sure that all provisions of the agreement are included in the contractual negotiations which take place up-front. For example, regarding the concept of reopeners, the word "agreement" is cited to make sure those discussions do take place and are bargained for up-front. This gives the applicant and the commissioner flexibility but also gives notice that these things should be done up-front. REPRESENTATIVE ROKEBERG stated on line 11 of the amendment, the stipulation of the word "increase" is important because this specifically grants the commissioner the power to increase the royalty rate on a sliding scale for whatever relevant factor or event which might cause that. He said this power could override an existing, pre-bargained for bid for royalty rate. He noted Co- Chairman Green feels the word "modify" covers that but Representative Rokeberg felt making it specific and explicit is helpful and will avoid any confusion in the future. Number 362 REPRESENTATIVE ROKEBERG said the balance of the amendment reflects Co-Chairman Green's language also. He stated the one point of distinction is the mandate of oil price. He noted in CSHB 207(RES) and the prior versions that is permissive because there are certain circumstances where price may not be a determining factor. This allows the commissioner to have a little more flexibility. REPRESENTATIVE ROKEBERG felt Co-Chairman Green's language and this amendment are very similar in intent. He urged support for Representative Ogan's amendment. (Representative BARNES joined the committee.) CO-CHAIRMAN GREEN said he preferred the language contained in CSHB 207(O&G). He stated that which is a preexisting condition is implicit because this issue would not even be on the table if it were not. Number 386 KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES (DNR), testified via teleconference and stated he agrees with the amendment to add the word "increase". CO-CHAIRMAN GREEN asked Mr. Boyd to also comment on adding the words "if preexisting economic conditions warrant". MR. BOYD said he did not understand that part and would like to see it in writing. He stated he is not sure what a preexisting factor is meant to mean. CO-CHAIRMAN GREEN clarified that Mr. Boyd would prefer to have the words "increase or otherwise modify". MR. BOYD replied yes. He felt it gives certainty to the word "modify" and the word "increase" says one can increase. Therefore, there is no possibility of misunderstanding. CO-CHAIRMAN GREEN felt the word "modify" meant increase or decrease in reference to a sliding scale, which goes either way. He wondered if Mr. Boyd would like to include the words "increase or decrease". MR. BOYD said that would be fine. Number 450 REPRESENTATIVE ROKEBERG said he would not object to deleting "if preexisting economic conditions warrant," on line 3 of the amendment and deleting the words "otherwise modify" and inserting the word "decrease". REPRESENTATIVE BILL WILLIAMS asked if the committee is making any changes to the bill with all this language. CO-CHAIRMAN GREEN replied probably not. REPRESENTATIVE BARNES asked since there has been a proposed language change to the amendment, and since it is a minor adjustment to the language contained in CSHB 207(RES), would it be better to not adopt the amendment and just put the words in the existing draft. REPRESENTATIVE OGAN WITHDREW his MOTION. CO-CHAIRMAN GREEN made a MOTION to AMEND CSHB 207(RES), on page 3, line 3, delete the word "modify" and insert after the word "to" the words "increase or decrease". CO-CHAIRMAN GREEN asked if there were any objections. Hearing none, the MOTION PASSED. REPRESENTATIVE OGAN asked for a brief at ease. CO-CHAIRMAN GREEN reconvened the meeting at 8:55 a.m. REPRESENTATIVE BARNES made a MOTION to MOVE CSHB 207(RES) as amended, with a zero fiscal note, out of committee with individual recommendations. REPRESENTATIVE KOTT OBJECTED because he would like to hear Mr. Boyd's testimony first. MR. BOYD stated he had a few suggestions which might clarify the bill better. He said on page 2, line 10, of CSHB 207(RES), the word "quantities" is not necessary because it is a word that was left over when the word "commercial" was deleted. On line 25, page 2, he noted the language contemplates a second document when in fact this is still the commissioner's finding and determination. He felt for consistency, the language should say, "shall, as part of the commissioner's finding and determination". MR. BOYD said on page 2, line 31, of CSHB 207(RES), the words "sliding scale royalty or equivalent provision" are too restrictive in that other mechanisms cannot be used. He suggested the words "sliding scale royalty or other mechanisms" be used. He felt the words "equivalent provision" means the commissioner cannot use anything else. He thought it was important to keep flexibility for the commissioner to modify the royalty in any way he or she seems appropriate. MR. BOYD stated on page 3, line 4, it says "economic factors including". He expressed concern that it appears the factors only include those terms listed. He suggested the words "may include" be used instead of "including". He mentioned page 3, lines 8-15, of CSHB 207(RES), and stressed there still is a desire to keep a floor of 25 percent. On page 3, line 17, it says "lessee or lessees to submit, with the application for the royalty reduction," and he felt that language is redundant with the language on the prior line 16. He felt one of the clauses needs to be removed. Number 570 MR. BOYD said on page 4, line 8, the language says, "make final written findings and a written determination". He suggested deleting the words "a written". He stated on page 4, line 31, the language says "the commissioner's written determination of royalty". He pointed out if the commissioner did not decide to give a royalty reduction, this language implies a different standard which could be appealed. He suggested the word "regarding" be used after the word "determination". REPRESENTATIVE BARNES felt Mr. Boyd's words did not have much substance but since Co-Chairman Green had spent a lot of time on the work draft, she requested he comment on Mr. Boyd's suggestions. CO-CHAIRMAN GREEN said in regard to page 2, line 25, he could understand Mr. Boyd's comments since there may be a finding which does not allow for a reduction. He stated the word "agreement" was used because there was a desire to have it as part of the agreement not a separate document. He felt the word "agreement" should remain in the language. CO-CHAIRMAN GREEN stated in regard to page 2, line 31, and the words "or equivalent provision". He recalled Mr. Boyd suggested the words "or other mechanisms". He said, "we wanted to include the fact that the commissioner would reference the sliding scale as a `yardstick' and whatever he did would not have to have that but it should be something akin to that. So if they can come to a different agreement that does provide for the state to have an increase if oil goes to $75 a barrel, that we would reap some of that benefit as well or if it drops to a nickel, that we would reduce the royalty. If they come to another method of doing that, that is fine as long as it is in the same...so we have some idea what is coming. I would prefer to leave it the way it is." CO-CHAIRMAN GREEN said in regard to page 3, line 4, of CSHB 207(RES) and Mr. Boyd's suggestion to change the word "including" to "may include", at one time different words were considered. He explained the bill drafter assured him on three separate occasions that by using the word "including", that does mean this is a basket the commissioner can pluck anything he wants to from. CO-CHAIRMAN GREEN said, "We have addressed the 25 percent floor, which the commissioner wishes versus the need, in my estimation, that he does need a little bit larger latitude because there may be, especially in the older fields, some that 25 percent may not be adequate. As far as being a potential for encouraging others to come and say, hey we can go to Alaska, explore and if for some reason we find a puddle but the puddle is not quite big enough, we know that they are in favor of us developing and will make an opportunity for us to do that rather than a rigid hard 25 percent." Number 622 REPRESENTATIVE OGAN said on page 3, line 13, of CSHB 207(RES), it indicates on older fields, up to 90 percent can be taken off. He recalled that Co-Chairman Green had said in the case of older fields, there may be a need for more latitude. He felt they have that latitude. He noted if Representative Barnes would withdraw her motion, he has an amendment to offer, changing the 80 percent on line 10 to 75 percent. CO-CHAIRMAN GREEN recalled that Mr. Boyd said the language on page 3, lines 16 and 17, is redundant. He said the language may appear redundant but the thought was one would be an accompanying document, not something that would be floating around somewhere else. He felt the language should be left as is. He stated in regard to Mr. Boyd's comments on page 4, line 9, he does not object to deleting the words "a written". REPRESENTATIVE BARNES WITHDREW her MOTION. REPRESENTATIVE BARNES made a MOTION to AMEND CSHB 207(RES) on page 4, line 8, delete the words "a written". CO-CHAIRMAN GREEN asked if there were any objections. Hearing none, the MOTION PASSED. REPRESENTATIVE BARNES made a MOTION to AMEND CSHB 207(RES) on page 4, line 31, delete the word "of" and insert the word "regarding". CO-CHAIRMAN GREEN asked if there were any objections. Hearing none, the MOTION PASSED. Number 660 REPRESENTATIVE OGAN made a MOTION to AMEND CSHB 207(RES) on page 3, line 10, delete the number "80" and insert the number "75". REPRESENTATIVE OGAN felt the state is going to have a constitutional problem because the state is required to protect the resources which belong to the people, not to the state. He thought the minimal amount from the state's resource development should be put into the permanent fund. He stated the legislature has a moral and legal obligation to do that. CO-CHAIRMAN GREEN stated there is no legal obligation. He said, "the amount `75' was arbitrary because I think it ties to the earlier version of leases that said 25 percent of the royalty received from that lease would go to the permanent fund, 1980 or 1979, it was up to 50 percent of whatever was received not that it would be of 12.5 percent or 16 percent or 20 percent, which numbers of royalties have been in other leases. That 75 to me is an arbitrary figure." CO-CHAIRMAN GREEN continued, "There is no change that what is received, whether it be only 20 percent of the 12.5 percent, roughly 2.4 percent...still 50 percent of the leases since 1981 will still go to the permanent fund and if it is prior to that, 25 percent will still go to the permanent fund and the 12.5 percent, I submit to you is a historic number, one-eighth and there is no real justification for that--that is an agreement struck between the lessor, in this case the state, and the lessee which is the company. We still protect the permanent fund. We are saying we would like a smaller piece but have something of that rather than a big piece of nothing." REPRESENTATIVE BARNES OBJECTED to the motion. CO-CHAIRMAN GREEN asked for a roll call vote. Voting in favor of the amendment were Representatives Kott, Nicholia, and Ogan. Voting against the amendment were Representatives Austerman, Barnes, Williams and Green. The MOTION FAILED 4-3. TAPE 95-42, SIDE B Number 000 REPRESENTATIVE OGAN made a MOTION to AMEND CSHB 207(RES), on page 4, lines 2-9 inserting the language contained in the earlier work draft, version K, page 4, lines 3-26. CO-CHAIRMAN GREEN OBJECTED. REPRESENTATIVE BARNES noted that this section had been modified as a result of Mr. Boyd's suggestion. Number 052 REPRESENTATIVE OGAN felt proper oversight of the process was not being provided. He said public comment is a good thing to do but stressed the public has no leverage over the commissioner. He stated the Alaska Oil and Gas Conservation Commission has the expertise to determine whether or not royalty reductions are a good idea and would provide some legislative oversight. REPRESENTATIVE ALAN AUSTERMAN OBJECTED. CO-CHAIRMAN GREEN asked for a roll call vote. Voting in favor of the amendment were Representatives Nicholia, Ogan, and Kott. Voting against the amendment were Representatives Barnes, Austerman, Williams, and Green. The MOTION FAILED 4-3. REPRESENTATIVE BARNES made a MOTION to MOVE CSHB 207(RES), as amended, with a zero fiscal note out of committee with individual recommendations. CO-CHAIRMAN GREEN asked if there were any objections. Hearing none, the MOTION PASSED.
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