Legislature(2001 - 2002)

02/01/2002 01:15 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 307-OIL/GAS EXPLORATION INCENTIVE CREDIT                                                                                   
                                                                                                                                
Number 0010                                                                                                                     
                                                                                                                                
CO-CHAIR MASEK announced that the  first order of business before                                                               
the committee  would be HOUSE BILL  NO. 307, "An Act  delaying to                                                               
June 30,  2007, the  last date  by which  hydrocarbon exploration                                                               
geophysical   work   must  be   performed   or   drilling  of   a                                                               
stratigraphic test well or exploratory  well must be completed in                                                               
order  for  a person  to  qualify  for an  exploration  incentive                                                               
credit."                                                                                                                        
                                                                                                                                
Number 0212                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE,  speaking as the sponsor,  explained that HB
307 is an  extension of a bill already in  existence that sunsets                                                               
in 2004;  this bill extends  the life of that  bill to 2007.   He                                                               
explained  that  this  bill  provides  an  exploration  incentive                                                               
credit (EIC) to  the industry.  He said the  [EIC] already exists                                                               
and this  bill extends  the incentive  for [an  additional] three                                                               
years.   He said  the [EIC]  allows a company  to explore  in the                                                               
Nenana  basin,   which  he  suggested   has  an   extremely  high                                                               
potential.   Currently, there is only  one company to bid  on the                                                               
area and  therefore only one  explorer in  the Nenana basin.   He                                                               
indicated that this  legislation would allocate money  to be used                                                               
as an  incentive credit toward  future royalties.  He  noted that                                                               
Mark Myers was on teleconference and could provide the details.                                                                 
                                                                                                                                
REPRESENTATIVE FATE  referred to a  previous debate in  the House                                                               
Special  Committee  on  Oil  and   Gas;  he  suggested  that  the                                                               
committee was neutral  on this bill and that is  why it was moved                                                               
out.                                                                                                                            
                                                                                                                                
Number 0389                                                                                                                     
                                                                                                                                
REPRESENTATIVE GREEN asked  if Mark Myers could  explain what the                                                               
legislation is granting with the EIC.                                                                                           
                                                                                                                                
Number 0401                                                                                                                     
                                                                                                                                
CO-CHAIR   MASEK  announced   that  Representative   Kapsner  had                                                               
arrived.                                                                                                                        
                                                                                                                                
Number 0434                                                                                                                     
                                                                                                                                
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources, testified  via teleconference.   He  informed                                                               
the  committee that  HB 307  does extend  the economic  incentive                                                               
credit program  that was passed by  the legislature in 1994.   He                                                               
said the [EIC]  had a ten-year period, which is  slated to sunset                                                               
in  2004.   He explained  that the  EIC grants  a credit  against                                                               
either royalties,  taxes, lease-bonuses,  or rentals;  the credit                                                               
can  be up  to  50 percent  of the  cost  of certain  activities.                                                               
Those   activities  include:      drilling  wells,   exploration,                                                               
stratigraphic  test wells,  or  geophysical  information such  as                                                               
seismic data.                                                                                                                   
                                                                                                                                
MR. MYERS said the  [EIC] can be up to 50 percent  of the cost of                                                               
the  exploration  well,  the  stratigraphic  test  well,  or  the                                                               
seismic data on "unleased" state land;  the [EIC] can be up to 25                                                               
percent on federal  or Native-owned land.  He  explained that the                                                               
program was designed to limit  the total exposure to $30 million;                                                               
an individual project, which was never  defined, can get up to $5                                                               
million total in credit.                                                                                                        
                                                                                                                                
Number 0576                                                                                                                     
                                                                                                                                
MR.  MYERS  suggested  that the  legislative  intent  behind  the                                                               
program  was fundamental  for the  state  to acquire  information                                                               
that it would not otherwise be  able to acquire regarding oil and                                                               
gas.   He said the  state takes that data  and shows it  to third                                                               
parties to bolster competition in  the industry.  He offered some                                                               
history about this  bill.  He said this [legislation  is based on                                                               
a]  stratigraphic test  well  program, which  is  a program  that                                                               
companies  participate  in  before   the  exploration  season  or                                                               
exploration in an area.                                                                                                         
                                                                                                                                
MR. MYERS explained that the  [exploration company] would go into                                                               
an "unleased" basin  or area, drill a well as  a consortium among                                                               
10  or 12  companies, for  example, and  drill deliberately  in a                                                               
nonprospective  area   where  the  company  can   understand  the                                                               
representative geology.   Since  [the area] would  be "unleased,"                                                               
the  [exploration  company] would  not  want  to find  commercial                                                               
hydrocarbons, but  would want  to test and  see what  the geology                                                               
looked like.   He said the [exploration company]  would take that                                                               
information and use  it in its evaluation prior  to a competitive                                                               
lease sale to determine where and how much it wants to bid.                                                                     
                                                                                                                                
Number 0670                                                                                                                     
                                                                                                                                
MR. MYERS  explained that the  concept of the [program]  was that                                                               
prior to  a lease sale,  an [exploration company] might  drill in                                                               
some of the  Interior basins [using this type of]  test.  He said                                                               
there  wasn't the  same  interest  that there  was  in the  past,                                                               
especially  in  the  offshore  basins  where  a  dozen  different                                                               
companies are  participating.  He  said in those cases  the state                                                               
could accelerate  an [exploration company's] drilling  one of the                                                               
wells or subsidize  the drilling of the well up  to 50 percent on                                                               
unleased state lands, or to a  lesser extent on federal or Native                                                               
lands.  Having  the criteria for evaluating this  program is what                                                               
is valuable about this information to the state.                                                                                
                                                                                                                                
MR.  MYERS  said  Andex  Resources,  the  company  interested  in                                                               
[drilling]  in   Nenana  basin,   has  proposed   [obtaining]  an                                                               
exploration license  from the state.   He said  the [legislature]                                                               
enacted  this program  in 1994;  it allows  exclusive exploration                                                               
rights  to an  individual  company for  up to  5,000  acres.   He                                                               
explained that  Andex Resources  has applied  for such  a license                                                               
and it  is anticipated that if  all goes well the  [license] will                                                               
be granted over [a period of time].                                                                                             
                                                                                                                                
MR. MYERS  said in  doing this,  the state has  to issue  a best-                                                               
interest finding, which means it  is in the state's best interest                                                               
to issue the  license.  He explained that a  license is different                                                               
from a conventional  lease because the state  receives a one-time                                                               
application fee of  $1 per acre, and then receives  no bonuses or                                                               
rentals from the land.                                                                                                          
                                                                                                                                
MR.  MYERS said  the state  receives a  work commitment  from the                                                               
company, which is  the competitive part.  He  explained that when                                                               
a company applies  for a license the  state publishes information                                                               
that announces  that the license  is available and  [accepts bids                                                               
on  which  company]  will  spend the  most  money  on  legitimate                                                               
exploration activities.   The company will typically  bid so many                                                               
millions  of  dollars;  Andex Resources  bid  approximately  $2.5                                                               
million, which doesn't go to the  state but instead goes into its                                                               
exploration program.   He said  in the  areas that the  state had                                                               
deemed  that exploration  wasn't  rapidly occurring  or where  it                                                               
wasn't going  to have an  area wide sale,  it had a  mechanism to                                                               
offer a large amount of acreage as an incentive to development.                                                                 
                                                                                                                                
Number 0808                                                                                                                     
                                                                                                                                
MR. MYERS  said in a  typical case  the exploration license  is a                                                               
very  positive incentive;  in this  case, it  is estimated  to be                                                               
worth  about $10.5  million  in  terms of  what  the state  would                                                               
normally have  gotten if it had  received its minimum $5  bid per                                                               
acre and had  received the normal rentals during the  period of a                                                               
typical seven-year license.   He reiterated that he  thinks it is                                                               
a good  inducement.  He  expressed enthusiasm because there  is a                                                               
current applicant that is in  the process of attempting to obtain                                                               
a license.                                                                                                                      
                                                                                                                                
MR. MYERS  explained that  the way  the exploration  credit would                                                               
apply in  this particular case.   Prior  to drilling a  well, the                                                               
applicant  would come  to  the  state and  announce  that it  was                                                               
requesting an EIC.  He said  the state would then have to [review                                                               
it] and  the Department of  Natural Resources  (DNR) commissioner                                                               
would determine  whether the information was  of sufficient value                                                               
to the  state that  it wanted  to contribute to  the cost  of the                                                               
well.  The  commissioner would have the discretion to  give up to                                                               
50 percent [EIC]  on leased state land or 25  percent of the cost                                                               
of the  well if it  was drilled  on privately owned  or federally                                                               
owned land;  the cost will  be determined  on a footage  basis by                                                               
the well or by line-mile or square mile on the seismic data.                                                                    
                                                                                                                                
Number 0914                                                                                                                     
                                                                                                                                
MR. MYERS  reiterated that if  the state values  the information,                                                               
it could contribute  to the cost of the well.   He suggested that                                                               
the state has other advantages such  as being allowed to show the                                                               
data  to  third   parties,  which  in  some  cases   could  be  a                                                               
significant  value to  the state.   If  the well  was drilled  on                                                               
"unleased" land  and the state  was going to have  a conventional                                                               
sale in  the area  and wanted  to promote  the well,  it couldn't                                                               
give the data to a third party  but it could show the third party                                                               
the prospective seismic  data, well data, etcetera.   He said the                                                               
challenge in  regard to  an exploration  license is  that another                                                               
company  could not  be promoted  into  the basin  because of  the                                                               
exclusive exploration rights given to the third party.                                                                          
                                                                                                                                
Number 0988                                                                                                                     
                                                                                                                                
MR. MYERS  explained that the EIC  would also be valuable  if the                                                               
state  valued the  information  on a  well  drilled on  privately                                                               
owned  land  or  federal  land  for which  the  state  would  not                                                               
typically receive the data for 24  months.  He said on state land                                                               
the state  gets the data within  30 days after the  completion of                                                               
the well, and it  gets the seismic data after it  is shot via the                                                               
permit to shoot  on state land.  He said  on privately owned land                                                               
the state does not get the seismic  data, but that data may be of                                                               
value to the  state, and it may want  to pay for it.   He said on                                                               
private  lands, the  [EIC] would  either  accelerate the  state's                                                               
getting the data, if needed, or  would allow the state to acquire                                                               
seismic data that it wouldn't otherwise receive.                                                                                
                                                                                                                                
Number 1016                                                                                                                     
                                                                                                                                
MR. MYERS  explained that  this program  has never  actually been                                                               
used;  in   the  last   seven  years   [DNR]  has   received  two                                                               
applications for an  EIC under this program, one  was for seismic                                                               
data  regarding  National  Petroleum  Reserve-Alaska  (NPR-A)  by                                                               
Anadarko  [Petroleum  Corporation];  the   state  looked  at  the                                                               
request  and  said,  "Yes,  we're  not going  to  get  this  data                                                               
[otherwise].    It's important  to  our  state lands  immediately                                                               
adjoining  NPR-A."   Therefore, the  state offered  an EIC  of 18                                                               
percent to  Anadarko.  He said  Anadarko decided it did  not want                                                               
to accept  the EIC  because of  the state's  ability to  show the                                                               
[seismic] data  to third parties  however.  He explained  that in                                                               
the other case,  some geochemical data was being shot  in an area                                                               
where the state had some  great seismic coverage and didn't think                                                               
the data was important enough to  grant an EIC, so it was denied.                                                               
He said the $30 million in the  EIC fund is still fully there and                                                               
intact; to  date, the state  has had  no applications for  an EIC                                                               
for  wells.   He stated  that  DNR is  neutral on  this bill  and                                                               
believes it is the [committee's] policy  call on how this bill is                                                               
used.                                                                                                                           
                                                                                                                                
Number 1190                                                                                                                     
                                                                                                                                
CO-CHAIR  MASEK asked  if this  bill is  applicable statewide  to                                                               
[those wanting to explore] beyond the Nenana basin.                                                                             
                                                                                                                                
MR. MYERS  said yes, it  would certainly apply statewide  as well                                                               
as to  federally and privately  owned land.   He said one  of the                                                               
challenges with this bill, in applying  it to a licensed area, is                                                               
that [DNR]  would have to  [determine] whether the value  of that                                                               
information  is significant  to the  state.   He reiterated  that                                                               
that  was the  intent  of the  program.   He  commented that  the                                                               
intent  was  not  to  decrease   the  risk  in  the  drilling  of                                                               
commercial wells; rather, it was  all focused toward the value of                                                               
the  information.   He  suggested  that if  the  state wants  the                                                               
program  to   be  applied  differently  in   order  to  stimulate                                                               
commercial development,  then it should  set the intent  to limit                                                               
the risk to the party drilling.   He commented that the intent is                                                               
the  value  of  the  data  and  the  legislative  history  really                                                               
strongly supports that.                                                                                                         
                                                                                                                                
Number 1204                                                                                                                     
                                                                                                                                
REPRESENTATIVE GREEN  explained that  he'd asked for  that review                                                               
because  several members  of the  committee were  not present  in                                                               
1994 or [may  not] have understood what this bill  did.  He asked                                                               
if it  was true that several  basins have not [been  drilled] and                                                               
as  a result  there  is a  lot of  speculation  about what  those                                                               
basins  might  have.    He suggested  that  the  remoteness  from                                                               
[transportation]  to  market may  be  a  deterrent to  using  the                                                               
[EIC].   He reiterated  that the [committee]  would like  to keep                                                               
this bill  if there  is a  [company] that would  like to  use it,                                                               
especially a  [company] within proximity to  an existing pipeline                                                               
to be able to get it to market if it does discover something.                                                                   
                                                                                                                                
Number 1265                                                                                                                     
                                                                                                                                
MR.  MYERS concurred  with Representative  Green's  comment.   He                                                               
explained that there have been  positive indications.  Currently,                                                               
DNR has three applications for  exploration licenses:  two in the                                                               
Susitna basin and  one in the Nenana basin; DNR  has also granted                                                               
a license  in the Copper  River basin.   He said  approximately 2                                                               
million  acres  is  involved  in   these  licenses;  the  pattern                                                               
indicates these are all primarily gas-prone basins.                                                                             
                                                                                                                                
Number 1389                                                                                                                     
                                                                                                                                
MR. MYERS suggested that they are  pretty much along the route of                                                               
a prospective pipeline, near the  Anchorage Bowl or the Fairbanks                                                               
area, where  there are  local markets that  should have  a demand                                                               
for gas, either now or in the  future.  He suggested that this is                                                               
a positive  indication that the  market is driving this  and that                                                               
the expectation of  a commercial gas line is driving  a new round                                                               
of exploration.                                                                                                                 
                                                                                                                                
MR. MYERS commented that one  of the encouraging things about the                                                               
Nenana basin, in  particular, is that the market  in Fairbanks is                                                               
right  for   the  gas;   the  geology  of   the  basin   is  very                                                               
"prospective," and right now gas commands  a very high price.  He                                                               
said  liquefied natural  gas (LNG)  shipped  to [Fairbanks]  gets                                                               
about $8  per mmBtu  [million British  thermal units]  or million                                                               
cubic feet  (mcf) at the  burner tip,  which is a  very lucrative                                                               
price.   He  reiterated  that  the economics  are  there for  gas                                                               
exploration in  the basin.   He  said the basin  is not  that far                                                               
from the Fairbanks infrastructure, and  he thinks that there is a                                                               
very commercially  viable opportunity  in the  Nenana basin.   He                                                               
commented that the license will help that process a lot.                                                                        
                                                                                                                                
MR. MYERS  said the question [involves]  how much "incentivizing"                                                               
needs  to be  done  versus how  much will  be  done naturally  by                                                               
market  forces.   He  said  in regard  to  economics, at  current                                                               
prices there  is a  netback of  about $4 a  mcf to  the wellhead,                                                               
which is  itself a  great incentive if  the basin  has commercial                                                               
gas.  He explained that the  basin is about 20,000 feet deep with                                                               
lots of  coal; DNR has good  geochemical data to support  that it                                                               
has generated  the gas and  there are  good reservoir rocks.   He                                                               
reiterated that it is a very  prospective basin.  He said DNR was                                                               
encouraged by it back when it  did the final state land selection                                                               
and therefore  picked up as  much of  the acreage as  possible in                                                               
the basin.   He said the  positive news is that  exploration will                                                               
occur in this basin;  a license is a great tool  to get it there.                                                               
He  indicated  that licensing  is  in  progress for  the  Susitna                                                               
basin, as  well as potentially  to the  north in the  Yukon Flats                                                               
where both oil and gas may exist.                                                                                               
                                                                                                                                
MR. MYERS suggested  that earlier rounds of  exploration in these                                                               
basins stopped  mainly because there  wasn't really a  market for                                                               
gas.   He said [companies]  were looking for commercial  oil, and                                                               
in these  cases the test  wells did  not suggest good  oil source                                                               
rocks in many of these basins.                                                                                                  
                                                                                                                                
Number 1459                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA  asked  if the  original  policy  behind                                                               
using  exploration  credits  was  so the  state  could  get  more                                                               
information, which it could then  show to third parties, and have                                                               
a better understanding of what was happening in those areas.                                                                    
                                                                                                                                
Number 1476                                                                                                                     
                                                                                                                                
MR. MYERS  answered yes; it was  the value of the  information to                                                               
the  state.    He  explained  that at  that  point  in  time  the                                                               
exploration-licensing program [did  not exist].  He  said if this                                                               
information  is  made available  before  a  competitive sale,  it                                                               
might increase the level of  activity and interest.  He suggested                                                               
that  the data  is valuable  when the  state needs  that data  to                                                               
assess land  selection or other  purposes.  The value  of getting                                                               
data  that it  would not  otherwise receive  on private  lands or                                                               
federal lands was also important.                                                                                               
                                                                                                                                
Number 1500                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA  asked   if  the  exploration  licensing                                                               
statute that Mr. Myers had explained was in place.                                                                              
                                                                                                                                
MR. MYERS answered yes.                                                                                                         
                                                                                                                                
Number 1514                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA  asked if that  allows $1 an acre  and if                                                               
the license can be converted to a lease if a discovery is made.                                                                 
                                                                                                                                
MR. MYERS explained that  it is $1 a acre for  the state, so that                                                               
on a 500,000-acre application an  [exploration company] would pay                                                               
a $500,000  application fee.   He said the  [exploration company]                                                               
commits  to  a  certain-million-dollar  [amount]  of  exploration                                                               
expenditures; DNR  doesn't dictate  what the  expenditure amounts                                                               
are,  which just  have to  be reasonable  exploration costs.   He                                                               
said  those  costs  could  be for  wells;  seismic,  gravity,  or                                                               
magnetic data; or geologic fieldwork.   He explained that that is                                                               
the competitive part:   the party that bids the  highest level of                                                               
work commitment,  which is  based on dollars,  is the  party that                                                               
wins the  competitive part of  the bid.   Once the party  has the                                                               
license, it  has a negotiated  period with DNR for  that license,                                                               
typically, five up to  a maximum of ten years; at  the end of ten                                                               
years, it has  the right to convert the entire  amount of acreage                                                               
into  a lease.   He  explained  that the  lease term  is at  12.5                                                               
percent.   At that point, it  pays rentals, but no  bonus; it's a                                                               
noncompetitive program which  allows the company to  explore.  He                                                               
mentioned exploring to "high-grade" the  acreage that it wants or                                                               
taking  it all  in a  noncompetitive [way].   He  reiterated that                                                               
this  is a  good  tool to  see for  exploration  in the  Interior                                                               
basins.                                                                                                                         
                                                                                                                                
Number 1603                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA  asked  if   this  would  add  onto  the                                                               
legislation already in place.                                                                                                   
                                                                                                                                
Number 1610                                                                                                                     
                                                                                                                                
MR. MYERS answered that  she was correct.  He said  it is also an                                                               
existing program;  up to [the  year] 2004 both programs  could be                                                               
used.  He pointed out that  the issue that had not been addressed                                                               
is that it's clearly on state  land, unleased acreage.  He said a                                                               
license  is  not  really  a lease;  it  still  [gives]  exclusive                                                               
exploration rights  to the party.   He said DNR is  checking with                                                               
the  Department of  Law to  make  sure that  a license  is not  a                                                               
lease; the preliminary view of it  is that they are distinct.  He                                                               
suggested  that it  would allow  DNR to  give extra  credit on  a                                                               
license.  He reiterated that it's still preliminary.                                                                            
                                                                                                                                
Number 1651                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA asked  how much  is known  about certain                                                               
areas  of  the  state  such  as the  Tanana  River  basin.    She                                                               
commented  that she  had heard  testimony that  there was  a high                                                               
potential there.  She asked if her understanding was accurate.                                                                  
                                                                                                                                
Number 1668                                                                                                                     
                                                                                                                                
MR. MYERS said  there are two wells drilled into  the basin.  One                                                               
was drilled by Union Oil  Company of California (Unocal), and the                                                               
other  was drilled  by ARCO  Alaska,  Inc. (ARCO).   Following  a                                                               
competitive sale  in 1982,  ARCO drilled the  last well  into the                                                               
basin.   He  said state  sold a  fair amount  of acreage  in that                                                               
sale; there  have been competitive  sales.  He explained  that at                                                               
that point in time the companies  were looking for oil; two wells                                                               
were drilled, one by Unocal and  one by ARCO, and a regional grid                                                               
of seismic data was shot.                                                                                                       
                                                                                                                                
MR.  MYERS  explained  that  the  state  has  that  [information]                                                               
available, which very  clearly outlines the basin;  there is also                                                               
gravity and magnetic data that support  the belief that this is a                                                               
very deep  basin, about 20,000 feet  in depth; it's a  very young                                                               
basin and has good reservoir rocks as well as lots of coals.                                                                    
                                                                                                                                
MR. MYERS  said the basin  has generated enough  geochemical data                                                               
to suggest that  those coals have generated plenty  of gas; there                                                               
is a  fairly low likelihood  of oil in  the basin, based  on some                                                               
potential oil  source rocks that  are primarily  gas-prone source                                                               
rocks.  He  said basin [indisc.] very abruptly  and has exposures                                                               
of some  of the reservoir and  source rocks on the  planks of the                                                               
basin.                                                                                                                          
                                                                                                                                
Number 1749                                                                                                                     
                                                                                                                                
MR. MYERS  said the  Usibelli Coal  area is  an example  of those                                                               
similar  rocks exposed  at the  surface.   He suggested  that the                                                               
coals  and  the sandstones  found  at  Usibelli would  make  good                                                               
reservoirs into the basin.  He  said that basin has generated gas                                                               
and has  lots of good  reservoir rocks; the challenge  is whether                                                               
it has  a good  seal or  good tracking  mechanism.   He mentioned                                                               
that the regional seismic data  has very nice geologic structures                                                               
on it,  large structures;  the key elements  appear to  be there,                                                               
but it  still has an element  of risk to it.   He said DNR  has a                                                               
lot more data  on this basin than on most  of the Interior basins                                                               
because of  the wells and the  seismic [data].  He  said the data                                                               
was  very positive  for gas,  but not  so positive  for oil.   He                                                               
commented that he thinks this is why earlier explorers left.                                                                    
                                                                                                                                
Number 1785                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA  said it looks  as though there is  not a                                                               
whole lot of  risk there and now  there is a market for  it.  She                                                               
said the policy debate is  about how far the [legislature] should                                                               
go in terms of giving a break to  a company that comes in when it                                                               
is already known that it is a good  area and a ready market.  She                                                               
mentioned that it appears it is  going to happen whether the bill                                                               
is [passed] or not.  She asked Mr. Myers for a response.                                                                        
                                                                                                                                
Number 1825                                                                                                                     
                                                                                                                                
MR.  MYERS said  if  the  original intent  is  the  value of  the                                                               
information,  then  that  would   be  the  determinate  that  the                                                               
commissioner would have to weigh in  deciding what size of EIC is                                                               
[given]; that judgment  can't be made until the  locations of the                                                               
well are  known, etcetera.  He  said the second question  is much                                                               
more difficult, which is when  an incentive is effective and when                                                               
is it "icing on top of the  cake."  He suggested that the problem                                                               
with the  EIC is that it  isn't automatic.  The  commissioner has                                                               
discretion to look at those factors  and could give 10 percent if                                                               
he/she  thought it  was appropriate,  for  example.   It is  also                                                               
difficult to  know if the  company would explore [because  of] or                                                               
without the incentive.   He said in his  personal experience, the                                                               
license itself  is a  very powerful  incentive.   He said  in his                                                               
opinion,  because  a  license requires  a  work  commitment,  the                                                               
company will have  sufficient data to decide whether  it wants to                                                               
drill; that  drilling will largely  be based  on "prospectivity,"                                                               
based on what is seen in the  seismic data and how the geology is                                                               
tied into that, as well as  the company's assessment of the costs                                                               
of  development,  building the  pipeline,  and  getting into  the                                                               
market.                                                                                                                         
                                                                                                                                
Number 1921                                                                                                                     
                                                                                                                                
MR. MYERS said  he thinks it is the market  forces that drive it,                                                               
and generally the  incentives are a fairly ineffective  tool.  He                                                               
said is a somewhat subjective  judgment based on his own industry                                                               
experience  and  background,  rather  than someone  else's.    He                                                               
suggested that companies  would argue that the  [EIC] does reduce                                                               
risks for them.   He wondered if it was  enough risk-reduction to                                                               
change behavior;  he noted that  is always the challenge  and the                                                               
question.   He  said in  this  case, the  way that  he reads  the                                                               
current  EIC statutes  and  regulations,  the commissioner  would                                                               
really have to look at the value  of the data.  He said a license                                                               
diminishes the ability to use  that data to raise competition, so                                                               
the question is how large  a grant [the commissioner] would make,                                                               
which  Mr.   Myers  said   he  cannot  answer.     He   said  the                                                               
[commissioner] would have to weigh the individual situation.                                                                    
                                                                                                                                
Number 1959                                                                                                                     
                                                                                                                                
CO-CHAIR  MASEK turned  attention to  page 1,  lines 9-11,  which                                                               
refers to the commissioner and  says the qualified applicant must                                                               
be approved before  drilling or geophysical work  commences.  She                                                               
commented  that that  probably has  a lot  of "weight  to carry."                                                               
She refers to  the last part of the bill,  which says, "copies of                                                               
all raw  and processed data  derived from drilling"; and  goes on                                                               
to  say  that   it's  "within  30  days   after  the  completion,                                                               
abandonment,  or suspension  of the  well."   She said  there are                                                               
good safeguards in [place].                                                                                                     
                                                                                                                                
Number 2019                                                                                                                     
                                                                                                                                
REPRESENTATIVE   GREEN    addressed   Representative   Kerttula's                                                               
concern.   He  said the  biggest oil  field in  North America  is                                                               
Prudhoe Bay,  located on  the Barrow "arch",  which was  a highly                                                               
prospective area.  He explained  that the North Prudhoe Bay fault                                                               
has separated  the Prudhoe  Bay field,  which is  productive, and                                                               
another sister  field that BP  drilled years ago and  spent about                                                               
$50  million on.    He said  it  was the  same  "arch," the  same                                                               
"trap," and  it was  barren; there were  13 wells  drilled before                                                               
the discovery of  Prudhoe Bay.  He suggested that  this bill does                                                               
not  give anything;  it's just  as an  incentive that  if all  of                                                               
those things  that look good prove  up, then maybe there  is some                                                               
incentive for an oil company.   He said even if things look good,                                                               
there is  still an enormously  high risk.   He suggested  that if                                                               
the  [oil companies]  can  be encouraged  to  [explore], then  it                                                               
certainly is in the state's best interest.                                                                                      
                                                                                                                                
Number 2103                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE thanked  Mr. Myers for the time  spent on his                                                               
testimony.   He said he  didn't want  to suggest to  anybody that                                                               
"it's a slam-dunk."   He said the belief is that  there is a high                                                               
potential in a  basin.  He commented that to  his knowledge there                                                               
had never been  any three-dimensional (3-D) seismic  work done in                                                               
there, which he  said really is the  state of the art.   He asked                                                               
Mr. Myers how much 2-D [seismic  work] had been done and how that                                                               
basin  was delineated  [from] the  two wells  that had  been done                                                               
almost 20 years ago.                                                                                                            
                                                                                                                                
Number 2150                                                                                                                     
                                                                                                                                
MR. MYERS  said he doesn't  have the exact line-miles,  but there                                                               
were two  regional seismic grids shot  there, basically far-apart                                                               
lines just to  kind of outline the basin sufficiently  to get the                                                               
fringes of the basin.   He said it was 2-D  data, which is fairly                                                               
good-quality data,  but it's  certainly not  adequate to  drill a                                                               
prospect in  the basin with any  confidence.  He said  the normal                                                               
procedure  would be  to go  into  the [basin];  depending on  the                                                               
style  of  trapping mechanism  [needed],  it  would be  either  a                                                               
series of closely spaced 2-D lines or a series of 3-D lines.                                                                    
                                                                                                                                
MR. MYERS  said the  other part  of the data  is the  gravity and                                                               
magnetic data.  Sedimentary rocks  are distinguished from igneous                                                               
rocks in their  lower density, and they have  a different gravity                                                               
profile because of that lower  density; gravity data outlines the                                                               
basin very  clearly because the  reservoir rocks  are low-density                                                               
even  when  compared to  some  of  the  North  Slope rocks.    He                                                               
explained that the  basin stands out very clearly  in gravity and                                                               
magnetic data; this  helps to provide a good model  of the basin.                                                               
He  said  this  is  based  on   some  work  done  in  a  [capital                                                               
improvement project (CIP)],  in terms of getting  the gravity and                                                               
magnetic data  interpreted, which  the state  did.   He expressed                                                               
confidence and commented that the regional seismic grid is good.                                                                
                                                                                                                                
Number 2224                                                                                                                     
                                                                                                                                
MR. MYERS said the two wells did  not hit the heart of the basin;                                                               
the  Totek Hills  ARCO  well was  drilled on  the  fringe of  the                                                               
basin,  and the  Nenana  1 Unocal  well was  not  drilled in  the                                                               
deepest part.   He  said it  is encouraging  that they  have good                                                               
sedimentary  sections and  good  potential  reservoir rocks,  and                                                               
that gas shows in the well.   He commented that this doesn't mean                                                               
they  have  encountered a  commercial  reservoir.   He  said  the                                                               
deepest part  of the basin  has not been tested;  any exploration                                                               
program would go  in there and either shoot a  closely spaced 2-D                                                               
survey in the  area where they are interested or  a 3-D survey if                                                               
they are  looking for  stratigraphic traps,  which are  much more                                                               
subtle.    The [exploration  program]  would  also try  to  apply                                                               
techniques that  looked for  direct indications  of hydrocarbons,                                                               
which  can be  done  in  these types  of  rocks, particularly  if                                                               
there's gas.   He explained that the  [exploration program] would                                                               
look for flat spots and bright  spots on closely spaced 2-D or 3-                                                               
D data; direct hydrocarbon indicators  are a possibility here for                                                               
gas.                                                                                                                            
                                                                                                                                
Number 2286                                                                                                                     
                                                                                                                                
MR.  MYERS  said   all  of  those  would  be   prudent  before  a                                                               
[exploration program]  spent between $6 million  and $6.5 million                                                               
per well;  it would  need to be  fine-tuned with  seismic [work].                                                               
He said the EIC gets the  workmen a long ways toward that seismic                                                               
grid; it  probably wouldn't  cover all that  they want  to shoot,                                                               
but it would  cover a lot of  it.  He explained  that the company                                                               
would have  to decide  whether it thought  it had  a commercially                                                               
viable prospect that came from that  data.  He reiterated that it                                                               
was not [guaranteed].                                                                                                           
                                                                                                                                
MR.  MYERS  remarked  that  the  weakest  geologic  potential  is                                                               
proving a seal.   He said the structures, reservoir,  and gas are                                                               
there, but  he questioned whether  there was  a seal to  hold the                                                               
gas inside  that reservoir.   That is something that  3-D seismic                                                               
and  2-D  [work]  would  provide   more  certainty  about  before                                                               
drilling [commenced].   He  said the other  issue is  in building                                                               
the  commercial infrastructure;  the findings  have to  be [good]                                                               
enough to justify  building a gas treatment  plant, if necessary,                                                               
and a  pipeline from those  facilities.  He mentioned  that these                                                               
are the kinds of risks that oil companies take.                                                                                 
                                                                                                                                
MR.  MYERS  said one  of  the  positive things  that  exploration                                                               
licensing does  to accelerate  is not  only lower  capital costs,                                                               
but  allow  a  large  area   of  exclusive  rights;  that  allows                                                               
companies to bring  in other companies that will pay  part of the                                                               
exploration costs.   He  offered an example:   Andex  could share                                                               
with two, three,  or four other companies, giving  them a smaller                                                               
percentage of interest "in the play" for the capital to explore.                                                                
                                                                                                                                
Number 2360                                                                                                                     
                                                                                                                                
MR. MYERS explained  that that kind of "farming  out" of interest                                                               
is  very common;  it happens  all of  the time  in the  industry,                                                               
including  on the  North Slope  [presently] and  Cook Inlet.   He                                                               
said  this  is  particularly  appropriate here,  where  the  risk                                                               
sharing could  be done between  companies; it also  provides more                                                               
capital  and  minimizes  the  individual  companies  risks.    He                                                               
suggested that  would be a  typical model followed in  the basins                                                               
if exploration gets to the drilling station.                                                                                    
                                                                                                                                
Number 2396                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA asked  him  if  getting the  exploration                                                               
license itself  was an enough  of an  incentive in regard  to the                                                               
Tanana basin.                                                                                                                   
                                                                                                                                
Number 2499                                                                                                                     
                                                                                                                                
MR. MYERS said that is  what he personally believes, although the                                                               
exploration company may have a  very different opinion of that in                                                               
how it  assesses the risk.   He explained that at  this time, the                                                               
exploration  program license  is new.    It has  only issued  one                                                               
license and is  in the process of "this" and  two other licenses;                                                               
the programs need  to have a chance to work.   He reiterated that                                                               
the EIC program  is discretionary.  The DNR  commissioner has the                                                               
discretion not  to grant an [EIC]  if he/she doesn't think  it is                                                               
appropriate,  and the  commissioner has  the discretion  to limit                                                               
the amount of dollars given in the program.                                                                                     
                                                                                                                                
MR.   MYERS   explained  that   the   difficult   part  in   that                                                               
determination will  be how the [commissioner]  assesses the value                                                               
of that  data, because  it's not going  to promote  a competitive                                                               
lease sale.   The [commissioner] is going to have  to justify the                                                               
value of that data under the  current intent, which might make it                                                               
problematic for  a large grant of  an EIC.  He  commented that he                                                               
is not  prejudging what  the commissioner  would or  wouldn't do.                                                               
He said if  he looks at the straight intent  of the EIC language,                                                               
he is not  sure what the commissioner would  decide regarding the                                                               
application,  which   would  be  looked  at   individually.    He                                                               
suggested that the  "flip-side" is that there are  other areas of                                                               
the state where the [EIC] might be of use as well.                                                                              
                                                                                                                                
Number 2487                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA  asked Mr. Myers  in what other  areas of                                                               
the state foresees this coming up.                                                                                              
                                                                                                                                
Number 2499                                                                                                                     
                                                                                                                                
MR. MYERS  said he suspected if  anything was done on  the Tanana                                                               
basin, then the other basins  that have licenses would want equal                                                               
treatment; the two  licenses in the Susitna basin and  the one in                                                               
Copper  River  would have  similar  expectations  and could  make                                                               
similar arguments.   He mentioned the  Yukon Flats as an  area of                                                               
interest to the north of a prospective  gas line; it is not a lot                                                               
of state land, but federal land.                                                                                                
                                                                                                                                
MR.  MYERS said  the other  Interior basins  are more  difficult;                                                               
they're farther from infrastructure,  pipelines, and large enough                                                               
markets.    In  those  cases, it  would  be  smaller  [companies]                                                               
wanting  to test  things  such as  coal-bed  methane on  unleased                                                               
acreage or  maybe gas  hydrates or  some more  exotic technology.                                                               
He suggested  it would largely  be done as a  science experiment,                                                               
perhaps by  the Department of Community  and Economic Development                                                               
or maybe  by a  Native corporation, for  example; it  wouldn't be                                                               
large-scale  development.   He  said places  where  this is  most                                                               
likely to  be seen are  along the route,  such as a  local market                                                               
like Fairbanks  that's large enough  to be serviced and  has high                                                               
value for gas.                                                                                                                  
                                                                                                                                
Number 2586                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GREEN moved  to report  HB 307  out of  committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.                                                                                                                          
                                                                                                                                
Number 2594                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA asked for more discussion on it.                                                                        
                                                                                                                                
Number 2609                                                                                                                     
                                                                                                                                
REPRESENTATIVE GREEN  withdrew his motion  to move HB 307  out of                                                               
committee.                                                                                                                      
                                                                                                                                
Number 2614                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA  said she  thought that Mr.  Myers raised                                                               
two interesting points.  The  first point, she explained, is that                                                               
it  seems  the  [EIC]  is  [designed] to  give  an  incentive  to                                                               
companies  when  there's really  a  risk,  rather than  just  the                                                               
state's wanting  to get  the information.   She  said she  is not                                                               
really sure how she feels about  that, because in some ways maybe                                                               
the  only   thing  that  should   be  measured  is   whether  the                                                               
information  being  gained by  the  company  is valuable  to  the                                                               
state.                                                                                                                          
                                                                                                                                
REPRESENTATIVE KERTTULA asked  if it is the risk  to the company,                                                               
which  she  said  seems  to  be a  fairly  low  risk,  that  [the                                                               
committee] is  worried about.  She  asked if that is  the measure                                                               
the  [committee] wants  in regard  to  the areas  around the  gas                                                               
line.   She said  the second  point is the  question of  what the                                                               
risk is back  to the state:   if it's a sure thing  or very close                                                               
to it, then how  much money does the [state] stand  to lose?  She                                                               
indicated she is not sure if  this applies to this legislation or                                                               
to future  legislation.  She  suggested this may  provide several                                                               
ways  for companies  to  get  breaks.   She  asked  if the  other                                                               
committee members had similar thoughts or concerns.                                                                             
                                                                                                                                
Number 2680                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GREEN  reiterated  that  there  is  risk  to  the                                                               
company, not  to the state.   He said  the company would  have to                                                               
weigh that, which is probably  the biggest portion of determining                                                               
whether to  spend the money.   He mentioned probability  and said                                                               
both  are  added   up  and  assigned  percentage   factors.    He                                                               
reiterated  his point  about the  drilling done  in Prudhoe  Bay.                                                               
Drilling  is  very expensive.    In  drilling wells  one  through                                                               
twelve, [the  company] lost out,  but it was the  thirteenth well                                                               
that hit [oil], by chance.                                                                                                      
                                                                                                                                
REPRESENTATIVE  GREEN  reiterated that  there  are  all sorts  of                                                               
risks.  The  [company] has to first find the  "trapment" and then                                                               
find that  it is  filled with  something.  He  said the  state is                                                               
risking some  amount of  money that it  might have  received, had                                                               
the [exploration  company] gone in  there on its own  without the                                                               
EIC.   He pointed  out that,  as Mr.  Myers had  testified, there                                                               
were two  [instances] when there  was a possibility of  using the                                                               
EIC, but  they didn't  work out:   in  one instance,  the company                                                               
didn't want  to share  the information; in  the other,  it wasn't                                                               
worth it for  the state to [give an EIC]  for the information the                                                               
state would receive, so it didn't go forward.                                                                                   
                                                                                                                                
Number 2769                                                                                                                     
                                                                                                                                
REPRESENTATIVE GREEN reiterated that it  is no guarantee that the                                                               
EIC would be  given; it is at the commissioner's  discretion.  He                                                               
indicated that it could be  the exploration company that does not                                                               
want to pursue  the EIC due to a provision  requiring it to share                                                               
that information.   He said  information is available on  the two                                                               
wells  that were  drilled  and  nobody has  come  forward in  the                                                               
Tanana [basin].   He suggested that there are  many concerns that                                                               
need  to be  addressed  before a  company will  go  in and  spend                                                               
money; if the  [legislature] can ease some of  those concerns, it                                                               
might result  in a  huge payback to  the state.   He said  if the                                                               
[exploration  company] goes  in there  and finds  something, then                                                               
there  would   still  be   land  available   in  the   basin  for                                                               
conventional leasing.                                                                                                           
                                                                                                                                
Number 2809                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  reiterated Representative  Green's statement                                                               
that the risk is huge.   He said the [committee] failed to assess                                                               
the   deliberations  of   the  boards   of  directors   of  these                                                               
corporations,  including small  corporations,  when they  [pursue                                                               
exploration]; they  have to make  the decision of whether  or not                                                               
to spend $6 million on one hole.   He said the 3-D seismic [work]                                                               
is extremely  expensive; the  board has  to determine  whether or                                                               
not it  has the money to  do 3-D seismic [work].   Representative                                                               
Fate  asked  how   to  weigh  the  risk  of   not  developing  an                                                               
environmentally   clean  resource   against  the   risk  of   the                                                               
[exploration  company's] not  drilling.   He suggested  that this                                                               
presents a big question for the  state.  He said the [state] runs                                                               
the risk of  no development if there are no  incentives and still                                                               
wants to have that incentive  produce revenues to the state later                                                               
on.   He  said these  are  the types  of things  he is  concerned                                                               
about.  He  suggested there are certain types  of incentives that                                                               
dig so  deep into  the credits given,  eventually the  state will                                                               
not  recapture a  great deal  of funds;  then it  may need  to be                                                               
seriously looked  at.  He said  this was not one  of those cases.                                                               
He suggested that  this bill is an extension  of legislation that                                                               
currently  exists  and   is  going  to  [result]   in  a  win-win                                                               
situation.                                                                                                                      
                                                                                                                                
Number 2917                                                                                                                     
                                                                                                                                
CO-CHAIR  SCALZI drew  attention to  the original  intent of  the                                                               
bill  and the  question of  why  the [committee]  was looking  at                                                               
reauthorization.  He said the  [discretion] that the commissioner                                                               
has  on  the level  of  risk  assessed  to each  individual  area                                                               
satisfied  him somewhat.    He said  that  although the  argument                                                               
could be  that the commissioner is  not going to be  as stringent                                                               
as he/she should be, that  is something that the [legislature] is                                                               
going to  have to  put in  the hands of  a representative  of the                                                               
state.                                                                                                                          
                                                                                                                                
TAPE 02-4, SIDE B                                                                                                               
Number 2975                                                                                                                     
                                                                                                                                
REPRESENTATIVE MCGUIRE commented that she  could see the value to                                                               
the  state in  collecting  the  raw and  processed  data that  is                                                               
derived from the [stratigraphic] test  wells.  She indicated that                                                               
there is risk and the EIC could  be offered as an incentive.  She                                                               
suggested that the  value of that data would be  of good value to                                                               
the state.   She  said the  incentive is  the development  of new                                                               
sources of  energy for the  state, particularly in  rural Alaska.                                                               
She  suggested  that  this  bill  presents  an  opportunity  [for                                                               
development].   She commented that  this is some of  the cleanest                                                               
and most environmentally friendly energy [available].                                                                           
                                                                                                                                
Number 2907                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GREEN  reiterated  Mr. Myers'  comment  that  the                                                               
basin  has  a huge  amount  of  sedimentary  rock as  opposed  to                                                               
igneous rock  in which  oil is  not found.   He  said sedimentary                                                               
rock is  an encouragement because  both oil and  gas hydrocarbons                                                               
can be found in it, [but there is no] guarantee.                                                                                
                                                                                                                                
Number 2875                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA  said this bill  in and of  itself really                                                               
isn't such a concern.  She  explained that if the next bill comes                                                               
along and  it looks  as though the  three [bills]  work together,                                                               
however then she would start to  have a much bigger concern.  She                                                               
said  while  development  should  be  encouraged  in  areas  that                                                               
present a return back  to the state, it is hard  to know if [this                                                               
is an incentive].   She commented that she is  satisfied with the                                                               
current  language  that the  commissioner's  decision  has to  be                                                               
based   on  whether   or  not   the  [EIC]   provides  worthwhile                                                               
information to the state.                                                                                                       
                                                                                                                                
Number 2805                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GREEN moved  to report  HB 307  out of  committee                                                               
with individual  recommendations and a  zero fiscal note.   There                                                               
being no objection,  HB 307 was moved out of  the House Resources                                                               
Standing Committee.                                                                                                             
                                                                                                                                

Document Name Date/Time Subjects