Legislature(1993 - 1994)
04/18/1993 01:20 PM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 150
An Act providing for oil and gas exploration licenses,
and oil and gas leases, in certain areas of the state;
and providing for an effective date.
Co-chair Pearce directed that SB 150 be brought on for
discussion and further directed attention to CSSB 150 (O&G)
and Amendments 1 through 5.
SENATOR LOREN LEMAN and ANNETTE KREITZER, aide to the Senate
Oil and Gas Committee, came before committee. Ms. Kreitzer
said that as backup material she was providing testimony
from five Senate Oil and Gas Committee hearings as well as a
synopsis of the differences between SB 150 and CSSB 150
(O&G).
Co-chair Pearce directed that the meeting be briefly
recessed.
RECESS - 1:30 P.M.
RECONVENE - 1:38 P.M.
Senator Leman explained that the Governor's bill, SB 150,
presents an alternative approach for exploration and
exploration licensing. It expands available exploration
options. It does not replace the existing competitive
leasing program; it merely adds another option. The main
objective of the bill is to "get exploration going in areas
of the state that have drawn little or no attention under
current leasing programs." The methodology would remove
leasing requirements calling for "up-front cash" and instead
devote financial input to exploration. Companies will
propose a site for licensing and a work plan for the site.
Licenses would issue based on the highest work commitment.
Senator Leman next outlined differences between the original
bill and CSSB 150 (O&G):
1. While the original bill placed no geographic
restrictions on application of the bill, the Oil and Gas
version excludes the North Slope and portions of Cook Inlet.
Areas north of the Umiat baseline remain available for
leasing under the regular lease program. The feeling was
that excluded areas would not meet the requirement that the
new license arrangement apply to large tracts about which
little is known.
2. The original bill allowed the licensee to hold the
entire licensed area for up to ten years. The Oil and Gas
version requires relinquishment of 25% after the fourth year
and 10% of the total land each year thereafter. Senator
Leman acknowledged that the committee considered a less
aggressive relinquishment schedule of 10% of remaining land
but, in the end, opted for more rapid relinquishment.
Relinquishment provisions are intended to prevent the
hoarding of large tracts of land.
3. The original bill called for bonding of the total
work commitment. The Oil and Gas version requires bonding
of only 10% of the annual work commitment. Testimony
indicated that bonding is extremely difficult for
independent exploration to obtain. The state does not stand
to lose much. If a licensee defaults, the tract of land
would merely be available for license to someone else.
4. The original bill provided for an oral outcry
auction and award on the highest work commitment. CSSB 150
(O&G) requires sealed competitive bids. It also defines
what expenses can be charged as direct exploration
expenditures. Concern was expressed that indirect
exploration work performed somewhere outside the state could
be charged.
5. The original bill provided that up to 30,000 acre
leases would not count against the existing 1 million
aggregate limit. CSSB 150 (O&G) would count these leases
against that limit.
6. The original bill set the license fee at $1 acre.
The Oil and Gas version says "up to $1/acre." That provides
the commissioner flexibility to allow for less than that in
areas where it is difficult to attract exploration.
Interior basins were specifically noted. The committee did
not want to restrict exploration because of the license
rental cost.
7. Proof of financial responsibility was not
addressed in the original bill. Requirements proposed by
Senator Sharp for inclusion in CSSB 150 (O&G) define these
requirements based on the size of the production facility.
It also reduces proof of financial provisions for on-shore
exploration to $1 million.
Discussion followed between Senator Rieger and Senator Leman
concerning opportunities for speculation under the proposed
bill. Senator Leman stressed that in order to receive an
exploration license, the applicant must make a commitment
for a total amount of work broken down in annual work
commitments. The commissioner will then decide whether or
not to issue the license. If there is competition for a
particular tract of land, the license will issue on a best
interest finding to the proposal offering the greatest work
commitment. If the proposal is not in the best interest of
the state, and there is no competition for the tract, the
commissioner will not issue the license. Senator Leman also
noted bond requirements attached to annual work commitments.
Further discussion followed between Senator Rieger and
Senator Leman regarding conversion of an exploration license
to a lease under the existing lease program. Senator Leman
noted that areas converted to lease would be "very much
smaller" than exploration license areas. Leases are likely
to encompass areas of discovery.
Responding to an additional question by Senator Rieger,
Senator Leman explained that the public process (the best
interest finding) is conducted prior to issuance of the
exploration license.
Co-chair Frank inquired concerning need for license
provisions allowing for exclusive right to explore an area
as opposed to an arrangement analogous to mineral entry.
Senator Leman voiced his understanding that something must
be provided in return for the commitment to exploratory
work. The actual value of such work might be comparable to
what one would bid at a lease sale.
KEN BOYD, Deputy Director, Division of Oil and Gas, Dept. of
Natural Resources, came before committee in response to a
question from Co-chair Frank. Mr. Boyd attested to need for
lease arrangements to prevent chaos in administration of
state lands. The five-year oil and gas leasing schedule is
the most orderly and predictable nationwide. It provides
industry a means of planning, allows the department
opportunity to establish terms and conditions in the best
interest of the state, and allows ample time for the public
process. A helter-skelter approach where companies explore
at will and subsequently lease areas of discovery would be
extremely disorderly. It would also be difficult for the
state to determine the value of the land in the best
interest of the people. An orderly schedule allows the
department to systematically evaluate lands as technology
changes. It also provides the additional benefit of being
able to review seismic data in the same time frame as
industry.
Extended discussion followed between Co-chair Frank and Mr.
Boyd regarding differences between mineral drilling and oil
and gas exploration.
In the course of further discussion of conversion
provisions, Mr. Boyd explained that a royalty--a minimum of
12.5%-- would be established, up front, in the lease.
Responding to further questions from Co-chair Frank, Mr.
Boyd spoke at length to the workings of the current lease
program. Additional discussion followed regarding the size
of lease and exploration areas as well as existing fields
and productive zones.
End, SFC-93, #65, Side 1
Begin, SFC-93, #65, Side 2
Co-chair Frank continued to voice concern over exclusive
right provisions of the bill, asking if the department
envisioned problems associated with interest by more than
one entity in a particular area if exclusive provisions were
removed. Mr. Boyd stressed that interested companies would
all have the opportunity to compete for an exploration
license. The one that commits to the most work on an annual
basis would earn the right to explore. Minimal work
commitment levels and a method for valuing proposed work
will be established in regulations.
Mr. Boyd explained that the bill is designed to attract
"anyone who wants to do work in Alaska." Bonding
requirements and the small up-front application fee should
accommodate small companies. Small companies also have the
opportunity to compete in the state's five-year leasing
schedule. Senator Leman added that CSSB 150 (O&G) makes
exploration licensing more attractive to smaller companies
without disadvantaging larger companies. The intent of the
legislation is to make the opportunity available to any
company wishing to do the work. Annette Kreitzer explained
that relinquishment provisions, bonding of only 10% of the
annual work commitment, and definition of what expenditures
would be allowed under competitive bid made the bill "more
palatable" to smaller companies.
Discussion followed between Co-chair Frank and Mr. Boyd
regarding philosophies associated with the current lease
program versus proposed exploration licensing. Mr. Boyd
noted that leasing works well in areas of high potential--
known oil and gas. He attested to benefits of exploration
licensing in remote areas where companies may have differing
ideas on methods of exploration.
Co-chair Frank spoke to proposals from constituents that the
department lower the lease and bonus bid, reduce the annual
lease rental, and lease more land. Mr. Boyd said that such
a proposal was not discussed when the bill was before Senate
Oil and Gas Committee. He then questioned ability to
compete without the bonus bid and noted that leases at $5
and $10 an acre are the lowest available anywhere.
Senator Sharp voiced his understanding that, under the Oil
and Gas version of the bill, a company or individual may
apply for an exploration license on lands anywhere in Alaska
(with the exception of the North Slope and Cook Inlet) at a
cost of $1 an acre or $3 per acre when the license is
converted to a lease. He noted that relinquishment
provisions allow the licensee, after ten years, to end up
with as much acreage as an original federal lease.
Senator Sharp said he was more comfortable with the Oil and
Gas version than the original bill because it promotes
commitments of exploration dollars in areas where there is
presently no activity.
In response to a question from Senator Rieger, Mr. Boyd
acknowledged that leases are assignable with permission from
the Dept. of Natural Resources.
Further discussion ensued regarding costs and operations of
the current lease program and statutory provisions contained
within AS 38.05.180(m) and (t). Referring back to the bill,
Senator Rieger voiced his understanding that the exploration
license would not entail a plan of development. Mr. Boyd
concurred. Since the license applies to tracts of land
about which little is known, it would be difficult to
develop such a plan.
In response to comments by Senator Kerttula regarding lease
rates, Mr. Boyd stressed that the philosophy is to allow as
many dollars as possible to be "put into the ground." The
goal of the program is exploration rather than collection of
fees.
Co-chair Pearce directed attention to Amendment No. 1 which
she explained was proposed by the administration. She
further directed attention to associated correspondence from
James Eason, Director of the division of oil and gas.
Senator Sharp MOVED for adoption of Amendment No. 1 for
discussion purposes. Senator Kerttula OBJECTED. Mr. Boyd
explained that under provisions of the current oil and gas
lease program, if a sale is postponed past the quarter in
which it was scheduled to occur, the department must "go
through the whole process again." It thus takes two years
to get the sale back on the schedule. The amendment
provides the commissioner a 90-day period in which to move
the sale. The statute was originally written in response to
oil company concern that the commissioner might remove lease
sales from the schedule. In actuality, under current
provisions, those with no interest in the state's leasing
program, in a pro-development sense, could litigate and
cause the state to miss its scheduled date. Once that
occurs, the sale is effectively delayed for two years.
Co-chair Pearce asked if the title of the legislation would
have to be amended to accommodate Amendment No. 1. Both
Senator Sharp and Mr. Boyd responded affirmatively and
directed attention to Amendment No. 4 which would effect the
needed title change.
Senator Sharp then AMENDED his motion for adoption of
Amendment no. 1 to include the title change within Amendment
No. 4.
Senator Kerttula asked that representatives of the oil and
gas industries speak to the amendment. PAUL QUESNEL, B P
Exploration, came before committee, voicing support for both
CSSB 150 (O&G) and the proposed amendment. Co-chair Pearce
called for a show of hands on the motion for adoption of
Amendments 1 and 4. The motion carried on a vote of 4 to 1,
and Amendments 1 and 4 were ADOPTED.
Senator Sharp MOVED for adoption of Amendment No. 2.
Senator Leman explained that it would add "in total and for
each year of the license" to commitment language at page 3,
line 11. The amending language was actually adopted by the
Senate Oil and Gas Committee but inadvertently omitted from
CSSB 150 (O&G). Co-chair Pearce called for objections to
the motion. No objection having been raised, Amendment No.
2 was ADOPTED.
Senator Sharp MOVED for adoption of Amendment No. 3.
Senator Leman explained that deletion of the word "minimum"
at page 7, line 12, would conform language relating to the
annual work commitment to like language throughout the bill.
No objection having been raised, Amendment No. 3 was
ADOPTED.
Senator Sharp MOVED for adoption of Amendment No. 5.
Senator Leman indicated that deletion of "the remaining
land" at page 5, line 4, would apply 10% relinquishment
provisions to the total land area. It provides a more
aggressive relinquishment schedule. Senator Rieger inquired
concerning whether relinquishment percentages could
mathematically be accomplished over the ten-year time
period. Senator Leman explained that at the end of nine
years, a licensee would have relinquished 75% of the tract
and 85% at the end of the tenth year. The licensee could
then convert the remaining acreage to lease. No objection
having been raised, Amendment No. 5 was ADOPTED.
Senator Rieger directed attention to conversion provisions
at page 7, line 19, and inquired regarding application of AS
38.05.180 subsections not spelled out within the bill.
Annette Kreitzer said that she advised the drafter of Senate
Oil and Gas Committee intent that leases not be subject to
subsections other than those cited in the legislation. The
drafter did not indicate need for specific exclusions within
the bill.
Co-chair Pearce called for additional testimony on the bill.
None was forthcoming. She then announced that Co-chair
Frank had asked that SB 150 be HELD in committee for
additional review.
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