Legislature(1995 - 1996)
05/08/1995 02:05 PM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 207(FIN) am
An Act relating to adjustments to royalty reserved to
the state to encourage otherwise uneconomic production
of oil and gas; and providing for an effective date.
Co-chairman Halford directed that CSHB 207 (Fin)am be
brought on for discussion and referenced SCS CSHB 207 (Res).
JOHN SHIVELY, Commissioner, Dept. of Natural Resources, and
KEN BOYD, Director, Division of Oil and Gas, Dept. of
Natural Resources came before committee. The Commissioner
voiced a preference for the House bill over the Senate
version and advised that he would present background
information on the legislation. A number of ideas have been
proposed to provide incentives for development of marginal
fields in Alaska. Early in this administration, the
proposed royalty incentive was determined to be "something
we could do this year" while the oil and gas policy
commission examines other methods of "making the state more
competitive, internationally."
The bill allows the Dept. of Natural Resources to determine
whether or not a field or pool of oil that could be
developed has been delineated. If such a delineation has
been made, an applicant can request a royalty reduction.
The Commissioner would then have to find clear and
convincing evidence that a reduction should occur. He must
further find that it is in the best interest of the state
that a royalty reduction be given.
The legislation mandates that the Commissioner "look at the
upside potential." If an incentive is provided based on
certain economics and those economics change, the state has
the right and responsibility to obtain its share of the
upside. That could be accomplished in a variety of ways.
The administration believes it could be done through
negotiations. The economics of an oil field are driven by
three factors:
1. Costs (both operating and capital).
2. The price of oil.
3. The volume of oil.
Costs may be relatively well known and can be reasonably
estimated. Price is "at best a guess." Agreements could
take into account price changes. The volume of an oil field
will almost always be understated at the beginning because
fields are generally not fully delineated. Advancing
technology also improves ability to recover oil. The
Commissioner is thus required to examine and respond to
increases in volume.
Commissioner Shively stressed the importance of early
incentives to the long-term economics of a field. By taking
some of the risk in the beginning, the state can obtain some
of the advantages at the end as prices improve and volume
increases.
Speaking to SCS CSHB 207 (Res), the Commissioner advised of
objection to the sunset provision which would send the
message that the state is "only half-heartedly interested in
giving incentives." An additional section that seemingly
provides for unilateral redetermination by the Commissioner,
"later in the deal," is not appropriate and makes the
legislation useless. Negotiations in this area have been
had and substitute language will be proposed. Provisions
relating to required findings may "force us to lose some
litigation." The department is suggesting that the findings
be permissive rather than required. Legislative oversight
language in the Senate bill is "very cumbersome." The
requirement for the Governor's approval of a royalty
incentive package is not appropriate. The Governor
generally does not approve "these kinds of things."
The Commissioner voiced his belief that the House did a good
job in developing its bill. He then reiterated his
preference for that version and expressed a willingness to
work with committee on the Senate bill.
Senator Phillips inquired concerning a definition of "clear
and convincing" and the "state's best interest."
Commissioner Shively advised that "clear and convincing" is
a legal standard--a very high standard. Current law allows
for royalty reductions for fields that are abandoned or
about to be "shut in." It merely provides for "a clear
finding." Best interest findings have been somewhat defined
by litigation. Under best interest findings, the
Commissioner has "some flexibility in looking at what is in
the best interest of the state." It could relate to jobs,
keeping facilities open, the tax base, pipeline tariffs,
etc. Best interest language is presently in statute, but
there is no statutory definition for the term.
Co-chairman Frank asked if language intended to eliminate
litigation remains within the Senate version. Commissioner
Shively referenced language indicating that "this decision
is not appealable by the applicant." The original
legislation said that the decision was not appealable. That
caused some confusion. A court can assume jurisdiction over
any decision by the executive branch. If provision of an
incentive was suspected of being fraudulent or not in
accordance with law, "somebody could sue the department and
would get a hearing."
End: SFC-95, #65, Side 2
Begin: SFC-95, #67, Side 1
Co-chairman Frank asked if information upon which the
department based its decision to allow a royalty reduction
would be made public through the court system if a suit is
filed. Commissioner Shively responded, "not necessarily."
The courts have the ability to receive confidential
information and keep it confidential. Information held
confidential by the department would continue to remain
confidential through the court process. In response to a
further question from the Co-chairman, Commissioner Shively
acknowledged that courts have much discretion. Should the
court wish to make something public, it would do so, and,
because of separation of powers, the executive branch could
do nothing about that.
Senator Rieger asked whether provisions relating to
litigation reflect concern regarding attorney fees awarded
public interest litigants when the intent is harassment
rather than appeal of a particular finding. He then
inquired regarding the department's position should court
rules be amended to provide that if a final determination is
appealed, public interest litigant fees could not be awarded
to the losing party. Mr. Shively explained that the intent
behind support for "the broader language" concerning appeal
is not to "keep everything out of court" but to set a very
high standard for the court in terms of review of the
decision. The attempt is to reduce opportunity for
frivolous lawsuits. Fees to public interest litigants were
not discussed by the administration when the bill was
developed. Commissioner Shively then expressed his personal
opinion that public interest litigants should not be awarded
attorney fees when they lose. He noted instances of award
of such fees that were "on the high side," and pointed to
difficulties associated with what is reasonable in terms fee
awards. Senator Sharp remarked that he would not be
interested in any bill that would allow public interest
groups to become a party to the litigation. The Senator
advised that unless that aspect is fixed, he would continue
to have a problem with the legislation. Commissioner
Shively voiced a desire to bring "some reason to that
system" but acknowledged that if the standard for all
legislation was that public interest groups could not sue,
little legislation would be passed. The administration
believes the standard originally in the bill limits, to the
maximum extent possible, litigation attempting to second
guess what the Commissioner did. That is as far as one can
go in any legislation. That provision was included in the
House bill. The Senate version prohibits appeal by the
applicant.
Co-chairman Frank voiced his understanding that existing law
allows for a royalty reduction only after two years of
production. Commissioner Shively explained that royalty
reduction statutes have existed since statehood. Original
law was largely patterned after federal law, allowing
royalty reduction in any case. A subsequent change required
production of a field for two years. That was repealed a
number of years ago. At the present time, the only
allowable royalty reductions after production are for fields
"that have already been shut in or fields about to be
abandoned." Mr. Boyd added that the earlier, two-year
production statute was repealed in 1990, "when Conoco first
applied and could not meet the two-year standard . . . ."
The present statute requires a "clear showing that a royalty
reduction is necessary."
Discussion followed between Co-chairman Frank and Mr. Boyd
regarding the basis for an earlier decision by former
Commissioner Heinz. Mr. Boyd advised that the benefit of
extending the life of the field was over shadowed by the
cost of the extension. Estimates indicated that over the
22-year life of the field, in the low price case, the state
would lose $60 million. The upside benefit for the last
three years would have been a much smaller number. No
matter what numbers were used in possible scenarios, it
appeared that the state would never benefit.
In response to a further question from the Co-chairman, Mr.
Boyd said current law allows for a royalty reduction to
extend the life of a field.
Senator Zharoff asked how the proposed process would be
applied. Commissioner Shively presented a scenario whereby
an oil company or group of lessees make a discovery. That
discovery (whether it be a whole field or pool) would be
delineated. Delineation of a find generally requires
drilling. Following delineation of the find, the applicant
would present the economics of the field (investment of
capital and operating costs, prices over the expected life
of the field, and anticipated volume of oil). The applicant
would then demonstrate that reduction of the royalty would
change the economics of the field and allow the applicant to
make an investment. The Commissioner must find clear and
convincing evidence that "those economics are correct."
Once the economics have been verified, the Commissioner must
find that provision of the royalty reduction is in the best
interest of the state. One of the methods of doing so would
be to show how the state would benefit in the upside should
the economics change (prices escalate, the anticipated
volume increases, etc.). Other items within the best
interest finding might include the effect on the pipeline
tariff (if the field was on the North Slope), use of
existing facilities, job creation, etc. Under the Senate
version, the Commissioner would make that decision, and the
Governor would review the decision. If the Governor
concurred, a 30-day public comment period would commence.
At the same time, the information would "come to the
legislature." The legislature could require that
confidential information be submitted to the Legislative
Auditor. The legislature could then hire its own consultant
to review the information. The Commissioner could also be
requested to appear and provide an explanation to the
Legislative Budget and Audit Committee. While the committee
would have no approval authority, it could comment upon the
proposed reduction. All of the foregoing must occur within
the 30-day public hearing process. At the end of the 30-
days, a public hearing would be had. Information gathered
from the public and the legislature would be reviewed by the
department. The Commissioner would then make a final best
interest finding which the Governor would review. If the
Governor approves, the agreement would be signed and become
effective.
In response to a question from Senator Zharoff regarding
time frames involved in the process, Commissioner Shively
estimated it would take 60 to 180 days to negotiate an
agreement on the economics and other requirements. Time
would then be added for review by the Governor. If approved
by him, the 30-day public comment period would commence.
The Commissioner would then have 30-days after public
comment in which to make a final determination. Mr. Boyd
cautioned that the foregoing reflects the process in its
simplest form. He stressed that it could become more
complicated and take longer. Much depends upon the field,
its economics, the company, other owners, etc.
Time frames associated with negotiations give rise to the
administration's concern regarding sunset provisions in the
Senate bill. There are presently several obvious fields
that might be looked at in the next two or three years, but
there are others drilling for prospects that have not yet
been found. Further, some lease sales have not yet taken
place. It takes time--approximately four years--to "get to
a delineated field." Sunset provisions would end the
program in five years. The bill would thus not appeal to
anyone who does not already have something on the drawing
board.
In response to an additional question from Senator Zharoff,
Commissioner Shively noted that the Governor would have to
sign off on the project twice--once after the preliminary
findings and again after final findings. He then suggested
that the Governor would certainly be aware of "a decision
that is this big." A Commissioner is unlikely to provide a
royalty reduction without informing the Governor.
Commissioner Shively advised of a lack of understanding
regarding actual need for the Governor's signature. He
noted arguments that oversight by the Governor would make
the decision less political. He asserted that it would, in
fact, make it more political. He then presented a scenario
whereby the granting of a royalty reduction in an election
year might be largely a political rather than economic
decision.
Speaking further to concerns regarding oversight,
Commissioner Shively stressed that the "real competency to
make this decision" does not rest with the Commissioner,
Governor, or legislature. It is within the division of oil
and gas where professionals make the necessary analyses.
That is where protection for the state rests. The
Commissioner pointed to testimony from Tesoro regarding
negotiation of the recent royalty contract and noted that it
attests to the fact that the state has "some very good
negotiators in that division."
Co-chairman Frank raised concern that the public might not
have much information upon which to base comments during the
30-day public process. He then inquired regarding what data
might be available for public review. Commissioner Shively
advised that public comment requirements were added in the
House. He acknowledged that potential problems could arise.
He further suggested that the public would probably know
more than merely that a decision has been made. The public
may know everything. "There is an option for the applicant
to have confidential information, but it is not required."
He suggested that the proposed procedure is "a little
different than some of the information that the industry
usually wants to keep private, particularly when they're
early on in the development of a field, and they don't want
the information on their wells to be public." The
Commissioner suggested that while pricing information and
other economics of the find might be kept confidential, the
department would be able to discuss the general concepts of
the field, the approximate size, amount of the reduction,
the structure for taking into account the upside in price
and volume, etc. In further discussion with Co-chairman
Frank, Commissioner Shively clarified that department rather
than applicant information would be made public.
Co-chairman Frank voiced need to be convinced that the bill
is necessary. He stressed need to understand the
methodology of how it would work and ensure that public
interest is protected on the upside. Mr. Boyd spoke to
difficulties associated with information on a new field that
has not yet been productive. He described sophisticated
computer models that would be utilized. It is a matter of
deciding what factors need to be considered. That involves
careful analysis. Staff is fully capable of utilizing the
computer model. The bill also provides the ability to hire
consultants to assist with assimilation of data. The
ultimate decision, however, rests with the Commissioner.
Co-chairman Frank asked why the bill was not applied after
production to ensure that a reasonable rate of return is not
denied because of the royalty. Commissioner Shively
acknowledged that rate of return is used, in some countries,
to drive investment. That is one of the reasons North
America is becoming less competitive. Business here does
not look at rate of return since it is more complicated to
do so on a sustained basis because it requires more auditing
than the proposed legislation. The administration has not
ruled out that system. It was felt that within the time
frame of this legislature, it was not reasonable to develop
that kind of law. That is one of the concepts that will be
placed before the oil and gas policy council. The proposed
bill fixes existing law. While it is not the final answer
to every oil field, it is a good start to development of
marginal fields.
Discussion followed regarding controversy over the
administration's position on habitat conservation in the
Tongass National Forest.
Co-chairman Halford referenced language at page 4
specifically prohibiting disclosure of information upon
which the determination is made to legislators.
Commissioner Shively explained that the language was
developed in Senate Resources. He then voiced a preference
for House oversight language.
Co-chairman Frank said that when the bill was before Senate
Resources, he sought information on the workings of the
legislation and was subsequently provided a sheet presenting
a hypothetical case. The Co-chairman distributed copies of
the handout (copy of file), provided by British Petroleum,
and voiced his understanding that figures are based on an
assumption of a 125 million-barrel field, 50,000 barrels a
day, and $325 million in investments. Discussion of numbers
on the handout followed. Commissioner Shively noted
numerous questions regarding underlying assumptions
associated with how taxes were figured, how operating costs
were derived, how fast the investment would be returned,
what interest rate was used, whether or not the applicant is
borrowing money, whether or not the ELF was considered, etc.
would have to be answered before a clear and convincing
decision could be made that the economics require a royalty
reduction. Computer models associated with the program are
considerably more complex than information shown on the
handout. Co-chairman Halford voiced need to "see the
process work by example." He then asked how much royalty
relief per barrel would be provided if the price is $18.00
and the maximum reduction was allowed. Commissioner Shively
expressed a willingness to "work something through an
economic model," but he cautioned that much depends upon a
variety of variables.
Co-chairman Halford voiced his assumption that "We're
trading jobs inside government (through state spending) for
jobs outside of government (in the private sector) for the
same number of dollars." He stressed need to understand
that the equation is working and "We're getting our money's
worth in the private sector." Commissioner Shively
questioned whether that was truly the concept. He noted
that if there is no development, there are no jobs in the
private sector nor income to the state. He suggested that
the number of jobs should not be a factor of the economic
equation in a trade-off for royalties. While it might be a
factor in best interest findings, the economics need to
stand on their own in terms of the field and agreed-upon
rate of return. The Commissioner agreed that Alaska
production of facilities and local hire might be part of the
negotiations. He stressed, however, that they would not be
part of the economics.
Co-chairman Halford observed that if activity and jobs in
the private sector are not generated as a result of the
royalty reduction, constituents will feel the state has
given something away that should not have been given away.
Commissioner Shively concurred. He stressed opportunity for
increased revenue at the end of the field over loss afforded
by a royalty reduction. Both loss and opportunity are
equal parts of the equation. Co-chairman Halford asked if a
provision could be included which requires "as much upside
potential as downside potential." Commissioner Shively said
he had discussed the issue with Senator Rieger. Price
provides the biggest potential for upside increases.
Senator Rieger noted that a decision to "do a modification
of a field" has to be made on the economics or straight
finances of the project. He referenced difficulties
associated with inclusion of benefits that are not
quantifiable. The Senator further advised of his belief
that it would be possible to prescribe some base parameters
and advised that he had been working on language "to try to
spell that out without unreasonably constraining the
department or the industry in how they work out a deal that
makes sense." For undeveloped fields, a royalty reduction
provides industry insurance of downside protection.
Industry should be willing to give as much or more, upside,
in exchange for that insurance.
End: SFC-95, #67, Side 1
Begin: SFC-95, #67, Side 2
Senator Rieger acknowledged that the problem with new,
undeveloped fields is that no one knows what will happen.
He ventured a guess that the fields, under the most likely
scenario, will "pencil out." While risk runs from negative
on one side to the high end on the other, both sides might
come out ahead on a risk-sharing basis. Modification should
not be considered a concession. He again voiced need for
established parameters. Commissioner Shively acknowledged
the importance of responsibility on both the upside and
downside. House legislation clearly specifies that
responsibility. That was one of the state's original
principles in meetings with industry to develop the initial
draft of the bill. The administration is willing to "look
at how to set those parameters." The Commissioner cautioned
that "trying to set them exactly is a challenge" because of
three different fact situations:
1. New marginal fields.
2. Fields that are declining or about to be shut in.
3. Already abandoned fields.
It is unclear whether the same principles will work in all
three cases. Further, one kind of arrangement for one field
might not work well for another, depending upon size and
location. Commissioner Shively stressed the importance that
the proposed legislation send a message to industry that
"This isn't just a gift." In order to provide incentive to
proceed with marginal fields, the state must be assured that
industry will "pay the state back, not just what we would
have gotten, but more than we would have gotten if things
get substantially better than we anticipate."
Co-chairman Frank referenced page 3, line 9, and questioned
use of the word "may" rather than "shall." Commissioner
Shively explained that permissive language was used so as
not to confine the Commissioner in terms of what he or she
might ultimately do. Co-chairman Frank asked if the
administration would oppose changing to "shall" to ensure
that the state recovers on the upside, should upside
conditions occur. Commissioner Shively concurred with
comments by the Co-chairman. He advised of substantial
problems with referenced language and said he was working
with Senate Resources staff to try to redo the provisions.
Present language appears to allow the Commissioner to
unilaterally "come back in and change a deal . . . ." He
acknowledged need for provisions requiring that the state
receive upside benefits. The Commissioner advised that the
department has "provided language to do that."
Co-chairman Halford referenced earlier review of the handout
provided by Co-chairman Frank and noted mention of need for
12 persons to "run a marginal field." He then said he was
experiencing difficulty separating economics and policy
relating to jobs in consideration of whether or not to grant
a royalty incentive. He then asked what ongoing employment
a 100,000-barrel-day field would provide once it was
productive. Commissioner Shively said staffing needs would
vary, depending upon location of the field and proximity to
existing facilities. A distant field might require new
processing facilities and additional people. If it is
located close to existing facilities, fewer people would be
needed.
Commissioner Shively noted comments suggesting that
development of Badami might require 12 people. ("That may
be 12 BP people.") BP and ARCO also do a lot of work
through contractors. The referenced 12 positions do not
include support staff, drilling, or pipeline maintenance.
There is no question, however, that as the industry has
become more efficient, and technology has improved, the
number of jobs it takes to run an oil field has been reduced
substantially. Co-chairman Halford voiced concern that the
economic determination could "come out marginally in the
positive" but produce few operating jobs and rely on
equipment and facilities manufactured outside the state. A
question is then raised concerning the benefits derived by
the state from allowing a royalty reduction. Commissioner
Shively concurred and explained that, for that explicit
reason, the decision of whether or not to grant the
reduction is not driven purely by economics. That is the
reason for best interest findings.
Co-chairman Halford expressed frustration over the fact that
other states (Texas and California were mentioned) derive
greater benefit than Alaska in the process of dealing with
Alaska oil. He voiced concern that royalty relief might
provide further benefits to states other than Alaska.
SENATOR LEMAN, Chairman, Senate Resources Committee, ANNETTE
KREITZER, aide to Senate Resources, and JIM EASON, Senate
Resources Committee consultant, next came before committee.
Senator Leman voiced support for the concept of flexible oil
royalties and expressed a preference for the Senate
Resources version over that passed by the House. The Senate
bill addresses two areas of concern:
1. Oversight by both the Governor and the
legislature. The first proposal was for the
legislature to grant approval or
disapproval. Problems became
apparent due to the fact that the
legislature only meets 120 days
each year. Provisions were thus
crafted that provide for
Legislative Budget and Audit
Committee review. The House bill
provides for this review but does
not include provisions for
presentation of underlying,
confidential data to committee.
Oil companies are concerned
regarding protection of
confidential data. Rather than
making this data available to all
60 members, provisions allow for
availability to the legislative
auditor and his staff or
contractual professionals
conducting review. In that way,
everything available to the
Commissioner would also be
available to those reviewing his
action. Senate Resources also feels
that the granting of an incentive
should be signed off on by an
elected official. A requirement
for signature by the Governor was
thus added to the bill.
2. Sunset. Senator Leman suggested that the impetus
for the bill is "likely Badami." It is thus
important that the legislation pass this year
"so BP can take . . . [an] agreement to their
board of directors in October and possibly
begin building the ice roads and do some work
this winter." It is unlikely any other
projects will be at a stage where passage of
legislation this session is critical.
Provision of royalty relief for non-producing
fields is not done "anywhere else in the
world." Sunset would allow the legislature,
five years hence, to review the process to
"see how this has been working." The
legislature could, at that time, extend the
sunset or remove it altogether. A second
reason for the sunset rests in intent to
encourage development activity to occur
sooner rather than later.
Speaking to appealability, Senator Leman referenced
prohibited appeal by the applicant, in the Senate version.
He explained that it is intended to engender greater public
confidence in the process. He voiced his hope that
litigation would not ensue and that the process would be
done in such a way that there would be no need for
litigation.
In response to a question from Co-chairman Frank regarding
Legislative Budget and Audit Committee review, Senator Leman
reference a proposed amendment adding "unless directed
otherwise" to language requiring that information be
provided to the Legislative Budget and Audit committee for
review of underlying data. Co-chairman Frank asked if
information would be given to committee should application
for royalty relief be made but not granted by the
department. Senator Leman answered that provision of
information would only follow approval of the application
via issue of preliminary findings and commencement of public
comment.
Comments followed by Co-chairman Frank regarding past
requests for royalty reduction that have been turned down.
Further discussion followed regarding appearance of the
Commissioner and Legislative Auditor before the Legislative
Budget and Audit Committee to speak to royalty incentives
approved by the department. Senator Leman acknowledged that
the Legislative Auditor would not be able to share
confidential information, contained in underlying data, with
the committee. The committee would thereafter issue a
recommendation for approval or disapproval. Testimony
before Senate Resources Committee indicated that if the
Legislative Budget and Audit Committee recommended "against
the deal" both the industry and the administration would
"back away from it and would not want to pursue it." Review
and approval or disapproval by committee would be
"advisory."
Referring to sunset provisions, Co-chairman Frank voiced his
understanding that the expiration date would cut off
opportunity for new royalty reductions. It would not
terminate those already in place. Senator Leman concurred.
Discussion followed between Senator Phillips and Senator
Leman reiterating reasons for and aspects of legislative
oversight. Senator Leman acknowledged concern on the part
of the administration that legislative oversight intrudes on
executive branch authority. Further comments followed
comparing proposed oversight with standard legislative
approval of leases and contracts such as the Tesoro
contract.
Senator Phillips next referenced earlier comments relating
to approval of Badami by the BP board of directors. Senator
Leman advised that he was told that obligation of a $325
million project would have to obtain board approval. That
project will compete for capital investment with other
projects throughout the world.
Senator Sharp asked if the Legislative Auditor would have
ability to hire experts to review underlying documentation
supporting the granting of a royalty incentive. Senator
Leman answered affirmatively, noting that agents hired by
the auditor would be subject to confidentiality provisions.
Senator Sharp voiced concern regarding leaks of confidential
information.
Senator Sharp next referenced limitations on legal challenge
and voiced his belief that past challenges have "in effect
killed every major lease sale in the last ten years . . . ."
He further spoke against award of judgment amounts even
when public interest groups lose and voiced need to shut
down that process. Senator Leman advised that he shared the
Senator's concern. He explained that limitations on appeal
by the applicant reflect the fact that "Anybody, probably,
could appeal in court anyway." Bill provisions require that
a higher standard will have to be met, evidencing extensive
deviation from law.
JIM EASON advised of several provisions that discourage
litigation. Language at page 5, subsection (9) lists four
categories of issues the Commissioner will consider in
making best interest findings.
The House bill simply provides that the Commissioner make a
finding that the proposal is in the state's best interest.
That is the standard set for all best interest findings
under Title 39, including oil and gas lease sales. While
the standard held for a number of years, challenges began to
develop in 1984. Each time, the supreme court seemed
increasingly likely to step in and submit to both the agency
and legislature its own view of what should be included in
findings when statutes are silent. The legislature thus
undertook greater specificity when it enacted SB 308, last
year. That listing of specific items has not yet been
challenged.
Senator Zharoff raised a question concerning royalty
contract review and opportunity for in-stream adjustments.
Mr. Eason said that changes would constitute amendments to
the lease. Nothing in the legislation compels the
Commissioner to set limits on the time in which those
amendments might operate. He could, with agreement of the
applicant, decide that the selected structure and mechanism
would only operate for a certain period of time and then
revert or change to some other procedure or be available for
reopen. That will be decided "up front of the findings."
Responding to an additional question from Senator Zharoff
regarding confidentiality, Mr. Eason explained that, under
current statutes, well information (productivity, source of
the oil, well tests, records and interpretations, etc.) is
confidential for two years. There are also provisions for
extension of confidentiality indefinitely, if a showing can
be made that certain conditions exist. If conditions are
met, the Commissioner must extend the confidentiality period
until those conditions no longer exist. For other materials
that would be submitted with royalty reduction applications
(geophysical and seismic data, engineering and financial
data) there is no expiration of the confidentiality period.
They are confidential in perpetuity. They do not become
public unless the applicant agrees to release them.
Senator Zharoff next inquired concerning the definition of
"marginal field." Senator Leman explained that testimony in
Senate Resources described such fields as those that "with a
royalty adjustment could help meet the yield threshold for
investments." BP indicated that it had investments
worldwide. To bring Badami to a point where the corporation
would want to make a capital investment, royalty adjustment
would have to be made to reach the appropriate threshold.
Many factors would be involved in the economics: ultimate
recovery, the pumping rate, price of oil, cost of
development, etc. Review of identified fields that have not
been developed suggests that the economics have not allowed
for development.
In response to a question from Co-chairman Frank regarding
Legislative Budget and Audit review, Senator Leman advised
that the committee may choose to say nothing, approve, or
disapprove the proposal. It could further offer comments to
the Commissioner during the public comment period. Co-
chairman Frank asked if delegation of legislative authority
to the Legislative Budget and Audit Committee would raise
constitutional questions.
End: SFC-95, #67, Side 2
Begin: SFC-95, #69, Side 1
ANNETTE KREITZER acknowledged discussion of the issue when
the bill was in the work draft stage. She further noted
advice from Legislative Legal Services indicating that
language incorporated within the Senate bill should not pose
a problem. Senator Phillips asked that the issue again be
examined by Legal Services and that legislative attorneys
provide an opinion on whether a constitutional problem is
raised by Legislative Budget and Audit approval or
disapproval of a proposed contract.
In response to a question from Co-chairman Halford
concerning the viability of the Senate bill, Mr. Eason
explained that he commenced work on the bill with the
presumption that the legislature wished to pass legislation
that would provide royalty relief for fields that are shut
in, have produced and been shut in, or are nearing the end
of productive life. That involves both the taking of
opportunity and risk. The bill seeks to reduce, to the
extent possible, the risk of trying to define something--the
parameters of which are many and relatively unknown--so that
there are protections for both sides. Mr. Eason stressed
need for sunset limitation to aid future review, follow-up,
and oversight. The proposal before committee is "heretofore
untried." It starts from the premise that "You can't define
what 'marginal' is very well." Under the circumstances,
however, there are ways of crafting language that will show
legislative intent and the public 's expectation to the
applicant, Commissioner, Governor and all those involved in
the process. Mr. Eason concluded his remarks by advising,
"If everyone does their job, as planned, we'll make it
work."
Responding to a comment by Senator Phillips, Mr. Eason
explained that in developing the Senate version, he
attempted to "make it something that works for everyone."
He stressed that he did not mean to leave the impression
that implementation of the bill would be as simple and as
straightforward as the House version or the version
introduced by the Governor. Protections incorporated within
revised language will make the bill more viable once enacted
and in actual operation.
Discussion followed between Co-chairman Frank and Mr. Eason
regarding current royalty reduction law. Mr. Eason stressed
that existing law does not contain specificity in terms of
what the Commissioner must consider when reviewing data. He
then spoke to deficiencies in the House version of HB 207
which calls only for review of production and financial data
reasonably available to the applicant. That creates a
potential conflict in terms of what is "reasonably
available." Rather than allow that to become the focus of
arbitration or litigation, the Senate bill seeks review of
"all the things that a company would think about when it
makes a decision to proceed or not proceed." That includes
production information, development information,
construction costs, transportation information, etc. The
Senate bill contains greater specificity in standards for
review. Current law is not a barrier to application for
royalty reduction once production has begun, if a showing
can be made.
Additional discussion of existing law followed. Mr. Eason
read existing language at page 2, line 29, which would be
removed from statute by the Senate bill. Comments followed
regarding House removal of statutory language at pages 6 and
7. Mr. Eason voiced his understanding that proposed
deletion represents the House belief that the department
needs the flexibility to consider other things beyond
maximum economic return. Other considerations may not be
"exactly translatable to the . . . balance sheet."
Employment, encouragement of exploration on adjacent leases,
and maintenance or increase of the flow of oil through the
pipeline to maintain lower tariffs were cited as examples.
Co-chairman Frank directed that the meeting be briefly
recessed.
RECESS - 4:15 P.M.
RECONVENE - 4:40 P.M.
Upon reconvening the meeting with Co-chairman Frank and
Senators Rieger and Sharp in attendance, Co-chairman Halford
asked that industry representatives speak to the bill.
JIM PALMER, Director for External Affairs, British
Petroleum, came before committee in support of the House
version of the legislation. He explained that development
in Alaska is in competition with other potential BP projects
worldwide. With the opening of the former Soviet Union and
activities in South America, Africa, Vietnam, etc., there
are many places and opportunities for investment of capital.
The task of BP's Alaska employees is to "make sure we get
our money to develop the fields here in Alaska." There is
opportunity in smaller fields around Prudhoe Bay. It may be
the only opportunity to ensure that production levels do not
decline precipitously.
Prudhoe Bay production declined approximately 15% last year.
Overall North Slope production declined 3%. The difference
between the two reflects ability to achieve greater
production from smaller fields. Milne Point and Pt.
McIntyre were mentioned. That is the challenge--to make
sure smaller fields come on line to help offset Prudhoe Bay
decline. Badami lies to the east of Prudhoe Bay and
Endicott. Appraisal drilling from this winter is now being
analyzed. BP's best belief is that there is sufficient oil
to produce "perhaps 50,000 barrels of oil." To make the
field competitive, engineers and contractors must reduce
costs to approximately $300 million. If this is not
accomplished, investment dollars will not be provided. The
proposed bill allows a field like Badami to "come on line."
Mr. Palmer stressed that the hope is to "get Badami so
competitive and so economically robust that perhaps we
wouldn't have to come to the state for a royalty
adjustment." One of the greatest risks is low oil prices.
Having the state share that risk on the low side and share
benefits on the high side, in an equal manner, is the intent
of the proposed bill.
Senator Rieger asked if, aside from Badami, undeveloped
fields would be feasible on a "straight analysis" of the
operating costs versus revenue. He acknowledged that the
big concern is up-front capital and the risk associated with
whether projections would come to pass. Mr. Palmer advised
that each field is different. Production figures, price
scenarios, operating costs, and capital costs all change.
Capital costs depend upon how far the field is located from
the pipeline, the geology of the reservoir, and other
factors. What Alaska BP staff is attempting to do is make
the project more competitive to ensure that the board of
directors in London chooses this project to fund rather than
one in the North Sea or elsewhere. That is the immediate
challenge.
In response to a further question from Senator Rieger, Mr.
Palmer acknowledged that the biggest variable to
profitability is the price of oil. The second most
important is recovery. The more barrels of the oil, the
greater the area over which costs may be spread. The number
of barrels in the reservoir at Prudhoe Bay made the pipeline
possible. For a smaller field such as Pt. McIntyre, there
is not enough oil, on a per barrel basis, to make investment
feasible.
Senator Rieger asked if royalty modifications on the upside
could, for the state, be greater than the downside royalty
reduction. Mr. Palmer voiced his belief that it should be
equal. Both parties should feel it is in their best
interest to proceed. If investments occur and assumptions
change, both benefit if changes are beneficial, and both
share some of the risk if changes are detrimental. Senator
Rieger questioned whether the situation should be equal. He
noted that the state is absorbing some of the risk in
granting an incentive. He then suggested there should be
some requirement that the upside represent the absorption of
risk assumed by the state. Mr. Palmer noted that the
developer is taking a substantial risk as well.
Senator Phillips voiced his understanding that the industry
was concerned by provisions requiring legislative approval
or disapproval. Mr. Palmer answered, "Our belief is [that]
the legislature has to be comfortable with any deal to go
forward." BP acknowledges it will have other dealings with
the legislature in the future. To proceed on a project
without "the comfort of the legislature would be not in our
best interest." The Legislative Budget and Audit oversight
proposed in the Senate Resources bill raises questions of
certainty and "quickness of decision." Industry seeks to
avoid the political disagreements that surrounded 1983
royalty oil contracts.
Senator Phillips referenced earlier comments that Badami
would be brought before the BP board of directors in London
to compete with other projects for board approval. He then
noted that Alaska's 60-member legislature serves as the
board for the state's 600,000 residents and suggested that
approval by the legislature is equally important. Mr.
Palmer reiterated need to avoid political wrangling.
Senator Phillips stressed the importance of approval on both
sides of the agreement. Mr. Palmer attested to the
oversight and negotiating skills of staff within the
Division of Oil and Gas at the Dept. of Natural Resources,
advising that they "protect the state's interest extremely
well."
Co-chairman Halford asked why the legislation seeks to place
in statute a prohibition against providing certain
information to legislators. Mr. Palmer replied, "That was
done in the Resources Committee." He voiced his assumption
that the provision was included because much confidential
information will be provided to both the department and
Legislative Budget and Audit Committee. It would be a
competitive disadvantage to BP, and perhaps the state,
should that information not be held in confidence. As an
example, he noted that a leak of information associated with
settlement of BP's income tax case was found to be very
valuable, in terms of negotiating posture, to companies that
had not yet settled. Mr. Palmer acknowledged that
confidential information would have to be provided to the
department and sufficient information must be given for the
legislature to feel comfortable making a determination and
recommendation.
Co-chairman Halford voiced his understanding that if Badami
were developed and produced 50,000 barrels a day, and
royalty was reduced from 12.5% to 5%, the difference in
income to the state would total $13.5 million a year. He
then asked how many people would be involved in direct
operation of the field once it is up and operating. How
many would be involved, on an annual basis, in development,
drilling, camp operations, etc.? The Co-chairman stressed
that for him the issue is not only an economic equation but
also a question of jobs. He then asked where the $300
million cost of development would be expended. Is there
anything the legislature can do to encourage construction of
parts, pieces, modules, etc. in Alaska versus another state?
The Co-chairman voiced frustration, saying:
Every time I get a chart that says where the money
from Alaskan oil goes, it's frustrating to see
other states making more than we are.
Mr. Palmer responded by reiterating that one of the
challenges facing the industry is to get operating costs
down. BP will have very few direct employees on site.
Estimated numbers range from 15 to 20. In addition to BP
employees, there would be a drilling crew. Doyon is the
nearest neighbor. It has sizeable drilling crews employed
by the corporation. Camp personnel would also be on site.
At the present time, NANA does the catering and performs
housekeeping for BP. Logistics (trucking and airplane
operations) would involve additional non-industry employees.
Further, there would be "all the construction people."
Without exception, BP is "looking . . . at Alaska companies
to do that." While the decision on modules has not yet been
made, BP would "very much like to, if it's economically
possible, build those in Alaska." BP is looking for
building sites with a capability and capacity of "doing
those things." Pipeline jobs would involve "Houston
Contracting," a subsidiary of Arctic Slope Regional
Corporation, and would be filled out of Fairbanks' labor
halls. VECO has a portion of the work and Alaska Interstate
would be the supplier of gravel. When pressed by the Co-
chairman regarding the actual number of jobs involved, Mr.
Palmer replied that he did not know.
Discussion followed regarding the handout distributed by Co-
chairman Frank containing hypothetical information
associated with an application for a royalty incentive. Mr.
Palmer pointed to figures indicating that at $28 oil, the
investment does well. However, at $10 a barrel, it does
not. The proposed incentive asks that the state share some
of the downside risk in exchange for potential upside
benefits. The point of the handout is to show the impact of
price.
Senator Zharoff inquired concerning the industry position on
sunset provisions in the Senate bill. Mr. Palmer advised,
"We would prefer it not be in the legislation." He added
that one of the important aspects of the bill is to "get
additional people to Alaska to invest in Alaska." He
questioned whether a 5-year program would do so.
Senator Zharoff inquired regarding oversight by the
Governor. Mr. Palmer acknowledged that the state must be
comfortable with the arrangement. He stressed need for
simplicity in the approval process to speed exploration and
development, since it would make projects more economical.
Mr. Palmer expressed concurrence in the provision
prohibiting the applicant from appealing the decision of the
Commissioner. He then voiced his belief that "That should
apply to everyone." Discussion with attorneys indicates
that would negate opportunity for "anybody . . . to take us
to court . . . ." It would establish a higher standard for
reducing nuisance suits.
Senator Sharp raised a question regarding other small
fields. Mr. Palmer advised that BP recently acquired and is
interested in getting North Star into production. Senator
Sharp reiterated earlier comments that state interest
extends beyond just maximization of revenues. He suggested
that the state must take risks necessary to "keep the TAPS
operational until the ANWR card is played . . . ." If the
pipeline is closed in eight or ten years because of lack of
production, the benefits of ANWR may not be realized.
End: SFC-95, #69, Side 1
Begin: SFC-95, #69, Side 2
Senator Sharp voiced his belief that the Senate version of
the bill provides a greater level of comfort than the House
bill.
Co-chairman Halford noted a number of amendments for the
legislation and suggested that discussion of their purpose
and impact commence.
Senator Rieger referenced his "all encompassing" Amendment
No. 3. He explained that the proposed bill addresses two
separate types of leases:
1. Badami and new unexplored fields where the risk
and need for royalty modification results from a high
degree of uncertainty regarding eventual
outcome as opposed to actual economics.
2. Known fields that are marginal, have shut down, or
are in danger of shutting down. There is little risk
here since operating characteristics are known.
In these cases, problems result from the fact that
the royalty is based on a valuation that differs
from the value to the producer.
The situations and economics are totally different in the
above cases. The type of royalty modification is also
different. That has not been well spelled out in the
legislation.
Senator Rieger stressed that the upside of a royalty
modification should be adequate to compensate the state both
for the downside it is assuming as well as assumption of the
risk. That is something that could be worked out to be
mutually advantageous to both industry and the state.
Speaking to "marginal fields at the other end of the
spectrum," Senator Rieger suggested that relief to prolong
the life of a field might not necessarily be achievable
solely through royalty reduction but from recalculation of
"where you value royalty." The problem is that royalty is
calculated "someplace . . . several steps down the line"
rather than at the same point from which the field owner
views it. The proposed amendment thus requires:
1. That the state and industry must agree on a set of
base assumptions that form an agreed upon most
likely future outcome, exclusive of the
riskiness of that assumption.
2. A royalty modification based solely on price.
That would then track with price increases and
decreases. The upside must totally
compensate the state for the downside.
3. If, even under the base assumption, a field is so
marginal the producer is requesting a royalty
modification, a provision would allow an optional
royalty modification based on ultimate recovery.
4. For fields in danger of shutting down, the
amendment would allow the point of valuation to be
moved closer to the in-ground value.
That would allow some portion of the
field production cost to be deducted
before royalty calculation. Instead of
a royalty reduction, there would
actually be a royalty increase but of a
much smaller number. It would provide
greater downside protection to the
operator and greater upside potential to
the state.
Senator Rieger noted that bill findings and recommendations
speak to employment of Alaskans, use of contractors, etc.
While these values are useful social and policy goals, they
could tend to confuse the issue in discussion of the actual
structure of a royalty modification. The proposed amendment
removes those provisions and focuses modification on the
financial aspects. There will thus be no confusion in
attempting to trade off the number of jobs versus foregone
revenue and other considerations.
Senator Rieger spoke to lack of clarity regarding the time
frame for appearance before the Legislative Budget and Audit
Committee, suggesting that the time table appears extremely
narrow. The amendment thus eliminates provisions thereto.
The Senator said he was proposing the amendment for general
feedback from the department and industry on workability of
the changes. He voiced a greater comfort level in addition
of parameters associated with modifications.
Senator Zharoff next presented Amendment No. 4. He
explained that the intent is to remove the requirement for
final approval by the Governor. He suggested that the
requirement represents an additional step that lengthens
time consumption.
Amendment No. 5, Senator Zharoff explained, removes the
effective date.
Speaking to Amendment No. 3, Commissioner Shively termed the
proposed concept "what we want to do." He then voiced need
for time to review the proposal to determine whether it fits
correctly and will work. He reiterated that he was not
uncomfortable with the concept but acknowledged that "It's
not quite the way we would have done it . . . ," in terms of
a mandatory schedule on price and optional provisions on
other items. He concurred that price represents the biggest
risk to the state in terms of "a deal going bad." He said
the department could work within the concepts but could not
commit to exact language at this time. Senator Rieger
explained that current wording seeks to address the high
degree of uncertainty rather than the economics of the
field.
In response to a question from Co-chairman Frank, Senator
Rieger remarked that industry would probably not seek
modification if the field appears to be economical. A
modification would only be sought if there are sufficient
risks in base assumptions to "make that kind of trade off."
Jim Palmer suggested that ideas embodied in Amendment No. 3
have merit. He cautioned, however, that it appears that
once capital costs are recovered, the rate would go up at a
point when the field was starting to decline. An increased
royalty at that point would not stabilize the situation.
That impact would not be in the best interest of either
industry or the state. Senator Rieger voiced his
understanding that concern relates to "the optional
modification based on total projection . . . not the
modification based on the price of oil." Mr. Palmer
concurred.
Senator Sharp noted need to review Amendment No. 3 in terms
of placement of Amendments 1 and 2 to determine if they
would still be necessary.
Senator Leman and Jim Eason again came before committee to
speak to proposed amendments. Senator Leman said he had no
problem with and would support Amendments 1 and 2.
Amendment 1 requires that, unless directed to do otherwise,
information would "go to the Legislative Budget and Audit
Committee." Language therein provides for better working
within the time line.
Amendment No. 2 accomplishes Senate Resources Committee
intent to have an agreement that spells out conditions. It
provides greater comfort to those who raised concerns
regarding a reopener. The redrafting clarifies the issue.
Amendments 4 and 5 would remove provisions of importance to
the Senate Resources Committee. Amendment No. 4 goes beyond
deletion of need for the Governor's signature in that it
also deletes Legislative Budget and Audit oversight.
Amendment No. 5 removal of the sunset provision will be the
subject of ongoing debate.
Mr. Leman advised that he had only recently been provided a
copy of Amendment No. 3. While it contains elements
consistent with the Senate Resources approach, it may not be
desirable or necessary to place in statutes. Jim Eason
concurred in concern regarding placement of the provisions
in statutes because they focus on one part of what is likely
to be many parts that must be examined "in any deal that's
proposed." Price is an important variable and one that will
be examined in every agreement. However, it will not be the
only variable. A situation in which prices remain high and
there is additional volume and reduced operating and capital
costs could produce an outcome where the state will do
better than it would have under a standard royalty but not
as good as it could have if the parties had agreed to
operation of several variables and how to account for them.
The proposed change is thus very limiting for both sides and
could potentially reduce revenue that might flow to the
state. It limits the Commissioner's flexibility to consider
other things and limits legislative oversight of a deal that
has more than one component.
Senator Rieger referenced an earlier comment that language
within the Senate Resources bill could be read as a possible
reopener. The Senator attested to focus on price and
production since other variables which describe a field "get
much more complicated to verify and could lead to a possible
dispute." Price and production are very clear. For other
parameters (initial capital cost, production cost, etc.)
which describe a field, the state should not exact a penalty
for improvement in those characteristics. The Senator
suggested the situation should not revert back to the
original schedule and the royalty increase because "you did
better than you said you could." Mr. Eason voiced need for
symmetry so that both sides shared risks and benefits. The
deal described in the findings would be a set of
assumptions, or relevant factors, that include, production,
ultimate recovery, price, and all variables. If the parties
agree that a presumed level of investment of capital and
operating spending would result in making the field
uneconomical or less than desirable for the applicant,
royalties should be reduced by a certain percent. Mr. Eason
then voiced presumption that the legislature intended to set
up a mechanism in advance that would react to changes in
assumptions that present a different economic picture for
both the applicant and the state. If the agreement has
multiple components, it will be more difficult to describe,
but it forces up-front description of the deal and action by
both parties.
Comments followed by Senator Zharoff regarding Legislative
Budget and Audit Committee review and extension of the time
frame for approval and granting of a reduced royalty. He
further spoke against 5-year sunset provisions. Senator
Leman attested to the 60-day process and stressed that
obtaining the Governor's approval should not add to that
time frame.
At this point in the meeting, Senator Sharp offered
Amendments 1 and 2 for consideration, saying that they
appear to remain viable and have merit.
In his closing remarks, Senator Leman voiced his belief that
Amendment No. 4 would do disservice to transfer of
information to the Legislative Budget and Audit Committee,
including underlying assumptions and dates. He directed
specific attention to page 5, lines 12-19, and he urged that
the amendment not be adopted.
Co-chairman Frank called for additional amendments, comments
by members, or testimony from others. None were
forthcoming.
RECESS
The meeting was recessed, subject to a call of the chair, at
approximately 5:45 p.m.
| Document Name | Date/Time | Subjects |
|---|