Legislature(2003 - 2004)
05/20/2003 10:38 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28(FIN)
"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."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill, "addresses oil and gas
royalty modifications for marginal oil and gas fields. The new
modification formula outlined in HB 28 allows the commissioner of
Department of Natural Resources to negotiate a royalty rate that is
in the best interest of the State."
Senator Taylor offered a motion to report the bill from Committee
with individual recommendations and accompanying fiscal note.
Senator Taylor then objected to the motion for the purpose of
taking testimony.
Co-Chair Wilken ordered the motion out of order.
REPRESENTATIVE VIC KOHRING, Sponsor, testified that in 1995 the
legislature passed a law that provided for an oil royalty
reduction. He relayed that the intent was to encourage development
of marginal fields that are not profitable, including, new,
existing and "mothballed" fields. He remarked that this statute
"just hasn't worked" with the State receiving only one application
for reduction that was not approved. He attributed the failure of
the statute to its complexity and because it did not encourage
industry participation. As a result, he sponsored the current
legislation, which simplifies and streamlines the process.
Representative Kohring explained this bill grants the commissioner
of the Department of Natural Resources the authority to determine
the level of reduction of royalty rates based on the economics of
each field. He specified the reduction would be available for any
marginal field or field that is not profitable in Alaska that could
benefit from a royalty reduction. He noted the reduction would be
applied on "a sliding scale basis", generally between three and
12.5 percent, based on the profitability of each field. He
described the internal or contracted study that would be conducted
to analyze fuel recovery, production rate and volume, and operating
costs upon which the commission would base any decision whether to
grant a reduction and at what percentage.
Representative Kohring stressed the importance to provide incentive
to develop marginal fields to generate income for the State.
MARK MYERS, Director Division of Oil and Gas, Department of Natural
Resources, testified that this bill would modify an existing
royalty reduction statute, AS 38.05.180(j). He noted this statute
had been previously amended, although some of the changes have
proven cumbersome and unclear. He stated the existing statute is
difficult to administer.
Mr. Meyers stated this legislation would simplify the process yet
still provide the commissioner "the necessary tools" to evaluate,
condition and accept or reject an application for royalty
reduction. He detailed the application and approval process for
participation. He listed three cases for which a royalty reduction
could be granted: a delineated field that a producer claims would
be uneconomic to develop, an existing field that has proven to be
uneconomic possibly due to declining production or increasing
operating expenses, and fields that are "shut in already". He
acknowledged that determination of whether a field is uneconomic is
a complex process that also must factor the price of oil, cost of
transportation, economics and size of the reservoir and size of the
wells.
Mr. Meyers pointed out that this legislation also allows a royalty
structure that could "recapture dollars" if the economics of the
field change.
Mr. Myers assured that a royalty reduction would not be granted
without extensive analysis of all relevant factors and an
understanding of the reasonable rate of return on the project.
Mr. Myers told of an application submitted by Unical, in which a
reduction was offered although the company chose to not
participate, and another application submitted by Conico, which the
Department denied because it was not determined to be in the public
interest. He stressed the applications are given serious
consideration and that instances exist whereby a royalty reduction
could result in a field beginning production or remaining in
production.
Mr. Myers cited current royalties are calculated at 12.5 to 16.66,
and occasionally 20 percent. He recognized that a reduction to
three percent would affect the economics of a field, although would
not "materially change it in a very large scope." However, he
emphasized the fiscal impact to the State is "very high".
[Note: tape interruption]
Co-Chair Wilken asked if this legislation allows for review.
Mr. Myers replied that this bill includes a provision allowing for
a legislative review of the preliminary best interest findings. He
explained that the Legislative Budget and Audit Committee or
"designated members" of the legislature to obtain the confidential
data. Therefore, he assured that the legislature could choose to be
directly involved in the process. He qualified that later reviews
or changes would be subject to the terms of the contract between
the producers and the State. He exampled a provision in contracts
allowing for periodic economic review.
KEVIN TABLER, Land and Government Affairs Manager, Unical,
testified via teleconference from an offnet location in support of
the legislation. He expressed that it would help clarify and
provide flexibility for the commissioner to process a royalty
application. He remarked that current statutes create an
"unworkable situation".
Senator Bunde commented he was encouraged by the testimony
indicating that in the event of success, the State would have an
opportunity to "recover on the upside".
Senator Olson asked the number of wells and amount of revenues in
question.
Mr. Myers replied that the extent of this legislation would be
highly variable and dependent upon companies' submission of
applications. He knew of no pending applications. He noted some
fields in the Cook Inlet are "late in their life of production"
that would receive serious consideration if an application were
submitted. He relayed that in review of other fields, it was
estimated that the revenue amount "could easily be in the hundreds
of millions of dollars" over the life of the field to "as much as a
few tens of millions of dollars differential in the royalty rate."
He qualified that the State could recover revenue if the contract
were "conditioned properly". He stated that under the provisions
of this legislation, a contract could be written to provide a net
fiscal effect of nearly zero. He spoke to the need that "the tail
be very long" and the royalty managed efficiently to recover
revenue resulting from a royalty reduced from 12.5 percent to three
percent.
Senator Olson asked the outcome if the results are not as
anticipated.
Mr. Myers assured that a full technical analysis would be conducted
to ensure the reduction is warranted. He listed geological and
geophysical engineering, studies of the reservoir, production
history and detailed cost data, as included in the analysis. He
furthered that this legislation allows the State to engage a
consultant to review the analysis.
Mr. Meyers emphasized this legislation is a policy call.
Senator Taylor offered a motion to report the bill from Committee
with individual recommendations and accompanying fiscal note.
There was no objection and CS SS HB 28 (FIN) MOVED from Committee
with fiscal note #2 for $150,000.
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