Legislature(1993 - 1994)
02/04/1994 01:42 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
VICE-CHAIRMAN HALFORD introduced SB 239 (NONCRUDE OIL OPERATIONS FINANCIAL RESPONSIBILITY) as the next order of business before the committee. MICHAEL CONWAY, Director of Spill Prevention and Response in the Department of Environmental Conservation (DEC), stated support in continuing the waiver provided in SB 239. The department is neutral on the position of changing the components of financial responsibility. He mentioned that under bonding requirements DEC works with the Department of Natural Resources (DNR) in order to ensure that small operators are able to have the financial resources that are onshore. SENATOR DONLEY asked if the responsibility for the transportation sector is in Section (1)(A) and the onshore exploration facility sector is addressed in Section (1) (3). MICHAEL CONWAY stated that SB 239 addresses onshore explorations regarding the proof of financial responsibility. He pointed out that these changes were entered by Senator Sharp who could speak to their intention. The waiver of the direct action requirement is for all transporters, handlers of petroleum products but it mainly effects the small operators. SENATOR DONLEY clarified Mr. Conway's position and asked if he had requested the changes in Section (1)(3). MICHAEL CONWAY agreed that he had not requested the change. SENATOR DONLEY asked if the onshore exploration facilities had problems getting this insurance. MICHAEL CONWAY stated that some of the smaller operators feel that this money can be better spent on the drilling operation due to their tight financial situations. The high limits of financial responsibility required for some of the operators is viewed as a block to entering into onshore operations. Number 195 SENATOR DONLEY inquired about the department's support of not changing the statutes for the large operations, but lowering the amount of liability for the smaller operations. MIKE CONWAY said that the department would be neutral due to the lack of data that could indicate the basis of changing the limits. SENATOR DONLEY observed that this change from $5 million to $1 million was immense and questioned the department's neutral stance. MICHAEL CONWAY said that if the legislation passed, the department would work with DNR. Mr. Conway pointed out that the difference with an onshore facility is that the operating conditions indicate easier response and access as opposed to offshore operations, individual cases should be reviewed. SENATOR DONLEY suggested that individual cases could be reviewed if there was a system which would point out smaller operations with less exposure of damage to the state. Then maybe a lesser amount would be reasonable. He noted that the departments are the professionals and would appreciate their input. MICHAEL CONWAY pointed out that the department keeps track of the financial responsibility of these operators, but there are no risk management officers or anyone on staff who has the ability to look at these insurance decisions. SENATOR LITTLE asked if this bill passed, how damage compensation could be obtained in the event of a spill. MICHAEL CONWAY explained that the financial responsibility is demonstrated by self insurance or insurance, a surety, the guarantee, a letter of credit approved by the department or other proof of financial responsibility including proof of financial responsibility provided by a group of insurers who have agreed to cover pollution risks of the members under the terms approved by the department. SENATOR LITTLE asked if the terms required now are similar to the terms written in this legislation. MICHAEL CONWAY said that SB 239 only changes the limits or amount required; the terms and methods of proof are not changed. Number 296 SENATOR LITTLE inquired of the state of Alaska's liability now or under this bill. MICHAEL CONWAY noted that currently the state has liability and SB 239 only changes the limits. He expressed that DNR does not have information indicating the likelihood of a spill. DNR believes that the likelihood of a spill is less in an exploratory situation otherwise each site must be reviewed. SENATOR DONLEY clarified that SB 239 was only for exploratory operations. He asked if there was a separate requirement for the bonding for ongoing production facilities. VICE-CHAIRMAN HALFORD pointed out that Section 1 of CSSB 239 explains that issue. SENATOR DONLEY asked if the department would oppose making the proof of fiscal responsibility requirement for onshore exploration a minimum of $1 million and up to $5 million pursuant of regulations. MICHAEL CONWAY reiterated that the department would remain neutral because there is no information indicating why this risk is considered greater or less. SENATOR SHARP pointed out that the Oil & Gas CS for SB 239 recognizes that existing statutes mandate levels of proof of financial responsibility and liability that are unrealistic to the point that coverage is not available and never has been. Section 1 only reduces the mandatory liability limits to more reasonably available levels; however, the reduced levels remain ten times higher than any other producing state in the U.S. Most states do not have liability responsibility. Section 2 makes the temporary waivers for shippers of refined products permanent, but Senator Sharp noted that while third party coverage is not available zero financial responsibility is provided. Senator Sharp asserted that his portion of SB 239 only provides reductions for onshore oil and gas exploration activities that in nine out of ten cases never involve exposure to crude oil. There has never been an onshore crude spill in Alaska caused by an exploration rig. He said that SB 239 creates a more realistic environment for small independent exploration firms to operate in Alaska. Independent oil companies in the lower forty-eight have historically discovered new basins and the wealth they generate is usually retained within the state one hundred percent. He believed that SB 239 along with the proposed balanced exploration licensing bill could stimulate renewed exploration in Alaska. He urged favorable consideration of this legislation. SENATOR LITTLE asked if under this legislation the state would still be maintaining an adequate safety net. SENATOR SHARP said yes. He believed the current situation stifles independent operations. Number 399 RAY GILLESPIE, Association of Refined Fuel Distributors representing Crowley Maritime, Delta Western, and Petro-Marine, spoke to Section 2 of SB 239. He referred to the direct action provision which allows the department to waive the requirement of an insurance policy to state that the insurer will be sued directly in the state. This would create a permanent law. VICE-CHAIRMAN HALFORD explained that Section 2 extends the ability to waive direct action indefinitely. The other sections deal with the incentive or disincentive of the liability amounts as they apply to onshore operators. SENATOR DONLEY clarified that Section 2 of the CS repeals a repealer on the section that allowed an exemption. SENATOR LITTLE questioned how the new provisions of liability in Section 1 came about. VICE-CHAIRMAN HALFORD explained that those provisions are an effort to make exploration licensing available and workable for small independents. The onshore production provisions are on a schedule that goes down to $1 million, while the pipeline and offshore provisions remain unchanged. SENATOR DONLEY asked how many facilities in the state apply to these categories added by this legislation. SENATOR SHARP stated that all onshore production facilities exceeding 10,000 barrels per day would be subject to the existing $20 million limit. SENATOR DONLEY inquired if this applied to operations taking a limited amount of product from pipeline to refine. MICHAEL CONWAY informed the committee that the refineries are considered terminal facilities who are addressed in AS 46.04.040. SENATOR DONLEY supported giving the department flexibility with appropriate independent exploration when a reasonable protection of public interests is included. He said that if there has been no problem with this and there is a low success rate; the insurance should be cheap due to the small risk of damage. Number 508 VICE-CHAIRMAN HALFORD expressed concern with the regulatory structure that allows DEC to change the rules after an bid is won. This could prohibit exploration after the initial process. He suggested that not allowing the standard to change during the period of an economic arrangement would weaken the ability to receive a decent bid or proposal. SENATOR DONLEY asked if there is a way to lock them into those requirements at a particular time. VICE-CHAIRMAN HALFORD noted that this program attempts to gain independence even in the face of obstacles such as distance and climate that are not within the government's control. VICE-CHAIRMAN HALFORD asked why shouldn't the department have regulatory authority; they could have more flexibility in the level of insurance required for onshore exploration activities. He asked if insurance is available for independent onshore exploration. SENATOR SHARP said that the insurance was not available to small independent producers who form joint ventures to do an exploratory well. He pointed out that insurance is cheap and available if one's net worth is considerably more than the anticipated loss. SENATOR DONLEY asked if the $1 million level is offered to smaller companies. SENATOR SHARP did not know. SENATOR DONLEY indicated that the risks in various sites could be so different that having one arbitrary sum for everyone does not seem practical. SENATOR SHARP maintained that such flexibility is available through the Division of Oil & Gas and DNR. Senator Sharp said that site specific hazards can be addressed through the DNR permit process. SENATOR DONLEY asked if the option for additional fiscal responsibility would be available when a particular site poses a threat. Furthermore, could additional bonding requirements be added to the fiscal responsibility proof. MICHAEL CONWAY clarified that concerns with specific drill sites are worked through DNR on the bonding requirement. The bonding requirement of DNR wants to assure sufficient resources for site clean up after the operation is over. He said that in order to allow smaller operators to get into business, they could work with DNR reviewing their available bonds. He noted that there is flexibility to target a specific site such as those near a sensitive habitat. TAPE 94-6, SIDE B Number 585 TOM LAKOSH, testifying from Anchorage, questioned what happens in the event of a spill with connecting drainage or what happens to the radioactive substances from a dry well, both apply to the Kenai River area. He stated that individual lessening would be more appropriate than a total removal of the liability insurance requirements. He noted that in the case of a small operator exploring an area with access to response equipment or other clean up plans, liability could be reduced to encourage economic development. He requested revising the amendment accordingly. SENATOR JACKO moved to pass CSSB 239 out of the committee with individual recommendations. Hearing no objections, it was so ordered.
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