Legislature(1993 - 1994)
03/23/1993 05:20 PM Senate O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATOR LEMAN closed the hearing on SB 151 and announced SB 150 OIL & GAS EXPLORATION LICENSES/LEASES to be up for consideration. Number 116 JERRY BOOTH, Cook Inlet Region (CIRI), said in light of the changing economics of the oil and gas industry in Alaska and the world, they think it is appropriate and advisable for the legislature to consider new and innovative approaches to oil and gas leasing and development. While SB 150 is a departure from the traditional competitive leasing approach, it is not unfamiliar to native corporations. It is designed to supplement, not replace the state's current competitive leasing program. Number 219 AL HASTINGS, Director of External Affairs, CONOCO, supported SB 150. He said the terms for licensing should be consistent with the current leasing program. Areas subject to large block licensing should exclude areas that are in the 5 year leasing program and areas such as the North Slope and Cook Inlet that are mature leasing areas. There should be a cap on the acreage under license to any one licensee of 500,000 acres. He supported annual bonding for each year's work commitment. Regulations should be developed to define how competing proposals would be evaluated by DNR. Also, a lease that has been converted from a license should be treated no differently than any other lease issued by DNR. Number 270 SENATOR LEMAN asked what the cost of a bond would be. MR. HASTINGS guessed exploration licensing in frontier areas would bring in tens of millions of dollars. DAVID LAPPI, President, Lapp Resources, Inc., gained his exploration experience in Australia. Alaska needs to adopt exploration license legislation to ensure that its favorable geology attracts its fair share of the international exploration dollar, he said. To do this the exploration license terms need to be at least as favorable as terms in other countries that offer exploration licenses. MR. LAPPI said he would like to see the actual work programs bid while the seismic shots are taken and exploration well footage is drilled - "to level the playing field" between large and small companies. Work programs bid by companies also should be tied to a time-line to encourage early exploration and development. Since the current bill doesn't require exploration to commence until the last year of the license, he said that should be changed to an annualized basis to encourage early work in the life of a license. Companies not performing their work on an annual basis without a valid overriding reason should lose the license. Another requirement they would like to see is for companies who own exploration licenses to relinquish 25% of the remaining licensed area every two years which would prevent warehousing of large parcels of acreage. MR. LAPPI said they would like to eliminate the oral outcry auction. The performance bond should also be eliminated and he supported offering licenses over the entire state including Cook Inlet and the North Slope. Number 354 KEVIN TABLER, Land Manager for Union Oil Company, said they believe in the current competitive lease sale process and they feel it is the best way to achieve evaluation of the state's oil and gas resource potential. Exploration licensing in areas like Cook Inlet is inappropriate and will not lead to an earlier evaluation of the state's oil and gas potential. MR. TABLER said that specific areas should be described in the bill and any one license should not exceed 500,000 acres and should conform to existing leasing statutes and regulations. Number 422 SENATOR LEMAN asked if he would exclude all of the Cook Inlet area and the North Slope from the frontier areas. MR. TABLER said Cook Inlet already has an active competitive lease sale program in place. Areas that have been actively explored in the past should not be included. SENATOR LEMAN asked why he would exclude areas that have been subject to lease sales? MR. TABLER replied that the exempt sales process provides for those lands to come up under a competitive process. Number 441 PETE NELSON, Land Manager, Texaco, said SB 150 presents an interesting and workable concept to the license program which will encourage accelerated exploration. She said the intent should be reflected in the legislation by not including mature areas in this program. A work commitment performance bond should be posted for the amount of work done each year. The Commissioner should adopt regulations for evaluating competing proposals. Licenses converted to leases should be subject to existing lease statutes. Number 469 JIM DAVIS, Senior Vice President of Exploration and Land, ARCO Alaska, supported SB 150, because it would invigorate exploration for oil and gas in Alaska and it would make Alaska more competitive internationally. The existing lease process could be supplemented with licensing based on work commitments, public disclosure, and competition. He said the bill's main purpose is to shorten the time required to explore. It gives a secure land position in return for a bonded work commitment, it relies on market competition to prevent abuse or giveaways, and provides protections to the state by allowing the Commissioner to reject any proposal and revert to the existing leasing program. He commented that all the suggested changes he has heard for this bill only dilute it. Regarding the "mature area" issue, he commented that the North Slope and Cook Inlet are producing areas, but they haven't been even close to thoroughly explored. Licensing should be available for both intellectual as well as geographical frontiers. Cook Inlet, for example, is in its second cycle of exploration. They just rethought this same area. New sources of oil are needed on the North Slope to keep TAPS running as long as possible to maximize the economic efficiency of existing production. Exploration licensing is especially applicable on the North Slope, because there is a limited window of opportunity. TAPE 93-9, SIDE B Number 580 MR. DAVIS said the oral outcry auction is protection for the person who submits the initial proposal which may be subject to partial disclosure. Some companies say they won't use licensing because they have only limited funds available for Alaska. In essence they are saying they want us to wait to explore until they are prepared to reinvest in Alaska, because they believe they have better foreign opportunities. This demonstrates that Alaska is at a competitive disadvantage. Number 558 SENATOR LEMAN asked how he felt about a distance requirement to protect existing fields that are being developed. MR. DAVIS said he didn't find that to be objectionable and he suggested the distance be as short as possible. SENATOR LEMAN asked him to comment on the cost of bonding. MR. DAVIS said bonding is basically 10 cents on the dollar for people who have assets. SENATOR LEMAN asked him to comment on the amount of discretion the Commissioner should have. MR. DAVIS said the Commissioner should have the discretion to evaluate competing proposals and put them out to bid. SENATOR SHARP asked him to comment on the expense of the bonding, since he, personally would rather see the money "put in the ground." MR. DAVIS said he didn't think it was appropriate for DNR to judge exploration programs and being held to a fixed program is not right. He said there are ways to work around the bonding issue as long as the basic concept of the bill is protected. Number 491 ROBERT ERICKSON, Administrative Assistant for Teacher's Local 959, and representing AFL-CIO, Plumbers and Pipefitters, Fairbanks, said they like the concept of the bill and think it is necessary for the well being of Alaska's future. Number 462 JOHN RINGSTAD, BP Exploration, Inc., supported large block licensing for relatively unexplored areas in Alaska. Their focus is on the North Slope and will remain there. They believe the licensing approach would facilitate the exploration of so-called interior basins in basically all the state outside of Cook Inlet and the North Slope. MR. RINGSTAD said they do oppose SB 150 as written. They targeted its application to the North Slope, the oral outcry auction provision, and the exemption which allows the warehousing of acreage. He said that it is not clear that licensing would bring about exploration of the Slope any faster than conventional leasing would. Number 321 JIM EASON, Director, Division of Oil and Gas, explained that up to 500,000 acres would be available for large block licensing. Any subsequent lease converted from a license would be exempt from the statutory limits for leasing and would be limited to 30,000 acres. MR. EASON said there are two conclusions he has come to in his 20 years of experience with the industry. One is that things never stay the same and the second is that big dogs here are small dogs there. He urged them to be careful and not favor any one company in the legislation. The intent of the legislation is not to cast aside the North Slope area or anything else. They want to have the flexibility to react to situations where they think it's in the state's best interest, based upon the facts at the time, and public comment, to use an alternative. He said it was a valid point of contention that leasing versus licensing will lead to earlier exploration and development. To avoid litigation, it is important to have real firm commitments, whether it's under leasing or licensing, to make sure people do what they intended to do in a timely basis. On the bonding issue, he said it is important that the state get what it bargains for. If the standard is too low, there is the unfortunate circumstance where we will be left to try and judge among competing proposals, non of which we are assured will be carried out. That would be a mistake. On one hand the state is giving up an extraordinarily valuable right for an extended period of time to explore exclusively, with no competition, a fairly large area. At the same time, there is the right to convert areas to lease. If there is a discovery, it will be an extraordinarily valuable right for the licensee in exchange for a commitment up front for a specified work program. The only way to be sure of getting the work program is to have full bonding. Doing the bonding on an annual basis, you would have to restrict the rights that are transferred, so that the person doesn't have the rights until the sequential bonding has been accomplished. Number 215 SENATOR LEMAN announced SB 134 CREDITS AGAINST PURCHASE OF ROYALTY OIL to be up for consideration for the purpose of taking testimony from Larry Smith in Homer. LARRY SMITH, representing himself, said there are things we ought to do before we start providing credits for over-due tax payments. He said Cook Inlet pays more than their share for spill prevention and response planning and the state should treat them equitably. SENATOR LEMAN thanked Mr. Smith for his testimony and announced they would take up SB 150 OIL & GAS EXPLORATION LICENSES/LEASES again. MR. EASON explained the reason they have the outcry auction is because it is likely to be more in the state's interest and that the competition would be stiffer in those circumstances than under sealed bid. Number 138 SENATOR SHARP commented that it looks like things are going the way of big business. He asked if there was a place for the independent at the current time in Alaska? MR. EASON said the Department makes sure there are leasing opportunities for independents by providing "a level playing field." Leases have been taken by independents, but there have been few instances where they have been able to drill, for one reason or another. They still have the option for competitive leasing and if they can put together the deal, as the broker for the financing, they can participate.
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