Legislature(2003 - 2004)

03/26/2004 03:40 PM Senate RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
        SB 312-CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                    
                                                                                                                                
CHAIR SCOTT OGAN announced SB 312  to be up for consideration. He                                                               
recapped  that  the committee  had  a  conceptual amendment  that                                                               
wasn't  adopted and  he intended  to finish  that discussion  and                                                               
work on getting a CS to consider.                                                                                               
                                                                                                                                
SENATOR ELTON noted  that he was having a  difficult time dealing                                                               
with the  conceptual amendment  and the bill  of rights  that was                                                               
drafted in non-bill form and  asked Legislative Legal Services to                                                               
draft an amendment incorporating most  of its elements. He wasn't                                                               
going  to move  the  amendment  today, but  wanted  to make  sure                                                               
everybody  saw it.  An accompanying  memo explains  the different                                                               
elements that  didn't go as far  as the drafters of  the property                                                               
owners' bill  of rights  wanted it to  go, but  Legislative Legal                                                               
Services pointed out (6)(i) and constitutional problems.                                                                        
                                                                                                                                
CHAIR  OGAN stated  for  the  record that  on  two occasions  two                                                               
separate  individuals who  are associated  with  leadership of  a                                                               
group in the Mat-Su Valley threatened him.                                                                                      
                                                                                                                                
     One said  you pass this  through both bodies  and we'll                                                                    
     call off the dogs -  and they're referring to my recall                                                                    
     - and  the other person  said that the recall  would go                                                                    
     away in a  heartbeat if I just do  this legislation for                                                                    
     them.                                                                                                                      
                                                                                                                                
     I just want  to state very clearly for  the record that                                                                    
     this committee is always about  good state policy and I                                                                    
     think,  for  the  most  part,  with  some  maybe  minor                                                                    
     exceptions, I think to a  great degree I want to really                                                                    
     commend  the members  of this  committee  that when  we                                                                    
     walk  in  this  door,  I think  most  of  our  partisan                                                                    
     differences  get  left  behind.  I  really  salute  the                                                                    
     minority for  working with me.  I try to work  with the                                                                    
     minority as  well as all majority  committee members. I                                                                    
     will  always  do  what  I believe  is  the  best  thing                                                                    
     policy-wise  for the  state regardless  of  the heat  I                                                                    
     get.                                                                                                                       
                                                                                                                                
SENATOR ELTON added:                                                                                                            
                                                                                                                                
     Because of  those remarks, I think  it's important that                                                                    
     I note  for the record  that none of those  people have                                                                    
     talked to my  office. I had the  amendment drafted, not                                                                    
     because of any representations that  were made to me by                                                                    
     anybody in the Valley, but  simply because I was having                                                                    
     a  very  difficult  time  dealing  with  how  you  take                                                                    
     something that is in non-legal  form and incorporate it                                                                    
     conceptually.  For me,  I needed  to have  something in                                                                    
     writing  in amendment  form. That's  the reason  I have                                                                    
     brought the amendment to this  table, not for any other                                                                    
     purpose such  as the purposes  that you  suggested that                                                                    
     some people have mentioned to you.                                                                                         
                                                                                                                                
CHAIR OGAN  said he didn't mean  to infer that Senator  Elton had                                                               
the amendment drafted  for any other reason. "I  believe you have                                                               
been very  honorable in this  committee as all the  other members                                                               
have...."                                                                                                                       
                                                                                                                                
MR.  KEN   BOYD,  Chairman,   Land  Exploration   and  Operations                                                               
Committee, Alaska  Oil and Gas  Association (AOGA), said it  is a                                                               
private non-profit  trade association  whose 19  member companies                                                               
represent the majority of oil and gas operations in this state.                                                                 
                                                                                                                                
     AOGA  is on  record supporting  the concept  of a  best                                                                    
     interest   finding  for   oil  and   gas  leasing   and                                                                    
     exploration licensing as contained  in SB 312. While we                                                                    
     believe there  are adequate safeguards for  shallow gas                                                                    
     leasing under  existing law, we  also believe  a higher                                                                    
     level of public policy is  achieved by adopting a time-                                                                    
     tested best interest  finding approach for dispositions                                                                    
     of state land.  A best interest finding is  used in all                                                                    
     other oil  and gas  programs in  Alaska and  works well                                                                    
     for  both the  members of  the public  and the  private                                                                    
     companies interested in investing in Alaska.                                                                               
                                                                                                                                
     The best interest findings process  allows the state to                                                                    
     incorporate  all public  input into  a single  document                                                                    
     that  will  address  all concerns  in  a  comprehensive                                                                    
     manner.  We've not  had the  opportunity to  thoroughly                                                                    
     review  what  has  been  referred   to  as  the  Alaska                                                                    
     Property Owners'  Bill of Rights. However,  a first and                                                                    
     very quick reading indicates  both legal challenges and                                                                    
     perhaps  some misunderstandings  - for  instance, about                                                                    
     the extent  of current protection for  property owners,                                                                    
     the extent  of state laws, local  laws, regulations and                                                                    
     mitigation measures that  already protect Alaska's air,                                                                    
     water,  fish and  wildlife resources,  and lastly,  the                                                                    
     historic  benefits to  all the  citizens  of the  state                                                                    
     when  the state  owns  the subsurface  of its  selected                                                                    
     lands.                                                                                                                     
                                                                                                                                
     As  many of  you, I  presume all  of you,  know [split-                                                                    
     estate]  is one  of  the state  issues  that is  common                                                                    
     throughout  the western  United  States. Indeed,  there                                                                    
     are  more than  100 years  of case  law laying  out the                                                                    
     rights of  both the surface and  subsurface owners. One                                                                    
     estate occurs  when one party  owns the  surface, which                                                                    
     is usually  a private  citizen or  a number  of private                                                                    
     citizens and  one other party owns  the subsurface. The                                                                    
     subsurface  owner is  often the  federal government  or                                                                    
     the  state, but  in  Alaska  it can  also  be a  Native                                                                    
     Regional  Corporation.  The   challenge  always  is  to                                                                    
     protect the  rights of access  to the  subsurface while                                                                    
     protecting  the rights  of owners  of  the surface.  In                                                                    
     fact,  in  most  cases,   agreement  has  been  reached                                                                    
     between the surface and subsurface owners.                                                                                 
                                                                                                                                
     The  existing shallow  gas-leasing program  was crafted                                                                    
     with   bi-partisan   support    during   a   democratic                                                                    
     administration. This  support was justified  since this                                                                    
     program  has  the potential  to  bring  new sources  of                                                                    
     clean,  efficient  energy  to  the  state  as  well  as                                                                    
     providing jobs  and taxes for  local economies.  It can                                                                    
     be  done  in  an   environmentally  safe  manner  under                                                                    
     current law and  can be done in a  manner that respects                                                                    
     the  rights of  both  private property  owners and  the                                                                    
     lessee of  the subsurface.  In fact, the  Department of                                                                    
     Natural  Resources  has conducted  extensive  workshops                                                                    
     and  discussions [indisc.]  the  coalbed methane  (CBM)                                                                    
     shallow  gas development  in the  Mat-Su Valley  and in                                                                    
     Homer. We are hopeful  that further discussion of these                                                                    
     issues will  facilitate a  better understanding  of the                                                                    
     environmental  and property  right protections  already                                                                    
     in  place  in  a  historical success  of  split  estate                                                                    
     development.  Thanks for  your time,  Mr. Chairman  and                                                                    
     members of  the committee.  AOGA looks forward  to this                                                                    
     being  part of  the  informed  decision-making on  this                                                                    
     subject and that concludes my testimony.                                                                                   
                                                                                                                                
CHAIR  OGAN asked  him  for his  background in  the  oil and  gas                                                               
industry and in the public sector.                                                                                              
                                                                                                                                
MR. BOYD  responded that he  was deputy director of  the Division                                                               
of Oil and Gas from 1990 - 1995  and was director of it from 1995                                                               
-  2001.   In  the   private  sector,   he  was   an  exploration                                                               
geophysicist for 20 years.                                                                                                      
                                                                                                                                
CHAIR  OGAN said  the  property owner  consent  provision of  the                                                               
conceptual amendment  basically says that the  property owner can                                                               
just say  no and  the state  must also provide  a legal  fund for                                                               
them  to hire  legal counsel.  They must  also be  protected from                                                               
retaliatory lawsuits by developers.                                                                                             
                                                                                                                                
CHAIR OGAN asked:                                                                                                               
                                                                                                                                
     What effect  has it on resource  development if surface                                                                    
     owners could basically  say no? Isn't that  like just a                                                                    
     transfer  of  an  asset  that they  didn't  buy  -  the                                                                    
     subsurface - into their control?                                                                                           
                                                                                                                                
MR. BOYD replied:                                                                                                               
                                                                                                                                
     Well, in  my opinion, Mr.  Chairman, I don't  think you                                                                    
     can make good public policy  by demands raised by small                                                                    
     groups  of citizens,  no matter  how well-meaning  they                                                                    
     may  be. If  I had  to  base decisions  based on  every                                                                    
     document that came across my  desk when I was director,                                                                    
     the  state  would  be   a  hodge-podge  of  conflicting                                                                    
     opinions  and   conflicting  rules  and   nobody  would                                                                    
     benefit from that. That's why  AOGA and me, personally,                                                                    
     support the notion of a best interest finding.                                                                             
                                                                                                                                
     I believe,  Mr. Chairman,  when I look  at the  bill of                                                                    
     rights, that  we can agree  on numbers 4 and  10. Let's                                                                    
     have competitive  bidding and your bill  does that. And                                                                    
     in order to  have competitive bidding, then  we need to                                                                    
     have  a best  interest  finding. Fine,  let's do  that,                                                                    
     too.  Then let's  take the  other numbers  and let  the                                                                    
     state go  through its process, which  they have already                                                                    
     begun, in a  sense. I mean they've already  had a bunch                                                                    
     of hearings in a  lot of different affected communities                                                                    
     - and  take these issues  one by one, decide  what's in                                                                    
     the  best interest  of  the  state and  put  it into  a                                                                    
     legally   defensible  document   and   then  you   have                                                                    
     something you  can work with  instead of  a hodge-podge                                                                    
     of conflicting notions.                                                                                                    
                                                                                                                                
CHAIR  OGAN  asked  if  he  wanted  to  comment  on  the  buyback                                                               
provisions.                                                                                                                     
                                                                                                                                
MR.  BOYD replied  that  he probably  shouldn't  comment, but  he                                                               
personally has  listened to the  director of the Division  of Oil                                                               
and  Gas, Mark  Myers',  testimony  and agreed  with  him that  a                                                               
buyback  would  come at  a  cost  to  the  state. He  also  heard                                                               
something about the  state not getting its full value  if it buys                                                               
back leases for  more than it paid for them  and refuted, "That's                                                               
nonsense."                                                                                                                      
                                                                                                                                
     I mean, what would you  value Prudhoe Bay at then? What                                                                    
     should we have  leased Prudhoe Bay at -  $150 billion -                                                                    
     and had  no takers?  Companies have  to take  risks and                                                                    
     they put money on the table  to take that risk. I think                                                                    
     the state, you know, owes  them something for that risk                                                                    
     and  we collect  our 12.5  percent share.  So, I  can't                                                                    
     talk to a  number, Mr. Chairman. I don't  know what the                                                                    
     number  is.  Whatever Mark  says,  I  would support  it                                                                    
     assuming that  he has the  backup and I'm sure  that he                                                                    
     does. So, it will cost  him more than just saying, gee,                                                                    
     you  came  to a  lease-sale;  here's  your money  back.                                                                    
     Here, take  your leases. I  don't think that's  fair. I                                                                    
     don't  think  it's right.  I  think  it's a  lousy  and                                                                    
     terrible precedent for the state.                                                                                          
                                                                                                                                
CHAIR  OGAN asked  if a  buyback had  happened in  the past  - in                                                               
lower Cook Inlet.                                                                                                               
                                                                                                                                
MR. BOYD  replied that  happened a  long time  ago, but  he noted                                                               
that the Legislature made Kachemak  Bay off limits to gas leasing                                                               
and it  remains off limits  to this day.  The only buyback  he is                                                               
familiar with  is the federal sale  in Bristol Bay that  was held                                                               
about 15 years  ago when millions and millions of  dollars had to                                                               
be paid back to the companies.                                                                                                  
                                                                                                                                
SENATOR WAGONER remembered a Chevron lease buyback in 1972.                                                                     
                                                                                                                                
SENATOR   ELTON  recollected   that  happened   in  the   Hammond                                                               
administration in 1974.                                                                                                         
                                                                                                                                
CHAIR OGAN  explained that  the Property  Owners' Bill  of Rights                                                               
advocates that all 74 leases be  bought back and asked what would                                                               
happen  if the  state  did that.  Also, a  program  on Channel  2                                                               
indicated the Agrium  Plant might pull out of  Cook Inlet because                                                               
of gas supply issues.                                                                                                           
                                                                                                                                
MR. BOYD replied he wasn't  sure how Agrium's decision related to                                                               
this issue, but a buyback just says the state can't be trusted.                                                                 
                                                                                                                                
     A  lease sale  is  more than  just  expending money.  A                                                                    
     lease sale, I mean, people  don't even want you to know                                                                    
     where they  are going to  bid. And when they  have bid,                                                                    
     of  course,  they've   shown  their  cards,  basically.                                                                    
     They've  said we're  willing to  pay this  many dollars                                                                    
     for these acres.  When that's done, that goes  on a map                                                                    
     that becomes  a public  document and everybody  gets to                                                                    
     see it -  all their competitors. I  mean, you've really                                                                    
     bared your  soul. And  then to say  oh well,  thank you                                                                    
     very much, here's  your bid back; we  already know your                                                                    
     strategy. What  will you do  in the future  then? Who's                                                                    
     going to  trust anybody  to do  something like  that? I                                                                    
     think it  creates a very  bad precedent for  the state,                                                                    
     Mr.  Chairman, and  if we're  talking about  Cook Inlet                                                                    
     and  the  Mat-Su  Valley,  and  I'll  just  speak  very                                                                    
     frankly, I  think the  stakes in  terms of  dollars are                                                                    
     relatively low. But  if you take the  same situation to                                                                    
     the Slope, and I have no  reason to believe that if you                                                                    
     do it  here, you won't  do it  there, then I  think the                                                                    
     stakes become enormously high.                                                                                             
                                                                                                                                
CHAIR OGAN said  he suspected a buyback would put  the state in a                                                               
bit of a tight position. He invited Mr. Norman to comment.                                                                      
                                                                                                                                
MR. JOHN NORMAN, Commissioner, Alaska Oil and Gas Conservation                                                                  
Commission (AOGCC), said he had practiced as a lawyer for 33                                                                    
years and would address the Property Owner's Bill of Rights.                                                                    
                                                                                                                                
     In section  8, which addresses water  protection, there                                                                    
     are four things  that are sought to  be accomplished as                                                                    
     I read  it. One  of them is  to prohibit  production of                                                                    
     coalbed methane from aquifers. A  second is to prohibit                                                                    
     the use  of toxic  hydraulic fracturing fluids  and the                                                                    
     third is to  require the deep injection  of liquids and                                                                    
     waste produced  in conjunction with coalbed  methane. A                                                                    
     fourth  is  to  insure  that  there  is  no  hydrologic                                                                    
     connection -  no communication between  injection zones                                                                    
     and fresh water  sources. So, looking at  those, all of                                                                    
     these, I think  are attainable goals and  many of them,                                                                    
     in fact, are consistent with existing law right now.                                                                       
                                                                                                                                
     A  prohibition on  production from  aquifers used  as a                                                                    
     source of existing or future  water perhaps is not good                                                                    
     public policy if it were to  find its way into law as a                                                                    
     blanket  prohibition.  In   some  areas,  this  coalbed                                                                    
     methane may  be very  welcome as  the first  local fuel                                                                    
     that many  communities have had  and so  the commission                                                                    
     would suggest  that if we  were to rule  out production                                                                    
     from what  we refer to  as a same source  aquifer, that                                                                    
     there be an  exception for an operator  to petition the                                                                    
     AOGCC  and  the  commission  to  make  a  finding  that                                                                    
     production would not in any  way degrade the aquifer as                                                                    
     a source of fresh water.  I think we are very confident                                                                    
     that we could provide a  forum and offer a fair hearing                                                                    
     and reach  a determination  and, if  it looked  like it                                                                    
     would   degrade  the   aquifer,   then  the   exception                                                                    
     requested  would not  be granted,  but  we would  avoid                                                                    
     having Alaska paint itself into  a corner, because very                                                                    
     often aquifers  cover large areas  and it would  not be                                                                    
     advisable to rule that out.                                                                                                
                                                                                                                                
     As to  the second thing,  prohibiting the use  of toxic                                                                    
     hydraulic   fracturing   fluids   -   we're   certainly                                                                    
     supportive of that in this  area. If this does make its                                                                    
     way  into an  actual amendment,  then we  would perhaps                                                                    
     have some fine-tuning  on the wording to  offer, but we                                                                    
     see that as doable.                                                                                                        
                                                                                                                                
     The third  objective in  section 8  is to  require deep                                                                    
     underground   injection  of   the  liquids   and  waste                                                                    
     produced and we would, here,  suggest that it would not                                                                    
     be advisable, again, to make  a blanket rule that would                                                                    
     absolutely require all produced  water, for example, to                                                                    
     be reinjected,  that there are certainly  occasions and                                                                    
     examples where  the water  coming out  is of  very good                                                                    
     quality and  might be  put to a  beneficial use  on the                                                                    
     surface.  But, insofar  as injection  is the  choice of                                                                    
     the operator  and the  land owner  and is  the sensible                                                                    
     thing  to do,  then we  think it's  very workable  that                                                                    
     that  requirement would  be imposed  -  to be  injected                                                                    
     deeply, the idea being that  it would be well below any                                                                    
     aquifer that's used as a source of fresh water.                                                                            
                                                                                                                                
     The term 'existing or future  water wells' is used and,                                                                    
     of  course, future  water wells  is  open-ended and  we                                                                    
     might suggest  'existing or  which could  reasonably be                                                                    
     expected  as  a  source  of   future  fresh  water'  be                                                                    
     substituted.                                                                                                               
                                                                                                                                
     Finally, a  fourth objective is insure  no hydrological                                                                    
     connection between the waste  water injection zones and                                                                    
     present and  future drinking  water sources.  And here,                                                                    
     we  have no  problem with  that;  in fact,  we do  that                                                                    
     already and have done that  and the statutory authority                                                                    
     for that already exists in AS 31.050.30, (d)(3).                                                                           
                                                                                                                                
     In  summary, on  section  8, we  think  there are  some                                                                    
     goals  there that  if the  committee did  want to  move                                                                    
     this forward,  they're attainable and we'd  be happy to                                                                    
     work with you  to fine-tune the wording of  the bill to                                                                    
     make sure it's workable.                                                                                                   
                                                                                                                                
     I  guess working  backwards in  numerical order,  then,                                                                    
     the next section  6 is local control  and in principle,                                                                    
     the AOGCC has no opposition  to providing for a measure                                                                    
     of  local control.  We  would want  to  make sure  that                                                                    
     there is coordination with the  AOGCC. Our primary area                                                                    
     of jurisdiction  is subsurface regulatory  activity and                                                                    
     also,  we  would  want  to make  sure  that  the  local                                                                    
     control did not result in waste of a resource.                                                                             
                                                                                                                                
CHAIR OGAN asked Mr. Norman if he was a geologist by profession                                                                 
and to touch on the water protection issues.                                                                                    
                                                                                                                                
MR. NORMAN replied that he has worked in the industry, but the                                                                  
other AOGCC commissioner, Dan Seamount, is a geologist and Mr.                                                                  
Bob Crandall is one of AOGCC's senior geologists.                                                                               
                                                                                                                                
CHAIR OGAN  asked, "To your  knowledge, has any toxic  fluid been                                                               
used for hydraulic fracturing for coalbed methane in Alaska?"                                                                   
                                                                                                                                
MR. BOB  CRANDALL, AOGCC Petroleum  Geologist, replied as  far as                                                               
he   knows  toxic   fluids  haven't   been  used   for  hydraulic                                                               
fracturing.                                                                                                                     
                                                                                                                                
     There  has  been  a  treatment to  the  well  prior  to                                                                    
     fracturing  called  an  acid wash  where  a  relatively                                                                    
     small  volume of  dilute hydrochloric  acid is  used to                                                                    
     clear the  perforations in the well  prior to injecting                                                                    
     the hydraulic fracturing fluid.                                                                                            
                                                                                                                                
CHAIR OGAN asked if acid  reacts to the formation by neutralizing                                                               
it into CO2, salt and water.                                                                                                    
                                                                                                                                
MR. CRANDALL  replied that's true, but  he doesn't see that  as a                                                               
significant toxic component.                                                                                                    
                                                                                                                                
CHAIR  OGAN  asked  if  it  worked  something  like  baking  soda                                                               
neutralizing acid.                                                                                                              
                                                                                                                                
MR. CRANDALL replied basically that's right.                                                                                    
                                                                                                                                
CHAIR  OGAN stated  for the  record that  a libelous  article was                                                               
printed by  a couple  of local  papers that  talked about  how an                                                               
operator used  hydrochloric acid  gas in  Texas wells  to enhance                                                               
production and it somehow leaked out  and killed a lot of people.                                                               
He thought  the article's author was  mistakenly calling hydrogen                                                               
sulphide (H2S)  hydrochloric acid gas.  He asked Mr.  Crandall to                                                               
clarify that.                                                                                                                   
                                                                                                                                
MR. CRANDALL answered:                                                                                                          
                                                                                                                                
     The occurrence of  H2S is in a  Tyonek formation, which                                                                    
     has been  a target  for coalbed  methane in  the Mat-Su                                                                    
     Valley. It  has only  been encountered  in undetectable                                                                    
     levels  in the  wells that  have been  drilled so  far.                                                                    
     There is no  history of H2S in the  Mat-Su Valley based                                                                    
     on previous  drilling. In  future drilling,  there will                                                                    
     be H2S  detectors and that,  of course, even  though it                                                                    
     hasn't  been  observed  in the  past,  will  always  be                                                                    
     treated by  us as  a potential  threat. I  think you're                                                                    
     correct.                                                                                                                   
                                                                                                                                
     As  far  as  the  reference in  the  article  that  you                                                                    
     referred to as a gas,  that's something that I'm really                                                                    
     not aware of. Sometimes  large concentrations of H2S is                                                                    
     present in  natural gas.  That happens  frequently, for                                                                    
     instance, in the Canadian  Rockies, and that's referred                                                                    
     to typically in the industry as sour gas.                                                                                  
                                                                                                                                
CHAIR OGAN interrupted to say there is some of that in Texas.                                                                   
                                                                                                                                
MR.  CRANDALL  agreed  and  added,  "Acid  gas,  I  think,  is  a                                                               
misstatement by someone."                                                                                                       
                                                                                                                                
TAPE 04-30, SIDE B                                                                                                            
4:30                                                                                                                            
                                                                                                                                
CHAIR OGAN  said the fear in  some places is that  diesel is used                                                               
to "frac," but all the petroleum  engineers he talked to say that                                                               
diesel is  commonly used  for oil  wells, because  it has  an oil                                                               
base; it is  rarely used, if ever, for coalbed  methane. He asked                                                               
what the  likelihood was  for other toxic  fluids being  used for                                                               
fracturing.                                                                                                                     
                                                                                                                                
MR.  CRANDALL replied  that petroleum-based  frac fluids  are not                                                               
used in  Alaska for coalbed methane.  It is not commonly  used in                                                               
any coalbed methane operations.                                                                                                 
                                                                                                                                
     In fact,  there is a memorandum  of understanding (MOU)                                                                    
     between  the   two  largest  commercial   well  fracing                                                                    
     companies   in  the   EPA  that   they  will   not  use                                                                    
     hydrocarbon-based frac  fluids in  USDWs, which  is the                                                                    
     EPA term for water that  has less than 10,000 parts per                                                                    
     million   total  dissolved   solids.   There  is   this                                                                    
     recognition by the industry that  by and large, diesel-                                                                    
     based  frac   fluids  are  inappropriate   for  coalbed                                                                    
     methane.                                                                                                                   
                                                                                                                                
CHAIR OGAN asked  if the theory is  that you can use  it in water                                                               
that's already polluted, but you can't use it in anything fresh.                                                                
                                                                                                                                
MR. CRANDALL  replied that the  underground injection  control is                                                               
in the  Safe Drinking Water  Act. He thought the  EPA established                                                               
the total dissolved solids threshold  at 10,000 parts per million                                                               
because that represents  the type of water that's  good enough to                                                               
be treated for human consumption.                                                                                               
                                                                                                                                
CHAIR OGAN moved on to another issue.                                                                                           
                                                                                                                                
     One  of  the  criticisms  has  been  that  there  isn't                                                                    
     specific  statutory requirements  to  inject water.  My                                                                    
     understanding  is   that,  while  it's   not  addressed                                                                    
     specifically in the statutes, it  is required to inject                                                                    
     the  water if  you get  a certain  amount of  dissolved                                                                    
     solids  and I  don't know  if that's  10,000 parts  per                                                                    
     million or what.  So, there is a  requirement to inject                                                                    
     it  unless you're  getting drinking  water quality  and                                                                    
     then you  can get  an NPDS permit  to discharge  on the                                                                    
     surface  along with  DEC and  Fish and  Game and  a few                                                                    
     other things.  Could you clarify  what is  required now                                                                    
     if it's produced water.                                                                                                    
                                                                                                                                
MR. NORMAN stepped in and said:                                                                                                 
                                                                                                                                
     It's generally exactly as you  stated it, that if it is                                                                    
     of drinking  water quality,  it can  be disposed  of on                                                                    
     the surface. Otherwise, it's  reinjected into wells and                                                                    
     those wells,  the State of  Alaska has been  given, and                                                                    
     specifically  this  agency,   the  AOGCC,  primacy  for                                                                    
     oversight over  these labeled class 2  wells. The water                                                                    
     is  injected   and  those  wells  are   very  carefully                                                                    
     monitored and  it's the responsibility and,  I believe,                                                                    
     carried out  very well,  to insure  that when  water is                                                                    
     reinjected, it absolutely will  not pollute fresh water                                                                    
     in any way.                                                                                                                
                                                                                                                                
CHAIR OGAN  said another requirement  is to reinject  all liquids                                                               
and wastes including ground-up rock from drilling the hole.                                                                     
                                                                                                                                
MR. NORMAN agreed.                                                                                                              
                                                                                                                                
CHAIR OGAN  said if  this requirement  was drafted  literally, it                                                               
would require that  the ground-up rock be  reinjected and coalbed                                                               
methane  wells  don't  have  annular rings  [the  pad  area  that                                                               
remains after a  well hole is drilled through it]  like the deep-                                                               
hole, high-pressure wells  on the North Slope and  Cook Inlet. He                                                               
asked if it  was technically possible to  reinject ground-up rock                                                               
into a well.                                                                                                                    
                                                                                                                                
MR. CRANDALL answered:                                                                                                          
                                                                                                                                
     There is  a very  large-scale slurry  injection project                                                                    
     up  on the  North Slope  where exactly  that happens  -                                                                    
     where old  reserved beds are ground-up  very small and,                                                                    
     then, injected through the well into the subsurface.                                                                       
                                                                                                                                
CHAIR OGAN said  a literal interpretation of that  is, then, that                                                               
a  coalbed methane  operation, no  matter where  it was  located,                                                               
would have  to get one of  those wells on-line and  grind up rock                                                               
in a slurry and reinject it.                                                                                                    
                                                                                                                                
MR. CRANDALL responded  that's how he reads this and  that is not                                                               
a practical requirement.                                                                                                        
                                                                                                                                
CHAIR OGAN asked what class well that would be.                                                                                 
                                                                                                                                
MR. CRANDALL replied that is labeled  a class 2 injection well. A                                                               
class 1 is for hazardous sorts of waste.                                                                                        
                                                                                                                                
CHAIR OGAN asked what a class 2 well costs to build.                                                                            
                                                                                                                                
MR. CRANDALL  replied that it  could be very expensive.  It would                                                               
depend on the stratography, the sequence  of rocks in an area and                                                               
a  number of  other  things. His  experience  indicates having  a                                                               
large number of class 2 disposal wells wouldn't be practical.                                                                   
                                                                                                                                
CHAIR OGAN  asked if the life  of the well would  be fairly short                                                               
since the slurry would be pumped into it.                                                                                       
                                                                                                                                
MR. CRANDALL replied,  again, that would depend on  the nature of                                                               
the  formations.  "Wells  on the  Slope  actually  perform  quite                                                               
well."                                                                                                                          
                                                                                                                                
CHAIR OGAN asked what other items were under the AOGCC purview.                                                                 
                                                                                                                                
MR. NORMAN briefed  the committee that the  commission sees local                                                               
control as an attainable goal and encouraged:                                                                                   
                                                                                                                                
     ...  a  close coordination  with  the  AOGCC and  other                                                                    
     regulatory agencies  so we don't  bump into  each other                                                                    
     and we get  into questions of conflicts  with state law                                                                    
     and we  would also encourage that  coordination and try                                                                    
     to minimize, eliminate and prevent  waste - that is the                                                                    
     waste of a  valuable resource. We think  there are ways                                                                    
     to  do  that and  I  think,  on  the subject  of  local                                                                    
     control, I'll just leave it  there and see if there are                                                                    
     any questions.                                                                                                             
                                                                                                                                
CHAIR  OGAN said  the Mat-Su  Borough is  proposing an  ordinance                                                               
that would require  well spacing no closer than 360  acres or one                                                               
per section. What would happen  if that passed and the commission                                                               
determined that well  spacing that far apart  would create waste?                                                               
Is that a local control override?                                                                                               
                                                                                                                                
MR. NORMAN replied that could happen right now.                                                                                 
                                                                                                                                
     I'm assuming  the 360 is  actually intended to  be 320.                                                                    
     Half of  a 640-acre section  would be 320....  There is                                                                    
     the potential  for conflict. I  think what needs  to be                                                                    
     clarified  is   our  regulation  of  spacing   and  the                                                                    
     professional  staff here  normally thinks  in terms  of                                                                    
     subsurface   spacing   patterns....   It's   a   pretty                                                                    
     fundamental  distinction.  Whereas, I  think,  probably                                                                    
     the borough, and the proponents  of the bill of rights,                                                                    
     are   more   concerned   with   surface   spacing   and                                                                    
     facilities. That's  a first distinction that  has to be                                                                    
     kept in  mind and  sorted through in  properly drafting                                                                    
     any  legislation.  But  it  is  possible  that  if  the                                                                    
     spacing were  such depending  upon the  host reservoir,                                                                    
     it could result in waste.                                                                                                  
                                                                                                                                
     An operator would probably try  to drill as efficiently                                                                    
     as they could.  The nature of the industry  has been to                                                                    
     have  a smaller  and smaller  footprint and  there have                                                                    
     been  magnificent strides  in the  area of  directional                                                                    
     drilling and  production from lateral wells.  So, there                                                                    
     are  an awful  lot  of  technological innovations  that                                                                    
     right now  even in a  few years may give  operators the                                                                    
     ability  to  reach  out. Coalbed  methane  is  slightly                                                                    
     different, but  the area  where we  would see  it might                                                                    
     bump  in  - that's  one  potential  area  - is  on  the                                                                    
     spacing of wells.                                                                                                          
                                                                                                                                
CHAIR  OGAN   remembered  Jack  Chenoweth's   (Legislative  Legal                                                               
Services) testimony  that state  authority is already  implied in                                                               
the  statutes  and  constitution  to override  local  control  in                                                               
situations  like  this.  He  asked  if  directional  drilling  is                                                               
feasible with coalbed methane operations.                                                                                       
                                                                                                                                
MR. NORMAN  replied that Mr.  Chenoweth referred to  the doctrine                                                               
of preemption, which states if  a superior government entity - in                                                               
this case, the State  of Alaska - has a body of  law in place for                                                               
a purpose for the benefit of  all the citizens of the state, then                                                               
a lesser  (a more confined  geographic area)  governmental entity                                                               
generally should  not be  allowed to  interfere with  that larger                                                               
state purpose.                                                                                                                  
                                                                                                                                
     I think,  probably, there would  be a way to  work with                                                                    
     the borough to enact an  ordinance to insure that waste                                                                    
     would not take place.                                                                                                      
                                                                                                                                
     On  directional drilling,  of  course, on  conventional                                                                    
     [vertical]  wells in  production there  have been  some                                                                    
     truly  mind-boggling innovations  in that  area. In  so                                                                    
     far  as coalbed  methane  and  directional drilling  is                                                                    
     concerned, my understanding...is  that probably we will                                                                    
     see  those,  but  I  don't  think  we  have  quite  the                                                                    
     directional  drilling capability  now  in  the area  of                                                                    
     coalbed methane that we see,  for example, on the North                                                                    
     Slope, where  you can have these  very small footprints                                                                    
     that reach  out or  even in Cook  Inlet or  other areas                                                                    
     where you're  drilling for  deeper oil  or conventional                                                                    
     gas.                                                                                                                       
                                                                                                                                
MR. NORMAN asked Mr. Seamount,  with his experience, if he wanted                                                               
to comment on  the ability for directional  drilling with coalbed                                                               
methane development.                                                                                                            
                                                                                                                                
MR.  DAN  SEAMOUNT,  AOGCC Commissioner,  added  that  incredible                                                               
drilling patterns  have been  made from one  mother bore  in some                                                               
areas of the country. But, the  geology of the Mat-Su area has up                                                               
to 24  different coal  seams and he  doubted that  technology was                                                               
ready  for areas  like  that  at this  time.  He elaborated  that                                                               
economic  production has  already  happened  from a  conventional                                                               
type  well bore  before technological  experimentation has  taken                                                               
place.  Actually, very  economic  producing  wells have  happened                                                               
through  drilling  patterns  that  look  like  herring-bones  and                                                               
feathers.                                                                                                                       
                                                                                                                                
MR. NORMAN concluded  that the last section of  the proposed bill                                                               
of rights that would interface with  the powers and duties of the                                                               
commission is section 5, baseline studies.                                                                                      
                                                                                                                                
     Right  now,  we  don't  think it's  workable  and  some                                                                    
     suggestions we  would have is that  rather than putting                                                                    
     the obligation  on the state  to measure  the baseline,                                                                    
     that  that obligation  be placed  upon an  operator and                                                                    
     that would be just a part of the development project.                                                                      
                                                                                                                                
     Secondly,  we would  think that  that type  of baseline                                                                    
     information could be required  prior to commencement of                                                                    
     commercial  production,  because  a lot  of  the  wells                                                                    
     drilled  will  not  involve   any  type  of  commercial                                                                    
     production. So, to avoid a lot  of work that may not be                                                                    
     useful at  all, we would  recommend that it be  tied to                                                                    
     commencement  of  commercial  production and  that  the                                                                    
     sampling of wells  involve a radius of  about a quarter                                                                    
     mile around  each producing  well. There  are different                                                                    
     ways to  look at that, but  if you think in  terms of a                                                                    
     quarter  mile  radius  around a  well,  that's  a  huge                                                                    
     volume  of   potential  water  under  there   and  that                                                                    
     generally is a distance that  the AOGCC works with when                                                                    
     we  administer   the  Safe  Drinking  Water   Act,  for                                                                    
     example.                                                                                                                   
                                                                                                                                
     The  request  in  here  for  a  monitoring  program  on                                                                    
     methane seepage - we don't  really think it's practical                                                                    
     and  that  it  would  really  yield  a  lot  of  useful                                                                    
     information. That is, it tends  to be somewhat sporadic                                                                    
     and,  if you  try to  draw scientific  conclusions from                                                                    
     some sort of  a broad areawide sniffing  of methane, it                                                                    
     would not  be useful and  so, should this make  its way                                                                    
     in to law,  we would recommend more that  that focus be                                                                    
     upon  monitoring wells  and  sampling  for methane  and                                                                    
     that is the most practical way to do this.                                                                                 
                                                                                                                                
     The  proposal   here  in  section   5  talks   about  a                                                                    
     possibility  of  an   operation  causing  contamination                                                                    
     within  a  well and  an  allocation  of the  burden  of                                                                    
     proof.  I don't  know that  we have  an opinion  on the                                                                    
     burden  of proof.  I  think you  could  argue that  one                                                                    
     either   way.  An   operator  probably   would  be   in                                                                    
     possession of  the best information,  but on  the other                                                                    
     hand, a  shifting of the  burden of proof like  this is                                                                    
     counter,  generally,  to  what are  considered  general                                                                    
     principles of due process of  law. But in any event, it                                                                    
     raises a  question, then: would  a property  owner file                                                                    
     presumably in  the Superior Court  and, if so,  it does                                                                    
     raise a  specter of a  number of possible  filings. And                                                                    
     we  think right  now  that the  AOGCC,  because of  our                                                                    
     ongoing  responsibilities  to  monitor from  cradle  to                                                                    
     grave,  if  you will,  every  well  drilled, that  this                                                                    
     agency would  be in a  position to take  testimony from                                                                    
     citizens. And, after all, that's  our ultimate client -                                                                    
     the  citizens of  the State  of Alaska  - and  we could                                                                    
     serve   as  a   forum  to   receive  such   complaints,                                                                    
     adjudicate them. Then, there  would always be an appeal                                                                    
     right that  any private property owner  would have into                                                                    
     the  court system.  My thought  is that  that would  be                                                                    
     preferable  to allowing  these to  just be  thrown into                                                                    
     the   court  system   and  then   requiring  individual                                                                    
     property owners  to engage  their hydrologists  and the                                                                    
     company's.  You  might  over   a  period  of  time  get                                                                    
     inconsistent results. So, that  is just a suggestion if                                                                    
     section 5 were to find its  way in. I'll stop here, Mr.                                                                    
     Chairman, and  we can  answer questions  on any  of the                                                                    
     points that we've touched on.                                                                                              
                                                                                                                                
CHAIR OGAN said that section  5 requires a baseline water quality                                                               
and quantity  study on all  surface and  well waters that  may be                                                               
affected and  asked if that  means everything in the  lease would                                                               
be tested.                                                                                                                      
                                                                                                                                
MR. NORMAN replied  that he read the language to  be even broader                                                               
than that.                                                                                                                      
                                                                                                                                
     It's  not  necessarily  confined  to the  lease.  As  a                                                                    
     practical  matter,  this  zone  of  influence  -  we're                                                                    
     suggesting a quarter mile -  may or may not equate with                                                                    
     the lease.... It  would make a lot more sense  and be a                                                                    
     lot  more efficient  if  it were  tied  to a  producing                                                                    
     well. And  once there  was a  producing well,  prior to                                                                    
     production,  they would  have to  secure this  baseline                                                                    
     information  and make  that an  operator responsibility                                                                    
     as   a   condition   to  commencement   of   commercial                                                                    
     production. I  think we're set  up to monitor  that and                                                                    
     keep an  eye on it and  if the operations are  on state                                                                    
     lands,  certainly the  State Division  of  Oil and  Gas                                                                    
     could likewise do so.                                                                                                      
                                                                                                                                
CHAIR  OGAN  said  that  Article  8,  Section  9,  of  the  State                                                               
Constitution  currently has  a property  owner's  bill of  rights                                                               
providing protection for surface owners  in terms of trespass for                                                               
people  who are  unduly deprived  of  use of  their property  and                                                               
damages. He  asked what  would happen if  a coalbed  methane well                                                               
operation affects someone's well water in a negative way.                                                                       
                                                                                                                                
MR. NORMAN replied:                                                                                                             
                                                                                                                                
     We think the likelihood of  that occurring is not great                                                                    
     in the  experience in other  areas that  we're familiar                                                                    
     with. That  is an understandable bit  of anxiousness on                                                                    
     the  part  of  property  owners, so  I  don't  mean  to                                                                    
     disparage that,  but the reality  of it we  don't think                                                                    
     is high.  But, if an  operation did interfere  with the                                                                    
     well  and  damaged  that  well, then,  I  think  as  an                                                                    
     agency, we would have the  grid, the pattern of all the                                                                    
     wells and we could make a determination.                                                                                   
                                                                                                                                
     There  are a  couple  of  ways in  which  a well  could                                                                    
     theoretically be interfered with.  One of them would be                                                                    
     that there  might be some  methane that might  find its                                                                    
     way into  the water. Again,  we don't think  that would                                                                    
     occur  given the  constraints and  requirements imposed                                                                    
     on drilling. But if it  did, it's something that we are                                                                    
     certainly   able  to   watch   and  to   make  a   fair                                                                    
     determination  on.  I  think  we  could  do  it  in  an                                                                    
     efficient way and a fair way to Alaskans.                                                                                  
                                                                                                                                
     The second part  of that would be - let's  say - that a                                                                    
     well  flowed at  a certain  rate, so  many gallons  per                                                                    
     minute or per hour, and at  some point, it went dry, in                                                                    
     an  extreme  example. Then  the  question  is did  that                                                                    
     occur because of the operations  being conducted by the                                                                    
     coalbed methane operator or did  the well simply go dry                                                                    
     and it  might have gone  dry anyway. Again, I  think we                                                                    
     could monitor  that and if  it was necessary,  we could                                                                    
     provide a  forum; we  have all the  tools to  issue the                                                                    
     subpoenas, to  adjudicate fairly and to  enter an order                                                                    
     and then  there is  always the possibility  of judicial                                                                    
     oversight  on that.  To conclude  on  that, a  property                                                                    
     owner  potentially would  have a  claim for  damages if                                                                    
     somehow  their  well  were   interfered  with  in  that                                                                    
     unlikely event.                                                                                                            
                                                                                                                                
CHAIR OGAN pointed out that the presumption for water quality                                                                   
in the property owners' bill of rights is:                                                                                      
                                                                                                                                
     Within five  years after coalbed methane  operations on                                                                    
     or  around  his  or  her property,  there  shall  be  a                                                                    
     presumption that such  operations cause diminishment or                                                                    
     pollution and the coalbed  methane operator shall carry                                                                    
     the burden of proving otherwise.                                                                                           
                                                                                                                                
CHAIR OGAN called that a refutable presumption.                                                                                 
                                                                                                                                
     I  personally know  people whose  wells  have gone  dry                                                                    
     after  earthquakes and  personally  we  don't have  too                                                                    
     much of  a problem with  drought in Alaska,  although I                                                                    
     know my  well behavior has  changed over the  years. My                                                                    
     well doesn't produce as much water as it used to.                                                                          
                                                                                                                                
He thanked the AOGCC members for providing their time and                                                                       
expertise to the committee. Next he took testimony from the Mat-                                                                
Su Valley.                                                                                                                      
                                                                                                                                
MR. ROBERT HALL, Vice President, Houston Chamber of Commerce,                                                                   
said Houston has four test wells recently drilled by Evergreen                                                                  
Resources.  In  the  late  1990s, Alaska's  first  CBM  well  was                                                               
drilled there by an Australian company.                                                                                         
                                                                                                                                
     Overall the  experience has been  positive. It's  a new                                                                    
     industry  and  we  recognize the  need  for  additional                                                                    
     refined  state regulations.  We'd  like  to offer  some                                                                    
     comments  in  three  areas.  One has  to  do  with  the                                                                    
     private surface  owner property rights -  and they vary                                                                    
     from state to state.  Alaska doesn't have the strongest                                                                    
     surface  property owner  rights  statute. We  recognize                                                                    
     that what  you do on  private property might  have some                                                                    
     impact  on the  North Slope  and in  other ways  it's a                                                                    
     complicated issue. A  couple of ideas - one  is that if                                                                    
     the  property owner  and the  subsurface lessee  cannot                                                                    
     reach a  surface owner agreement,  the DNR  should only                                                                    
     in essence  institute one  for them  and allow  them to                                                                    
     post a bond when there's no reasonable alternative....                                                                     
                                                                                                                                
     Second,  if  they're  allowed  on  the  property,  they                                                                    
     should  be required  to minimize  the  impact and  only                                                                    
     impact   the  property   as  much   as  is   reasonably                                                                    
     necessary.                                                                                                                 
                                                                                                                                
     Third,  some reasonable  compensation for  loss of  use                                                                    
     and enjoyment.  An example  is in  some states  that if                                                                    
     you  have a  farm  and you  lose -  up  here they  grow                                                                    
     carrots  and potatoes  - and  if you  lose 30%  of your                                                                    
     acreage,  a couple  of  acres of  farmland  to the  CBM                                                                    
     thing,    you    should   receive    some    reasonable                                                                    
     compensation.                                                                                                              
                                                                                                                                
MR. HALL said there are a  lot of misconceptions about what local                                                               
governments can and cannot do and  that needs to be clarified. He                                                               
said the  original purpose of  the CBM  program in Alaska  was to                                                               
jump-start  the industry,  which  it has  done  in the  populated                                                               
areas of Southcentral, but it still  needs to happen in the rural                                                               
areas. He suggested offering local  governments the option to opt                                                               
in  or opt  out  of  the program  or  tailoring  it to  different                                                               
regions.                                                                                                                        
                                                                                                                                
CHAIR  OGAN said  he  was considering  bifurcating  the issue  by                                                               
geology and population to minimize  conflicts in highly populated                                                               
areas.  Energy  needs  in  rural Alaska  need  to  be  addressed;                                                               
there's just no  economy at all in the central  area. He admitted                                                               
there were  some unintended consequences to  the original program                                                               
and he didn't  want to react to those without  first thinking the                                                               
situation through. He  then asked Ms. Kristin Ryan  to comment on                                                               
the areas her department would have purview over.                                                                               
                                                                                                                                
MS.  KRISTIN RYAN,  Director, Division  of Environmental  Health,                                                               
Department of Environmental Conservation  (DEC), replied that she                                                               
hadn't  seen  the conceptual  amendment,  but  she could  comment                                                               
based on  testimony she has  heard today. She corrected  that the                                                               
federal legislation  that allows the protection  of surface water                                                               
is not  the Safe Drinking  Water Act;  it's the Clean  Water Act,                                                               
which  determines  what levels  of  certain  contaminates can  be                                                               
discharged to  the surface  water or into  the ground  that would                                                               
get into the ground water.                                                                                                      
                                                                                                                                
     That determination  is based on  the use of  the water.                                                                    
     Actually,  drinking   water  usage  is  not   the  most                                                                    
     stringent  standard -  actually, fish  habitat is.  So,                                                                    
     depending  on what  the water  body that  the discharge                                                                    
     could  potentially  get  into is  what  determines  the                                                                    
     standard   that   has  to   be   met   and  they   vary                                                                    
     significantly based on the use of the water body.                                                                          
                                                                                                                                
CHAIR OGAN noted  that someone stated produced  water is required                                                               
to be  reinjected and was  assuming that it wouldn't  be drinking                                                               
water or fish water quality.                                                                                                    
                                                                                                                                
MS. RYAN responded:                                                                                                             
                                                                                                                                
     The standards could not be  broken if the discharge was                                                                    
     to occur,  but what could  happen - they  wouldn't have                                                                    
     to reinject it necessarily.  They could treat the water                                                                    
     so that  it met the  minimum standards. The  problem is                                                                    
     that tends  to be  more expensive than  reinjecting it.                                                                    
     So, they choose to reinject, usually.                                                                                      
                                                                                                                                
CHAIR OGAN asked  if most of the produced water  in Cook Inlet is                                                               
discharged into the Inlet after it's treated.                                                                                   
                                                                                                                                
MS. RYAN replied that she  wasn't familiar with those leases, but                                                               
was focused on the CBM development.                                                                                             
                                                                                                                                
     The  concept that  the rocks  and  solid material  that                                                                    
     would  come up  in the  exploratory phase  as the  well                                                                    
     developed -  similar to our  clean water  standards. We                                                                    
     would  not allow  that material  to be  discharged onto                                                                    
     the  surface   if  it  violated  any   of  the  state's                                                                    
     standards for  that kind  of material.  Sometimes, that                                                                    
     rock or  debris can be  low enough in  any contaminants                                                                    
     or  heavy metals  that  they  may want  to  use it  for                                                                    
     beneficial use -  for example, building a  road or work                                                                    
     on  the pad.  So, DEC  is not  supportive of  a blanket                                                                    
     standard  that  would   eliminate  that  function.  The                                                                    
     standard  for  protection  should  be  what's  used  to                                                                    
     determine the disposal method of a material.                                                                               
                                                                                                                                
CHAIR OGAN  asked if  she supported testing  rocks coming  out of                                                               
the wells.                                                                                                                      
                                                                                                                                
MS. RYAN replied:                                                                                                               
                                                                                                                                
     We just  propose that there  be that  flexibility, that                                                                    
     based  on the  level  of  contamination determines  the                                                                    
     usage  of  the material.  The  landfill  out in  Mat-Su                                                                    
     Valley  has   been  approved  to  be   a  recipient  of                                                                    
     hazardous  waste.  So,  they   may  prefer  to  be  the                                                                    
     recipient of  the material because  they can use  it as                                                                    
     fill in their landfill, for example.                                                                                       
                                                                                                                                
CHAIR OGAN remembered that the  landfill received federal funding                                                               
to install  a liner  and recalled a  press release  justifying it                                                               
for coalbed methane waste disposal.                                                                                             
                                                                                                                                
MS. RYAN said that is correct.                                                                                                  
                                                                                                                                
MR.  LARRY  OSTROVSKY,  Assistant Attorney  General,  offered  to                                                               
address any particulars the committee would like.                                                                               
                                                                                                                                
CHAIR  OGAN  asked if  he  agreed  with  Mr. Chenoweth  that  the                                                               
Property  Owners'   Bill  Of  Rights   was  going  to   run  into                                                               
constitutional and statehood compact issues.                                                                                    
                                                                                                                                
MR. OSTROVSKY said he agreed with him.                                                                                          
                                                                                                                                
     Giving  surface   owners  a   veto  over  the   use  of                                                                    
     subsurface  mineral  estate  could be  construed  as  a                                                                    
     partial  alienation to  surface owners  of the  state's                                                                    
     ownership of  the mineral estate  and I think  it could                                                                    
     be  contrary  to  the requirements  of  (6)(i)  of  the                                                                    
     Statehood  Act  that  requires   the  state  to  retain                                                                    
     mineral  ownership  of lands  granted  to  the state  -                                                                    
     subject to leasing the  mineral rights for development.                                                                    
     I think it does raise a significant issue.                                                                                 
                                                                                                                                
CHAIR OGAN said he is looking  for a way to help his constituents                                                               
and  asked if  a constitutional  amendment giving  the state  the                                                               
ability  to dispose  of the  subsurface was  feasible and  if the                                                               
state could  sell subsurface  estate to a  surface owner  who was                                                               
worried  about  development or  a  surface  owner who  wanted  to                                                               
develop the subsurface.                                                                                                         
                                                                                                                                
MR. OSTROVSKY  replied that such  an amendment might  be possible                                                               
if (6)(i) of the Statehood Act was amended first.                                                                               
                                                                                                                                
SENATOR FRED DYSON  asked what issues are involved  if the state,                                                               
as owner of the subsurface,  declines to make available for lease                                                               
an area that promises to be rich in subsurface resources.                                                                       
                                                                                                                                
MR. OSTROVSKY replied:                                                                                                          
                                                                                                                                
     Not every acre  of state subsurface is  open for lease.                                                                    
     I mean,  the state  does areawide plans  and designates                                                                    
     certain  areas   as  critical  habitat   areas,  parks,                                                                    
     etc....                                                                                                                    
                                                                                                                                
SENATOR DYSON asked  if issues are involved if  a landowner takes                                                               
action  against  the  State  of  Alaska  to  force  DNR  to  make                                                               
available  some of  their subsurface  treasure  arguing that  not                                                               
putting it on the market denies him a beneficial use.                                                                           
                                                                                                                                
MR. OSTROVSKY replied:                                                                                                          
                                                                                                                                
    I   believe   the    Legislature   could,   under   the                                                                     
       constitution. Really, the Legislature manages the                                                                        
     disposition of the state resources.                                                                                        
                                                                                                                                
SENATOR DYSON asked  if citizens have no  recourse except through                                                               
the  Legislature  to  bring  an action  to  get  their  resources                                                               
developed if DNR does not make them available.                                                                                  
                                                                                                                                
MR. OSTROVSKY  replied that it  wouldn't be a viable  lawsuit. "I                                                               
think ultimately  it's a legislative  determination that  in some                                                               
cases its decisions are delegated to a state agency...."                                                                        
                                                                                                                                
SENATOR DYSON  asked if  citizens could bring  an action  if they                                                               
believe  the  DNR  has  opened land  that  is  inappropriate  for                                                               
critical habitat  or that  there is a  detrimental effect  to the                                                               
surface owners.                                                                                                                 
                                                                                                                                
MR.  OSTROVSKY replied  that issue  could  have standing.  People                                                               
challenge DNR decisions all the  time regarding oil and gas lease                                                               
sales, mining permits, etc.                                                                                                     
                                                                                                                                
TAPE 04-32, SIDE A                                                                                                            
                                                                                                                                
SENATOR DYSON asked  if someone could bring action  if he thought                                                               
DNR inappropriately listed an areawide lease sale.                                                                              
                                                                                                                                
MR. OSTROVSKY replied  that he did not  think DNR inappropriately                                                               
listed  property.   Theoretically  a   person  could   take  that                                                               
position, but he would have little chance of prevailing.                                                                        
                                                                                                                                
CHAIR  OGAN  asked if  the  state  enters  into  a lease  with  a                                                               
producer  and  the  state  buys  back  that  lease,  "Is  that  a                                                               
violation of the contract?"                                                                                                     
                                                                                                                                
MR.  OSTROVSKY  replied that  would  be  condemnation or  use  of                                                               
eminent domain.                                                                                                                 
                                                                                                                                
     Right now, I don't  think DNR has legislative authority                                                                    
     to  use eminent  domain  power.  That's something  they                                                                    
     would have  to be given  by statute and, of  course, we                                                                    
     haven't had a situation quite  like this in Alaska, but                                                                    
     normally, eminent domain, the  state would buy property                                                                    
     back  at fair  market  value -  what  a willing  seller                                                                    
     would sell  for and what  a willing buyer would  buy it                                                                    
     for.  And, of  course, there  would likely  be disputes                                                                    
     over what that value is.                                                                                                   
                                                                                                                                
CHAIR  OGAN asked  if  some  of the  disputes  could  be loss  of                                                               
potential income from resources.                                                                                                
                                                                                                                                
MR. OSTROVSKY  replied that  would depend to  some degree  on the                                                               
work that  was done on  a particular  lease. For example,  if the                                                               
company  had obtained  a  lease and  done  exploratory work  that                                                               
showed there  was value  to that lease,  using eminent  domain, a                                                               
willing buyer  would probably  pay a premium  for that  lease. On                                                               
the other hand, it could be that  the work has shown there was no                                                               
value in the lease. It could really go in either direction.                                                                     
                                                                                                                                
CHAIR OGAN  assumed that value  would be pretty subjective  if no                                                               
exploration  had  been  done.  He   thanked  everyone  for  their                                                               
patience  and testimony  on this  issue. There  being no  further                                                               
business to come  before the committee, he  adjourned the meeting                                                               
at 5:22 p.m.                                                                                                                    

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