Legislature(2001 - 2002)

03/18/2002 03:38 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           HB 307-OIL/GAS EXPLORATION INCENTIVE CREDIT                                                                      
                                                                                                                              
CHAIRMAN TORGERSON announced HB 307 to be up for consideration.                                                                 
                                                                                                                                
4:20 p.m.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  FATE,  sponsor of  HB  307,  said it  extends  the                                                              
sunset provision  of exploration incentive  from 2004 to  2007 and                                                              
expands  the incentive  to  other basins  outside  of Cook  Inlet,                                                              
which  the  original  bill  provided.  One reason  this  bill  was                                                              
brought  forward  is because  there  is  renewed interest  in  the                                                              
Nenana Basin,  which has  now been identified  as a basin  of high                                                              
potential  for  the exploration  of  gas.  He explained  that  the                                                              
geological data  goes to the  Division of Oil  and Gas to  use for                                                              
future programs, either leasing or licensing.                                                                                   
                                                                                                                                
CHAIRMAN TORGERSON asked where the expanding language was.                                                                      
                                                                                                                                
REPRESENTATIVE  FATE  explained  that AS  41.09.010  defines  Cook                                                              
Inlet specifically.  This bill has no definition as  to where this                                                              
takes place, meaning it could be throughout the entire state.                                                                   
                                                                                                                                
MR. MARK MYERS,  Director, Division of Oil and Gas,  DNR, said DNR                                                              
has taken  a neutral  position on  this bill.  The purpose  of the                                                              
bill was  to allow  the state  to acquire  information or  data in                                                              
areas where it had very little data.  It allows the state to pay a                                                              
portion of that data to share risk.  The concept was based on what                                                              
used to be called  a cost well where companies would  go out in an                                                              
area prior to a lease sale, drill  a well strictly to get geologic                                                              
information  (not  necessarily where  they  think  oil would  be).                                                              
Companies would go together and share  the cost. In 1994 that kind                                                              
of  activity wasn't  occurring  very  often, particularly  in  the                                                              
interior basins.                                                                                                                
                                                                                                                                
     I think  the thought  process behind  the original  bill                                                                   
     was to have the state have incentive  to pay for part of                                                                   
     the cost should  a third party go out there  and want to                                                                   
     drill  a well  and  was  extended also  for  geophysical                                                                   
     data, particularly  seismic data. The credit  was from a                                                                   
     pot of  money of $30 million  for the maximum  extent of                                                                   
     the program up to $5 million  per project. That project,                                                                   
     again,  would have  presumably  to consist  of wells  or                                                                   
     seismic data. For  seismic data it was line  miles or so                                                                   
     many  dollars per  square mile.  The  program has  never                                                                   
     been utilized.  There have  been two applications  under                                                                   
     the program.  One was for  geochemical data  or sampling                                                                   
     of  surface rock  data to  try  to figure  out what  the                                                                   
     source potential  underneath the  area was. That  was on                                                                   
     the North Slope in an area where  the state had a lot of                                                                   
     seismic  data  just  south   of  Kuparuk.  The  director                                                                   
     determined  at  the  time that  the  information  really                                                                   
     wasn't that critical  to the state since we  had what we                                                                   
     thought was  superior seismic data  in the area.  So, we                                                                   
     did not grant that application.                                                                                            
                                                                                                                                
     The second  case was in  the National Petroleum  Reserve                                                                   
     Alaska where  the state does  not get the  seismic data.                                                                   
     In  that  case the  case  granted  18%  of the  cost  of                                                                   
     seismics  to   Anadarko.  Anadarko,  then,   decided  to                                                                   
     decline  accepting that because  of the state's  ability                                                                   
     under this  program to show  that it had third  parties.                                                                   
     So, they were convinced the  confidentiality of the data                                                                   
     for  the upcoming  lease  sales  was so  important  they                                                                   
     didn't  want to  use  the credit.  So,  twice it's  been                                                                   
     applied  for. Once  it's been granted.  It's never  been                                                                   
     used.                                                                                                                      
                                                                                                                                
     Again,  primarily the  data could be  from state  lands,                                                                   
     but  regulations require  it to be  from unleased  state                                                                   
     acreage. So, if you own a lease  in the area and it's on                                                                   
     state  land and  you want to  apply for  it, you're  not                                                                   
     eligible to receive this credit.                                                                                           
                                                                                                                                
     The  second  area where  it's  on private  or  federally                                                                   
     owned lands,  they can keep 25%. That credit  is against                                                                   
     either royalties,  taxes, bonus bids for rentals  and is                                                                   
     transferable. So,  it's real dollars for the  credit. It                                                                   
     doesn't have to be that company's  credit. They can sell                                                                   
     to a third party.                                                                                                          
                                                                                                                                
     So, again,  just to summarize.  The program  is designed                                                                   
     to encourage  acquisition of  data and it's  stated that                                                                   
     the state either would receive,  as in the case of wells                                                                   
     potentially  drilled on Native  lands and certainly  the                                                                   
     seismic  data of  wells on  private  or privately  owned                                                                   
     land, the state does not receive that data.                                                                                
                                                                                                                                
     The  second part  of it,  the state  receives the  data.                                                                   
     There are  some cases where  it encourages a  lease sale                                                                   
     or exploration  in an  area or  competition in an  area,                                                                   
     but the  state wants  to have the  ability to show  that                                                                   
     confidential  data.  On  wells that  data  is  generally                                                                   
     limited  to  25  months  when   the  confidentiality  is                                                                   
     released, but there is extended  confidentiality that in                                                                   
     some cases  can extend that confidentiality  beyond that                                                                   
     primary term.                                                                                                              
                                                                                                                                
     On  seismic data  that  is shot  on  private lands,  the                                                                   
     state is not entitled to give  that data and, of course,                                                                   
     couldn't show that data under  normal circumstances. So,                                                                   
     to   summarize  again,   there  are   some  very   clear                                                                   
     advantages in  certain conditions for the state  I think                                                                   
     to  contribute to  the cost  of exploration  activities.                                                                   
     The  other important  element  is discretionary  by  the                                                                   
     Commissioner  of Natural  Resources'  decision prior  to                                                                   
     the drilling  of that well or shooting the  seismic, the                                                                   
     commissioner can determine the  value of the information                                                                   
     to  the state  and offer  an appropriate  amount not  to                                                                   
     exceed  $5 million,  then,  of the  50%  on state  owned                                                                   
     lands and  25% on privately  owned lands. Thank  you Mr.                                                                   
     Chairman.                                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON asked Mr. MYERS to stay on line while he                                                                     
talked to Mr. Dodson who was waiting to testify.                                                                                
                                                                                                                                
MR. JIM DODSON, Andex Resources,  L.L.C., said Andex would like to                                                              
have the  exploration incentive  credits  extended to seismic  and                                                              
drilling. If they  were available, they might shoot  a much larger                                                              
program as  it allows  their dollars  to go  further and  get more                                                              
data. "It eases  the burden, those high risk  exploratory dollars,                                                              
if the  state could  grant some exploratory  credits to  basically                                                              
help us to push the envelope…"                                                                                                  
                                                                                                                                
He supported extending the bill for  three years to help encourage                                                              
exploration  in areas that  are not  explored or underexplored  at                                                              
this point.                                                                                                                     
                                                                                                                                
CHAIRMAN TORGERSON asked if Andex  has land under exploration that                                                              
is not state land.                                                                                                              
                                                                                                                                
MR. DODSON answered yes, it has lands under option 2.                                                                           
                                                                                                                                
CHAIRMAN TORGERSON informed him that  no credits are available for                                                              
leases on state land.                                                                                                           
                                                                                                                                
MR. DODSON replied  that Andex is seeking an  exploration license,                                                              
not a lease on state lands.                                                                                                     
                                                                                                                                
CHAIRMAN  TORGERSON  asked  if  Andex  would  participate  in  the                                                              
shallow gas leasing sale.                                                                                                       
                                                                                                                                
MR. DODSON  replied that it's not  shallow gas leasing.  Andex has                                                              
applied under  the exploration  license program  for an  all depth                                                              
license in the Nenana Basin.                                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON  asked if it's  their interpretation  that they                                                              
are eligible because it's not a lease.                                                                                          
                                                                                                                                
MR.  DODSON  replied  that  is correct.  He  said  that  licensing                                                              
usually   takes  place   in  under-explored   areas  and   so  the                                                              
exploration incentive  credit would be more applicable  there than                                                              
in an area like Cook Inlet where leasing takes place.                                                                           
                                                                                                                                
SENATOR HALFORD  said the existing  statute has been on  the books                                                              
for seven  or eight  years and no  one has used  it. He  asked Mr.                                                              
Dodson if Andex  Resources intends to make application  within the                                                              
next year.                                                                                                                      
                                                                                                                                
MR.  DODSON answered,  "Absolutely.  We  have sent  a  preliminary                                                              
letter  to the  Division of  Oil  and Gas,  Department of  Natural                                                              
Resources,  outlining  what our  plans  are....  We'd like  to  be                                                              
shooting seismic data in winter '03 - '04 in the Nenana Basin."                                                                 
                                                                                                                                
TAPE 02-10, SIDE B                                                                                                            
                                                                                                                              
CHAIRMAN TORGERSON asked  Mr. Myers to brief the  committee on the                                                              
number  of  potential  companies  that  would  qualify  under  the                                                              
exploration licensing  part of this  instead of the  leasing part.                                                              
He asked if shallow gas leasing would get an exemption as well.                                                                 
                                                                                                                                
MR. MYERS replied  that there are four exploration  licenses - one                                                              
is issued at  Copper River where Forrest is the  primary operator.                                                              
They might apply if they want to  go forward with seismic data. In                                                              
addition, there  are two companies  in the Susitna Basin  that are                                                              
in the application process for about  500,000 acres each. DNR also                                                              
has the  Andex proposal for an  exploration license in  the Nenana                                                              
Basin. On private lands, there's  nothing to say that an applicant                                                              
couldn't apply for  this program on any Native  or federally owned                                                              
land. It's not geographically restricted.                                                                                       
                                                                                                                                
Since  the shallow  gas lease  program  is noncompetitive  because                                                              
companies buy  leases, he  didn't think a  company would  apply to                                                              
explore  since another  company could  come in  and file a  lease.                                                              
Shallow gas or  coal bed methane wells are relatively  shallow and                                                              
cheap  to drill.  He  pointed out,  "They're  quicker to  actually                                                              
drill than an exploration well with the intent of production."                                                                  
                                                                                                                                
     Realistically  with  the shallow  gas  leasing  program,                                                                   
     there  is  no way  the  program  could be  used  because                                                                   
     basically you  acquire that non-competitive  lease first                                                                   
     and then  go ahead and drill  your well. If  not, you're                                                                   
     proving up potentially someone else's play.                                                                                
                                                                                                                                
MR. MYERS  thought that  many companies could  use this  bill, but                                                              
the state would be getting the information  anyway. He thought the                                                              
intent in  the end was  to get enough  interest for  a competitive                                                              
sale  when legislation  was initially  passed. The  idea was  that                                                              
exploration would be done and the  state would follow through with                                                              
a conventional lease sale. The commissioner  would have to look at                                                              
the value  of the  information in  licensed areas  to promote  the                                                              
development of oil and gas.                                                                                                     
                                                                                                                                
CHAIRMAN TORGERSON asked if there  had been any application for an                                                              
EIC under the exploration license program.                                                                                      
                                                                                                                                
MR. MYERS said  they had only granted  one and are in  the process                                                              
of granting three, "So, it's a relatively new program."                                                                         
                                                                                                                                
He explained under  the licensing program they are  required to do                                                              
a work  commitment - so  many dollars  for a work commitment.  The                                                              
work  commitment doesn't  necessarily  include  drilling wells  or                                                              
shooting seismic.  He remarked,   "It's reasonable to say  at this                                                              
point in  time the program  is early enough  in its life  that you                                                              
would  not  expect  to have  many  applications  under  a  license                                                              
scenario."                                                                                                                      
                                                                                                                                
4:42 p.m.                                                                                                                       
                                                                                                                                
CHAIRMAN TORGERSON said he was trying  to understand why the state                                                              
would  want to give  this credit  on state  land.  He said he  can                                                              
understand it for off state land  and the purpose for the state to                                                              
get data but  he didn't understand why they would  give the credit                                                              
on  state   land  just   because  it   has  a  different   license                                                              
arrangement. He stated, "It seems like we're going backwards."                                                                  
                                                                                                                                
MR. MYERS responded:                                                                                                            
                                                                                                                                
     I think  you bring up a  good point. Again,  the program                                                                   
     was intended so the state could  acquire the information                                                                   
     under  a license agreement  that it's  going to get  the                                                                   
     information   anyway.  We're  not   going  to   get  the                                                                   
     information  any sooner  if a  well or  seismic data  is                                                                   
     shot on  state land. What we  do do is give  the ability                                                                   
     to show  that well data  before it's publicly  released,                                                                   
     which is typically  25 months to show the  seismic data.                                                                   
     The main  reasons you  would want to  do that is  to get                                                                   
     competition  in an area.  So if  there is a  competitive                                                                   
     lease sale in the area, you  would bring more bidders to                                                                   
     the  table  or  get  more  parties   interested  in  the                                                                   
     exploration.                                                                                                               
                                                                                                                                
     The  question  is what  is  the  advantage in  terms  of                                                                   
     showing that  data earlier on. As Mr. Dodson  points out                                                                   
     the other  advantage is to make the  exploration dollars                                                                   
     go further. I  think in some ways that's  not the intent                                                                   
     of  the original  legislation,  however.  That puts  the                                                                   
     commissioner  in the position  where he's going  to have                                                                   
     to  weigh all those  factors in  determining whether  or                                                                   
     not they grant  an exploration incentive credit  as well                                                                   
     as your determination of intent with the legislature.                                                                      
                                                                                                                                
CHAIRMAN TORGERSON  said there  was no doubt  that they  needed to                                                              
work on that.  He asked if the  maximum credit was $5  million per                                                              
well.                                                                                                                           
                                                                                                                                
MR.  MYERS replied  that the  credit  is $5  million per  eligible                                                              
project  and "project"  is not  defined. It  could be  wells or  a                                                              
series of wells and it could certainly be seismic data.                                                                         
                                                                                                                                
CHAIRMAN  TORGERSON asked  if that  was  offset against  corporate                                                              
taxes.                                                                                                                          
                                                                                                                                
MR.  MYERS replied,  "Taxes,  royalties,  rentals  or bonuses  and                                                              
basically severance tax."                                                                                                       
                                                                                                                                
CHAIRMAN TORGERSON asked if that could be carried forward.                                                                      
                                                                                                                                
MR. MYERS replied that it can.                                                                                                  
                                                                                                                                
     In reality  what we've  found - this  is the second  EIC                                                                   
     program.  There was  another program  that involved  the                                                                   
     competitive  leasing instead of  the lease term  that an                                                                   
     EIC  of so  many  dollars per  foot  is granted  for  an                                                                   
     exploration  well. What we've  found with that  program,                                                                   
     companies either used it immediately  or they sold it to                                                                   
     a third party  who used it immediately, the  North Slope                                                                   
     production typically. I believe  the state granted about                                                                   
     $54  million  or  so  in  these  credits  in  the  other                                                                   
     program.                                                                                                                   
                                                                                                                                
CHAIRMAN TORGERSON asked if he had a position on whether they                                                                   
should extend this to land that the state already owns.                                                                         
                                                                                                                                
MR. MYERS replied that they are neutral on it.                                                                                  
                                                                                                                                
     Again, I think  there are cases where you  look at other                                                                   
     basins, areas  not under license  where the  state wants                                                                   
     to get  that information acquired.  The only way  to get                                                                   
     that information  would be  to contribute  significantly                                                                   
     to it.  This does provide  a vehicle under  the original                                                                   
     scenarios  that were envisioned.  I think that  original                                                                   
     intent is  good, certainly the  ability to do  that. But                                                                   
     it hasn't been  used. We certainly want to do  it. In an                                                                   
     area where it might for example  is the NPRA where there                                                                   
     may be  critical seismic  data that  because we have  no                                                                   
     random understanding  of whether that be  [indisc.] that                                                                   
     the state  badly needs to see  that seismic data  and is                                                                   
     willing to pay  for it. Although companies  are under no                                                                   
     condition to let us see it.                                                                                                
                                                                                                                                
MR. MYERS said there may be cases on the North Slope where it                                                                   
could be used, for instance a well being drilled on Native land                                                                 
with adjoining state land in an upcoming lease sale.                                                                            
                                                                                                                                
     One  of Phillips'  wells this  winter,  for example,  in                                                                   
     Heavenly  is  being  drilled on  Arctic  Slope  Regional                                                                   
     Corporation  land,  which adjoins  state  land. I'm  not                                                                   
     saying we  would, but we might  want to offer  credit in                                                                   
     those  kinds  of  circumstances.   The  other  kinds  of                                                                   
     circumstances are  very frontier basins like  Kolitna or                                                                   
     some area  where there isn't  sufficient data  where the                                                                   
     state may  say if  a company is  interested in going  in                                                                   
     and  acquiring   baseline  data,  we're   interested  in                                                                   
     contributing  to that  cause,  because we  want to  have                                                                   
     competitive sales and want to  see more activity in that                                                                   
     area.                                                                                                                      
                                                                                                                                
CHAIRMAN TORGERSON asked if Mr. Dodson's company had submitted a                                                                
request to them already.                                                                                                        
                                                                                                                                
MR. MYERS  replied that  they had  submitted an informal  request,                                                              
but the  department needed very  specific information  because the                                                              
commissioner has to consider the  value of that information to the                                                              
state and you  can't unless you actually see the  locations of the                                                              
wells, what  they've drilled, what  it would provide or  where the                                                              
seismic series  are. They can't in  good faith do that  until they                                                              
have a license issued..."                                                                                                       
                                                                                                                                
He  said that  Mr. Dodson  is  right that  the  bill might  expire                                                              
before  they can  use  it because  of the  timing  of issuing  the                                                              
license and drilling and operational  permits. They are optimistic                                                              
to get  things done by  2004, but there  are cases where  he might                                                              
not be willing to drill at that point.                                                                                          
                                                                                                                                
     A formal application will have  to have more detail than                                                                   
     his preliminary  letter, but  he certainly has  explored                                                                   
     with us  the possibility. I  will say one of  the things                                                                   
     we are concerned  about in the license areas,  since the                                                                   
     license  is built  on a  dollar commitment  that is  the                                                                   
     part of the  license you will buy and the  winner is the                                                                   
     one  that  puts in  the  largest dollar  commitment  for                                                                   
     work.  We want  those dollars  in  the EIC  case to  not                                                                   
     offset  those  original  dollars that  remain  from  the                                                                   
     commitment or the  variable part of a bid.  So, it would                                                                   
     be  exploration work  in addition  to, say,  a $2 to  $3                                                                   
     million commitment to get the  license. We don't want to                                                                   
     double  dip on  the same  program. If  it is  used in  a                                                                   
     license   scenario  and   the   commissioner  deems   it                                                                   
     appropriate,  we would want to  see it as  additive, not                                                                   
     layered  on as  an additional  incentive on  top of  the                                                                   
     exploration license, which is already…                                                                                     
                                                                                                                                
CHAIRMAN  TORGERSON said Mr.  Myers hit  on the  two issues  he is                                                              
concerned with. The first one is  that it's already state land and                                                              
the state  has never given  credit to get  data back off  of state                                                              
land. He  had heartburn  with that. He  said, "Even though  by the                                                              
letter of the law we may be able  to do it, I'm not sure that it's                                                              
good  policy to  start  setting up."  The other  issue  is if  the                                                              
incentive  bills  working their  way  through the  legislature  do                                                              
pass, the state would end up paying  folks to drill. He explained,                                                              
"I'd like a better handle on all  of the things that we may end up                                                              
passing on these  incentive bills including what's  already on the                                                              
books."                                                                                                                         
                                                                                                                                
4:45 p.m.                                                                                                                       
                                                                                                                                
SENATOR HALFORD  said the  fiscal note  in 2004  says zero  to $30                                                              
million, but  existing law  goes into 2004.  He wanted to  know if                                                              
the fiscal note is accurate.                                                                                                    
                                                                                                                                
MR. MYERS explained that DNR made  it that way because $30 million                                                              
was the maximum  amount that could  be used. It could be  an error                                                              
on his part if  it's before July 1, 2004. The  bill doesn't change                                                              
the total amount of credits for the program.                                                                                    
                                                                                                                                
SENATOR HALFORD  said he  wanted to see  exactly how  this program                                                              
would stack with any other incentive program in the state.                                                                      
                                                                                                                                
MR.  MYERS  replied   that  he  would  start   by  explaining  the                                                              
exploration license itself:                                                                                                     
                                                                                                                                
     An exploration  license - basically  the state  does not                                                                   
     go into  a lease mode until  the company is ready  to or                                                                   
     until  the license  expires. So,  a typical  exploration                                                                   
     license  would  be a  5 to  10  year period.  The  state                                                                   
     foregoes what would be a competitive  bonus bid it would                                                                   
     get for the acreage. The license  could be up to 500,000                                                                   
     acres. It also foregoes a period  of license the typical                                                                   
     rentals the state would receive,  which in the case of a                                                                   
     500,000  acre  license,  the   max,  and  the  companies                                                                   
     typically go for that or near  that number, and you went                                                                   
     ahead and granted  for a seven year period,  it would be                                                                   
     worth about  $10 million differential than  if the state                                                                   
     had gotten a minimum bonus bid.                                                                                            
                                                                                                                                
     It's substantial  value to the party. The  party then at                                                                   
     the end of the license has committed  a work permit that                                                                   
     is so  many dollars.  Typically, we're  seeing $2  to $3                                                                   
     million  for a  work permit  for a  license. That's  not                                                                   
     money the  state receives. That's money that's  spent by                                                                   
     the company on legitimate exploration activity.                                                                            
                                                                                                                                
SENATOR HALFORD asked if that was covered in this incentive.                                                                    
                                                                                                                                
MR. MYERS  replied that  wasn't covered in  this incentive.  It is                                                              
built into the exploration licensing,  "So, this incentive has the                                                              
potential, if  the state were to  grant it in a licensed  area, of                                                              
overlaying on top of that."                                                                                                     
                                                                                                                                
He explained if six wells, an extreme  case, were drilled and each                                                              
determined  a project  in  a given  license  area,  they would  be                                                              
granted the maximum  of $10 million. The state could  give in that                                                              
licensed area $30 million worth of credits.                                                                                     
                                                                                                                                
     In theory,  those $30 million  could offset some  of the                                                                   
     costs that  were guaranteed in the exploration  license,                                                                   
     because   remember,  they   are   guaranteeing  a   work                                                                   
     commitment.  There   is  the  potential  for   these  to                                                                   
     overlay, but again, this program  is discretionary and I                                                                   
     don't think the commissioner  would take a position that                                                                   
     would  allow  there  to  be  that  overlay.  But  it  is                                                                   
     theoretically  possible that  the dollars  spent in  the                                                                   
     exploration license  could be offset - at  least half of                                                                   
     those dollars offset - by the EIC.                                                                                         
                                                                                                                                
     Other incentives, then, you  could do royalty reduction,                                                                   
     which  of course,  if they  were  to continue  on for  a                                                                   
     successful exploration  program and determine  that they                                                                   
     couldn't  commercially develop  at  the current  royalty                                                                   
     rate, the state could grant  a royalty reduction down to                                                                   
     about 3% under current law.                                                                                                
                                                                                                                                
     The   severance  tax   is  based   of   course  on   the                                                                   
     productivity  factor for gas  fields and low  production                                                                   
     or for  oil -  low production.  That could be  severance                                                                   
     tax  as  low   as  zero,  but  it's  probably   in  most                                                                   
     commercial cases around 5 to  7% severance tax on top of                                                                   
     that.  In addition,  if the  licensed area  were in  the                                                                   
     Cook Inlet area,  you could be eligible for  a discovery                                                                   
     royalty, which would give you  a royalty rate of 5% from                                                                   
     production for  the first 10 years from the  date of the                                                                   
     discovery.  So, those are  the main  overlays that  I am                                                                   
     aware of in our programs.                                                                                                  
                                                                                                                                
He didn't have that much concern over this particular incentive                                                                 
credit, because of the discretionary nature.                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON asked if there is a cap on how many acres one                                                                
could get under the exploration license.                                                                                        
                                                                                                                                
MR. MYERS replied that 500,000 acres is the cap per license.                                                                    
                                                                                                                                
CHAIRMAN TORGERSON asked if a company could hold more than one                                                                  
license.                                                                                                                        
                                                                                                                                
MR. MYERS replied yes; a company could have up to 2 million                                                                     
acres.                                                                                                                          
                                                                                                                                
CHAIRMAN TORGERSON asked what the rental fee per acre is under                                                                  
this bill.                                                                                                                      
                                                                                                                                
MR. MYERS replied that there is no rental fee. He explained:                                                                    
                                                                                                                                
     There is  a $1 per  acre initial application  fee. There                                                                   
     is no other  fee other than if they convert  if they are                                                                   
     successful  at the end  of the  license period and  they                                                                   
     want to convert to leases. They  would then convert to a                                                                   
     standard 12.5% lease and then they would pay the normal                                                                    
       rentals, but the rentals will start at $3 per acre,                                                                      
     rather than $1.                                                                                                            
                                                                                                                                
CHAIRMAN  TORGERSON  asked if  they  can  only explore  from  this                                                              
license and not produce.                                                                                                        
                                                                                                                                
MR. MYERS  said they  could theoretically,  but they wouldn't  get                                                              
the royalties for  it. But from a practical standpoint  to get the                                                              
production credit, they would have  to convert to a lease prior to                                                              
commercial production.                                                                                                          
                                                                                                                                
CHAIRMAN  TORGERSON   asked  what  will  happen  if   they  go  to                                                              
production under the exploration license.                                                                                       
                                                                                                                                
MR. MYERS explained,  "They don't have a right to  the oil and gas                                                              
under a license until they convert it to a lease."                                                                              
                                                                                                                                
SENATOR TAYLOR  said he didn't mention  the ELF and asked  if that                                                              
only applies to oil.                                                                                                            
                                                                                                                                
CHAIRMAN TORGERSON replied that it applies to gas, also.                                                                        
                                                                                                                                
MR. MYERS  explained that  it depends on  the rate of  production,                                                              
but they  would expect in a  commercial scenario, the  wells would                                                              
have to have high  enough rates in this basin to  be commercial in                                                              
the  Fairbanks market.  It would  probably  pay between  5 to  10%                                                              
severance tax.                                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON asked if it was 10% maximum on gas.                                                                          
                                                                                                                                
MR. MYERS said that was right.                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON added that the  state gives the first 3,000 MCF                                                              
for free,  so, it's effectively .8%.  He said they needed  time to                                                              
figure out  how all  this was stacking  on top  of each  other. He                                                              
asked Mr. Myers if he could put a  flow chart together of how this                                                              
works.                                                                                                                          
                                                                                                                                
4:55 p.m.                                                                                                                       
                                                                                                                                
MR. DODSON  said it  was important to  point out that  exploration                                                              
licenses  can only  be  applied for  areas  outside  of the  known                                                              
producing regions in Alaska.                                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON said:                                                                                                        
                                                                                                                                
     My biggest heartburn is that  this program was set up to                                                                   
     pay for  data off of state  land. I'm not too  sure this                                                                   
     isn't oversight  that we don't  get the data as  part of                                                                   
     the license  agreement or the  lease or something.  It's                                                                   
     almost mixing  oranges and apples. It's like  a loophole                                                                   
     in the law  that lets you take credit for us  to get the                                                                   
     data.  If you  want  to change  the  scope  of the  law,                                                                   
     that's a  different subject  entirely than what  we have                                                                   
     before  us. It seems  counterproductive  for us pay  for                                                                   
     our own data off our own land.                                                                                             
                                                                                                                                
REPRESENTATIVE  FATE asked  if it  costs us  to get  data off  our                                                              
state land and if we wouldn't be able to get it otherwise.                                                                      
                                                                                                                                
CHAIRMAN TORGERSON  said that  right now we  get the data  off the                                                              
state land. "This  program was initially credited to  get data off                                                              
of non state land."                                                                                                             
                                                                                                                                
MR. MYERS  added, "There are cases  where the state, I  think, and                                                              
the intent when  this bill was created, [indisc.]  to pay for data                                                              
on leased state  land where it could show that  data physically to                                                              
third parties."                                                                                                                 
                                                                                                                                
He said they also  use that data in managing state  lands. If they                                                              
are trying  to evaluate  that land  for its  potential on  a lease                                                              
sale,  for example,  it might  be valuable  to show  that data  to                                                              
other  companies  and  potentially  other agencies.  He  said  the                                                              
original  intent of  this  program  was not  to  overlap with  the                                                              
normal  areas  like  Cook  Inlet. He  said  getting  the  baseline                                                              
information  in the unleased  areas would  be important  enough to                                                              
the state that it  might want to contribute part  of the cost. The                                                              
state can  get the data,  but it can't  show it to  third parties.                                                              
They might want  to promote a lease sale and it  would help to get                                                              
the data out there right away.                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON  said the  data would  eventually be  ours, but                                                              
this is just an accelerated time schedule.                                                                                      
                                                                                                                                
MR. MYERS replied that the state  gets their data at the same time                                                              
either way, but  it allows the state to show that  data to a third                                                              
party prior to its being released.                                                                                              
                                                                                                                                
     In all  cases on wells drilled  on state land  there's a                                                                   
     25  month  period  of  confidentiality,   which  can  be                                                                   
     extended  under  certain  confidentiality  circumstances                                                                   
     under  statute and  regulation…For seismic  data we  get                                                                   
     the right  again by permit to  get the data.  That would                                                                   
     not  be accelerated,  but we  would be  allowed to  show                                                                   
     that  data  to a  third  party.  Seismic data  is  never                                                                   
     released by DNR to third parties.                                                                                          
                                                                                                                                
SENATOR HALFORD  said, "But  the data we're  talking about  is not                                                              
fully interpreted. That still is proprietary to the industry."                                                                  
                                                                                                                                
MR. MYERS replied the data would  be the geophysical data from the                                                              
well. It  really depends on  what the state  is paying for  in the                                                              
data.  The  state  is  not  going   to  give  a  third  party  its                                                              
interpretation of the data, but it could if it wanted to.                                                                       
                                                                                                                                
He clarified  that an EIC doesn't  allow the state to  release the                                                              
data; it  allows them  to show the  data. "So  a company  can come                                                              
into DNR and look  physically at the data, but they  can't take it                                                              
with them."                                                                                                                     
                                                                                                                                
There were  no further comments  and CHAIRMAN TORGERSON  adjourned                                                              
the meeting at 5:06 p.m.                                                                                                        

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