Legislature(2005 - 2006)BUTROVICH 205

05/04/2005 03:30 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 71 OIL& GAS EXPLORATION CREDIT & LEASE TERMS TELECONFERENCED
Heard & Held
+ HB 26 SHORT-TERM COM FISHING CREWMEMBER LICENSE TELECONFERENCED
Heard & Held
+ HB 286 VALUE OF ROYALTY ON GAS PRODUCTION TELECONFERENCED
Moved SCS HB 286(RES) Out of Committee
   CSHB  71(FIN)am-OIL& GAS EXPLORATION CREDIT & LEASE TERMS                                                                
                                                                                                                                
CHAIR  WAGONER  announced   CSHB  71  (FIN)  am  to   be  up  for                                                               
consideration  and that  he  had  asked Ms.  Robson  in the  last                                                               
meeting to provide more information for the record.                                                                             
                                                                                                                                
BONNIE  ROBSON,  oil  and  gas attorney  and  consultant  to  the                                                               
Legislative Budget  and Audit Committee  on gas  pipeline issues,                                                               
said she wanted  to cover six different points with  regard to HB
71.                                                                                                                             
                                                                                                                                
4:15:05 PM                                                                                                                    
     First, and very importantly, I  want to talk about what                                                                    
     we  didn't hear  on  Monday. Second,  I  would like  to                                                                    
     correct some  incorrect statements or  impressions left                                                                    
     on Monday.                                                                                                                 
                                                                                                                                
     Third, I heard concern over  what is the right standard                                                                    
     for 'reasonable  profitability' on  Monday and  I think                                                                    
     we should discuss that as  well. Fourth, there was some                                                                    
     dispute about how  the duty would be  enforced, how the                                                                    
     duty  to  develop  and   market  gas  when  'reasonably                                                                    
     profitable'   would  be   enforced.   Fifth,  I   think                                                                    
     strategically,  we  need to  talk  about  the time  for                                                                    
     invoking the  duty and what  that means for  you today.                                                                    
     And,  sixth,  discuss  some options  available  to  the                                                                    
     committee at this point in time.                                                                                           
                                                                                                                                
     First, what  did we  not hear on  Monday. If  you think                                                                    
     back  a couple  of weeks  ago, Spencer  Hosie testified                                                                    
     before a  combined committee,  LB&A and  this committee                                                                    
     and he testified  that there was in oil  and gas leases                                                                    
     an obligation  to develop and  market oil and  gas when                                                                    
     reasonably profitable  to do so.  He was before  you on                                                                    
     behalf of the Administration and  you did not hear from                                                                    
     lessees at  that time. He  was emphatic that  there is,                                                                    
     in fact, a duty or  an obligation to develop and market                                                                    
     gas when reasonably profitable to do so.                                                                                   
                                                                                                                                
     On Monday,  you heard  from the  other side.  You heard                                                                    
     from lessees, you  heard from industry representatives.                                                                    
     And I did not hear anyone  deny that the duty exists. I                                                                    
     think   I  listened   carefully.   Nobody  denied   the                                                                    
     obligation  was there;  nobody  suggested that  lessees                                                                    
     can  warehouse  leases   long-term  without  having  an                                                                    
     obligation to develop and market.  They did dispute how                                                                    
     you would go  about enforcing that duty  and what would                                                                    
     be the standard for  measuring 'reasonable profit,' but                                                                    
     nobody disputed that the obligation was there.                                                                             
                                                                                                                                
     The second thing that you did  not hear on Monday is no                                                                    
     one disputed  that seven years  was a  reasonable time-                                                                    
     clock  for getting  the gas  to market  once there  had                                                                    
     been  a  determination  that  it  would  be  reasonably                                                                    
     profitable  to  do  so.  As  we  mentioned  on  Monday,                                                                    
     particularly for the State of  Alaska and for the other                                                                    
     project  participants, time  is  money. It's  a lot  of                                                                    
     money. At current gas prices,  every year delay of this                                                                    
     pipeline    project   costs    the   state    and   its                                                                    
     municipalities  on  the order  of  $2  billion -  rough                                                                    
     order of  magnitude $150 million  per month for  a year                                                                    
     delay in this project.                                                                                                     
                                                                                                                                
     This  bill, HB  71,  includes a  seven-year time  clock                                                                    
     once  there has  been  a determination  that a  project                                                                    
     would  be   reasonably  profitable  to  get   that  gas                                                                    
     developed  and to  market and  nobody disputed  that on                                                                    
     Monday - that seven years was a reasonable timeframe.                                                                      
                                                                                                                                
     Next   I'd   like   to  move   on   to   correct   some                                                                    
     misimpressions, I think, created  on Monday and I don't                                                                    
     mean   to  suggest   that  these   misimpressions  were                                                                    
     intentional. I think sometimes the  person at the table                                                                    
     did not  have a full  familiarity with some of  the oil                                                                    
     and gas  leasing history of  this state and  that might                                                                    
     be the source  of some misimpressions. But,  as I said,                                                                    
     there was no dispute  about whether the obligation, the                                                                    
     duty  to  develop  and market  exists  when  reasonably                                                                    
     profitable and  that exists currently under  leases and                                                                    
     unit agreements.                                                                                                           
                                                                                                                                
     It's  important  to know  the  origins  of the  state's                                                                    
     leases and  unit agreements. There was  some suggestion                                                                    
     that perhaps these were contracts  of adhesion. I don't                                                                    
     believe that's so.  With regard to the  state's oil and                                                                    
     gas  lease form,  it used  to be  in regulations  and I                                                                    
     think all of  you know that for anything  to be adopted                                                                    
     as  a  regulation, it  must  go  through a  public  and                                                                    
     industry  comment  period.  So,  that  lease  form  was                                                                    
     developed through  a public  process and  initially put                                                                    
     into regulations.  It's no  longer in  regulations, but                                                                    
     that's its origin, so there was public comment.                                                                            
                                                                                                                                
4:18:43 PM                                                                                                                    
SENATOR ELTON asked what a contract of adhesion is.                                                                             
                                                                                                                                
MS. ROBSON explained:                                                                                                           
                                                                                                                                
     There  are  times  when because  of  uneven  bargaining                                                                    
     power  between two  parties to  a  contract, one  party                                                                    
     might  actually be  relieved of  its obligations  under                                                                    
     the contract -  because it was a  contract of adhesion,                                                                    
     you  didn't  have  any   choice.  Here,  because  we're                                                                    
     talking  about  the State  of  Alaska  and the  largest                                                                    
     international petroleum  companies, so there  isn't the                                                                    
     disequilibrium in bargaining power.  But there was some                                                                    
     concern these were 'take it  or leave it' contracts and                                                                    
     an implication  that maybe that should  bear on whether                                                                    
     the duty to  develop and market should  be enforced and                                                                    
     how.                                                                                                                       
                                                                                                                                
SENATOR ELTON thanked her for the clarification.                                                                                
                                                                                                                                
MS. ROBSON continued:                                                                                                           
                                                                                                                                
     So,  the lease  form adopted  through a  public process                                                                    
     and then  if we  turn and think  about how  the state's                                                                    
     oil and gas  leases are put out to bid,  it's through a                                                                    
     competitive  bid  process.  If   you  think  about  the                                                                    
     competitive bidding process,  typically there's one bid                                                                    
     variable price,  often the bonus  bid. You can  try for                                                                    
     two  bid variables;  that  complicates things.  Usually                                                                    
     any contract by competitive bid  - all the terms of the                                                                    
     contract are  spelled out and there's  one bid variable                                                                    
     - something  like prices. So,  I don't think  that this                                                                    
     body wants  to think  of every  competitive bid  in the                                                                    
     oil  and  gas  industry  and in  the  United  State  of                                                                    
     America  as a  contract of  adhesion or  a 'take  it or                                                                    
     leave it'  contract. That's  simply the  process that's                                                                    
     used  in  the  competitive   process.  That's  how  our                                                                    
     state's   oil  and   gas  leases   are  by   and  large                                                                    
     distributed.                                                                                                               
                                                                                                                                
4:20:24 PM                                                                                                                    
SENATOR  SEEKINS   argued  that   the  process  still   fits  the                                                               
definition of a contract of adhesion.                                                                                           
                                                                                                                                
MS. ROBSON disagreed  and said that contracts  of adhesion happen                                                               
most  often where  you  have two  parties  of unequal  bargaining                                                               
strength.                                                                                                                       
                                                                                                                                
SENATOR SEEKINS  said it's generally applied  to situations where                                                               
one party would have no  meaningful chance to negotiate the terms                                                               
of a contract.                                                                                                                  
                                                                                                                                
MS. ROBSON responded: "Actually  that's not correct. Specifically                                                               
with regard  to the  obligation we're talking  about here  in the                                                               
oil  and gas  lease forms  there's  some language  and we  didn't                                                               
cover it Monday and I think  it's important that we talk about it                                                               
today. In paragraph 20 entitled "Diligence" it reads:                                                                           
                                                                                                                                
4:22:11 PM                                                                                                                    
     'Diligence   -   Lessees  shall   exercise   reasonable                                                                    
     diligence in  producing and shall abide  by and conform                                                                    
     to  regulations  of  lessor   related  to  the  matters                                                                    
     covered by  this paragraph in  effect on  the effective                                                                    
     date  hereof   or  herein  after   in  effect   if  not                                                                    
     inconsistent  with  any   specific  provision  of  this                                                                    
     lease.'                                                                                                                    
                                                                                                                                
     There  is  elsewhere  in the  lease  a  provision  that                                                                    
     generally only  the regulations in  effect at  the date                                                                    
     the lease was issued  governed the operations under the                                                                    
     lease,  but  this  specific paragraph  with  regard  to                                                                    
     diligence and the obligation  to diligently produce oil                                                                    
     and  gas   allows  the  lessor  to   proceed  to  adopt                                                                    
     regulations thereafter  covering this subject  matter -                                                                    
     regulations   such  as   how  you   define  'reasonable                                                                    
     profitability.'                                                                                                            
                                                                                                                                
4:23:06 PM                                                                                                                    
SENATOR SEEKINS asked if there is an integration clause in                                                                      
lease.                                                                                                                          
                                                                                                                                
MS. ROBSON replied that that such a clause would be conditioned                                                                 
by the specific language on diligence in paragraph 20.                                                                          
                                                                                                                                
4:23:56 PM                                                                                                                    
MS. ROBSON said with regard to unit agreements:                                                                                 
                                                                                                                                
     I think with unit  agreements, particularly for Prudhoe                                                                    
     Bay and the Pt. Thompson  unit, are instrumental to the                                                                    
     enforcement  of the  duty in  this  instance. The  unit                                                                    
     agreements  were  negotiated  and there  are  reams  of                                                                    
     paper now  in archives that  were generated as  part of                                                                    
     negotiating the  specific terms of the  unit agreements                                                                    
     for Prudhoe Bay and Pt.  Thompson. So, in any case, you                                                                    
     had the state sitting down  with the lessees at Prudhoe                                                                    
     Bay  and  Pt.  Thompson  and  negotiating  those  terms                                                                    
     including the  language in  those unit  agreements that                                                                    
     allows the Department of Natural  Resource from time to                                                                    
     time  to  alter or  modify  the  quantity and  rate  of                                                                    
     production from  the unit area.  So, you do  have terms                                                                    
     in both the leases and  the unit agreements specific to                                                                    
     this obligation that  gives to the State  of Alaska, as                                                                    
     lessor,  to the  DNR,  the ability  to set  obligations                                                                    
     regarding  production  and  to  alter  and  modify  the                                                                    
     quantity and rate of production.                                                                                           
                                                                                                                                
     Another area, I  think on Monday, where  there was some                                                                    
     incorrect   impressions   left    is   what   are   the                                                                    
     consequences of  this obligation,  the duty  to develop                                                                    
     and  market gas  when reasonably  profitable to  do so.                                                                    
     There was  a picture painted that  this legislation was                                                                    
     intended to  force lessees to  pay $20 billion  for new                                                                    
     investment or  lose their interest at  Prudhoe Bay. And                                                                    
     that's  a   dramatic  statement.  I  believe   it's  an                                                                    
     overstatement. If  we look at  the consequences  of the                                                                    
     obligation, there  at least  three different  ways that                                                                    
     you  can  comply with  the  obligation  to develop  and                                                                    
     market   Prudhoe  Bay   and  Pt.   Thompson  gas   when                                                                    
     reasonably profitable to do so.                                                                                            
                                                                                                                                
     First of  all, you can  sell the  gas in the  field and                                                                    
     you  can  leave it  to  somebody  else to  spend  their                                                                    
     capital  to  build  the  new  gas  treatment  plant  at                                                                    
     Prudhoe  Bay   for  gas  processing  and   to  build  a                                                                    
     pipeline. So, if  there is an offer to  purchase gas at                                                                    
     Prudhoe  Bay and  Pt. Thompson,  that offer  includes a                                                                    
     reasonable profit  to the lessees of  those units. Then                                                                    
     they  can  comply  with  their  obligations  under  the                                                                    
     leases and  the unit  agreements simply by  selling the                                                                    
     gas.  That's  a  low risk  operation,  particularly  at                                                                    
     Prudhoe Bay where they're producing  over 8 bcf per day                                                                    
     right now  and they are  paying to  put in back  in the                                                                    
     ground. If  somebody is there  offering to pay  to take                                                                    
     that  gas  and  put  it   through  their  own  new  gas                                                                    
     treatment plant  and their own  pipeline and  the price                                                                    
     offered includes a reasonable  profit, then that is one                                                                    
     method of compliance.                                                                                                      
                                                                                                                                
     The second method of compliance  is if somebody else is                                                                    
     willing to spend their capital  to build this pipeline,                                                                    
     the lessees  could ship their  gas on the  pipeline and                                                                    
     then they would be in  the position to capture the high                                                                    
     side. When  gas prices go  high, they would be  there -                                                                    
     of  course  having  the  obligation   to  pay  for  the                                                                    
     pipeline  transportation.  That's  a second  method  of                                                                    
     compliance.                                                                                                                
                                                                                                                                
     A third method  - they could choose to build  a new gas                                                                    
     treatment plant  and the pipeline themselves.  So three                                                                    
     different  ways to  comply  with  the obligation  after                                                                    
     there's been a determination  that there's a reasonable                                                                    
     profit to  be made from developing  and marketing North                                                                    
     Slope gas.                                                                                                                 
                                                                                                                                
4:27:59 PM                                                                                                                    
     If  the  lessees decide  not  to  purchase gas  when  a                                                                    
     reasonable offer is  made and decide not  to ship their                                                                    
     gas  on somebody  else's  pipeline  when another  party                                                                    
     offers to build  that pipeline and decide  not to build                                                                    
     a pipeline, all when  there's been a determination that                                                                    
     it would  be reasonably  profitable to  do so,  so they                                                                    
     will not be  in compliance with their  lease. They will                                                                    
     be  in  breach.  And  the  remedy -  I  think  it's  an                                                                    
     overstatement  to  say  they're  at  serious  risk  for                                                                    
     losing  all  of their  interest  at  Prudhoe Bay.  More                                                                    
     probably, what  I see happening  is certainly  under HB
     71  with the  seven-year  time clock,  if  there was  a                                                                    
     determination that there was  a reasonable profit to be                                                                    
     made,  seven years  came  and went  and  they were  not                                                                    
     marketing their  gas, they may  be liable to  the State                                                                    
     of Alaska  for royalties as  if they had  developed and                                                                    
     marketed their gas.                                                                                                        
                                                                                                                                
     Other possible  remedies -  at Prudhoe  Bay potentially                                                                    
     severing  the  oil  interests from  the  gas  interests                                                                    
     leaving  the oil  interests with  the current  lessees,                                                                    
     possibly leaving some of the  gas interest because some                                                                    
     of that gas  is marketed as NGLs blended  in with crude                                                                    
     and  for  local  use.  But   having  some  of  the  gas                                                                    
     interests severed and returned to the state.                                                                               
                                                                                                                                
4:29:02 PM                                                                                                                    
     Also, at  Pt. Thompson is  a particular case.  You have                                                                    
     to realize some of those  leases are more than 40 years                                                                    
     old and  Pt. Thompson  is a  world-class field.  It has                                                                    
     not  been   developed.  There's  not  even   the  first                                                                    
     development well there now and  if the lessees have the                                                                    
     opportunity  after a  determination  that  it would  be                                                                    
     reasonably  profitable to  market that  gas, they  have                                                                    
     the opportunity to sell it to  a third party or ship it                                                                    
     on  somebody  else's  pipeline or  build  the  pipeline                                                                    
     themselves  and   they  don't   take  it,  it   may  be                                                                    
     appropriate for the state to  seek the remedy of return                                                                    
     of those  leases so  that the  state could  relet those                                                                    
     leases to a  party who would make it a  priority to get                                                                    
     that gas to market.                                                                                                        
                                                                                                                                
4:29:52 PM                                                                                                                    
     There  was  concern  expressed from  several  different                                                                    
     sides  on Monday  about  whether  the language  written                                                                    
     into HB  71 provided the right  standard for reasonable                                                                    
     profitability  and if  you'll recall  there was  a dual                                                                    
     part standard  for the  pipeline piece  of it,  for the                                                                    
     regulated piece. Built  into the statute was  a rate of                                                                    
     return equal  to or higher  than FERC would  allow. For                                                                    
     the  unregulated  production  operations, the  rate  of                                                                    
     return  talked about  was a  10-year simple  average of                                                                    
     the  return  on  capital  employed   for  oil  and  gas                                                                    
     companies, discretioned  with DNR  as to what  would be                                                                    
     the  group  of oil  and  gas  companies used,  but  our                                                                    
     example used  the four largest  international petroleum                                                                    
     companies and  the three largest Alaska  companies. And                                                                    
     right now if you look  at the previous 10-year average,                                                                    
     you  get to  a 14  percent return  on capital  employed                                                                    
     that  is return  on all  forms  of capital  - debt  and                                                                    
     equity. So  that if this  pipeline project  is financed                                                                    
     80 percent debt and 20  percent equity as is envisioned                                                                    
     with  the federal  loan guarantee,  that the  return on                                                                    
     equity  could  be  as  high as  46  percent  under  the                                                                    
     language  in this  bill. And  there  was some  question                                                                    
     about whether that's a reasonable  standard. I tell you                                                                    
     quite frankly  I would have  some concerns  about that,                                                                    
     but for some information  that unfortunately I'm not in                                                                    
     a  position to  share with  you today,  because of  the                                                                    
     confidentiality requirements.                                                                                              
                                                                                                                                
     But the  important point today  is that there is  not a                                                                    
     single standard or only one  standard for what could be                                                                    
     reasonable.  There are  a  number  of possibilities  of                                                                    
     what  could  be  used  as  a  standard  for  reasonable                                                                    
     profit.  There have  been  suggestions,  in fact,  from                                                                    
     consultants we  are using with  regard to  gas pipeline                                                                    
     issues that  the cost of  capital - different  from the                                                                    
     rate of  return on capital  employed - but the  cost of                                                                    
     capital could  be one measure.  You could also  look at                                                                    
     the  return on  equity as  another measure  and we  did                                                                    
     hear   from  industry   that   perhaps   it  would   be                                                                    
     appropriate to look to venture  capital. There was some                                                                    
     discussion about venture capital  earning in the low 20                                                                    
     percents.  The  thing  to think  about  there  is  that                                                                    
     venture  capital is  100 percent  equity.  There is  no                                                                    
     borrowing; there  is no  cheap capital  in the  form of                                                                    
     debt  when you're  talking about  venture capital.  So,                                                                    
     actually  the suggestion  from AOGA  or the  discussion                                                                    
     about 20s,  low 20s rate  of return indicative  of what                                                                    
     is appropriate  for venture capital and  maybe for this                                                                    
     project,  could be  a  lower rate  than  what could  be                                                                    
     allowed under this statute.                                                                                                
                                                                                                                                
     This statute, as I mentioned, could  go as high as a 46                                                                    
     percent return on equity. Compare  that to your low 20s                                                                    
     percent  return on  equity  return  on venture  capital                                                                    
     that  was  discussed  here  on   Monday.  I  think  the                                                                    
     important  point  to  recognize   here  today  is  that                                                                    
     there's not going  to be agreement within  this room by                                                                    
     all  parties on  what the  appropriate standard  is for                                                                    
     measuring reasonable  profitability and that may  be an                                                                    
     issue that  if you don't  chose to resolve  today could                                                                    
     be  looked at  in the  Interim; it  could be  looked at                                                                    
     next session.  It is  an important  issue not  only for                                                                    
     this  bill, but  it's also  an important  issue as  you                                                                    
     begin  to think  about  gas pipeline  issues under  the                                                                    
     Stranded  Gas Act  and any  proposal that  may come  to                                                                    
     you.                                                                                                                       
                                                                                                                                
4:33:42 PM                                                                                                                    
     There was  some industry suggestion on  Monday that the                                                                    
     free  market should  be the  standard -  that basically                                                                    
     you should  leave it to  the lessees to decide  what is                                                                    
     the rate  of return  appropriate. Again, that  means in                                                                    
     effect  there is  no duty  to develop  and market  when                                                                    
     reasonably   profitable.  If   you   leave  a   lessees                                                                    
     obligation to the  lessee to decide and  enforce, it is                                                                    
     effectively no obligation at all.                                                                                          
                                                                                                                                
4:34:19 PM                                                                                                                    
     Another  question that  came up  and  was discussed  on                                                                    
     Monday was just how is the  duty enforced - the duty to                                                                    
     develop and market when reasonably profitable.                                                                             
                                                                                                                                
     To  think the  lessees came  in here  and urged  in the                                                                    
     first  instance it  should be  the court  system making                                                                    
     the determination whereas there  was discussion of this                                                                    
     bill   providing   for   DNR  to   make   the   initial                                                                    
     determination.  And   there  is   a  reason   for  that                                                                    
     difference of perspective. The  lessees, I think, would                                                                    
     see certain  benefits in having  the court  system make                                                                    
     the  initial  determination.  It   forces  DNR  or  the                                                                    
     Administration to  be the  one to file  suit and  it is                                                                    
     not easy  or undertaken lightly  in this state  for the                                                                    
     Administration  to sue  big oil.  It's an  advantage if                                                                    
     industry forces  the state  to be the  one to  take the                                                                    
     matter to the courthouse.                                                                                                  
                                                                                                                                
     The second  advantage industry may  see in  leaving the                                                                    
     trial   court  as   the  one   to   make  the   initial                                                                    
     determination  is  that if  there  is  no DNR  decision                                                                    
     preceding going  to court, then  there is  no deference                                                                    
     accorded the DNR decision. And  the third thing is that                                                                    
     it may  provide an opportunity for  lessees to withhold                                                                    
     information until such time as you get into court.                                                                         
                                                                                                                                
4:36:32 PM                                                                                                                    
     As we discussed  before, we think under  the status quo                                                                    
     that, in fact, the decision is  first to be made by DNR                                                                    
     whether  you're  looking  at the  leases  or  the  unit                                                                    
     agreements. Earlier today we  talked about the language                                                                    
     in the lease agreements -  in the paragraph 20 specific                                                                    
     to  diligence -  saying  that  the Administration,  the                                                                    
     Department  of Natural  Resources, had  the ability  to                                                                    
     adopt  regulations on  the subject  matters covered  in                                                                    
     the paragraph  on diligence after  the adoption  of the                                                                    
     lease and the lessees would  be bound by that. So, that                                                                    
     the Administration  could, in fact, adopt  standards on                                                                    
     reasonable    profitability    in    accordance    with                                                                    
     preexisting lease terms and make  a determination as to                                                                    
     whether those standards had been met.                                                                                      
                                                                                                                                
     Same thing  with the unit  agreements where  after hard                                                                    
     negotiations,  the  lessees  gave DNR  the  ability  to                                                                    
     alter  or  modify  from  time   to  time  the  rate  of                                                                    
     production from the unit areas.                                                                                            
                                                                                                                                
     The advantages, of course,  from the Administration and                                                                    
     the State  of Alaska's perspective of  having DNR being                                                                    
     the initial decision-maker is  that if industry doesn't                                                                    
     like the decision issued by  DNR, they have to take the                                                                    
     matter  to   court.  Also,  DNR's  decision   would  be                                                                    
     entitled  to  some  level of  deference  in  the  court                                                                    
     system as  to some issues  and finally, there  would be                                                                    
     the ability  and, in fact,  the incentive  for industry                                                                    
     to provide  information to  DNR when  it is  making its                                                                    
     decision  pre-court and  so  information actually  gets                                                                    
     exchanged  at  an earlier  point  in  time and  informs                                                                    
     DNR's decision-making.                                                                                                     
                                                                                                                                
     In any  case, HB 71  did not  do anything to  alter the                                                                    
     status  quo as  to who  is the  primary decision-maker,                                                                    
     the  first decision-maker  on this  duty.  There is  no                                                                    
     language in  there that  is intended  to shift.  So, if                                                                    
     the  debate remains  open, if  you're unpersuaded  that                                                                    
     DNR   is  to   be  the   initial  decision-maker,   the                                                                    
     legislation  did  not  intend   to  alter  the  current                                                                    
     situation and, if  in fact, the trial courts  are to be                                                                    
     the initial  decision-maker, that would not  be changed                                                                    
     by HB 71.                                                                                                                  
                                                                                                                                
4:38:10 PM                                                                                                                    
     Two more points  - strategically what is  the best time                                                                    
     for  invoking  the  duty to  develop  and  market  when                                                                    
     reasonably profitable  to do  so? This is  important to                                                                    
     you today because  it may frame the  time period within                                                                    
     which you  want to act on  this matter. And I  think on                                                                    
     Monday you heard some people  say, 'Not now, because of                                                                    
     Stranded Gas Act negotiations.  Don't upset the balance                                                                    
     of  those negotiations.  Worry about  this later.'  And                                                                    
     you also  heard some people  say, 'Now would be  a good                                                                    
     time.'  People  who  know  what's  going  on  in  those                                                                    
     negotiations thought  it would be an  appropriate time,                                                                    
     but let's  look practically  at how  the duty  would be                                                                    
     invoked  and enforced  and whether  it matters  whether                                                                    
     you act now or next session or at all.                                                                                     
                                                                                                                                
     Of course,  Prudhoe Bay  is the  lynch pin  for getting                                                                    
     this gas  to market. And  so if  we look at  the annual                                                                    
     plans of development for the  main reservoir at Prudhoe                                                                    
     Bay  and what  is the  time frame  for DNR  raising any                                                                    
     issue about  whether that gas  should be  developed and                                                                    
     marketed  because   it's  reasonably   profitable,  the                                                                    
     lessees at  Prudhoe Bay will  not be obligated  to file                                                                    
     their  next proposed  plan of  development until  March                                                                    
     30, 2006 and  DNR will have until June 30  of next year                                                                    
     to act  on their proposed  plan of development.  And so                                                                    
     whether  you act  on this  matter today  or next  year,                                                                    
     that  will  not necessarily  change  how  DNR would  go                                                                    
     about enforcing  the obligation that already  exists in                                                                    
     the leases and unit agreements  - because a new plan of                                                                    
     development isn't  to be filed  with DNR until  the end                                                                    
     of March. And as I believe  was pointed out by at least                                                                    
     one  of  the senators  on  Monday,  it looks  like  the                                                                    
     obligation,  the duty,  is already  there and  so maybe                                                                    
     you never need to act  on this matter. But certainly it                                                                    
     is not time  critical and I don't mean  to suggest that                                                                    
     at the end of this session.                                                                                                
                                                                                                                                
4:40:23 PM                                                                                                                    
     Pt.  Thompson  -  a  little  bit  different.  The  next                                                                    
     proposed plan of development has  to be filed July 1 of                                                                    
     this year and DNR will  have until the end of September                                                                    
     to act  on that and decide  whether or not they  are in                                                                    
     compliance  with that.  DNR may  or may  not choose  to                                                                    
     raise the issue of the  duty to develop and market with                                                                    
     regard  to   Pt.  Thompson  in  this   year's  plan  of                                                                    
     development. Again,  Pt. Thompson  is important  to the                                                                    
     gas pipeline, but  Prudhoe gas is the  number one issue                                                                    
     there. Also, Pt.  Thompson, you have a  situation, as I                                                                    
     mentioned before,  where you've had leases  - some held                                                                    
     for  decades  -  and  there's been  no  development  or                                                                    
     production  there. So,  DNR may  choose to  take it  up                                                                    
     this year.  That would  certainly be  their prerogative                                                                    
     if that obligation already exists.                                                                                         
                                                                                                                                
4:41:22 PM                                                                                                                    
     In closing, I  would like to talk about  what options I                                                                    
     see available to this committee  today. I see one of my                                                                    
     jobs is to  provide you with different  options on ways                                                                    
     to  proceed  and  certainly there  are  four  that  are                                                                    
     immediately apparent.                                                                                                      
                                                                                                                                
     First, you could  act on the legislation as  is or with                                                                    
     some  revisions to  the  standard  on what  constitutes                                                                    
     'reasonably  profitable.' And  if you  think about  it,                                                                    
     what  you do  have then  in HB  71 is  a compliment  of                                                                    
     exploration  incentive  credits   in  which  the  state                                                                    
     undertakes some  of the risk of  exploration. It agrees                                                                    
     to effectively  cover the cost  of up to 40  percent of                                                                    
     the  cost  of  new  exploratory  wells.  So,  it  makes                                                                    
     exploration less risky  and yet the new  sections 1 and                                                                    
     2   of  this   bill  say   when  that   exploration  is                                                                    
     successful,  when you  have a  reservoir that  would be                                                                    
     reasonably profitable to develop,  we are affirming our                                                                    
     belief in your obligation to  go ahead and develop that                                                                    
     gas.                                                                                                                       
                                                                                                                                
     A  second  alternative  would be  drop  the  reasonably                                                                    
     profitable  standard  from  the  proposed  legislation,                                                                    
     keep  the exploration  incentive credits  and keep  the                                                                    
     seven-year  clock.  There  was  no  dispute  raised  on                                                                    
     Monday  about the  seven-year clock,  so that  would be                                                                    
     another alternative.                                                                                                       
                                                                                                                                
     How would  the seven-year clock then  work without this                                                                    
     definition  of  reasonably profitable  included?  Well,                                                                    
     the  way it  would  work is  if DNR  in  the course  of                                                                    
     enforcing  the preexisting  obligation  to develop  and                                                                    
     market  gas   found  that  there   was,  in   fact,  an                                                                    
     obligation to  do so at  this point in time,  you would                                                                    
     be  providing guidance  that you  expected to  see that                                                                    
     gas to market in a maximum of seven years.                                                                                 
                                                                                                                                
     The  third   alternative  would  be  to   separate  the                                                                    
     language  on  exploration  incentive  credits  and  the                                                                    
     reasonably profitable legislation  including the seven-                                                                    
     year  clock into  separate bills  with the  exploration                                                                    
     incentive  credits being  acted  on this  year and  the                                                                    
     reasonably profitable sections 1  and 2 considered next                                                                    
     year.                                                                                                                      
                                                                                                                                
     A  fourth alternative  would be  again to  separate the                                                                    
     exploration  incentive  credits   from  the  reasonably                                                                    
     profitable  legislation, act  on the  EIC's exploration                                                                    
     incentive credits  this year and simply  recognize that                                                                    
     there  already is  an existing  duty and  obligation to                                                                    
     develop  gas when  reasonably profitable  to do  so and                                                                    
     leave it to the administration  to enforce it under the                                                                    
     pre-existing standards  without any  further definition                                                                    
     and no  time clock,  but as  DNR or  the Administration                                                                    
     saw appropriate at the time  they saw appropriate. With                                                                    
     that, I'll conclude my remarks.                                                                                            
                                                                                                                                
4:44:23 PM                                                                                                                    
SENATOR SEEKINS asked if data from an exploratory well is made                                                                  
freely available to the state to be able to consider the                                                                        
commercial applicability of that field.                                                                                         
                                                                                                                                
MS. ROBSON replied that it depends on whether or not the well is                                                                
on state acreage.                                                                                                               
                                                                                                                                
     There are some requirements with  regard to oil and gas                                                                    
     wells drilled on state acreage  about data that must be                                                                    
     provided to  the state. There are  different rules that                                                                    
     apply  when it  is not  on state  acreage -  subject to                                                                    
     state oil and gas lease.                                                                                                   
                                                                                                                                
SENATOR SEEKINS said he heard there may be some Security                                                                        
Commission regulations on what kind of data can be released and                                                                 
when.                                                                                                                           
                                                                                                                                
4:45:44 PM                                                                                                                    
MS. ROBSON replied:                                                                                                             
                                                                                                                                
     There  are rules  with regard  to the  requirement that                                                                    
     well  data be  provided  to the  Department of  Natural                                                                    
     Resources when  the well is  on state leased  lands and                                                                    
     some of  that data,  I believe,  is released  after two                                                                    
     years, but, again,  I am not the best  person to answer                                                                    
     that question.                                                                                                             
                                                                                                                                
She offered to follow up on this question.                                                                                      
                                                                                                                                
4:47:08 PM                                                                                                                    
SENATOR ELTON reflected that Spencer  Hosie asserted a right that                                                               
was  reaffirmed through  the  adoption of  the  amendment on  the                                                               
floor. He asked  if the amendment ere taken out  and HB 71 passes                                                               
without it, has the Legislature  clouded the state's assertion of                                                               
that right.                                                                                                                     
                                                                                                                                
MS. ROBSON replied:                                                                                                             
                                                                                                                                
     There may be  a variety of ways in which  you could act                                                                    
     with regard to  HB 71 and I didn't mean  to suggest how                                                                    
     it  is   that  you   would  go  about   separating  the                                                                    
     exploration  credits  from  the  sections 1  and  2  on                                                                    
     reasonable profit.                                                                                                         
                                                                                                                                
SENATOR ELTON asked if one of  those mitigators could be a letter                                                               
of intent saying that removal of  the amendment does not mean the                                                               
state can't assert the rights.                                                                                                  
                                                                                                                                
MS. ROBSON  replied that Representative  Samuels would  know more                                                               
about that subject than she does.                                                                                               
                                                                                                                                
4:48:31 PM                                                                                                                    
SENATOR GUESS  asked if HB  71 is saying  the standard will  be a                                                               
simple  10-year average  and that's  the only  standard that  the                                                               
commissioner of  DNR can apply  regarding reasonability or  is it                                                               
just one standard of a number of standards that may be applied.                                                                 
                                                                                                                                
MS.  ROBSON  replied that  the  bill  requires that  the  10-year                                                               
average be applied.                                                                                                             
                                                                                                                                
     There  would  be discretion  as  to  what oil  and  gas                                                                    
     companies were  used in the sample  group of companies,                                                                    
     but  the 10-year  simple average  of return  on capital                                                                    
     employed  is, at  this stage,  non discretionary.  That                                                                    
     could certainly be changed.                                                                                                
                                                                                                                                
SENATOR GUESS  asked if  that is  the only  standard that  can be                                                               
used.                                                                                                                           
                                                                                                                                
MS. ROBSON answered:                                                                                                            
                                                                                                                                
     There  is  some  language  in section  1  on  findings,                                                                    
     subpart 13, that  talks about there may be  a number of                                                                    
     comparisons that would be appropriate  to make - to the                                                                    
     cost of  capital, to the  cost of equity, to  return on                                                                    
     capital employed  or to return  on equity. And  so, the                                                                    
     findings  language  indicates  that   there  may  be  a                                                                    
     variety  of   potentially  reasonable   standards.  The                                                                    
     section  2 language,  as it  currently reads,  does not                                                                    
     give  discretion  in  terms  of  choosing  a  different                                                                    
     standard.                                                                                                                  
                                                                                                                                
4:50:54 PM                                                                                                                    
REPRESENTATIVE RALPH SAMUELS said he wanted to give a brief                                                                     
snapshot of the thinking that went into the amendment to HB 71.                                                                 
                                                                                                                                
     I'm  not an  attorney and  I won't  apologize for  that                                                                    
     either. So,  I know  that you've  heard from  plenty of                                                                    
     industry lawyers and I know  that you've heard from Ms.                                                                    
     Robson  twice....  I was  in  and  out of  meetings  on                                                                    
     Monday  and  I  tried  to  listen in  to  some  of  the                                                                    
     testimony  and I  realize full  well what  the reaction                                                                    
     was going to be going into this.                                                                                           
                                                                                                                                
     I   did  catch   part   of  one   presentation  and   I                                                                    
     wholeheartedly  agreed with  a  lot of  what was  said.                                                                    
     Ken Conrad testified and he's  an executive with BP and                                                                    
     I have met  him several times over the past  year and I                                                                    
     have  a   lot  of  respect   for  Mr.  Konrad.   He  is                                                                    
     articulate, he  knows the oil  and gas  industry better                                                                    
     than I will  ever know the oil and gas  industry and he                                                                    
     has   some  very   good  points.   One   of  the   main                                                                    
     thrusts...was who  is going pay if  the state's numbers                                                                    
     are  wrong  and we  have  now  forced investors  to  do                                                                    
     something which  they know is  wrong and  they're going                                                                    
     to lose  money on. Who  is going  to make it  right? He                                                                    
     was a little  over the top on  the un-American comments                                                                    
     and this and that, but  all in all, that's an extremely                                                                    
     valid point. Who  would pay if our  numbers were wrong?                                                                    
     And   philosophically  speaking,   the  point   of  the                                                                    
     amendment and to get the  debate going is the fact that                                                                    
     it cuts both  ways. Who is going to pay  if the numbers                                                                    
     are right  and the project  is not developed?  The jobs                                                                    
     that are lost for Alaskans.  A lot people testified are                                                                    
     the  people that  want the  jobs  - the  jobs that  are                                                                    
     lost. The money to the state.                                                                                              
                                                                                                                                
     So, they're  both extremely valid points  and the point                                                                    
     of the amendment was to  make sure that both points are                                                                    
     up  for debate  before we  adjourn. I  hope in  my soul                                                                    
     that we come back here some  time this fall and we have                                                                    
     a  vote. And  I think  that to  push something  of this                                                                    
     magnitude off,  if you listen  to the  Hosie testimony,                                                                    
     whether you  agreed with  it or you  do not  agree with                                                                    
     it, if  it is  left hanging out  there, the  water will                                                                    
     get muddy at  the end when we can least  afford to have                                                                    
     muddy water on this entire project.                                                                                        
                                                                                                                                
     I think that  all of us as members,  all elected people                                                                    
     in this building  right now, 61 of  us, including Frank                                                                    
     Murkowski,  who's been  doing this  a whole  lot longer                                                                    
     than  all of  us  combined, will  never  have a  bigger                                                                    
     choice to  make than this  gas pipeline - 30,  40 years                                                                    
     worth  of  things,  grandchildren  -  a  legacy.  We're                                                                    
     fortunate to  be serving at  this time, but  along with                                                                    
     that   honor   of   serving   right   now   comes   the                                                                    
     responsibility to  know everything  that you  can about                                                                    
     every possible aspect of this  project - duties, rights                                                                    
     and  responsibilities,  both  of industry  and  of  the                                                                    
     state.  If we're  scared to  discuss it,  then I  think                                                                    
     that come fall  it's going to be  problematic. And that                                                                    
     was the  point behind amendment  1 - knowing  full well                                                                    
     what the  lawyers were going  to say and the  fact that                                                                    
     the water  was going  to get muddy  now and  I honestly                                                                    
     believe that  it was  better now  and I  felt it  was a                                                                    
     duty to do better now than it  was going to be to do it                                                                    
     later.                                                                                                                     
                                                                                                                                
     That being  said, Mr.  Chairman, I  also wholeheartedly                                                                    
     agree with the  original concept behind HB  71. I think                                                                    
     exploration tax  credits - quite frankly  they work. We                                                                    
     look  at  the  Nenana  Basin; we  look  at  the  Alaska                                                                    
     Peninsula where  I grew  up and  those folks  have come                                                                    
     around to  think that  it is probably  a good  thing to                                                                    
     try to open the door a little bit.                                                                                         
                                                                                                                                
     So, with that, as you  and I have discussed previously,                                                                    
     Mr.   Chairman,  I   wholeheartedly   agree  with   the                                                                    
     [indisc.].  I've got  a copy  of the  CS for  286 right                                                                    
     here.  To  take  the  tax   credits,  the  rather  non-                                                                    
     controversial  part of  this bill  -  it had  - on  the                                                                    
     House side I  believe 30 or 35 votes  supporting it. It                                                                    
     was  pretty  uncontroversial.  To  move  those  forward                                                                    
     under a different vehicle and  not move forward with HB
     71,  I  think,   was  in  the  best   interest  of  the                                                                    
     Legislature and  the state at  this time. So,  that was                                                                    
     kind of the thinking behind it.                                                                                            
                                                                                                                                
4:56:08 PM                                                                                                                    
     And I'd like to add just  a couple of remarks here that                                                                    
     I'm  pretty troubled  by.  Those of  us  in the  public                                                                    
     life, you  end up getting  a pretty thick skin  and you                                                                    
     get it pretty  quick or you don't last.  It's as simple                                                                    
     as  that. But  I am  troubled by  some of  the personal                                                                    
     comments that have been made  about Amendment 1 towards                                                                    
     myself.  And not  a  lot, but  I wanted  to  go on  the                                                                    
     record  that   there  are  very  few   people  in  this                                                                    
     building,  and most  of them  are  probably sitting  in                                                                    
     this room right  behind me, that know more  about a gas                                                                    
     line than I do as far  as the process goes that are not                                                                    
     professionals at this.  And I would not  have done this                                                                    
     had  I not  thought  it  was in  the  best interest  of                                                                    
     moving  the gas  line forward.  So, with  that I  don't                                                                    
     know how  appropriate that comment  is, but I  did want                                                                    
     to get  it on the  record that  I thought that  some of                                                                    
     the comments  made were clearly inappropriate  and I've                                                                    
     got  as thick  a skin  as any  of the  rest of  you do.                                                                    
     So.... I appreciate you having this hearing.                                                                               
                                                                                                                                
4:57:34 PM                                                                                                                    
SENATOR SEEKINS asked if he had ever been able to sneak anything                                                                
through in the middle of the night in this building.                                                                            
                                                                                                                                
REPRESENTATIVE SAMUELS replied no and pointed out that he                                                                       
hearings were being held right now.                                                                                             
                                                                                                                                
     We have six or eight days  left. We wanted to make sure                                                                    
     we  had some  hearings  on this  subject  so that  that                                                                    
     Hosie  testimony  is not  just  hanging  out there  and                                                                    
     waiting until the fall. The  sharks are circling around                                                                    
     this project. It will get  attacked no matter what deal                                                                    
     is cut.  No matter who it  is cut with, it  is going to                                                                    
     get rocks thrown at it.                                                                                                    
                                                                                                                                
CHAIR WAGONER agreed that this is a work in progress. He thanked                                                                
Representative Samuels for his testimony and announced an at                                                                    
ease.                                                                                                                           

Document Name Date/Time Subjects