Legislature(2007 - 2008)BUTROVICH 205

04/13/2007 03:30 PM RESOURCES

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Time Limit May Be Set> --
Moved CSSB 109(RES) Out of Committee
-- Testimony <Time Limit May Be Set> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
3:36:41 PM                                                                                                                    
            SB 109-OIL & GAS CONSERVATION COMMISSION                                                                        
3:37:14 PM                                                                                                                    
CHAIR HUGGINS announced SB 109 to be up for consideration.                                                                      
CHERYL SUTTON, Staff to the  Legislative Budget & Audit Committee                                                               
(LB&A), testified  that SB 109  was introduced through  the Rules                                                               
Committee  by  request  of  LB&A  and  the  Alaska  Oil  and  Gas                                                               
Conservation  Commission  (AOGCC).  She  said  the  House  has  a                                                               
companion bill  that is exactly  like the  CS before them  and it                                                               
was moved from the House  Oil and Gas Committee yesterday without                                                               
objection. The  CS reflects  changes resulting  from interactions                                                               
between  the Alaska  Oil  and Gas  Association  (AOGA) and  other                                                               
industry members.                                                                                                               
3:38:24 PM                                                                                                                    
MS.  SUTTON  went through  the  changes  in  the CS  saying  that                                                               
sections 1, 2,  3, 5, 6, 9, 10 and  13 remain unchanged. Sections                                                               
4, 7, 8 and 11 are  reworded for clarity, but have no substantive                                                               
changes.  Section  12  is  reworded  for  clarity  and  adds  "an                                                               
underground interjection well for the  purpose of gas storage" to                                                               
the Commission's  list for permitted  wells. Section  14 combines                                                               
the  material contained  in sections  14 -  17 from  the original                                                               
bill and clarifies the language.                                                                                                
MS. SUTTON  said the substantive change  in the CS is  on page 8,                                                               
lines 18 - 19 and it  deals with the civil penalty the Commission                                                               
may  impose and  says "not  more  than $100,000  for the  initial                                                               
violation and  not more than  $10,000 for each day  thereafter on                                                               
which  the violation  continues."  The remainder  of the  section                                                               
consolidates the language from the  original bill's sections 14 -                                                               
17. She  said the  remaining sections  remain unchanged,  but are                                                               
renumbered to reflect the consolidation.                                                                                        
3:40:31 PM                                                                                                                    
CHAIR  HUGGINS asked  Commissioner Norman  to address  section 14                                                               
and asked if that was the most substantive piece.                                                                               
JOHN NORMAN,  Chair, Alaska Oil  and Gas  Conservation Commission                                                               
(AOGCC), said that section 14  is the updated penalty section and                                                               
it is one  of the substantive changes. The civil  penalty had not                                                               
been updated for almost 20 years.  It proposes an amendment to AS                                                               
31.05.150(a)  that  would  establish  a  $100,000  penalty  as  a                                                               
maximum that  could be  assessed by the  Commission for  a single                                                               
violation. Should  that violation continue unabated  for a number                                                               
of days,  it could  asses an  additional accumulating  penalty of                                                               
$10,000 a  day. The reason for  this change is because  there are                                                               
situations where the worst part  of an offense could occur within                                                               
a  24-hour  period and  the  offender  escapes a  proper  penalty                                                               
simply by  the violation's short duration.  Secondly, the $10,000                                                               
per day brings Alaska into line  with penalties other oil and gas                                                               
producing states use.                                                                                                           
CHAIR  HUGGINS   asked  if  anyone  vehemently   contested  those                                                               
MR.  NORMAN replied  that he  hasn't heard  anything, but  others                                                               
should speak on that.                                                                                                           
3:43:46 PM                                                                                                                    
SENATOR  STEVENS  asked for  the  reasoning  behind the  $100,000                                                               
MR. NORMAN  clarified that  the current penalty  is up  to $5,000                                                               
per day. If  a violation continued for five  days, the Commission                                                               
would  have the  ability to  assess  a maximum  of $25,000.  This                                                               
change would allow  the state to capture  serious violations that                                                               
might otherwise escape the continuing  penalty because they occur                                                               
in a  short time period.  For the most egregious  violations, the                                                               
Commission  could  assess  up  to   a  $100,000  penalty.  If  it                                                               
continued after that, the Commission  could assess as a maximum a                                                               
$10,000-per-day penalty.                                                                                                        
3:45:36 PM                                                                                                                    
MR.  NORMAN continued  saying that  existing  statutes also  have                                                               
criminal  penalties  that  are  levied by  the  court  under  the                                                               
Criminal Justice  system and those  would not be assessed  by the                                                               
Commission. However,  the old penalty  amount was a  lower amount                                                               
and it made  no sense not to  bring it up to $10,000  at the same                                                               
time they are doing this housekeeping amendment.                                                                                
He explained  that subsection 15(d),  which is  on page 8  of the                                                               
CS, increases the  penalty for the waste of  valuable natural gas                                                               
in  Alaska.  Currently, if  the  Commission  finds waste,  either                                                               
intentional or from operator negligence,  it can assess a penalty                                                               
against  that  operator  equal  to  the value  of  the  gas.  The                                                               
Commission believes that an adequate  penalty for wasting the gas                                                               
should not  be just the  value of the  gas, so that  they suggest                                                               
doubling that value.                                                                                                            
Subsection (g) is another important  subsection under section 14,                                                               
which  sets forth  a number  of specific  criteria that  give the                                                               
Commission guidelines  when assessing  a penalty and  is intended                                                               
to put  sideboards on the  assessments so the  Commission doesn't                                                               
use "unbridled discretion." Both parties  can refer to this check                                                               
3:47:49 PM                                                                                                                    
SENATOR WAGONER  asked how easy it  is to determine how  much gas                                                               
has been illegally flared under subsection (d).                                                                                 
MR.  NORMAN  replied that  operators  file  a disposition  report                                                               
every month  through an  engineer that  has to  be signed  off by                                                               
Commissioner Foerster. Every disposition  has to be reported, but                                                               
it  is fairly  easy to  do. Falsifying  a report  is at  the very                                                               
highest end  of the spectrum of  violations, so it is  not a good                                                               
idea to do that.                                                                                                                
3:50:00 PM                                                                                                                    
SENATOR  STEVENS asked  why language  in the  waste section  says                                                               
"may" instead of "shall".                                                                                                       
MR.  NORMAN  replied that  "may"  addresses  situations where  it                                                               
could  be a  very  close call  - for  instance,  once a  pipeline                                                               
experienced  harmonic  vibration  and  broke,  but  the  operator                                                               
notified the  Commission immediately.  If that  incident happened                                                               
again  to  the same  operator,  it  might  be a  different  call.                                                               
Sometimes  there  is  a  fine   line  between  acts  of  God  and                                                               
3:51:56 PM                                                                                                                    
MR. NORMAN  hit the rest  of the high spots  in the CS.  There is                                                               
reference to  granting the Commission the  statutory authority to                                                               
regulate  the underground  storage of  natural gas.  He said  the                                                               
Railbelt  and the  Cook Inlet  Basin are  no longer  stranded gas                                                               
provinces  and operators  no longer  have the  ability guaranteed                                                               
during peak periods  of demand to be able to  open the valves and                                                               
deliver all the gas that's  needed. They are taking the necessary                                                               
steps to  try to identify  spent-out reservoirs that can  be used                                                               
for  storage so  that during  the summer,  for example,  they can                                                               
continue to produce and put gas  into storage and then in periods                                                               
of peak  demand they can draw  not only upon the  reservoirs, but                                                               
upon  the storage.  This is  a common  practice elsewhere  in the                                                               
United States,  but while  the Commission  presumes to  have this                                                               
authority and  already exercises it,  it has not been  granted in                                                               
black-letter law.  They want to have  it in law to  eliminate any                                                               
future arguments.                                                                                                               
3:53:46 PM                                                                                                                    
SENATOR WAGONER asked  if he was talking about  the Swanson River                                                               
and Kenai gas fields.                                                                                                           
MR. NORMAN  replied yes;  and they  may see more  of that  in the                                                               
SENATOR WAGONER asked if Pretty  Creek (Kenai gas field) supplies                                                               
MR. NORMAN  replied that  he would  have to  get that  answer for                                                               
him. He  said another change in  the statute is to  include among                                                               
the recitals of authority and  responsibility of the Commission a                                                               
responsibility  to oversee  not just  conservation, waste,  fresh                                                               
water  et  cetera,  but  "safety  and  public  health".  This  is                                                               
consistent  with  the 2004  version  of  the  Model Oil  and  Gas                                                               
Conservation  Act  promulgated  by  the Interstate  Oil  and  Gas                                                               
Compact Commission.  It is being  proposed to keep Alaska  in the                                                               
forefront of  having one  of the  best regulatory  structures for                                                               
oil and gas in the United States.                                                                                               
3:56:08 PM                                                                                                                    
SENATOR STEDMAN joined the committee.                                                                                           
Another  change he  described as  a slight  course correction  in                                                               
Section  5.  He said  currently  the  AOGCC  has oversight  of  a                                                               
program that  requires well testing  and development  of baseline                                                               
information  for  the  exploration  and  development  of  coalbed                                                               
methane wells. This  change fine-tunes the wording  that now says                                                               
"when a well  is drilled for production or  production testing of                                                               
coalbed  methane" that  would trigger  the  requirement for  this                                                               
program  by making  "or production  testing" at  the Commission's                                                               
discretion.  Production  testing  presents minimal  risk  to  any                                                               
fresh  water   supplies  because   risk  occurs   almost  without                                                               
exception in  the exploration phase.  If, however, the  well then                                                               
progresses to where it goes on  to what is defined in regulations                                                               
as "regular production" then that requirement would be there.                                                                   
3:58:13 PM                                                                                                                    
SENATOR   WIELECHOWSKI  asked   if  they   are  eliminating   the                                                               
Commission's ability  to require  design and implementation  of a                                                               
well testing program if they are doing production testing.                                                                      
MR. NORMAN replied that he would say:                                                                                           
     We  don't really  have  the ability  to  require it.  I                                                                    
     believe the  statue mandates  that this  be done  and a                                                                    
     triggering  event  is  the  drilling  and  then  if  an                                                                    
     operator  wishes to  test  and see  if  they've made  a                                                                    
     discovery,   that  triggers   this  program   which  is                                                                    
     expensive.  And it  isn't because  of the  expense that                                                                    
     we're  recommending it.  But  if it  is  very low,  low                                                                    
     yield -  next to  nothing -  there's no  risk at  all -                                                                    
     that I would  represent to you - to any  fresh water as                                                                    
     a  result  of  production  testing.  If,  however,  the                                                                    
     operator moves into regular  production from that well,                                                                    
     then all  of the  protections that  are now  in statute                                                                    
     would remain. So, it's just this one small change.                                                                         
3:59:27 PM                                                                                                                    
SENATOR WIELECHOWSKI  said it is  a very controversial  issue. He                                                               
asked  Mr.  Norman  if  there  was absolutely  no  risk  of  well                                                               
contamination in production testing for coalbed methane.                                                                        
3:59:47 PM                                                                                                                    
MR. NORMAN  replied that it's not  often that he would  say there                                                               
is absolutely  no risk and he  didn't know if he  should now, but                                                               
all of life  is a matter of cost benefit  analysis. In the things                                                               
the  Commission regulates  and of  the things  that can  go wrong                                                               
every day  in the drilling  that's going  on right now,  there is                                                               
"minimal, minimal,  minimal risk from  just testing a  well." The                                                               
well has  already been drilled;  the operator just wants  to test                                                               
it. Once it goes to  regular production, careful monitoring would                                                               
be instituted.                                                                                                                  
CHAIR  HUGGINS  asked if  the  change  didn't prevent  them  from                                                               
testing a well once it is in production.                                                                                        
SENATOR WIELECHOWSKI said if there was  no risk, he didn't have a                                                               
problem with not  requiring well testing, but if  there was risk,                                                               
he didn't want to delete that requirement.                                                                                      
MR. NORMAN replied among all  the things the Commission regulates                                                               
this is way  down at the total bottom of  the scale of presenting                                                               
any  threat to  fresh water.  The risk  is involved  once a  well                                                               
begins to produce and the  pressure changes between the water and                                                               
4:03:36 PM                                                                                                                    
CHAIR  HUGGINS  said  this  doesn't  eliminate  the  Commission's                                                               
ability to  do testing  at a  time when  production and  the real                                                               
risk potentially might come to fruition.                                                                                        
MR.  NORMAN agreed  emphatically  and added  that the  Commission                                                               
still  has the  ability  to impose  conditions  before issuing  a                                                               
drilling permit  if it sees the  need. This just mandates  it for                                                               
coalbed methane.                                                                                                                
CHAIR HUGGINS asked if this change was lobbied for by industry.                                                                 
4:06:07 PM                                                                                                                    
MR. NORMAN replied,  "No, sir. This change was  brought about and                                                               
identified by  the Commission." It  became apparent to  them that                                                               
this requirement didn't serve a useful purpose.                                                                                 
He said  the AOGCC is  one of  the oldest regulatory  agencies in                                                               
Alaska. It was  enacted pursuant to Chapter 4, SLA  1955. This is                                                               
remarkable  because   that  is  before  oil   was  discovered  in                                                               
commercial quantities here and  predates statehood. The framework                                                               
has  served  them  remarkable  well over  these  many  years  and                                                               
demonstrates   remarkable  foresight   on  the   part  of   those                                                               
He said  this act contains  its own provisions about  appeals for                                                               
decisions  of the  AOGCC  in Section  10 that  seem  to grant  an                                                               
automatic trial de  novo. These provisions are  outmoded and were                                                               
superseded by general rules that  were applicable to appeals from                                                               
all  administrative  agencies.  This has  been  the  Commission's                                                               
position.  Occasionally people  have contested  this and  in each                                                               
case the Commission has prevailed  and most recently in a Supreme                                                               
Court decision, Allen  v AOGCC 147 Pacific 3   664. This language                                                               
cleans up that issue and brings alignment to statute.                                                                           
4:11:04 PM                                                                                                                    
MR.  NORMAN went  to Section  12 that  proposes to  eliminate the                                                               
statutory  fee  of   $100  for  a  permit  to   drill.  This  fee                                                               
contributes a  total of $25,000  per year toward the  agency's $4                                                               
million-year-plus budget.  It has not  been changed for  at least                                                               
37 years and started out in 1955 at $50 going to $100 in 1970.                                                                  
The  Commission  considered  a  range  of  options  for  the  fee                                                               
including increasing it - some  states charge a fairly hefty fee;                                                               
others don't charge  at all. They considered the  effect upon new                                                               
companies  coming in  to Alaska  as well  as consulting  with the                                                               
current  regulatory   industry  that  pays  the   regulated  well                                                               
regulatory cost charge  that funds the operations  of the agency.                                                               
And now  the Commission recommends deleting  the $100-penalty. It                                                               
doesn't  serve much  of  a  purpose simply  because  many of  the                                                               
companies  that  pay the  regulatory  cost  charge also  wind  up                                                               
paying this $100 fee which is  then deducted from what they would                                                               
otherwise pay. But  it causes a fair amount of  accounting at the                                                               
end  of  the year  with  a  true up  and  an  adjusted bill.  The                                                               
administration supports this bill.                                                                                              
SENATOR  WIELECHOWSKI  asked  if  it  costs  $25,000  to  do  the                                                               
accounting for the fee.                                                                                                         
MR. NORMAN replied no, but it  comes out as a deduction and there                                                               
is no net gain to the state in keeping it.                                                                                      
4:14:45 PM                                                                                                                    
MR. NORMAN  went to  Section 7,  which makes  more well  data and                                                               
applications  to   drill  information   public  and   makes  that                                                               
information  public sooner  than is  the  case now  in two  ways.                                                               
First,  it  narrows  the  field   of  wells  that  would  receive                                                               
protection   of   confidentiality    only   to   exploratory   or                                                               
strategraphic  wells, because  the  Commission believes  industry                                                               
has  a  legitimate  reason  to want  to  retain  its  proprietary                                                               
information. It cost them a lot  of money to drill the wells. But                                                               
most  of the  wells are  development wells  and the  greater good                                                               
will be  served by getting  the information  on those out  to the                                                               
public. So  the bill proposes  to eliminate  what is now  the 24-                                                               
month  period  of confidentiality  for  those  wells making  that                                                               
information public immediately upon delivery to the AOGCC.                                                                      
A  second  part  addresses  applications for  permits  to  drill.                                                               
Historically  an  application for  a  permit  to drill  has  been                                                               
treated  as  confidential  and  except  for  certain  information                                                               
listed in the  statute, can not be released for  2 months. Again,                                                               
that cloak of confidentiality is  limited to only exploratory and                                                               
strategraphic  test  well  information   and  then  only  to  the                                                               
information   the  Commission   determines  is   proprietary  and                                                               
deserving of protection. The main thrust  of this again is to get                                                               
more  information out  to the  public  and to  avoid putting  the                                                               
Commission in  the position of saying  no to a citizen  who wants                                                               
to see an application. They want  to strike a balance between the                                                               
legitimate needs of the industry for proprietary protection.                                                                    
CHAIR  HUGGINS summarized  that this  enhances public  knowledge,                                                               
rather than reducing it.                                                                                                        
MR. NORMAN replied that is correct.                                                                                             
4:17:32 PM                                                                                                                    
MR. NORMAN  continued on  saying another  provision in  Section 8                                                               
provides that information voluntarily  provided to the Commission                                                               
makes it clear that by receiving  it in that fashion they are not                                                               
guaranteeing that protection will carry  over in a future hearing                                                               
or  to another  application.  Currently  and for  a  long time  a                                                               
company has been able to  provide information voluntarily but can                                                               
ask  to have  it remain  confidential. That  proceeding will  now                                                               
have  to  stand  on  its  own  legs.  They  are  eliminating  any                                                               
potential  that  a  company  might   argue  that  it  voluntarily                                                               
provided  information  to  the  Commission  in  2007  and  it  is                                                               
confidential; so now in 2010  when they are filing this petition,                                                               
this  information  is  already confidential.  The  Commission  is                                                               
saying that  it won't work that  way because it has  to develop a                                                               
public  record that  will support  its decisions.  This does  not                                                               
reduce public  awareness and he  said that all  the commissioners                                                               
recommend  this  legislation   for  favorable  consideration  and                                                               
4:20:52 PM                                                                                                                    
SENATOR  STEVENS asked  on page  9  subsection (e)  if a  knowing                                                               
violation penalty is used very often.                                                                                           
MR.  NORMAN replied  that  subsection (e)  is  not something  the                                                               
Commission  would  use;  it  is about  something  that  would  be                                                               
prosecuted  criminally.   The  Commission  can   introduce  civil                                                               
penalties and those are addressed  in subsection (a) that says if                                                               
an action is so willful that it  rises to the level of a criminal                                                               
violation, that  it can also  be prosecuted criminally  and would                                                               
constitute a misdemeanor.                                                                                                       
SENATOR STEVENS asked if that penalty is being left at $10,000.                                                                 
MR.  NORMAN   replied  yes   because  he   thinks  it   would  be                                                               
presumptuous of the  Commission to begin to delve too  far into a                                                               
criminal  issue.  It's  up  to   the  Criminal  Division  of  the                                                               
Department of Law to decide if that number should be increased.                                                                 
4:23:20 PM                                                                                                                    
KARA  MORIARTY,  External Affairs  Manager,  Alaska  Oil and  Gas                                                               
Association (AOGA),  supported SB  96 and Mr.  Norman's suggested                                                               
changes  and  supported the  changes  in  the  CS. She  hoped  to                                                               
continue working with them on clarifying questions.                                                                             
ALAN BIRNBAUM,  Assistant Attorney  General, Oil, Gas  and Mining                                                               
Section, Alaska  Department of Law,  said he is  representing the                                                               
AOGCC and  that Mr.  Norman did an  excellent job  of summarizing                                                               
the CS. He  wanted to clarify that the last  reference to Section                                                               
14(e) on the  top of page 9  changes the penalty from  what it is                                                               
in statute today at $5,000 a day to $10,000 a day.                                                                              
4:27:34 PM                                                                                                                    
MARK WORCESTER,  Senior Council,  ConocoPhillips, said it  is the                                                               
largest  producer in  Alaska  and the  most  active explorer.  He                                                               
supported Mr.  Norman's explanation  of the CS  and congratulated                                                               
him on  being so diligent  in updating its statutes,  making sure                                                               
that  ConocoPhillips understands  what  he is  trying  to do  and                                                               
listening  to their  concerns. His  responses are  thoughtful and                                                               
thorough. He  said ConocoPhillips  supported this bill  and urged                                                               
its passage.                                                                                                                    
SENATOR STEDMAN  moved to adopt  CSSB 109(RES), version  M. There                                                               
were no objections and it was so ordered.                                                                                       
4:29:59 PM                                                                                                                    
SENATOR STEVENS asked if the  Commission was celebrating its 50th                                                               
MR. NORMAN replied  that they are preparing a  history right now,                                                               
which is  somewhat of  a history  of all of  Alaska for  the 50th                                                               
anniversary. He  anticipated being  able to widely  distribute it                                                               
showing the  evolution of  the industry that  is so  important to                                                               
the State of Alaska.                                                                                                            
SENATOR STEDMAN moved  to pass CSSB 109(RES)  from committee with                                                               
individual recommendations  and zero  fiscal note. There  were no                                                               
objections and it was so ordered.                                                                                               

Document Name Date/Time Subjects