Legislature(2007 - 2008)BUTROVICH 205
04/13/2007 03:30 PM RESOURCES
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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 numbers. 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 penalty. 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 list. 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 accidents. 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 future. SENATOR WAGONER asked if Pretty Creek (Kenai gas field) supplies Beluga. 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 gas. 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 legislators. 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 rd 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 action. 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 anniversary. 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.