Legislature(2021 - 2022)BUTROVICH 205

03/10/2021 03:30 PM RESOURCES

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**Streamed live on AKL.tv**
         SB 62-GAS LEASES; RENEWABLE ENERGY GRANT FUND                                                                      
4:02:48 PM                                                                                                                    
CHAIR REVAK  announced the consideration  of SENATE BILL  NO. 62,                                                               
"An  Act relating  to surface  use restrictions  for oil  and gas                                                               
leases; relating to  gas leases in Kachemak Bay;  relating to the                                                               
renewable  energy  grant fund;  and  providing  for an  effective                                                               
4:03:20 PM                                                                                                                    
HALEY  PAINE,   Deputy  Director,   Division  of  Oil   and  Gas,                                                               
Department  of Natural  Resources,  Anchorage, Alaska,  explained                                                               
her presentation will  provide the committee with  an overview of                                                               
SB  62 including  its purpose,  any potential  challenges if  not                                                               
permitted, and a sectional analysis.                                                                                            
4:03:52 PM                                                                                                                    
MS. PAINE referenced  slide 2 and stated the purpose  of SB 62 is                                                               
to  allow the  Division  of  Oil and  Gas  to  lease and  capture                                                               
revenue  from state-owned  resources underlying  lands restricted                                                               
to surface.  The bill  does not  open Kachemak  Bay or  any other                                                               
closed area to surface development,  the bill simply aims only to                                                               
capture  royalty revenue  from geology  drained through  adjacent                                                               
development on nearby unrestricted lands.  With the use of modern                                                               
drilling technologies, oil  and gas may be  safely developed from                                                               
adjacent lands  with no impact  to the surface of  the restricted                                                               
areas, to include the offshore.                                                                                                 
MS. PAINE stated  that the primary benefit of SB  62 is increased                                                               
state  revenue. Lands  with  surface-use  restrictions can  still                                                               
provide revenue  in the  form of lease  sale bids,  annual rental                                                               
payments,  and royalties  if made  available for  subsurface-only                                                               
development. The  state will  be able to  protect the  land using                                                               
established  regulatory   methods  while  still   maximizing  the                                                               
economic recovery of its resources.                                                                                             
MS. PAINE  turned to  slide 3  and said the  main concern  is the                                                               
mechanism for  collecting royalties  if unleased land  is drained                                                               
from wells  on adjacent leases  where the state does  not realize                                                               
royalty payment  and possible  diminished revenue.  For instance,                                                               
the wellhead  may be  located on private  land; this  may prevent                                                               
the state  from realizing the  royalty revenue unless  the remedy                                                               
is sought  through [Alaska Oil  and Gas  Conservation Commission]                                                               
(AOGCC) for correlative rights.                                                                                                 
She explained leasing is the  standard mechanism for establishing                                                               
a contractual  relationship between the state  and the developer.                                                               
The  state   exercises  its  authority  through   the  lease  for                                                               
mitigation  measures  compliance.  The state  also  requires  the                                                               
sharing  of drilling  and reservoir  data, data  integral to  the                                                               
state understanding the extent of its resources.                                                                                
4:06:21 PM                                                                                                                    
MS. PAINE  said bill  Section 2 addresses  the subject  area. The                                                               
bill seeks  to allow gas-only  leasing of the subject  area while                                                               
maintaining the  surface use restrictions  that are  currently in                                                               
place. The  offshore state  lands in Township  5 South,  Range 15                                                               
West are shown both within the  context of the Greater Cook Inlet                                                               
with more  detail in addition  to a  closeup of the  subject area                                                               
illustrated in the blue-hashmark region.                                                                                        
MS.  PAINE  detailed  the  subject area  is  adjacent  to  active                                                               
development on  the Kenai Peninsula,  including the  Seaview Unit                                                               
which was recently approved by  the division in October 2020. The                                                               
Cosmopolitan Unit  to the northdepicted   in olive  colorare  all                                                               
being developed  from the onshore  Hansen padlocated   on private                                                               
landabout   halfway   up  the  unit  along   the  coastline.  The                                                               
Cosmopolitan  Unit provides  an example  of successful  access of                                                               
offshore  resources  without  impacting the  surface-use  of  the                                                               
SENATOR  STEVENS  asked how  far  the  pipelines reach  out  into                                                               
Kachemak Bay.                                                                                                                   
MS. PAINE replied  they are all accessed from the  Hansen pad for                                                               
the Cosmopolitan  Unit but  she would follow  up with  the actual                                                               
distance to the wellbore.                                                                                                       
SENATOR  STEVENS said  he assumed  pipelines are  able to  extend                                                               
farther and farther from shore.                                                                                                 
MS. PAINE answered yes, modern  drilling technologies continue to                                                               
improve for  safely accessing resources. The  distance from shore                                                               
would depend on  the variety of factors including  the pool depth                                                               
within  the   geologynoting   current  examples.   The  blue-hash                                                               
subject  area  should be  well  within  current technologies  for                                                               
access via unrestricted surface land.                                                                                           
4:09:30 PM                                                                                                                    
MS. PAINE provided the following sectional analysis for SB 62:                                                                  
     Section 1  - Amends AS 38.05  to add a new  section, AS                                                                  
     38.05.176  to specify  that a  statute restricting  the                                                                    
     surface use  of an oil  and gas or gas-only  lease area                                                                    
     does not  also restrict  drilling of the  subsurface of                                                                    
     that  leased  area from  an  adjacent  leased area  not                                                                    
     subject   to  restrictions   on  surface   use,  unless                                                                    
     specifically provided.                                                                                                     
     Section 2  - Amends AS 38.03.184(b)  to acknowledge the                                                                  
     exemption (created  by Section 3  of this bill)  to the                                                                    
     statute   prohibiting   the   Department   of   Natural                                                                    
     Resources  or  any  other  state  agency  from  issuing                                                                    
     leases  for oil  exploration  or  development on  state                                                                    
     owned land  and waters in  and around Kachemak  Bay and                                                                    
     extending  to the  three-mile offshore  limit of  state                                                                    
     Section  3  -  Amends  AS 38.04.184  by  adding  a  new                                                                  
     subsection  (h) specifically  authorizing the  director                                                                    
     of  the  Division of  Oil  and  Gas to  offer  gas-only                                                                    
     leases  in   an  area  adjacent   to  Kachemak   Bay                                                                       
     specifically, within  Township 5 South, Range  15 West,                                                                    
     Seward  Meridian, Alaska.  Such leases  would carry  no                                                                    
     right to  use the surface  of the land and  would allow                                                                    
     only  natural gas  exploration  or production  drilling                                                                    
     from adjacent leased lands.                                                                                                
     Section  4  -  Amends  AS  42.45.045(b)  to  allow  the                                                                  
     legislature  to  appropriate  to the  Renewable  Energy                                                                    
     Grant  Fund  the  state's rentals,  royalties,  royalty                                                                    
     sale proceeds and net  profit shares generated pursuant                                                                    
     to oil and  gas, or gas-only leases  issued pursuant to                                                                    
     AS  38.05.180(f)  and  (g), as  well  as  such  revenue                                                                    
     generated  by gas-only  leases  issued  pursuant to  AS                                                                    
     38.05.184(h) (authorized  by Section  3 of  this bill).                                                                    
     Such  appropriations  would  occur after  the  required                                                                    
     deposit  of any  such revenue  to the  Alaska Permanent                                                                    
     Fund  required under  art. IX,  sec. 15  of the  Alaska                                                                    
     Section   5   -   Amends  AS   45.45.045(c)   requiring                                                                  
     investments funds  to be managed  by the  Department of                                                                    
     Revenue,  which  shall be  the  fiduciary  of the  fund                                                                    
     under AS 37.10.071.                                                                                                        
     Section 6 - Provides an immediate effective date.                                                                        
4:12:48 PM                                                                                                                    
SENATOR STEVENS noted Senator Micciche  passed him a note saying,                                                               
"We are  talking about extending out  to 7.5 miles." He  asked if                                                               
drilling  from shore  eliminates the  need for  the big  platform                                                               
sites in the ocean.                                                                                                             
MS. PAINE answered  that [drilling from shore] may not  be a full                                                               
replacement for any offshore  development. Locations would depend                                                               
on where  the resource  is accessed.  Locations primarily  in the                                                               
Upper Cook  Inlet are not near  shore reach. SB 62  is looking to                                                               
direct specific leasing areas that  are close enough for safe and                                                               
modern drilling  technology to access from  adjacent unrestricted                                                               
surface land.                                                                                                                   
SENATOR STEVENS  remarked that drilling  from shore seems  like a                                                               
great goal.                                                                                                                     
4:14:26 PM                                                                                                                    
SENATOR KIEHL noted the focus on  the Kachemak Bay area and asked                                                               
if the  bill would apply to  subsurface leases on all  state land                                                               
with a surface restriction. For  example, a critical habitat area                                                               
like in  Gustavus, a state  park, or a  piece of state  land that                                                               
has a private lease for a lodge.                                                                                                
MS. PAINE replied the intention of  SB 62 is to provide a general                                                               
framework  that  would allow  for  specific  designations in  the                                                               
future  should there  be  a  specific lease-by-application  (LBA)                                                               
that closes  or restricts that. Consideration  will always depend                                                               
on whether  the state has the  mineral estate and whether  it can                                                               
be  safely accessed  from a  nearby piece  of unrestricted  state                                                               
land. At this time, the bill  is only contemplating the access of                                                               
the subject area.                                                                                                               
SENATOR  KIEHL  asked  her  to  confirm  that  the  bill  applies                                                               
everywhere, not just the Kachemak Bay area.                                                                                     
MS. PAINE answered yes, the  bill is looking at addressing future                                                               
surface-use restrictions that  may be imposed. At  this time, the                                                               
Kachemak Bay  oil and gas  closure is  a very unique  location in                                                               
terms of  its authorization  through statute  and the  bill would                                                               
create the opening in case there are future opportunities.                                                                      
4:16:27 PM                                                                                                                    
SENATOR VON IMHOF read the following from slide 3:                                                                              
       If unleased land is drained from wells on adjacent                                                                       
     leases, royalties may not be paid to the state or that                                                                     
     revenue could be diminished.                                                                                               
She said  she looks at  this as  a revenue enhancement  bill. She                                                               
offered her understanding that  horizontal drilling technology is                                                               
becoming  more  capable and  it  could  occur without  the  state                                                               
MS. PAINE replied  the state currently does  not contemplate that                                                               
drilling  from adjacent  leases  is actively  occurring, but  the                                                               
bill  sets the  stage for  the state  to not  have to  go through                                                               
AOGCC to maximize revenue for those lands.                                                                                      
SENATOR VON IMHOF recapped that  the bill prepares for what could                                                               
happen and it ensures the  state maximizes the revenue. She read,                                                               
"To  allow  the legislature  to  appropriate  revenue from  these                                                               
leases  to the  Renewable Energy  Grant Fund."  in Section  4 and                                                               
asked if some of the money will go to a designated fund.                                                                        
MS.   PAINE  answered   yes,  the   legislature  may   choose  to                                                               
appropriate  revenues from  the  leases to  the Renewable  Energy                                                               
Grant Fund.                                                                                                                     
4:18:50 PM                                                                                                                    
SENATOR  VON   IMHOF  asked  her  to   confirm  that  legislative                                                               
appropriation  to the  Renewable Energy  Grant Fund  is currently                                                               
not happening, but this would change that.                                                                                      
MS. PAINE answered yes.                                                                                                         
SENATOR  MICCICHE  asked her  to  confirm  that only  funds  from                                                               
projects that  are associated  with the  specified type  of lease                                                               
would be deposited into the Renewable Energy Grant Fund.                                                                        
MS.  PAINE answered  yes, the  bill would  only authorize  leases                                                               
from  the  specified  area  to   have  monies  allocated  to  the                                                               
Renewable Energy Grant Fund.                                                                                                    
SENATOR MICCICHE  pointed out  the bill  only affects  Township 5                                                               
South,  Range  15  Westan   area   of  interest  because  of  the                                                               
[Cosmopolitan Unit] and  other developments. He asked  her if the                                                               
state  has seismic  [data]  in that  particular  area that  looks                                                               
MS.   PAINE  replied   the  noted   areas  are   currently  under                                                               
development  with their  pools and  being  delineated. The  state                                                               
does not  have a  specific reason  at this time  to say  that the                                                               
development is  going to occur.  However, the bill  simply allows                                                               
for departmental  preparation to  move forward with  land leasing                                                               
should development  occur within  the Kenai Peninsula  and Anchor                                                               
Point area.                                                                                                                     
SENATOR  MICCICHE  asked   if  separate  legislationincluding   a                                                               
"Section  3" that  identifies the  specific  township and  range                                                                
would occur  if an additional  area in  Alaska at some  point has                                                               
some potential or interest by someone.                                                                                          
MS.  PAINE  offered  her  understanding  that  with  the  general                                                               
provision  in place  the department  would  need to  find out  if                                                               
there is  a specific closure  area that is already  enshrined for                                                               
that particular location, and then  that particular statute would                                                               
require modification.                                                                                                           
4:21:25 PM                                                                                                                    
SENATOR  STEVENS asked  her to  confirm  that appropriations  are                                                               
currently deposited into  the Alaska Permanent Fund  and the bill                                                               
would  allow for  appropriations  to the  Renewable Energy  Grant                                                               
Fund. He  asked what  the funds from  the Renewable  Energy Grant                                                               
Fund are used for.                                                                                                              
MS. PAINE  replied that  from a  broad perspective  the Renewable                                                               
Energy Grant  Fund has  been used to  fund projects  in different                                                               
communities  throughout  Alaska  that  are in  the  research  and                                                               
development stage. She offered to  follow up with a more detailed                                                               
SENATOR  KIEHL  said  his  question  goes  back  to  the  general                                                               
applicability  of  directional  drilling  under  lands  that  are                                                               
otherwise not  open for oil  and gas leasing,  specifically parks                                                               
and  some  state  marine  parks that  include  both  surface  and                                                               
subsurface waters. He asked if her  sense is that should the bill                                                               
pass,  the  state will  not  have  to  worry  about some  of  the                                                               
incompatible use  restrictions currently in the  state management                                                               
plans for parks or other  special areas. For example, things like                                                               
noise and  lights associated with industrial  development for oil                                                               
and gas extraction.                                                                                                             
4:23:29 PM                                                                                                                    
MS. PAINE  explained that  imbedded in  the current  formal lease                                                               
contract  is  all the  regulatory  authority  and protection  for                                                               
mitigation measures  and other authorization that  dictates how a                                                               
development may  occur in  a particular area.  The bill  does not                                                               
set aside any  plans or agreements that have been  set out in any                                                               
MS. PAINE said the department  will continue to do successful and                                                               
safe  resource development  in areas  throughout the  state where                                                               
there  are  other  management  plans   using  the  best  interest                                                               
findings  process  as  well  as the  mitigation  measures  for  a                                                               
specific lease. The department addresses  those and ensures those                                                               
aspects are only  authorized in a manner that  is compatible with                                                               
a plan of operations.                                                                                                           
4:24:45 PM                                                                                                                    
CHAIR REVAK opened  public testimony on SB 623;  finding none, he                                                               
closed public testimony.                                                                                                        
4:25:10 PM                                                                                                                    
CHAIR REVAK held SB 62 in committee.                                                                                            

Document Name Date/Time Subjects
SB 61 CS (RES) Work Draft 32-GS1706.B.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 61 DNR Response to Committee Questions 2.17.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 61 LAA Legal Opinion 2.19.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 62 Sectional Analysis Version A 2.2.2021.pdf SRES 3/10/2021 3:30:00 PM
SB 62
SB 62 Sponsor Statement 1.28.2021.pdf SRES 3/10/2021 3:30:00 PM
SB 62
SB 61 AOGA Letter of Support- 3.9.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 62 DNR Presentation- Gas Leases; Renwable Energy Grant.pdf SRES 3/10/2021 3:30:00 PM
SB 62