Legislature(1995 - 1996)
04/05/1995 01:40 PM House FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
APRIL 5, 1995
1:40 P.M.
TAPE HFC 95 - 78, Side 2, #000 - end.
TAPE HFC 95 - 79, Side 1, #000 - end.
TAPE HFC 95 - 79, Side 2, #000 - #448.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 1:40 P.M.
PRESENT
Co-Chair Hanley Representative Kohring
Co-Chair Foster Representative Martin
Representative Mulder Representative Navarre
Representative Brown Representative Parnell
Representative Grussendorf Representative Therriault
Representative Kelly
ALSO PRESENT
Mike Greany, Director, Legislative Finance Division;
Representative Scott Ogan; Representative Joe Green;
Representative Norman Rokeberg; Patrick Coughlin, Assistant
Attorney General, Oil and Gas Mining Section, Civil
Division, Department of Natural Resources; Ken Boyd, Acting
Director, Division of Oil and Gas, Department of Natural
Resources; Arthur Snowden II, Administrative Director,
Alaska Court System; Richard Fineberg, Research Associates,
Ester, Alaska; Paul Wessells, B.P. Exploration, (Testified
via teleconference), Anchorage; Mike Bruner, (Testified via
teleconference), Anchorage; Patrick Dalton, Delta Junction.
SUMMARY
CAMBRIDGE ENERGY RESEARCH ASSOCIATES CONTRACT
The Cambridge Energy Research Associates Contract
was passed out of the House Finance Committee.
HB 207 An Act relating to adjustments to royalty reserved
to the state to encourage otherwise uneconomic
production of oil and gas; relating to the
depositing of royalties and royalty sale proceeds
in the Alaska permanent fund; and providing for an
effective date.
1
HB 207 was placed in Subcommittee with
Representative Therriault as Chair and with
members, Representative Brown and Representative
Parnell.
THE CAMBRIDGE ENERGY RESEARCH ASSOCIATES CONTRACT
MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
explained the contract between the Cambridge Energy Research
Associates and the House and Senate Finance Committees for
the purpose of providing oil and gas related services and
publications. He specified that the contract amount was
$15,750 dollars.
Representative Mulder MOVED the recommendations to retain
the Cambridge Energy Research Associate contract.
Representative Navarre OBJECTED for purposes of discussion.
He stated that the Department of Revenue currently provides
the same information.
Mr. Greany advised that the contractual agreement
illustrated a useful expenditure of finances, noting that it
provides advice and wisdom from an agency which has a global
perspective on oil prices. Representative Navarre
reiterated that the information used by the Cambridge Energy
Research Associates was also used by the Department of
Revenue. He emphasized that revenue decisions made by the
Legislature were not based on information received from that
report.
Representative Martin agreed with Representative Navarre,
stating that the Department of Revenue and the local
newspapers provided sufficient information for making budget
decisions. Representative Grussendorf disagreed. He
commented that the research report kept the Department of
Revenue honest in the information they provided for the
local citizens. Representative Therriault thought the
information provided by the research was "irrelevant".
Mr. Greany advised that the current contract price was for a
presentation and work preparation which have already been
completed. Mr. Greany apologized for the tardiness in the
House Finance Committee's receipt of the contract this year.
Representative Brown pointed out that within the "Standard
Agreement", there was reference to an attachment not
provided to the Committee. Mr. Greany offered to pursue
finding that attachment although he understood that the only
item billed separately would be the direct travel expenses.
Representative Brown asked if retainer advisory services
were currently being provided to the association. Mr.
2
Greany advised that the State currently receives those
services.
Co-Chair Hanley suggested discontinuing the contract next
year. Representative Navarre WITHDREW THE OBJECTION, with
the understanding that negotiations of the contract would be
reconsidered for the next year. There being NO FURTHER
OBJECTIONS, the contract was approved.
Representative Navarre then MOVED to discontinue the
contract for the following year. Representative Parnell
remarked that $15 thousand dollars was not an expensive
insurance policy indicating that he was not sure that the
contract was no longer needed. He added that the Department
of Revenue only provides one side of the budget
consideration, whereas, the contract provided an independent
view of that information. Mr. Greany agreed with
Representative Parnell, suggesting that a second opinion in
a professional arena should be encouraged. He pointed out
that at this time oil prices are predictable.
Representative Navarre WITHDREW THE MOTION with the
understanding that the Committee would work with Dr. Logston
to determine the futility in continuing the contract.
The House Finance Committee authorized the contract between
the Cambridge Energy Research Associates and the House and
Senate Finance Committees in the amount of $15,750 dollars.
ALASKA COURT SYSTEM
ARTHUR SNOWDEN II, ADMINISTRATIVE DIRECTOR, ALASKA COURT
SYSTEM, advised the Committee that the ANS gas case had
settled on 4/05/95. He noted that portion of the Court
System's supplemental request would be returned.
HOUSE BILL 207
"An Act relating to adjustments to royalty reserved to
the state to encourage otherwise uneconomic production
of oil and gas; relating to the depositing of royalties
and royalty sale proceeds in the Alaska permanent fund;
and providing for an effective date."
KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, explained that HB 207 was
designed to clarify and expand existing law.
Mr. Boyd provided a sectional analysis of the legislation.
Section #1 would provide the "Legislative Intent". Section
The State of Alaska has had a royalty reduction provision in
3
order since statehood. This section would also expand the
current law and would provide the commissioner the ability
to reduce royalties for future production. Section #2 is
considered the sustentative portion of the bill and
addresses where the law applies, and also defines a
"field".
Mr. Boyd continued, the Commissioner may not grant a
reduction of royalty unless the lessee requests that
reduction and then makes a clear and convincing showing that
the reduction would meet the requirements of that section
and would be in the best interest of the State. The royalty
reduction agreement condition would specify that a royalty
reduction could be granted by making reference to a sliding
scale royalty or an equivalent provision providing for an
adjustment to protect the State's interests. Mr. Boyd added
that the commissioner could not grant a royalty reduction
for a field, pool or portion of a field or pool that exceeds
75%, or royalties supplied requiring the balance to be at
least 25%.
Representative Parnell questioned the logic of establishing
the 25% balance number. Mr. Boyd countered there had been
no formula used to achieve that number and that the
Administration ascertained that it would be a reasonable
floor.
Representative Navarre asked if the ELF contribution tax
would be at zero. Mr. Boyd replied that in many cases, the
ELF would be near zero.
Mr. Boyd noted that Section #3 was the most important part
of the bill. It clarifies that the commissioner may not
reduce royalty on leases in connection with a cooperative or
unit plan except as provided in (j). Sections #4 & #5 were
added in the House Resources Committee to address the
spacing units and pieces of development contracts.
(Tape Change, HFC 95-79, Side 1).
Representative Brown inquired if the actions recommended in
HB 207 would be similar to the disposal of State land and
resources requirements referenced in AS 38.05.945. Mr. Boyd
responded that language had been added in the previous
Committee and that he did not know the answer.
Representative Brown referenced Page 2, Lines 4-13: "...not
yet produced" field. She asked if it would be possible to
have a reduction on only one stream in an area that produced
more resources. Mr. Boyd acknowledged that could occur.
Representative Brown asked if Prudoe Bay had produced gas
4
for sale to date. Mr. Boyd responded there has not been a
major gas sale to date although, there have been transfers
and sales of gas among the fields. Representative Brown
questioned how the language on Line 10 would apply to that
situation. Mr. Boyd stated that language would not be a
result but would be part of the clear and convincing showing
that a royalty reduction would be a difficult case to make.
Representative Brown questioned if the commissioner would
have the authority to require production in return for
lowering the royalty. Mr. Boyd stated that the commissioner
currently has that authority, and that the legislation would
not change it. Representative Brown expressed her fear that
a company could request a royalty and then not proceed with
the production. She suggested modifying the language on
Page 2, Line 31 to be more broad in order that the
commissioner could condition the agreement in any way
necessary. Mr. Boyd pointed out that if a company does not
produce oil, the royalty reduction would be meaningless.
PATRICK COUGHLIN, ASSISTANT ATTORNEY GENERAL, OIL AND GAS
MINING SECTION, CIVIL DIVISION, DEPARTMENT OF NATURAL
RESOURCES, explained the standard used to prolong the
economic life of a field would require a determination that
the State has achieved a maximum economic return as well as
that the field is and would likely continue to be
insufficient to produce a reasonable rate of return. He
added, those standards have been deleted from the bill.
Representative Brown referenced the last phrase on Line #16,
"any increase or decrease is sufficient to make future
productions no longer economically feasible". She thought
there could be other factors driving the situation.
Representative Grussendorf spoke to the owner/state
doctrine, acknowledging that in that philosophical base, all
resources belong to all the people of the State and any
revenue derived from those resources should be disbursed.
Representative Grussendorf referenced Page 4, Line #31, "the
commissioner's written determination regarding royalty
reduction is final and not appealable to the courts".
Mr. Coughlin pointed out that the Legislature has adopted
such language at previous times. The meaning of such
phrases has been appealed and that the Alaska Supreme Court
has stated that it will honor such a statement by the
Legislature to the extent that it accords with
constitutional guarantees.
Representative Martin questioned the constitutionality of
the language. He added, from information received from Dr.
Logston, there are seven fields which are not charged taxes,
5
thus leaving only royalty collections on those fields.
Representative Martin emphasized that continuation of the
royalties was extremely important to the State.
REPRESENTATIVE SCOTT OGAN noted that the bill requires that
the commissioner transmit copies of the action to the
presiding officer of each Body and the Chairs of the
Resource and Oil and Gas Committees. He stressed that the
"findings" would not be appealable. He questioned at the
time in which the finding was transmitted, would that be the
formality or would the Legislature then have the ability to
add into the decision. Mr. Boyd replied that they would
not, although the Legislature would have the same
opportunity during the public notice process to comment.
Once the "findings" were established, the results would be
available for the use and review of the Legislature.
Representative Brown questioned the issue of the competitive
sale process and that relationship to the bill. Mr.
Coughlin agreed that there is a possibility that a bidder
could be treated unfairly. All leases issued by the State
of Alaska since statehood have had a provision which
specifies that the royalty can be reduced under certain
circumstances.
Mr. Boyd added that the commissioner would be required to
consider the factors of delineation of each field. The
applicant would be required to be at the field for a
specified amount of time and had done some work in order to
be able to apply for the royalty reduction. Mr. Coughlin
added, under existing law the same problems could occur, and
would reflect the integrity of the bidding process.
PAUL WESSELLS, (TESTIFIED VIA TELECONFERENCE), DIRECTOR OF
TAX, B.P. EXPLORATION, ANCHORAGE, spoke in support of HB
207. He stated that the legislation would be an important
step in developing a new type of relationship for the State
of Alaska and the petroleum industry. That relationship
would be based on interest in common.
MIKE BRUNER, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
voiced opposition to the proposed legislation and asked if
there was a provision included in the legislation which
would increase oil royalties to amounts higher than
currently exist. Mr. Boyd referenced Page 3, Lines 2-3,
"...under this paragraph, the commissioner shall include
provisions in the agreement to increase or decrease the
state's royalty share based on relevant economic factors".
He added that the commissioner has the authority to
establish the royalties lower initially in order to get the
project "off the ground" with the option to modify that
provision.
6
Mr. Bruner understood that the commissioner did not have the
authority to raise the fee higher than established in the
original lease. Mr. Boyd stated that information was
incorrect and had resulted from the agreement between the
State of Alaska and a certain company. Mr. Bruner
concluded, there has been no historical incentives to
producing oil for companies and he felt that the rate of
return should benefit only the State.
RICHARD FINEBERG, RESEARCH ASSOCIATES, ESTER, ALASKA, spoke
in opposition to the legislation. [Copy on file]. He
summarized that there is a strong substantive case for
easing the State's existing royalty relief provisions as
proposed in all versions of HB 207 to date. He referenced
specific areas:
1. Production trends.
2. Comments on production trends.
3. Profitability
Mr. Fineberg continued, HB 207 contains serious structural
defects.
1. Procedures for royalty relief should be
clearly framed and the need for royalty
relief should be clear to the owners of the
resource.
(Tape Change, HFC 95-79, Side 2).
2. Economic considerations should include an
analysis of pipeline profits.
3. Blanket confidentiality. The requirement
that the Commissioner shall hold application
material confidential at industry request
contravenes the state's laws, common sense
and jurisprudence.
4. Contractor analysis.
5. Judicial review. He stated that it was easy
to understand why the industry would like to
remove judicial review.
Mr. Fineberg concluded that the current approach to
incentives is flawed. In the policy arena, where the
mission is to protect the public interest in both the
revenue stream and the environment, industry desires must be
balanced against those concerns. It would be self-evident
that any bill that increases industry revenue at the expense
7
of the State Treasury would tend to stimulate production.
The industry would advocate such a measure. If the
provision which grants confidentiality at the lessee's
request were removed or replaced with language that
guarantees public access to information necessary to
evaluation of public policy, it would be necessary to
demonstrated that the legislation would be necessary.
Mr. Fineberg summarized, in view of the well documented
history of abuses of confidentiality, it would make little
sense to allow the lessees, at their own initiative to
prevent it from materializing.
REPRESENTATIVE NORMAN ROKEBERG noted that he was the Chair
of the House Oil and Gas Committee and spoke to the
significant amount of effort and activity that went into
preparing the legislation and the committee substitutes.
The objective of the Oil and Gas Committee was to develop a
framework around the commissioner's discretion and to
protect the citizens of Alaska and their resources
Representative Rokeberg commented on the philosophy of the
legislation. He emphasized that Alaska is competing in a
global market. It is clear that B.P. Exploration and ARCO
are the two major investors in the State which also have
significant interest in the North Sea. Those governments
have revolutionized their tax system to accommodate that
interest.
He added, without the legislation there would be no new
capital investments made in the State. There has not been
one royalty reduction made in Alaska. The legislation will
clarify problems from the past while making adjustments to
new fields.
Representative Rokeberg recommended five areas within the
proposed legislation which should be focused on. He
explained that the Oil and Gas Committee made a
differentiation between new and old fields. He added that
the major controversial areas are in the imposition of the
floors. The original bill made a provision for a "hold
harmless" for the Permanent Fund thus establishing
artificial floors, 50% on leases occurring after 1980 and
25% on leases before that time. Following significant
testimony and review, it was determined that there were no
constitutional bounds. The Oil and Gas Committee returned
language to the status quo: "Any royalty payments made to
the State of Alaska should be shared between the general
fund and the permanent fund".
Representative Rokeberg continued, an additional issue
reviewed by the Committee was the oversight provisions on
8
Page 3, Section 6. The Committee adopted the Alaska Royalty
Advisory Commission Board as an oversight group to analyze
the commissioners discretion. In the House Resource
Committee, it was decided to use public notification and
review. Representative Rokeberg requested that House
Finance Subcommittee deliberate this area.
Representative Rokeberg offered his assistance to the House
Finance Subcommittee in reviewing HB 207. He pointed out
that the federal government is currently working on royalty
reduction legislation. These royalty reduction bills will
investigate deep water and frontier areas.
Representative Brown asked Representative Rokeberg if
consideration had been given to have the Legislature provide
the required oversight. She recommended providing a
disapproval mechanism within the bill unless approved by the
Legislature. Representative Rokeberg responded that the
Legislature and LBA had been considered. He added that a
sunset provision would not be workable as the time frame
does not lend itself to the interim schedule. He thought
that the situation should not be "politicized" and felt it
would be if the Legislature or LBA provided the oversight.
PATRICK DALTON, (TESTIFIED VIA TELECONFERENCE), DELTA
JUNCTION, spoke in opposition to HB 207. He stated that the
bill would provide uneconomic production of oil and gas in
the State. He added, the legislation would be an
environmental risk. Mr. Dalton emphasized that if the State
can not get what the minerals or resources are worth, they
should be left in the ground. Mineral rights then could be
allocated to the Alaskan residents.
Co-Chair Hanley countered that there existed a difference in
philosophy regarding the legislation. He placed HB 207 into
Subcommittee consisting of Chair, Representative Therriault,
and members Representative Parnell and Representative Brown.
HB 207 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting adjourned at 3:30 P.M.
HOUSE FINANCE COMMITTEE
APRIL 5, 1995
1:40 P.M.
9
TAPE HFC 95 - 78, Side 2, #000 - end.
TAPE HFC 95 - 79, Side 1, #000 - end.
TAPE HFC 95 - 79, Side 2, #000 - #448.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 1:40 P.M.
PRESENT
Co-Chair Hanley Representative Kohring
Co-Chair Foster Representative Martin
Representative Mulder Representative Navarre
Representative Brown Representative Parnell
Representative Grussendorf Representative Therriault
Representative Kelly
ALSO PRESENT
Mike Greany, Director, Legislative Finance Division;
Representative Scott Ogan; Representative Joe Green;
Representative Norman Rokeberg; Patrick Coughlin, Assistant
Attorney General, Oil and Gas Mining Section, Civil
Division, Department of Natural Resources; Ken Boyd, Acting
Director, Division of Oil and Gas, Department of Natural
Resources; Arthur Snowden II, Administrative Director,
Alaska Court System; Richard Fineberg, Research Associates,
Ester, Alaska; Paul Wessells, B.P. Exploration, (Testified
via teleconference), Anchorage; Mike Bruner, (Testified via
teleconference), Anchorage; Patrick Dalton, Delta Junction.
SUMMARY
CAMBRIDGE ENERGY RESEARCH ASSOCIATES CONTRACT
The Cambridge Energy Research Associates Contract
was passed out of the House Finance Committee.
HB 207 An Act relating to adjustments to royalty reserved
to the state to encourage otherwise uneconomic
production of oil and gas; relating to the
depositing of royalties and royalty sale proceeds
in the Alaska permanent fund; and providing for an
effective date.
HB 207 was placed in Subcommittee with
Representative Therriault as Chair and with
members, Representative Brown and Representative
Parnell.
10
THE CAMBRIDGE ENERGY RESEARCH ASSOCIATES CONTRACT
MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
explained the contract between the Cambridge Energy Research
Associates and the House and Senate Finance Committees for
the purpose of providing oil and gas related services and
publications. He specified that the contract amount was
$15,750 dollars.
Representative Mulder MOVED the recommendations to retain
the Cambridge Energy Research Associate contract.
Representative Navarre OBJECTED for purposes of discussion.
He stated that the Department of Revenue currently provides
the same information.
Mr. Greany advised that the contractual agreement
illustrated a useful expenditure of finances, noting that it
provides advice and wisdom from an agency which has a global
perspective on oil prices. Representative Navarre
reiterated that the information used by the Cambridge Energy
Research Associates was also used by the Department of
Revenue. He emphasized that revenue decisions made by the
Legislature were not based on information received from that
report.
Representative Martin agreed with Representative Navarre,
stating that the Department of Revenue and the local
newspapers provided sufficient information for making budget
decisions. Representative Grussendorf disagreed. He
commented that the research report kept the Department of
Revenue honest in the information they provided for the
local citizens. Representative Therriault thought the
information provided by the research was "irrelevant".
Mr. Greany advised that the current contract price was for a
presentation and work preparation which have already been
completed. Mr. Greany apologized for the tardiness in the
House Finance Committee's receipt of the contract this year.
Representative Brown pointed out that within the "Standard
Agreement", there was reference to an attachment not
provided to the Committee. Mr. Greany offered to pursue
finding that attachment although he understood that the only
item billed separately would be the direct travel expenses.
Representative Brown asked if retainer advisory services
were currently being provided to the association. Mr.
Greany advised that the State currently receives those
services.
Co-Chair Hanley suggested discontinuing the contract next
year. Representative Navarre WITHDREW THE OBJECTION, with
11
the understanding that negotiations of the contract would be
reconsidered for the next year. There being NO FURTHER
OBJECTIONS, the contract was approved.
Representative Navarre then MOVED to discontinue the
contract for the following year. Representative Parnell
remarked that $15 thousand dollars was not an expensive
insurance policy indicating that he was not sure that the
contract was no longer needed. He added that the Department
of Revenue only provides one side of the budget
consideration, whereas, the contract provided an independent
view of that information. Mr. Greany agreed with
Representative Parnell, suggesting that a second opinion in
a professional arena should be encouraged. He pointed out
that at this time oil prices are predictable.
Representative Navarre WITHDREW THE MOTION with the
understanding that the Committee would work with Dr. Logston
to determine the futility in continuing the contract.
The House Finance Committee authorized the contract between
the Cambridge Energy Research Associates and the House and
Senate Finance Committees in the amount of $15,750 dollars.
ALASKA COURT SYSTEM
ARTHUR SNOWDEN II, ADMINISTRATIVE DIRECTOR, ALASKA COURT
SYSTEM, advised the Committee that the ANS gas case had
settled on 4/05/95. He noted that portion of the Court
System's supplemental request would be returned.
HOUSE BILL 207
"An Act relating to adjustments to royalty reserved to
the state to encourage otherwise uneconomic production
of oil and gas; relating to the depositing of royalties
and royalty sale proceeds in the Alaska permanent fund;
and providing for an effective date."
KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, explained that HB 207 was
designed to clarify and expand existing law.
Mr. Boyd provided a sectional analysis of the legislation.
Section #1 would provide the "Legislative Intent". Section
The State of Alaska has had a royalty reduction provision in
order since statehood. This section would also expand the
current law and would provide the commissioner the ability
to reduce royalties for future production. Section #2 is
considered the sustentative portion of the bill and
addresses where the law applies, and also defines a
12
"field".
Mr. Boyd continued, the Commissioner may not grant a
reduction of royalty unless the lessee requests that
reduction and then makes a clear and convincing showing that
the reduction would meet the requirements of that section
and would be in the best interest of the State. The royalty
reduction agreement condition would specify that a royalty
reduction could be granted by making reference to a sliding
scale royalty or an equivalent provision providing for an
adjustment to protect the State's interests. Mr. Boyd added
that the commissioner could not grant a royalty reduction
for a field, pool or portion of a field or pool that exceeds
75%, or royalties supplied requiring the balance to be at
least 25%.
Representative Parnell questioned the logic of establishing
the 25% balance number. Mr. Boyd countered there had been
no formula used to achieve that number and that the
Administration ascertained that it would be a reasonable
floor.
Representative Navarre asked if the ELF contribution tax
would be at zero. Mr. Boyd replied that in many cases, the
ELF would be near zero.
Mr. Boyd noted that Section #3 was the most important part
of the bill. It clarifies that the commissioner may not
reduce royalty on leases in connection with a cooperative or
unit plan except as provided in (j). Sections #4 & #5 were
added in the House Resources Committee to address the
spacing units and pieces of development contracts.
(Tape Change, HFC 95-79, Side 1).
Representative Brown inquired if the actions recommended in
HB 207 would be similar to the disposal of State land and
resources requirements referenced in AS 38.05.945. Mr. Boyd
responded that language had been added in the previous
Committee and that he did not know the answer.
Representative Brown referenced Page 2, Lines 4-13: "...not
yet produced" field. She asked if it would be possible to
have a reduction on only one stream in an area that produced
more resources. Mr. Boyd acknowledged that could occur.
Representative Brown asked if Prudoe Bay had produced gas
for sale to date. Mr. Boyd responded there has not been a
major gas sale to date although, there have been transfers
and sales of gas among the fields. Representative Brown
questioned how the language on Line 10 would apply to that
situation. Mr. Boyd stated that language would not be a
13
result but would be part of the clear and convincing showing
that a royalty reduction would be a difficult case to make.
Representative Brown questioned if the commissioner would
have the authority to require production in return for
lowering the royalty. Mr. Boyd stated that the commissioner
currently has that authority, and that the legislation would
not change it. Representative Brown expressed her fear that
a company could request a royalty and then not proceed with
the production. She suggested modifying the language on
Page 2, Line 31 to be more broad in order that the
commissioner could condition the agreement in any way
necessary. Mr. Boyd pointed out that if a company does not
produce oil, the royalty reduction would be meaningless.
PATRICK COUGHLIN, ASSISTANT ATTORNEY GENERAL, OIL AND GAS
MINING SECTION, CIVIL DIVISION, DEPARTMENT OF NATURAL
RESOURCES, explained the standard used to prolong the
economic life of a field would require a determination that
the State has achieved a maximum economic return as well as
that the field is and would likely continue to be
insufficient to produce a reasonable rate of return. He
added, those standards have been deleted from the bill.
Representative Brown referenced the last phrase on Line #16,
"any increase or decrease is sufficient to make future
productions no longer economically feasible". She thought
there could be other factors driving the situation.
Representative Grussendorf spoke to the owner/state
doctrine, acknowledging that in that philosophical base, all
resources belong to all the people of the State and any
revenue derived from those resources should be disbursed.
Representative Grussendorf referenced Page 4, Line #31, "the
commissioner's written determination regarding royalty
reduction is final and not appealable to the courts".
Mr. Coughlin pointed out that the Legislature has adopted
such language at previous times. The meaning of such
phrases has been appealed and that the Alaska Supreme Court
has stated that it will honor such a statement by the
Legislature to the extent that it accords with
constitutional guarantees.
Representative Martin questioned the constitutionality of
the language. He added, from information received from Dr.
Logston, there are seven fields which are not charged taxes,
thus leaving only royalty collections on those fields.
Representative Martin emphasized that continuation of the
royalties was extremely important to the State.
REPRESENTATIVE SCOTT OGAN noted that the bill requires that
14
the commissioner transmit copies of the action to the
presiding officer of each Body and the Chairs of the
Resource and Oil and Gas Committees. He stressed that the
"findings" would not be appealable. He questioned at the
time in which the finding was transmitted, would that be the
formality or would the Legislature then have the ability to
add into the decision. Mr. Boyd replied that they would
not, although the Legislature would have the same
opportunity during the public notice process to comment.
Once the "findings" were established, the results would be
available for the use and review of the Legislature.
Representative Brown questioned the issue of the competitive
sale process and that relationship to the bill. Mr.
Coughlin agreed that there is a possibility that a bidder
could be treated unfairly. All leases issued by the State
of Alaska since statehood have had a provision which
specifies that the royalty can be reduced under certain
circumstances.
Mr. Boyd added that the commissioner would be required to
consider the factors of delineation of each field. The
applicant would be required to be at the field for a
specified amount of time and had done some work in order to
be able to apply for the royalty reduction. Mr. Coughlin
added, under existing law the same problems could occur, and
would reflect the integrity of the bidding process.
PAUL WESSELLS, (TESTIFIED VIA TELECONFERENCE), DIRECTOR OF
TAX, B.P. EXPLORATION, ANCHORAGE, spoke in support of HB
207. He stated that the legislation would be an important
step in developing a new type of relationship for the State
of Alaska and the petroleum industry. That relationship
would be based on interest in common.
MIKE BRUNER, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
voiced opposition to the proposed legislation and asked if
there was a provision included in the legislation which
would increase oil royalties to amounts higher than
currently exist. Mr. Boyd referenced Page 3, Lines 2-3,
"...under this paragraph, the commissioner shall include
provisions in the agreement to increase or decrease the
state's royalty share based on relevant economic factors".
He added that the commissioner has the authority to
establish the royalties lower initially in order to get the
project "off the ground" with the option to modify that
provision.
Mr. Bruner understood that the commissioner did not have the
authority to raise the fee higher than established in the
original lease. Mr. Boyd stated that information was
incorrect and had resulted from the agreement between the
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State of Alaska and a certain company. Mr. Bruner
concluded, there has been no historical incentives to
producing oil for companies and he felt that the rate of
return should benefit only the State.
RICHARD FINEBERG, RESEARCH ASSOCIATES, ESTER, ALASKA, spoke
in opposition to the legislation. [Copy on file]. He
summarized that there is a strong substantive case for
easing the State's existing royalty relief provisions as
proposed in all versions of HB 207 to date. He referenced
specific areas:
1. Production trends.
2. Comments on production trends.
3. Profitability
Mr. Fineberg continued, HB 207 contains serious structural
defects.
1. Procedures for royalty relief should be
clearly framed and the need for royalty
relief should be clear to the owners of the
resource.
(Tape Change, HFC 95-79, Side 2).
2. Economic considerations should include an
analysis of pipeline profits.
3. Blanket confidentiality. The requirement
that the Commissioner shall hold application
material confidential at industry request
contravenes the state's laws, common sense
and jurisprudence.
4. Contractor analysis.
5. Judicial review. He stated that it was easy
to understand why the industry would like to
remove judicial review.
Mr. Fineberg concluded that the current approach to
incentives is flawed. In the policy arena, where the
mission is to protect the public interest in both the
revenue stream and the environment, industry desires must be
balanced against those concerns. It would be self-evident
that any bill that increases industry revenue at the expense
of the State Treasury would tend to stimulate production.
The industry would advocate such a measure. If the
provision which grants confidentiality at the lessee's
request were removed or replaced with language that
guarantees public access to information necessary to
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evaluation of public policy, it would be necessary to
demonstrated that the legislation would be necessary.
Mr. Fineberg summarized, in view of the well documented
history of abuses of confidentiality, it would make little
sense to allow the lessees, at their own initiative to
prevent it from materializing.
REPRESENTATIVE NORMAN ROKEBERG noted that he was the Chair
of the House Oil and Gas Committee and spoke to the
significant amount of effort and activity that went into
preparing the legislation and the committee substitutes.
The objective of the Oil and Gas Committee was to develop a
framework around the commissioner's discretion and to
protect the citizens of Alaska and their resources
Representative Rokeberg commented on the philosophy of the
legislation. He emphasized that Alaska is competing in a
global market. It is clear that B.P. Exploration and ARCO
are the two major investors in the State which also have
significant interest in the North Sea. Those governments
have revolutionized their tax system to accommodate that
interest.
He added, without the legislation there would be no new
capital investments made in the State. There has not been
one royalty reduction made in Alaska. The legislation will
clarify problems from the past while making adjustments to
new fields.
Representative Rokeberg recommended five areas within the
proposed legislation which should be focused on. He
explained that the Oil and Gas Committee made a
differentiation between new and old fields. He added that
the major controversial areas are in the imposition of the
floors. The original bill made a provision for a "hold
harmless" for the Permanent Fund thus establishing
artificial floors, 50% on leases occurring after 1980 and
25% on leases before that time. Following significant
testimony and review, it was determined that there were no
constitutional bounds. The Oil and Gas Committee returned
language to the status quo: "Any royalty payments made to
the State of Alaska should be shared between the general
fund and the permanent fund".
Representative Rokeberg continued, an additional issue
reviewed by the Committee was the oversight provisions on
Page 3, Section 6. The Committee adopted the Alaska Royalty
Advisory Commission Board as an oversight group to analyze
the commissioners discretion. In the House Resource
Committee, it was decided to use public notification and
review. Representative Rokeberg requested that House
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Finance Subcommittee deliberate this area.
Representative Rokeberg offered his assistance to the House
Finance Subcommittee in reviewing HB 207. He pointed out
that the federal government is currently working on royalty
reduction legislation. These royalty reduction bills will
investigate deep water and frontier areas.
Representative Brown asked Representative Rokeberg if
consideration had been given to have the Legislature provide
the required oversight. She recommended providing a
disapproval mechanism within the bill unless approved by the
Legislature. Representative Rokeberg responded that the
Legislature and LBA had been considered. He added that a
sunset provision would not be workable as the time frame
does not lend itself to the interim schedule. He thought
that the situation should not be "politicized" and felt it
would be if the Legislature or LBA provided the oversight.
PATRICK DALTON, (TESTIFIED VIA TELECONFERENCE), DELTA
JUNCTION, spoke in opposition to HB 207. He stated that the
bill would provide uneconomic production of oil and gas in
the State. He added, the legislation would be an
environmental risk. Mr. Dalton emphasized that if the State
can not get what the minerals or resources are worth, they
should be left in the ground. Mineral rights then could be
allocated to the Alaskan residents.
Co-Chair Hanley countered that there existed a difference in
philosophy regarding the legislation. He placed HB 207 into
Subcommittee consisting of Chair, Representative Therriault,
and members Representative Parnell and Representative Brown.
HB 207 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting adjourned at 3:30 P.M.
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