Legislature(1995 - 1996)
04/30/1996 08:15 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 30, 1996
8:15 A.M.
TAPE HFC 96-148, Side 1, #000 - end.
TAPE HFC 96-148, Side 2, #000 - end.
TAPE HFC 96-149, Side 1, #000 - #414.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 8:15 a.m.
PRESENT
Co-Chair Foster Representative Martin
Representative Brown Representative Mulder
Representative Grussendorf Representative Navarre
Representative Kelly Representative Parnell
Representative Kohring Representative Therriault
Co-Chair Hanley was absent from the meeting.
ALSO PRESENT
Representative Ramona Barnes; John Shively, Commissioner,
Department of Natural Resources; Robin Randall, Fairbanks;
Al Near, Fairbanks.
SUMMARY
HB 548 An Act authorizing, approving, and ratifying the
amendment of Northstar Unit oil and gas leases
between the State of Alaska and BP Exploration
(Alaska) Inc.; and providing for an effective
date.
The Work Session on HB 548 was recessed until
transmittal of the legislation.
SB 112 An Act establishing a discovery royalty credit for
the lessees of state land drilling exploratory
wells and making the first discovery of oil or gas
in commercial quantities.
SB 112 was rescheduled to another time.
SB 289 An Act relating to runaway minors and their
families or legal custodians.
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SB 289 was HELD in Committee for further
consideration.
SENATE BILL NO. 289
"An Act relating to runaway minors and their families
or legal custodians."
ROBIN RANDALL, FAIRBANKS testified via the teleconference
network. She expressed concern that the legislation remain
strong. She read a letter to the Committee (copy on file).
She emphasized that children run away from good homes. She
maintained that getting tough and attaching consequences to
running away is effective.
AL NEAR, FAIRBANKS testified via the teleconference network.
He maintained that the House Judiciary Committee version has
weakened the legislation. He stressed that the legislation
is not about abused, homeless or neglected children that
voluntary walk into youth shelters. He asserted that the
legislation is about the growing number of rebellious
teenagers that exploit weakness in the existing laws to
manipulate to the system to evade authority. He stressed
that the revolving door policy must be ended. He spoke in
support of the Senate version of SB 289. He emphasized the
need for early intervention.
SB 289 was HELD in Committee for further consideration.
HOUSE BILL NO. 548
"An Act authorizing, approving, and ratifying the
amendment of Northstar Unit oil and gas leases between
the State of Alaska and BP Exploration (Alaska) Inc.;
and providing for an effective date."
Co-Chair Hanley noted that the Committee would conduct a
work session on HB 548.
JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES
gave an overview of the Northstar oil field. He noted that
Northstar is offshore of the North Slope. There are seven
leases; five state leases and two federal leases. Four
leases were released in 1979. The bid variable was the net
profit rate. A base rate of 20 percent was set and the oil
companies bid how much of their profits they would share.
The average net profit bid was approximately 89 percent.
The fifth lease was bid in 1983 and had a set net profit of
40 percent with a bonus bid of $72.0 thousand dollars and a
12.5 percent royalty.
Commissioner Shively noted that in 1979, most people were
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estimating that oil prices would continue to rise at the
astronomical rates of the 1970's. The leases were awarded
to a consortium of companies headed by Amerada Hess. The
field is estimated to produce 130 million barrels of oil.
Original projections were approximately twice this amount.
Commissioner Shively observed that a Department of Energy
study concluded that the field was uneconomic due to the net
profits provision. Amerada Hess came to the conclusion that
they could not economic develop the field. Development
costs are estimated at $1.5 billion dollars. The leases
were offered for sale. The leases were won by British
Petroleum Exploration (Alaska), Inc. (BP) in 1995. The
State agreed to the transfer and allowed BP three years to
look at a development plan.
Commissioner Shively stressed that net profit share is a
fairly complicated way to due business. Oil companies make
expenditures, pay themselves back, and then start to pay the
State. This is complicated by a development account. He
explained that as oil companies begin to spend funds,
expenses are accrued into the Development Account. The
Developmental Accounts run with the leases not with the
company that spent the money. When BP bought the leases
they also received a $200 million dollar Development
Account. The Account is currently at $262 million dollars.
The greater the account and the longer it takes to pay it
off, the less the net profits are worth. He observed that
the question is whether or not there is enough money to pay
off the Development Account so that the State can get to
their net profits. This is driven by volume, price and the
amount of money that has gone into the Development Account.
Commissioner Shively stated that the Department of Natural
Resources does not think Northstar is a marginal oil field.
He estimated that BP could make a 20 percent rate of return.
In return for giving up the net profits the State would get
a supplemental royalty, based on price adjusted for
inflation. This would earn the State 7.5 percent above the
base 20 percent royalty. In addition, BP agreed to raise
the 12.5 percent royalty to 20 percent. This field would
have the highest royalty in the North Slope. The State also
received a promise from BP to get the project sanctioned by
their Board of Directors or return the leases to the State.
Commissioner Shively pointed out that BP is in the middle of
a three year development plan. He did not think that the
State could take the leases back until after the three year
period. The State could order BP into production in the end
of April 1998. At this time, BP could give the leases back,
begin production or sue the State.
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Commissioner Shively stressed that BP is committed to build
modules for the project in Alaska. He noted that they had
previously indicated that the modules would be build in
Canada.
Commissioner Shively explained that 1996 dollars and the
State's mid case scenario were used to assess value. He
estimated that the State would receive $37 million dollars
in supplemental royalty. If the field were developed under
net profit share today the State would receive $85 million
dollars. He emphasized that it is unlikely that BP would
develop the field before 1998. If the project were
developed in 1998 the net profit share would drop from $85
to $41 million dollars. The longer it takes for a field to
develop the less the net profits. He pointed out that more
oil in the pipeline reduces the tariff for existing oil.
Northstar would be the first off shore development in the
North Slope. Northstar development will be on an island
with a buried pipeline.
Commissioner Shively observed that the Department of Natural
Resources submitted a fiscal note for the State Pipeline
Coordinator's Office.
Commissioner Shively noted that BP thinks it can bring the
cost of the project down to $350 million dollars. He
pointed out that an additional $25.0 million dollars in
expenses would wipe out the net profits.
Commissioner Shively stated that the legislation needs
legislative approval. He maintained that there should be
public review.
In response to a question by Representative Mulder,
Commissioner Shively stressed that it is to BP's advantage
to wait to develop the field. He maintained that a volume
of 130 million barrels is a reasonable amount.
Representative Mulder noted the value of BP's agreement to
give up the lease if the project is not sanctioned.
Representative Brown questioned why the solution does not
incorporate other fields. Commissioner Shively stated that
Northstar is a relatively unique situation. He maintained
that it is a situation that can be dealt with on its own.
He stressed that it would be difficult to find a generic fix
for net profit leases. He acknowledged that there are other
net profit share and bid variable leases. Representative
Brown questioned the precedent of HB 548 in relation to
other leases. Commissioner Shively emphasized that it is
the responsibility of the State to look at the development
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of its resources. He noted that other aspects of leases
have been changed. He maintained that the legislature would
have to approve any changes to net profit leases.
Representative Brown pointed out that the State has never
changed a competitively bid lease outside the statutory
frame work. She noted that the legislature is not permitted
to violate the Constitution.
In response to a question by Representative Martin,
Commissioner Shively clarified that the total net profit of
the field if it were developed in 1998 or 1999 would be $41
million dollars. The State would receive over $400 million
dollars with the addition of royalty. The life of the field
is estimated at 12 years.
Commissioner Shively noted that the Department of Natural
Resources estimates that without the legislation development
would begin around the year 2002.
REPRESENTATIVE RAMONA BARNES spoke in support of HB 548.
She stressed that the legislation will bring the production
on line earlier than the year 2002. She stressed that the
purpose of HB 548 is to bring revenues to the State and
assure local hire. She maintained that CSHB 548 (WTR) would
provide for local hire without weakening the
constitutionality of the bill. She observed that CSHB 548
(WTR) reflects a lease agreement that was voluntarily signed
by the Commissioner of Department of Natural Resources and
Mr. Luttrell, Vice President, British Petroleum Exploration.
(Tape Change, HFC 96-148, Side 2)
Representative Barnes discussed CSHB 548 (WTR). She noted
that the complete text of the lease agreement was
incorporated into the legislation beginning on page 5. She
maintained that the legislation meets the constitutional
test because of the voluntary agreement. She noted that the
agreement demands that BP file reports every 6 months to
demonstrate how they have complied with the local hire
provisions.
Representative Barnes referred to the fiscal note
accompanying CSHB 548 (WTR). A letter from John C. Morgan,
President, BP, was attached (copy on file). She noted that
the legislative findings in HB 548 are extensive.
Representative Martin expressed concern that BP may need
outside expertise. Representative Barnes emphasized that
the legislation will create a module industry in Alaska that
can be exported. She maintained that it is in Alaska's best
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interest to try to provide jobs for its people and make sure
jobs are not just entry level. She noted that the
legislation does not require that every job be held by an
Alaskan. She asserted that Alaskans can be trained.
Alaskan residency is detailed in the bill.
Representative Grussendorf questioned if the legislation
allows individuals or groups to challenge the lease.
Representative Barnes noted that anyone can sue anyone at
anytime. She asserted that the separation of powers
doctrine is followed in the bill.
Representative Navarre pointed out that there are already
trained unemployed Alaskans that can be put to work.
Representative Brown asked if there is any recourse if the
terms of local hire and module production do not take place.
Representative Barnes stressed that BP would suffer from a
bad public image if they do not live up to the intent of the
legislation. She maintained that the State could introduce
sanctions against BP.
Representative Brown asked for a explanation of language on
page 6, lines 8 - 10: "In determining feasibility, lessee
shall consider commercial, health, safety, and environmental
conditions and requirements" in determining feasibility.
Representative Barnes stated that "commercial" means that
Alaska has in place a system to build the modules.
Representative Brown referred to a memorandum from John
Miller, Attorney to Bill Allen, VECO Corporation, dated
April 4, 1996 (copy on file). Mr. Miller concluded that any
requirement for BP to adopt a resident hire policy or
procedure would constitute impermissible State action. Mr.
Miller added that: "If it could be shown that the State of
Alaska exercised coercive power or provided significant
encouragement, either overt or covert, BPXA's actions would
be deemed to be that of the State." Mr. Miller concluded
that the local hire provisions would be struck down.
Representative Barnes noted that the opinion was given to
Mr. Jack Chenoweth, Legislative Counsel. Mr Chenoweth
responded to Mr. Miller's statements in a memorandum, dated
April 29, 1996. Representative Barnes asserted that there
was no coercion in any way.
Representative Brown stressed that there is significant
encouragement that local hire be part of the proposal.
Representative Barnes reiterated that, in exchange for
giving up the net profit share, BP voluntarily agreed to the
local hire provision. She referred to a memorandum by James
Baldwin, Assistant Attorney General, dated March 26, 1996
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(copy on file). She noted that Mr. Baldwin maintained that
the State must show public benefit for giving up the net
profit share. She emphasized that public benefit is
established through the lease document which institutes
local hire and module building in Alaska, and allows for an
early production date.
Representative Brown agreed that local hire is a significant
part of the proposal. She maintained that the inclusion of
local hire would open the legislation to a constitutional
challenge. Representative Barnes disagreed. Representative
Brown maintained that the State required the local provision
to be part of the proposal. Representative Barnes
maintained that the House World Trade Committee record
reflects that BP voluntarily reached the agreement to give
up something for something.
Representative Mulder supported Representative Barnes'
claims that BP did submit to the terms voluntarily.
Discussions continued regarding the proposal.
Representative Brown reiterated concerns regarding the
constitutionality of the proposal.
Commissioner Shively gave a brief history of the proposal.
He noted that BP approached the State and asked that net
profit shares leases be included in HB 207. The
Administration decided that HB 207 was not the appropriate
vehicle. He felt that there was not legal authority for him
to make an agreement. He indicated that legislative
approval would be needed. He observed that there were
discussions about the issue of local hire and
constitutionality throughout the negotiations.
Representative Brown questioned the lost value to the State
if other net profit oil leases were modified. Commissioner
Shively stated that each lease has different conditions. He
clarified that there have not be discussions regarding other
net profit leases. There are approximately 40 net share
leases, with 9 that are producing. He reviewed other net
profit leases.
Representative Mulder questioned if it would be in the
financial interest for other net profit leases to make a
modification to a 20 percent base royalty. Commissioner
Shively did not have any statistics regarding the proposed
change. He did not think it would be advantageous to
change other net profit leases.
In response to a question by Representative Navarre,
Commissioner Shively noted that the Superior Court ruled
that the Development Account could be transferred. He
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thought that the Court would consider the legislative
record. He noted that the Legislature has included intent
language. He pointed out that the law is the legislative
effort.
Representative Martin expressed concern that the contract is
outside of the legislation. Commissioner Shively responded
that the State can encourage but not require BP to institute
local hire. He observed that BP's voluntary agreement made
the legislation acceptable to the Legislature. He
emphasized that the main issue is how the State encourages a
company to institute local hire. He stressed that BP has
been made aware of how important local hire is to the
political leadership, Administration and Legislature. He
noted that BP initially proposed to build the modules in
Canada.
Representative Martin questioned if there are enough
unemployed people in the state of Alaska to fill the jobs
that would be created. Commissioner Shively pointed out
that many of the best jobs available are in the oil
industry. Representative Martin stressed that it is easy
for oil companies to bring in their own people. He
questioned if union contracts need to be changed.
Commissioner Shively noted that unions have local chapters.
(Tape Change, HFC 96-149, Side 1)
In response to a question by Representative Kelly,
Commissioner Shively explained that Kuupik is a non-
producing unit. Most of the leases are net profit share.
He stressed that there is not enough oil for production.
The State has never received any money for the Duck Island
net profit share leases.
Representative Therriault observed that net profit leases
were only issued from 1980 - 1984. He noted that testimony
in 1979, argued that net profit share leases were
uneconomical for the State. Commissioner Shively clarified
that lower oil prices are not conducive to net profit share
leases. He stressed that the Oil and Gas Policy Council has
suggested that the State may want to take more risks in
order to encourage development. He noted that a more
traditional system of sharing risks or a profit proxy could
be used.
In response to a question by Representative Therriault,
Commissioner Shively reviewed supplemental royalty. He
noted that royalty is based on a per barrel price of $17.35
dollars. Anything above $17.35 dollars a barrel, ANS West
coast, would result in an increase in supplemental royalty.
The price is adjusted for half of the inflation factor on an
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annual bases. The escalator begins April 1996.
Commissioner Shively noted that the State would currently
receive an additional 7.5 percent, if the agreement was
active.
Representative Brown pointed out that 4 of the 5 leases
already have a 20 percent base royalty. The fifth lease
that was raised from 12.5 to 20 percent has no production
allocated to it. She questioned if the conditions in AS
38.05.180(j) were considered.
Commissioner Shively explained that State tried to get the
same information from BP that would have been required in a
application for reduction under HB 207. The Department did
not go through the 16 step process contained in HB 207. He
stressed that there was no legislative authority to use this
process for decision making. He noted that HB 207 was
designed to look at marginal oil fields. The commissioner
must declare that the royalty reduction is necessary for the
development. He observed that a finding that a royalty is
necessary to make Northstar economically viable could not be
found. He reiterated that Northstar is not a marginal oil
field. He stressed that the timing of development is of
concern to the State. He observed that there is a question
as to whether net profit share can be considered a royalty.
He emphasized that he testified that HB 207 did not apply to
net profit share leases.
In response to a question by Representative Brown,
Commissioner Shively noted that no outside contractors were
hired to assess the hydrocarbon potential production. He
stressed that the Department was confident that the in
house, economic model was accurate. He emphasized that the
public record has been made in the legislature.
In response to a question by Representative Brown,
Commissioner Shively stated that the process in HB 207 is
onerous. He pointed out that HB 207 was changed from a
three to sixteen step process. He observed that there is no
final legislative approval in HB 207. He maintained that if
there were not legislative approval for the proposal under
discussion that the Department's process would have been
more extensive. He maintained that the Department's
decision is getting full public review.
Representative Brown asked if the Department conducted an
oil price sensitivity analysis to compare net profit share
capturing of up side and down side economics versus
supplemental royalty. Commissioner Shively stated that
there is no net profit share on the down side.
Representative Brown provided members with charts showing
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the effect of up side and down side prices (copy on file).
She observed that if oil prices are 10 percent higher than
the State's base case assumes there is a significant benefit
from the use of net profit share. She concluded that the
State is giving up a significant part of the up side. She
agreed that supplemental royalty protects the State on the
down side.
Commissioner Shively pointed out that even a small increase
in expenses eliminates the net profit share. He reiterated
that timing is a problem. He felt that the State's mid case
oil scenario is aggressive. He concluded that the certainty
of the supplemental royalty was worth the trade offs.
Representative Brown asked the effect of a lawsuit on the
State. Commissioner Shively observed that if a lawsuit was
lost and the proposal returned to a net profit share, there
would be a further delay of any net profit benefit. He
stressed that the effect is worse on the net profit share
leases because of the accumulation of the Development
Account. He stated that the longer the delay the better the
supplemental royalty. He noted that if there was a delay to
the year 2003, the supplemental royalty goes to $80.0
million dollars, and the net profit share falls to under
$20.0 million dollars. By 2005 the net profit share would
be zero.
Representative Therriault referred to the fiscal note. He
observed that the House Department of Natural Resources
Subcommittee determined that the Agency's budget would not
be cut to accommodate the legislation. The fiscal note
would fund the legislation.
HB 548 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting adjourned at 10:05 a.m.
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