Legislature(1995 - 1996)
04/30/1996 01:55 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
APRIL 30, 1996
1:55 P.M.
TAPE HFC 96 - 150, Side 1, #000 - end.
TAPE HFC 96 - 150, Side 2, #000 - end.
TAPE HFC 96 - 151, Side 1, #000 - end.
TAPE HFC 96 - 151, Side 2, #000 - #329.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 1:55 P.M.
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Navarre
Representative Grussendorf Representative Parnell
Representative Kelly Representative Therriault
Representative Kohring
ALSO PRESENT
John Shively, Commissioner, Department of Natural Resources;
Kenneth Boyd, Director, Division of Oil and Gas, Department
of Natural Resources, Anchorage; Patrick Coughlin, Deputy
Director, Division of Oil and Gas, Department of Natural
Resources, Anchorage; Keith Burke, General Manager, Support
Industry-Alaska Alliance Organization, Anchorage; Steve
Conn, Executive Director, Alaska Public Interest Research
Group, Anchorage; Eric Luttrell, Vice President for New
Development, BP Exploration, Anchorage; Jerry McCutcheon,
(Testified via teleconference), Anchorage; Mike Bruner,
(Testified via teleconference), Anchorage.
SUMMARY
SB 89 An Act relating to the members of the board and
staff of the Alaska Permanent Fund Corporation.
SB 89 was postponed for a hearing at a later date.
SB 98 An Act making changes related to the aid to
families with dependent children program, the
Medicaid program, the general relief assistance
program, and the adult public assistance program;
directing the Department of Health and Social
Services to apply to the federal government for
waivers to implement the changes where necessary;
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relating to eligibility for permanent fund
dividends of certain individuals who receive state
assistance, to notice requirements applicable to
the dividend program; and providing for an
effective date.
SB 98 was postponed for a hearing at a later date.
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 for May 1, 1996 A.M.
meeting.
SB 289 An Act relating to runaway minors and their
families or legal custodians.
SB 289 was postponed for a hearing at a later
date.
HB 500 An Act making capital and other appropriations;
and providing for an effective date.
HB 500 was postponed for a hearing at a later
date.
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.
CS HB 548 (WTR) was reported out of Committee with
a "do pass" recommendation and with two fiscal
notes by the Department of Natural Resources.
HOUSE BILL 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."
JERRY MCCUTCHEON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
stated that judging from what Governor Knowles and British
Petroleum (BP) have said regarding legislative information,
the down side, assuming the recovery was 105 million
barrels, the contract would yield $28 million dollars more
than the current contract. He emphasized that the proposal
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put forth by the Administration was not a smart business
move for the State.
Mr. McCutcheon suggested that the Governor and BP were not
supplying all the data on Northstar and Amerada-Hess. He
insinuated that hearings were being held without public
notice so as to move this "unfair" deal through the
Legislature. Mr. McCutcheon spoke to Seal No. #1 and
Northstar No. #1, two large wells. He continued, Seal No.
not dry, it would greatly increase the size of the Northstar
project. Seal No. #4 appears to be outside of the Amerada-
Hess leases and on federal lands. Under a U.S. Supreme
Court decision coming forth, Seal Island may extend State
lands into what formerly was federal land. That move could
enhance State revenues.
Mr. McCutcheon continued, the "well step-outs" are
approximately one mile, except Seal No. #3. The area served
by the island with a mile step-out is 3.6 square miles,
amounting to 6.3 square miles for Northstar and the Seal
Islands. He asked why the leases cover 60 square miles for
only 6.3 square miles indicated. Mr. McCutcheon claimed
that BP has suggested that the field could produce 13
billion barrels of recoverable oil; he claimed that 17
billion barrels would be more accurate.
He noted that his company found that the Northstar original
oil in place (OOIP) is twice what BP claims. If the 45%
rate BP claims recoverable, then 180 million barrels are
recoverable with an OOIP of 400 million barrels. Crude oil
is 42 degrees gravity oil with gas to use in recovery. The
recoverable oil should approach 80% or better, 300 million
barrels-plus which is about two and half times what the
Knowles Administration and BP have told the Legislature.
Mr. McCutcheon calculated that 130 million barrels vs. 320
million barrels is 190 million barrels more, and at $6
dollars a barrel that is a $1.1 billion dollar difference.
He suggested that perhaps Seal Island No. #4 is not dry.
That would be a loss to the State.
Mr. McCutcheon summarized that OOIP is twice what BP
suggests in relationship to the Amerada-Hess numbers, making
it is a very high crude grade which could be twice as
recoverable as BP claims. Speculation warrants concern that
BP will not show the contract made with Amerada-Hess. Mr.
McCutcheon suggested that BP had not purchased the leases
but would receive a share to commensurate BP's ability to
"beat down" the State.
MIKE BRUNER, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
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testified in opposition to the renegotiation of the
Northstar leases. He said that it was not constitutional.
It is specified in statute that the Legislature "shall"
develop the leases for the maximum benefit of the people.
He indicated that "shall" does not mean "may". He suggested
that there should be a mutuality of consideration. The
State should not loose.
He commented that BP would not be "pushing" the bill if they
did not have a lot at stake to win. Mr. Bruner suggested
that the proposed legislation was a "scandal" about to
happen, stressing that the legislation is not in the best
interest to the State.
Representative Therriault commented that the estimated
reserves have taken continual investment. That investment
will be paid for by the State.
ERIC LUTTRELL, VICE PRESIDENT FOR NEW DEVELOPMENTS, BP
EXPLORATION, ANCHORAGE, provided back-ground information on
BP Exploration. He suggested that BP's interest is in the
development of new fields in Alaska. The agreement will
unlock the potential of Northstar which has been blocked for
seventeen years. The agreement reached with the State will
fully align BP's interest and will provide a substantial
benefit in terms of economic development and jobs. He
added, when Northstar is developed, it will provide
substantial revenues to the State of Alaska.
BP acquired Northstar in 1994 from Amerada-Hess and
purchased an additional piece of the field from Shell Oil in
early, 1995. The purchase was made in a competitive process
in hopes of reducing development costs. BP realized that
net share profit (NSP) terms were on the leases. BP
purchased Northstar anticipating that would not be a problem
and that an agreement could be made with the State. To
date, BP has invested $25 million dollars in Northstar.
Mr. Luttrell explained that the agreement with the State is
not an incentive or concession, but is an agreement by two
parties to allow development of the field in a timely
manner. The agreement does contain BP's commitment to
Alaska hire and Alaska fabrication. The total benefits to
the State will be near $1 billion dollars. Alaskan
contractors will be working with BP.
Mr. Luttrell spoke to the fabrication issue. BP, following
examination of Alaskan capabilities, agreed that a
considerable amount of the work will be performed within the
State. The probable cost to BP using in-state hire will be
$15 million dollars more. All design and engineering work
will be done within Alaska and will result in substantial
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new business opportunities for the State.
He concluded that BP is excited about Northstar and the
potential, noting that the project is critical to the State
and to BP. If new oil fields are not developed, then BP
would remove their business from the State. The proposed
development will unlock a large potential for Alaska in off-
shore and fabrication work.
Representative Brown referenced Exhibit C in the
renegotiated lease project schedule. She asked if the
"obligation" would be affected by the "force majeure" clause
as part of the lease. Mr. Luttrell noted that clause should
cover the project schedule. He added that he did not know
when they would invoke "force majeure", but the language
does allow it.
Representative Brown noted that Paragraph #41, which relates
to employment of Alaska residents, was entirely being
replaced. She suggested that BP had made purchasing
decisions using commercial justification for taking business
out of Alaska. Mr. Luttrell was not familiar with the
language. Representative Brown informed him that language
related to suppliers who were unhappy loosing BP's business.
Representative Brown questioned the net profit share (NPS)
being referred to as a "tax". Mr. Luttrell responded that
"it" had been referred to in a variety of ways; as a tax and
as a royalty. Representative Brown asserted that it should
not be referred to as a tax. She referenced a handout
previously distributed from Mr. Luttrell, dated 1/2/96,
Initial Feedback from Discussion with the Legislature.
[Copy on file]. She asked why there was a specific
Northstar bill and not a policy "fix" of all net profit
share lease (NPSL) terms. Mr. Luttrell replied that was a
"rhetorical" question.
Representative Brown asked why BP acquired the purchase from
Amerada-Hess given the NPSL sale terms. Mr. Luttrell
replied that BP acquired an "option" from Amerada-Hess,
providing an economic possibility. Representative Brown
questioned if BP recognized the responsibility to act upon
the State's behalf with the leases held. Mr. Luttrell noted
they did.
Representative Brown inquired what would distinguish this
lease. Mr. Luttrell replied that BP had a number of
economic models from which to choose. BP came to the
conclusion that to proceed, the interest of the State would
be "different". The commercial interest would dictate
something that would not be of benefit to the State. BP
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made a decision not to develop the field.
Representative Brown ascertained that the field appears to
be very profitable with rates returned projected to be
better than 20% and profits returned at $3.50 a barrel. She
pointed out that the lease has been locked into a 20%
return. She voiced caution that action would prematurely
shut the field in. Mr. Luttrell commented that an early
condition in negotiation with the Department of Natural
Resources was to not seek relief under AS 207.
Representative Brown asked if there had was ongoing
discussion with the Department regarding the possibility of
amending any other leases. Mr. Luttrell said no.
Representative Brown asked if there has been discussion
regarding the possibility of gas development. Mr. Luttrell
replied no; adding that no written analysis had been
prepared on other legal points.
Representative Brown spoke to the size of the field and the
downward readjustment of the parameters. Mr. Luttrell
stated that he did not know the original estimates. He
thought that the production rate should be around ten
thousand barrel per day. Representative Brown stated that
testimony on the record has indicated that it is common
practice in industry that the growth rate be increased two
or three times the original estimate of oil in place. She
asked if that was true.
Representative Brown discussed the State's interest and
spoke on behalf of the State as the royalty owner. She
spoke to the common experience regarding world expectation.
Mr. Luttrell stated since his tenure at Northstar, there
have been no downward revisions.
Representative Brown requested information on BP's interest
recently acquired in Venezuela and the terms involved with
that purchase. Mr. Luttrell responded that those were not
net profit terms, rather a tax and royalty system, similar
to Alaska. That area was acquired at a generous deal to the
company. The costs associated with activity in the well are
substantially less than they are in Alaska. The agreement
is "economic". Representative Brown pointed out that the
per barrel profit in Alaska is much greater than that in
Venezuela.
Representative Brown asked how much BP had spent on
advertising to convince Alaskans that the Northstar proposal
would be in their best interest. Mr. Luttrell replied
approximately $50 thousand dollars.
(Tape Change, HFC 96-150, Side 2).
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Representative Therriault asked for more information
regarding the jobs which could flow to workers in Fairbanks.
Mr. Luttrell replied that construction of modules could be
built in Fairbanks. One of the bidders for that project
will be the firm H.C. Price. He also understood that the
gravel work would be done by an agency in Fairbanks.
Representative Martin voiced support for Alaskan hire.
Representative Brown asked if there was a significant
difference in the capital costs of producing the modules in
Alaska versus sharing with other facilities. Mr. Luttrell
replied, the options have been cut. The amount of capital
to proces on the island as opposed to on shore was modest.
The decision has been made to do the processing on the
island. Representative Therriault asked if that decision
was irreversible. Mr. Luttrell could not imagine changing
that decision.
Mr. Luttrell spoke to the "economics" of the project. He
spoke to the material added in the House Resources version
of the legislation. Mr. Luttrell referenced the NORTHSTAR:
Key Variables Affecting Economics. [Copy on file]. He
provided an overview of the variables:
* Oil reserves
* Capital investment
* Oil price
* Operating costs
* Production rate
Mr. Luttrell spoke to the misalignments:
* Lowering operating cost:
Increase the revenue account and
Accelerates initiation of Net Profit Share
* Increasing flow rate:
Increase near term revenues and
Accelerates initiation of Net Profit Share
Representative Brown spoke to BP's response to the Senate
Resources Committee request dated 4/3/96, and asked if
changes had been made to that request. Mr. Luttrell stated
no changes had been made. He added that the number quoted
for Shradder Bluff originated from a document presented by
BP and Occidental to that Committee; he suggested it was an
optimistic number.
Representative Navarre inquired where an "optimistic number"
would fall. Mr. Luttrell understood that $9.68 dollars was
the actual cost of development at Trader Bluff. The cost of
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development is not the only determinant of the value of the
field.
STEVEN CONN, EXECUTIVE DIRECTOR, ALASKA PUBLIC INTEREST
RESEARCH GROUP, ANCHORAGE, spoke against passage of the
proposed legislation. Mr. Conn referenced the keynote
speech of E.L. Bartlett at the original Alaska State
Constitutional Convention. The Department of Natural
Resources has testified to BP's refusal to develop the
Northstar unit lease. That represents the first occasion in
which the State oil and gas lessee has confirmed they could
develop an oil field, although, are unwilling to do so
unless the State renegotiates the competitive bid terms of
the lease.
Mr. Conn noted the dangers indicated by delegate Bartlett,
stressing that outside interests could stifle development in
Alaska which would compete with activities elsewhere. That
action has resulted in the terms of the renegotiated lease.
He urged the Committee to take seriously their
"responsibility" to be the stewards of the land and public
resources.
KEITH BURKE, GENERAL MANAGER, SUPPORT INDUSTRY-ALASKA
ALLIANCE ORGANIZATION, ANCHORAGE, spoke in support of the
proposed legislation. The legislation will put members of
the Alliance and others to work. BP is willing to contract
the activities in both Anchorage and Fairbanks.
(Tape Change, HFC 96-151, Side 1).
JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
spoke to the 1993 Department of Energy study which addressed
deterrents to development of the field and confirmation of
the reserves. The reserves have not been confirmed. He
pointed out that with the National Price Index (NPI) in
place, it would not be an economic prospect for price cases.
Commissioner Shively commented on the history of the case.
In 1994, Amerada-Hess drilled one more well which was a
"bust". They brought down the reserves and then decided not
to proceed because of the high development costs.
Department geologists confirmed that assessment. Resulting
from was that information, the current assessment was
arrived at.
KENNETH BOYD, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES, responded to Representative
Therriault's query, pointing out that the Department has all
the data available and access to information on fields to be
drilled and seismic equipment to probe the ground. He
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thought that 120 million barrels would be a "good" number.
A range between 105 - 160 million barrels is the most which
could be reached given the available information.
Representative Mulder referenced the 79.59% NPS for Duck
Island. Commissioner Shively stated that the NPS has not
"kicked in" for Duck Island. The Department has not made
that projection to date. That site has been in production
for ten years.
Representative Brown pointed out that the net profit "kicks
in" late in the life of a well and is affected by price.
She noted that the lease sales were efficient at capturing
the rent for the State. Representative Brown suggested that
it was premature to think that the leases would not be
profitable under the terms in which they were bid.
Representative Mulder commented on the change of approach
assumed by the State, noting that leases currently, are not
bid including the NPS. Representative Brown stated that
actions are influenced by what is occurring economically at
that time.
Representative Brown asked if DNR staff had provided an
analysis regarding the economic benefits, should there be a
lawsuit stopping development. Commissioner Shively stated
that a delay would be a benefit to the State. The net
profit share declines as the supplemental royalty increases.
Representative Brown asked if the benefit of the force
majeure clause had been considered in negotiating the
agreement. Commissioner Shively replied that it was the
State's decision to allow BP to invoke the force majeure
clause. If BP felt that the State was acting unreasonably,
they could sue. The need for use of the force majeure had
been discussed, speculating that a delay would benefit the
State.
Representative Brown understood Commissioner Shively meant
that there would be benefits in attributing value to early
development. Commissioner Shively agreed that there is
value to early development, although, in this situation
there is value to the Department in delaying. He suggested
that delaying would encourage BP not to invoke the force
majeure clause. Representative Brown pointed out that early
development is not a certainty.
Representative Brown asked if the losing bidders rights had
been infringed upon with the change of terms. Commissioner
Shively thought there was no indication of suits pending
against the State resulting from the 1979 decision.
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Representative Brown referenced a letter dated 4/23/96 to
Governor Knowles from Jerry Van Kooten, Anchorage. [Copy on
file]. Mr. Van Kooten is critical of the proposal,
indicating the probable reserve growth at Northstar.
Historically, fields that perform well are clastic
reservoirs and Northstar is of that type. It is reasonable
based on past experience for the Northstar reserves to
increase over its life. That increase will be in the range
of 2 or 3 times today's estimate.
Mr. Van Kooten stressed that the State of Alaska would be
giving up the most value in the current renegotiation and
will lose much.
Representative Brown agreed with his projection and asked
why the Department was willing to sacrifice that
possibility. Commissioner Shively referenced the letter
including the suggestion "at the time of the first
discovery". There have been a number of wells drilled and
work has been done by the Department, all indicating the
history of the field. The Department does not feel the
field is capable of growing 2 to 3 times its current
capacity. He indicated that DNR's staff has supported and
directed the current decisions.
Representative Brown advised that some of the "competent"
and "professional" staff at DNR have concerns regarding the
decisions being presented. Representative Brown referenced
the second issue addressed by Mr. Van Kooten regarding the
"level playing field" and the political pressure that comes
with that. Commissioner Shively responded that there was
"no price" of entry. There have been lease terms changed in
the past. Representative Brown informed the Commissioner
that Theus Island was the only lease in which the State's
take had not been diminished. Commissioner Shively noted
that there had been no public review of that case.
Representative Brown asked if Amerada-Hess received any
future production resulting from the transfer of leases from
BP. Commissioner Shively stated that information was
confidential.
Representative Brown noted that the record shows several
overriding royalty interests on one of the leases #355001,
which was raised to 20%. Commissioner Shively was not aware
of the ownership, although, there was a 2% overriding
royalty on that lease.
Representative Brown asked if there was an analysis of the
allocations of oil within the Northstar unit. Mr. Boyd
responded to Representative Brown, noting that BP would have
to prove that there was oil on the lease as part of the plan
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development. He added, the allocation was handled within
the Division with a 98% interest.
Representative Brown questioned if the Division's staff was
analyzing the allocation to the individual leases. Mr. Boyd
thought it had been done, although, did not know how much
oil was on each track.
Mr. McCutcheon asked which wells were being referenced. Mr.
Boyd replied it was the well drilled on the southern track,
Northstar III. Mr. McCutcheon questioned why the contract
between BP and Amerada-Hess was not available. Commissioner
Shively stated that the Department has asked that it be made
public, although, Amerada-Hess will not release BP from
their confidentiality.
Mr. McCutcheon ascertained that the State does not really
know if BP purchased the lease. Mr. Luttrell clarified that
the leases have been filed with the State even though they
are not public information. A document of transfer of
ownership has been signed.
Representative Brown asked if lessees were required to
expose contingent liabilities on a lease, overriding
royalties and shares of future production. Commissioner
Shively assumed that would be required by the State at the
time of production.
Representative Kelly inquired if each unproductive lease
would be revisited. Commissioner Shively noted that other
committees have suggested a more "generic" approach for the
future.
Representative Brown spoke to the renegotiation of the lease
term value provision. The lease appeared to be rewritten
except for the provisions of associated substances. She
quoted the Alaska North Slope (ANS) lease agreement
exclusion.
PATRICK COUGHLIN, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, explained that reference
was to the ANS royalty oil settlement agreement which was
reached between BP and the State in 1991. The point was to
use that value as agreed by all the involved parties.
Representative Brown asked if that agreement provided that
leases not be included. Mr. Coughlin responded that BP did
not own those leases at the time of settlement.
Representative Navarre asked if a different value had been
attributed when Amerada-Hess owned it. Mr. Coughlin stated
that settlement agreement was with "BP" and not Amerada-
Hess. He did not know if there had been any settlements
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with Amerada-Hess prior to BP getting the leases that apply
valuation to Northstar.
Representative Brown pointed out that many of the old leases
had been corrected with the new leases. She asked why the
Division felt it was in the State's interest to agree to
that settlement rather than incorporating "value" language.
Mr. Coughlin said there has been no litigation on the new
lease form, a request by BP.
Representative Brown questioned if an evaluation had been
provided of the projected losses by the lease form language.
Mr. Coughlin replied that question assumes that value had
been lost; the Department would not agree.
(Tape Change, HFC 96-151, Side 2).
Representative Brown interjected that the State had
relinquished something significant by removing the minimum
value determination provision. Commissioner Shively replied
that decision had been made based on information of other
leases on the slope producing to a similar extent. It
resolved potential litigation between the State and
development of the field. He added, there has been no
litigation over that to date.
Representative Brown asked if any value had been attributed
to that provision in negotiations. Commissioner Shively
stated it had not.
Representative Kohring voiced support of the bill which will
further enhance the oil industry and generate jobs. He
added that BP has negotiated in "good faith" the local hire
issue.
Representative Therriault questioned the date of the court
decision regarding the development account. Commissioner
Shively noted that decision was made in 1985/1986. The
total development costs to the State are estimated to be
$260 million dollars. That figure does not include BP's
expense in the amount of $50 million dollars.
Representative Brown referenced a letter from Assistant
Attorney General, James Baldwin. [Copy on file]. The
letter concludes with a reference to the "mandate resident
hire on module fabrication projects". Mr. Baldwin stated
the probable constitutionality problems exist from inclusion
of that language. Representative Brown advised that the
language is not enforceable as currently drafted. She noted
that an amendment has been requested to address that
concern.
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Mr Bruner provided Committee members a faxed copy of
testimony. [Copy on file]. He spoke against the proposed
legislation.
Representative Martin MOVED to report CS HB 548 (WTR) out of
Committee with individual recommendations and with the
accompanying fiscal notes. Representative Brown stated that
the amendment would be HELD for action on the floor.
Representative Brown asked why the fiscal note did not
indicate funds spent in FY97. Commissioner Shively pointed
out that there were two fiscal notes, one of which indicates
funds for FY97. Discussion followed regarding the two
fiscal notes.
Representative Martin noted that the letter from Mr. John
Morgan, dated 4/29/96 would be MOVED with the two fiscal
notes. There being NO OBJECTION, it was so ordered.
CS HB 548 (WTR) was reported out of Committee with a "do
pass" recommendation and with two fiscal notes by the
Department of Natural Resources.
ADJOURNMENT
The meeting adjourned at 4:45 P.M.
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