Legislature(1993 - 1994)

03/10/1994 08:36 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                     HOUSE FINANCE COMMITTEE                                   
                         March 10, 1994                                        
                            8:36 a.m.                                          
                                                                               
  TAPE HFC 94-55, Side 1, #000 - end.                                          
  TAPE HFC 94-55, Side 2, #000 - end.                                          
                                                                               
  CALL TO ORDER                                                                
                                                                               
  Co-Chair Larson called the House  Finance Committee to order                 
  at 8:36 a.m.                                                                 
                                                                               
  PRESENT                                                                      
                                                                               
  Co-Chair Larson                                                              
  Co-Chair MacLean            Representative Martin                            
  Vice-Chair Hanley           Representative Navarre                           
  Representative Brown        Representative Parnell                           
  Representative Grussendorf    Representative Therriault                      
                                                                               
  Representatives Hoffman and Foster were  not present for the                 
  meeting.                                                                     
                                                                               
  ALSO PRESENT                                                                 
                                                                               
  Representative  Joe  Green;  Jerry   Gallagher,  Legislative                 
  Liaison, Department of Natural Resources; Jeff Cook, ARCO.                   
                                                                               
  SUMMARY INFORMATION                                                          
                                                                               
  HB 199    "An  Act providing  for  oil  and gas  exploration                 
            licenses, and oil and gas leases, in certain areas                 
            of  the  state;  and providing  for  an  effective                 
            date."                                                             
                                                                               
            CSHB 199 (O&G)  was HELD in Committee  for further                 
            discussion.                                                        
                                                                               
  SB 141    "An Act extending  workers' compensation  coverage                 
            to certain high  school students in  uncompensated                 
            work-study programs."                                              
                                                                               
            SB 141 was assigned  to a subcommittee  consisting                 
            of   Representative   Parnell    as   Chair    and                 
            Representatives Hanley and Navarre.                                
  SENATE BILL NO. 141                                                          
                                                                               
       "An  Act  extending workers'  compensation  coverage to                 
       certain   high   school   students   in   uncompensated                 
       work-study programs."                                                   
                                                                               
                                                                               
                                1                                              
                                                                               
                                                                               
  Co-Chair Larson assigned SB 141 to a subcommittee consisting                 
  of  Representative  Parnell  as  Chair  and  Representatives                 
  Navarre and Hanley.                                                          
  HOUSE BILL NO. 199                                                           
                                                                               
       "An Act providing for oil and gas exploration licenses,                 
       and oil and gas leases, in  certain areas of the state;                 
       and providing for an effective date."                                   
                                                                               
  REPRESENTATIVE JOE GREEN  testified in  support of CSHB  199                 
  (O&G).  He  noted that  the state's oil  revenues have  been                 
  dropping.  He explained that the legislation would encourage                 
  further  exploration  and  development  of  state  resources                 
  through the  issuance of  large block exploration  licenses.                 
  He pointed out  that half  of the  companies formally  doing                 
  business in  Alaska  have  left.   He  emphasized  that  the                 
  current leasing process  only provides small blocks  of land                 
  for  exploration.   He observed  that CSHB  199  (O&G) would                 
  allow up  to 500,000 acres  to be licensed  to a company  or                 
  group of  companies.   He  asserted  that the  larger  block                 
  approach  would give  greater flexibility  for  companies to                 
  invest in exploration.   He observed that  areas surrounding                 
  existing oil fields will  be excluded.  He noted  that areas                 
  of Cook Inlet and land north of the Umiat Baseline would  be                 
  excluded.                                                                    
                                                                               
  Representative Green gave examples of how a license could be                 
  issued.    He noted  that  a  company could  propose  to the                 
  commissioner of Department of Natural Resources that an area                 
  between 20 and 500,000  acres be licensed.  They  would need                 
  to provide justification of the exploration of remote sites.                 
  If  the  Commissioner  of Department  of  Natural  Resources                 
  agrees to allow  the area to  be licensed a competitive  bid                 
  will pursue.   He noted that the cost of the license will be                 
  in the form of a monetary  work commitment.  The exploration                 
  would be  limited to oil and gas.  Other uses could continue                 
  concurrently.  The license would be issued for ten years.                    
                                                                               
  Representative  Green  discussed  the operation  of  a  work                 
  commitment.  The licensee  must post a work commitment  bond                 
  on a  yearly basis  in addition  to any  environmental bonds                 
  required.    The  bond  would  be  the amount  of  the  work                 
  commitment bid, minus what has been expended and approved by                 
  the Commissioner, divided by the number of years left on the                 
  license.   If 25 percent  of the work commitment  is not met                 
  after four years the license is revoked.  If more than  half                 
  of  the  work  commitment has  been  met  than  there is  no                 
  relinquishment  of  acreage.    After  the fourth  year,  50                 
  percent of the work commitment is not met the licensee would                 
  lose 25 percent of  the acreage licensed.  Until  50 percent                 
  of the work commitment is met 10 percent of the license will                 
                                                                               
                                2                                              
                                                                               
                                                                               
  be lost each  year, until  an additional 50  percent of  the                 
  license is lost.  The legislation is structured to encourage                 
  work to proceed quickly.                                                     
                                                                               
  Representative Green  discussed the conversion of  a license                 
  to  a lease.     The  legislation allows  a  portion of  the                 
  license, agreed upon  by the Commissioner and  the licensee,                 
  to be converted to lease.  Money spent on the lease does not                 
  go  to meet the  requirement of the  license work commitment                 
  agreement.                                                                   
                                                                               
  Representative Green asserted that the state only receives a                 
  small portion of their revenues through lease sales.                         
                                                                               
  Representative Grussendorf noted  that the legislation gives                 
  the Commissioner of Department of  Natural Resources a great                 
  deal of latitude in directing the use of state assets.                       
                                                                               
  Representative Green asserted that the best interest for the                 
  state of Alaska is to develop resources.  He maintained that                 
  Commissioners are environmentally sensitive.                                 
                                                                               
  Members   discussed   competitive   leasing   versus   block                 
  licensing.   Representative  Green noted  that most  leasing                 
  sales receiving  competitive bids are  close to  established                 
  fields or near transportation corridors.  He emphasized that                 
  CSHB 199 (O&G) would encourage  exploration of remote areas.                 
  He  asserted that leasing revenues  would not be lost, since                 
  it is unlikely that a lease would otherwise  take place.  He                 
  stressed that even if a discovery  is made the licensee must                 
  justify   creation   of   the   infrastructure  needed   for                 
  development.                                                                 
                                                                               
  Representative Grussendorf asked if bid money will go to the                 
  Permanent  Fund.   Representative  Green clarified  that the                 
  revenue derived from the  license will be  in the form of  a                 
  work  commitment.   Revenues  will  be  the  result  of  the                 
  discovery of oil or gas.                                                     
                                                                               
  Representative Therriault  asked what  restrictions will  be                 
  placed on the public use of the license                                      
                                                                               
  JERRY GALLAGHER, LEGISLATIVE LIAISON,  DEPARTMENT OF NATURAL                 
  RESOURCES explained that the license  does not exclude other                 
  uses.  Public  access provided for under AS  38.05.130 would                 
  apply.   Operators are allowed  to prevent public access for                 
  reasons  of health,  safety  and  certain security  reasons.                 
  Concurrent uses could occur.                                                 
                                                                               
  In  response  to  a   question  by  Representative   Hanley,                 
  Representative Green  reiterated  that areas  known to  have                 
  production value have  been excluded.   If oil is found  the                 
                                                                               
                                3                                              
                                                                               
                                                                               
  area  surrounding  the   find  would  be  excluded   by  the                 
  Commissioner.  He  stressed that  only unknown and  untapped                 
  areas are addressed.                                                         
                                                                               
  Representative Grussendorf asked if off shore licenses would                 
  be  granted.   Representative  Green  replied that  offshore                 
  licenses would be possible but felt  that they would be more                 
  difficult to rationalize to  the Commissioner of  Department                 
  of Natural Resources.                                                        
                                                                               
  Representative Brown questioned if the licensee is  required                 
  to show a  geological prosect or  reason to expect that  the                 
  area  to  be licensed  merits  exploration.   Representative                 
  Green  suggested  that  they  would  need to  convinced  the                 
  Commissioner in order to receive a license.  Representatives                 
  Green and Brown  discussed the granting  of licenses by  the                 
  Commissioner of Department of Natural Resources.                             
                                                                               
  Representative  Brown  asked  if  provisions  which  exclude                 
  Bristol Bay from  exploration would remain.   Representative                 
  Green assured her  that the  legislation would not  override                 
  any statutes in existence.  Representative Brown pointed out                 
  that there are several sections, such as on page 8, lines 24                 
  and 25, which specify that particular parts of AS 38.05.180.                 
  apply.   Representative Green explained  that the  provision                 
  would allow companies  possessing leases to not  be excluded                 
  from holding a license.   Representative Green admitted that                 
  he was not certain that Bristol Bay is excluded.                             
                                                                               
  In   response  to  a   question  by   Representative  Brown,                 
  Representative  Green  explained the  differences  between a                 
  licensee and a lessee.  A licensee may only explore an area.                 
  A licensee cannot exclude an  area from other excepted uses.                 
  A lessee is granted additional rights.                                       
                                                                               
  Representative Brown asked  what responsibilities the lessee                 
  is  relieved of by holding  a license.  Representative Green                 
  reiterated that the  licensee cannot drill or  transport the                 
  product.   Representative Brown noted  that the  legislation                 
  provides a  continuing phased  package.   She observed  that                 
  upon discovery  the licensee shall have the right to convert                 
  to a lease.                                                                  
                                                                               
  Representative Green acknowledged that the right  to convert                 
  exists.    He   emphasized  that  the  license   provides  a                 
  commitment to produce.   He added  that when the license  is                 
  converted to  a lease the  holder must show  how development                 
  will proceed and  how much acreage  will be involved in  the                 
  lease.  Representative  Brown observed  that CSHB 199  (O&G)                 
  states that at  the time the license is granted  the form of                 
  the lease to be issued shall be made available.                              
                                                                               
                                                                               
                                4                                              
                                                                               
                                                                               
  Representative Brown asked  what is required to convert to a                 
  lease.  Representative  Green stated that the  company would                 
  have  to  show the  Commissioner just  cause  as to  why the                 
  conversion  should   take  place.     He   added  that   the                 
  Commissioner  would  want to  know  what will  be exploited.                 
  Representative Brown  noted that page  8 states that  if the                 
  Commissioner  determines  that the  work  commitment  is met                 
  there may be  a conversion.  Representative  Green clarified                 
  that  some leases  may be  for  five years.   Representative                 
  Brown observed that leases are normally ten years.                           
                                                                               
  (Tape Change, HFC 94-55, Side 2)                                             
                                                                               
  Representative Brown  addressed  the  issue  of  competitive                 
  opportunities for exploration.  She  asked if it is possible                 
  that no other company would have  the opportunity to compete                 
  for a  lease  when  the  licensee requests  to  convert  the                 
  license  to  a   lease.    Mr.  Gallagher  noted   that  the                 
  Commissioner can allow  other proposals for a  time specific                 
  period  or  a single  application  for  a license  could  be                 
  received.  Page 7, line  3 gives the Commissioner  authority                 
  to reject or  to public  notice that the  proposal is  under                 
  consideration.  He stated  that there are no provisions  for                 
  entertaining      additional     competitive      proposals.                 
  Representative Green stated  that the  intent is that  there                 
  will be the right for  additional proposals.  Representative                 
  Brown  reiterated  her concerns  that  large blocks  of land                 
  could be controlled by one company.                                          
                                                                               
  Mr. Gallagher stressed that the intent  of CSHB 199 (O&G) is                 
  to allow individuals  or companies to  invest in areas  that                 
  are not likely to be explored.                                               
                                                                               
  Representative Brown queried  why all existing sales  on the                 
  five year leasing program are  not excluded.  Representative                 
  Green noted that  industry supports areas contained  in CSHB                 
  199 (O&G).  Mr. Gallagher added that the Commissioner of the                 
  Department of Natural Resources is  required to go through a                 
  written process to  designate which lands will  be available                 
  beyond the excluded areas.                                                   
                                                                               
  Co-Chair MacLean asked if public input is allowed during the                 
  conversion to a  lease.   Mr. Gallagher  clarified that  the                 
  best  interest  finding  would  be  completed prior  to  the                 
  issuance of the  license, under AS 38.05.035.   Public input                 
  would occur during this time.                                                
                                                                               
  In   response   to   a   question   by   Co-Chair   MacLean,                 
  Representative  Green  clarified  that  the amount  of  land                 
  conveyed with  the granting of the lease would be restricted                 
  to land associated  with a discovery.   Representative Brown                 
  clarified that lease acreage  limitations under AS 38.05.140                 
                                                                               
                                5                                              
                                                                               
                                                                               
  (c) would apply.                                                             
                                                                               
  JEFF  COOK, DIRECTOR,  GOVERNMENTAL  PUBLIC RELATIONS,  ARCO                 
  testified in support  of CSHB 199  (O&G).  He asserted  that                 
  the  bonding  formulation  strikes  an  appropriate  balance                 
  amongst a variety  of interests  to provide equal  financial                 
  footing  for  bidders and  solid  protection of  the state's                 
  interest.  He noted that leases  are achieved only after the                 
  entire work commitment is completed, which minimizes chances                 
  for   speculation.     He   added   that  the   bonding  and                 
  relinquishment provisions provide incentives to conduct  the                 
  work  early  and  vigorously.   He  maintained  that bonding                 
  provisions allow  the licensee  the  maximum flexibility  to                 
  pursue a work program that makes  sense.  He emphasized that                 
  the winning  bid is  based upon  the objective  standards of                 
  total dollar amount, using sealed bids.                                      
                                                                               
  Representative  Brown referred to  page 8, lines  26 and 27.                 
  She asked why  a 12.5 percent royalty provision was included                 
  rather than  a reference  to AS  38.05.180 (f),  competitive                 
  bidding for leases.  Witnesses were unable to reply.                         
                                                                               
  Representative Brown  asked  if multiple  licenses could  be                 
  held.   Mr. Gallagher did  not think that  multiple licenses                 
  would be prohibited.                                                         
                                                                               
  Representative Brown  questioned how the  Commissioner would                 
  meet requirements of CSHB 199 (O&G) with a zero fiscal note.                 
  Mr.   Gallagher  assured   her  that   the   Department  can                 
  incorporate   the    program   at   no    additional   cost.                 
  Representative  Brown  stressed  that  the  Commissioner  is                 
  obligated in page 7, section (d)  to respond to requests and                 
  that regulations  must be  developed.   Representative Brown                 
  noted that the  state's leasing  program lacks resources  to                 
  meet current demands and legal  obligations.  Representative                 
  Green observed that if the  program expands the Commissioner                 
  could request a supplemental or increased funding for FY 96.                 
                                                                               
                                                                               
  Representative Brown  suggested that  "shall" be  changed to                 
  "may" on page  6, line 29.   Representative Green felt  that                 
  the change would weaken the legislation.                                     
                                                                               
  Representative   Therriault  suggested   that   a  lack   of                 
  geological   surveys  conducted   by   the  state   prevents                 
  exploration and development  of remote  areas.  He  observed                 
  that CSHB 199  (O&G) could entice industry  to explore areas                 
  that the state cannot afford to map.                                         
                                                                               
  CSHB 199 (O&G) was HELD in Committee for further discussion.                 
  ADJOURNMENT                                                                  
                                                                               
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  The meeting adjourned at 9:55 a.m.                                           
                                                                               
                                                                               
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