Legislature(1997 - 1998)

03/28/1998 02:15 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
             HOUSE FINANCE COMMITTEE                                           
   March 28, 1998                                                              
                   2:15 P.M.                                                   
TAPE HFC 98 - 81, Side 1.                                                      
TAPE HFC 98 - 81, Side 2.                                                      
CALL TO ORDER                                                                  
Co-Chair Therriault called the House Finance Committee                         
meeting to order at 2:15 P.M.                                                  
Co-Chair Therriault   Representative Kohring                                   
Representative Kelly  Representative Martin                                    
Representative G. Davis  Representative Mulder                                 
Representative Grussendorf                                                     
Representatives Hanley, Foster, Moses and J. Davies were                       
not present for the meeting.                                                   
ALSO PRESENT                                                                   
Ken Boyd, (Testified via Teleconference), Director,                            
Division of Oil and Gas, Department of Natural Resources;                      
James Eason, Representative for Forcenergy, Anchorage;                         
Representative Mark Hodgins; Pat Carter, Staff,                                
Representative Mark Hodgins; John Shively, (Testified via                      
Teleconference), Commissioner, Department of Natural                           
Resources; Kevin Tabler, (Testified via Teleconference),                       
Land Manager & Governmental Affairs, UNOCAL Oil Company,                       
HB 380 An Act relating to a temporary reduction of                             
royalty on oil and gas produced for sale from                                  
fields within the Cook Inlet sedimentary basin                                 
where production is commenced in fields that have                              
been discovered and undeveloped or that have been                              
shut in.                                                                       
 CS HB 380 (FIN) was reported out of Committee                                 
with individual recommendations and with a fiscal                              
note by the Department of Natural Resources dated                              
HOUSE BILL NO. 380                                                             
"An Act relating to a temporary reduction of royalty                           
on oil and gas produced for sale from fields within                            
the Cook Inlet sedimentary basin where production is                           
commenced in fields that have been discovered and                              
undeveloped or that have been shut in."                                        
Co-Chair Therriault advised that he had spoken with                            
Representative Hodgins regarding the downward modification                     
to the reserves.  Amendment #1 would reduce the total                          
number of barrels to 25 million.  [Copy on File].                              
REPRESENTATIVE MARK HODGINS noted that he did not have a                       
problem protecting the State's interest.  He reminded                          
Committee members that the fields in the proposed                              
legislation had been shut for thirty years with no revenue                     
generated.  Representative Hodgins emphasized the need for                     
an incentive.                                                                  
reminded Committee members of past history in which oil                        
companies had threatened the State that they would not                         
develop an oil field without an incentive.  Two years later                    
those fields were developed.  He stressed that the State                       
has an obligation to do something with the royalties, price                    
and volume.                                                                    
Representative Kohring voiced his disappointment that                          
Director Boyd and Commissioner Shively were not advocating                     
for oil field development.  In response to Representative                      
Kohring, Co-Chair Therriault commented that it is the                          
responsibility of the Department and the oil companies to                      
strike a balance.  Representative Grussendorf stressed that                    
Director Boyd was fulfilling his job by looking after the                      
revenue resources of the State.                                                
Representative Grussendorf pointed out that within the last                    
five years, two major leases have been accepted.  The bids                     
had not been made with the understanding that there would                      
be an incentive.  The industry deserves to know that the                       
State of Alaska will not change the existing structure.  He                    
questioned why the incentives were important at this time.                     
Representative Grussendorf advised that the State has not                      
yet received the 3D's seismic tests from Forcenergy.  He                       
suggested that the Committee was making a major decision                       
without the release of important information.  Advisors                        
need to be consulted so that the State does not give away                      
its resources.  He stressed that there has been no economic                    
evaluation of the project.  He noted that he would support                     
incentives to assist the industry if there was a need.                         
Representative Grussendorf added that he resented the State                    
giving away resources.                                                         
Representative Hodgins replied that such activity was not                      
unusual and referenced the timber industry's negotiation of                    
this type of sale.  The type of fields proposed in this                        
legislation are shut-in fields which to date have not                          
produced.  The legislation would offer an incentive for                        
these six fields.                                                              
Representative Grussendorf countered that the State does                       
not know at this time what is in the reserve.  He                              
reiterated that oil companies would develop these fields                       
without an incentive.  The proposed legislation benefits                       
only the companies, their employees and the federal                            
government from the royalties they would receive. Through                      
statute of the State Constitution, 50% of all royalties go                     
into the Permanent Fund which then benefits all Alaskans.                      
He cautioned that giving the royalty incentives to industry                    
takes the money from State residents.                                          
Representative Hodgins agreed that Commissioner Shively and                    
Director Boyd have pertinent information, although,                            
reminded Committee members that the ultimate decision is                       
with the Legislature.  He pointed out that the fields had                      
not been proven and were not in production.  The proposed                      
incentive would help to bring the sites up to production.                      
He stressed the need for more oil in Cook Inlet.                               
Representative Grussendorf suggested that the price aspect                     
of the legislation should be considered.  He recommended                       
that a triggering mechanism be put in place so that the                        
royalties would be contingent on the movement of the price,                    
in which case, the State could also benefit by the                             
DEPARTMENT OF NATURAL RESOURCES, clarified that the                            
Department is not opposed to giving appropriate incentives                     
on royalties to anybody who deserves it.  However, the                         
Administration has established two important principles:                       
? If such an incentive is given, there needs to be                             
an economic analysis;                                                          
? In addition, the State must get a lump sum if the                            
economic analysis indicates that the prices are                                
substantially higher than those initially                                      
? Because little is known about these fields, and                              
it has been suggested that HB 207 does not work,                               
that bill should be changed.                                                   
Commissioner Shively stressed that the State was treading                      
on dangerous ground by giving a straight royalty reduction                     
to field areas where little is known.                                          
Co-Chair Therriault asked if the Commissioner could modify                     
HB 207 to remove the delineation requirement.  Commissioner                    
Shivley replied that could be addressed and adjusted in a                      
noted that UNOCAL supports legislation which creates                           
incentives for development.  UNOCAL has been an active                         
proponent in supporting legislation specifically as it                         
applies to Cook Inlet.  He noted that there is a declining                     
reserve base in that area which has created the need for                       
discovery and development of new reserves.  He concluded                       
that the timing is right and that access alone may not make                    
the reserves economically viable.  In closing, Mr. Tabler                      
supported the adoption of the legislation, as it would                         
enhance economic liability for development in Cook Inlet.                      
He cautioned that the fields are mature and that they are                      
Co-Chair Therriault warned that residents in Interior                          
Alaska's only tie to the economic benefit of this policy                       
would be the royalty received.  He commented that it would                     
be sensible to have an upper limit production cap.  Co-                        
Chair Therriault pointed out that the bill's drafter had                       
allowed for caps to be in place.  Representative Hodgins                       
noted that the upper limit production cap on the original                      
legislation was 50 million barrels.  He added that                             
production must start within five years to qualify for the                     
Representative G. Davis pointed out that the Department has                    
requested the 3D seismic data and report from Forcenergy.                      
He inquired if efforts had been made to produce those                          
PAT CARTER, STAFF, REPRESENTATIVE MARK HODGINS, noted that                     
information had not been requested from Forcenergy.  The                       
legislation is an incentive bill.  The unit of measurement                     
of success would be the level of participation.  He                            
acknowledged that there is a level of uncertainty which                        
accompanies investments into the oil and gas industry.                         
Representative Grussendorf stressed that the proposed six                      
fields have not been delineated yet.  Representative                           
Hodgins replied that delineation was one of the                                
requirements of HB 207, in drilling holes to determine the                     
size of the field.  Representative Grussendorf stated                          
because that bill had been passed, it is now in statute.                       
HB 380 creates a situation in which the field has not yet                      
been delineated, although that information is required                         
under statute.                                                                 
Representative Martin concurred with Representative                            
Grussendorf.  He recommended that Forcenergy should comply                     
with the proposed requests regarding the fields potential.                     
Representative Martin reiterated that he was not                               
comfortable with how much the State is potentially giving                      
up.  Representative Hodgins replied that the potential                         
give-up would be 7% on 25 million barrels.  The potential                      
of what the State could gain is 5% on 25 million barrels.                      
He noted, the situation is such that the fields have sat                       
for a long time; if they were viable, they would have                          
already been developed.  He remarked that HB 207 has not                       
worked because it is cumbersome and has generated no                           
Representative Grussendorf stated that HB 380 was vague and                    
that it was moving through the Committee too quickly.  Mr.                     
Carter commented that at this time, Forcenergy is not                          
committed to any field development.  They have purchased                       
and unitized the lease.  Representative Grussendorf pointed                    
out that they had purchased the leases before the incentive                    
was available.  Mr. Carter disagreed.  He commented that                       
the cost measure to unitize would be $7 million dollars per                    
hole.  He stated that to assume that Forcenergy was                            
building a platform was misinformation.                                        
Representative G. Davis commented that the proposal was a                      
practical offer and solution.  He voiced his support of the                    
legislation.  He advised that the life and economic                            
viability of the Cook Inlet area are at stake.  He                             
encouraged the Committee's support and success of the                          
(Tape Change HFC 98- 81, Side 2).                                              
Representative Kohring reiterated that the State should                        
offer more incentive and opportunity to the industry and                       
less tax so that we will develop a stronger economy with                       
more people employed.  He pointed out that the industry is                     
willing to take on the risk of field development.                              
Representative Grussendorf pointed out that this decision                      
was being made without adequate economic evaluation and                        
Representative Kelly asked what was involved in unitizing a                    
lease.  Mr. Boyd explained that the reference was to an                        
exploratory unit.  A unit had been developed for efficiency                    
and protection.  In the case of Forcenergy, the State took                     
five leases, two of which are to expire 3/31/98; those                         
leases were extended in exchange for a work method over                        
time.  Forcenergy was given a series of milestones to be                       
met to keep the unit.  The first requirement was to shoot a                    
3D seismic program.  The next step would be due at the turn                    
of the century, at which time they would be required to                        
drill a well or build a platform.  If a milestone is                           
missed, the unit goes away.  The cost of unitization is $5                     
thousand dollars.                                                              
Representative Kelly understood that this would be a series                    
of agreements in which the oil companies would have to                         
comply, in order to receive the benefits of unitization.                       
Representative Kelly asked what was keeping the State from                     
seeing the 3D seismic.                                                         
responded that Forcenergy's 3D seismic information is                          
collected on State lands and is available for the                              
Department of Natural Resources (DNR) to use confidentially                    
if they request it.                                                            
Representative Grussendorf understood that DNR had                             
requested the information and had yet received it.  Mr.                        
Eason stated that he was not aware that the Department had                     
requested that information.  Mr. Boyd replied that in most                     
cases, the Department is required to ask for the                               
information, however, in this scenario, Forcenergy is                          
required to provide it as a part of their unit agreement.                      
It is due by 3/31/98 and the Department has to date not                        
received it.                                                                   
Co-Chair Therriault MOVED to adopt Amendment #1.                               
Representative Kohring OBJECTED.                                               
A roll call vote was taken on the motion.                                      
IN FAVOR: G. Davis, Grussendorf, Kelly, Martin,                                
OPPOSED:  Mulder, Kohring                                                      
Representatives Moses, J. Davies, Foster and Hanley were                       
not present for the vote.                                                      
The MOTION PASSED (5-2).                                                       
Representative Mulder MOVED to report CS HB 380 (FIN) out                      
of Committee with individual recommendations and with the                      
accompanying fiscal note.  Representative Grussendorf                          
OBJECTED.  He stated that to date there had not been enough                    
information provided to release the State royalties.                           
A roll call vote was taken on the motion.                                      
IN FAVOR: G. Davis, Kelly, Kohring, Martin, Mulder,                            
OPPOSED:  Grussendorf                                                          
Representatives J. Davies, Foster, Moses and Hanley were                       
not present for the vote.                                                      
The MOTION PASSED (6-1).                                                       
CS HB 380 (FIN) was reported out of Committee with                             
individual recommendations and with a fiscal note by the                       
Department of Natural Resources dated 3/13/98.                                 
The meeting adjourned at 3:15 P.M.                                             
H.F.C. 8 3/28/98                                                               

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