Legislature(2011 - 2012)HOUSE FINANCE 519

03/16/2011 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 166 STATE AGENCY PERFORMANCE AUDITS TELECONFERENCED
Moved CSHB 166(FIN) Out of Committee
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
+ Presentation by AOGCC, Continued TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 16, 2011                                                                                            
                         1:39 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:39:31 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:39 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mark Neuman                                                                                                      
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Mike  Chenault, Sponsor;  Representative Mike                                                                    
Hawker;   Representative  Alan   Austerman;  Senator   Cathy                                                                    
Giessel;  James  Armstrong,  Staff for  Representative  Bill                                                                    
Stoltze; Sharon Kelly,  Staff, Representative Mike Chenault;                                                                    
Daniel  Seamount, Geology  Commissioner,  Chair, Alaska  Oil                                                                    
and Gas Conservation Commission.                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 166    STATE AGENCY PERFORMANCE AUDITS                                                                                       
                                                                                                                                
          CS HB 166(FIN) was  REPORTED out of committee with                                                                    
          a  "do pass"  recommendation and  with new  fiscal                                                                    
          notes  from the  Office  of the  Governor and  the                                                                    
          Legislature.                                                                                                          
                                                                                                                                
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HOUSE BILL NO. 166                                                                                                            
                                                                                                                                
     "An Act  relating to performance reviews  and audits of                                                                    
     executive  branch agencies,  the University  of Alaska,                                                                    
     and  the  Alaska Court  System;  and  providing for  an                                                                    
     effective date."                                                                                                           
                                                                                                                                
1:41:34 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough MOVED  to ADOPT  workdraft CS  HB 166                                                                    
(FIN) (27-LS0492\X,  Kirsch, 3/14/11) as a  working document                                                                    
in front of the committee.                                                                                                      
                                                                                                                                
Hearing no objection it was so ordered.                                                                                         
                                                                                                                                
[NOTE: The bill  version used can be located  on BASIS under                                                                    
the  Documents section  and is  titled:  "HB 166  Comparison                                                                    
version I to X.pdf"]                                                                                                            
                                                                                                                                
JAMES  ARMSTRONG,  STAFF  FOR REPRESENTATIVE  BILL  STOLTZE,                                                                    
discussed that  Sharon Kelly,  Staff to  Representative Mike                                                                    
Chenault  had been  the lead  staff on  the legislation.  He                                                                    
noted that  there had been a  meeting on March 3,  2011 that                                                                    
included  Representative Hawker,  staff from  the Office  of                                                                    
Management and  Budget, and other  offices. He  thanked Lisa                                                                    
Kirch in Legislative  Legal for her hard work on  the CS and                                                                    
all of the  workdrafts that came before it.  He relayed that                                                                    
the  committee  was  in possession  of  the  workdraft,  the                                                                    
comparison, and new fiscal note.  He added that the agencies                                                                    
had been reordered and bracketed in the legislation.                                                                            
                                                                                                                                
REPRESENTATIVE   MIKE   CHENAULT,   SPONSOR,   thanked   the                                                                    
committee  for  hearing  the  bill.  During  the  March  3rd                                                                    
meeting approximately  20 issues  had been reviewed  and the                                                                    
current CS was  based on the consensus of the  work team. He                                                                    
asked his staff to discuss the changes of the bill.                                                                             
                                                                                                                                
SHARON   KELLY,   STAFF,   REPRESENTATIVE   MIKE   CHENAULT,                                                                    
highlighted  several  of the  major  items  in the  CS.  She                                                                    
discussed  that  the review  team  would  operate under  the                                                                    
Legislative Audit  Division instead of the  Budget and Audit                                                                    
Committee.  She  explained  that  the  order  of  department                                                                    
reviews   had  been   changed  slightly   to  group   "like"                                                                    
departments  together. Additionally,  the  Budget and  Audit                                                                    
Committee had the authority to  accelerate audits and at the                                                                    
request of  the review team  the legislature and  the Office                                                                    
of the Governor  were added to the list.  Lastly, the timing                                                                    
of  the  process was  changed  slightly  to accommodate  the                                                                    
legislative  process and  the  review  process would  sunset                                                                    
after  the  first  round  of  reviews  to  ensure  that  the                                                                    
legislature's desired results were accomplished.                                                                                
                                                                                                                                
Co-Chair  Thomas  asked why  the  legislation  would have  a                                                                    
sunset versus a continuous  review. Ms. Kelly responded that                                                                    
Legislative Audit  had requested the sunset  to make certain                                                                    
that the process was working correctly.                                                                                         
                                                                                                                                
Representative  Doogan  asked  whether it  was  possible  to                                                                    
speed the  process up to  receive reviews sooner than  10 or                                                                    
11 years  out. Ms.  Kelly responded that  it was  a ten-year                                                                    
cycle but that  the Budget and Audit  Committee could choose                                                                    
to accelerate the process if they wished.                                                                                       
                                                                                                                                
Representative  Doogan wondered  whether the  entire process                                                                    
could be accelerated. Ms. Kelly replied in the affirmative.                                                                     
                                                                                                                                
Representative  Doogan was  concerned  about  the length  of                                                                    
time  it  would take  to  complete  the process  given  that                                                                    
institutional  knowledge  within  the legislature  could  be                                                                    
lost during the ten-year period.                                                                                                
                                                                                                                                
Co-Chair Stoltze suspected  that it could be  a dynamic that                                                                    
was in the purview. He  noted that there were routine eight-                                                                    
year audits and that  some boards, commissions, and agencies                                                                    
had experienced the problem.                                                                                                    
                                                                                                                                
Vice-chair  Fairclough  remarked  that it  was  possible  to                                                                    
include more money in the fiscal  note in order to advance a                                                                    
project. She believed  that the proposed CS  would allow the                                                                    
legislature to  look at the  numbers in the first  few years                                                                    
to determine  what could be accomplished  with the allocated                                                                    
funds.  She noted  that the  legislature  could revisit  the                                                                    
fiscal note  at anytime  to advance things  to a  more rapid                                                                    
pace. She supported the ten-year  outlook and the ability to                                                                    
learn from the  first departments that would  go through the                                                                    
process.                                                                                                                        
                                                                                                                                
Representative  Hawker  relayed  that   the  work  team  had                                                                    
discussed at  length whether the  ten-year review  cycle was                                                                    
frequent enough.  The solution  incorporated in the  bill on                                                                    
Page   3,  Lines   15-17   included   language  that   would                                                                    
specifically   provide   the   legislature   the   statutory                                                                    
authority to conduct  reviews prior to the  ten-year date at                                                                    
the  discretion   of  the   Legislative  Budget   and  Audit                                                                    
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Stoltze remarked  that the  agencies could  not be                                                                    
eliminated through the sunset provision.                                                                                        
                                                                                                                                
Representative   Edgmon   voiced    his   support   of   the                                                                    
legislation.  He  asked  whether  the bill  would  help  the                                                                    
process  regarding  the  scrutiny   of  agency  budgets  and                                                                    
provide a  better understanding  of division  activities and                                                                    
court duties.  Ms. Kelly responded  in the  affirmative. She                                                                    
relayed  that  as  part   of  the  requirements  Legislative                                                                    
Finance and Legislative Audit would  provide the review team                                                                    
and finance subcommittees with an  in depth report of issues                                                                    
that had arisen during the process.                                                                                             
                                                                                                                                
Representative  Edgmon  wondered  how   the  timing  of  the                                                                    
process worked with the governor's  budget that was released                                                                    
annually  on December  15 and  with the  legislative session                                                                    
that  began January.  Ms. Kelly  replied  that beginning  in                                                                    
2012  Legislative  Audit   would  receive  information  from                                                                    
departments  throughout the  year and  that the  audit would                                                                    
then go  to the  Budget and Audit  Committee about  the same                                                                    
time  that   the  governor's   budget  was   released  every                                                                    
December.   The   departments   would   continue   to   have                                                                    
approximately  one  month  to respond  and  the  information                                                                    
would then  be available for the  finance subcommittees when                                                                    
their work began every January.                                                                                                 
                                                                                                                                
Representative Guttenberg  referred to Page 3,  Lines 14-17.                                                                    
He   was  concerned   about   how   to  handle   multiagency                                                                    
relationships  with programs,  such  as  the Departments  of                                                                    
Law, Public  Safety, Corrections, and the  Court System that                                                                    
were interrelated  in the  work that  they did.  He wondered                                                                    
whether there  was a way  that the integration of  a justice                                                                    
system could work  in the process. Ms. Kelly  replied in the                                                                    
affirmative.  She  referred  to  Page  3,  Lines  11-13  and                                                                    
explained  that  overlapping  services  between  departments                                                                    
would  be  recognized  as Legislative  Audit  developed  the                                                                    
scope of the audit that would  be approved by the Budget and                                                                    
Audit  Committee.   She  stated   that  it  could   be  more                                                                    
appropriate for  the justice system integration  to occur in                                                                    
2013,  while issues  related to  other departments  could be                                                                    
addressed  at the  time of  the Budget  and Audit  Committee                                                                    
review.                                                                                                                         
                                                                                                                                
Representative Guttenberg wondered how  the logistics of the                                                                    
process would take place. He  discussed that the new process                                                                    
would have  significant legislative authority;  however, the                                                                    
final product would have to  come before the legislature for                                                                    
approval.  He noted  that the  bill would  allow Legislative                                                                    
Audit to rewrite missions and  measures and wondered whether                                                                    
a new section  of expertise would be required  given that an                                                                    
understanding  of exactly  what  programs  were supposed  to                                                                    
accomplish would be necessary.  Ms. Kelly responded that the                                                                    
missions and measures  language was the result  of a request                                                                    
by  a  member   of  the  review  team.   She  believed  that                                                                    
Legislative Audit  would look at  the missions  and measures                                                                    
to  determine  whether   they  appropriately  measured  work                                                                    
conducted  by  state  agencies  on  behalf  of  the  Alaskan                                                                    
public. She added that the  committee would have the ability                                                                    
to recommend any changes that it would see fit.                                                                                 
                                                                                                                                
Representative  Wilson wanted  to make  certain the  reports                                                                    
would  be available  to the  public. She  cited language  on                                                                    
Page 3,  Lines 8-10,  that read "performance  review reports                                                                    
are confidential  unless the report has  been approved…" Ms.                                                                    
Kelly  replied the  reports would  become public.  She noted                                                                    
that  Page 3,  Section  2  referred to  work  that would  be                                                                    
completed  prior to  its transmittal  to Legislative  Audit.                                                                    
Currently  and   continuing  forward  the   information  was                                                                    
confidential during  the month-long  process and  the Budget                                                                    
and Audit  Committee would release the  report following the                                                                    
designated period.  She read from the  legislation that "one                                                                    
week  before the  first day  of the  regular session  of the                                                                    
legislature in the  year following the review  [year set out                                                                    
in AS  44.66.020(a)], the review  team shall provide  to the                                                                    
chairs  or  cochairs  of  the  [senate  and  house  finance]                                                                    
committees a final report…"(Page 6, Lines 15-18).                                                                               
                                                                                                                                
Representative Gara  wondered about the general  fund budget                                                                    
for the  University of Alaska.  Ms. Kelly responded  that it                                                                    
was approximately $360 million.                                                                                                 
                                                                                                                                
Representative  Gara was  concerned that  the bill  included                                                                    
language that  would allow  department budget  reductions of                                                                    
at least  ten percent  when inefficiencies  were identified;                                                                    
however, he agreed with the  general concept of the bill, an                                                                    
external review, and the goal  to identify duplicate efforts                                                                    
and inefficiencies.  He believed the ten  percent figure was                                                                    
arbitrary and  relayed that  it would  be his  preference to                                                                    
receive  a   report  that  cited   inefficiencies,  provided                                                                    
solutions,  and recommended  ways to  save money.  He opined                                                                    
that in  some circumstances it  could decimate an  agency to                                                                    
take ten percent. He expressed  that the figure would equate                                                                    
to  $110  million to  $120  million  for the  Department  of                                                                    
Education and  Early Development's  (DOEED) budget  and that                                                                    
the   significant   reduction    would   only   reduce   the                                                                    
effectiveness  of the  state's  education  system. He  added                                                                    
that  he might  introduce an  amendment on  the House  floor                                                                    
that  would  change  the  language   for  DOEED.  Ms.  Kelly                                                                    
responded  that it  was not  mandatory that  the legislature                                                                    
accept  the ten  percent reduction.  She explained  that the                                                                    
sponsor had looked  at the "Texas sunset bill"  and that the                                                                    
Texas budget  committee was  recommending a  fifteen percent                                                                    
cut. Although the bill aimed at  a ten percent cut to reduce                                                                    
inefficiencies,  it  did  not intend  agencies  to  cut  ten                                                                    
percent across the board. She  remarked that the legislature                                                                    
may  decide  to invest  in  the  infrastructure to  increase                                                                    
savings in the future.                                                                                                          
                                                                                                                                
Representative  Gara   reiterated  concern  that   the  bill                                                                    
required departments  to find  inefficiencies, duplications,                                                                    
and things not  authorized by statute that  equaled at least                                                                    
ten  percent   of  the  budget.   He  understood   that  the                                                                    
legislature  had   the  ultimate   appropriation  authority;                                                                    
however,  he believed  that the  standards  outlined in  the                                                                    
bill may not exist. He  explained that some agencies may cut                                                                    
fifteen  percent  and others  could  be  forced to  cut  ten                                                                    
percent from areas outside of the bill's standards.                                                                             
                                                                                                                                
Representative Chenault remarked  that without the inclusion                                                                    
of a  set percentage  a department may  profess that  it was                                                                    
not able  to make any  cuts. He communicated that  the state                                                                    
was  fortunate that  it did  not have  to currently  require                                                                    
cuts of a set percentage;  however, that could change in the                                                                    
future  due to  issues  that  were out  of  its control.  He                                                                    
believed that  allowing the departments to  review their own                                                                    
programs to  determine the  inefficiencies and  select areas                                                                    
that  could handle  budget reductions  would be  better than                                                                    
arbitrary cuts made by the legislature in the future.                                                                           
                                                                                                                                
Representative Gara  believed that their view  points on the                                                                    
bill were not very far  apart and that the legislature would                                                                    
not be  required to accept  the budget  cut recommendations.                                                                    
He reiterated his  concern that a reduction  of $110 million                                                                    
to  the DOEED  would  do  nothing but  hurt  the quality  of                                                                    
education provided to Alaskans.                                                                                                 
                                                                                                                                
Representative Chenault  agreed; however,  he noted  that in                                                                    
order  to  have  the  legislative  "buy-in"  to  the  budget                                                                    
process, it  was also necessary  to have a  department "buy-                                                                    
in."                                                                                                                            
                                                                                                                                
2:02:58 PM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough  appreciated the ten  percent language                                                                    
and  would  support it  on  the  House floor.  She  remarked                                                                    
during  the review  of the  DOEED and  University of  Alaska                                                                    
budgets  those  involved had  worked  to  make the  agencies                                                                    
aware that  oil production was declining,  but the increased                                                                    
oil  price  had  camouflaged  the decline  for  the  general                                                                    
public. Two  years earlier she  had a conversation  with the                                                                    
University  of  Alaska  President   Mark  Hamilton  who  had                                                                    
reported that  100 new programs  had been implemented  and 3                                                                    
had been eliminated in the  last decade. She delineated that                                                                    
the  100   new  programs  did  not   necessarily  have  full                                                                    
classrooms,  but  that agencies  were  leaving  them on  the                                                                    
books.  She opined  that for  transparency  purposes it  was                                                                    
important to have a prioritization  of services and programs                                                                    
to benefit Alaskans. She explained  that the legislature had                                                                    
worked to  communicate to  the university  for the  past six                                                                    
years that  budget cuts  may occur  in the  event of  an oil                                                                    
production decline.                                                                                                             
                                                                                                                                
Representative   Doogan  asked   whether   there  had   been                                                                    
consideration  to the  idea of  ranking  the activities  and                                                                    
programs  of  each  agency  from  most  important  to  least                                                                    
important.  He wondered  whether  a ranking  process in  the                                                                    
audit would  help to address the  likelihood that priorities                                                                    
would  change   over  time.  Ms.   Kelly  replied   that  AS                                                                    
37.07.050(a)(13)  required departments  to prioritize  every                                                                    
agency   underneath  their   jurisdiction   (Page  7).   She                                                                    
discussed  that Representative  Hawker's office  had located                                                                    
one  of   the  prioritization   lists  from  2004   and  had                                                                    
recommended   that  the   language   be   included  in   the                                                                    
legislation.                                                                                                                    
                                                                                                                                
2:06:12 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  asked  whether there  were  any  comments                                                                    
regarding the fiscal note.                                                                                                      
                                                                                                                                
Representative Doogan MOVED a  conceptual amendment to shift                                                                    
the  sections  that  dealt  with  the  legislature  and  the                                                                    
governor  to  the  top  of  the list  and  to  have  reviews                                                                    
conducted for the two agencies every two years.                                                                                 
                                                                                                                                
Vice-chair Fairclough OBJECTED.                                                                                                 
                                                                                                                                
Representative  Doogan  believed  that   it  would  be  more                                                                    
effective to begin the review  process with the legislature.                                                                    
He  explained  that he  was  not  attached  to the  idea  of                                                                    
conducting the  review every two  years and that  every four                                                                    
years  was another  option. He  thought that  conducting the                                                                    
review  every ten  years  would not  satisfy  the people  of                                                                    
Alaska and  would not help to  road test what would  be done                                                                    
with the budgets.                                                                                                               
                                                                                                                                
Co-Chair  Stoltze had  no objection,  but  wondered how  the                                                                    
mechanics of the amendment would work.                                                                                          
                                                                                                                                
Vice-chair  Fairclough relayed  that  there  had been  prior                                                                    
discussions  regarding the  order in  which the  departments                                                                    
were  listed.  She was  happy  to  have the  legislature  go                                                                    
through the review process at  a much earlier year; however,                                                                    
she believed that until the  first audit was conducted there                                                                    
was no  way to  know what resources  would be  required from                                                                    
the  legislative  divisions, what  administrative  resources                                                                    
would be necessary  to support the departments  as they went                                                                    
through  the review  process, and  how  much the  governor's                                                                    
budget would be affected.                                                                                                       
                                                                                                                                
Representative  Hawker was  concerned  about moving  forward                                                                    
with a  conceptual amendment that  had not  been deliberated                                                                    
and  discussed with  those who  would be  administrating the                                                                    
audits.  He  relayed that  there  were  specific reasons  to                                                                    
begin with a single agency  and that resources would need to                                                                    
be put into place and  policies and procedures would need to                                                                    
be  established.  He  remarked   that  the  items  could  be                                                                    
accommodated  under  the  amendment; however,  it  would  be                                                                    
necessary  to have  the  precise language  in  front of  the                                                                    
committee  in  order to  evaluate  exactly  what the  impact                                                                    
would be. He added that  even though the legislature and the                                                                    
governor were  included in the ten-year  rotation, there was                                                                    
a provision in the bill  that would allow the legislature to                                                                    
accelerate the review schedule at any time.                                                                                     
                                                                                                                                
Representative Edgmon  believed that the  current department                                                                    
order  should  be  maintained  because  oil  production  was                                                                    
declining  and   the  intent  of   HB  166  was   to  create                                                                    
efficiencies, prioritization,  and to  focus on  savings. He                                                                    
opined that in  the event of a major decline  in oil revenue                                                                    
a self  audit of the  legislature and the  governor's office                                                                    
could occur very quickly.                                                                                                       
                                                                                                                                
Representative  Guttenberg was  supportive of  the bill  but                                                                    
believed  that the  legislature should  show other  agencies                                                                    
that it was  willing to go through the  review process first                                                                    
which  would   help  to  eliminate  resistance   from  state                                                                    
employees. He  expressed that other  agencies would  be able                                                                    
to see that the legislature  was not treated differently and                                                                    
that problems  detected in the initial  review process would                                                                    
be modified and improved prior to audits of other agencies.                                                                     
                                                                                                                                
Representative  Wilson  wondered  about the  possibility  of                                                                    
moving only the  legislature to the top of  list. She wanted                                                                    
to  make  the  general  public aware  that  the  legislature                                                                    
believed in the  idea and was willing to  put itself through                                                                    
the  process   first.  She  was   very  supportive   of  the                                                                    
legislation  and  believed  that  agencies,  such  as  DOEED                                                                    
needed to  take a close  look at their programs  to increase                                                                    
efficiencies.                                                                                                                   
                                                                                                                                
Co-Chair Stoltze asked Representative  Doogan to restate the                                                                    
conceptual amendment.                                                                                                           
                                                                                                                                
Representative  Doogan replied  that the  proposed amendment                                                                    
was to move  the legislature and the governor to  the top of                                                                    
the list  and to require a  review for the two  groups every                                                                    
two years.                                                                                                                      
                                                                                                                                
2:17:24 PM                                                                                                                    
                                                                                                                                
Representative Gara  believed that the  amendment maintained                                                                    
the bill and would add  public confidence. He expounded that                                                                    
the  Department  of Health  and  Social  Services and  DOEED                                                                    
would  be  very   large  audits  given  the   size  of  each                                                                    
department  and  that  comparatively  it would  be  easy  to                                                                    
include  the legislature,  the  governor's  office, and  the                                                                    
Department of  Corrections (DOC)  in the  first year  of the                                                                    
review given their small size.                                                                                                  
                                                                                                                                
Representative  Hawker wondered  about the  intent to  "move                                                                    
[the legislature  and the governor's  office] to the  top of                                                                    
the list." He asked whether the  intent would be to have the                                                                    
two  agencies share  the  top of  the list  with  DOC or  to                                                                    
appropriately  adjust  DOC  and the  remaining  agencies  to                                                                    
later years.                                                                                                                    
                                                                                                                                
Representative Doogan clarified that  the intent was for the                                                                    
legislature  and the  governor's  office to  be included  in                                                                    
addition to DOC.                                                                                                                
                                                                                                                                
Representative  Hawker advised  that  the committee  solicit                                                                    
the counsel  of the audit  administrators in regards  to the                                                                    
impact of  moving from  one to three  agencies in  the first                                                                    
year.  He explained  that the  first  year was  specifically                                                                    
limited  to  one   agency  to  account  for   time  to  hire                                                                    
personnel, and outside contracts.                                                                                               
                                                                                                                                
Co-Chair   Stoltze  opposed   the  current   amendment,  but                                                                    
believed  that there  was potential  to accomplish  the goal                                                                    
with further deliberation on the House floor.                                                                                   
                                                                                                                                
Representative Doogan WITHDREW  the conceptual amendment. He                                                                    
supported the  legislation, but would reintroduce  a similar                                                                    
version of the amendment on the House floor.                                                                                    
                                                                                                                                
Co-Chair  Stoltze  believed  that   a  compromise  could  be                                                                    
reached through discussion outside of the committee.                                                                            
                                                                                                                                
2:22:13 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough hoped  that  any  amendment would  be                                                                    
discussed  with  the  affected   bodies  as  recommended  by                                                                    
Representative Hawker.                                                                                                          
                                                                                                                                
Vice-chair Fairclough MOVED to report  CS HB 166(FIN) out of                                                                    
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
                                                                                                                                
CS  HB 166(FIN)  was REPORTED  out of  committee with  a "do                                                                    
pass"  recommendation and  with  new fiscal  notes from  the                                                                    
Office of the Governor and the Legislature.                                                                                     
                                                                                                                                
2:23:02 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:30:21 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
2:30:34 PM                                                                                                                    
                                                                                                                                
DANIEL  SEAMOUNT, GEOLOGY  COMMISSIONER,  CHAIR, ALASKA  OIL                                                                    
AND  GAS  CONSERVATION  COMMISSION,  (AOGCC),  introduced  a                                                                    
chart titled "Approved Permits to  Drill for Each Year (1996                                                                    
-  2010) Statewide:  Oil, Gas  and Alternative  Energy Wells                                                                    
and  Wellbores"  (Page  17   of  a  PowerPoint  presentation                                                                    
titled:   "Alaska  Oil   and  Gas   Conservation  Commission                                                                    
(AOGCC)"). The  chart showed the number  of approved permits                                                                    
for  all oil,  gas, and  alternative energy  wells that  had                                                                    
been drilled  in the state.  The cost  of oil appeared  in a                                                                    
green  line that  overlaid the  chart and  the permit  scale                                                                    
ranged from 0  to 400. With the exception of  1999 and 2000,                                                                    
there were  slightly under 250  permits issued per  year. He                                                                    
highlighted a correlation  between the dip in  oil prices in                                                                    
1998 and 1999 and the lowest  number of wells drilled in the                                                                    
past 20  years; however, with  recent high oil  prices there                                                                    
could have been  an inverse correlation. He  was not certain                                                                    
about the  reason related to  the decrease in the  number of                                                                    
permits that  were issued  around 2004  and 2005,  but AOGCC                                                                    
planned to  look at  the compiled  total footage  drilled to                                                                    
determine whether the  oil wells were more  complex and took                                                                    
more time.                                                                                                                      
                                                                                                                                
Mr. Seamount addressed  Page 18 related to  wells drilled on                                                                    
the North  Slope: "Approved Permits  to Drill for  Each Year                                                                    
(1996   -  2010)   North   Slope:   Oil-Related  Wells   and                                                                    
Wellbores." He explained that the  chart looked very similar                                                                    
to the  one on Page  17 because  the North Slope  was "king"                                                                    
when it  came to the  number of  oil wells drilled  and very                                                                    
few  wells had  been  drilled in  other locations  including                                                                    
Cook  Inlet. He  discussed the  actual work  done by  actual                                                                    
investors:  "Alaska  Oil  and Gas  Conservation  Commission"                                                                    
(Page 19). He explained that  the charts looked very similar                                                                    
to  the numbers  for permits  to  drill on  Page 17  because                                                                    
operators  tended  to  follow  through  on  their  plans  in                                                                    
Alaska. He noted  that this was not the case  in other areas                                                                    
such as  the Rocky Mountains  where a significant  number of                                                                    
permits  issued  were  never used.  He  discussed  that  Mr.                                                                    
Davies, Petroleum  Economist, AOGCC,  had developed  the pie                                                                    
chart:  "Alaska 2010  Wells and  Wellbores"  (Page 20).  The                                                                    
chart showed that there had  been total of 183 wells drilled                                                                    
in 2010 and  did not account for wells  drilled by operators                                                                    
who  were   still  in  the   process  of   submitting  their                                                                    
completion  reports. Out  of 183  wells  drilled the  Arctic                                                                    
Slope accounted  for 125 producer  wells, 39  service wells,                                                                    
and 4  exploration wells. The  remaining wells  were located                                                                    
in Cook Inlet and other areas of the state.                                                                                     
                                                                                                                                
2:36:37 PM                                                                                                                    
                                                                                                                                
Mr. Seamount  pointed to a  chart that showed oil,  gas, and                                                                    
alternative energy  exploration wells  drilled: "Exploratory                                                                    
Wells  and  Wellbores  Statewide:  Completed,  Suspended  or                                                                    
Abandoned (1996-2010)"  (Page 21). The chart  looked similar                                                                    
to the  ones shown on Pages  17 and 18 that  were related to                                                                    
permits to  drill. There  was low  exploration and  price in                                                                    
1999 and 2000. In 2010  the number of wells drilled exceeded                                                                    
the number of  permits (shown on the far  right-hand side of                                                                    
the page)  because many of  the applications for  permits to                                                                    
drill had  been submitted in  2009. He remarked that  out of                                                                    
the 15 exploration wells drilled in  2010 only 7 were oil or                                                                    
gas exploration.                                                                                                                
                                                                                                                                
Representative   Gara  indicated   that  that   the  numbers                                                                    
discussed by Mr. Seamount did  not match the numbers on Page                                                                    
21.  Mr. Seamount  clarified that  there had  been 15  wells                                                                    
drilled in 2010 by 9 operators.                                                                                                 
                                                                                                                                
Representative Gara wondered whether  2011 was the year that                                                                    
only one exploratory well was  drilled. Mr. Seamount replied                                                                    
in the  affirmative. He communicated  that 2011 would  be an                                                                    
abysmal year for exploration.                                                                                                   
                                                                                                                                
Mr.  Seamount  discussed  Page 22:  "Exploratory  Wells  and                                                                    
Wellbores  Statewide:  Completed,   Suspended  or  Abandoned                                                                    
(1996-2010)," that  related only to  oil and gas.  There was                                                                    
low exploration  and price in  1999 and 2000, but  there was                                                                    
an inverse  correlation between  exploration and  price that                                                                    
began in 2005. He examined  development and service wells on                                                                    
Page   23:   "Development    and   Service   Wells/Wellbores                                                                    
Statewide: Completed,  Suspended or  Abandoned (1996-2010)."                                                                    
The chart did not include  exploration wells and was similar                                                                    
to the  total wells drilled  because of the small  number of                                                                    
exploration  wells. ConocoPhillips  (shown  in  red) and  BP                                                                    
(shown  in green)  made  up the  largest  percentage of  the                                                                    
development  and  service wells  depicted  on  the graph.  A                                                                    
handful  of  newer  producers including  Pioneer,  ENI,  and                                                                    
Savant  accounted  for  most  of  the  remaining  percentage                                                                    
beginning around  2008. There had  been a dip in  the number                                                                    
of  wells drilled  beginning in  2004 and  2005, but  it had                                                                    
remained relatively level through 2010.                                                                                         
                                                                                                                                
2:40:08 PM                                                                                                                    
                                                                                                                                
Representative  Costello   asked  for  a  breakout   of  the                                                                    
completed, suspended,  or abandoned  wells that  were listed                                                                    
on Page 23.  Mr. Seamount replied that he  would provide the                                                                    
information to the committee. He  added that very few of the                                                                    
wells shown  had been abandoned  and that the  majority were                                                                    
actively  producing  oil or  injecting  fluids  to keep  the                                                                    
reservoir pressure up.                                                                                                          
                                                                                                                                
Representative  Costello   wondered  whether   Mr.  Seamount                                                                    
supported a claim made in  another committee that the legacy                                                                    
companies did  not take into  account taxes or the  price of                                                                    
oil in  their data  represented on  the chart.  Mr. Seamount                                                                    
responded that he did not  have enough information to answer                                                                    
the  question and  that he  was  not privy  to that  company                                                                    
detail.                                                                                                                         
                                                                                                                                
Co-Chair Stoltze  provided a  baseball analogy  in reference                                                                    
to the  difficulty he  had experienced  in following  all of                                                                    
the information on the production and operation wells.                                                                          
                                                                                                                                
Representative Guttenberg wondered whether  there was a rule                                                                    
of  thumb  regarding  the allowable  lag  time  between  the                                                                    
submittal of  a development plan  and the installation  of a                                                                    
well.  Mr.  Seamount replied  that  it  was highly  variable                                                                    
depending upon  how desirable a  project was to  a company's                                                                    
management  team. He  reflected on  one prospect  in Wyoming                                                                    
that had taken nine years to be drilled.                                                                                        
                                                                                                                                
Representative Guttenberg  remarked that the  variables were                                                                    
incalculable,  for  instance  a   company  could  be  highly                                                                    
interested in  a project and  then discover that  there were                                                                    
no  rigs available.  Mr. Seamount  replied  that there  were                                                                    
numerous  variables that  could delay  a project,  including                                                                    
economic, government, litigation, and more.                                                                                     
                                                                                                                                
Representative  Guttenberg  had  heard of  circumstances  in                                                                    
which a company  had interest in drilling a well  but it was                                                                    
unable to  do so because  access to  a rig was  not possible                                                                    
until the following season when  an ice road could be built.                                                                    
Mr.  Seamount  agreed. He  observed  that  the logistics  in                                                                    
Alaska were more challenging than those in the Lower 48.                                                                        
                                                                                                                                
2:44:26 PM                                                                                                                    
                                                                                                                                
Representative Gara  wondered why Page 22  showed that there                                                                    
were five  exploratory well developers but  did not indicate                                                                    
the number of  wells. Mr. Seamount explained  that the scale                                                                    
shown  on the  left (x-axis)  of  the chart  related to  the                                                                    
number of wells drilled.                                                                                                        
                                                                                                                                
Representative  Gara  asked  about  the  difference  between                                                                    
Pages  21  and  22.  Mr. Seamount  responded  that  Page  21                                                                    
included oil, gas,  and alternative energy and  Page 22 only                                                                    
included oil and gas.                                                                                                           
                                                                                                                                
Representative Gara  wondered whether Page 14  only included                                                                    
information  about the  North  Slope.  Mr. Seamount  replied                                                                    
that Page  14 related to  statewide oil and  gas exploratory                                                                    
well permits, excluding alternative energy.                                                                                     
                                                                                                                                
Representative  Gara asked  whether  there was  a page  that                                                                    
showed exploratory  well permits  for the North  Slope only.                                                                    
Mr. Seamount  responded that he  would provide a  chart with                                                                    
the data to committee members.                                                                                                  
                                                                                                                                
Representative Gara  believed that  the focus of  the debate                                                                    
on  ACES [Alaska's  Clear and  Equitable Share]  centered on                                                                    
the North  Slope and not  on other  areas of the  state. Mr.                                                                    
Seamount  answered that  information was  included later  in                                                                    
the presentation  about the wells  that had been  drilled on                                                                    
the North Slope.                                                                                                                
                                                                                                                                
Representative  Gara  queried   whether  the  suspended  and                                                                    
abandoned  wells  were drilled  during  the  year they  were                                                                    
presented  on Pages  21  and  22 or  whether  they had  been                                                                    
drilled in prior years. Mr.  Seamount replied that the wells                                                                    
were  drilled in  the year  in  which they  appeared on  the                                                                    
chart.  He  expounded  that  wells  in  close  proximity  to                                                                    
infrastructure were  completed and  those that  were farther                                                                    
away were not.                                                                                                                  
                                                                                                                                
2:48:37 PM                                                                                                                    
                                                                                                                                
Representative Wilson  wondered whether  there was  a review                                                                    
process to  determine why wells were  suspended or abandoned                                                                    
to  ensure that  the appropriate  tax credits  were applied.                                                                    
Mr.  Seamount   replied  that  there  were   four  petroleum                                                                    
engineers  that monitored  the  situation  closely and  that                                                                    
approval for  a company to  abandon a project  was required.                                                                    
He elaborated that it was necessary  for a company to have a                                                                    
good reason for abandoning one  area to drill in another and                                                                    
that an extensive review took place.                                                                                            
                                                                                                                                
Representative  Wilson wondered  whether the  information on                                                                    
abandoned  wells was  public.  She noted  that  it would  be                                                                    
helpful for  her to know  why the wells were  abandoned. Mr.                                                                    
Seamount remarked  that he could provide  the committee with                                                                    
the  information.  He  added   that  there  was  a  two-year                                                                    
confidentiality rule  on exploration wells but  the rule did                                                                    
not apply to development wells.                                                                                                 
                                                                                                                                
Co-Chair Thomas  wondered whether there were  inactive wells                                                                    
that  might be  activated once  a tax  system that  was more                                                                    
desirable for  oil companies was  implemented in  the state.                                                                    
Mr. Seamount  was not aware  of anyone using  the particular                                                                    
strategy. He noted that there were  quite a few areas in the                                                                    
state  that   were  capable  of  production   but  were  not                                                                    
currently under production due to  various issues related to                                                                    
infrastructure or government.                                                                                                   
                                                                                                                                
Co-Chair  Thomas  asked whether  the  issue  was related  to                                                                    
state or federal permitting. Mr.  Seamount responded that he                                                                    
was not  aware of  any situation  in which  state government                                                                    
was inhibiting production.                                                                                                      
                                                                                                                                
2:52:10 PM                                                                                                                    
                                                                                                                                
Representative  Gara observed  that oil  companies had  also                                                                    
stopped  production  by  prohibiting access  to  others.  He                                                                    
cited an  example in  which Conoco  had prevented  a company                                                                    
from gaining  access to  land by denying  it the  ability to                                                                    
cross land  owned by Conoco.  Mr. Seamount was not  aware of                                                                    
the particular situation.                                                                                                       
                                                                                                                                
Representative Costello  asked whether a company  could slow                                                                    
the  rate of  production  on an  active  well. Mr.  Seamount                                                                    
replied that a company could  slow the wells when gas ratios                                                                    
became  too  high  and  for a  variety  of  other  technical                                                                    
reasons.                                                                                                                        
                                                                                                                                
Representative  Costello wondered  whether there  were other                                                                    
reasons for slowing a well.  Mr. Seamount could not think of                                                                    
any other economic or additional reasons.                                                                                       
                                                                                                                                
Mr. Seamount discussed that Page  24 titled "Development and                                                                    
Service Wells/Wellbores  Statewide: Completed,  Suspended or                                                                    
Abandoned (1996-2010) by BP  Exploration (Alaska), Inc," was                                                                    
similar to Page  22 and 23 but only  included BP Exploration                                                                    
Alaska.  He relayed  that 99  percent of  the wells  were in                                                                    
Prudhoe Bay,  Milne Point, and  Point McKenzie and  were all                                                                    
in the North Slope. Page  25 titled "Development and Service                                                                    
Wells/Wellbores    Statewide:   Completed,    Suspended   or                                                                    
Abandoned  (1996-2010)  by   ConocoPhillips  Alaska,  Inc.,"                                                                    
related  only to  ConocoPhillips  Alaska,  Inc. He  reported                                                                    
that the  majority of the company's  development and service                                                                    
wells   were  located   in  Kuparuk   and  Colville   River.                                                                    
Additionally, the company did not  take much risk, but their                                                                    
activity had been fairly constant over the years.                                                                               
                                                                                                                                
Mr.  Seamount   directed  attention   to  Page   26  titled:                                                                    
"Completed, Suspended  and Abandoned  Oil and  Support Wells                                                                    
and Wellbores - North Slope  Only 1996-2010." The wells were                                                                    
broken out by  type, the oil producers were  shown in green,                                                                    
the  oil injectors  were shown  in blue,  and waste  ejector                                                                    
wells were indicated in black.  He highlighted that the same                                                                    
trends that were  present on the previous  slides applied to                                                                    
Page 26 as well. He discussed  a bar chart on Page 27 titled                                                                    
"Alaska's  Active  Drilling  and   Workover  Rigs  for  Each                                                                    
Quarter (2005-2010),"  that related  to statewide  oil, gas,                                                                    
and alternative energy. The light  green portion of the bars                                                                    
represented  drilling  rigs  and   the  dark  green  portion                                                                    
represented workover rigs. He  delineated that there were 15                                                                    
or more active  drilling and workover rigs  per quarter from                                                                    
2005 to  the fourth quarter of  2008; but there was  a sharp                                                                    
decline  in 2009  through 2010.  The price  of oil  that was                                                                    
relatively high  was represented as  a dark green  line and,                                                                    
with the  exception of 2006  showed no correlation  with the                                                                    
active rigs.                                                                                                                    
                                                                                                                                
2:57:13 PM                                                                                                                    
                                                                                                                                
Representative Gara  wondered whether  the dip in  the price                                                                    
of oil  in 2009  explained the lower  number of  active rigs                                                                    
one and  a half years later  given that plans to  drill were                                                                    
done two years in advance.  Mr. Seamount supposed that was a                                                                    
possibility.                                                                                                                    
                                                                                                                                
Representative  Gara   asked  whether  the   chart  included                                                                    
directional  drilling rigs  or whether  the smaller  rigs in                                                                    
2009 and  2010 were rigs  that drilled horizontally.  He had                                                                    
heard that  the number of  rigs had declined  as directional                                                                    
drilling  had increased.  Mr. Seamount  responded that  most                                                                    
rigs  were  extended  reach  and   that  the  majority  were                                                                    
horizontal.                                                                                                                     
                                                                                                                                
Representative Gara wondered  how long it had  been the case                                                                    
that  most  rigs were  extended  reach  and horizontal.  Mr.                                                                    
Seamount believed it had been since 1999 or 2000.                                                                               
                                                                                                                                
Mr. Seamount  addressed Page  28: "Alaska's  Active Drilling                                                                    
Rigs  for  Each  Quarter  (2005-2010)."  He  explained  that                                                                    
drilling rigs  were often  swapped out  to do  workovers. He                                                                    
noted the  correlation between the  number of  workover rigs                                                                    
and the  cost of oil  on Page 29: "Alaska's  Active Workover                                                                    
Rigs for  Each Quarter  (2005-2010)." He reported  that many                                                                    
of the  workover rigs had  been switched over  from drilling                                                                    
rigs and that  the payoff would be  quicker because workover                                                                    
rigs were less expensive.                                                                                                       
                                                                                                                                
Representative Hawker  asked for clarification that  Page 28                                                                    
included  oil, gas,  and alternative  energy statewide.  Mr.                                                                    
Seamount replied in the affirmative.  He noted that 2010 was                                                                    
the only year  on the page that  included alternative energy                                                                    
rigs and that  it would be necessary to  subtract three from                                                                    
that year to obtain oil and gas rigs only.                                                                                      
                                                                                                                                
Representative  Hawker wondered  whether alternative  energy                                                                    
wells  were  drilled  prior  to  2010 as  a  result  of  the                                                                    
extraordinary  number of  permits  that were  issued to  the                                                                    
Department of  the Interior in  2008. Mr.  Seamount believed                                                                    
that the Department of Energy  had drilled nine wells in the                                                                    
previous two years.                                                                                                             
                                                                                                                                
Representative  Hawker asked  whether the  chart on  Page 28                                                                    
included the alternative energy wells  in 2008 and 2009. Mr.                                                                    
Seamount responded  that coalbed methane was  not considered                                                                    
an alternative energy.                                                                                                          
                                                                                                                                
3:03:07 PM                                                                                                                    
                                                                                                                                
Representative  Costello asked  about  an earlier  statement                                                                    
that workover  rigs tended to  follow the price of  oil more                                                                    
closely because  they were more  cost effective for  the oil                                                                    
companies. Mr.  Seamount responded  that he  had interpreted                                                                    
the data that way.                                                                                                              
                                                                                                                                
Representative Costello wondered why  there was an exception                                                                    
in the fourth  quarter of 2009. She asked  whether there was                                                                    
another factor  at play during  that time. Mr.  Seamount was                                                                    
not aware of another factor at play.                                                                                            
                                                                                                                                
Mr. Seamount moved on to  Page 30: "Well Workover Activities                                                                    
for Each  Year (North Slope Only)  2003-2010." Workovers had                                                                    
reached  a significant  number of  over 400  per year  since                                                                    
2003. A high of 582 had  been reached in 2008 when oil price                                                                    
had been at its peak. He  detailed that 500 workovers out of                                                                    
3000  development   wells  in   Alaska  was   a  significant                                                                    
percentage.                                                                                                                     
                                                                                                                                
Representative  Guttenberg   wondered  what   constituted  a                                                                    
workover. Mr. Seamount replied that  typically a workover or                                                                    
drilling rig  was set  directly over the  well and  that the                                                                    
wellbore was drilled and modified  to increase production or                                                                    
to fix a leak, etc.                                                                                                             
                                                                                                                                
Representative  Guttenberg remarked  that it  took a  lot to                                                                    
move  a   rig  and  that   500  times  in  one   season  was                                                                    
significant. Mr. Seamount believed that it was expensive.                                                                       
                                                                                                                                
Representative  Gara  asked  about  the  difference  between                                                                    
workover rigs  and development rigs. Mr.  Seamount explained                                                                    
that a development well involved  drilling a new hole in the                                                                    
ground, whereas a workover did not.                                                                                             
                                                                                                                                
Representative Gara  asked whether  rigs had been  moved 558                                                                    
times  in 2010  to perform  workovers. Mr.  Seamount replied                                                                    
that sometimes  a series of  workovers was done on  the same                                                                    
wellbore; however,  a high number of  moves were represented                                                                    
in the number.                                                                                                                  
                                                                                                                                
3:07:07 PM                                                                                                                    
                                                                                                                                
Representative  Gara wondered  where well  workover activity                                                                    
and expense fit within the  goal to maintain and enhance oil                                                                    
production.  He  asked whether  the  higher  number of  well                                                                    
workovers in  2010 compared to  those conducted in  2007 was                                                                    
indicative  of  an  attempt  to  enhance  or  stabilize  oil                                                                    
production.   He  discussed   that  development   wells  and                                                                    
exploration wells were used to locate oil.                                                                                      
                                                                                                                                
Co-Chair Stoltze  remarked that the committee  would be able                                                                    
to  discuss some  of  the issues  in  the presentation  with                                                                    
other presenters as well.                                                                                                       
                                                                                                                                
Mr. Seamount  responded that a  significant portion  of well                                                                    
workover  activity  was  aimed  at  production  increase  or                                                                    
maintenance.                                                                                                                    
                                                                                                                                
Representative Doogan asked  for clarification regarding the                                                                    
number  of  wells that  were  represented  on Page  29.  Mr.                                                                    
Seamount responded  that they were  average numbers  for the                                                                    
quarter. When  a rig  only worked  for two  months out  of a                                                                    
quarter the number was represented as a fraction.                                                                               
                                                                                                                                
Representative   Doogan  wondered   whether   "four  and   a                                                                    
fraction" rigs were  used during the third  quarter of 2010.                                                                    
Mr. Seamount replied that one of  the rigs may not have been                                                                    
active for the entire  quarter and was therefore represented                                                                    
as a fraction.                                                                                                                  
                                                                                                                                
3:11:01 PM                                                                                                                    
                                                                                                                                
Mr. Seamount  discussed the baseline  of 200,000  barrels of                                                                    
oil  produced  per day  that  was  represented on  Page  32:                                                                    
"Alaska's  Average Daily  Oil and  NGL Production  Rate." He                                                                    
did  not  know about  the  significance  of the  number  but                                                                    
believed that it was very  low. He explained that at 200,000                                                                    
barrels  per day  that Alaska's  production  level would  be                                                                    
below  that of  North Dakota;  however, the  probability was                                                                    
not  high given  that  Alaska had  shale oil  as  well.   He                                                                    
detailed that Page  33: "Alaska's Average Daily  Oil and NGL                                                                    
Production  Rate,"  represented  a  six  percent  production                                                                    
decline that  AOGCC estimated would  take place  without any                                                                    
new development  or production. At  the six  percent decline                                                                    
rate the state  would see production of  200,000 barrels per                                                                    
day by  2030. Page 34  represented the same  information but                                                                    
included a scenario  in which a new Alpine  sized field came                                                                    
online in  2018(shown in  yellow). With  the discovery  of a                                                                    
new field  the time it  took to  reach the level  of 200,000                                                                    
barrels per  day would extend  to 2033.  A chart on  Page 35                                                                    
also   showed  the   same  information   but  included   the                                                                    
hypothetical discovery  of another Northstar in  2018 (shown                                                                    
in   bright  blue).   The  chart   indicated  that   regular                                                                    
production would  begin in 2024  and that a drop  to 200,000                                                                    
barrels per day would be delayed until 2035.                                                                                    
                                                                                                                                
Co-Chair   Thomas   wondered   whether  there   was   public                                                                    
information on the results of  a drilling operation that had                                                                    
occurred in  Yakutat years  earlier. Mr.  Seamount responded                                                                    
that the  information was public,  but due to the  length of                                                                    
time that had passed the records may not be complete.                                                                           
                                                                                                                                
Co-Chair  Thomas discussed  that the  first oil  produced in                                                                    
Alaska had  been in a  small village named Katalla  that was                                                                    
later designated  as a wilderness  site by  former President                                                                    
Roosevelt. He surmised  that it should be  possible to drill                                                                    
diagonally offshore  to gain  access to  the oil  that still                                                                    
bubbled  out of  the  ground in  the  village. Mr.  Seamount                                                                    
believed that  with new  technology, production  from shale,                                                                    
and with over  20 basins in Alaska, there was  a very bright                                                                    
future for oil and gas development in the state.                                                                                
                                                                                                                                
Co-Chair Stoltze wondered whether  ethanol was still popular                                                                    
in North  Dakota and other  areas. Mr. Seamount  opined that                                                                    
North Dakota  may have forgotten  about ethanol  given their                                                                    
current focus on shale oil.                                                                                                     
                                                                                                                                
Representative  Gara wondered  how much  shale oil  would be                                                                    
included  in  the  pipeline  when it  was  produced  in  the                                                                    
future. Mr.  Seamount believed that  shale oil had a  lot of                                                                    
potential  and recommended  that he  speak with  Paul Decker                                                                    
and Kevin Banks  at the Division of Oil  and Gas [Department                                                                    
of Natural Resources].                                                                                                          
                                                                                                                                
Representative  Gara  wondered how  much  it  would cost  to                                                                    
build  a  processing  facility for  a  field  that  produced                                                                    
30,000 barrels  per day. He  had heard others  recommend the                                                                    
idea of  providing a processing facility  credit to monetize                                                                    
smaller  fields.  He  thought   that  without  a  processing                                                                    
sharing  agreement   that  a  small  oil   field  could  not                                                                    
currently justify building its  own processing facility. Mr.                                                                    
Seamount did  not have an  estimate. He noted that  he would                                                                    
provide the  committee with the  name of one of  the smaller                                                                    
oil  companies  that  had  built  its  own  facility  for  a                                                                    
"little" field that produced 200 million barrels per day.                                                                       
                                                                                                                                
3:18:38 PM                                                                                                                    
                                                                                                                                
Vice-chair    Fairclough    wondered    whether    potential                                                                    
redundancies  between  state  and federal  regulations  were                                                                    
reviewed. She  believed that North Dakota  had the advantage                                                                    
of  drilling on  private  property versus  federal or  state                                                                    
land.  Mr.  Seamount  replied that  state  regulations  were                                                                    
slightly  more stringent  than federal  and  that they  were                                                                    
fairly streamlined.                                                                                                             
                                                                                                                                
Vice-chair  Fairclough  wondered   whether  there  were  any                                                                    
suggestions   related  to   increasing  federal   government                                                                    
drilling compliance  in the state. She  had received several                                                                    
non-flattering  photos  of  federal drilling  operations  in                                                                    
Alaska from AOGCC Commissioner  Cathy Foerster. Mr. Seamount                                                                    
replied that AOGCC had spoken  with Senators Mark Begich and                                                                    
Lisa  Murkowski  and  with  John  Katz  [staff  to  Governor                                                                    
Parnell] at the recent  Energy Council meeting in Washington                                                                    
D.C. The  local Department  of Interior office  in Anchorage                                                                    
was not  able to  ask for  the money  and had  recently been                                                                    
notified of the  AOGCC's intent to push  for federal funding                                                                    
to  take  care  of  the   problem  wells  that  existed.  He                                                                    
recommended   that   others   encourage   federal   Interior                                                                    
Secretary  Ken Salazar  to  provide more  funds  to fix  the                                                                    
wells in an orderly way.  He believed that that $200 million                                                                    
would be a good start.                                                                                                          
                                                                                                                                
Representative Hawker  wondered whether Mr.  Seamount agreed                                                                    
with the  Department of  Revenue (DOR)  production estimates                                                                    
that indicated  90 percent of  all estimated  future onshore                                                                    
North  Slope production  would come  from Alaska's  existing                                                                    
legacy fields.  Mr. Seamount believed the  forecast was very                                                                    
conservative  and that  the discovery  of another  large oil                                                                    
field was still possible.                                                                                                       
                                                                                                                                
Representative  Hawker wondered  how  probable  it was  that                                                                    
another onshore  development existed. Mr.  Seamount believed                                                                    
that another field existed, but it might not be discovered.                                                                     
                                                                                                                                
Representative  Hawker asked  whether Mr.  Seamount believed                                                                    
that  the  DOR  estimate  was  incorrect  and  that  another                                                                    
massive  development   of  unfound  oil  would   occur.  Mr.                                                                    
Seamount opined that DOR had  to be conservative and that it                                                                    
was  not  possible  to  bank on  the  discovery  of  another                                                                    
Prudhoe Bay  in the  near future.  He believed  that another                                                                    
field did exist but did not know that it would be found.                                                                        
                                                                                                                                
Representative Hawker  wondered about  the viability  of the                                                                    
projections  by  venture  capital company  Great  Bear.  The                                                                    
company had  never drilled a  well, but was making  plans to                                                                    
create a program that would develop 200 wells per year.                                                                         
                                                                                                                                
3:25:40 PM                                                                                                                    
                                                                                                                                
Mr. Seamount replied that  similar operations were currently                                                                    
underway in locations such as  North Dakota and although the                                                                    
logistics  in  Alaska  were  more  difficult,  there  was  a                                                                    
possibility that it would be feasible in the state.                                                                             
                                                                                                                                
Representative Hawker  asked whether there were  enough rigs                                                                    
available  to  develop  200 wells  per  year.  Mr.  Seamount                                                                    
answered  that there  were not  and that  the company  would                                                                    
have to bring rigs in.                                                                                                          
                                                                                                                                
Representative Hawker  asked about the validity  of previous                                                                    
testimony  provided by  AOGCC commissioners  that a  lack in                                                                    
facility access  on the  North Slope  had never  resulted in                                                                    
the  failure to  produce a  barrel  of oil.  He agreed  with                                                                    
earlier   testimony   regarding   the  importance   of   the                                                                    
Department  of  Interior,  Bureau of  Land  Management  well                                                                    
compliance situation.  Mr. Seamount believed  that testimony                                                                    
made  by   other  AOGCC   commissioners  was   accurate.  He                                                                    
clarified that  twelve years earlier AOGCC  had assumed that                                                                    
access  to  North  Slope exploration  would  have  been  too                                                                    
expensive and therefore, had not asked for access.                                                                              
                                                                                                                                
Co-Chair Thomas  wondered how  to access  shale oil.  He had                                                                    
heard that large  oil companies did not work  with shale oil                                                                    
and  that it  would  take smaller  independent companies  to                                                                    
access  the large  amount of  shale oil  that Alaska  had to                                                                    
offer. Mr.  Seamount replied  that historically  the smaller                                                                    
companies  were the  originators of  exploration for  things                                                                    
like  coalbed methane  and shale  gas. He  relayed that  big                                                                    
companies tended to follow later.                                                                                               
                                                                                                                                
Co-Chair Thomas  asked for  a definition  of shale  oil. Mr.                                                                    
Seamount explained  that conventional oil flowed  easily and                                                                    
had  high permeability,  whereas  shale oil  was located  in                                                                    
very tight  rock similar to  cement and it was  necessary to                                                                    
drill and  break the shale  into fractures to allow  the oil                                                                    
that was trapped in the mud layers to flow out.                                                                                 
                                                                                                                                
3:29:48 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze hoped that DOR Commissioner Butcher would                                                                      
help to fill in the gaps regarding the economic issues. He                                                                      
appreciated the depth of the presentation.                                                                                      
                                                                                                                                
Vice-chair Fairclough noted that DOR had provided two                                                                           
packets dated March 15, 2011, in response to committee                                                                          
member questions (copy on file).                                                                                                
                                                                                                                                
Co-Chair Stoltze thanked Mr. Seamount for his time and                                                                          
testimony.                                                                                                                      
                                                                                                                                
HB 110 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
3:32:32 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:32 PM.                                                                                           
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB166NEW FN LEG 030711 fiscal note.pdf HFIN 3/16/2011 1:30:00 PM
HB 166
HB166 CS WORKDRAFT 27LSO492X.pdf HFIN 3/16/2011 1:30:00 PM
HB 166
HB 166 Comparison version I to X.pdf HFIN 3/16/2011 1:30:00 PM
HB 166
HB110 DOR-Response 1 to HFIN 02-18-2011.pdf HFIN 3/16/2011 1:30:00 PM
HB 110
HB110 DOR Response2HFIN 03-14-2011.pdf HFIN 3/16/2011 1:30:00 PM
HB 110