Legislature(1997 - 1998)
03/28/1998 02:15 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 28, 1998
2:15 P.M.
TAPE HFC 98 - 81, Side 1.
TAPE HFC 98 - 81, Side 2.
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 2:15 P.M.
PRESENT
Co-Chair Therriault Representative Kohring
Representative Kelly Representative Martin
Representative G. Davis Representative Mulder
Representative Grussendorf
Representatives Hanley, Foster, Moses and J. Davies were
not present for the meeting.
ALSO PRESENT
Ken Boyd, (Testified via Teleconference), Director,
Division of Oil and Gas, Department of Natural Resources;
James Eason, Representative for Forcenergy, Anchorage;
Representative Mark Hodgins; Pat Carter, Staff,
Representative Mark Hodgins; John Shively, (Testified via
Teleconference), Commissioner, Department of Natural
Resources; Kevin Tabler, (Testified via Teleconference),
Land Manager & Governmental Affairs, UNOCAL Oil Company,
Anchorage.
SUMMARY
HB 380 An Act relating to a temporary reduction of
royalty on oil and gas produced for sale from
fields within the Cook Inlet sedimentary basin
where production is commenced in fields that have
been discovered and undeveloped or that have been
shut in.
CS HB 380 (FIN) was reported out of Committee
with individual recommendations and with a fiscal
note by the Department of Natural Resources dated
3/13/98.
HOUSE BILL NO. 380
"An Act relating to a temporary reduction of royalty
on oil and gas produced for sale from fields within
the Cook Inlet sedimentary basin where production is
commenced in fields that have been discovered and
undeveloped or that have been shut in."
Co-Chair Therriault advised that he had spoken with
Representative Hodgins regarding the downward modification
to the reserves. Amendment #1 would reduce the total
number of barrels to 25 million. [Copy on File].
REPRESENTATIVE MARK HODGINS noted that he did not have a
problem protecting the State's interest. He reminded
Committee members that the fields in the proposed
legislation had been shut for thirty years with no revenue
generated. Representative Hodgins emphasized the need for
an incentive.
KEN BOYD, (TESTIFIED VIA TELECONFERENCE), DIRECTOR,
DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES,
reminded Committee members of past history in which oil
companies had threatened the State that they would not
develop an oil field without an incentive. Two years later
those fields were developed. He stressed that the State
has an obligation to do something with the royalties, price
and volume.
Representative Kohring voiced his disappointment that
Director Boyd and Commissioner Shively were not advocating
for oil field development. In response to Representative
Kohring, Co-Chair Therriault commented that it is the
responsibility of the Department and the oil companies to
strike a balance. Representative Grussendorf stressed that
Director Boyd was fulfilling his job by looking after the
revenue resources of the State.
Representative Grussendorf pointed out that within the last
five years, two major leases have been accepted. The bids
had not been made with the understanding that there would
be an incentive. The industry deserves to know that the
State of Alaska will not change the existing structure. He
questioned why the incentives were important at this time.
Representative Grussendorf advised that the State has not
yet received the 3D's seismic tests from Forcenergy. He
suggested that the Committee was making a major decision
without the release of important information. Advisors
need to be consulted so that the State does not give away
its resources. He stressed that there has been no economic
evaluation of the project. He noted that he would support
incentives to assist the industry if there was a need.
Representative Grussendorf added that he resented the State
giving away resources.
Representative Hodgins replied that such activity was not
unusual and referenced the timber industry's negotiation of
this type of sale. The type of fields proposed in this
legislation are shut-in fields which to date have not
produced. The legislation would offer an incentive for
these six fields.
Representative Grussendorf countered that the State does
not know at this time what is in the reserve. He
reiterated that oil companies would develop these fields
without an incentive. The proposed legislation benefits
only the companies, their employees and the federal
government from the royalties they would receive. Through
statute of the State Constitution, 50% of all royalties go
into the Permanent Fund which then benefits all Alaskans.
He cautioned that giving the royalty incentives to industry
takes the money from State residents.
Representative Hodgins agreed that Commissioner Shively and
Director Boyd have pertinent information, although,
reminded Committee members that the ultimate decision is
with the Legislature. He pointed out that the fields had
not been proven and were not in production. The proposed
incentive would help to bring the sites up to production.
He stressed the need for more oil in Cook Inlet.
Representative Grussendorf suggested that the price aspect
of the legislation should be considered. He recommended
that a triggering mechanism be put in place so that the
royalties would be contingent on the movement of the price,
in which case, the State could also benefit by the
investment.
JOHN SHIVLEY, (TESTIFIED VIA TELECONFERENCE), COMMISSIONER,
DEPARTMENT OF NATURAL RESOURCES, clarified that the
Department is not opposed to giving appropriate incentives
on royalties to anybody who deserves it. However, the
Administration has established two important principles:
? If such an incentive is given, there needs to be
an economic analysis;
? In addition, the State must get a lump sum if the
economic analysis indicates that the prices are
substantially higher than those initially
captured;
? Because little is known about these fields, and
it has been suggested that HB 207 does not work,
that bill should be changed.
Commissioner Shively stressed that the State was treading
on dangerous ground by giving a straight royalty reduction
to field areas where little is known.
Co-Chair Therriault asked if the Commissioner could modify
HB 207 to remove the delineation requirement. Commissioner
Shivley replied that could be addressed and adjusted in a
pre-proposal.
KEVIN TABLER, (TESTIFIED VIA TELECONFERENCE), LAND MANAGER
& GOVERNMENTAL AFFAIRS, UNOCAL OIL COMPANY, ANCHORAGE,
noted that UNOCAL supports legislation which creates
incentives for development. UNOCAL has been an active
proponent in supporting legislation specifically as it
applies to Cook Inlet. He noted that there is a declining
reserve base in that area which has created the need for
discovery and development of new reserves. He concluded
that the timing is right and that access alone may not make
the reserves economically viable. In closing, Mr. Tabler
supported the adoption of the legislation, as it would
enhance economic liability for development in Cook Inlet.
He cautioned that the fields are mature and that they are
declining.
Co-Chair Therriault warned that residents in Interior
Alaska's only tie to the economic benefit of this policy
would be the royalty received. He commented that it would
be sensible to have an upper limit production cap. Co-
Chair Therriault pointed out that the bill's drafter had
allowed for caps to be in place. Representative Hodgins
noted that the upper limit production cap on the original
legislation was 50 million barrels. He added that
production must start within five years to qualify for the
incentive.
Representative G. Davis pointed out that the Department has
requested the 3D seismic data and report from Forcenergy.
He inquired if efforts had been made to produce those
documents.
PAT CARTER, STAFF, REPRESENTATIVE MARK HODGINS, noted that
information had not been requested from Forcenergy. The
legislation is an incentive bill. The unit of measurement
of success would be the level of participation. He
acknowledged that there is a level of uncertainty which
accompanies investments into the oil and gas industry.
Representative Grussendorf stressed that the proposed six
fields have not been delineated yet. Representative
Hodgins replied that delineation was one of the
requirements of HB 207, in drilling holes to determine the
size of the field. Representative Grussendorf stated
because that bill had been passed, it is now in statute.
HB 380 creates a situation in which the field has not yet
been delineated, although that information is required
under statute.
Representative Martin concurred with Representative
Grussendorf. He recommended that Forcenergy should comply
with the proposed requests regarding the fields potential.
Representative Martin reiterated that he was not
comfortable with how much the State is potentially giving
up. Representative Hodgins replied that the potential
give-up would be 7% on 25 million barrels. The potential
of what the State could gain is 5% on 25 million barrels.
He noted, the situation is such that the fields have sat
for a long time; if they were viable, they would have
already been developed. He remarked that HB 207 has not
worked because it is cumbersome and has generated no
interest.
Representative Grussendorf stated that HB 380 was vague and
that it was moving through the Committee too quickly. Mr.
Carter commented that at this time, Forcenergy is not
committed to any field development. They have purchased
and unitized the lease. Representative Grussendorf pointed
out that they had purchased the leases before the incentive
was available. Mr. Carter disagreed. He commented that
the cost measure to unitize would be $7 million dollars per
hole. He stated that to assume that Forcenergy was
building a platform was misinformation.
Representative G. Davis commented that the proposal was a
practical offer and solution. He voiced his support of the
legislation. He advised that the life and economic
viability of the Cook Inlet area are at stake. He
encouraged the Committee's support and success of the
measure.
(Tape Change HFC 98- 81, Side 2).
Representative Kohring reiterated that the State should
offer more incentive and opportunity to the industry and
less tax so that we will develop a stronger economy with
more people employed. He pointed out that the industry is
willing to take on the risk of field development.
Representative Grussendorf pointed out that this decision
was being made without adequate economic evaluation and
information.
Representative Kelly asked what was involved in unitizing a
lease. Mr. Boyd explained that the reference was to an
exploratory unit. A unit had been developed for efficiency
and protection. In the case of Forcenergy, the State took
five leases, two of which are to expire 3/31/98; those
leases were extended in exchange for a work method over
time. Forcenergy was given a series of milestones to be
met to keep the unit. The first requirement was to shoot a
3D seismic program. The next step would be due at the turn
of the century, at which time they would be required to
drill a well or build a platform. If a milestone is
missed, the unit goes away. The cost of unitization is $5
thousand dollars.
Representative Kelly understood that this would be a series
of agreements in which the oil companies would have to
comply, in order to receive the benefits of unitization.
Representative Kelly asked what was keeping the State from
seeing the 3D seismic.
JAMES EASON, REPRESENTATIVE FOR FORCENERGY, ANCHORAGE,
responded that Forcenergy's 3D seismic information is
collected on State lands and is available for the
Department of Natural Resources (DNR) to use confidentially
if they request it.
Representative Grussendorf understood that DNR had
requested the information and had yet received it. Mr.
Eason stated that he was not aware that the Department had
requested that information. Mr. Boyd replied that in most
cases, the Department is required to ask for the
information, however, in this scenario, Forcenergy is
required to provide it as a part of their unit agreement.
It is due by 3/31/98 and the Department has to date not
received it.
Co-Chair Therriault MOVED to adopt Amendment #1.
Representative Kohring OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: G. Davis, Grussendorf, Kelly, Martin,
Therriault
OPPOSED: Mulder, Kohring
Representatives Moses, J. Davies, Foster and Hanley were
not present for the vote.
The MOTION PASSED (5-2).
Representative Mulder MOVED to report CS HB 380 (FIN) out
of Committee with individual recommendations and with the
accompanying fiscal note. Representative Grussendorf
OBJECTED. He stated that to date there had not been enough
information provided to release the State royalties.
A roll call vote was taken on the motion.
IN FAVOR: G. Davis, Kelly, Kohring, Martin, Mulder,
Therriault
OPPOSED: Grussendorf
Representatives J. Davies, Foster, Moses and Hanley were
not present for the vote.
The MOTION PASSED (6-1).
CS HB 380 (FIN) was reported out of Committee with
individual recommendations and with a fiscal note by the
Department of Natural Resources dated 3/13/98.
ADJOURNMENT
The meeting adjourned at 3:15 P.M.
H.F.C. 8 3/28/98
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