Legislature(1993 - 1994)
03/16/1993 08:00 AM House O&G
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
JOINT SENATE AND HOUSE
SPECIAL COMMITTEE ON OIL & GAS
March 16, 1993
8:05 a.m.
SENATE MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Rick Halford
Senator Bert Sharp
MEMBERS ABSENT
Senator Judith Salo
Senator Al Adams
HOUSE MEMBERS PRESENT
Representative Joe Green, Chairman
Representative Gary Davis
Representative Joe Sitton
HOUSE MEMBERS ABSENT
Representative Pete Kott, Vice Chairman
Representative Harley Olberg
Representative Jerry Sanders
Representative Jerry Mackie
OTHER MEMBERS PRESENT
Representative Kay Brown
COMMITTEE CALENDAR
SENATE BILL NO. 150
"An Act providing for oil and gas exploration licenses, and
oil and gas leases, in certain areas of the state; and
providing for an effective date."
SENATE BILL NO. 151
"An Act providing for oil and gas exploration incentive
credits for certain activities on certain land in the state;
and providing for an effective date."
PREVIOUS ACTION
SB 150 - No previous action to record.
SB 151 - No previous action to record.
WITNESS REGISTER
Jim Eason, Director
Division of Oil and Gas
Department of Natural Resources
P.O. Box 107034
Anchorage, Alaska 99510-7005
POSITION STATEMENT: Commented on SB 150 and SB 151.
ACTION NARRATIVE
TAPE 93-5, SIDE A
Number 001
SENATOR LEMAN called the Special Committee on Oil and Gas
meeting to order at 8:05 a.m. and announced SB 150 OIL & GAS
EXPLORATION LICENSES/LEASES to be up for consideration.
Number 010
JIM EASON, Director, Division of Oil and Gas, said SB 150
and SB 151 are very important pieces of legislation to
accomplish focused goals. He recapped for the Committee,
the state's competitive oil and gas lease program which this
legislation does not try to replace, because competitive
leasing works fine in areas that have known oil and gas
potential. Exploration licensing might encourage
exploration in areas that have not traditionally been
explored with the competitive leasing program.
Current statutes require any sale offered on competitive
leasing terms to be under the five year schedule for at
least two calendar years before the quarter in which it is
scheduled to be held. There are exempt sales, however, that
are very narrowly focused.
He used charts to point out areas in Alaska that are mostly
unexplored, but are known to have sedimentary rocks. This
type of rock is the most likely to contain accumulations of
oil and gas. It's unclear what their oil and gas potential
really is. Last year they started looking for an
alternative to the competitive leasing program that would
work towards exploration in those areas.
MR. EASON said that SB 150 would require, before any
license, a preliminary written determination of the lands
the Commissioner feels should be eligible for licensing.
This would be published for public participation for 30
days. The next step would be a written determination of the
applicability. The rights attached to a licensee under this
legislation would be the exclusive right to explore the area
covered by the license for a period of up to 10 years.
There is a limitation on the total upland and tideland
acreage a lessee could hold and there is a limitation on the
size of the lease.
Generally, the large revenues come from royalties and
severance taxes and other related income that arises from
successful development of oil and gas, MR. EASON said. In
this case DNR is proposing that the money that would
traditionally have gone to bonuses actually "get into the
ground" and the bid variable for the license be the dollar
amount of what is committed - for things like geophysical
surveys and exploration wells.
Number 240
The license can be revoked and requires a performance bond,
MR. EASON explained. They are trying to build a responsible
system that will bring the state some return for its
commitment as well as the right to convert it to a longer
term lease. There would be a nonrefundable $1 per acre
license fee. The license would require an exclusive
agreement by the licensee that the cost of the work
commitment as it is performed is subject to audit. The
license is eligible for conversion to a lease if all the
commitments are met.
SB 150 is a vehicle that will offer an opportunity for the
vesting of rights, which are considerable in scale, for the
opportunity to explore very large areas, up to 500,000
acres, for a predefined period of time, and without
competition, to explore and develop that area.
Number 384
SENATOR LEMAN asked what conditions would be present for the
Commissioner to offer additional incentives, such as 5%
royalties mentioned in section 2.
MR. EASON said he was not clear on that. He said that that
provision was in statute and he didn't think the legislation
intended to link the two. By definition they do not intend
to offer the 5% royalty as a license initially.
REPRESENTATIVE GREEN tried to explain the first structure in
what ultimately became a productive reservoir was a new
discovery and that "first horizon" was subject to a 5%
royalty, but subsequent horizons productive within that
structure didn't enjoy the same royalty.
MR. EASON said he was correct and that provision was
repealed several years ago. Reduced royalties are still in
statute.
Number 439
REPRESENTATIVE GREEN asked if there was a possibility that
bonding could be reduced to an annual performance. MR.
EASON said they hadn't focused a great deal on options, but
there are a number of ways to structure that. He said they
have tried to give rights and keep obligations in a
significantly proportioned way.
Number 447
SENATOR LEMAN asked if it is possible for the Commissioner
of the Department of Natural Resources to consider what the
potential licensee would do and not just look at the dollar
amount. MR. EASON said that was possible and they propose
that if there are different proposals for the same area, the
Commissioner would try to determine whether a mixture of
terms would be in the state's best interest.
Number 467
SENATOR LEMAN closed the hearing on SB 150 and announced SB
151 OIL & GAS EXPLORATION INCENTIVE CREDITS to be up for
consideration.
MR. EASON explained SB 151 is not related to SB 150, but it
is intended to have many of the same goals as the large
block licensing proposal. That is, to encourage the earlier
exploration and evaluation of lands throughout the state, so
the state will be in a better position of understanding the
oil and gas potential of its lands and have better
information from which to manage those lands.
It is intended primarily for application where the Title 38
exploration incentive credit is not available. In the
current legislation, in addition to the state owned lands,
credits would be available for operations conducted on
private lands. Under Title 38 there are no limitations on
the maximum amount of credits that could be offered by the
state over the years. Under the proposed bill there is a
$50 million cap, the state's share for one project being no
more than $5 million. One major difference for the
geophysical exploration is that there is no requirement for
the exploration to be conducted on land that is scheduled
for sale. That gives them the flexibility to review any
project that is proposed in advance.
Number 534
SENATOR SHARP asked if this was an increase from 25% from
eligible costs that was offered in previous years? MR.
EASON said that was correct. The bill that was under
consideration last year treated all lands equally and this
bill treats private lands with more a more allowable credit
which was a decision predicated on the likelihood that
although those lands will have some value to the state, it
is likely to be a reduced value simply because of the
remoteness of those lands.
Number 550
SENATOR HALFORD asked if the $50 million limit was the
combined limit for the entire term of the legislation which
goes until 2003. MR. EASON said the $50 million limit would
apply to geophysical surveys or wells drilled under this
proposal. This is a cost sharing arrangement that is not to
pay for their entire program, but it is to encourage them to
cross that hurdle in those situations where they are at, or
very near, the point of making a decision, but for the
participation of the state.
SENATOR HALFORD did not disagree with it being cost sharing
and not cost shifting, but he thought the limitation to be
unrealistic if it was to be any real incentive for major
exploration.
SENATOR LEMAN asked what the impact would be if the
limitation were lifted. MR. EASON said it would increase
the state's exposure in an undefined way. He explained
there is similar exposure under Title 38.
TAPE 93-5, SIDE B
Number 580
SENATOR HALFORD asked if the 10-year term was too long. He
suggested using the $50 million allowance in the first 2
years and saying if you don't do it in the first 2 years,
you don't get it.
MR. EASON said there are some strong arguments to be made
for that suggestion.
SENATOR HALFORD commented that if you know the credit is
going to continue, you don't have the incentive to
accelerate your program.
MR. EASON said his view was entirely correct. However,
there have been a number of good developments on the North
Slope and in Cook Inlet that have created a euphoria that
has translated to several different companies outside the
state who haven't been participants here. That, in itself,
provides the biggest incentive. The time to look is now.
In his opinion, people will be inclined, for a lot of
different reasons, to pick projects that may be eligible
early on.
REPRESENTATIVE GREEN asked if the anticipated work
commitment is time related or just within the 10-year
period. MR. EASON explained once the state has committed to
being a participant, they would put some time limit on the
performance so they could keep the money available for other
worthwhile projects.
Number 519
SENATOR HALFORD asked if the credits could be assigned by
the qualified applicant to any other person, meaning another
tax payer, or if the credit could be sold. MR. EASON said
that was the intent in recognition that, for instance,
geophysical companies operating in Alaska have no royalty or
severance tax obligations. It gives them the opportunity of
using the credit by selling or trading it to others who can
use it.
SENATOR HALFORD asked how long they could hold the credit
before they start to do the work. MR. EASON said there is
no set limit in the statute, and that would be addressed in
regulations. In general terms, they would try to establish
a balance that allows for sufficient time.
Number 501
SENATOR LEMAN said they would take these bills up again next
Tuesday and adjourned the meeting at 9:00 a.m.
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