Legislature(1993 - 1994)
03/22/1993 05:00 PM House O&G
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL & GAS
March 22, 1993
5:00 p.m.
MEMBERS PRESENT
Representative Joe Green, Chairman
Representative Pete Kott, Vice Chairman
Representative Harley Olberg
Representative Gary Davis
Representative Jerry Sanders
Representative Joe Sitton
Representative Jerry Mackie
MEMBERS ABSENT
None
COMMITTEE CALENDAR
*HB 199: "An Act providing for oil and gas exploration
licenses, and oil and gas leases, in certain areas
of the state; and providing for an effective
date."
PLACED IN SUB-COMMITTEE FOR FURTHER CONSIDERATION
*HB 200: "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."
HEARD AND HELD IN COMMITTEE FOR FURTHER
CONSIDERATIONS
(* First public hearing.)
WITNESS REGISTER
Jim Eason, Director
Division of Oil & Gas
Department of Natural Resources
P. O. Box 107034
Anchorage, Alaska 99510-0734
762-2547
POSITION STATEMENT: Supported HB 199; Felt HB 200 encouraged
exploration
Jim Davis, Senior Vice President
Arco Alaska, Inc.
9421 Spring Hill Drive
Anchorage, Alaska 99507
265-6101
POSITION STATEMENT: Supported HB 199
Tom Lohman
North Slope Borough
Department of Wildlife Management
(address not available)
Barrow, Alaska
POSITION STATEMENT: Asked questions related to HB 199
Mary Shields, General Manager
Northwest Technical Services
4041 B Street
Anchorage, Alaska 99503
(907) 562-1633
POSITION STATEMENT: Stated There is Need For Development
Pete Nelson, Land Manager
Alaska Regional Office
Texaco
2550 Denali
Anchorage, Alaska 99503
(907) 278-9611
POSITION STATEMENT: Supports the licensing concept and
offered amendments to HB 199
Dave Lappi, President
Lapp Resources, Inc.
4900 Sportsmen Drive
Anchorage, Alaska 99515
(907) 248-5684
POSITION STATEMENT: Supported HB 199
Al Hastings, Director of External Affairs
CONOCO - Anchorage Division
3201 C Street
Anchorage, Alaska 99503
564-7600
POSITION STATEMENT: Suggested amendments to HB 199
Mr. Mano Frey, Land Manager
Unocal of Alaska
909 W. 9th Avenue
Anchorage, Alaska 99501
(907) 276-7600
POSITION STATEMENT: Supported HB 199
Kevin Tabler, Land Manager
Union Oil Company of California
909 W. 8th Avenue
Anchorage, Alaska 99501
276-7600
POSITION STATEMENT: Felt HB 199 needs modification
Robert Erickson, Administrative Assistant
Teamsters Local 959
4300 Boniface Parkway
Anchorage, Alaska 99508
(907) 269-4122
POSITION STATEMENT: Supported HB 199
John Ringstad, Associate Director
Government Affairs
BP Exploration Alaska, Inc.
900 E Benson Blvd.
Anchorage, Alaska 99508
(907) 561-5111
POSITION STATEMENT: Opposed HB 199
Larry Kimball, Chair
Alaska Federation of Natives
1577 C Street
Anchorage, Alaska 99503
(907) 274-3611
POSITION STATEMENT: Felt the state needed to look at its
interest in oil and gas
PREVIOUS ACTION
BILL: HB 199
SHORT TITLE: OIL & GAS EXPLORATION LICENSES/LEASES
BILL VERSION:
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
TITLE: "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."
JRN-DATE JRN-PG ACTION
03/05/93 549 (H) READ THE FIRST TIME/REFERRAL(S)
03/05/93 549 (H) OIL & GAS, RESOURCES, FINANCE
03/05/93 549 (H) -ZERO FISCAL NOTE (REV)
3/5/93
03/05/93 549 (H) GOVERNOR'S TRANSMITTAL LETTER
03/15/93 (H) O&G AT 05:00 PM CAPITOL 124
03/16/93 (H) O&G AT 08:00 AM CAPITOL 124
03/22/93 (H) O&G AT 05:00 PM CAPITOL 124
BILL: HB 200
SHORT TITLE: OIL & GAS EXPLORATION INCENTIVE CREDITS
BILL VERSION:
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
TITLE: "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."
JRN-DATE JRN-PG ACTION
03/05/93 550 (H) READ THE FIRST TIME/REFERRAL(S)
03/05/93 551 (H) OIL & GAS, RESOURCES, FINANCE
03/05/93 551 (H) -ZERO FISCAL NOTE (REV)
3/5/93
03/05/93 551 (H) GOVERNOR'S TRANSMITTAL LETTER
03/15/93 (H) O&G AT 05:00 PM CAPITOL 124
03/16/93 (H) O&G AT 08:00 AM CAPITOL 124
03/22/93 (H) O&G AT 05:00 PM CAPITOL 124
ACTION NARRATIVE
TAPE 93-08, SIDE A
Number 000
CHAIRMAN JOE GREEN called the meeting to order at 5:07 p.m.
Members present were Representatives Green, Kott, Olberg, G.
Davis, Sanders, Sitton, and Mackie. Chairman Green noted
there were numerous people who wanted to testify and
introduced Mr. Jim Eason as the first person to testify.
Number 027
JIM EASON, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF
NATURAL RESOURCES (DNR), stated that competitive leasing is
an appropriate and successful way of offering oil and gas
lands based upon past performance. Another method of
leasing which has been successfully used in several other
oil and gas producing nations is large tract licensing, he
noted.
HB 199: OIL & GAS EXPLORATION LICENSES/LEASES
MR. EASON stated HB 199 introduces this concept as an
incentive to frontier areas of Alaska as an exploration
incentive which would not be in competition with the
currently used competition leasing program. A written
determination would be made to the areas for licensing.
Certain rights would be granted to a licensee among them,
the exclusive right, for up to 10 years, for the licensee to
conduct exploration and evaluation. This license carries
the right to convert part or all of the area of the oil and
gas lease based upon all the obligations which are committed
to when the license is issued. Under this legislation a
license could be issued for up to but no greater than 30,000
acres. A license would be positioned on a specified work
commitment in terms of hours. The license would also carry
a performance bond not less than the work commitment amount.
The license would also require a non-refundable $1 per acre
license fee and it would require an explicit recognition by
the lessee that all costs incurred under a license are
subject to an audit. Exploration licenses could either be
proposed by the Commissioner or by a potential licensee and
solicitations would occur annually to encourage
solicitations from the public. The Commissioner would be
free to initiate a proposal for a specific area, but if the
industry initiates a proposal it would require public
notice, since solicitations and competitive proposals. If a
potential licensee initiates a proposal, it must be accepted
or rejected by the Commissioner of the DNR within 30 days by
a written decision. After considering proposals and public
comments the Commissioner submits a written finding which
would address the same matters that are addressed in
findings in an oil and gas competitive lease sale. If a
license is found to be in the state's best interest, the DNR
would determine which limitations, stipulations, and
conditions for changes for those proposed by potential
licensee would be required to make that license in the
state's best interest. If there was only one proposal, the
identity of the prospected licensee would be made known and
a copy of the license. If more than one licensee is
involved there are provisions for an up front auction under
regulations to be adopted.
MR. EASON further stated if a licensee fulfills the
obligations of a license they would have the opportunity to
convert that license, or any portion of it to a lease. Any
lease resulting from a license would be conditioned to a $3
per year, per acre annual fee and subject to other terms and
conditions that the Commissioner may find necessary for the
state's best interest.
Number 275
JIM DAVIS, SENIOR VICE PRESIDENT OF EXPLORATION/LAND FOR
ARCO ALASKA, INC., spoke in support of HB 199. He stated
the supplement to the state's leasing program can invigorate
exploration for oil and gas. It can do this by
substantially reducing the time required to acquire and
secure title to enough land to justify exploration
activities while meeting all environmental laws and
regulations.
MR. DAVIS said that Mr. Eason provided the committee with a
very complete review and analysis of HB 199 at the hearing
last Tuesday and supplemental today. He said, "First, I
would like to review how this bill came to be. I think this
will help us see the policy choices facing the state. Next,
I would like to supplement the remarks you have heard from
the DNR about the contents of the bill. Finally, I would
like to address the main objections that I have been hearing
and explain why they don't change our support for this
bill."
MR. DAVIS stated a little over a year ago, he sat in joint
hearings before this body and introduced the concept of
exploration licensing. There was general concern that
exploration in Alaska was declining and that oil companies
were scaling back or ending their operations; presumably in
favor of more attractive overseas prospects. He felt a
sense of loneliness as he tried to interest prospective
partners to join with ARCO in drilling Kuvlum in the
Beaufort Sea; and now it has turned out to be a discovery.
MR. DAVIS went on to say at that time the legislature asked
ARCO to talk about ways in which exploration in Alaska could
be stimulated. As ideas were developed ARCO considered
various options. He said, "Standing back and looking at
exploration in Alaska, we recognized that it is a very
costly and high risk venture." ARCO thought about ways the
state could reduce ARCO's direct exploration investment. It
was tempting to think of tax credits, because they have been
proven in other countries, such as Canada, to be very
effective in stimulating drilling. However, ARCO concluded
that the state would not be able to bear these up front
costs, especially in light of the fiscal gap crisis it was
facing.
MR. DAVIS stated the other alternatives examined were
reducing the time required to find and develop oil. ARCO
then focused on the state leasing program. Here ARCO found
real possibilities to shorten exploration time. For
example, under the present leasing system, it can take five
to ten years to accumulate enough of a land position to
justify the high expense of an exploratory well. This puts
Alaska at a competitive disadvantage with foreign countries,
and this is one reason other oil companies are leaving
Alaska and investing abroad. ARCO wanted to level the
playing field. Two activities which take time are waiting
first for a prospect to move through the five year leasing
schedule, and then developing a consolidated ownership out
of the patchwork of individual lease ownership covering the
prospect. Even more uncertain is consolidation of ownership
on adjacent leases after a discovery. ARCO believes that
speeding up the process of securing title would help the
state's goal of invigorating exploration.
MR. DAVIS stated ARCO found some interesting ideas in
methods used by many foreign countries. In the other
countries, development rights are given after government
chooses the specific work proposal that will most likely
yield discovery and development. The basic concept for
exploration licensing in Alaska came from this approach.
ARCO felt the existing lease process could be supplemented
with licensing based upon work commitments, public
disclosure, and competition.
MR. DAVIS stated a major aspect of HB 199 is that an
exploration license is applicable to unleased land. A
prospective licensee identifies an area not to exceed
500,000 acres and proposes a work program, expressed in
dollars, to be conducted over a time period of not more than
10 years. If the state does not reject the proposal, it
then solicits competitive proposals. Since the original
proposal is a matter of public record, and in order to not
put the original proposer at a disadvantage, an oral auction
is held to determine the prospective licensee that is
willing to make the greatest work commitment; again,
expressed as total dollars. During this process, the state
makes a best interest finding before awarding the license.
At the time the license is awarded, the terms of the
subsequent leases are established. In addition, the
licensee posts a performance bond that reverts to the state
for all committed work not completed by the end of the
license term. The bond is critical in that it provides the
incentive to do real work.
MR. DAVIS further stated after getting all of the normal
environmental and other permits, the new licensee conducts
the work. Upon completion of the work, the licensee, at its
option, converts all or part of the license to appropriate
sized leases. This conversion to small leases is critical
to keeping licensing from becoming a vehicle for land
speculation. It allows the state to take back leases after
the primary term expires, where no development potential is
shown. Therefore, the leases would be administered just as
they are today. House Bill 199 provides for leases acquired
through licensing to not be subject to the current 500,000
acre limit.
MR. DAVIS summarized and said, HB 199 is really quite simple
in its concept. Its main purpose is to shorten the time
required to explore. It gives a secure land position in
return for a bonded work commitment. It relies on market
competition to prevent abuse or giveaways. And it provides
protection to the state by allowing the Commissioner to
reject any proposal and revert to the existing leasing
program.
MR. DAVIS said he would respond to some of the major
arguments that have been heard against HB 199. Foremost,
ARCO can't understand why others would not see that it's in
the state's interest to get exploration moving: to find and
develop oil and gas as quickly as possible. In that light,
maybe HB 199 should be titled the "Exploration Work
Commitment Bill." He said, "That title captures for me the
fact that while land is being acquired, the real effect of
licensing is to get exploration work done. All of the
criticisms or amendments that have been heard serve to
weaken or dilute the goal of speeding up exploration. Let
me illustrate by looking at these objections one at a time."
MR. DAVIS stated that some say the leasing system is working
fine and that no license bill is needed. He continued,
"Yes, leasing does happen and clearly the state and the
industry have benefited. But benefits have not come because
of leasing: discovering and developing Prudhoe, for example,
had much more to do with the quality of the reservoir than
the effectiveness of the leasing system. Further, revenues
to the state from bonuses and rental have amounted to less
than one percent of total revenues from 1981 through 1992.
Clearly the state benefits most from discovery and
development. A way to supplement the lease system with a
faster process such as licensing is needed."
MR. DAVIS stated a more specific complaint is that HB 199
should exclude broad portions of the North Slope and Cook
Inlet from licensing. The reason is that licensing is only
needed in "frontier" areas. Two thoughts Mr. Davis offered
was that first we agree that this should be a frontier area
bill: but that licensing should be available for both
intellectual as well as geographic frontiers. ARCO's Cook
Inlet discovery, the first in 25 years, is a good example of
this. Most basins go through cycles of discoveries. Cook
Inlet is now in its second cycle. We rethought the geologic
concepts in Cook Inlet and by applying them, found oil in an
area that industry had all but abandoned. There is land in
both the Cook Inlet and on the North Slope that has been
leased and returned to the state, or offered for sale and
not bought. These areas are intellectual frontiers and when
new concepts are developed, these areas should be available
for licensing.
MR. DAVIS' second thought was that the Arctic North Slope is
a particularly poor choice for blanket exclusion. Because
new sources of oil are needed to keep TAPS (Trans Alaska
Pipeline Service) running as long as possible. Crude rate
through TAPS will be declining significantly over the next
ten years and modifications such as shutting down pump
stations will be needed. Over time, it will be more and
more expensive to bring TAPS capacity back up. New
discoveries will have to bear those costs. As time
proceeds, discoveries will have to be larger and larger to
justify TAPS investments. Arco must try to find many
smaller sized fields as soon as possible to maximize the
economic efficiency of TAPS and to keep rates from declining
too quickly. There is an added benefit that the longer TAPS
operations continue, more oil will be produced from existing
fields like Prudhoe and Kuparuk. Exploration licensing is
especially applicable on the North Slope because there is
only a limited window of opportunity.
MR. DAVIS said the performance bond has also been criticized
as being too onerous. But it would be a mistake to provide
relief from bonding. The reality is that Alaskan
exploration is high risk and high cost. Nothing has changed
for players without the financial ability or interest in
licensing. They can continue to participate through the
existing competitive leasing program, or they can form joint
ventures with others and seek licensees. Losing the bond
requirement encourages speculation, not exploration. And
holding land without exploring is of no benefit to the
state.
MR. DAVIS stated the oral outcry form of bidding has been
criticized as not being viable. ARCO sees oral auctions as
protection for the person who submits the initial proposal,
which may be subject to partial disclosure. The originator
may be disadvantaged during bidding by competitors having
that information. After the state has solicited and
evaluated proposals, it develops a common basis for the
bidding and the competitors bid a work commitment in terms
of dollar amount. There really is not anything unworkable
here. Also, this concept is not new, its been utilized in
numerous countries for many years.
Number 450
MR. DAVIS mentioned, one of the fundamental protection for
the state and the industry is the existence of market
competition. One of the most disturbing arguments heard
against this is that some companies will not use licensing
because they have only limited funds for Alaska. In
essence, these people are saying that the state should not
speed up the pace of exploring for and discovering oil until
they are prepared to reinvest in Alaska. This is probably
because they have better foreign opportunities. He stated,
"This demonstrates that Alaska is at a competitive
disadvantage as I mentioned earlier. Exploration Licensing
will help level the playing field by making Alaska more
attractive for exploration."
MR. DAVIS said critics of HB 199 are quick to point out that
ARCO has committed nearly one billion dollars to an active,
ongoing five year exploration program and that exploration
licensing is not fair to other companies who have not made
such commitments. He continued, "But we should remember
that the goal of this legislation is to have a process which
speeds up exploration and which creates competition for
making work commitments. Just the introduction of this bill
has created a climate of competition within the industry to
seek and win licenses. I hope that ARCO can benefit from
licensing, but I also hope that the state benefits from
licensing; because that will mean that exploration in Alaska
has been reinvigorated."
Number 473
VICE CHAIRMAN PETE KOTT asked where small companies go to
participate in exploration in the state of Alaska.
Number 480
MR. DAVIS answered smaller companies would be able to
participate in traditional lease sales and team up with
other companies to work licenses. A lot of large
discoveries have been made by small companies who have been
working in partnership with large companies.
Number 496
REPRESENTATIVE JERRY SANDERS asked what effect licensing
would have on Native lands and other private lands as
opposed to state lands.
Number 499
MR. DAVIS felt exploration licensing as being a very
effective way to merge the state and Native land interests
together. "If Native lands were located remotely from state
lands I would not see an impact," he said.
Number 514
REPRESENTATIVE SANDERS asked if he thought the overall
effect would be good for the Native lands.
Number 515
MR. DAVIS stated that from an explorationist point of view,
absolutely.
Number 517
REPRESENTATIVE GARY DAVIS asked since there are no bonus
dollars with this, where is the benefit to the state.
Number 522
MR. DAVIS stated that bonus dollars have never been a
consistent source of income for the state, but what is a
consistent source of revenue is money from royalty and
severance taxes from production.
REPRESENTATIVE JOE SITTON asked how many small companies are
there in the state and what role do these small companies
play in the oil and gas market.
Number 539
MR. DAVIS stated there are very few small players, Stewart
Petroleum is the only active independent player in the state
and he felt they would not be hurt by exploration licensing,
but would benefit from it.
Number 553
REPRESENTATIVE SANDERS asked Mr. Davis if he felt this would
bring more independent, smaller companies, to Alaska.
Number 557
MR. DAVIS felt this had the ability to bring in the larger
independents.
Number 572
REPRESENTATIVE SANDERS asked how ARCO felt about the
competition this would bring to Alaska.
Number 575
MR. DAVIS stated the competition was good for ARCO as their
program is being run very intensive because of land access.
He stated ARCO would rather have a smaller piece of many
wells than a big piece of a few wells. He stated ARCO
benefits indirectly if anyone discovers oil in Alaska
because it is a healthier environment for the state.
Number 592
VICE CHAIRMAN KOTT asked if HB 199 did not pass, what impact
would that have on ARCO's exploration schedule.
Number 598
MR. DAVIS stated a lot of exploration is follow-up on
discoveries they have been fortunate enough to announce.
There is a base program underneath this level and it would
carry on. He felt it would be a tragedy for the state
because it would bring the state one year closer to a
decline. He added "ARCO would go on and do our best, but
things could be much better for the state, industry, and for
ARCO if this bill (HB 199) is passed."
Number 608
TOM LOHMAN testified on behalf of THE NORTH SLOPE BOROUGH
DEPARTMENT OF WILDLIFE MANAGEMENT. He said, "The Borough
has not taken a position on this, but I have a couple of
questions. Asked someone to compare a couple of points
between leasing and licensing, if licensing proposal applies
to state waters as well as state lands, and thirdly is there
anyone who has taken a position on this bill (HB 199) other
than ARCO?"
Number 620
REPRESENTATIVE JERRY MACKIE asked if anyone was going to
answer the questions that Mr. Lohman has asked.
MR. EASON answered Mr. Lohman's questions and said that "the
Division of Oil & Gas would be looking at the same issues in
licensing as we do in leasing, and involve the public in the
same fashion." He stated that the Division has not proposed
off-shore licensing.
Number 656
MARY SHIELDS, GENERAL MANAGER FOR NORTHWEST TECHNICAL
SERVICES AND ON THE BOARD OF DIRECTORS FOR THE ALASKA
ALLIANCE, stated as a manager of a contract firm it is her
interest that the more exploration in the state of Alaska
and more development, the better off her people will be.
She stated jobs are going to become relatively scarce over
the next five to ten years as Prudhoe winds itself down,
just as it will affect the state of Alaska. She stated the
more land the state can open up the better picture it has of
its overall land, and the more work that is out there, the
better off the state will be.
CHAIRMAN GREEN stated there was written testimony from
Alaska Federation of Natives, Doyon, and Cook Inlet Regional
Corporation and that they were all in support of HB 199.
Number 686
PETE NELSON, LAND MANAGER FOR TEXACO, ALASKA REGIONAL
OFFICE, stated that HB 199 presents a workable concept of a
licensing program which will encourage exploration and
hopefully development of the state's frontier areas. She
stated the amendments Texaco would like to see made were 1)
to include mature areas, such as the North Slope and Cook
Inlet, in a large block leasing/licensing program is
inappropriate and that language be drafted to eliminate
these types of areas from availability; 2) the issuance of
the licenses should be conditioned upon the annual revenue;
3) the commissioner should adopt regulation to evaluate the
proposal; and, 4) merging from a lease/license to a lease or
leases should be accomplished under existing state leasing
regulations.
TAPE 93-08, SIDE B
Number 000
MS. NELSON stated Texaco supports the licensing concept and
requests the committee consider amendments which will
address these concerns.
Number 041
DAVE LAPPI, PRESIDENT OF LAPP RESOURCES, INC., a small
exploration company based in Anchorage, stated they are
interested in exploring in Alaska. He supported HB 199 and
felt it would bring in higher revenue than the now 85% for
the state. He stated that there should be a review by the
DNR of the work program in progress and the bidding progress
should include a detailed work program submitted by
companies on a competitive basis; not on the dollar amount,
but a work program. He stated companies know best where to
explore for oil and if a company submits a bid in an area
that is not thought to be prospective, the state should
perform the best interest finding and then it would be
subject to that finding. He felt the performance bond
should be eliminated from HB 199, or drastically modified.
AL HASTINGS, DIRECTOR OF EXTERNAL AFFAIRS FOR CONOCO'S
ANCHORAGE DIVISION, stated since Conoco views large block
licensing as an adjunct to the current leasing program, they
believe the terms and conditions of the licensing should be
consistent with the existent leasing program. There are
five areas in HB 199 that could be strengthened: 1) stated
in Section 38.05.132(a) the areas subject to large block
licensing would be areas that are not under current five
year leasing programs and should also exclude areas such as
the North Slope and Cook Inlet that are currently producing;
2) in section 38.05.132(c)(2) the total acreage for any one
licensee should be limited to 500,000 acres; 3) the
requirements in section 38.05.132(c)(5) as currently
proposed, pertaining to economic waste industries annual
resources. The license areas may have already been proven
by initial work in the license area. Conoco believes a
better alternative would be to require the licensee to bond
annually for each year's work; and 4) section 38.05.133(h)
which proposes an oral outcry for getting license proposals,
should be modified by developing regulations that would
require competing proposals by the DNR. The DNR would then
make a selection based on regulations and information from
the proposals. The sealed bidding process would be similar
to the bidding process that is very successful in the
current leasing program. It would be possible for a
licensee to have proposals for different acreage, different
durations, and different times of distribution of the
voluntary work program.
Number 256
MANO FREY, PRESIDENT OF ALASKA AFL/CIO, stated he fully
supports and encourages the committee to pass HB 199 out of
committee.
Number 339
KEVIN TABLER, LAND MANAGER FOR UNION OIL COMPANY OF
CALIFORNIA, UNOCAL here in Alaska, stated Unocal has
conducted business in the state of Alaska since the early
1900s. Initially they sold and distributed petroleum
products, and in the thirties followed with the beginnings
of an exploration strategy and geological programs. Their
exploration efforts resulted in significant major oil and
gas discoveries in the Cook Inlet Basin. Unocal, along with
partners and other exploration companies, actively produced
hydrocarbons from the Cook Inlet Basin for over thirty five
years. On the North Slope of Alaska, Unocal has ownership
in two of the three currently producing oil fields and has
been involved in numerous exploration wells throughout this
region. In the 1993/94 drilling season alone, Unocal has
announced plans to participate in two rank wildcat
exploration wells on the North Slope. Since the beginning
of oil and gas exploration activities in the state, hundreds
if not thousands of miles of seismic survey have been
conducted and untold man hours expended interpreting the
information collected from these two mature exploration
areas.
MR. TABLER said the state's oil and gas leasing programs is
clearly defined, well understood, and designed to make
available for competitive sale, the state's oil and gas
natural resources pursuant to an analytical evaluation and
best interests finding. Unocal believes in the current
competitive lease sale process and feels, that it is the
best way to achieve evaluation of the state's oil and gas
resource potential. Industry input, through expressions of
interest under the five year leasing program and call for
comment process, have provided the DNR with guidance in the
offering of available state lands. This process has
provided the oil and gas industry with a stable and
predictable competitive lease sale schedule in mature
exploration areas where planning for large capital
expenditures are necessary. Unocal believes that
exploration licensing in mature exploration areas, such as
the North Slope and Cook Inlet Basin, is inappropriate and
will not lead to an earlier evaluation of the state's oil
and gas resource potential and, therefore, should not apply
in these areas.
MR. TABLER believes, however, exploration licensing could
encourage oil and gas exploration activity in frontier
areas, such as Interior Alaska, and be a very effective
means in which to augment the state's leasing program in
areas for which insufficient or undocumented geologic and
geophysical information exists concerning the oil and gas
potential of that land, or state land that has not or is not
currently subject to an oil and gas lease sale.
MR. TABLER said the concept of exploration licensing,
introduced some time ago to industry, was specific in its
design and presented as having application in frontier areas
where little or no scientific information and/or industry
activity occurred. Industry in general, supported this
concept, subject to review of its utilization and
administration. Since introduction of HB 199 on March 1,
1993, Unocal has evaluated its specific provisions, its
intended purpose, and its objective. Unocal feels HB 199 as
currently written, needs modification to clearly reflect the
intended purpose expressed by the Division of Oil and Gas at
the joint House and Senate Oil and Gas Committee hearing on
March 16, 1993.
MR. TABLER stated to this end, Unocal would like to make the
following specific comment about HB 199: 1) large block
licensing is an attractive addition to the state's leasing
program to accelerate exploration and potential development
of Alaska's frontier areas; 2) lands which should be
excluded from licensing are state lands that have not or are
not currently subject to an oil and gas lease sale, and all
state lands north of 68 degrees, 30 minutes north latitude;
3) total lands under license to any one licensee should
conform to existing leasing statutes and regulations to
assure compliance therein and prevent the warehousing of
leases; 4) licensing should be conditioned upon the annual
posting of work commitment performance bonds or other
security in favor of the state in amounts not less than the
equivalent work commitment for that year; 5) the
Commissioner should adopt regulations to evaluate competing
proposals and the evaluation process must be based only on
the original written proposals submitted by the prospective
licensees; and 6) conversion from license to lease should be
under existing state leasing regulations AS 38.05.180 (I) -
(u) and (x) - (z), and should be subject to the acreage
qualifications of AS 38.05.140 (c).
Number 434
ROBERT ERICKSON, ADMINISTRATIVE ASSISTANT TO THE TEAMSTERS
LOCAL 959, stated he represents about 4,500 members of the
state of Alaska who are both public and private employees,
along with 3,000 retirees. He stated that all of these
people will be affected by the declining revenues in the
state. He supported HB 199 and urged the committee to pass
it out of committee with a recommendation to pass it.
Number 488
JOHN RINGSTAD, ASSOCIATE DIRECTOR, GOVERNMENT AFFAIRS FOR BP
EXPLORATION ALASKA, INC, stated that BP supports the idea of
large-block licensing for the relatively unexplored areas of
Alaska. While BP's focus is on the North Slope and will
remain there, the licensing approach could facilitate the
exploration of the so called "interior basins" in Alaska --
basically, all of the state outside of the Cook Inlet Basin
and the North Slope. He declared BP applauds the governor
and those in his administration who worked to develop HB
199, for breaking out of the "traditional mind-set" of 30
years of using the same practice, and for having the
willingness to propose a new system that they think will
work better than leasing.
MR. RINGSTAD stated despite support for the general idea of
large block licensing for the relatively unexplored areas of
Alaska, BP opposes HB 199 as currently written. He added BP
has three specific matters of concern: 1) its application
to the North Slope, 2) the oral outcry auction provision,
and 3) the exemption which allows the warehousing of
acreage.
MR. RINGSTAD stated BP's first concern is that HB 199 would
allow licensing on the North Slope, particularly in the
planning areas for the remaining state lease sales scheduled
for the Slope. He said BP believes the state's interests
would harm, not help, by allowing the currently planned
lease sales to be cast aside in favor of a licensing
program. Lease sales bring in cash bonuses; the licensing
program would not. Unlike lease sales in unexplored areas,
which bring in minimum bonuses, the recent state lease sales
on the Slope show there is enough interest to make the
bonuses there substantial. Thus, to stop using lease sales
on the Slope would represent a significant cash cost to the
state. For licensing to be justified, therefore, it has to
be great enough to offset this cost.
MR. RINGSTAD said the chief advantages that licensing offers
are the possibility of more exploration and earlier
exploration. There is already more exploration interest on
the Slope than anywhere else in the state, and the Slope is
likely to end up being just as thoroughly explored under
convention led leasing as it would with large block
licensing. Moreover, it is not clear that licensing would
bring about exploration on the Slope any faster than
conventional leasing would. It is expected that exploration
drilling under a licensing program would begin as early as
two years after a license is issued. He disclosed BP's
Cascade Well that they are drilling this year is on land
leased only two years ago in 1991. He disclosed further
that BP plans to drill the Yukon Gold Well later this year,
and it, too, is on a lease issued in 1991. ARCO's Cave Bear
well, scheduled to be drilled next year, is on land they
leased just last year. Even though it is sometimes true
that exploratory drilling doesn't begin until eight or nine
years after a lease is issued, it is also true that much of
the current exploratory drilling on the Slope is occurring
as soon after a lease sale as it would under a large block
licensing program.
MR. RINGSTAD said there is one more thing to consider before
letting the Slope be opened up to large block licensing.
Conventional leasing allows companies to come in and bid for
leases even though they do not plan to operate the leases
they may acquire. They are, in effect, investors rather
than operators. The licensing program, in contrast, gives a
tremendous advantage to companies who are already operators
in the vicinity of a license; because they already have a
base of operations there and have working knowledge and
experience with the area. On the Slope, there are two
dominant operators. He asked, "Is it good state policy to
let one, or both, 'lock up' the rest of the Slope under a
licensing program? Or would it be better to continue
letting other companies have a chance for a piece of the
action, as they do with conventional lease sales? For BP's
part, we are not afraid of having more competition, but
welcome it."
MR. RINGSTAD stated BP's second concern is about the nature
of the auction for a large block license. House Bill 199
calls for an "oral outcry" auction -- that is, the bidders
are all in a room together and each one keeps bidding higher
and higher about how much exploratory work they will do,
until finally no one is willing to bid any higher and the
license goes to the last, and highest, bidder. This is a
singular departure from the way similar "concessions" are
offered elsewhere around the world. The usual method is
with sealed written bids that are submitted in advance, much
the same way bonus bids are submitted to Alaska in its
competitive oil and gas lease sales. The system of sealed
bids in advance makes everyone bid on the basis of their
best view of the prospect, and it is likely to attract more
participants in the auction than the "oral outcry". He
advised that BP prefers sealed bids.
MR. RINGSTAD said their third concern is whether a lease
being carved out of a license area counts against the
state's limits on how much acreage a company may have under
lease at one time. House Bill 199, at lines 8 and 9 on page
5, specifically exempts such a lease from the acreage
limits. He declared BP sees no reason for the state to give
such an exemption. The acreage limits were enacted as part
of the original State Land Act in 1959 in order to prevent
companies from warehousing large numbers of leases. The
state wanted companies to either explore and develop the
leases they got, or else surrender them back to the state.
This is shown by the fact that leases in an exploration unit
or a development unit are not counted against the acreage
limit. With a unit, the state knows there is a plan, and
has to approve that plan, either to explore the leases or to
develop and produce the leases, depending on the type of
unit.
MR. RINGSTAD said, "If you think about it for a moment,
there is no reason for such an exemption even from a license
holder's point of view. Why would a licence holder be
trying to get a lease for part of his license area in the
first place? Because he either has found something there or
has good reason for believing something is there. But in
either case, there is no reason why he cannot put the lease
into a unit if he does not want it to count against his
acreage limits. And if he does unitize the lease, then the
state will continue to have assurance that there are real
plans for further exploration and/or development for that
lease." He added BP believes a lease being carved out of a
license area should count against the acreage limits.
MR RINGSTAD said in summary, "BP supports the general idea
of large block licensing for the relatively unexplored areas
of Alaska. But we oppose HB 199 in its present form because
it does not deal adequately with the issue of licensing on
the North Slope." He stated BP is seriously concerned about
the provision in HB 199 to use "oral outcry" auction instead
of sealed bids, and about its exemption from the anti-
warehousing acreage limits for leases carved out of a
license area. With corrections in these areas, BP would
welcome HB 199 as a progressive new approach for encouraging
oil and gas exploration in Alaska.
Number 582
CHAIRMAN GREEN stated his intention to revert HB 199 to a
sub-committee to work out some of the differences, and
appointed Representatives Sitton, G. Davis and himself to
serve on the subcommittee.
Number 593
REPRESENTATIVE JERRY MACKIE felt the committee had the same
intent to foster new exploration in the state and the
comments by ARCO and BP's people were very encouraging.
Some of the smaller companies made some comments which were
constructive and he felt it was a good idea to have everyone
sit down and work some of the problems out.
Number 617
REPRESENTATIVE HARLEY OLBERG brought up the fact that April
3rd is coming up very quickly.
Number 622
CHAIRMAN GREEN stated this would have to be done post haste,
but without some ironing out of some of the problems HB 199
doesn't accomplish or promote from all sectors some
increased activity.
Number 626
REPRESENTATIVE OLBERG asked if HB 199 was still going to the
House Resources Committee.
Number 630
CHAIRMAN GREEN replied in the affirmative.
Number 635
REPRESENTATIVE OLBERG stated if HB 199 is heard next week it
cannot be scheduled before the third of April. He suggested
Representative Green and other members of the House
Resources Committee could form a sub-committee there and
make appropriate changes.
Number 638
CHAIRMAN GREEN stated if HB 199 goes to the House Resources
Committee they will be somewhat at a loss of what is coming
over with some changes of substance and "lose some of the
time we tried to gain."
Number 641
REPRESENTATIVE MACKIE stated from past experience, anytime
you can craft a piece of legislation that is acceptable to
everyone involved, legislation can be moved through the
process. He stated that with Chairman's Green experience
and understanding of this issue and the fact that many of
the parties involved want to sit down and work things out he
felt HB 199 should be moved to a sub-committee for further
work.
Number 656
CHAIRMAN GREEN stated he was moving to form a sub-committee
and that he would contact the people who have indicated an
interest outside this committee. He then stated he would
take testimony on HB 200 at this time.
HB 200: OIL & GAS EXPLORATION INCENTIVE CREDITS
Number 668
MR. EASON felt HB 200 encourages exploration in the state.
He stated, "They are proposing that the new legislation
would actually amend Title 41 because it is exploration
incentive credit provision that we want to make for all land
not just state land. They are also proposing the process be
changed somewhat. Credits be available for the review for
specific expiration be undertaken whether they be on state
land, federal, or private lands. It is not mandatory that
we give the credit it would be discretionary by the
Commissioner. The rationale for selecting the different
percentage participation is twofold, first although there
may be very valuable information leading to the evaluation
of state lands, private lands, under all circumstances, are
more remote and data is therefore less applicable."
TAPE 93-9, SIDE A
Number 000
MR. LAPPI stated he does not think the state needs to be in
the business of deciding what area should be supported as
far as private exploration goes in the state, and that the
industry needs to have the state participation financially
or assisting them in deciding which program should be
supported with state money.
Number 028
REPRESENTATIVE G. DAVIS asked Mr. Eason if HB 200 was
similar to MAPCO\Tesoro's proposal as far as the state
assisting development.
SB 134: CREDITS AGAINST PURCHASE OF ROYALTY OIL
Number 039
MR. EASON stated that it is up to the Commissioner to make a
determination each time it is in the state's interest to
fund or participate in a project. He said, "Under SB 134
the proponents of that legislation have presented a bill
that truly is nondiscretionary in finding what is a clear
and convincing finding of the project that they propose to
build with state money. Under the EIC (Exploration
Incentive Credit), we identify the ones we want to
participate in, set the limits, and the amount of money that
can be credited. Under SB 134 there is no such control
because there is potential to create new disputes at any
time on the instate refiners' part. The EIC's encourage
competition and they are available to all lessees in a lease
sale. Senate Bill 134 we believe, is a very anti-
competitive bill and will tilt the competitive balance. The
EIC's represent no forgiveness, they don't establish
precedent of fighting the state for years and years in court
only to be found wrong and not have to pay. Everyone who
equally wants to participate in the program and they do it
without having to renegotiate the contract position."
Number 139
REPRESENTATIVE G. DAVIS asked if he saw any amendments that
would make SB 134 amendable or agreeable by the
administration.
Number 149
MR. EASON stated that he personally does not think so, but
he has not talked with the administration on that specific
point.
Number 163
LARRY KIMBALL, CHAIR FOR ALASKA FEDERATION OF NATIVES, felt
the state needs to look at what is considered to be its
interest in oil and gas and that interest has changed. He
said, "There are a series of court cases in which the state
has determined that the state is to pick up lands throughout
the state. To say the state's interest may be diluted by
remote areas is misleading, it may be true, or more true, if
we were looking at the old state land selections." He
stated they do not have any selections that do not have a
major encroachment by the state's interest.
Number 206
ADJOURNMENT
CHAIRMAN GREEN adjourned meeting at 6:50 p.m.
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