Legislature(1995 - 1996)
03/09/1995 01:18 PM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 9, 1995
1:18 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Scott Ogan, Vice-Chairman
Representative Gary Davis
Representative Bill Williams
Representative Tom Brice
Representative David Finkelstein
MEMBERS ABSENT
Representative Bettye Davis
OTHER MEMBERS PRESENT
Representative Mike Navarre
Representative Joe Green
COMMITTEE CALENDAR
*HB 207: "An Act relating to adjustments to royalty reserved to
the state to encourage otherwise uneconomic production
of oil and gas; relating to the depositing of royalties
and royalty sale proceeds in the Alaska permanent fund;
and providing for an effective date."
HEARD AND HELD
H0&G - 03/09/95
*HB 209: "An Act relating to the authority of the commissioner
of natural resources to allow reductions of royalty on
oil and gas leases; and providing for an effective
date."
SCHEDULED BUT NOT HEARD
(* First public hearing)
WITNESS REGISTER
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99810
Telephone: (907) 465-2400
POSITION STATEMENT: Supported HB 207
PATRICK COUGHLIN, Assistant Attorney General
Oil, Gas and Mining Section
Department of Law
1031 West 4th Avenue
Anchorage, AK 99501
Telephone: (907) 269-5255
POSITION STATEMENT: Supported HB 207
BILL VAN DYKE
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, AK 99501
Telephone: (907) 762-2550
POSITION STATEMENT: Supported HB 207
PREVIOUS ACTION
BILL: HB 207
SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
JRN-DATE JRN-PG ACTION
02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE
02/27/95 501 (H) FISCAL NOTE (DNR)
02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV)
02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER
03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) No. 3
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
BILL: HB 209
SHORT TITLE: OIL & GAS ROYALTY REDUCTION
SPONSOR(S): REPRESENTATIVE(S) GREEN, Rokeberg
JRN-DATE JRN-PG ACTION
02/27/95 503 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 503 (H) OIL & GAS, RESOURCES, FINANCE
03/01/95 551 (H) COSPONSOR(S): ROKEBERG
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
ACTION NARRATIVE
TAPE 95-8, SIDE A
Number 000
CHAIRMAN NORMAN ROKEBERG called the House Special Committee on Oil
and Gas meeting to order at 1:18 p.m. Members present were
Representatives Rokeberg, Ogan, G. Davis and Williams. Chairman
Rokeberg declared a quorum was present. Chairman Rokeberg Chairman
Rokeberg announced that although HB 207 and HB 209 were scheduled,
the committee would only hear HB 207 due to time constraints.
HO&G - 03/09/95
HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES
HB 207, Sponsored by Rules by request of the Governor was before
the committee. CHAIRMAN ROKEBERG welcomed Commissioner Shively and
his staff members.
Number 027
CHAIRMAN ROKEBERG stated to the members of the committee and all
who were in attendance, he was glad to have received this bill from
the Governor. He then mentioned he thought this particular bill
marked a watershed event in the relationship between the state and
the petroleum industry. He said this will be the most important
legislation considered by the legislature this session. He then
stated he was pleased the Governor saw fit to bring this bill
forward. He then asked Commissioner Shively to begin his
testimony.
Number 043
JOHN SHIVELY, Commissioner, Department of Natural Resources, stated
he would like to make some opening comments and then would answer
questions from the committee. He mentioned there were three staff
members with him and they were in attendance to provide him with
any needed information.
COMMISSIONER SHIVELY thanked the Chairman for his kind comments
about this legislation, and stated they were pleased to be able to
bring it forward. He then mentioned he thought all of the people
in the room were concerned about how the oil industry, in Alaska,
is faring with regards to the rest of the world. In order for us
to continue to have a healthy industry we need to understand what
is going on throughout the world which is one of the reasons the
Governor is in London this week. This legislation starts us on the
road to address how we can be competitive in the world climate. He
told the members he wished to discuss what this world climate is,
and what it is not. Commissioner Shively stated, what they are
doing is a technical re-write of the existing law. He stated this
is not a new law, they are taking existing legislation and changing
it to make it more workable. He then mentioned one of the more
significant changes is the commissioner already has the authority
to reduce royalties on fields which have been abandoned, or fields
which are about to be shut-in; this allows the commissioner to
reduce the royalties for new fields. He stated, this was the most
significant change. He then mentioned the state has lived for a
long time off of Prudhoe Bay and Kaparuk, both of which are large
fields, and off of some of the smaller fields. But as the industry
starts to go out into new frontiers, we are looking at smaller and
smaller fields. Therefore, some of the assumptions which work in
some situations may not work in others.
COMMISSIONER SHIVELY then mentioned the legislation makes the
language, which gives the commissioner the discretion, more
explicit and more workable. Commissioner Shively then stated, this
is not the final answer as to how we can provide incentives to the
oil and gas industry. He said, he thinks there are other roads,
and some other additional legislation. He stated it was his
decision, at this point, given the newness of the Administration,
that this is something we can do this year. However, the Governor
has appointed the Oil and Gas Policy Council, and one of their
responsibilities is to look at other methods of providing
incentives for oil development, and for a healthy oil industry. He
then stated they consider this to be just the first step.
COMMISSIONER SHIVELY said at this time he would like to talk about
a few parts of the legislation which have caused people some
concern. He stated there has been some concern over the amount of
discretion which the commissioner is apparently granted by this
legislation. In response to this concern, Commissioner Shively
stated this was discretion which the Office of the Commissioner
already has. He stated, right now he can reduce royalties on
fields which are about to be shut-in, or abandoned. This is really
not something new to the office. He stated, however, in order for
him to make a decision to reduce a royalty, he has to find clear
and convincing evidence. This means the situation must warrant the
reduction. Not only that, even if the situation warrants the
reduction, he must be sure it is in the best interest of the state.
He then stated, for example, there could be a field which warrants
the royalty reduction, but this may not be in the best interest of
the state. These are two hurdles which the commissioner must go
across. He then stated the other thing this legislation does in
regards to the commissioners discretion, which he believes is an
improvement, is it allows the commissioner to look at what
Commissioner Shively considers to be the three prongs of any
decision about the economics of an oil field. Those are the costs
of development, the volume of oil in the field, and the price of
oil. He stated those are not static prongs of any decision, the
cost in some ways may be the most stable. He said but when
technology changes, even costs can significantly change. Certainly
price can have significant changes and even volume can encourage
changes. He said this law allows the commissioner to look at the
situation and if the current economic assumptions warrant a royalty
reduction, grant it; but also provide that if those economic
assumptions change, the state gets more money. Indeed, the state
could end up with higher royalties than we are currently entitled
to under certain circumstances. Commissioner Shively then
mentioned this does allow the commissioner more flexibility than
the office currently has.
COMMISSIONER SHIVELY explained another issue which was discussed is
the non-appealability of the applicant. The reason this provision
was included is the applicant is coming to the state and asking for
a favor. The applicant made an assumption, at one point, that they
could develop fields under the lease and royalty provisions we have
had, and now they are making another assumption. We feel the
decision should rest with the commissioner, and his decision should
be the end of the issue. Commissioner Shively then mentioned he
was not a fan of litigation. He stated it was a waste of public
resources. At this time, he stated this was just the first step in
trying to build a partnership between the state, the industry, the
legislature, and the communities which are involved in the oil
industry. Commissioner Shively then expressed his appreciation to
the representatives of the oil industries who worked with the
Administration to develop this legislation.
Number 192
CHAIRMAN ROKEBERG thanked Commissioner Shively for his testimony.
He then stated, for the record, Representative Tom Brice joined the
committee at 1:20 p.m. He also mentioned Representative Joe Green
was present in the committee room and invited him to join the
members at the committee table.
Number 202
CHAIRMAN ROKEBERG stated he would first like to discuss a point on
which there was some confusion. This was the genesis for the
insertion of Section 1 in the statute which relates to the
permanent fund. He stated there have been some discussions between
the staff relating to why this was put into the legislation, and as
he understood at the genesis of this, there was a concern of some
possible constitutional challenges to the statute if this wasn't in
there. He stated there were also concerns about public perception.
Chairman Rokeberg stated he had requested a legal opinion from
legislative counsel, which is in the packets distributed to the
members, that says there is no foundation for a legal challenge.
He then asked if Mr. Coughlin could comment on this matter so the
committee could move forward.
Number 222
COMMISSIONER SHIVELY stated he was prepared to comment. He
continued by saying he couldn't tell the members there was no basis
from which someone couldn't argue. He then stated they believe
there is no constitutional requirement stating you can't go below
the floor of the permanent fund contribution.
Number 231
PATRICK COUGHLIN, Assistant Attorney General, Oil, Gas and Mining
Section, Department of Law then added to the testimony by stating
the Attorney General's opinion is that there is no constitutional
requirement making the permanent fund whole as provided for in the
bill.
Number 236
CHAIRMAN ROKEBERG stated, as he understood it, this is a new
feature which adds two things: It makes an exception for the
permanent fund, yet doesn't maintain the status quo. He then
mentioned the status quo would be without Section 1 in the
legislation.
CHAIRMAN ROKEBERG then asked the members of the committee if they
had any questions on that particular issue. Hearing none, he said
he would like to focus on the process of this procedure. He
explained one of the issues which interests him are the problems
revolving around the delineation of what a field is, and the
definition of "a field." He then said he was wondering if it would
be in the best interest of this legislation to define a field.
Number 257
COMMISSIONER SHIVELY said he doesn't believe they need to define "a
field." There are a variety of different possibilities which can
occur. He then stated the leases are in the shape of squares or
rectangles which have nothing to do with geography. When we lease
an area, it is very difficult to determine what is under the
ground. There may be one big oil field or several little pockets
of oil. We think there are opportunities, as this legislation is
written, to look at the horizons in oil development. However, you
still need to take into account other developments under that
lease. For example, if you have part of a field which is already
developed and there is discussion about developing another horizon
then the kind of investment which has already been made under the
lease, how they will use those facilities. All those factors need
to be taken into account. We think we can do this under the
proposed legislation as it currently stands. He then stated Mr.
Bill Van Dyke could elaborate more clearly on those issues.
Number 278
CHAIRMAN ROKEBERG said he was looking at some of the record from
the Conoco application and finding from 1990. He said it was his
understanding that what is defined as a field can be vertically
separated within the unit. Therefore, if you have a horizon which
goes beyond the unit there could be some difficulties. He then
stated you could define a field under this statue as a horizon
notwithstanding whether it was inside the unit or not.
Commissioner Shively stated he would allow Mr. Bill Van Dyke to
respond to that point.
Number 290
BILL VAN DYKE said the Chairman was correct. Under the Conoco
application there was a considerable amount of discussion as to
what the definition of a field was. The existing statute refers to
total investment in the field, and so we had to address total
investment in the field. This particular legislation would take
out the reference to total investment. He then stated, under the
proposed legislation they would look at individual horizons. He
then stated they would not look at individual horizons under leases
where the horizon was not delineated. He then mentioned they would
want to know the volume, areal extent, and productivity of any of
the reservoirs which we have applications for royalty releases
pending. If it is not delineated it is not going to be eligible
for the reduction.
Number 309
CHAIRMEN ROKEBERG asked Mr. Van Dyke if the word "delineated" was
a specific term of art. Chairman Rokeberg mentioned he wanted to
be clear on this because the term "delineated" appears in the
legislation on page 2, line 28. In other words, do we need to
define this term to help you out? It seems to me there has been a
lot of energy spent, in the past, trying to define what a field is.
It therefore, seems if we can define the term in this statute we
can go on to bigger and better things.
Number 318
MR. VAN DYKE stated when you start creating definitions in the
statute they can sometimes cause as many problems as they were
designed to fix. He stated they think they know how the phrase
will be applied. It may vary from field to field. As soon as you
start listening to long sets of standards, it is really opened up
to challenge again. He then stated there is a need to know what
you are looking at, in terms of expected costs and production.
This is why the term "delineated" is in the legislation.
Number 330
REPRESENTATIVE GARY DAVIS stated there has been some good
explanations on this subject. He then asked if an application for
a royalty reduction were to be put in, it could be for a delineated
field which could encompass a number of tracts? Representative G.
Davis was told that was correct. Representative G. Davis then
asked if the application upon approval would designate tracts, and
probably a field also, or would it just be tracts?
Number 340
COMMISSIONER SHIVELY stated what usually happens when you have more
than one lease involved is they ask for a unit. So the unit
defines which leases you have and then the field itself is
delineated within those leases by the exploratory drilling that
takes place.
Number 345
REPRESENTATIVE G. DAVIS stated he did have some concern about this
topic. He asked if this is was a royalty reduction curve would be
allowed, and then anything outside of this would be another
application?
Number 350
COMMISSIONER SHIVELY stated they have to be able to understand, for
example, let's say you have six leases but they have delineated oil
under only four of them, if we don't think the field is delineated
under the other two, then there is no royalty reduction on those
leases. Someday the company might go out and do some additional
drilling, but until they do, we wouldn't give them the reduction
even if those leases were already in the unit.
Number 356
CHAIRMAN ROKEBERG read a passage out of the Conoco decision which
says that department's definition of "field" states, "Is similar to
that used by the Alaska Oil and Gas Conservation Commission (AOGCC)
in that it considers multiple, vertically separated pools or
reservoirs underlying the same lease or leases in a single field."
He then said the impression he receives from this is, you can have
different horizons within a unitized field. He then stated the
question becomes, for example, if Westsak isn't part of the Kaparuk
unitization, you would have two different horizons within one unit.
Number 369
COMMISSIONER SHIVELY stated he feels the legislation, as drafted,
would allow us to deal with Westsak as a delineated field and give
them a royalty reduction without reducing the royalty on the
Kaparuk field.
Number 375
CHAIRMAN ROKEBERG said his concern was that in the past, there has
been an historical denial in the reduction. He stated that he is
concerned about this.
Number 377
COMMISSIONER SHIVELY stated he was not the commissioner when that
occurred, and mentioned Mr. Coughlin may be able to explain this
situation.
Number 380
MR. COUGHLIN said the issue in the Conoco litigation was what did
"field" mean under the terms of the statute. Conoco argued where
there were two horizons, you could only look at one horizon which
constituted the field. He then stated at this particular time,
they had not gone into production on Schrader Bluff's horizon, they
were producing on Kaparuk. He then stated Conoco claimed the only
thing which could be looked at to determine the reduction was the
Kaparuk horizon, and that the Department of Natural Resources (DNR)
could not consider the lower horizon as part of the total
investment of the field. He then stated, the position of the DNR
was that you needed to look at the fact that both horizons were
using the same facilities to produce. We believe in this
particular situation, the definition which the DNR adopted, which
is every horizon which might underlay a lease, would grant the
commissioner the discretion to grant a reduction to one horizon and
not the other. In making this decision, the commissioner has to
look at the whole horizon because the economics on one horizon
effects the overall economics of the field.
Number 404
COMMISSIONER SHIVELY then said, if you were dealing with a horizon
with a small amount of oil underneath a larger pool of oil
presently being produced, if you just looked at the smaller pool of
oil you would be able to say it definitely needs a royalty
reduction, but if you combine it with the investment which is
already made in the other field it may not. He then stated you
must look at all of the horizons under a lease even if you end up
treating some of them differently.
Number 414
REPRESENTATIVE TOM BRICE said as far as administrative procedures
are concerned, he has noticed there wasn't a strong delineation in
the Governor's bill about the equity within the ability to
re-negotiate a lease. For example, you have a producing well which
is a whatever percent royalty which is locked in, yet to bring on
line another well of the same quality would require a substantially
lower rate. He asked if there is going to be any administrative
ability to re-negotiate those leases, if necessary.
Number 427
COMMISSIONER SHIVELY stated there would not be that ability in the
middle of the contract. If the company has made the economic
decision to produce, they are to proceed. However, if they come to
the department and state they intend to shut-in or abandon the
field then there would be an opportunity to renegotiate. They
would then have to prove the royalty reduction is essential to
keeping the field operating.
Number 435
REPRESENTATIVE BRICE asked the commissioner to explain the process
of proving a reduction that is necessary and how long it takes.
Number 436
COMMISSIONER SHIVELY said he did not know how long the process
takes, but stated his best guess was about three to four months.
He then said there are two ways this could be done which is if the
division has the staff time available, or if the legislation
provides for the division to ask the industry to pay for an
independent assessment.
Number 443
CHAIRMAN ROKEBERG said his concern at this time is, as he
understands the process, on the edges of certain units there can be
non-reducible oil or hydrocarbons like the Prudhoe Bay tarmacs. He
then stated the committee would be willing to help the department
if this were to become a problem. Chairman Rokeberg then stated
his approach to this problem is, the more decisions the legislature
can take away from the commissioner, the easier the job of the
commissioner will become. This would be building a fence around
the commissioner's discretion.
Number 458
COMMISSIONER SHIVELY stated he understood the points being made by
the Chairman, and said he is willing to discuss those problems. He
then mentioned this is not an easy situation. Oil fields, horizons
and geography are all different. The current legislation is
designed to allow the commissioner to look at all of these factors
with maximum flexibility to decide whether the royalty reduction is
justified. He then stated his willingness to work with the
legislature on the language, and intent of the bill.
Number 468
CHAIRMAN ROKEBERG mentioned the Westsak field springs out as being
a problematic. You may want to take some of these definitions, in
terms of looking at unitization, as the foundation of your decision
of what a field is.
Number 471
COMMISSIONER SHIVELY said he doesn't feel it stands in the way, but
it doesn't necessarily mean we are always going to agree with the
industry. He then said this was the problem with Conoco. The
department did not agree with what the industry is asking for. He
then said this is the problem with these kinds of decisions, you
have two competing interests in the economic development interests,
and protecting the assets of the people to make sure we get our
fair return. In the Conoco case, they made a judgment in which
the request was not appropriate in terms of our responsibility to
protect the assets of the state.
Number 480
CHAIRMAN ROKEBERG asked the members if they had any further
questions on this topic.
Number 481
REPRESENTATIVE G. DAVIS noticed the Commissioner would send a copy
of his findings to every member of the legislature. He recommended
they simply let the legislature know there is a report available
and if we wanted the report, each individual legislator could
request one.
Number 495
CHAIRMAN ROKEBERG stated he has mentioned to the members he has
discussed with Commissioner Shively, the possibility of setting up
a "triad" style of decision making with the Attorney General's
Office and the Commissioner of Revenue. He then asked for
Commissioner Shivley's input on the issue.
Number 500
COMMISSIONER SHIVELY said, clearly, legislation can provide
whatever checks and balances the legislature feels is appropriate.
He said there has been several things discussed, one of those
things is whether or not two other commissioners should be
responsible for accepting or rejecting the decision. The Royalty
Board has been discussed as another option, and a third option was
the AOGCC. He then stated this was really a policy call.
Commissioner Shively said they basically believe the Executive
Branch is responsible for making decisions, you could develop as
many steps in the decision making process as you want but one of
the problems the government has as we look at bringing the cost of
government down, is taking some of these steps out. Commissioner
Shively mentioned they don't want to take so many steps out as to
damage the public process. He then stated there is a lot of
redundancy in how the state makes its decisions, and he believe
this would be redundant.
Number 515
CHAIRMAN ROKEBERG noted Representative David Finkelstein joined the
committee at 1:30, and acknowledged the presence of Representative
Mike Navarre in the committee room.
Number 518
REPRESENTATIVE BILL WILLIAMS stated he too dislikes going to court
to solve these issues. He stated it is easier to work out the
issues among the parties involved. Representative Williams then
stated he would like to discuss the non-appealable issue further,
and how this body can communicate with the commissioner.
Number 525
COMMISSIONER SHIVELY asked if the question was in terms of why they
think this concept works.
Number 526
REPRESENTATIVE WILLIAMS responded by asking how would it work.
Number 527
COMMISSIONER SHIVELY said it is really designed to look at the
applicants. For example, lets say oil company "A" comes in and
makes a request for a reduction in the royalty. The request is
reviewed, the commissioner makes a decision either not to reduce it
as much as the oil company wants, or not to reduce it at all. This
language says this is the final point in the process, and would not
allow them to go to court. This, however, does not prevent
constitutional challenges to the concept, but it does keep the
process within the department.
Number 539
REPRESENTATIVE WILLIAMS asked if the legislature disagrees with the
Commissioner and how could we act.
Number 539
COMMISSIONER SHIVELY then commented we are dealing with a situation
where the oil industry came in, made a bid on leases, they knew the
conditions when they made those bids. They were willing to say
they would pay a certain amount of money. We recognize the fact
that situations can change, so this bill allows us to make changes
which we think are warranted. This is really our decision due to
the fact the companies have already agreed to play by a certain set
of rules. If we decide not to do them a favor by changing the
rules, all we are saying is they must play by the same rules they
agreed to when they entered the agreement.
Number 546
REPRESENTATIVE SCOTT OGAN noticed there was a fiscal note stating
one person would be hired. He asked if this would be a petroleum
engineer.
Number 547
COMMISSIONER SHIVELY stated the new person would be an engineer.
Number 552
REPRESENTATIVE OGAN asked if there was a fee built in this for
making a royalty application.
Number 553
COMMISSIONER SHIVELY stated there is no current fee. He then
stated the department can make the company pay for an independent
evaluation if the department does not have the resources to deal
with an evaluation of this type. The department will then take the
information provided by the independent company, and make the
decision to grant or refuse the reduction.
Number 564
REPRESENTATIVE OGAN asked if any other incentive programs currently
requires a fee to process applications. Commissioner Shively
responded no. Representative Ogan referred to Section 2, page 3,
line 9 of HB 207 and explained the bill says, "The commissioner may
require the lessee to pay the costs of a third party contractor."
He asked if this was a good idea.
Number 571
COMMISSIONER SHIVELY responded by asked stating if the
Representative wanted the language to read, "If a third party
contractor is required, the commissioner shall require the company
to pay." Commissioner Shively said this would be fine, but noted
currently it is under his discretion. He then said this is
something they intend to do.
Number 577
REPRESENTATIVE OGAN then mentioned he didn't believe there would be
a problem making that change. He said he had heard some concerns
about the confidentiality issue. He asked Commissioner Shively if
he would be against allowing the oil company to participate in the
selection of a third party, if one was needed.
Number 579
CHAIRMAN ROKEBERG stated he has had some concern over the
confidentiality issue. He asked the Commissioner Shively if he
would be opposed to allowing an oil company to participate in the
selection of a third party.
Number 588
COMMISSIONER SHIVELY stated he would allow the company to have an
opportunity to veto the selection of a third party if there are
good reasons. He did, however, express some concern with allowing
the oil company to choose their own third party. Commissioner
Shively mentioned the philosophy behind the legislation. He said
this a new era between the state and the industry in terms of how
we can talk through some of our differences. He said he was
convinced they could work through those differences.
COMMISSIONER SHIVELY mentioned he would like to comment on the
confidentiality issue. He said they put this into the legislation
because they believe the industry needs to make the choice as to
whether the information they provide the state is confidential. In
discussing this issue with the industry both privately and
publicly, he has told them it is in their best interest to make
public as much information as possible. This is because the more
public the decision is, the better off we will all be. This is
part of being a partner with the state.
Number 611
REPRESENTATIVE DAVID FINKELSTEIN asked about the issue of appeals.
He stated as he understood the argument, a company which enters an
arrangement has accepted the arrangement whether they get a benefit
on top of that or not. He said there is another side to this
argument. If someone from the public believes the commissioner
makes a decision which is not beneficial to the state, there needs
to be some sort of procedure available to look at the decision. He
mentioned this may be best solved by some sort of internal review.
Number 623
COMMISSIONER SHIVELY stated the decisions are currently being made
that way. He said he has this discretion, under current law, for
fields which are abandoned or are about to be shut-in. In terms of
a review process, the courts tend to give a lot of discretion to
the decisions. He stated the legislature can provide for that.
Commissioner Shively said they are asking for more contention and
more delay.
Number 632
CHAIRMAN ROKEBERG said he wanted to make a statement, and asked Mr.
Coughlin to correct him if he is wrong. He stated that as he
understands this, there is no appeal by the applicant, and there is
nothing in this statute to prohibit a third party from suing.
Number 637
MR. COUGHLIN said to make that point clear you might want to insert
the words "by the applicant" into the legislation.
Number 638
CHAIRMAN ROKEBERG then said his own personal preference would be to
insulate the process from an outside litigant.
Number 639
MR. COUGHLIN explained the court will honor the legislative
statement of finality which, in essence, is in the bill.
TAPE 95-8, SIDE B
Number 000
REPRESENTATIVE FINKELSTEIN said if this is interpreted as it was
just mentioned, then he does not have a problem with it. He did
state that if someone is going to make the case, the public
interest isn't being represented in a major decision like this,
they can go to court and say the provisions of the constitution
regarding fair return have to be followed. He then stated he
doesn't see how they will protect public interest. When the courts
review this, they should also be able to review the particular
provisions of this which happen to implement the fair return with
the language requiring a determination of making something
uneconomical, economical. He stated this is what the legislature
has asked you to do, and the courts will be looking at the
constitutional challenge to determine if the decision which the
commissioner has made on whether an uneconomical project has become
economical, and does it fit under the constitutional requirements
to get a return on our resources.
Number 040
REPRESENTATIVE TOM BRICE said there needs to be some type of
system, whether we want to keep the language the way it is or
delineate it a little more, that insures finality in a timely
manner for both the industry and the state. Otherwise, I can see
these types of challenges continuing like the issue of back taxes
where nobody is helped by having it thrown back into the
legislature to become a divisive fight. He then mentioned this may
be appropriate to leave this with the commissioner so we can side
step the entire problem.
Number 060
CHAIRMAN ROKEBERG asked if there was any existing regulations,
under the Administrative Procedures Act, allowing the applicant to
appeal for reconsideration.
Number 071
MR. COUGHLIN said under DNR's regulations, there is the right to
ask the commissioner for reconsideration.
Number 072
CHAIRMAN ROKEBERG said there is at least a way they can get back in
the door if they can correct a problem. He then asked if it was
possible to reject an application and then give the company a hint
as to the best way to come back.
Number 077
COMMISSIONER SHIVELY said most of these are probably going to be
negotiated because the companies are going to concentrate on what
they see as the current economic situation. He said he has to make
a determination whether a reduction in royalty is justified.
Assuming he gets to that step, he said his concern and the concern
of future commissioners is going to be on the other end of the
scale. He said he doesn't think there will be just a straight
application up or down, it is going to be a negotiated process as
to what happens with the royalty reduction on downside economics
and what happens when it goes back up. Commissioner Shively said
he would hope that during the process there would be the ability to
be able to come to some agreement on those. However, if they
couldn't agree, and he refused the reduction, they could come back
and look at this in a different way we will entertain your request.
Number 118
REPRESENTATIVE WILLIAMS referred to the sectional analysis for the
bill, and asked how they will know what a companies costs are going
to be.
Number 121
COMMISSIONER SHIVELY responded to the question by stating they will
know the costs on a field which is already producing because the
company will provide the costs to the commissioner. In the case of
a new field, the company will make projections as to what their
costs will be.
Number 122
REPRESENTATIVE WILLIAMS said he was referring to the fields which
were already there. He then stated he was familiar with the costs
of a logging operation, and asked if this was a similar type of
situation.
Number 140
COMMISSIONER SHIVELY said it clearly is when they near the end of
the life of an oil field because you will be able to go in and look
at their records from previous years, and make projections as to
the future costs of operation. With a new field, this is a little
different because there will be more assumptions made. However,
they will still have to share their economic assumptions about the
field, and we will review them. For example, let's say a company
came to me and said the cost of operating a certain field is $100
million dollars per year, and we look at the field a couple of
years later and the cost is only $50 million dollars, this means
the economic assumptions we based the royalty reduction on were
wrong. He then stated they would go back to the company and
re-open the process. Commissioner Shively then referred to logging
and stated there are changes in technology and price, which change
costs. He said there could be one area which was logged ten years
ago, which had different costs than a company logging it today.
The same thing happens with oil fields.
Number 163
REPRESENTATIVE OGAN asked what would happen in the event an oil
company goes into the field and there turns out to be a greater
production level than was anticipated. Will this automatically
roll up, or is it the commissioners discretion to roll up? He also
asked if the company has requested this information to be
confidential, and how does the public know the prices are being
rolled back up?
Number 175
COMMISSIONER SHIVELY said the commissioner will not have full
discretion to make changes. Surely in terms of price, the public
is very aware of what happens to oil prices. Lets say we make the
assumption that a field is going to be developed at $16 per barrel,
and four years from now it is $22 per barrel. There are two
possibilities in this circumstance, one, in the agreement is a
"step-up" where the royalty increases after the price of oil
increases. Another thing is to provide for a re-opener, and
re-negotiation, and if we can't come to an agreement, the royalty
returns to its original level. He noted the other two parts of the
economics of an oil field are the volume and costs which they keep
track of both.
Number 192
REPRESENTATIVE OGAN said lets say the oil company says the field
they are producing is a marginal field and they request a
reduction. After this they continue to play shell games regarding
volume and keep production low. He then said he wanted to know
about any safeguards which will prevent a company from doing this.
Number 208
COMMISSIONER SHIVELY said it is easy to determine this on the North
Slope because all the oil goes through the pipeline. He then
stated the companies are required to report the volumes. If the
companies don't want to take out the oil at the fastest possible
rate, he wasn't sure if there was anything they could do about it.
He stated if you look at the economics, when they come in to
request a reduction, we will look at what they estimate to be the
total recoverable volume in the field. If we get down the road
eleven years and the company has produced the amount of oil they
estimated and is still going strong, this becomes a reason to
change the royalty.
Number 226
MR. VAN DYKE stated the past disputes with royalties and the AOGCC
have not revolved around how much oil is coming from one horizon
versus another horizon, or from one lease versus another lease.
The disputes are value disputes and not volume disputes. There are
very few disputes, with the lessee, over volumes and where those
volumes come from. He then mentioned if a company wants to produce
a well at 100 barrels per day, or 150 barrels per day, this is
their choice.
Number 238
COMMISSIONER SHIVELY then mentioned the Oil and Gas Division is
staffed with people who understand this process. They know how to
look at the data, and if we thought it was important, we would have
it independently looked at.
Number 242
REPRESENTATIVE OGAN asked if the amount of royalty changed
depending on how much they produce per day. For example, they have
the ability to produce 150 barrels, per day, and they only produce
100 barrels, per day.
Number 250
COMMISSIONER SHIVELY said they are not looking so much at volumes,
per day, as they are looking at recoverable volumes in the field.
It would be very strange for an oil company, once they have made
the capital investment, to not want to try to maximize the amount
of oil they can recover. As he understands it, one of the jobs of
the AOGCC is to make sure they don't maximize it to such an extent
that they do damage to the field. We will base our decision on how
much oil they say is there. If it turns out they underestimate the
amount, which often happens, you can have a delineated field where
as the company does further drilling they find more oil than they
estimated. Representative Ogan then said you hope that happens.
Commissioner Shively stated that is right.
Number 263
REPRESENTATIVE MIKE NAVARRE asked if it kicks back up retroactively
to oil which has already been produced. Historically, we have seen
significant underestimates, and part of that is due to increased
investment. He asked how do you go back.
Number 269
COMMISSIONER SHIVELY stated he does not anticipate you would go
back. What he does anticipate, under certain circumstances, the
royalty could end up being higher at that end of the scale than it
was in the original lease. If we can take it down from one set of
economics below what is in the current lease, we can take it up if
those economics are substantially better.
Number 277
REPRESENTATIVE NAVARRE stated he would agree, except then you are
increasing the amount on a significantly reduced volume because the
high end of production would come on the front end. He then asked
how the numbers came about on page 3, line 18, 70 percent, 50
percent production, which is equivalent to the amount that goes
into the general fund. The permanent fund is held harmless
so-to-speak, but the general fund is impacted potentially 100
percent. He said his question is since the legislature is not
going to have this information except on your finding, but with the
Department of Revenue with respect to production taxes and the
application of the economic limit factor (ELF) which could reduce
the production taxes down to zero.
Number 293
COMMISSIONER SHIVELY stated as part of his best interest findings,
he has to look at what the financial impact of the state will be,
what jobs are at issue, along with other things. He stated his
guess was if you have a field which will qualify for a royalty
reduction, it qualifies under ELF. Therefore, you could end up in
a situation where there was no contribution to the general fund.
We discussed earlier whether it was necessary to have this language
in the bill, and it is not. If the legislature wanted to change
the language to state any royalty which was left was appropriately
split either 25-75 percent, or 50-50 between the general fund and
the permanent fund, that is possible.
Number 305
CHAIRMAN ROKEBERG said we have talked about the sunset clause, and
said he wanted to get the answer Commissioner Shively had told him
the other day.
Number 313
COMMISSIONER SHIVELY when we look at what we were doing, which was
making a part of the existing law operate better, the existing law
had no sunset. As we go down with the Oil and Gas Policy Council
and look at other ways to make the industry competitive
internationally, it may turn out this can be replaced with
something else in which case it would be repealed, but otherwise we
think it is just a better re-write of current law.
Number 320
CHAIRMAN ROKEBERG asked if Commissioner Shively if he or staff
would be available next Tuesday.
COMMISSIONER SHIVELY stated he would be in Fairbanks until Monday
night, and said he would be happy to make himself available.
Chairman Rokeberg thanked Commissioner Shively.
Number 339
CHAIRMAN ROKEBERG stated there were a few areas which he felt
needed to be discussed further. These are issues which will
revolve around making decisions in terms of the best interest
finding. He said he would like to know the concerns of the
Commissioner to see if the committee can be helpful in any way. He
said he is certain the committee will have language as it relates
to the volume of a particular field. He then directed the members
to page 3, line 24 which states, "if any relevant factor such, as
the price of oil and gas, changes." He stated he had problems with
the term "any relevant factor" because it was too ambiguous. He
then said he was concerned about costs. Chairman Rokeberg stated
that costs can be defined where an existing field, in one set of
circumstances, versus a new prospect and this is significant given
depreciation schedules and attitudes about evaluations of money in
time are significantly different between an old field and a new
field. He then mentioned there were some questions, from committee
members, about the reasonable rate of return, which is certainly a
major concern. Chairman Rokeberg then mentioned he would like to
discuss some of these areas on Tuesday. He also asked if the
department could present any suggestions they would like to enter
into the legislation. He stated they may even enter a definition
of reasonable rate of return.
Number 390
COMMISSIONER SHIVELY stated the whole concept of reasonable rate of
return, the reason we took it out, is we feel it was not something
you can really determine. For example, a reasonable rate of return
for Representative Ogan may be unreasonable to himself. He stated
the different industries not only view it differently, but one
company may view it differently than another company, and in terms
of marginal fields, by definition we will have a lower rate of
return on the marginal field than you would on a greater field.
Oil companies have made those decisions to proceed when the
economics looked very close. Sometimes this has helped them and
they turn out better than planned, and sometimes they don't.
COMMISSIONER SHIVELY then stated this is a very difficult concept
to get at. The whole idea of what they get out of this deal is
something he looks at in terms of whether or not the reduction is
justified. He then said they are willing to discuss this.
Number 410
CHAIRMAN ROKEBERG said this certainly would come into play when
every decision would be made by the commissioner.
COMMISSIONER SHIVELY responded by stating, "Amount of money they
will make under what conditions?"
CHAIRMAN ROKEBERG mentioned some of his concern about the prior
criteria used by the state is rather disturbing. This is why the
legislature should perhaps help make some policy in this regard.
Number 420
REPRESENTATIVE FINKELSTEIN stated his goal was not to get an exact
number figure, or definition of reasonable return. He said his
goal was to make sure we look at the bigger picture. Companies are
differently situated, and what may be enough incentive for one
company, may not be enough for another because some have bigger
shares of the pie. He then said his goal is to make sure the
broadest set of factors get considered.
Number 426
COMMISSIONER SHIVELY stated this is where the real difficulty lies,
their economic interests versus our economic interests. When you
are making this, you have to try and define a very difficult line.
You know that sometimes the views of the state and the oil company
will be very different. When we start, they are going to give
their best case for the lowest possible royalty.
Number 436
CHAIRMAN ROKEBERG said one of his concerns is if you were to have
somebody in your chair, in the future, who might have a more
hostile attitude towards the industry, these variables are all
going to change. He said he thinks that has been demonstrated in
the past, and that is a concern he has.
Number 442
COMMISSIONER SHIVELY said the problem is no matter what you put in,
in that regard, if a future commissioner who's less reasonable than
he is were to say he found against a reduction because he felt
something wasn't a reasonable rate of return, then that is the end
of the deal. So putting this into the bill doesn't force the
equation unless you want to have another appeal process above the
commissioner.
Number 450
REPRESENTATIVE FINKELSTEIN stated he wanted to pursue the issue of
appealability. He stated he understood the arguments being
presented, but he also said anyone in the Administration would love
to have their decisions not subject to appeal. What makes this
different is some of these things are easy to factually determine.
On the other side of this, the costs are not easy to determine. We
are spending tens of millions of dollars arguing with the companies
over allowable costs. If this was an easy question, we wouldn't
have these tariff disputes. He said he is not yet convinced there
is anything inherent in this particular decision making which would
argue we should treat this differently.
Number 465
CHAIRMAN ROKEBERG asked if there were any more questions for
Commissioner Shively.
Number 470
REPRESENTATIVE WILLIAMS stated he needs to think about the economic
life being prolonged with increasing costs in the later stages of
production. He said he wants to understand this area better.
COMMISSIONER SHIVELY offered to have one of his staff members come
to speak with him.
Number 476
CHAIRMAN ROKEBERG said he had some concerns about the differentials
between existing older fields and newer fields. For example, even
stipulating some kind of return criteria which would be different.
He said a lower return for an older field is obviously more
suitable.
Number 481
COMMISSIONER SHIVELY said under the old language, if for instance,
in the year 2022, if ARCO and BP were to come to them and say it is
time to shut this field down, however, if you give us a reduction
we could keep it going for two years. If we took in the rate of
return for the total field, which is what the current language
states, the answer would be no, however, we might keep the field
open to provide jobs or even a small revenue stream.
Number 494
REPRESENTATIVE WILLIAMS stated he agreed with the Commissioner
Shivley's statement. He said he had a problem with watching the
bells and whistles go off. You are going to be making these
decisions, what can company "A" do to get to where they would like
to be. He then asked how is the state watching the early stages of
a field in relation to how the later stages are being watched.
Representative Williams said there are ways, you can say company
"A" should have been using this type of pumping technique.
Number 505
COMMISSIONER SHIVELY stated as he understands it, the rate of
production is the responsibility of the Alaska Oil and Gas
Conservation Commission and not the commissioner. He then stated
the AOGCC does, in fact, make those decisions as an independent
within the Department of Administration.
Number 511
CHAIRMAN ROKEBERG then told Commissioner Shively about some of the
questions the committee plans to ask on Tuesday. He asked the
Commissioner if he had any comments.
Number 513
COMMISSIONER SHIVELY said he thinks if the legislature wants a
review process, the AOGCC would be his last choice because they are
interested in the field development, itself, and not the economics
of the field. So, if you were at an existing body within state
government, which was outside having other commissioners look at
it, the royalty board would be a more appropriate institution to
use.
Number 517
CHAIRMAN ROKEBERG asked if the Royalty Board was used to observing
confidential information.
COMMISSIONER SHIVELY said not generally.
CHAIRMAN ROKEBERG asked if they serve at the will of the Governor,
or if they have to be dismissed for cause.
COMMISSIONER SHIVELY stated he thought the Royalty Board did not
serve at the will of the Governor.
CHAIRMAN ROKEBERG asked Commissioner Shively why he did not like
the AOGCC. Commissioner Shively stated because the AOGCC does not
generally deal with a royalty issue.
CHAIRMAN ROKEBERG thanked the Commissioner and his staff.
ADJOURNMENT
Number 525
CHAIRMAN ROKEBERG declared the committee adjourned at 2:41 p.m.
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