Legislature(1997 - 1998)
02/26/1998 10:04 AM House O&G
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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
February 26, 1998
10:04 a.m.
MEMBERS PRESENT
Representative Mark Hodgins, Chairman
Representative Scott Ogan
Representative Norman Rokeberg
Representative Joe Ryan
Representative Con Bunde
Representative Tom Brice
Representative J. Allen Kemplen
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Representative Ramona Barnes
COMMITTEE CALENDAR
* HOUSE BILL NO. 380
"An Act relating to a temporary reduction of royalty on oil and gas
produced for sale from fields within the Cook Inlet sedimentary
basin where production is commenced in fields that have been
discovered and undeveloped or that have been shut in."
- HEARD AND HELD
HOUSE BILL NO. 393
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 380
SHORT TITLE: REDUCE ROYALTY ON COOK INLET OIL & GAS
SPONSOR(S): REPRESENTATIVES(S) HODGINS
Jrn-Date Jrn-Page Action
02/04/98 2218 (H) READ THE FIRST TIME - REFERRAL(S)
02/04/98 2218 (H) OIL & GAS, FINANCE
02/26/98 (H) O&G AT 10:00 AM CAPITOL 124
BILL: HB 393
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S)
02/11/98 2281 (H) OIL & GAS, FINANCE
02/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV)
02/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER
02/19/98 (H) O&G AT 11:00 AM CAPITOL 124
02/19/98 (H) MINUTE(O&G)
02/24/98 (H) O&G AT 10:00 AM CAPITOL 124
02/24/98 (H) MINUTE(O&G)
02/26/98 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
PAT CARTER, Legislative Assistant
Alaska State Legislature
Capitol Building, Room 110
Juneau, Alaska 99801
Telephone: (907) 465-2283
POSITION STATEMENT: Presented sponsor statement on HB 380.
JOHN MIESSE, Representative
Marathon Oil Company
P.O. 196168
Anchorage, Alaska 99519
Telephone: (907) 564-6374
POSITION STATEMENT: Testified in support of HB 380.
KATHRYN THOMAS, Owner
Construction Service Company
P.O. Box 3005
Kenai, Alaska 99611
Telephone: (907) 776-5515
POSITION STATEMENT: Testified in support of HB 380.
BILL HUTTO, Operations Manager
Gas-Pro Alaska
P.O. BOX 3005
Soldotna, Alaska 99669
Telephone: (907) 262-4291
POSITION STATEMENT: Testified in support of HB 380.
KEVIN TABLER, Manager of Land
Government Affairs
Union Oil Company of California
P.O. Box 196247
Anchorage, Alaska 99519
Telephone: (907) 263-7600
POSITION STATEMENT: Testified in support of HB 380.
GARY CARLSON, Vice President
Forcenergy Incorporated
310 K Street, Suite 700
Anchorage Alaska 99501
Telephone: (907) 258-8600
POSITION STATEMENT: Testified in support of HB 380.
KEN BOYD, Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503
Telephone: (907) 269-8800
POSITION STATEMENT: Testified on HB 380.
REPRESENTATIVE TERRY MARTIN
Alaska State Legislature
Capitol Building, Room 502
Juneau, Alaska 99801
Telephone: (907) 465-3783
POSITION STATEMENT: Testified on HB 380.
PAM LABOLLE, President
Alaska State Chamber of Commerce
217 2nd Street, Suite 201
Juneau, Alaska 99801
Telephone: (907) 586-2323
POSITION STATEMENT: Testified in support of HB 380.
ACTION NARRATIVE
TAPE 98-14, SIDE A
Number 0001
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and
Gas meeting to order at 10:04 a.m. Members present at the call to
order were Representatives Hodgins, Ryan, Bunde, Brice and Kemplen.
Representatives Rokeberg, Ogan and Brice arrived at 10:08, 10:12
and 10:23 p.m., respectively.
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS
Number 0068
REPRESENTATIVE HODGINS announced the committee would hear HB 380,
"An Act relating to a temporary reduction of royalty on oil and gas
produced for sale from fields within the Cook Inlet sedimentary
basin where production is commenced in fields that have been
discovered and undeveloped or that have been shut in." He asked
Pat Carter to present the bill.
Number 0098
PAT CARTER, Legislative Assistant, read the sponsor statement into
the record: The intent [of House Bill 380] is to encourage the
development of gas reserves within the Cook Inlet region. In
addition to stimulating the development of several known
undeveloped fields, most of which were developed more than 30 years
ago, House Bill 380 has the potential to leverage additional
exploration and development in the vicinity of new infrastructure,
required to develop those known fields. Any new oil and gas
production resulting from the development of these fields will in
turn reduce the average cost of producing existing reserves, and
extend the economic life of both existing and new Cook Inlet
production and transportation infrastructure.
"Lease holders with leases overlying previously discovered oil or
gas fields which have remained undeveloped from at least January 1,
1988 through December 31, 1997, would have an incentive to develop
those fields as rapidly as possible. Oil and Gas from these fields
brought into production before January 1, 2004, would pay a reduced
royalty of 5 percent, instead of the normal rate of 12.5 percent.
This royalty holiday would last for a period of 10 years from the
date from which production begins.
"In order to qualify for the royalty reduction, lease holders would
have to act almost immediately in order to bring these fields to
production by the end of the year 2003. By limiting the royalty
holiday for the qualifying fields to a 10-year-period, HB 380
provides for reasonable limit to the state's foregone royalties in
exchange for oil and gas production that may otherwise not occur.
The state's royalties from currently producing Cook Inlet oil and
gas fields will not be effected by this legislation.
"By encouraging the development of existing uneconomic oil and gas
fields, HB 380 will benefit the state and local economies through
taxation and royalties, as well as encouraging future development
of new oil and gas discoveries by lowering the costs of
infrastructure, as well as providing jobs for Alaskans. Some of
these reserves were discovered more than 30 years ago and this
legislation allows us to provide a reasonable incentive to develop
those reserves so that all of us may realize the benefit. As they
say 5 percent of something is better than 12.5 percent of nothing."
Number 0307
REPRESENTATIVE ROKEBERG asked if he happened to review the minutes
of HB 207 from the 19th legislature because it might be
illuminating.
Number 0448
JOHN MIESSE, Representative, Marathon Oil Company, testified via
teleconference from Anchorage and read the following statement into
the record; "As most of you know, Marathon has been an operator in
the Cook Inlet area for over 30 years and we appreciate your
support and interest of the oil and gas industry in the Cook Inlet
area. I'd like take a few moments to comment on HB 380, which is
intended to provided an incentive for oil and gas development in
Cook Inlet from fields that have previously been undeveloped or
shut-in.
"Marathon supports House Bill 380 and believes that in the long
term, this incentive will have a positive economic impact on the
state of Alaska and the local communities. I would like to point
out, however, that we believe this bill would have a more immediate
impact on undeveloped or shut-in fields because of the readily
available market for this product. The ultimate incentive for
adding additional reserve capacity, whether it be oil or natural
gas, is the availability of ready and stable markets. While such
a market is certainly available for new oil reserves in the Cook
Inlet area, the same cannot be said for natural gas. New markets
for uncommitted natural gas reserves are not available for the next
several years, making it difficult to economically justify near
term drilling expenditures. Although this bill will provide some
economic benefit to the industry, we do not believe by itself, will
be enough to stimulate significant activity for natural gas
development at least in the near future.
"I would like now to ask the committee to consider points of
clarification that we believe are needed in House Bill 380. It is
our understanding that the intent of this legislation is to provide
the temporary relief to fields that have been undeveloped or shut-
in. We would like clarification on the definition of undeveloped.
Specifically, we would like to know if a field that has produced
periodically over the last few years, but requires additional
drilling to fully develop the field, would be eligible for the
temporary royalty relief. Also we would like to clarify that
royalty relief would apply to either a re-entry of an existing well
or a new well needed to recover undeveloped reserves. Again, we
understand the intent of the proposed legislation is to address
these scenarios, but we would appreciate the department's review to
make sure the language is explicit.
"In closing, many of the oil and gas producing states enacted
similar incentives for oil and gas development in the early 1990's.
These states have found the programs to be beneficial to all stake
holders involved and have maintained those programs. We believe
incentive programs such as House Bill 380 will also lead to
economic gain for our communities and the state, but we recognize
that market availability is probably the overriding incentive for
our industry to look for new oil or gas reserves. Therefore, we
believe you will see a more immediate impact on the undeveloped oil
fields in the Cook Inlet area as a result of this proposed
incentive.
"Thank you for the opportunity to share these comments with you
today. I will be glad to answer any questions."
Number 0679
REPRESENTATIVE JOE RYAN referred to a presentation that showed a
reduction in amount of gas coming out of Cook Inlet and by 2004 it
was supposed to be at a level that would support the existing
customer base in the Anchorage bowl area. He asked if this was
correct.
Number 0727
MR. MIESSE replied that in the future additional reserves will be
needed to make deliverabilities in the local markets. Economically
it would be hard to justify spending millions today for a product
that cannot be sold until 2004 or beyond.
Number 0783
REPRESENTATIVE NORMAN ROKEBERG asked if Marathon considered any
application under HB 207 and if not, was it because of the nature
of their asset mix of gas verses oil.
Number 0817
MR. MIESSE replied that is correct, Marathon has sold its oil
reserves and HB 207 would probably have a more immediate effect on
oil production and it is a matter of market. He stated that their
gas is committed to long-term markets, currently.
Number 0872
CHAIRMAN HODGINS stated that HB 380 is a companion bill to a Senate
bill and there are areas in the bill that might need to be changed.
Number 0896
KATHRYN THOMAS, Owner, Construction Service Company, testified via
teleconference from Kenai that she has served on the boards of the
North Peninsula Chamber of Commerce, Alaska Trucking Association,
Alaska Industry Support Alliance and was the past chairman of the
Alaska State Chamber of Commerce. She stated that in all her time
spent on the boards, a considerable amount of time was spent in
trying to keep a viable economy and provide jobs. She stated that
the gas reserves in the Cook Inlet basin have been in decline,
resulting in the loss of many good paying jobs that the gas
industry has traditionally provided to the Kenai Peninsula economy.
She explained that the local communities have made many efforts to
replace these jobs which work in other fields of industry and
resource development but at this time jobs in the development of
oil and gas are the highest paying.
MS. THOMAS stated that on the Kenai Peninsula they have actively
sought ways to revitalize what has been perceived as an old oil
field. For many years, industry has declined to invest development
dollars in many Cook Inlet discoveries, citing the rate of return
on investment of capital dollars as a contributing factor. House
Bill 380 provides an opportunity for them to attract these dollars,
by providing the incentive for companies to make infrastructure
investments in Kenai projects.
Number 1105
MS. THOMAS stated that the question raised regarding the
eligibility of royalty relief for fields that require additional
drilling to fully develop the fields and if it would apply to re-
entry of an existing well or if a new well would be eligible at
this time, she stated that she is not prepared to comment on it.
House Bill 380 will provide some incentives for them to attract
investment dollars and provide jobs for the community.
Number 1155
BILL HUTTO, Operations Manager, Gas-Pro Alaska, testified via
teleconference from Kenai, that he has had a few years of
experience in Cook Inlet's oil and gas fields. He stated that
their project will have the potential of providing the base with
the distribution of gas to areas on the Southern-end of the Kenai
Peninsula. He stated that this is advantageous to all Kenai
Peninsula residents. He stated that HB 380 provides the
opportunity for the company to attract the development dollars
necessary to see that the gas can reach a market.
Number 1253
KEVIN TABLER, Manager of Land, Government Affairs, Union Oil
Company of California (Unocal), testified via teleconference from
Anchorage that Unocal supports HB 380 and has been an active
proponent of incentive legislation, specially as it may apply to
the Cook Inlet area. Early exploration in Cook Inlet identified
several oil and gas accumulations which were deemed uneconomic by
the then current market conditions. Development of these reserves
were impacted as much by market conditions as they were by a lack
of readily available infrastructure. Development will require
expansion and utilization of the existing infrastructure and by
taking advantage of economies of scale. He stated that the time is
right to access the existing accumulations, but in order to do so
the royalty burden needs to be reduced.
Number 1342
MR. TABLER stated that Cook Inlet's economy of scale financial
incentives to expend capital as well as simple supply and demand
economics will be the determining factors in whether or not
development of known accumulations will occur. He stated that as
the existing Cook Inlet fields are reduced, initiatives such as HB
380 will be critical if the known, but unproduced, areas are to be
accessed. He stated that Unocal supports HB 380, as it will
enhance and prolong the economic viability of resource development
in Cook Inlet.
Number 1439
REPRESENTATIVE ROKEBERG stated that Unocal was the only company to
apply for a royalty of modification under HB 207 and asked if he
could explain any problems faced with that legislation and why HB
380 would be easier to implement.
Number 1465
MR. TABLER stated that there are many uncontrollable factors that
have to be taken into account under HB 207, whereas HB 380 would
have one factor, purely royalty reduction, a controllable factor.
In House Bill 207, the recoupment language, for the new field
development was very clear but for marginal fields the bill is more
subjective and requires the negotiation and the determination that
it is in the state's best interest. He explained that the
commissioner, prior to HB 207, had the authority to adjust
royalties for economic relief on the marginal fields as they
applied to Cook Inlet. He stated that the commissioner has the
mandate to protect the state's interest which could be in direct
conflict with the analysis the company goes through in making
investment decisions. He explained that companies must provide a
full economical and technical proposal. He said, "As long as there
was a positive NPV or Net Precious Value on any of these projects
that we proposed, the state was not inclined to grant royalty
relief under HB 207." He stated that a clear, clean, easily
administered approach would have more utility, at least for the
marginally producing fields in Cook Inlet.
Number 1561
REPRESENTATIVE ROKEBERG asked if under HB 207, he could have
started at a lower rate than 5 percent and if he could justify it.
He stated that it did take in account that if the field could be
further delineated and had a greater level of profitability, there
would be a provision for a sliding scale. He stated that HB 380
does not provide for a sliding scale, in case the amount of
recoverable oil proves to greater then first thought. He asked if
Mr. Tabler was saying the requirements in HB 207 were too
burdensome, economically and he would prefer to see a simpler
calculation.
Number 1624
MR. TABLER replied that is what he is saying. The sliding scale
discussion, as he recalled, was centered around the new field
development but in order to make a clear and convincing showing as
required under HB 207 that royalty relief required that an owner
must show that the present operations or planned investments will
clearly destroy value. He explained that as a result royalty
relief is likely to be granted only to those companies which extend
considerable resources on unattractive projects and are willing to
refund all or a portion of the rewards that would be gained. He
stated that HB 207 results in the discussion of what is a
reasonable rate of return as opposed to a straight forward royalty
reduction. With HB 380 there is no question, either you get the
reduction or you do not.
Number 1692
REPRESENTATIVE ROKEBERG stated that Unocal recently announced that
they are going to look at the development of coal bed methane
fields and asked his opinion of the gas portion in the bill.
Number 1722
MR. TABLER stated that Unocal believes that there is a need for
more gas in Cook Inlet and are actively out exploring it.
Number 1777
REPRESENTATIVE ALAN KEMPLEN stated that this legislation has a time
horizon of ten years from the date that oil or gas production
commences from a particular field and the price of oil and gas has
fluctuated, sometimes at a fairly significant rate. He asked if
during periods of high prices for oil or gas, wouldn't it be
appropriate for the state to reap its normal 12.5 percent royalty
and shouldn't the proposed legislation have language to make that
adjustment during periods of high prices.
Number 1831
MR. TABLER stated that he would disagree somewhat with that
statement in that investment decisions are based on the market
conditions at that time. He stated that the decision to make the
investment was made and the drilling was done back when there was
a certain price. As incentive legislation, it would require the
incentive, in order for companies to spend the money on the
undeveloped fields.
Number 1884
CHAIRMAN HODGINS stated that it is his intention to have limits
placed on the amount of oil and gas that this royalty reduction
would affect. For example, if a larger field is found there will
be a limit and the royalty reduction will no longer occur.
Number 1933
REPRESENTATIVE CON BUNDE referred Mr. Miesse's written statement
regarding stimulating significant activity in the near future and
asked what changes would have to be made and how he would define
significant activity.
MR. MIESSE stated that he was referring to the natural gas
development, the bill provides a good incentive for oil because of
it is readily available for sale. He stated that because the gas
is committed for the next several years they do not need to find
new gas, therefore, a lot of money would be spent at present, but
the return on the investment would not occur for several years.
Number 1989
REPRESENTATIVE ROKEBERG stated that the Nikolai Creek field is
owned 50 percent by Unocal and 50 percent by Marathon. He asked if
HB 380 were in effect would he be more apt to list the gas from
that creek then otherwise, and wouldn't that replace the 12.5
percent royalty gas.
Number 2016
MR. MIESSE replied that Unocal has different needs then Marathon,
but would still have the problem of selling the new gas reserves.
He stated that because the royalties would be less, there would be
an incentive to try and work with Unocal to do something with the
creek.
Number 2044
REPRESENTATIVE KEMPLEN stated that Enstar said that they were
concerned with the supply of natural gas. He referred to Mr.
Miesse's statement of new markets for uncommitted natural gas
reserves are not available for the next several years. He asked
when would it be appropriate for his industry to begin drilling for
natural gas reserves in order to meet the projected demand by
Enstar.
Number 2075
MR. MIESSE replied that at the end of the time-frame stated in the
bill. He stated that they would more apt to spend money on gas in
the 2002 to 2003 time-frame. He agreed that Enstar has uncommitted
gas needs beyond the time-frame but he believed that new
discoveries would fill those needs in the future.
Number 2111
REPRESENTATIVE KEMPLEN asked if they just needed a year's lead time
in order to do the drilling and meet Enstar's demand.
MR. MIESSE replied that it depends on where the drilling is located
and how close it is to the infrastructure. If the hook-up is
close, then a year to two is sufficient.
Number 2138
GARY CARLSON, Vice President Forcenergy Incorporated, stated that
Forcenergy is an independent oil and gas company and started
investing money in Alaska about 15 months ago. He stated that they
have 22 employees, 18 of them Alaskan residents. He pointed out
that Forcenergy was very successful in the Gulf of Mexico by taking
a strong technical approach to pick up marginal fields that were
out of the focus of major oil companies. Cook Inlet is in that
category. He stated that in the fifteen months that they have been
here they have committed $180 million to the state through
acquisitions, seismic projects and drilling. He stated that
Forcenergy is in support of HB 380 as it provides the types of
incentives that are needed to develop marginal fields. He stated
that similar incentives have worked elsewhere as with the coal bed
methane.
CHAIRMAN HODGINS stated that he is appreciative of their commitment
to local hire and to Cook Inlet.
Number 2276
REPRESENTATIVE ROKEBERG stated that he is pleased with Forcenergy's
commitment to Alaska. He asked how much of their strategic
planning in the Gulf of Mexico was influenced by federal royalty
relief and other state royalty relief in that area.
Number 2311
MR. CARLSON replied that he has only been with Forcenergy for about
a year but his observation of their success is by strictly looking
for a technical approach to increase recovery of fields that had
been developed by others or to take over fields that had lost
investments. It had more to do with the geologic opportunities
rather that any federal incentives.
Number 2333
REPRESENTATIVE ROKEBERG asked how much of a difference would this
royalty reduction make to Forcenergy's desire to lift the gas in
the West Foreland's field.
Number 2376
MR. CARLSON stated that their general philosophy is to look for the
opportunities, evaluate them and either invest in them or walk away
from them. He stated that the incentives could either encourage
them to drill a well, that otherwise they would not have drilled or
after a well was drilled, the incentive would affect whether to
proceed and put it into production.
Number 2417
REPRESENTATIVE ROKEBERG stated that there is the desire to have
some sort of cap that relates to the quantity of recoverable
reserves in a particular field and asked Mr. Carlson if that is an
option.
Number 2443
MR. CARLSON referred to the Redoubt Shoal Field.
TAPE 98-14, SIDE B
Number 0007
MR. CARLSON stated that if the field showed 20 million barrels, the
relief would not matter. But a range of 40 to 55 million dollars
and a cap in that range would still provide the incentive to
proceed and yet there would be some assurance that if it was a
large field the state would recover some of the lost opportunities.
Number 0031
REPRESENTATIVE ROKEBERG asked it he could provide some examples of
fields that might fit into this category.
Number 0095
MR. CARLSON stated he would do that. He encouraged the committee
to look at a simple cap rather then to try to estimate a cap for
each field as every one is different.
Number 0146
REPRESENTATIVE RYAN stated that he has heard testimony that the
market is uncertain yet the Oil and Gas Journal stated that the
liquefied natural gas (LNG) landings have doubled. He stated that
the people don't invest money in tankers if they aren't fairly sure
that the market is going to be there. He stated that he would like
to clear up the uncertainty of a gas market not being there.
Number 0196
MR. CARLSON stated that from the LNG standpoint, the reason for
substantial investments was a result of the market place driving
the investment, Japan, Korea and Taiwan were signing upwards of 30
year contracts at attractive prices. He stated that it is easier
to plan on a global scale.
Number 0261
REPRESENTATIVE RYAN asked if Marathon only ships just gas or do
they ship LNG as well.
MR. CARLSON responded that Marathon is selling LNG.
Number 0306
REPRESENTATIVE BUNDE stated that earlier testimony stated that HB
380 would not impact gas production but it would impact oil
production. He stated that Forcenergy has both oil and gas
interests and asked if he visualized using this bill as expanding
both their oil and gas production.
Number 0334
MR. CARLSON replied that Forcenergy will look at both oil and gas,
as they do not have the infrastructure and fixed market that
Marathon Oil Company has. He stated that they hope they would be
able to negotiate contracts and market gas. He stated that he
hoped the incentive would help clarify the gas situation in Cook
Inlet.
Number 0383
REPRESENTATIVE BUNDE asked if it was correct to assume that gas
production is front-end loaded, in that more is recovered in the
first ten years than in the second ten years. He asked what life
expectancy would he plan for in the Cook Inlet oil fields.
Number 0407
MR. CARLSON stated that in regards to an oil field they are at the
latter stage of development in Cook Inlet, as it has been ongoing
for 30 years. He stated that a new development would not be
planned that would take 30 years, investments would be made to try
and compact that time-frame. He stated that gas would depend on
the contracts and it is possible to end up with a flatter decline
for gas if there was a sufficient amount of gas and market place,
investments would be made accordingly. Probably more wells at
first to get it started and then drill wells for deliverability
later on. He stated that oil field investments would come very
early.
Number 0457
REPRESENTATIVE KEMPLEN stated that there has been talk about the
concept of a circuit breaker and asked if that concept could be
extended to price. He stated that there is a lot of uncertainty in
the energy market and in the Middle East in the ten year time
horizon, various acts could occur that would disrupt the flow of
energy. He asked if it would be appropriate to have a similar
circuit breaker for price as there has been for volume.
Number 0499
MR. CARLSON replied that an administration of a price cap would be
very difficult. He stated that price strategy would be built in
deciding to spend extra millions to bring a field to the market
place. It would be difficult to administer a price cap easily and
simply.
Number 0559
KEN BOYD, Director, Division of Oil and Gas, Department of Natural
Resources, referred to a letter that the division sent to the
Senate regarding the Senate companion to HB 380. He stated that
the division does not have a position on the bill. He stated he
would outline the division's questions on HB 380 for the committee:
The bill has no provision to account for changing economic
conditions. If the price of oil were to increase, the relief would
remain the same. How does the bill protect the states upside
interest. There is no economic analysis that leads to the terms of
the royalty reduction described in the bill. Why is it at 5
percent for 10 years. Are the economic requirements of all
companies so similar that the same level of relief is needed for
each of them, and the same question would pertain to the fields
themselves. He asked why not use HB 207 for royalty relief as it
is the law. Which fields would qualify for the royalty reduction.
He stated that those are the questions he has on the bill and he
would try to answer any of the questions that the committee has.
Number 0696
REPRESENTATIVE ROKEBERG asked on the issue of the expansion ability
of a particular field that may have been granted a royalty
reduction, how could further proven reserves work as practical
matter and could that be simplified in the bill.
Number 0740
MR. BOYD stated that it is worth discussing and he would work on
that as he could not address that on the spot.
Number 0761
REPRESENTATIVE ROKEBERG asked if he thought a pricing sliding scale
would be difficult.
MR. BOYD replied that sliding scales have been used in some of
their leases as there as been sliding scale royalties that vary
with price over time.
REPRESENTATIVE ROKEBERG asked if price was the major element.
MR. BOYD replied that is correct.
Number 0826
REPRESENTATIVE KEMPLEN asked if there is a simple way to administer
a circuit breaker on price.
Number 0853
MR. BOYD replied that he would hesitate to recommend a methodology,
he stated that there are probably ways to tie price to relief. It
would truly be sliding scale that would slide from a low-side to an
up-side and capped at each end.
Number 0896
REPRESENTATIVE ROKEBERG stated that the bill is limited to the Cook
Inlet sedimentary basin and asked if it is geologically difficult
to define.
Number 0903
MR. BOYD stated that one suggestion would be to use the definition
from exploration licensing. He questioned if this bill would apply
to a coal bed methane unit in Wasilla.
Number 0973
REPRESENTATIVE ROKEBERG asked if the administration would rather
see a fix to HB 207 rather than this HB 380.
Number 0992
MR. BOYD replied that he believed that the administration would be
willing to fix HB 207.
Number 1047
CHAIRMAN HODGINS stated that HB 380 would be held over to a future
meeting.
HB 393 - DEVELOP STRANDED GAS RESOURCES
Number 1069
CHAIRMAN HODGINS announced the committee would hear HB 393
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date." He
stated that he asked his colleagues to present their concerns and
suggestions regarding the bill.
Number 1080
REPRESENTATIVE TERRY MARTIN, stated that he has concerns about this
issue. He referred to the history of the issue of financing a gas
pipeline. He stated that he had voted against the bill that had
initiated this because the legislature was giving too much up to
the executive branch. He referred to Title 9 of the constitution
that stated the power of taxation should never be surrendered. He
stated that legislators should not force the economy one way or
another. He stated that the free market should be allowed to work
and the legislature should not be in the way.
Number 1282
REPRESENTATIVE MARTIN stated that as legislators they should look
at what is being done with the gas. He stated that recycling of
gas is producing more oil resulting in an estimated 2 billion
barrels of excess oil received. He stated that if the pipeline is
forced the oil will decrease because once gas is taken out the oil
reserves will be depleted. He asked how much this will cost the
state of Alaska in oil royalties.
Number 1401
REPRESENTATIVE MARTIN stated that the incentive programs should
make the participants, "run like mad". He referred to Section 2,
"The legislature further intends, however, that any fiscal terms
agreed to in a contract under this Act in lieu of other taxes will
fully and fairly compensate the people of the state of Alaska for
the severance, production, and sale of natural resources belonging
to the people" and "The value of the infrastructure that may be
provided by the state to a project, including all the advantages of
civilized society that may be provided by the state to the sponsors
of a project." He stated that clause should cause any investor to
not participate in the project. He stated that at the most
investors would receive 3 percent of what they invested even with
the incentive.
Number 1581
REPRESENTATIVE MARTIN stated that a market should be established
first and the market should invest in the pipeline if China had
equity in the pipeline it could be assured that they would uphold
their contract. He stated that almost immediately the pipeline
would be able to put 15 million metric tons on the market which
will result in a drop in prices. He stated that we are willing to
give away gas to get more jobs.
Number 1618
REPRESENTATIVE MARTIN referred to the Alaska hire issue and feared
that there would be a influx of people coming to Alaska to live off
our welfare system and fill the residency requirement in order to
work on the pipeline. He stated that Alaska does not have 5,000
top quality welders needed for the pipeline. He stated that
Alaskan hire is misleading. He asked that the reasons motivating
the project be looked at.
Number 1946
REPRESENTATIVE RAMONA BARNES stated that she was just here to
listen in on the committee process and did not intend to comment.
She then stated that a big concern that she has with the bill is
that it is called stranded gas legislation instead of the gas
pipeline legislation. She stated that gas-to-liquids subject
should not be in this bill as it is a different tax regime. She
stated that a taxing regime for using the pipeline that exists is
different from building a new one. She asserted that the socio-
economic aspect of the bill should be deleted and the section
dealing with local government needs a lot of work. She stated that
there is a section in the bill dealing with the commissioners
laying their plans before the Budget and Audit committee, she
objected to that and stated that any plan needs to come before the
entire legislature.
Number 2157
PAM LABOLLE, President, Alaska State Chamber of Commerce, stated
that she did not have the expertise to speak to any of the details
of the bill. She stated that her testimony is in support of the
concept of bringing the stranded natural gas into production and
specifically their resolution on the subject urges the legislature
and the administration to continue to take those steps to provide
a stable appropriate fiscal and regulatory environment which will
give the project the best opportunity to become commercially viable
thus enabling the earliest possible development of the resource.
Number 2266
REPRESENTATIVE RYAN stated that the committee has asked a lot of
questions to which the answers were not forthcoming because there
has not been any conceptual engineering done, no one knows what the
market is and who the investors may be et cetera. He stated that
these basic fundamental questions need to be answered. He
reiterated his concerns on the bill and stated that he needs to
know that we would be operating on a more secure basis.
TAPE 98-15, SIDE A
Number 0013
CHAIRMAN HODGINS stated that the committee is trying to get answers
to those questions.
Number 0038
REPRESENTATIVE BARNES stated that the van Meurs' study went into
great detail as to what is needed to be done to make the project
economically feasible and it is known that there is at least 15
trillion cubic feet of gas at Prudhoe Bay and 6 to 11 estimated
trillion feet of gas at Point Thompson. She asserted that it is
known that 15 million metric tons a year would be needed to be put
into the system to make the gas line economically feasible. It is
necessary in order get the gas into the market place, Alaska has to
be in the market place by 2005. She stated that some of the
purchasers are interested in holding an equity position in the
pipeline such as China Petroleum and would purchase 25 percent of
the gas that Alaska would put into the market place. She stated
that Alaska is competing with the world market and the several gas
projects that are scheduled to come on line. If they get into the
market before Alaska does, our gas "will sit up there in what they
call a stranded gas hold for eternity I suspect."
Number 0290
REPRESENTATIVE KEMPLEN stated that this proposed legislation is
establishing a framework by which the Administration and the
private sector can move forward with this complex project. He
pointed out that the legislation lays out the process for how the
project is to be done and identifies the key issues that needs to
be addressed by the sponsor group. He stated that it gives
permission for the Administration to negotiate with a qualified
sponsor group. He stated that it will take a few years before
there is a contract presented to the legislature. He stated that
it is important to move forward with this bill and to make sure the
project does happen.
Number 0456
REPRESENTATIVE ROKEBERG advised everyone to read the memorandum by
the Honorable Kay Brown. He stated that area of interest is if
there are going to be any equity issues as it relates to the
affected municipalities of the state, a decision on what is to be
done on this needs to be made. He stated that the financing
mechanisms need to be looked at, as it is key to this project. He
suggested that the bill may need to be sent to a subcommittee
because there will not be any progress until the committee starts
making its changes.
Number 0622
CHAIRMAN HODGINS stated that he agreed and would consider a
subcommittee.
Number 0678
REPRESENTATIVE BARNES referred to Representative Martin's statement
raising the issue of gas re-injection to raise oil. She stated
that should not be an issue because if Point Thompson was developed
first, we would not need any of the gas in Prudhoe Bay but beyond
that, there is a tremendous amount of excess gas that is being put
back into the holds. She addressed the question of equity interest
and if taxes are deferred in the up-front portion of the gas line
to recoup at the back-end, that is an equity interest. She stated
that would be Alaska's contribution to making the project
financially feasible.
Number 0783
CHAIRMAN HODGINS stated that he would talk with Representative
Martin to inform him on past meetings. He stated that it is a big
project for Alaska and a lot of work regarding the enabling
legislation will be done in this committee.
ADJOURNMENT
Number 0821
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 11:55 p.m.
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