Legislature(1995 - 1996)

03/09/1995 01:18 PM O&G

Audio Topic
* first hearing in first committee of referral
+ 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                  
           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                                                               
 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                     
 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            
 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                    
 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                   
 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              
 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             
 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               
 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             
 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                   
 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              
 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.                     
 Number 525                                                                    
 CHAIRMAN ROKEBERG declared the committee adjourned at 2:41 p.m.               

Document Name Date/Time Subjects