Legislature(1995 - 1996)

03/14/1995 10:06 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                            
                         March 14, 1995                                        
                           10:06 a.m.                                          
                                                                               
                                                                               
 MEMBERS PRESENT                                                               
                                                                               
 Representative Norman Rokeberg, Chairman                                      
 Representative Scott Ogan, Vice-Chair                                         
 Representative Gary Davis                                                     
 Representative Bill Williams                                                  
 Representative Tom Brice                                                      
 Representative Bettye Davis                                                   
 Representative David Finkelstein                                              
                                                                               
 MEMBERS ABSENT                                                                
                                                                               
 All members present                                                           
                                                                               
 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                                                       
 HO&G - 03/14/95                                                               
 HB 209:  "An Act relating to the authority of the commissioner of             
          natural resources to allow reductions of royalty on oil              
          and gas leases; and providing for an effective date."                
                                                                               
          SCHEDULED BUT NOT HEARD                                              
 WITNESS REGISTER                                                              
                                                                               
 JOHN SHIVELY, Commissioner                                                    
 Department of Natural Resources                                               
 400 Willoughby Avenue                                                         
 Juneau, AK 99801                                                              
 Telephone: (907) 465-2400                                                     
 POSITION STATEMENT:  Discussed HB 207                                         
                                                                               
 KEN BOYD, Deputy Director                                                     
 Division of Oil and Gas                                                       
 Department of Natural Resources                                               
 3601 C Street, Suite 1380                                                     
 Anchorage, AK 99503-5948                                                      
 POSITION STATEMENT:  Discussed HB 207                                         
                                                                               
 DAVID JOHNSTON, Chairman                                                      
 Alaska Oil and Gas Conservation Commission                                    
 3001 Porcupine Drive                                                          
 Anchorage, AK  99501                                                          
 POSITION STATEMENT:  Discussed HB 207                                         
                                                                               
 PREVIOUS ACTION                                                               
                                                                               
 BILL:  HB 207                                                               
 SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES                             
 SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                  
                                                                               
 JRN-DATE     JRN-PG                  ACTION                                   
 02/27/95       501    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 02/27/95       501    (H)   OIL & GAS, RESOURCES, FINANCE                     
 02/27/95       501    (H)   FISCAL NOTE (DNR)                                 
 02/27/95       501    (H)   2 ZERO FISCAL NOTES (DNR, REV)                    
 02/27/95       501    (H)   GOVERNOR'S TRANSMITTAL LETTER                     
 03/08/95       665    (H)   CORRECTED FISCAL NOTE (DNR) #3                    
 03/09/95              (H)   O&G AT 12:00 PM CAPITOL 17                        
 03/09/95              (H)   MINUTE(O&G)                                       
 03/14/95              (H)   O&G AT 10:00 AM CAPITOL 124                       
                                                                               
 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                        
 03/09/95              (H)   MINUTE(O&G)                                       
 03/14/95              (H)   O&G AT 10:00 AM CAPITOL 124                       
                                                                               
 TAPE 95-9, SIDE A                                                             
 Number 000                                                                    
 HO&G - 03/14/95                                                               
 HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES                               
                                                                               
 CHAIRMAN NORMAN ROKEBERG:  called the House Special Committee on              
 Oil and Gas to order at 10:06 a.m.  For the record, committee                 
 members present are, Representative Tom Brice, Representative Gary            
 Davis, Representative Bettye Davis, and the Chairman, myself, a               
 quorum is present.  On today's calendar is a continuation our                 
 meeting from last week, last Thursday that is, March 9, 1995, on HB
 207, the royalty reductions for oil and new fields.  If I could ask           
 Commissioner Shively to come forward -- and perhaps Mr. Boyd also,            
 if you want to, if that's convenient -- why don't you pull a chair            
 up there, sorry about that.  If you would be so kind, gentlemen, as           
 to clearly state your full names, affiliations, and titles for the            
 records please.  Good morning to you.                                         
                                                                               
 Number 030                                                                    
                                                                               
 JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES:  Good            
 morning Mr. Chairman my name is John Shively.  I'm Commissioner of            
 the Department of Natural Resources.                                          
                                                                               
 Number 031                                                                    
                                                                               
 KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF             
 NATURAL RESOURCES:  Good morning Mr. Chairman, and I'm the Acting             
 Director for the Division of Oil and Gas.                                     
                                                                               
 Number 032                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Commissioner, is there any particular things              
 you would like to start out with this morning that would help                 
 clarify any of the testimony of last week, or anything that has               
 come up in the interim that you would like to make an opening                 
 statement?                                                                    
                                                                               
 Number 038                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Yes, Mr. Chairman, if I might.  We had a               
 fairly lengthy discussion last time of whether or not we could deal           
 with a pool of oil that was at a different level or horizon in --             
 that was over -- a field that was currently producing, and I think            
 I led the committee to believe that we felt that this legislation             
 would allow us -- in fact, I know I led the committee to believe              
 that we felt that the legislation would allow us to do that.  We              
 have gone back and looked at that and have decided that we really             
 can't do that.  That was just some of my own lack of familiarity              
 with how oil fields are structured.  We, if it is the committee's             
 desire to want to deal with separate pools under leases that are              
 part of a producing field, we can provide language to the committee           
 that would allow the legislation to cover that, and we don't have             
 a strong feeling either way, but certainly if the committee wanted            
 it covered, or if you think that the testimony supports having                
 those pools of oil covered we will provide you language to do so.             
                                                                               
 Number 070                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Commissioner I, in my discussions with various            
 members of the industry, I believe that would be the case, so I               
 would ask that you provide us with some language and also for your            
 information I have had some discussions, I believe with British               
 Petroleum about defining a field (indisc. -- coughing) would that             
 be part of the....                                                            
                                                                               
 Number 079                                                                    
                                                                               
 COMMISSIONER SHIVELY:  This is, part of, yeah, it's part of how you           
 define a field and it has to do with us stating in the legislation            
 that one of the triggering events would be a delineated field...              
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 COMMISSIONER SHIVELY:  ...and that probably does not allow us to              
 deal with a separate pool of oil that's in a field that's produced.           
                                                                               
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 COMMISSIONER SHIVELY:  We have -- I can-- a suggested language.               
 I can either have Mr. Boyd tell you what it is or we can provide it           
 to your staff later, whatever your (indisc. -- paper shuffling)               
 are.                                                                          
                                                                               
 Number 090                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  If you wouldn't mind going ahead because I want           
 to make sure everybody on the committee understands the concept of            
 field. I think it's, from my position an example would be like                
 Kaparuk as a unit, and when you have the Westsak(ph) formation has            
 a different horizon and field even though it's in one unit then, I            
 want to make sure everybody understands that concept.  Mr. Boyd did           
 you....                                                                       
                                                                               
 Number 099                                                                    
                                                                               
 MR. BOYD:  Yes, Mr. Chairman, just to clarify, even at a lease                
 level that we're talking about, -- same field as Commissioner                 
 Shively has said -- if you could imagine the lease, let's say it is           
 a three by three mile lease, just extending to the center of the              
 earth and everything that is contained in that lease then is                  
 considered to be a field and the way the bill is written, as                  
 Commissioner Shively has said, doesn't allow us to separate                   
 individual pools.  In other words, if something were under                    
 production it would not allow us to give a royalty relief for                 
 something that was not under production.  So the suggested change             
 that I believe would cure that is on Page two of the bill. I'll               
 begin with line 28.  I want to be sure we are all on the same sheet           
 music here, we're amending 3.05.180J.  It's a new J begins on line            
 28 beginning with underlined bold text.  "To allow for production             
 from a delineated but not previously produced field," add the words           
 pool or portion of a field or pool "that would not otherwise be               
 economically feasible to prolong the economic life of an oil and              
 gas field," and then insert that same language after the word                 
 field.  So the words pool, or portion of a field or pool then would           
 appear after the word field on lines 29 and 30 following the word             
 field.                                                                        
                                                                               
 Number 130                                                                    
 CHAIRMAN ROKEBERG:  Do you have that in writing for us?                       
                                                                               
 Number 131                                                                    
                                                                               
 MR. BOYD:  I have it in poor writing.                                         
                                                                               
 Number 132                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay, no problem.  It will be reflected in the            
 record, so we'll have that when we start drafting our committee               
 substitute.  As I mentioned, some members of the industry are going           
 to make some recommendations on this line too obviously, and we can           
 synthesize that particular language.  Is there any questions of the           
 committee on this particular area here?  Excellent, moving on...              
                                                                               
 Number 145                                                                    
                                                                               
 COMMISSIONER SHIVELY:  In terms of my issues, that's it.  We'd be             
 glad to answer any further questions.                                         
                                                                               
 Number 146                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Mr. Boyd, is there anything -- as you return to           
 the process -- is there anything you'd like to say about this                 
 particular bill?                                                              
                                                                               
 Number 148                                                                    
                                                                               
 MR. BOYD:  No Mr. Chairman, but again, we're prepared to answer any           
 specific questions the committee might have.                                  
                                                                               
 Number 152                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay, yeah.  One thing that has come to light,            
 and given the further studies, if the committee members would drop            
 over to page three of the bill then we can, shall adopt regulations           
 to (indisc.--paper shuffling) and also today there has been handed            
 out to the committee members a copy of the Alaska Administrative              
 Code, Section 11 AAC 83.185 Royalty Reduction.  And, just prior to            
 the meeting I gave the commissioner and the director copies of this           
 and I asked them about this.  One of my concerns right now is the             
 legal effect of the deletion in the bill as proposed and the                  
 existing regulations, and also the fact that the bill calls for a             
 (indisc.) part of industry of confidentiality in their application.           
 And the regulations as I read them are really pretty fundamental in           
 terms of just pointing out what information is required to be in              
 the application, and also the public hearing process.  So I guess             
 my first question, which is kind of a legal question, is what is              
 the effect of the deletion?  Does that have any effect on the                 
 existing regulations, and the interplay between the two bills?  And           
 secondly, to follow up on that is the provisions for public notice            
 in here because of confidentiality seem to be, they would seem to             
 be needed to be deleted.                                                      
                                                                               
 Number 189                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Let me respond to that.  Deleting the                  
 requirement for regulations does not prohibit the department from             
 having regulations so I don't see a conflict there.  In terms of              
 the public notice for public meetings, I haven't really actually              
 had much time to think about this. I would say if the information             
 is confidential, the information would not be made available at a             
 public hearing.  The confidential information is covered by the               
 requirements of state law and so if we had a public hearing we                
 would have it only on those aspects of the application that the               
 applicant agreed to have public.  And the parts of my decision --             
 there will be parts of my decision, clearly, that are public, the             
 best interest findings and things like that.  But, so, I don't know           
 that this is unworkable the way it's presently structured in                  
 regulation.                                                                   
                                                                               
 Number 205                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well could we get some feedback from you...               
                                                                               
 COMMISSIONER SHIVELY:  We will get a legal opinion for you.                   
                                                                               
 COMMISSIONER ROKEBERG:  ...how this all works.  As well as, it                
 might be, in addition under that section, and variously under                 
 existing regulations, I take due note that there is a sliding scale           
 royalty at point 183.  A definition there that may prove                      
 troublesome, or may be okay.  You need to take a look at that to              
 see how that may effect anything in the future.  (indisc.) the                
 provisions for confidentiality throughout the regulations and                 
 various other things. I think what you need to do is review the               
 regs. and see how they mesh with the bill.  Mr. Boyd.                         
                                                                               
 Number 220                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, 11 AAC 83.183, the sliding scale royalty             
 has been on the books for a long time.  It is actually a method of            
 bidding.  It is something that is available now, it has been                  
 available for some time but it has been, if it has been used it has           
 been very little used and I, it would be an up front sort of thing            
 in the bidding process, it's brought in later, and it's a                     
 contractual obligation of the lease.                                          
                                                                               
 Number 228                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Rather than have the committee wade through the           
 regs, why don't you guys do it and tell us what we need to do about           
 it.                                                                           
                                                                               
 MR. BOYD:  Okay.                                                              
 CHAIRMAN ROKEBERG:  Representative Ogan.                                      
                                                                               
 Number 230                                                                    
                                                                               
 REPRESENTATIVE SCOTT OGAN:  Thank you, Mr. Chairman.  This method             
 of bidding, there's four of them is that correct?                             
                                                                               
 MR. BOYD:  I believe there's six.                                             
                                                                               
 REPRESENTATIVE OGAN:  Is it my understanding that every time a new            
 lease sale comes up that DNR spends a fair amount of time deciding            
 what method, looking at what method is best to use to bid?                    
                                                                               
 Number 239                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, Representative Ogan, that is exactly                 
 right.  The commissioner receives a partly confidential briefing at           
 some point in the lease sale process, after the preliminary                   
 finding, and before the final finding is issued.  The preliminary             
 finding has a lot of issues, community impact, and things that we             
 discuss.  We discussed with the commissioner the issues of title              
 and be sure the land is all clear and able to be sold, but  during            
 that briefing the commissioner is given information regarding what            
 we perceive to be the economics of the area, the leaseability of              
 the area, if you like.  What we would suggest to the commissioner             
 would be the proper terms and conditions and they would concern               
 things like: what is the proper bidding method?  And quite often,             
 in the past, we've selected a royalty rate of 12.5 percent with a             
 variable bonus.  That has not been the case always in the past.               
 Other leasing methods in different areas may have different                   
 applications.  At the same time we pick a term of the lease.  On              
 the North Slope it's often ten years, in the Cook Inlet it is often           
 seven years; and  that just reflects the amount of time it takes to           
 work, to mobilize in the limited drilling season and things like              
 that.  So, the commissioner considers all these things in each, as            
 you say, at each lease sale those are then put into the final                 
 finding and those are the terms and conditions under which the                
 leases are issued and they may vary from sale to sale.                        
                                                                               
 CHAIRMAN ROKEBERG:  Representative Ogan.                                      
                                                                               
 Number 262                                                                    
                                                                               
 REPRESENTATIVE OGAN:  Thank you Mr. Chairman.  Is it my                       
 understanding that generally they use the same method all the time.           
                                                                               
 Number 265                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, Representative Ogan, more recently that is           
 the method that is used with, I'll say, a slight twist.  The                  
 exploration incentive credit program, which is on the books, is               
 another piece which is often added into the equation, leases that             
 are being offered that are far from infrastructure or areas that we           
 perceive to have relatively weak geology, we may offer an                     
 exploration incentive credit, and I think you know that gives the             
 state the opportunity to offer a certain percentage of the well               
 cost up to a certain limit.  And this usually provides that the               
 lessee drill in a certain period of time.   But, in the near past,            
 the 12.5 percent with sixty and two-thirds in some cases, or a                
 mixture of those, the terms of the lease sale need not be the same            
 for every lease and in some cases we've had leases that carry a               
 12.5 percent royalty with a variable bonus, and some that had a               
 sixty and two-thirds royalty with a variable bonus.  And that has             
 been deemed by our economists and our staff to be the method that             
 was most likely to be in the state's best interest.                           
                                                                               
 Number 290                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  If you go back to the existing regulations,               
 section four, there's contained a detailed statement covering the             
 entire life of the lease showing all expenses and costs of                    
 operating the lease including all the royalties and over-riding               
 royalties, and all income from all produced minerals from the                 
 lease.  That's section four of 11.AAC.83.185 for the record.  Could           
 you, one of the concerns that's come to light is the information we           
 got in (indisc.) basis from Marathon Oil about their North Trading            
 Bay application which was turned down as every application in the             
 history of the state for this provision has been turned down.  I              
 have finally been able to verify there never has been a grant of a            
 royalty reduction to the to my knowledge.  Is that correct?                   
                                                                               
 Number 304                                                                    
                                                                               
 MR. BOYD:  (indisc.) my recollection that's true but I believe                
 there have been, I'm sorry, there have been three applications to             
 my knowledge: the Trading Bay, there was one from Texaco, and then            
 there was then Conoco Oxy.  But, Conoco Oxy, which went through, as           
 you know, litigation and negotiation finally settled for a past               
 value but there was a royalty reduction granted to Occidental from            
 twenty percent to twelve and a half percent but only to Occidental            
 and only on some leases.  I believe it was six or seven leases.  I            
 could get those numbers.                                                      
                                                                               
 Number 314                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I sit corrected.  I'm glad, we've been trying             
 to get at that...                                                             
                                                                               
 MR. BOYD:  Yes.                                                               
                                                                               
 CHAIRMAN ROKEBERG:  ...actual fact.                                           
                                                                               
 Number 316                                                                    
                                                                               
 MR. BOYD:  That's quite recent, that decision was in 1993, I                  
 believe, late 1993.  I can get you some details on that,                      
 Representative.                                                               
                                                                               
 Number 318                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  We'll go back to my question.  What happened              
 with Marathon was they had purchased a lease and platform in the              
 inlet and which had gone through two sets of ownership apparently             
 over a period years.  Also, when they purchased the property they             
 really didn't have all the historic operating data that went with             
 it, and so when they applied for reduction under J, and basically,            
 it was refused in the process because the then director asked them            
 to provide this historic data which they didn't have, so therefore            
 they couldn't go forward with their application for reduction.  And           
 what's occurred with that particular formation, the North Trading             
 Bay one, as I understand it, it is that well, the oil production on           
 that well field was shut in, and because of the geology there will            
 never be able to be reopened.  Therefore, the, what seems to me an            
 obstacle, was put up by the bureaucracy, overcame the intent of               
 this statute, and that particular field is probably blocked forever           
 because of that.  Therefore, I'd appreciate it if we could look at            
 the regulations, or in the statute and make some provision that               
 would allow for an instance like that whereas if the data was not             
 readily available to the applicant, particularly for an older                 
 field, that they wouldn't be necessarily penalized, because it                
 seems to me that even the lay person could understand the economics           
 of the equation of an older field for the granting of a reduction.            
 I don't think you necessarily have to go to all the historic                  
 economic investment there to be able to view that instant                     
 situation, to be able to go forward with the proper decision,                 
 whether to grant a reduction or not because the life of the field             
 is very finite.  Mr. Commissioner.                                            
                                                                               
 Number 352                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Yeah, that's why we took out the language              
 that talked about the rate of return with respect to the lessees'             
 total investment in the field.  Under the old law, I think you were           
 required to get that kind of information in order to make the                 
 finding that was required on the rate of return.  That's precisely            
 because of that kind of problem, and the problems we talked about             
 before about what happens when you get close to shut-in or                    
 abandonment why you don't take in the total rate of return on the             
 field.  So, I think that that change does, would allow us to go               
 back and change the regulations, but I think under the current law            
 we had no choice.                                                             
                                                                               
 Number 362                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Right.  Well, I think we need to....                      
                                                                               
 COMMISSIONER SHIVELY:  We would make such a choice.                           
                                                                               
 CHAIRMAN ROKEBERG:  How do you stipulate an accommodation for that            
 instance particularly as it relates to existing producing fields or           
 older fields?  How are we going to (indisc.) for that.  I think               
 that's, it's more than unfortunate.  You have all the sum costs in            
 an actual offshore platform and they may, as I understand it,                 
 produce some gas from there but their not, they will probably never           
 be able to produce any more oil.  And that's because of political             
 decision.  I don't know.  I'm not going to editorialize, excuse me.           
                                                                               
 Number 371                                                                    
                                                                               
 COMMISSIONER SHIVELY:  It may or may not.  I'm not going to try to            
 second guess my predecessors but, but I think that the law was                
 somewhat constraining in that regard as it was then written and               
 that's one of the reasons were taking that section out, because it            
 provides just the kind of restraint that we were talking about.               
                                                                               
 Number 376                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I can appreciate that.  I spent most of this              
 weekend trying to come up with a definition of reasonable rate of             
 return, and ultimately, after much reaction on the part of several            
 people in the industry, I may have to scrap the whole idea because            
 it may be the wrong approach even, and that may be...  I mean your            
 argument about why you -- if you remove that from the statute --              
 may hold more water and we can talk about that later.  At any rate,           
 so therefore, that was a point I wanted to make on these                      
 regulations.  And also under four, right now if that regulation,              
 that line wasn't changed it may create a, you know, major burden on           
 the part of an applicant depending in particular old fields, but I            
 don't know what other ramifications there are.  How would you                 
 perceive the process?  I mean, as I mentioned, you would have to              
 have all the costs....                                                        
                                                                               
 Number 394                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Let me go through what I see, you know, the            
 process being, because there are really three major events that               
 happen.  The first thing is that the applicant would have to come             
 in and I would have to find that there is a delineated field, or if           
 we make the change we talked about earlier, a pool.  That is the              
 first thing that I have to find, and if that doesn't exist then the           
 process stops.  If we determine that, then we have to determine               
 whether or not a royalty reduction would change the economics so              
 that a marginal field could start development or an old field could           
 keep going.  In that case, I have to look at all the economic data            
 that the applicant wants to make available to the department, some            
 of which may be public and some of which may be confidential.  So,            
 and then we will determine whether or not the royalty reduction we            
 think affects the economics, so that a field can go forward.  Once            
 we've made that decision we still have to make a decision of                  
 whether or not, even if we believe that the economics are improved,           
 that it's in the state's best interest to go forward and give them            
 that reduction.  So there are really three steps to the process.              
                                                                               
                                                                               
 Number 412                                                                    
                                                                               
 CHAIRMEN ROKEBERG:  Very Good.  Because one of my concerns is that            
 it quite clearly states that the application will include a                   
 statement covering the entire life of the lease showing all                   
 expenses and costs of operating the lease. I mean, that's a very              
 broad requirement.  And let me, let me go on to say that for the              
 information of the committee members what I'm concerned about here            
 is if after the department reviews this, the bill and existing                
 regulations to find out the relationship, that, rather than to                
 have, ask the department to go back and rewrite the regulations, I            
 believe it's going to be my recommendation that these regs, which             
 are not real long, be revised to meet this new bill and then put in           
 the statute so then they don't have to go through the regulatory              
 process.  So I'm going to ask for a recommendation from the                   
 division on that, and that way, that does a couple things.  It                
 speeds up the whole process.  We don't have to wait six months for            
 them to write one page of regulations, if you will, and go through            
 the approval process and the approval by the Lieutenant Governor              
 and various other things.  I mean, that's what I'm thinking of.               
 And in doing so, when we do that, then these, then these standards            
 might take on a much higher impact.  So, if we do it we need to be            
 careful about what we are putting in there.  Mr. Commissioner.                
                                                                               
 Number 435                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Mr. Chairman.  I do not find section four to           
 be particularly constraining even with the change.  I mean, this is           
 the kind of information we will need, they'll have to estimate the            
 life; they'll have to estimate their expenses, their costs,                   
 including the royalties overriding currents.  All that information            
 is going to have to be in the application.  So I don't, although              
 it's sort of written a little bit to take care of the existing law,           
 which is fields that are about to be shut-in or abandoned fields,             
 I think, I think it's workable, but we will go back and look at               
 them.                                                                         
                                                                               
 Number 442                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well how about -- but you would have to revise,           
 I would think, based on a new field.  In other words, their                   
 performance or other models they may have to demonstrate to you.              
                                                                               
 Number 445                                                                    
                                                                               
 COMMISSIONER SHIVELY:  It says a detailed statement can tell you,             
 cover the entire life of a lease showing all expenses.  Well, if              
 the lease is just starting it's their projected expenses.                     
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 COMMISSIONER SHIVELY:  So, I, I don't think that that language is             
 (indisc.--papers shuffling).                                                  
                                                                               
 Number 452                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Very good.  So, if you could give us, get back            
 to us on that section.  There is one think I would like to clear up           
 right now.  It's a little bit of a bookkeeping thing.  It goes down           
 to the third-party contractor.  I'm trying to see where that is.              
                                                                               
 COMMISSIONER SHIVELY:  Oh yeah.                                               
                                                                               
 Number 464                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  On line, page three, line eight I believe.  The           
 condition of evaluating application and data, the commissioner may            
 require lessee to pay the cost of contractors selected by the                 
 commissioner to assist in the evaluation.  I've had some                      
 conversations with the various members of industry and there is,              
 has been raised some concerns about the fact that a contractor may            
 be selected by the commissioner's office, but they may have to have           
 had some bad experience, or the commissioner applicant does not               
 like the contractor selected by the commissioner, and I, there has            
 been a request for him, well, here's some tests for the future                
 about mutual agreement or something like that.  You care to comment           
 on this process?                                                              
                                                                               
 Number 465                                                                    
                                                                               
 COMMISSIONER SHIVELY:  I would.  It think it's important that we              
 understand what we're doing here.  Ordinarily, if we have the staff           
 capacity, the application comes into the commissioner, goes to the            
 division of oil and gas and it will be the staff of the division of           
 oil and gas that will make the determination.  The industry,                  
 whether they like our staff or don't like our staff, really doesn't           
 have the ability to choose which of our staff members review that.            
 In the case where we feel we cannot cover the, take care of the               
 application internally we would say that we wanted to use an                  
 independent contractor and that the applicant would pay for it.  I,           
 believe the independent contractor has responsibility to the state            
 really.  I mean, that's who they are working for.  They're make               
 assessment for the state, not for the industry, as to whether or              
 not this proposal is accurate.  We have to control that decision.             
 So, the most that I would be willing to look at for a change there            
 would be a one-time veto of one contractor.  So, if they, if we               
 named a contractor and they said no, we don't want that, sort of              
 like the lawyers and judges where, where you get sort of an                   
 opportunity to get one judge in.  I mean, I, we haven't really made           
 a position on that internally.  I haven't discussed that, but                 
 that's the furthest I would go.  But I, we are not prepared to sit            
 and negotiate with the industry over who should review an                     
 application that has to be reviewed for the public interest.                  
                                                                               
 Number 485                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, could, could you give that some thought             
 and get back with a recommendation to the committee on that so we             
 can, you know, perhaps compromise and take your method and then               
 make a...  Mr. Boyd.                                                          
                                                                               
 Number 490                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, I would only add to Commissioner Shively             
 the testimony that generally speaking, I believe the, the                     
 contractor would be used in a purely technical sense.  We would be            
 feeding him the company numbers and it would be the hard grinding             
 of numbers.  The contractor wouldn't be making policy.  The numbers           
 we get back I think would be a matter of equations and, and facts,            
 and not of speculations so much.  I mean, the speculation, if you             
 want to use that word, is in deciding whether when the numbers come           
 back, its in the interest of the state to grant the reduction.  The           
 contractor is not in the position to make that decision.                      
                                                                               
 Number 500                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, I think it, as I took it, was that the              
 confidential nature of the data was sensitive and they were                   
 concerned about who was looking at it.  I mean, that's kind of                
 common sense.  I think that was a concern, really.  Not so much the           
 competence or something like that, or perhaps a bad experience with           
 them and yeah, there is multiple reasons.  Those requests are                 
 coming so if we can kind of nip it in the bud.                                
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman.                                    
                                                                               
 CHAIRMAN ROKEBERG:  Mr. Finkelstein.                                          
                                                                               
 Number 505                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Just while we're on that subject, I,             
 you know, while you're thinking about it, I think it might be worth           
 reflecting on how we do this in the rest of government.  Is there             
 an example anywhere in government where we allowed any regulated              
 industry to have some say under both employees and the contractors            
 that state government chooses to make its decisions because its of,           
 well, I could understand, you know, the reasons some might want to            
 have something like this in there.  I think it could be a horrible            
 precedent.  I've certainly never heard a place in government where            
 we let industry veto, even once, the choices the state government             
 makes as far as its employees and its contractors.  Maybe there is            
 some place in government I'm missing, but I, I certainly haven't              
 seen it before.                                                               
                                                                               
 Number 515                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Well, the only, certainly the only place I             
 know of, and I haven't done any research on this, is the judicial             
 system, which is fortunately or unfortunately, part of government             
 and they do it all the time.                                                  
                                                                               
 Number 517                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  In a court proceeding?  Jury                     
 selection.                                                                    
                                                                               
 Number 519                                                                    
                                                                               
 CHAIRMAN SHIVELY:  Also judge selection.  I mean, you're allowed to           
 kick out a judge, and either side can do; both sides can do it.               
                                                                               
 Number 529                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Right.  There's two parties.  Here               
 there's one party.  Okay, in fact, it turns out in this case its an           
 unappealable decision before a regulatory agency.  There is no                
 other party.  You are both parties.  You're making a decision and             
 you're representing the public interest, so.                                  
                                                                               
 Number 525                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  The, I would like to just open up discussions             
 on the confidentiality and the whole review system.  I know that              
 Mr. David Johnston is going to be testifying this morning from the            
 Alaska Oil and Gas Conservation Commission, and I'd like, before he           
 testifies, I'd like to have your input on the idea, and let me try            
 to articulate what the chair's thinking is right now.  One of the             
 concerns under the bill is that the commissioner will have almost             
 untrammeled discretion in making the grant.  Therefore, it's I                
 think, in the best interest of the state that the, we expand the              
 overview and oversight of the decision-making process, particularly           
 in order to reassure the public that the decision made by the                 
 commission is in, is in keeping with his charge.  And in certain              
 ways to do that is to have more people involved in the decision-              
 making process.  However, because of the confidentiality nature               
 here, that review has to be limited somehow to an in camera or                
 confidential hearing basis.  As a result, having talked to a number           
 of people, and I've asked Mr. Johnston to testify this morning,               
 it's my thought that I'd like your views on bringing the                      
 conservation commission into the loop as either a, the group from             
 which an appeal could be made by the applicant and/or a competitor            
 or somebody else with stipulated standing to make a complaint and             
 then have the commission act as the oversight agency and the appeal           
 board there.  Or, in addition, or, and/or have the commission act             
 as either the final arbiter whereas say you've made the best                  
 interest finding and recommended that they, you know, you grant the           
 application and perhaps send it to the commission, have them review           
 it to make sure it's, in their opinion, a proper decision and                 
 accept, reject or send it back for modifications.  In other words,            
 it's my intention to try to open up that area of oversight then               
 conflicting the commission, in my opinion, I think is important               
 because they're normally, they're, the nature of the commission               
 will find out about that later is such as they are used to working            
 with this type of information.  They are also used to working on a            
 confidential nature because their primary charge is the unitization           
 and the conservation of, of the hydrocarbons that are produced in             
 the state, and there is, I take it, there is, I believe there a               
 (indisc.) engineer and geologist public memo on the (indisc.).  In            
 addition, there are people that are appointed for six years and               
 they can only be removed for cause, so there's a political                    
 installation (indisc.).  We already have them there.  They, you               
 know, you don't have to create this thing.  And there is the                  
 royalty board too, which is a different, so.  I'd like to have your           
 comments on pursuing that idea at this stage and then in a few                
 minutes we'll take some comments from Mr. Johnston and talk about             
 this.                                                                         
                                                                               
 Number 571                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Yeah, well, I mean, you know, if you feel              
 you need a review process, I mean, that's a decision obviously for            
 the committee to make.  We, we have said that we do not think so,             
 that any review process increases as a minimum the time, and                  
 probably the cost of, of this, and I, I guess in terms of who you             
 use, AOGCC is certainly a candidate.  They certainly can determine            
 and know how to determine what a field is, a delineated field or              
 what a pool is.  I don't, they certainly have the expertise for               
 that.  I do not believe that they have the expertise on staff to              
 make the economic determination, which is, I think, critical to the           
 whole decision here, and that in terms of reviewing the best                  
 interest findings probably they could do that because the best                
 interest findings are really a statement of, of my beliefs or any             
 other commissioner's beliefs as to why they should take place.  So,           
 I think the question for any review panel is how they would be                
 prepared to deal with the economics and what would be the cost to             
 government, and then whether or not whether or, I think another               
 consideration for you and for industry is whether or not you want             
 to put any constraints in term of time limits for review because if           
 you're going to have a process where the commissioner or the                  
 royalty board can keep bouncing things back and forth, I mean,                
 we've seen government operate that way and I, it ends up I think              
 with potentially a fair amount of waste for both government and               
 industry.                                                                     
                                                                               
 Number 571                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I certainly agree with you on the time frame              
 issue there.  Representative Brice.                                           
                                                                               
 Number 592                                                                    
                                                                               
 REPRESENTATIVE BRICE:  Just for clarification, Mr. Chair, of what             
 you're trying to get at.  You're looking at overview, or having               
 somebody look over the commissioner's shoulder to, number one, make           
 sure he doesn't give away the barn, or/and to make sure that                  
 industry has an appeal process outside of the commissioner.  Is               
 that right?                                                                   
                                                                               
 CHAIRMAN ROKEBERG:  That's essentially it.                                    
                                                                               
 REPRESENTATIVE BRICE:  Okay, okay.  So, for those two times.  Okay.           
                                                                               
 Number 600                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Matter of fact is if I could read, I received             
 a letter last Friday from an individual's attorney in Anchorage.              
 It's a pretty good letter.  In it he indicates that the one thing             
 we need to be careful, and this is kind of more, if I could be                
 permitted to read a sentence here.  It says, "A governor's bill               
 would substitute for a free market for us as an entirely private              
 process open to outright skullduggery to the subtleties of                    
 political favoritism and influence peddling, or just plain stupid             
 decision making."  I mean how does he really feel about this?                 
 Yeah, how does he really feel about it?                                       
                                                                               
 REPRESENTATIVE BRICE:  Well, Mr. Chair, what I don't understand               
 then, I guess then, is why the concern is for that, or for royalty            
 reduction, which has probably a limited, of limited actual benefit            
 to the state, particularly when we're looking at when the attorney            
 general's office has their sole ability to go in and close out on             
 oil settlements, you know, which have, then you know, billions and            
 billions of dollars to the state.  It might be something to                   
 consider having the attorney general provide the overview of the,             
 of the commissioner in these times.                                           
                                                                               
 CHAIRMAN ROKEBERG:  No.                                                       
                                                                               
 Number 620                                                                    
                                                                               
 REPRESENTATIVE OGAN:  Mr. Chairman, on that point.                            
                                                                               
 CHAIRMAN ROKEBERG:  Representative Ogan.                                      
                                                                               
 REPRESENTATIVE OGAN:  The attorney general has, you know, has gone            
 in and closed out a lot disputed cases after the fact and I think             
 with a little bit of foresight having the advantage of looking in             
 the past with 20-20 vision, if things were more clearly set out and           
 maybe some safeguards were put in place in the first place there              
 wouldn't have been all these, this litigation, and I think it's,              
 personally, I, I kind of agree with a little bit of extra                     
 oversight, not, with all due respects to the commissioner, I think            
 our whole system of government is, is set up on, on the idea of               
 checks and balances and I think it would certainly behove us to...            
 We're talking about a serious amount of money here and, and a                 
 really long impact on, on the state.  My concerns for this are the            
 fact that, you know, the fact that we've spent so much time in                
 court and so much money resolving disputes in the past that clearly           
 there's areas for dispute.  Number two is that assuming everyone is           
 playing by the rules nobody knows how much oil is underneath the              
 ground and, and if there is, you know, it's an educated guess at              
 best, and plus technology has continued to increase and as the                
 fields lose more oil, assuming that they may, I think it would be             
 good to have some, some extra oversight there and, and, and some              
 safeguards for those fields that do produce more than they                    
 originally are expected.                                                      
                                                                               
 Number 635                                                                    
                                                                               
 REPRESENTATIVE BRICE:  Mr. Chair, I think that's why we want to               
 delineate between review to make, oversight of the commissioner, to           
 make sure that he doesn't give the farm away to begin with.  And              
 the process by which somebody can appeal the decision of, because             
 they are wholly two different things.  I mean, you know, there's              
 various different appeal processes that we have, have, I mean they            
 are only limited by your imagination for the most part as far as              
 relevant.  I guess I'm concerned that if there is a concern that              
 the commissioner is going to give away all our royalty then to, in            
 the, in the need to make sure that it's done in a timely fashion,             
 that it's done, you know, in an appropriate fashion, that somebody            
 is, and that's why I keep coming back to the AG, you know, I think            
 I see that's a role that the attorney general could more than                 
 adequately fulfill versus, you know, throwing it to another long              
 process of through the conservation commission.  And, but you know,           
 in times of dispute and the need for an appeal process, you know,             
 that's something else that, you know, we can discuss.                         
                                                                               
 Number 660                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Right.  The, one point, early on I think last             
 week I think, I discussed with the commissioner -- we can get his             
 comments on it -- I also though of, I call it the triad of having             
 the commissioner of revenue the AG and the commissioner of natural            
 resources do that, but then I think there's some structural                   
 problems, I mean various problems and perhaps commissioner Shively            
 would like to comment on what his perception there is.                        
                                                                               
 Number 666                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Well, I, I, again it depends on what kind of           
 process you want.  If you want a review by two other officials that           
 obviously have some background in, in oil and gas development and             
 leasing, those would be the two, or at least the economics of it,             
 would be the two obvious ones, and, and if that gives people extra            
 comfort I think it could work, but the problem I have with the                
 review process is that once you open it up, I mean, if, you either            
 have one or you don't, and so if, if you have one then, you know,             
 if, let's say its Exxon that came in and asked for the royalty                
 reduction, yes, they would get to appeal if they thought I was                
 unfair.  If BP thought they were getting too good a deal and had a            
 competitive problem, they'd take it up.  If Trustees for Alaska               
 just doesn't like the whole development they get involved.  What              
 happens, my experience, and this is one of the things that drives             
 me nuts about the judicial system is whenever you ask a judge to              
 solve a problem he thinks he has, he or she thinks she has to                 
 change something, and so you're asking, whenever you're asking a              
 body to review you're really encouraging them to make changes.  So,           
 I, I mean you're going to have to make that decision.  It's a tough           
 choice.  One is a more open process, more comfort, and the other is           
 getting a decision and getting on with it.  We obviously prefer the           
 latter, but I certainly understand the concerns of you and others             
 have raised about, about a process that provides more review.  It's           
 just, it's just not an easy, easy decision to make either way.                
 There are dangers on both sides.                                              
                                                                               
 Number 685                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  So, you're suggesting it's something we need to           
 struggle with ourselves?                                                      
                                                                               
 Number 686                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Well, we're certainly pleased to help.  We,            
 of course, have our position, so...                                           
                                                                               
 Number 688                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  If I might, if the committee would indulge my,            
 me a (indisc.) that in my long years of being in business,                    
 particularly the real estate business, I found that whenever an               
 attorney got involved in the deal they'd screw it up.  I bring in             
 the AG and stuff like that kind of worries me.                                
                                                                               
 Number 692                                                                    
                                                                               
 REPRESENTATIVE BRICE:  I think the AG though has a lot of                     
 background historically, in oil and gas disputes and is considered,           
 I mean, the state's primary negotiator in terms of those disputes,            
 and it's just a logical process.                                              
                                                                               
 CHAIRMAN ROKEBERG:  I had a similar idea, Representative...                   
 REPRESENTATIVE BRICE:  Yeah, the triad thing, like you're talking             
 about, could be something with, that could be worked on.                      
                                                                               
 Number 696                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  The problem there, as I see it, however, is all           
 three of these people work for the same boss, and therefore, you              
 know, what, really what point, what level of review are you going             
 to get.  I mean, once the, I would say the commissioner of Natural            
 Resources make a decision (indisc.) it's still a possibility.  I              
 think there's some other problems with it.  I think we need to                
 discuss it when we are doing a markup later.                                  
                                                                               
 TAPE 95-9, SIDE B                                                             
 Number 000                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS:  We were talking about something different           
 in back tax litigation compared to understanding the oil reservoirs           
 and things like, you know, that geological nature, and I think                
 there was also a lot of, of contracting and consultation on the AGs           
 part, which, again, adds to expense and time.  So, I don't know,              
 maybe the commissioner can, can, you know, talk about that a little           
 bit.  I don't see the AG, I think, I think you're laying out a lot            
 more the confidentiality aspect out of a lot more people's desks              
 going through the Ags Office than, than someone else specifically             
 knowledgeable about the technical nature of, of the situation.                
                                                                               
 Number 019                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Mr. Chairman, Representative Davis.  I think           
 you've hit on the problem.  There really isn't anyone else in                 
 government with the full expertise to make this decision.  There              
 are people that understand oil and gas pools and fields, and                  
 clearly, the AOGCC does that.  Really, in terms of the economics of           
 the field, certainly the division, the department of natural                  
 resources has it.  I think the department of revenue may have it to           
 a lesser extent because of their tax responsibilities.  The Ags               
 office has it in people, but they have it in people largely that              
 would be advising us on whether or not we should go forward with              
 making a positive recommendation on the application.  So, if you              
 want to buy the same kind of expertise to make this decision that             
 we're going to use initially, it's going, somebody is going to have           
 to go out and spend some extra money to do it, and whether that's             
 the applicant, the appellee or the extra government agency I guess            
 is an issue that you would have to address.                                   
                                                                               
 Number 043                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Look, as long as we're on that subject, I think           
 that, well, let's, let's haul about here.  Let me do some little              
 housekeeping here.  I'd like the record to show that Representative           
 Finkelstein arrived at 10:10 and Representative Williams at 10:15.            
 I think I could, oh...  Representative Ogan, he showed up too.                
                                                                               
 REPRESENTATIVE OGAN:  I'm not sure.  I thought we might have had              
 some (indisc.).                                                               
                                                                               
 CHAIRMAN ROKEBERG:  I thought you were already been on the roll               
 though (indisc.).                                                             
                                                                               
 REPRESENTATIVE OGAN:  It's my job as vice chairman to keep him in             
 line.                                                                         
                                                                               
 CHAIRMAN ROKEBERG:  That's correct.                                           
                                                                               
 REPRESENTATIVE OGAN:  Tough job, but somebody's got to do it.                 
                                                                               
 Number 060                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  The, there's a few things I'd like to talk                
 about today.  They have, they revolve around the confidentiality              
 issue and then there's a number of other things, but I think I'd              
 like to take, if you don't mind, testimony from Mr. Johnston                  
 because we're on this topic and if you could just, and if you could           
 just hang with us or do you have any other scheduling problem?                
                                                                               
 Number 070                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Mr. Chairman, I have to be in the Governor's           
 Office for a bit.  Mr. Boyd will stay here. He's fully capable of             
 staying and I will try to come back as soon as I am done upstairs.            
                                                                               
 CHAIRMAN ROKEBERG:  Good.  And there's, actually a number of things           
 I want to discuss, but they're almost more in the way of queries              
 also that I would like to get some additional information too, so             
 that would be certainly okay.  Mr., Representative Ogan.                      
                                                                               
 REPRESENTATIVE OGAN:  Mr. Chairman.  Commissioner Shively, would              
 you have time to answer one question before you go?                           
                                                                               
 COMMISSIONER SHIVELY:  I certainly will.                                      
                                                                               
 Number 077                                                                    
                                                                               
 REPRESENTATIVE OGAN:  Would you define what would be in the best              
 interest of the state?                                                        
                                                                               
 CHAIRMAN ROKEBERG:  You don't have time for the answer.  Do you               
 have time?  Would you like to think about that and come back?                 
                                                                               
 Number 087                                                                    
                                                                               
 COMMISSIONER SHIVELY:  Representative Ogan.  Actually, sort of term           
 of art of virtually everything the department does for major                  
 decisions and it's something, to be perfectly frank, I'm still                
 trying to get comfortable with.  If we do a timber sale, or oil and           
 gas lease sale (indisc. - someone coughing) assets, we, and I                 
 believe it's sort of a constitutional requirement.  There's a, if             
 I recollect correctly, that when we do these things that it be in             
 the best interest of the state.  When you make a best interest                
 finding you're probably going to take a number of things into                 
 account.  You're going to take into account whether or not the                
 state is receiving any revenue.  You may take into account                    
 environmental impact.  You're going to take into account whether or           
 not you're creating jobs.  You're going to take into account                  
 probably whether local governments feel that there is some                    
 advantage here.  You're going to take into account whether in an              
 oil and gas field where they're keeping that additional production            
 on assist both in keeping production facilities going that might              
 also otherwise be shut down or may have an impact on the tariff on            
 the pipeline.  So, there are a whole list of issues that one looks            
 at to see whether or not on the whole this is, this is, it's better           
 for the state to do this than not to do it.  But, there's not a               
 formula.                                                                      
                                                                               
 REPRESENTATIVE OGAN:  Thank you.                                              
                                                                               
 CHAIRMAN ROKEBERG:  Very good.                                                
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman.                                    
                                                                               
 CHAIRMAN ROKEBERG:  Representative Finkelstein.                               
                                                                               
 Number 112                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  I had questions I can hold off until             
 later, but they are to follow up on the discussion we had earlier             
 about the existing royalty reduction provisions and the attempts to           
 use them in the past.                                                         
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  So I could ask them now or ask them              
 later, whatever is better for you.                                            
                                                                               
 Number 115                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Why don't we -- I indicated to Mr. Johnston               
 that we would be taking his testimony around 11 o'clock, so I'd               
 like to do that and then we can go back if that's okay.  Thank you,           
 commissioner.  We hope you can get back and join us.                          
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.                         
                                                                               
 Number 124                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  You're leaving us in good hands.  Mr. Johnston,           
 are you there?                                                                
                                                                               
 DAVID JOHNSTON:  Yes, I am.                                                   
                                                                               
 CHAIRMAN ROKEBERG:  Thank you for your patience and I really                  
 appreciate your coming out and testifying today, and hopefully, you           
 have heard some of the discussions leading up to this right now and           
 given that, if you'd like to go ahead and make some comments about            
 it we'd appreciate your input.                                                
                                                                               
 MR. JOHNSTON:  Okay.  (Indisc.) to Representative Rokeberg and                
 members of the House Oil and Gas Committee.  For the record my name           
 is David Johnston, Chairman of the Alaska Oil and Gas Conservation            
 Commission.  I appreciate this opportunity to comment on House Bill           
 207.  Just a little bit of background on the Oil and Gas                      
 Conservation Commission.  We are an intended quasi-judicial agency            
 of the state.  We primarily serve as the chief regulator of                   
 Alaska's oil and gas industry.  The commission acts to ensure that            
 maximum ultimate recovery is obtained; to prevent the physical                
 waste to crude oil and natural gas; and to protect the correlative            
 rights of persons owning oil and gas interests and land subject to            
 Alaska's police powers.  The commission is headed by three                    
 commissioners appointed by the Governor and confirmed by the                  
 legislature.  Each commissioner serves a six-year term.  The terms            
 are staggered.  By statute, one commissioner must be a registered             
 engineer, another must be a petroleum geologist and the third need            
 not have any particular expertise.  I want to commend Governor                
 Knowles for his leadership in encouraging oil and gas development             
 in the state, providing the means to reduce royalties on marginal             
 accumulation, sponsor investment and jobs and recovery of oil and             
 gas that may otherwise be lost to the state.  As with any bill,               
 some fine tuning of this legislation may be appropriate, however.             
 For example, I suggest that the committee consider whether to allow           
 royalty reductions on leases that are compulsory unitized by the              
 commission under AS 31.05.10.  This can be (indisc. - background              
 noise) by asserting this provision in line three on page three.               
 What the, line three essentially reduces the royalty on individual            
 leases, or leases unitized as described in T of this section, but             
 leaves out the compulsory unitization process that we engaged in on           
 AS 31.05.10.  I believe it would be appropriate to include it in              
 the compulsory unitized leases as well.  Another change, and there            
 was some mention of this earlier, but a change that may be                    
 appropriate is to require the lessee to hire a third party                    
 independent contractor acceptable to the commission, the                      
 commissioner to assist in the evaluation.  This change, of course,            
 would apply to eight, nine and ten on page three.  As now written,            
 the commissioner would hire the contractor and the lessee would pay           
 the cost.  My suggestion would take government out of the hiring              
 circle, eliminate the burdens of R&E process and allow industry to            
 directly negotiate the best contract.  (Indisc.) the commissioner             
 to condition a royalty reduction with the means of increasing or              
 otherwise modifying the state's royalty share to certain factors              
 such as oil, excuse me, such as the price of oil and gas and                  
 change, the price of oil and gas and change.  It may be appropriate           
 to time this prevention so that arbitrary revisions do not occur              
 with each fluctuation in oil price.  For this incentive program to            
 work industry must have some assurance that a royalty reduction               
 granted today will not be arbitrarily altered by a future                     
 commissioner solely because the price of oil may have changed by a            
 few cents.  The commission is also aware of the concerns expressed            
 by some about putting such power in the hands of one person,                  
 especially, especially when the royalty reduction decision is not             
 appealable.  Should the legislature identify a role for the                   
 commissioner addressing these concerns we standing willing and able           
 to offer our services as an independent quasi-judicial agency                 
 (Indisc.).  This concludes my direct testimony and I would be happy           
 to answer any questions (Indisc. - coughing).                                 
                                                                               
 Number 209                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, thank you, Mr. Johnson.  How you, could             
 you explain to me how you conceive the process?  I think there's              
 two different ways we can look at it right now.  One where you                
 would be like a standby oversight in case there was an appeal                 
 requested or if you would be specifically in the loop as a, as                
 oversight.  There's two different ways to, to use your, your                  
 commission here.  I'd like to have your viewpoint on that.                    
                                                                               
 Number 217                                                                    
                                                                               
 MR. JOHNSTON:  Well, as I understood the conversation, it appears             
 that there is concern that, that this process being broadened and             
 I believe that the Oil and Gas Commission can be considered as an             
 appropriate agency to look to our board to provide this wall.  I              
 think it would probably be only appropriate though for us to either           
 confirm or deny the position of the commissioner as having a                  
 reasonable basis and that the process was all above board.  I don't           
 think it would necessarily be a problem though for the commission             
 to substitute its judgement for that of the commissioner of natural           
 resources and charge them whether a royalty reduction should be               
 applied as the extent of their reduction.                                     
                                                                               
 Number 230                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I agree.  I think that's the way to go myself.            
 And that's, as I brought up earlier about plain stupid decision-              
 makings and other skullduggery, that, that's where you bring the              
 light of day.  I mean, you know, I think I, I'm comfortable with              
 that type of approach.  Could you talk about the time frames                  
 involved in this or how you see that working?                                 
                                                                               
 Number 239                                                                    
                                                                               
 MR. JOHNSTON:  I would just like to mention that as well under our            
 statutory authorities the commission is required to render a                  
 decision within 30 days after a hearing.  So, presumably if, if               
 there was some entity out there that wanted to have our review we             
 would go forward with a hearing.  Once that hearing was held then             
 within 30 days we would issue a decision.                                     
                                                                               
 Number 248                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Good.  And, I'm not sure.  Did you answer my              
 question?  I was trying to make some notes here about what your               
 preference in the process just as, just an over...  just as the               
 appeal, or just...                                                            
                                                                               
 Number 254                                                                    
                                                                               
 MR. JOHNSTON:  Yeah, I'm not sure.  I'm not following that.                   
 Basically, you know, I see us working I guess one or two ways                 
 depending on how the legislature would like to structure it.  One,            
 we could only be brought into the picture if there was an actual              
 appeal or, or somebody protesting the decision, or two, we could              
 look at all royalty reductions decisions that are rendered by the             
 commissioner and just, you know, vote up and down, or vote the                
 proposal up and down after a review, after a public review, to                
 assure that the process was aboveboard.                                       
                                                                               
 Number 263                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  How about modifying it and sending it back if             
 you...                                                                        
                                                                               
 Number 265                                                                    
                                                                               
 MR. JOHNSTON:  Yeah, I think that would, could be something that              
 could be done.  It could be sent back to the commissioner for                 
 further work...                                                               
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 MR. JOHNSTON:  ...if we felt that, I don't necessarily know if the            
 commission themselves would want to get into the modification                 
 process, but we could express our concerns and request that the               
 commissioner direct some attention to that.                                   
                                                                               
 CHAIRMAN ROKEBERG:  Representative Brice has a question for you.              
                                                                               
 Number 270                                                                    
                                                                               
 REPRESENTATIVE BRICE:  Could you please clarify what you had just             
 said?  You had just said something that, these decisions would be             
 under public review?  Or did you mean commission review?                      
                                                                               
 Number 274                                                                    
                                                                               
 MR. JOHNSTON:  Well, what I meant is we have a public process.  We            
 would put out a notice and then convene a hearing.  We would ask              
 people to come before.  We would swear those people to testimony,             
 and we would review the process that was engaged, you know, that              
 the commissioner engaged in, in granting the royalty reductions.              
 That is a, a public process that we would conduct.  In terms of               
 protecting the confidentiality of data we also routinely deal with            
 that and in those cases we would close the hearing so the people              
 that have a right to hear that public, or confidential data.                  
                                                                               
 REPRESENTATIVE BRICE:  Okay, okay.                                            
                                                                               
 Number 286                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, that was my next question is how you                
 handle that confidential data and how that fits into the whole                
 process?  And I think you've pretty much covered that.                        
                                                                               
 Number 290                                                                    
                                                                               
 MR. JOHNSTON:  We routinely deal with confidential data all the               
 time, and we have processes to, to address those concerns.                    
                                                                               
 Number 293                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Very good.  So, you guys are willing to take              
 this on.  Will it create a burden for your commission?  Or, is it             
 something you think you can handle in your normal workload?                   
                                                                               
 Number 298                                                                    
                                                                               
 MR. JOHNSTON:  Well, I, I think again it would depend on the nature           
 of how the legislature structured the review process.  Commissioner           
 Shively was correct when he indicated that we do really have a lot            
 of expertise in the commission when it comes to economic analysis             
 and evaluation.  And if that was a desire of the legislature to               
 look at that type of, to that level of detail then basically, we              
 would have to request additional money for a, for an office, for              
 example.  On the other hand, you know, judges make decisions all              
 the time based upon the reasonableness of the decision and not                
 necessarily a detailed analysis, and I would think that that is               
 probably the approach that we would desire to take.  We would just            
 review it to make sure that there was, that the Commissioner of               
 Natural Resources acted properly, that there was no shady dealings            
 involved in that thing and provide the assurances to the, to the              
 residents of the state that this process was done all aboveboard.             
                                                                               
 CHAIRMAN ROKEBERG:  Representative Brice.                                     
                                                                               
 Number 314                                                                    
 REPRESENTATIVE BRICE:  Maybe it's not necessarily a question for              
 you, but a comment.  Okay, then after the commission, conservation            
 commission makes this determination that the commissioner, you                
 know, they confirmed that the commissioner, commissioner's logic              
 was, was appropriate and everything else, and accepts it, and then            
 somebody comes in an says, "We want to appeal that decision.".                
 Where would that appeal go to, or would that decision be                      
 appealable?                                                                   
                                                                               
 Number  328                                                                   
                                                                               
 CHAIRMAN ROKEBERG:  Well, I think that we're going to request of              
 the department to have their legal, legal opinion...                          
                                                                               
 REPRESENTATIVE BRICE:  Okay.                                                  
                                                                               
 CHAIRMAN ROKEBERG:  ...legal opinion as it relates to all these,              
 all these matters of appealability, the outside fair party due                
 process...                                                                    
                                                                               
 REPRESENTATIVE BRICE:  Yeah.                                                  
                                                                               
 CHAIRMAN ROKEBERG:  ...from the AGs office through the commissioner           
 of natural resources here a full legal analysis of these                      
 ramifications to go with this bill, or make any changes, and I'd              
 like to get that as soon as we possibly can because I think in our            
 last hearing, on last Thursday, there was, we brought up those                
 questions and frankly, the answers are not, weren't really                    
 satisfactory, you know, to me, and I'm sure that there's other                
 questions of the members of the committee in that regard, and so,             
 we really should get that cleared up so we under... there's full              
 understanding in this committee process at this time of what, what,           
 what happens there.  It's entirely conceivable that we may want to            
 recommend that the standing for anybody to appeal that decision be            
 extremely limited.  Let's say for example, to the applicant                   
 himself, and/or a let's say competitor or somebody with a clear               
 economic interest in that particular field, or you know, for                  
 example, you know, there's an adjacent field or a sort of                     
 production field (indisc.) that area that clearly that other                  
 company may have a compelling interest or reason to make a                    
 complaint, but a minimize outside type complaining about it.  I               
 mean, there's, that's something we need to talk about.  In order to           
 have that conversation a legal opinion (indisc.). Representative              
 Finkelstein.                                                                  
                                                                               
 Number 356                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  Though we              
 also, we want to have some ability to deal with the kind of things            
 you deal with in that letter of mistakes and, you know, deals that            
 are improper.  There has to be some way for someone other than a              
 competitor to, or a actual company to review the deal because if              
 it's just the companies involved they have no incentive to ask for            
 any review.  (Indisc.)                                                        
                                                                               
 Number 362                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, that's why we're talking to the, the                
 Conservation Commission here for that very purpose and as I                   
 understand it, at this stage, there is nothing that would bar a               
 citizen of the state of Alaska to make a challenge based on the               
 constitution to something like this.  In other words, if they                 
 thought the commissioner was giving away the store, under our                 
 constitution it's, I think, fair enough they may all be able to               
 bring a cause of action against it.  So, there may be nothing we              
 can do about that, so, but we need to understand that going in here           
 what,...                                                                      
                                                                               
 REPRESENTATIVE BRICE:  That's right.                                          
                                                                               
 CHAIRMAN ROKEBERG:  ...what happens.  Representative Finkelstein.             
                                                                               
 Number 371                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Chair.  Just a question for           
 the commission.  The, you mentioned that the, at this time, you               
 don't have much experience in the world of pricing and those sort             
 of things.  Does the commission have any authority or any                     
 involvement now in anything having to do with royalties, taxes, or            
 any of these other pricing mechanisms?                                        
                                                                               
 Number 378                                                                    
                                                                               
 MR. JOHNSTON:  What we focus on is the actual production of the               
 resource.  We do not enter into discussions having to do with                 
 royalty or taxation.                                                          
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Okay.  Thank you, Mr. Chair.                     
                                                                               
 Number 380                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay, one thing, Mr. Johnston, one thing before           
 I forget it.  If we are, if we're going to put you into the statute           
 on oversight basis, could you, could you make a, submit a memo to             
 us as soon as possible about any statutory changes, or scope, or              
 enabling statutes that may, that you see may be necessary to get              
 you in the loop?                                                              
                                                                               
 Number 389                                                                    
                                                                               
 MR. JOHNSTON:  I would be very pleased to.                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay.  Representative Davis.                              
                                                                               
 Number 390                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS:  Thank you, Mr. Chairman.  So, the                   
 question here isn't, it seems to me there's two phases in this                
 thing.  There's the, there's the findings that are going to                   
 determine whether an adjustment should be made, and then, there's             
 the size of the adjustment.  So there's two things.  There's the,             
 the technical geological aspect and there's the economic aspect.              
 So, and where is our concern?  Is it in both or is it in one                  
 because it seems like the decision on the feasibility of the                  
 request is going to be made in the findings aspect, and then, then            
 it says, yes, there is some grounds for some review here.  So then,           
 the commissioner drops it off -- well, that would be in your lap              
 too -- even that decision would involved in the findings, so it               
 seems like, like that's one phase of the deal.  Then the other                
 phase is determining the size of the adjustment.  If...                       
                                                                               
 Number 405                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, Representative Davis.  That's, it's                  
 exactly right and that also falls within our shop because we have             
 the geologists and the geophysicists because, as you recall from              
 the bill, it's on delineated fields and you can say that in a                 
 particular field you do things on a lease by lease basis, and                 
 that's a part of the decision-making process, as you say, to decide           
 not only how much is the reduction but on which leases it might               
 apply.  And that's part of the finding process and that goes back             
 to the economics; an economic decision.                                       
                                                                               
 Number 413                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS:  Well, Mr. Chairman, if I might continue.            
 The division of oil, those people on the line...                              
                                                                               
 CHAIRMAN ROKEBERG:  Conservation commission.                                  
                                                                               
 REPRESENTATIVE G. DAVIS:  ...okay, conservation commission, their             
 expertise is strictly in, would be dealing in the first phase, in             
 the findings aspect, whether there is rational to consider an                 
 adjustment rather than the economic aspect.  Or is it just                    
 backwards?                                                                    
                                                                               
 Number 419                                                                    
                                                                               
 REPRESENTATIVE BRICE:  It'd be both.  It could be neither.                    
                                                                               
 Number 420                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS:  Well, you said, my understanding is that            
 Mr. Johnston indicated that they would, for the economic aspect,              
 they would probably need to contract that.                                    
                                                                               
 CHAIRMAN ROKEBERG:  Representative Finkelstein.                               
                                                                               
 Number 422                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Mr. Chair, just to clarify the, it               
 isn't there at the first phase, which you're right, it's two                  
 phases, isn't a geologic decision, it's still an economic decision.           
 The decisions that we're talking about here and about these                   
 royalties are economic decisions.  The unitization and all the                
 decisions about the fields, the geologic ones are made.  Now the              
 question is should we lower the royalties?  So, the commission is             
 going to have a problem with both those decisions.  They're going             
 to have to get new information, or new contractors, or some new               
 expertise because they've never dealt with anything having to do              
 with pricing of oil.  Basically, decisions on what, what we should            
 get for the state haven't been before them.  And I'm not saying               
 it's not possible they could get that, but I, I think there's a               
 cost and I think no matter what they say, they can probably give              
 these kind of additional duties, which something being done by the            
 division, we should ask the division how much it's cost them in the           
 past to make these decisions when an appeal has been made.  I mean,           
 it's, they're big decisions, you know.  Multi, multimillion dollar            
 decisions.                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Representative Ogan.                                      
                                                                               
 Number 436                                                                    
                                                                               
 REPRESENTATIVE OGAN:  Mr. Chairman.  There's two things I like                
 about having the, entertaining the idea of having the Oil and Gas             
 Conservation Commission get involved in this.  Number one, it                 
 involves a little bit more of the public process for public review.           
 And number two, I think some oversight is appropriate given the               
 fact that for example, Prudhoe Bay was, I believe if I'm not                  
 mistaken, was originally delineated -- is that an appropriate term            
 for this -- at nine billion barrels I think they're going to end up           
 producing twenty, or somewhere just about.  So, I, I, you know, my            
 concern with this whole process is the fact that because of maybe,            
 again, I'll reiterate at this point that's unforeseen deals, they             
 end up producing more than they anticipated, or the technology gets           
 better with, they produce it, and I really want some safeguards               
 that if the field, if we're going to give somebody a break because            
 this field is being treated as a marginal field and then we find              
 out that it has a heck of a lot more oil in it than we originally             
 thought, there should be some oversight of that, and there should             
 be some remuneration for the fact that that field turned out to be            
 larger.                                                                       
                                                                               
 Number 456                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  No question.  We'll be discussing that,                   
 Representative Ogan, and let's call here any relevant factors, and            
 we'll be working on that real hard when we get to it, but that's              
 exactly right (indisc.).  Let's see where, Representative                     
 Finkelstein.                                                                  
                                                                               
 Number 460                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. President.  Just a, Mr.           
 Chairman, I have a question for the commission.  The, do you have             
 the authority right now, I assume, to contract anyone necessary for           
 you to complete your decisions?  Is there any limit that exists now           
 in your ability to contract?                                                  
                                                                               
 CHAIRMAN ROKEBERG:  You're referring to Mr. Boyd?                             
                                                                               
 REPRESENTATIVE FINKELSTEIN:  No, no.  The Conservation Commission.            
                                                                               
 CHAIRMAN ROKEBERG:  The Conservation Commission.  Dave, are you               
 there?                                                                        
                                                                               
 MR. JOHNSTON:  Yeah (Indisc.).                                                
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Well, let me ask you again, Dave, the,           
 do you have any limitations on your ability to contact, contract              
 for any expertise or background necessary in your decisions?                  
                                                                               
 Number 470                                                                    
                                                                               
 MR. JOHNSTON:  Under our statute we're specifically allowed the               
 ability to contract with third parties.  The only limitations, of             
 course, would be the availability of funds to the commission under            
 the budget process.                                                           
                                                                               
 Number 473                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  And do you now select, generally, you            
 use a contractor?  Do you select them through a sole source                   
 process, or through bidding?                                                  
                                                                               
 Number 475                                                                    
                                                                               
 MR. JOHNSTON:  No, we would go through the same procurement rules             
 and go through the RFP process and solicit them.                              
                                                                               
 Number 477                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  And do you have a, any sort of cost              
 recovery mechanism in the statutes to get from industry the cost of           
 those experts?                                                                
                                                                               
 Number 479                                                                    
                                                                               
 MR. JOHNSTON:  Well the, I guess the only cost recovery factor that           
 we have is the fact that the state charges an Oil and Gas                     
 Conservation tax on the industry to fund the other programs of the            
 commission.  That's currently four mills per barrel of oil                    
 produced, and per fifty on state (indisc.) gas.  Currently brings             
 in about $2.1 million and our budget is currently about $1.6 or               
 $1.7 million.                                                                 
                                                                               
 Number 489                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Oh, we got cush.  Does the balance go on the              
 general fund?                                                                 
                                                                               
 MR. JOHNSTON:  Pardon me?                                                     
                                                                               
 CHAIRMAN ROKEBERG:  Does the balance go on the general fund?                  
                                                                               
 Number 486                                                                    
                                                                               
 MR. JOHNSTON:  Yes.  Those monies go into a special account in the            
 general fund.                                                                 
                                                                               
 Number 488                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Well, Dave, isn't the amount available           
 to you in a year the one point five?  That's the amount we                    
 appropriate, not the two point one.                                           
                                                                               
 Number 489                                                                    
                                                                               
 MR. JOHNSTON:  No, no.  You're right.  The amount that our budget             
 is about one point six right now.  That's being considered by the             
 legislature.                                                                  
                                                                               
 Number 490                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  So, it's just sort of a, it's a happy            
 coincidence that more money comes in.  You couldn't use it unless             
 we appropriate it?                                                            
                                                                               
 MR. JOHNSTON:  Unless it was appropriated.  That's right.                     
                                                                               
 Number 492                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  And in your decisions about use of a             
 contractor, it's purely your decision?  That's correct?  There's no           
 involvement by the regulated party.                                           
                                                                               
 Number 494                                                                    
                                                                               
 MR. JOHNSTON:  No, that's right.  We would look at the case before            
 us and then make the determination that a contractor was                      
 appropriate, and then we would start submitting the proper or                 
 current paperwork through the commission of the Department of                 
 Administration under which we are housed.  That would then go to              
 OMB for approval, and then presumably on to the legislature.                  
                                                                               
 Number 499                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  And is that, has that been a big                 
 issue?  Has there been some, has there been in the past that any              
 great level of unhappiness with the contractors that the commission           
 has chosen?                                                                   
                                                                               
 Number 501                                                                    
                                                                               
 MR. JOHNSTON:  Well, it's been quite a few years since the                    
 commission has secured a contract.  In fact, I think you'd have to            
 go back quite a few years to the early '80s when we last employed,            
 you know, contractors to aid us in an evaluation.                             
                                                                               
 Number 500                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Do you recall at that time whether               
 that, I mean, it seems to me that the system works for you, at                
 least in the past.                                                            
                                                                               
 Number 507                                                                    
                                                                               
 MR. JOHNSTON:  Well, I, I think, you know, there's just a problem,            
 we worked pretty efficiently, but then the state was rolling in a             
 lot of money now.  I think the problem that we have today is just             
 the reality that monies are tight and if, when I come before the              
 legislature with a request it's closely scrutinized and many times            
 I can make the case, but what our experience has also been is that            
 with across the board reductions then you may grant the approval on           
 one hand, but an across the board reduction wipes it out on the               
 other hand.  So, lately it's been a real difficult thing as you can           
 all appreciate, the tight budgets.                                            
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.                         
                                                                               
 Number 516                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  As long as we're on that subject, Mr. Boyd,               
 there is a fiscal note attached to this bill.  Could you comment on           
 that, and also, how you proceed with requiring applicants to offset           
 that so Chairman Hanley doesn't have hemorrhage up there in                   
 Finance.                                                                      
                                                                               
 Number 521                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, we included a fiscal note of, as I recall,           
 $91,000 plus some miscellaneous expenses as I recall, $15,000 that            
 might require travel or whatever, for a petroleum engineer, a range           
 26A. In my experience, the analysis of these kinds of requests,               
 again, using the Conoco perhaps as an example, requires looking at            
 a lot of well data, petroleum engineers sometimes have economic               
 backgrounds.  The other money was strictly for travel or incidental           
 expenses.  At the moment, I don't believe we have anything to                 
 offset that cost although in unitization we've done that by                   
 charging five thousand dollars per unit application.  I don't                 
 believe you can assess a high enough fee for each of these wells              
 reduction applications to completely offset the cost.  I would only           
 add that if we believe that this project is a benefit and the new             
 fields are developed that would not have been developed after this            
 legislation, and I believe in a sense the program begins to pay for           
 itself, hopefully many times over.                                            
                                                                               
 Number 534                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Then presumably it also (indisc.) industry                
 paying $2 billion a year in taxes here.  I'd really kind of like to           
 get something for my money too, I think.  You know, I am concerned            
 about this cost and we should probably, you know, discuss it                  
 further and ...                                                               
                                                                               
 Number 538                                                                    
                                                                               
 MR. BOYD:  Again, Mr. Chairman.  It's a matter of how many                    
 applications are received, whether we can do it with, with existing           
 staff among other things that may have to be done in the division.            
 We do have two petroleum engineers, one of which is our unit                  
 manager, one an economist.  A lot of these applications would begin           
 to overload, although we do have the opportunity as the bill is               
 written to use third parties.  But I still believe to make the                
 determinations of state's interests you need people that are                  
 working in the state to do that work.  I really see the contracting           
 as a very technical job, a number crunching type job, and not some            
 philosophical advice that we're asking.                                       
                                                                               
 Number 547                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Someone you can, okay.  You can even hire an              
 accounting firm, if you will, rather than petroleum.                          
                                                                               
 Number 550                                                                    
                                                                               
 MR. BOYD:  There are firms that probably would do this kind of                
 work, and again, it's a matter of what kind of data is being                  
 submitted, but I would see it more as an accounting function than             
 I do as a, as anything else.                                                  
                                                                               
 Number 552                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay, are there any other questions for Mr.               
 Johnston?  Mr. Johnston, we look forward to getting your memorandum           
 here and any further ideas you have on this, this regard, and I               
 appreciate your testifying here.  I'm going to ask a question of              
 Mr. Boyd you might be interested in hearing right now.  Mr.                   
 Johnston indicated he would recommend that the company hire that              
 consultant because then we could avoid the RFP process and the                
 state procurement code.  What, what would be your initial reaction            
 to that?  You want to think about that?  Or...                                
                                                                               
 Number 558                                                                    
                                                                               
 MR. BOYD:  I'd prefer to talk to the commissioner about that, Mr.             
 Chairman.                                                                     
                                                                               
 Number 561                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Why don't you get back on it.  It seems like              
 one way to expedite things.  It also would take out the problem of            
 who was being hired, but then perhaps the commissioner would have             
 the veto then.  He might want to give us a recommendation on two              
 ways to go on that one.  The, I'd like to just bring to the                   
 attention of the committee there's a number of other issues we want           
 to get on.  It's my intention right now to go until noon today.  I            
 notice, we notice for a carry over, we will not be meeting anymore            
 today; however, tomorrow at 5 p.m. in the Beltz Room we will have             
 a teleconference there and my intention would be to run about one             
 hour there so we don't spend too much time.  I know we're all busy            
 with budget markups and various other things, but this to me I                
 think still is the most important bill that the legislature is                
 going to be considering this session and because of the testimony             
 involved, what I intend to do, particularly for people who are in             
 the audience or to let other people know is that I'd like them to,            
 everybody to contact my Chief of Staff, Shirley Armstrong, and more           
 or less try to make appointments that, for your testimony so we can           
 make arrangements to make it the most convenient as possible.  In             
 addition, I, I hopefully will at least have a working draft of a              
 committee substitute by the end of the week and as soon as we                 
 circulate it to the committee members and, you know, to get some              
 input on that.  So, that's kind of what's on my mind, to let                  
 everybody know, in case anybody has to get up and leave, so.  And             
 we will, like the, even the Friday night meeting, if in fact we               
 have it, it will just be like an hour.  I don't want to disturb               
 everybody, but I think if we can continue and get this stuff                  
 cranked through and get the testimony behind us then we can start             
 marking things up.  And then we're going to generate questions                
 probably from when we work on marking the bill up too, so we'll               
 probably have to have, I see us going into just the first part of             
 next week hopefully and maybe moving the bill next week if we can,            
 but I know it's an inconvenience on everybody on the schedule, but            
 I think this really is an important bill so, if there's any                   
 problems or conflicts please let me know.  Okay, Mr. Boyd, as long            
 as you're in the line of fire, what we, I'm kind of trying to move            
 down the billing a little bit.  Could you talk to the commissioner            
 about, Representative Ogan asked a very good questions, that is,              
 what, what (indisc.) and there's a question I had, is there any               
 kind of setting up some type of criteria for best interest either             
 in the regulations or at least a statement of intent from them,               
 like you just did.  I'd like to get some feedback later on about              
 what that means and how we will even approach that because one of             
 my concerns is that the language that was deleted from the bill               
 previously set some standards that related to cost and reasonable             
 rates returned, and things like that.  And, as a result, you know,            
 I think we need to discuss that further.  As long as we're on that            
 I might mention to the committee some of my struggles over this               
 past weekend to try to confront what a reasonable rate of return is           
 and so forth, if you will indulge me for a few minutes.  One thing            
 that, that caught my attention was reading the record, particularly           
 of the Conoco application, was the fact that the people in the then           
 Division of Oil and Gas Commissioner's Office to come up with a               
 statement that they thought a reasonable rate of return was the               
 average, three-month average of six-month T-bills, which at the               
 time was between four but not in excess of six percent, and to say            
 that that was a reasonable rate of return I find somewhat                     
 offensive.  The reasonable rates of return are always in the eye of           
 the beholder, and I think it's, so I thought, I struggled all                 
 weekend to get my brain churning and came up with an idea about               
 taking a composite rate of various T-bills.  For example, the two-            
 year, ten-year and thirty-year note and going back five years,                
 getting an average, making differentials between integrated                   
 producers on the North Slope, non-North Slope areas, old fields and           
 adding different basis points to the, to the baseline composite               
 rate; all these kind of things, you know, which ultimately, I think           
 is like I was out tilting windmills and chasing, chasing the tail             
 here a little bit because, and I've discussed it with various                 
 people.  And that's one of the problems right now is what a                   
 reasonable rate of return is.  I think certainly a reasonable rate            
 of return for a older existing field would be lower than for a                
 newer frontier field, which a company would have a higher hurdle              
 rate for, and then, than an older field.  But, I think that's part            
 of the decision-making process the commissioner has to go through             
 when he's making his findings.  And what's, I've found problematic            
 was in the particularly the Conoco application was that with the              
 language that has been deleted in the last two, the reasonable rate           
 of return in the lessee's total investment in the field have caused           
 difficulties in the past.  And I think that was the motivation on             
 the part of the Governor to remove that, those things from the                
 bill.  And I, I've been trying to work to put them back in my own             
 mindset, but I'm thinking maybe that that's wrong.  I mean, maybe             
 you guys are right.  I don't know at this point.  I'm only going              
 through that process to try to understand it myself and everybody             
 on the committee thinking hopefully it falls because what has                 
 struck me about this whole thing is the intention of this                     
 legislation.  And I believe the intention of this legislation is to           
 create an environment and also with economic inducements for the              
 petroleum industry to, to risk and make the investments in their              
 worldwide capital allocations.  In other words, we need to send a             
 message to the petroleum industry that we're open for business and            
 we're very serious about this, and we want to in certain instances            
 provide a modest inducement for them to come to Alaska and make               
 those investment decisions and put their dollars here.  And that's            
 the message we want to send, but, and I think that's a proper                 
 message, but to try to define everything in detail is a problem               
 because right now from a board room in London to the board rooms in           
 L.A. there's going to be a reduced, and there's a difference in               
 their hurdle rates, their expectations.  Every company and every              
 project is going to have a different set of numbers.  There's no              
 question about that.  And here I think properly that the commission           
 should have some discretion because you have to look at them.  If             
 you try to draft a bill here and try to be too specific then it's             
 just going to cause more problems.                                            
                                                                               
 TAPE 95-10, SIDE A                                                            
 Number 000                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  The commissioner needs to have that flexibility           
 to make some of his decisions.  And I just wanted to make that                
 point to the members of the committee here what the process we've             
 been going through here on working with the bill.  The, I'd like to           
 move on to what I think is the heart of the bill right now and I,             
 I, we may not finish all of this, but plug in the, line 24 on page            
 three, that range there, 23, the commissioner may, (indisc.) grant            
 this section when really necessary to protect the state's best                
 interests and also including increasing or otherwise modifying the            
 state's royalty share any relevant factor such as the price of oil            
 changes.  To me, this, this is what I, almost the heart of the bill           
 because this is what you end up doing in terms of a sliding scale             
 or something like that.  I'd like to ask you and to get the                   
 feedback from the commissioner as to whether you think that we                
 should mandate a sliding scale price royalty scheme right into the            
 bill, or we should come up with a statement of some of these                  
 various factors as they relate to this in a more narrative form.              
 We haven't even...  Go ahead.                                                 
                                                                               
 Number 049                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman.  I believe my reading of the bill would be           
 that the otherwise modifying would include the option for the                 
 commissioner to something on a sliding scale, again on a negotiated           
 basis.  And your second part, if I understand you correctly, your             
 wanting more clarity on relative factors, we have presite(ph) one.            
                                                                               
 CHAIRMAN ROKEBERG:  Right, price.                                             
                                                                               
 MR. BOYD:  Price.  I mean, obviously there are other things.                  
                                                                               
 Number 060                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, as Representative Ogan rightly points out           
 in our, even in the sliding scale of regulations now that                     
 production volume should be taken into account.  I've had                     
 discussions with various people and you don't necessarily build               
 this into one mathematical formulation, but it can be reduced to a            
 quantifiable set of numbers or additional graphs and charts as you            
 will.  So I'd like to have, I, I know that industry is going to               
 bring forward some statements in this area, so.  And I see this as            
 something that this committee needs to focus on and add to because            
 by doing so I think we, we're building our fences a little more,              
 and we're also helping define what we're looking for to give the              
 commissioners a charge when we should be focusing on it.  You know,           
 obviously the production volume here is conspicuous by its absence,           
 you know.  We need to look at that.  And also, I think we need to             
 have, and I'd like to get your input on the clear statement that              
 the commissioner could raise the royalty.  And the reason I say               
 that is this:  In existing leasehold interests that have been                 
 granted to lessees there are stipulated royalty rates, be they 12.5           
 percent or be they higher and an argument could be made legally               
 that albeit the commissioner may be granting a reduction initially,           
 in, in, under section J here that we're doing, that a company would           
 argue that later on or something you couldn't raise the royalty               
 higher, for example, if oil prices were to go up.  It seems to me             
 that when a company comes in here and asks for this relief that               
 they, they're opening up their leads and if the terms should be               
 able to be modified throughout the lease.  I think we need to get             
 some feedback on what your perception of that is.  And also, I                
 think we need to stipulate right in here where it says modifying,             
 including increase and your other items modified by the state's               
 role is here.  So, you can increase it?                                       
                                                                               
 Number 114                                                                    
                                                                               
 MR. BOYD:  Yes.  I believe, Mr. Chairman, I believe line 23 gives             
 the commissioner that ability.                                                
                                                                               
 CHAIRMAN ROKEBERG:  Right, okay.  Also, there has been some                   
 conversations that I've heard from members in this (indisc.) that             
 there are existing like 103 net profit leases in the state, or                
 there's a large number.                                                       
                                                                               
 MR. BOYD:  There's a large number.  I don't know the numbers.                 
                                                                               
 CHAIRMAN ROKEBERG:  Quite a number of leases that were issued over            
 the years under the net profits type formulation and we've, I think           
 we're going to receive some testimony requests from the industry              
 that not only the basic royalty provision but also the net profits            
 portion of the leases be able, the commissioner be able to adjust             
 those?  Well, let me tell the committee why.  There's a number of             
 leases out there that have a 90 percent net profit provision, which           
 is real burdensome to a, to a marginal field situation,                       
 particularly if you're going to the chairman of the board saying,             
 I need $300 million bucks to open up this field, but it has a 90              
 percent net profits field.  Where's the beef?  I mean, you know,              
 there's not going to be any real return there if there's this high            
 net profits provision.  I mean, I, that's kind of the worst state             
 case scenario, but I think we need to redress it, and I'd                     
 appreciate the input from the, the department on that.  Go ahead,             
 Representative Finkelstein.                                                   
                                                                               
 Number 148                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN: On that, just on that point 'cause a              
 lot of us, including myself, aren't very familiar with the net                
 profit ones.  Mr. Boyd, were they, I assume that there's somebody             
 out there with a 90 percent net profit lease that it came through             
 competitive bidding and other people bid 70 or 80 or 60 or 50 and             
 they all lost.  The person with the 90 is the one we want (indisc.)           
 the others (indisc. - papers rattling) lower levels.  They just               
 didn't get the bid.  Were they, is that how they did those?                   
                                                                               
 Number 157                                                                    
                                                                               
 MR. BOYD:  Yes, Mr. Chairman.  That isn't always the case.  There             
 was some certainly where the net profit share was the variable in             
 the bidding process, and one of the variables, you'd have a fixed             
 bonus perhaps, X number of dollars and you pay that regardless, and           
 the variable that you would win the bid on was your net profit                
 share and in a former life I worked for Marathon Oil Company and I            
 can tell you that we were involved in some of that bidding and                
 dropped out when it got above 70 percent, and there, are as                   
 Representative Rokeberg says, some out there with 90 odd percent              
 net profit shares.  But I believe there are also some leases where            
 there is a fixed net profit share, where there was another                    
 variable.  I just can't cite that off the top of my head, but there           
 are some leases that carry, for instance, a 30 percent net profit             
 share and that was agreed to at, there would be another variable              
 that they won the bid on, but that would have been carried along              
 with it.  In fact, I can cite one in Thetis Island where it carried           
 12.5 percent royalty and a 30 percent net profit share.                       
                                                                               
 Number 176                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Well, the net profit share, that's not, is that           
 part of calculating the royalty payment?                                      
                                                                               
 MR. BOYD:  No.                                                                
                                                                               
 CHAIRMAN ROKEBERG:  Or is that a separate...                                  
                                                                               
 Number 178                                                                    
                                                                               
 MR. BOYD:  No, it's a separate calculation on top of the royalty.             
 If, in fact, the royalty is a variable in the bid.  I mean, if the            
 lease carries a royalty it has a royalty it has a royalty, and that           
 net profit share is not part of the royalty.  The net profit share            
 will pay out when, in time, there is a net profit to count against.           
 Endicott Field being an example that we're looking at now, which is           
 a net profit share, wondering where the net profits.                          
                                                                               
 Number 187                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Right.  I mean, to me, I'd love to be able to             
 utilize the net profit formulation even in this bill, but I'm very            
 reluctant to do so because of the problems involved around the                
 definition of what net profit is.  To see, and have you had any               
 litigation, or is there producing fields now?  You said...                    
                                                                               
 MR. BOYD:  Endicott.                                                          
                                                                               
 CHAIRMAN ROKEBERG:  ...Endicott.  Is that the only one that's under           
 production with a net profit?                                                 
                                                                               
 MR. BOYD:  I believe there are others that have producing, but I              
 can't cite them off the top of my head.                                       
                                                                               
 CHAIRMAN ROKEBERG:  I mean, isn't there like, aren't there                    
 problems?  Or is this, you...                                                 
                                                                               
 Number 199                                                                    
                                                                               
 MR. BOYD:  The problem is what point in time, or how do you count             
 it?  How do you account for the profit?  What is the profit?  What            
 is...  The profit is net by definition.  When does the state begin            
 to collect its share?  I think you have to look out in time. It is            
 a bid variable.  It seems to me the company has taken a longer                
 view, decided that they can live with a certain amount of profit              
 from this field and bid that as a variable.  And then to come back            
 and say, well, we'd like to reduce that, I think it's something               
 that needs to have some hard thought.                                         
                                                                               
 CHAIRMAN ROKEBERG:  Well, I appreciate that.  Representative                  
 Finkelstein.                                                                  
                                                                               
 Number 208                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  This question is a step back, but we             
 were talking before about increasing the ability to increase the              
 royalties in some of these provisions.  Under this bill, would you            
 be able to increase it above the original level?  The level that              
 they  (indisc.) that?                                                         
                                                                               
 Number 212                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, Representative Finkelstein.  In my view,             
 that's exactly right.  And even the current bill at utiniz...                 
 excuse me, current law allows us in a sense to do that now.  We, we           
 could, under unitization, under P, as an example, is Thetis Island            
 where we removed a net profit share and increased the royalty rate            
 from 12.5 to 16 2/3.                                                          
                                                                               
 Number 220                                                                    
                                                                               
 CHAIRMAN ROKEBERG: That is not true that under unitization                    
 provisions that you can modify the royalty payment, but it,                   
 historically, you've only increased it twice and never decreased              
 it?                                                                           
                                                                               
 Number 224                                                                    
                                                                               
 MR. BOYD:  The word, the operative word, Mr. Chairman, is change.             
 And it was discussions with the Department of Law and many hours of           
 discussion with industry and others, we felt that the word change             
 did not mean decrease, and there is no historical basis for                   
 decreasing whether you decided that was just because that was what            
 you wanted to do or because everybody believes that you couldn't              
 lower it.                                                                     
                                                                               
 Number 231                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Was that, well, obviously with the revision in            
 P on page four of the (indisc.--background noise).  That corrects             
 that problem.  Is that right?                                                 
                                                                               
 Number 233                                                                    
                                                                               
 MR. BOYD:  Yes, Mr. Chairman, because really all, all pieces if you           
 want a royalty reduction, if you want a royalty change in                     
 unitization go to J.                                                          
                                                                               
 Number 236                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Right.  And that's what the case law says about           
 Conoco too in a way; that's one of the rationales.                            
                                                                               
 MR. BOYD:  Conoco over...                                                     
                                                                               
 CHAIRMAN ROKEBERG:  But we couldn't grant a reduction under                   
 unitization P because the higher standards were in section J so the           
 division used that as a sword to deny Conoco their relief because             
 they felt there was a higher standard in J than in P.                         
                                                                               
 Number 244                                                                    
                                                                               
 MR. BOYD:  That was also...  Mr. Chairman, that was also decided in           
 court.  That's part of it.  There was also, Conoco's history is               
 beyond just that decision because it goes back to, they didn't                
 produce for two years.  There are other parts and pieces of the               
 Conoco decision which have a very long and fairly complicated                 
 history, which was eventually resolved in the court.                          
                                                                               
 CHAIRMAN ROKEBERG:  So, you could look at historically with the               
 exception of the Oxy Settlement, even with these provisions on the            
 books for a number of years like from `78 is it?                              
                                                                               
 MR. BOYD:  There have been provisions for royalty reductions since            
 Statehood.                                                                    
                                                                               
 Number 255                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  And so, in that period of time, since Statehood           
 40 years, there's been one reduction of royalty as a settlement in            
 a law suit.  Is that correct?                                                 
                                                                               
 MR. BOYD:  That's correct.  I believe there have been two or three            
 denials.                                                                      
                                                                               
 CHAIRMAN ROKEBERG:  Yeah.  But, even in unitization there've been             
 increases in not(?) normal deductions.                                        
                                                                               
 Number 259                                                                    
                                                                               
 MR. BOYD:  That's correct.  Again, we believe that the word change            
 does not mean decrease.                                                       
                                                                               
 Number 261                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Then that's what we're here about today --                
 change, isn't it?                                                             
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman                                     
                                                                               
 Number 263                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  This is the question I was trying to             
 ask and I would like to ask it again of Mr. Shively, but your                 
 mentioning two or three.  Of those two or three, one of them's the            
 Conoco, right?  One of them's the other one which revolves around             
 the issue of past information, the Marathon case where they had               
 past information, which didn't get pursued because they felt they             
 didn't have past information, which I think is an easily corrected            
 thing.  So, we just don't have many examples in all of these.  The            
 only one we've really got is Conoco and what was the eventual                 
 disposition of that?  What's happening with that, that lease                  
 currently?  Is it under production?                                           
                                                                               
 Number 273                                                                    
                                                                               
 MR. BOYD:  Yes.  I mean, well...                                              
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Milne Point.                                     
                                                                               
 MR. BOYD:  ...Milne Point, it was denied.  The field was sold to,             
 Conoco's interest in the field was sold to BP who picked it up with           
 the prevailing royalty rate.  Conoco, in the court decision, or as            
 a settlement of the court decision, we settled with Occidental                
 saying, we don't owe each other any money for the past.  Any of the           
 bills we may think we owe each other are done, and in consideration           
 of that we'll lower your royalty from 20 percent to 12.5 percent              
 on, I believe it's six or seven leases.  But now, British                     
 Petroleum, BP, has picked up the Milne Point field at the current             
 royalty rates of Conoco, the 20 percent, and has within, I guess              
 it's been two years now, has doubled the production of that field.            
                                                                               
 Number 289                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  My point, Mr. Chairman, is it's hard             
 to look at the past in condensed laws because we've only had one              
 case where they actually had the information and they were able to            
 proceed under the royalty reduction, and that case, although it was           
 turned down, that same area is now in production at the existing              
 royalty rates, so it would have been a bad decision if the state              
 had lowered the royalties because we'd be losing a load of money,             
 millions and millions of dollars.                                             
                                                                               
 Number 293                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I, I think I take somewhat of exception to                
 that, Dave, because we were, when you're really talking right at              
 the point of, of a policy decision that has been made.  That may              
 not necessarily be the case because the circumstances of BP and               
 Conoco were different, plus the fact of the matter is when Conoco             
 asked major application they asked to from major application they             
 asked to go from 20 percent to 5 percent.  It's like I don't know             
 why they never bargained at a different rate or why didn't they               
 just go down to 12.5 percent or something like that?                          
                                                                               
 Number 302                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, I would only interject that there was a              
 lot of discussion with the division on exactly that, of sliding               
 scales and other ways to get to the end that were never -- a                  
 successful negotiation was never reached.                                     
                                                                               
 CHAIRMAN ROKEBERG:  I mean, we were talking with Conoco about that?           
                                                                               
 MR. BOYD:  Yes.                                                               
                                                                               
 CHAIRMAN ROKEBERG:  And they didn't, because the record just shows            
 the five percent.                                                             
                                                                               
 MR. BOYD:  I don't know, Mr. Chairman, personally, whether that               
 might be in the confidential section that would have required us to           
 make those kind of negotiations revolving around confidential data            
 from Conoco, and then trying to reach some agreement.  I can find             
 that out for you certainly, but I just, I just personally wasn't              
 involved in that case, but I believe that, I know that the case,              
 that there was negotiation about other ways to find a common                  
 ground.                                                                       
                                                                               
 Number 307                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Seemingly, you read the record and it looks               
 like the five percent was there and there's not really much                   
 discussion about looking at alternate formulations and that's why             
 I thought minor, major impact.  I thought they might have been,               
 being a little greedy and overreaching in their request, you know.            
 So, perhaps not.                                                              
                                                                               
 Number 319                                                                    
                                                                               
 MR. BOYD:  No, I believe we can say that we started off, the                  
 royalty rate was raised, you know, at unitization from 12.5 to 20             
 and then they reapplied for five, but there was an attempt to reach           
 middle ground.  It was never accomplished.                                    
                                                                               
 Number 324                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Wait a minute.  You said that's where the 20              
 came from, that unitization?                                                  
                                                                               
 MR. BOYD:  Um-hmm.                                                            
                                                                               
 CHAIRMAN ROKEBERG:  Oh, very interesting.                                     
                                                                               
 MR. BOYD:  I forget what year that was.                                       
                                                                               
 CHAIRMAN ROKEBERG:  Oh, so they didn't bid that to begin with.                
                                                                               
 MR. BOYD:  No.                                                                
                                                                               
 CHAIRMAN ROKEBERG:  So you guys jammed 'em up.  Can you tell us               
 why, just in a nut shell, why that would happen?  Just generically.           
                                                                               
 Number 327                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, as I recall the history, this goes way               
 back before me.                                                               
                                                                               
 CHAIRMAN ROKEBERG:  No, I mean just as a rule.  I mean, not,                  
 that's....                                                                    
                                                                               
 MR. BOYD: The rule, I believe anecdotally I would say that the idea           
 was that they bought the leases at a time when oil prices were at             
 a relatively modest level, and when the time for unitization came             
 oil prices did nothing but go up and the commissioner decided that            
 if you want to unit the state wants a larger share because the                
 price of oil has nowhere to go but up.  Of course, what happened              
 was -- and I think everybody believed that -- I worked in industry            
 at the time and everybody believed in the early `80s that the price           
 of oil had nowhere to go but up, but of course, it does have places           
 to go but up.  And when it went down is at exactly the time when              
 Conoco was trying to put Milne Point into production and that's               
 when the royalty reduction request became in earnest.  So, I think            
 there was a good faith message on the part of the commissioner at             
 the time to raise the royalty rate.  It was agreed to by Conoco in            
 terms of unitization to go to a 20 percent rate.                              
                                                                               
 Number 344                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Now, isn't that, doesn't the tremendous                   
 leverage at that point in time when they are trying to unitize?               
                                                                               
 MR. BOYD:  Mr. Chairman, I just, I just simply don't know the...              
                                                                               
 Number 347                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I mean generally, not that case, but I mean,              
 I'm talking about generically, isn't there, isn't it to the                   
 advantage of the lessees to unitize?                                          
                                                                               
 MR. BOYD:  Absolutely.  And to the advantage of the state as well.            
                                                                               
 Number 350                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  (Indisc. - both talking) has significant power            
 right at that point to make demands which may be, how you say,                
 avarice in nature, depending on your perspective.  Is that, is that           
 a fair statement, or...                                                       
                                                                               
 Number 352                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, I guess I wouldn't care to respond to                
 that.                                                                         
                                                                               
 Number 354                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay, I'm sorry.  I appreciate that candor.               
 Representative Finkelstein.                                                   
                                                                               
 Number 356                                                                    
                                                                               
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  I wasn't               
 attempting to say that the Conoco case was simple, but if there's,            
 if we're going to look backwards there's so few cases to look back            
 on.  There's basically just one that had any sort of proceeding to            
 it and then that case I think, you know, I was, could you conclude            
 that, forgetting the interest of any one company, just looking at             
 the state's interest and all overall maximizing revenue that the              
 state's, it turns out by the way events have occurred since then              
 that we now know that the right decision was made and we, by not              
 granting the royalty reduction were actually maximizing state                 
 revenue because production is doubled under the 20 percent.  Is               
 that the case?                                                                
                                                                               
 Number 365                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, again, it goes to every point I believe              
 that's been addressed here this morning: whose crystal ball works             
 the best?  If you look into it early on it's hard to guess.  Had we           
 reduced the royalty would Conoco have stayed and done something               
 else?  Chairman Rokeberg is exactly correct in that this goes back            
 to reasonable rate of return.  What BP may do that Conoco can't do            
 or because of its size, its ownership, and the pipeline, its                  
 ability to own its tankers, all has to be taken into the decision-            
 making process.  That's why I believe it's very difficult to come             
 up with a formula. Conoco, on the other hand, if they had stayed              
 who knows what other fields, they're a smaller company.  They may             
 have been able to move more quickly into something else.  It                  
 becomes an impossible dilemma to somehow roll all this together,              
 but these things do have to be considered.                                    
                                                                               
 Number 377                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Kinda to follow up on those points that                   
 Representative Finkelstein is making, isn't it conceivable that the           
 industry didn't make applications for reductions because they felt            
 that they'd just be spinning their wheels because of the prior                
 history and the state's attitude at the time?                                 
                                                                               
 Number 381                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, I've not known very many companies that              
 would ever be afraid to ask.                                                  
                                                                               
 CHAIRMAN ROKEBERG:  But they didn't.  I mean, there's, I mean, they           
 thought their odds were pretty slim, (indisc.) I mean, is it fair             
 to...                                                                         
                                                                               
 Number 384                                                                    
                                                                               
 MR. BOYD:  I could not speak for the company, Mr. Chairman.                   
                                                                               
 CHAIRMAN ROKEBERG:  I know it is a speculative question.  I                   
 appreciate that.  Maybe we'll ask them when they testify.                     
 Representative Ogan.                                                          
                                                                               
 Number 387                                                                    
 REPRESENTATIVE OGAN:  Thank you, Mr. Chairman.  Something I would             
 like to see just for future reference would be a breakdown of what            
 fields that we already know are delineated and, and marginal, and             
 what the costs, what the revenues would be if those fields were               
 developed as marginal fields.  Of course, I assume they aren't                
 going to be developed 'cause they are marginal, but just to get an            
 idea of how big a scope of a picture we have out there.  I've got             
 some pretty current maps I could bring in, or I assume DNR would              
 have some too, but, I'd like to get a feel for what we've got out             
 there.                                                                        
                                                                               
 Number 398                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Perhaps a list of the fields, I think.  It may            
 already be in the data and you can just maybe pull it out.  We've             
 got so much stuff it's hard to wade through it sometimes.                     
                                                                               
 Number 400                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, if what Representative Ogan is asking for            
 is a list of fields that are discovered but not produced, I believe           
 we can get that to you, that part of it, fairly quickly.                      
 REPRESENTATIVE OGAN:  Okay.                                                   
                                                                               
 MR. BOYD:  When you get to delineated, then you become back to the            
 bill, and I think again, in the same sense that you have to think             
 of reasonable rate of return, it's something you have to look at,             
 maybe on an individual basis.  I believe that delineation is                  
 something that each field will have to stand on its own.  Older, I            
 don't want to use the word older, structural fields may be easier             
 to delineate.  You may have a greater, higher comfort level earlier           
 on that they've delineated the field.  The newer fields, what I'll            
 say is the future fields of Alaska, the stratigraphic type fields             
 I think require a different level of delineation before you have a            
 comfort, that you're actually able to bring under production.  So,            
 I can certainly get you the list of those fields, but I think to              
 have a further discussion we would need to sort of look at them               
 individually and say, this one has this characteristic, and that              
 one has this characteristic.  Other things, distance from                     
 infrastructure, of course, it's hard to just shine a light on it              
 and say, it's this kind of field.                                             
                                                                               
 Number 418                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  Okay.  In the interest of time, if you, if the            
 committee will allow me, I'd like to just go over some other topics           
 that we want to discuss later, and to alert the division and the              
 committee members of where we're heading with this.  The first is             
 the, I'd say the development of a more narrative definition of the            
 other relevant factors, and whether or not the commission would               
 like to, my preference right now would be to stipulate the                    
 commissioner has a right to set a fee, a flat fee, or he also would           
 have the right and would be, we prefer to see a sliding scale                 
 royalty based on royalty and oil prices, number one.  And then                
 additionally, that our next session would be the identification of            
 other key variables that the commissioner would have to, have to              
 review. And those would be things like capital cost, the amount of            
 the reserves, rate of return without putting reasonable or anything           
 else.  Just a, to stipulate what these other variables could be so            
 that a, perhaps even a secondary chart or scale could be developed            
 that would be connected to the first, and so we can stipulate in              
 the bill what those things would be, and that's kind of where I'm             
 going on that one.  These are the other relevant factors, and                 
 clearly the production and reserves of what they....  Then, I'd               
 like to talk about the possibility of a five sets, five-year sunset           
 clause in the bill that I would, I think somewhere like December              
 31st, 1999 or something.  And we'll get some industry testimony on            
 that.  And, one reason I'm going back to the sunset clause is this:           
 The recommendations in the historic record from your department has           
 said that the sunset clause can be, the reason to have it would be            
 as a message to the industry that you have this amount of time to,            
 to come in and ask for your reductions and make the investments.              
 So, I'm looking at the sunset clause as an inducement for near-term           
 investment.  That's, that's one reason.  But, I'm willing to, you             
 know, listen to both sides there.  And then I would like to                   
 implement a stipulated reopener clause in the document and then get           
 your feedback on that and then look at the prime(indisc.), maybe              
 three years, five years or whatever.                                          
                                                                               
 Number 460                                                                    
                                                                               
 MR. BOYD:  Mr. Chairman, if I may.                                            
                                                                               
 CHAIRMAN ROKEBERG:  Yes, go ahead.                                            
                                                                               
 MR. BOYD:  Stipulate a reopener on which provision?  On, on the               
 raising, or the loan...                                                       
                                                                               
 Number 461                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  On anything.  I would like to see like a                  
 bilateral right of reopeners by either party.                                 
                                                                               
 MR. BOYD:  I understand.                                                      
                                                                               
 CHAIRMAN ROKEBERG:  But, not, you need to have certain stability              
 there.  You don't what everybody to just come in and, you know,               
 day-to-day, from time-to-time.  You need to have horizons of                  
 stability, if you will.  And I'd like to have your comments on                
 that, whether you think that would be workable or how that would              
 work.  And also, the Chair is contemplating, in their CS, removing            
 section one, which is the Permanent Fund hold harmless, and if we             
 did that in section one now, there is, because of the way it's                
 drafted there's a floor which is relatively high bytake, six and a            
 quarter percent, and I'd like to have your opinions on setting a              
 floor at say 25 percent of the bargained for royalty in the lease.            
                                                                               
 Number 479                                                                    
                                                                               
 COMMISSIONER SHIVELY:  I can give you our position on that now.               
                                                                               
 CHAIRMAN ROKEBERG:  Oh, okay.                                                 
                                                                               
 COMMISSIONER SHIVELY:  I mean, I think that's acceptable.  In fact,           
 I know it's acceptable.  If you want to put a different kind of               
 floor in terms of the total royalty instead of a Permanent Fund               
 floor that, we have no problem with that change.                              
                                                                               
 CHAIRMAN ROKEBERG:  I appreciate that.  What do you think about 25            
 percent?                                                                      
                                                                               
 Number 483                                                                    
                                                                               
 COMMISSIONER SHIVELY:  I mean, you name a number.  I have a number            
 in there now that's either that or higher depending on the lease,             
 so I don't think that changes the entire legislation.                         
                                                                               
 Number 485                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  One of my concerns about the floor, as written            
 now, was that 50 percent really, I thought, impacted any kind of a            
 bail out sliding scale on older fields.  I think that's wrong.  And           
 it ties your hands in terms of formulating any kind of a agreement.           
 But, however, by putting a floor underneath there, part of the                
 (indisc.) again, but it's lower because it will recognize these               
 older fields, but still says you can't, we're not going to get into           
 this thing and get zero-zero revenue 'cause clearly, if you're,               
 particularly in an older field, you're going to be ELFed out there            
 anyway.  You're going to be zero severance taxes.                             
                                                                               
 Number 502                                                                    
                                                                               
 COMMISSIONER SHIVELY:  `Cause older fields also return with five              
 percent revision.                                                             
                                                                               
 Number 503                                                                    
                                                                               
 CHAIRMAN ROKEBERG:  I mean, there used to be a minimum royalty                
 regulation too, so.  I think it's been deleted or repealed, but, I            
 mean, I'd like to, you know, it seems to me that you want to keep             
 it the percentage rather than say stipulate three and an eighth               
 percent or something, 3.125...                                                
                                                                               
 COMMISSIONER SHIVELY:  But then...                                            
                                                                               
 CHAIRMAN ROKEBERG:  ...so if somebody bid historically on the                 
 higher royalty in their bidding process they're going to have to              
 live with that, you know.                                                     
                                                                               
 COMMISSIONER SHIVELY:  (Indisc.) allows us to adjust to the                   
 whatever the...                                                               
                                                                               
 CHAIRMAN ROKEBERG:  Right.                                                    
                                                                               
 COMMISSIONER SHIVELY:  ...royalty base.                                       
                                                                               
 CHAIRMAN ROKEBERG:  Right.  So, that's where I'd be coming from               
 there.  Let's see, there's, I see one more thing here.  Oh yeah.              
 In terms of the talking, go back to the subject of what I call the            
 integrity of the bidding process.  I would like to get the                    
 department's opinion on stipulating all future bidding that only              
 the 12.5 percent royalty, I mean, you'd have to just stick with the           
 12.5 percent royalty.  I guess the rationale being that I want to             
 try to avoid the 'bait 'n switch' bidding by the part of the                  
 industry where they would involve a higher royalty if you had that            
 as a flux(?) variable in the bidding processes, and come back later           
 and ask for a reduction.  And, that's the thing I've thought of               
 that goes to this integrity issue.  And any other ideas you have on           
 this line, I mean I would appreciate it.  I don't know.  Any other            
 questions of the committee?  I'm ready to adjourn this thing until            
 tomorrow at 5 p.m. in the Beltz Room for about an hour at which               
 time we can take some additional testimony.  I believe Mr.                    
 Quesnel(?), are you going to be there for tomorrow night?  Is that            
 (indisc.)?                                                                    
                                                                               
 PAUL QUESNEL(?):  (Indisc.)                                                   
                                                                               
 CHAIRMAN ROKEBERG:  But you intend to testify tomorrow?  Very good.           
 I want to thank the commissioner and director both for coming, and            
 this committee stands adjourned.                                              
 Adjourned at 12:07 p.m.                                                       
                                                                               

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