Legislature(1995 - 1996)
03/15/1995 05:03 PM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 15, 1995 5:03 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Bill Williams Representative Tom Brice Representative Gary Davis Representative David Finkelstein Representative Bettye Davis MEMBERS ABSENT Representative Scott Ogan 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 - 3/15/95 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 KEITH BURKE, General Manager Alaska Support Industry Alliance 421 B Street, Suite 200 Anchorage, Alaska 99501 Telephone: (907) 563-2226 POSITION STATEMENT: Testified in favor of HB 207 CARL PORTMAN, Communications Director Resource Development Council for Alaska 121 W est Fireweed Lane Anchorage, Alaska 99503 Telephone: (907) 276-0700 POSITION STATEMENT: Testified in favor of HB 207 PAUL WESSELLS, Director of Tax BP Exploration (Alaska) Inc. P.O. Box 196612 Anchorage, Alaska 99519-6612 Telephone: (907) 564-5585 POSITION STATEMENT: Testified in favor of HB 207 JOHN PETERSON Alaska Interstate Construction 649 West 54th Anchorage, Alaska Telephone: (907) 562-2792 POSITION STATEMENT: Testified in favor of HB 207 KEN BOYD, Deputy Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 762-2547 POSITION STATEMENT: Answered questions on 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 03/14/95 (H) MINUTE(O&G) 03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211 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 03/14/95 (H) MINUTE(O&G) 03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211 ACTION NARRATIVE HO&G - 03/15/95 TAPE 95-11, SIDE A HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES Number 000 CHAIRMAN NORMAN ROKEBERG: ...4:03 and March 15th, 1995, and for the record, committee members present at moment are Representative Bill Williams, Representative Tom Brice and Chairman Norman Rokeberg. We do not have a quorum, but we will proceed anyway. The important nature of this testimony requires that we, and the large number of people that wish to testify, we just do proceed. Therefore, as the first witness today -- the chair takes note that we have a quorum with Representative Gary Davis and Representative David Finkelstein now in attendance. We'd like to start on the teleconference today with Mr. Keith Burke of the Alliance in Anchorage. Keith, are you there? Hello. Anchorage, are you there? Hello. (Indisc.--problems with teleconference) This, is my bill, 207, and the problem is I've read it. UNKNOWN: Oh, oh. Now we are in trouble. CHAIRMAN ROKEBERG: Except, do I remember what I've read? UNKNOWN: It's a relatively easy bill now, Norm. CHAIRMAN ROKEBERG: Standing at ease right now. Waiting for our teleconference. And for the record, Representative Bettye Davis is now in attendance. Paul, how long is your testimony going to be? PAUL WESSELLS, DIRECTOR OF TAX, BP ALASKA: (Indisc.) of the minutes. Number 057 CHAIRMAN ROKEBERG: In light of, Keith Burke, are you, are you in attendance, sir. KEITH BURKE, GENERAL MANAGER, ALASKA SUPPORT INDUSTRY ALLIANCE OF ANCHORAGE (TELECONFERENCE): Yes, I am. CHAIRMAN ROKEBERG: Well, Keith, we're waiting anxiously and would you please state your name and affiliation and address for the record? MR. BURKE: My name is Keith Burke. I am general manager of the Support Industry Alliance organization, and our business address is 421 B Street, Suite 200 here in Anchorage. I'd like to (indisc.)... Number 066 CHAIRMAN ROKEBERG: Could you get closer to the mike, Keith? You're breaking up on us. MR. BURKE: Okay, is that better? CHAIRMAN ROKEBERG: Yes, yes. MR. BURKE: Okay. I'd like to start off first of all with just a, I believe you each have a copy of my testimony and I'll just go ahead and read through that and get started. I'd like to thank Chairman Rokeberg for allowing me to speak here today and to the members for their (indisc.) agenda. I am the general manager of the Alaska Support Industry Alliance. I have been a participant in Alaska's oil industry for the past 20 years. I am here today to represent The Alliance, myself and my family. I am here to support HB 207. (problems with teleconference) CHAIRMAN ROKEBERG: Hello. MR. BURKE: Yeah. (Teleconference people: What happened? -Getting some really bad feedback from you. -So are we, but I'm not sure why yet.) Number 087 CHAIRMAN ROKEBERG: This is Juneau talking. Are people's ears in order there? Anchorage, you on line? ANCHORAGE TELECONFERENCE: Yeah, we're on line. CHAIRMAN ROKEBERG: Is, who else is on line teleconferencee? Go ahead, Keith. Maybe we can give her another shot here. Excuse us for the technical breakdown. Number 092 MR. BURKE: No problem. I'll just start over where we're supposed to begin. I'm the general manager of the Support Industry alliance. I have been a participant in Alaska's oil industry for the past 20 years and I'm here today to represent the Alliance, myself and my family. I am here to encourage you to support HB 207. This legislation will be a great step forward in reversing the downward trend in oil and gas exploration and development activities in Alaska. It also would encourage continued investment in development of alaska resources by many major multi-national oil companies, the very companies who allow members of The Alliance to provide many quality jobs to our Alaskan employees. Since 1990, four oil and gas companies have closed their offices and have suspended operations in Alaska: Chevron, Conoco, Amoco, and Texaco. The downturn in labor, the labor force and lost jobs. Oil and gas companies have downsized and consolidated operations in an effort to affect maximum cost savings to remain competitive. With the completion of GHX2, the last major construction project currently planned on the North Slope, job levels are anticipated to continue a slow and steady decline. According to Neil Fried, Department of Labor, producers will probably experience a statewide decrease of 20 percent or more in 1995 over 1994. Producer employment from February, 1994 to February, 1995 shows a decrease of 18 to 19 percent. The combined downturn factoring in support industry jobs, will provide, will probably be around 10-11 percent. Since its peak in 1991 of more than 10,541 jobs, industry employment has declined substantially and is predicted to be approximately 8,000 in 1995, about the same level of employment as in 1987. Attached to copies of my testimony is a graph from the Department of Labor titled "Alaska's Oil Industry Employment is on the Wane." According to the University of Alaska, Institute of Social and Economic Research, oil revenues provide 30 percent of Alaskan's personal income and account for one in every three jobs. As oil production and revenues decline, so too will the number of Alaska jobs supported by petroleum revenues. Alaska Production/Revenue Decline: Alaska's revenue future closely tracks the continued depletion of petroleum reserves. (Table 1. (attached to my testimony) shows the Department of Revenue's Base Case projected petroleum revenues as a percent of total projected state restricted revenues.) Current forecast scenarios project total Alaskan oil production to decline at an average annual rate of 6 percent Fiscal Year 95 to Fiscal Year 2000, falling to one-half of current production levels by 2006, in the base case scenario. Although higher oil prices would offset some of the negative impact of lower production levels, ultimately revenues will fall barring some unforeseen oil discovery. (Table 2., attached,) shows current and projected oil production through FY 2010. Half of the oil production projected for the year 2000 and beyond depends on investments yet to be made. This means the fiscal outlook could be worse than current projections unless the state acts to ensure that the new investments implicit in the Department of Revenue's projections are actually made. If the industry is forced to cut back on investment, we'll not only sacrifice significant future growth, but near-term production could plummet as well. Number 165 CHAIRMAN ROKEBERG: Keith, excuse me, if you would. MR. BURKE: Yeah. CHAIRMAN ROKEBERG: We do have the written record you submitted here for the committee. Because of the large number of people who want to testify I'd appreciate it if you could perhaps try to wrap it up and let us know your final thoughts on this, and we really appreciate your testimony. Number 169 MR. BURKE: You betcha. I'll do that, and I want to thank you. It is extremely critical that you all know as representatives for people of Alaska that we (indisc.) industry, (indisc.) industry that can provide the engine for (indisc.) and for Industry Alliance of people of Alaska, but we encourage one of you to look through the testimony, if you have any questions, please let me know and I would encourage you each and every one of you to please vote for, and in favor of House Bill 207. Thank you very much. Number 178 CHAIRMAN ROKEBERG: Thank you, Mr. Burke. We appreciate that and the support of the Alliance. Next, we'd like to hear from Mr. Carl Portman in Anchorage. Number 180 CARL PORTMAN, COMMUNICATIONS DIRECTOR, THE RESOURCE DEVELOPMENT COUNCIL FOR ALASKA - ANCHORAGE (Teleconference). On behalf of the RDC, thank you for the opportunity to testify on HB 207. RDC is a proponent of the strong oil and gas industry and has worked for, has worked in advance in subjects that encourage the industry to explore for new oil fields in Alaska and to bring production, new production into line. Oil revenues, as you heard in the earlier testimony, account for about 80 percent of the state revenues and one in every three jobs in Alaska, and I saw oil production and revenues decline. So will a number of Alaska (indisc.) We are really concerned about this. Current forecast scenarios indicate Alaska's oil production will decline to about half the level by 2006 as was just reported. And that could be worse. If (indisc. - sneezing) not being elective is at a competitive disadvantage in attracting of capital investments because of high transportation, exploration and development costs. Long lead time include oil characteristics that discount North Slope oil and occurs in other crudes and it's state revenue pressure that takes a bigger share of profits. What Alaska needs is a strategy to counter these disadvantages to make Alaska more competitive in the world market so that more dollars are invested here. HB 207 is step in the right direction. Through a reduction in royalties this bill encourages otherwise uneconomic production from marginal fields and prolong the production life of declining fields. This is important because much of Alaska's future production will be from marginal fields. There a number of undeveloped North Slope oil accumulations, many of which would be in production if they were located in the Lower 48. But, in Alaska high costs combined with low volume(?) prices make them uneconomic. HB 207, however, would encourage the state and the industry to work together to change the economic depression from marginal fields. The passage of HB 207 allows stability to keep (indisc.) capital to improve as would the prospects for enabling economy with steady, well paying jobs. The benefits to Alaska are obvious: new jobs, more production and long term additions to the tax base for state and local property taxes. HB 207 sends a clear signal to board rooms in London, Los Angeles and Houston that Alaska means to be competitive in the world market and attract the investments necessary to develop this oil and gas potential. It provides DNR with the flexibility needed in working with investors (indisc. - static) statehood to make new development a reality. This bill will make a difference in attracting investment capital to Alaska instead of its going elsewhere. HB 207 will help get marginal fields into production, fields that might otherwise go in half, or would be shut in without a royalty reduction. Without HB 207, there may be no revenue from these fields. RDC believes this bill provides adequate safeguards to protect the states best interest. HB 207 would require the lessee to make clear and convincing case that a royalty reduction is necessary and its in the best interests of the state. It also provides (indisc.) change in the future the commissioner of DNR can rate(?) the royalties that were previously reduced. We encourage you to pass HB 207. Thank you for the opportunity to comment. Number 193 CHAIRMAN ROKEBERG: Thank you very much, Mr. Portman. At this time we will go to testimony in Juneau, and we'd like to invite Mr. Wessells to present his testimony. Please state your name and (indisc.) and -- oh, very good --. Number 234 PAUL WESSELLS, DIRECTOR OF TAX FOR BP EXPLORATION (ALASKA): Good afternoon, Mr. Chairman. My name is Paul Wessells. I'm director of Tax for BP Exploration (Alaska). I live in Anchorage, and thank you for the opportunity to testify on behalf of BP regarding HB 207. BP supports House Bill 207 and encourages this legislature to enact the bill. This bill represents a very positive step along the road to development of the state's marginal new oil fields, and marginal projects within existing fields. It is our belief that initiatives such as HB 207 signal a new spirit of cooperation between the oil industry and state government. And it is a joint effort that will be required for the state to fully realize the value of its oil and gas resources. In what manner does HB 207 promote full development of the state's resources? First, it clarifies the existing statute by specifying that new development, that is, properties that have never produced oil and gas, may qualify for royalty reduction. Second, the bill provides that relief may be granted with respect to individual leases, rather than solely as part of a unit application. The bill takes additional steps to protect the public interest by assuring that the Commissioner of Natural Resources will receive the financial and technical information necessary to allow a reasoned judgment on the merits of an application, and by requiring that the cost of third party professional assistance to the Commissioner in analyzing the application be borne by the application. In addition, the public interest is served by the provision in the bill that the state may condition a reduction in royalty on a readjustment at a later time if the circumstances which supported the grant of the reduction change. It is this last aspect of the bill that makes it clear that it is not just about reducing the royalty obligations of producers in the absolute sense. Indeed, it is entirely possible that a royalty adjustment program negotiated by the state and a leaseholder will lead to greater royalty payments over the full life of a property. We in BP believe that HB 207 will make it possible for the state and the oil industry to devise, through open sharing of information and good faith negotiation, methods for sharing the risks of developing marginal properties. It is imperative that we capture the potential of these properties to assure a strong and stable industry and a strong and stable Alaskan economy. That concludes my prepared remarks, Mr. Chairman, but I would be happy to answer an questions that you or the committee members may have. Number 271 CHAIRMAN ROKEBERG: Well, thank you, Mr. Wessells. I, just, in listening to your testimony, you indicate there's a provision in the bill that the state make additional reduction royalty or a readjustment at a later time if circumstances change? Would you, with you interpretations would you direct me to that provision in the bill? Is that possible? Is it the, the Number 282 MR. WESSELLS: 325? Thanks. Right. I would direct your attention to page three, line 25. Number 286 CHAIRMAN ROKEBERG: Okay. So, that would be your interpretation of changes, etc. Is that, so what your testimony expresses, your interpretation of what the bill says at that point, is that what you're saying? MR. WESSELLS: That's correct, what, if I could elaborate just a bit. CHAIRMAN ROKEBERG: Please. MR. WESSELLS: The bill allows the commissioner to effectively renegotiate the royalty terms of an existing lease and as part of that negotiation, the parties could condition, or they, the commissioner could condition as a term in the lease provision, that the reduction would either be reversed or changed, or reopened for discussion if circumstances that are assumed and stated in the renegotiation were to change. So, it would be a part of the contract itself. It would not be a unilateral power on the part of the commissioner. It would be a matter of agreement of the parties at the time they renegotiated the arrangement. Number 301 CHAIRMAN ROKEBERG: Excellent. So, as you say there could be a condition, but it isn't necessarily a condition on this existing statute. Number 303 MR. WESSELLS: That's subject to the negotiation between the parties. Number 304 CHAIRMAN ROKEBERG: Do you know if your firm would have any objections if that was made part of the bill itself, where it would be reopened? Number 306 MR. WESSELLS: Well, I think that if, if there is a reopener that is mandated in the bill itself it creates a significant amount of risk as far as the lessees are concerned that the terms, the terms of the agreement and the premises on which they base the development could change in the future beyond what they might expect that they would change at the time that the lease was negotiated, or the new provisions were negotiated. I think what, what is acceptable is that the parties make a good faith agreement and have a meeting of the minds during the course of the negotiation as to what conditions would allow for reopening, or how the actual amount of royalty would change given certain conditions such as price change, amount of oil and gas in the reserve, or in the deposit, or pool. If they were to change beyond what the expectations as stated in the renegotiation were. Things of this nature rather than just a unilateral power on the part of the commissioner to say this royalty arrangement is no longer any good. Number 321 CHAIRMAN ROKEBERG: Very good. There are a few other witnesses today that, there will be a few other questions I know. Representative Ogan, you have a question? Number 324 REPRESENTATIVE SCOTT OGAN: Thank you, Mr. Chairman. You pretty much answered the question somewhat, maybe I'll follow up to it in about an hour, that, you know, I guess the risk that I could see would be that, you know, if that, that was written into the language that it would be perceived as a risk, a greater risk on the part of your company. Basically, the only way that I would see that it would be written in if there was a price change and hopefully, it's up and, you know, there's more oil there than you anticipated and that's, that's the risk, I hope we all have, you know, and, therefore, had to pay a little more because of the increase in price or, or more oil than anticipated through either honest mistake that didn't quite estimate enough, or increase, or a change in the technology where you can recover more, which has already happened to existing fields. So, basically, I wouldn't have an objection if there was some sort of language either in the intent of the bill or the, written into the bill that would cover that and recover the state's costs if there is an increase in price or volume. Number 340 MR. WESSELLS: Well, I think the language that I referred to that exists in the current version of the bill actually does state that purpose. It, that particular power or ability is, is implied in any event. The commissioner, if the commissioner is granted the, the authority in the discretion in renegotiating contracts, lease contracts, then the commissioner can negotiate what terms they think is necessary to protect the state's interest, including protectors; things that would protect the state's interest and readjust the level of the royalty, where if the underlying circumstances which led to the grant of the reduction in the first place were to change, and I think that is implied in the, actually stated directly, in the provision, the area I referred to earlier, which is in line 24 or 25 on page three. It makes clear a power, or an ability that already exists. Number 354 REPRESENTATIVE OGAN: May I make one more follow up? CHAIRMAN ROKEBERG: Okay. Representative Ogan. REPRESENTATIVE OGAN: That's true. That's the problem I guess that I'm not totally comfortable with, just for the record I'd like to state that. And it's not meant to be a reflection on any particular person, but, or any particular commissioner, but whoever the commissioner may be now or in the future, it is totally up to his discretion and so it's, I'm not totally comfortable with it. I think there should be some sort of safeguards to protect the public's interest that maybe the commissioner is too busy, or he's not getting good information, or for whatever reason, the people's money is not being covered there. As a legislator I know how busy we are and how many decisions we make on a very limited amount of information sometimes. There's a possibility that could happen with a commissioner. Personally, I always had a greater comfort level if there was something a little bit more specific written to this, but at the same time, would not cause you guys to get real nervous about, about investing in a field, for example, if it's marginal. If you can help us with a way to do that I would appreciate it. Number 372 CHAIRMAN ROKEBERG: Representative Ogan, we are, we are working on that, so. REPRESENTATIVE OGAN: Okay. CHAIRMAN ROKEBERG: Hopefully, in the committee substitute we will be able to cover some of those questions. Representative Finkelstein, did you have a question? Number 374 REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. I have two quick questions. One of them is just understanding the dialogue that went on before with the Chair. The, for a company in your company's situation it would be better, this is my understanding of what you said, that if royalty reduction had in it some certainty that the reopener wouldn't occur until the price of oil rose to certain level, whatever other conditions would trigger it. It'd be, did I understand you right that it would be better to have it laid out at the time of the royalty reduction, what exactly would occur later? You know, at the point where essentially it was a sliding scale or a set of triggers that you knew ahead of time so you weren't, you know, developing something or investing something that you didn't know what lay ahead? Number 382 MR. WESSELLS: That's correct. I think it's, it's important that we have, we can't have absolute certainty about the facts, which is never the case, at least we have to have absolute certainty about the process which occurs when the facts do change rather than having the possibility of having, not knowing what the decision- making process, or the adjustment process would be, and if there were to be a change in the underlying circumstance. And, of course, these things are typically the subject of negotiation in normal commercial relationships. And that would be what we envisage would happen, or would occur in the course of making the reduction in the first instance. Number 391 REPRESENTATIVE FINKELSTEIN: Okay, Mr. Chairman, the other, other question is on confidentiality. Do you have any experience with the current, or any awareness of the current confidentiality provisions under this section, and do you have any problems with how it's laid out now, or required, you know requirement that you essentially separate your information in what you want confidential and what isn't confidential? Number 396 MR. WESSELLS: I do not have any experience personally with this sort of matter. Within the Department of Natural Resources, they have quite a lot of experience with this sort of matter within, in dealing with the Department of Revenue on tax matters, and as you probably are aware, there is quite a lot of company, individual company information that is confidential that must be disclosed to the Department of Revenue during the course of an examination of tax returns and we have never had a bad exp... We have never had a bad experience in terms of information actually being leaked or disclosed to other people, at least persons in BP, by any member of the Department of Revenue, and I would presume that the same sort of standards and safeguards would exist and we respect the information that's disclosed in the course of dealing with the Department of Natural Resources. CHAIRMAN ROKEBERG: Does Representative Finkelstein have a follow up? Number 408 REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Just to understand the, I guess what I was asking, and maybe the answer is you haven't experienced this, do you have any problem with justifying the confidentiality in saying, we want this material to be confidential because of such and such? I assume with the Department of Revenue that isn't much of an issue, that it's all treated as confidential? MR. WESSELLS: Yes. REPRESENTATIVE FINKELSTEIN: It's a different standard here under DNR. Number 412 MR. WESSELLS: Well, I think that, that whatever, the way the bill is written is that whatever is disclosed in terms of financial and technical information will be held confidential unless the applicant elects to have it disclosed. REPRESENTATIVE FINKELSTEIN: I was trying to ask about the status quo now with DNR. Number 415 MR. WESSELLS: To my knowledge, there has not been a problem. REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Number 417 CHAIRMAN ROKEBERG: Just one more question from the Chair, Mr. Wessells. In discussions with various companies in the industry, and trying to put together a sliding scale royalty graph, or a scheme for the sliding scale royalty, (indisc.) do you think that that should be mandatory in this bill, or just part of a panoply(ph) of options for the commissioner? And secondly, and obviously, let's open the discussion knowing that each type of a formula or scheme would be put together for a discrete project, obviously. One size doesn't fit all, obviously, in that regard. But given the fact that with a, I like to call it step one in terms of putting together a sliding scale, your going to use a graph that will show royalty rate and prices, oil prices. So, could you, with your background in this area, would you tell me at what price that your firm would use or would recommend using, for the price component, and number two, if, in fact, you had a sliding scale royalty what do you think about the necessity of the effect of putting a, like a GDP deflator factor in that to adjust for the price of oil all the time? Number 432 MR. WESSELLS: Yes, Mr. Chairman, I think that you referred to something in the first part of the question is really the reason why I think it's very difficult, if not impossible, to standardize this sort of thing, at least based on the knowledge that we have. That is that all of these properties that might be subject to applications are quite different. They're unique, in fact. They will have different characteristics in terms of size, remoteness, from existing infrastructure or transportation facilities. They will all have different cost structures. It's very difficult to prescribe a standard that would fit every situation. And that is why the, the idea, I believe is the idea behind this bill is to empower the Department of Natural Resources to, to decide what sort of scheme fits the purpose most correctly. And without having to choose from a menu that is preordained, and in order that the department can make rational judgement the bill provides that there will be full disclosure of the information as necessary to make that sort of judgement, and I think that that is how that particular problem is dealt with in this bill. And as far as our company, answering the second part of the question, BP having an idea of what the right price is, and whether a specific version of the GDP deflator is correct for any particular circumstance, we would not. We would, we would enter into discussion concerning these matters the same way that the department would on a, you know, discrete basis regarding the specific property that was the subject of the discussion, and we might have a different standard for a different property. Number 453 CHAIRMAN ROKEBERG: Just, (indisc.) you said the full disclosure? Number 455 MR. WESSELLS: Yes. Number 456 CHAIRMAN ROKEBERG: Where in the process would you have full disclosure? Number 457 MR. WESSELLS: When you make the application it's important, the applicant is required to disclose both financial and technical information. Number 458 CHAIRMAN ROKEBERG: But that's confidential. It's under the confidential... MR. WESSELLS: What I meant was full disclosure to the department. CHAIRMAN ROKEBERG: Oh, full disclosure to the department. Ah, okay. I, forgive me. It's a public perspective that I have. Right. Forgive that. Representative Brice, you have a quick one? Number 459 REPRESENTATIVE TOM BRICE: Yeah. Just a quick one. Basically, a statement, you know, I agree with what you're saying, Mr. Wessells, about the development of these fields and to try to prescribe and that some type of sliding scale or other type of, you know, royalty share table. I think it would be very difficult and you're not going to be able to find something that's going to be able to fit in all the circumstances, so, you know, I'd just like to bring in on the side that what we need to do is allow the flexibility for this discussion to continue between industry and the department, and that's basically about it. You (indisc.) what I was talking about. Number 467 CHAIRMAN ROKEBERG: Well, thank you very much, Mr. Wessells. If you will make yourself available for questions. I know you will. MR. WESSELLS: Thank you. CHAIRMAN ROKEBERG: Appreciate your testimony today. Moving on to Anchorage, I believe we have a Mr. Peterson for testimony. Are you available, Mr. Peterson. Number 470 JOHN PETERSON, ALASKA INTERSTATE CONSTRUCTION, INC. - ANCHORAGE (TELECONFERENCE): Yes, I'm here. Can you hear me? CHAIRMAN ROKEBERG: Yes, sir, five by five. MR. PETERSON: Okay. Senator Rokeberg and others, I am John Peterson. I work for Alaska Interstate Construction at 649 West 54th here in Anchorage. I am addressing House Bill 207. I am testifying this morning as a five year Alaska resident and have seen almost all resource development diminish as a result of regulations (indisc.) controlled by agencies (indisc.) the state and I (indisc.). I believe that House Bill 207 as proposed will provide the industry with enough protection, with incentives to develop the small and marginal fields by removing some of the risks, by protecting the state and its resident's interests. House Bill 207 will allow development of these marginal fields with less risk by removing some of the obstacles such as the price of oil as a factor and these developments would provide jobs, not only during the construction installation and operations, but still provide the long-terms positions to the state and local tax base. I, I feel very positive about House Bill 207 and I think you for the opportunity. Number 487 CHAIRMAN ROKEBERG: Thank you very much, Mr. Peterson. We appreciate your testimony and we really appreciate that. Is there anybody else on line in Anchorage or any other locations on line right now? Hearing nobody, the teleconference portion of the testimony can cease and then it's that Mr. Boyd was here, Bill. Yeah, maybe, we had some questions the other day. We can take advantage of his time here. I'm not sure. Is there anybody else in the audience that want's to testify today. For example, no? Okay. Mr. Boyd, if you, if you, we have some time if you'd like to come up here and perhaps use this time to make any statements you'd like and perhaps respond to some of the queries we had the other day. Number 497 KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES: Mr. Chairman, members of the committee. For the record. My name is Ken Boyd. I'm the acting director for the Division of Oil and Gas. Mr. Chairman, I got a fair few assignments the other day, yesterday. As you know, the attorney that worked on this for some time is, is not in town, but that's not to say there aren't other attorneys and other people in the state, but I've been working on things and I do have some things I hope to be able to share a few more tomorrow perhaps. I have not shared them with the commissioner, but I do have at least one thing, perhaps two things. The first one is, one of the discussions yesterday the committee was on contractors. There is a provision in the bill that you can use a third-party contractor that, if the state required it. If the, if there was an application that we needed some technical work on it, as I described it yesterday, that could be picked. And the current language as a condition of evaluating an application (indisc.) the commissioner may require of lessee to pay the cost of contractor selected by the commissioner to assist in the evaluation. That's on page three, three lines, the pertinent language is lines nine and ten. I have a suggestion. And there was some discussion about that. How do you, how do you, maybe you don't like the person that the commissioner picks. So we went back and looked at a case that in Western Alaska that happened last year, a couple of years ago actually, called Good News Bay, and we've gone back to look at some of the federal, the way the federal government does, selects contractors for the EIS process, another tax paying process. And here's what we've come up with. And this is just a suggestion again. The way it works is that the state would pick three contractors, you know, three people who could do the work, and then industry gets to pick off that list of three. Then industry would pay the contractor. The state would define the scope of work, whatever the work that needs to be done, and it would be a little different each time perhaps, but generally speaking, I think it would be mostly technical grinding of numbers. But, in any case, the state would define the scope of work. Industry would pick from the list of three. Industry would pay the contractor without the state being involved in the procurement process, and you know all the acronyms we use to trade money around. I believe that's eliminated. And it was found by the court that that is an acceptable procedure. So, I can, I will try to assemble more of the background information on that, Mr. Chairman, but in concept, we would agree to that, and perhaps, you know, the industry would care to comment. But that's something I'd like to bring forward. Number 526 CHAIRMAN ROKEBERG: Well then, Mr. Boyd, we would avoid the necessity of going through state procurement code for this? Is that what you, that would speed up the process? Number 527 MR. BOYD: Yes, Mr. Chairman. Truly, the way it works is we would supply the list of three and with industry picking from the list, the one they would say, okay this is what we want you to use. From then on all of the financial negotiation, if you like. All the, all the dealing in terms of dollars is done in the background. But we would provide the foreground, the scope of work that we perceive was needed to be done. And again, the state does not involve in any of the bill paying; doesn't even see the bills; doesn't care what the bills are. Number 532 CHAIRMAN ROKEBERG: So, there is precedence and there is some case law that provides (indisc.) MR. BOYD: Yes, Mr. Chairman. CHAIRMAN ROKEBERG: That'd be, I think, excellent because there has been suggestions like this on both sides. That may solve that problem if you could help us with some language we'd appreciate it. And you had some more for us. Number 535 MR. BOYD: Yes, Mr. Chairman. I do have some other things, Mr. Chairman, but again, I just have not had an opportunity to talk to Commissioner Shively about some of them. CHAIRMAN ROKEBERG: I can appreciate that. MR. BOYD: And, until I do so, unless, unless the committee has some other questions, I, I know there's a, I say I know, I believe there's a hearing tomorrow. CHAIRMAN ROKEBERG: Yes, there is. MR. BOYD: And I hope to be prepared by then to, to bring up some of the other issues, but would be glad to answer any questions that were left over from yesterday. Number 540 CHAIRMAN ROKEBERG: Did anybody have any questions here? Advise we've got a couple minutes. Mr. Boyd, would you like to comment on the statements by Mr. Wessells as relates to the reopeners and even perhaps you could even expand that and even comment on a sunset clause and the pros and cons of that. Number 544 MR. BOYD: Mr. Chairman, I agree with what Mr. Wessells said that, what, I believe what he's saying. I won't speak for him. Since he's here he can, he can give me a bad glare if I do say something wrong. But what he's saying is that when the applicant comes in for a royalty reduction you're entering into a new contract. You're talking to the commissioner and saying, we believe we need a royalty reduction. We just started the process. We need to negotiate what it is that has to be done for us to reach our objective, or hopefully, a calm objective. As part of that, you will negotiate as he said, no specific thing right away. There's no, you don't pick out a check list and say, well, it's this field and that field and this field so you have to do it this way. No. It's, what, what are you trying to achieve? And how do you do it? And you work through that, but as part of that the commissioner should be able to also say, ah, very good, you know I recognize that you need this, this benefit now perhaps, but what about if the oil price changes? Or your field is four times bigger than you thought it was? I want the ability to raise your royalty at some point in time. And I think that's, think that's all Mr. Wessells is saying, that the negotiations, you don't need a reopener in law, because, I think it's because it's a disadvantage to have that because it just invites more work for one thing, but just an opportunity for somebody to just leap in and say, well, something is changed. We need to reopen. Perhaps on some spurious basis that has no basis. And then you have to decide how will you resolve whatever it is you've reopened upon. Who gets to chose? I mean, who is right? Does it wind up in court? Does it wind up as with an arbitrator? There's just more expense and I think it's unneeded expense. I have a, I have a potential solution and it's a one-word change. I'm going to offer it now as a consideration, but not as an official, if you like, position, but it's something to consider and perhaps discuss tomorrow. On page three, line 21, where it says the commissioner may condition a royalty reduction granted under the subsection in any way necessary to protect state's best interest. That sentence. Instead of saying may, say shall. It, it's, in a sense it should give you some certainty that the commissioner will have to consider the upside and the downside potential. That's the way I read that. I'm trying to avoid the idea of having a reopener in law when I believe that a reopener is a reasonable part of a new contract; that would certainly be part of a new contract. As to the sunset provision, I have talked to Commissioner Shively, but not at any great length about this and we do not support a, he does not support a sunset provision. I, perhaps the easiest reason to say we don't support a sunset provision is this bill is, is part of a whole concept, I think, that we're trying to attract new players to Alaska and encourage the players we have here to stay. A sunset provision might very well encourage the players we have now today to stay, but when you think about attracting, and yesterday it was talked about, a five- year sunset, but think about it. With the delineation requirements in this bill you try to attract a new player with a new law, with a five-year commitment they have to make a delineated field and apply for royalty reduction. I think you don't have enough time. I really don't think the new player is going to be that attracted to something where that company has to sort of play catchup with companies that are here today. So, I believe if you think it's a good law it should be a good law, and it should stay a law, and if it turns out to be a lousy law that it could be repealed at some point, but I don't think a built in sunset is an advantage for new players. Number 587 CHAIRMAN ROKEBERG: Mr. Boyd, going back to the reopeners issue, I know it, because like Representative Ogan mentioned some of his concerns to stipulate that reopeners should be part of a bargain that the commissioner would make with a applicant, wouldn't the provisions for reopener, if they were stipulated to be based on a well price consideration, or a field production volume... TAPE Number 95-11, Side B Number 000 CHAIRMAN ROKEBERG: ...without being too specific. Wouldn't that be acceptable? MR. BOYD: Mr. Chairman. I absolutely agree that those can be two parts of a, of a very long equation. I guess the problem I have with adding more and more words, I mean, certainly, I could make that line very, very long, and if I drag petroleum engineers up here, we could make it really long as to what factors might change over time. I think all this bill says is that if something changes the commissioner is going to look at that change say what, what should I do now? And that will be part of the negotiated contract. Each field will have different characteristics. A field would be so well delineated you just know it's not going to triple in size. Another one might not be quite so well delineated. So, I, I agree with you that you can make a list with other, of other things that may change, but I still believe that just the fact that you have that statement there that the commissioner will consider that. That is again, goes back to the idea of having a contract, that you're going back and you're talking to the company, the company is talking to the state, and you're saying, okay, you need a benefit now; we need a benefit if this happens, and you work through the financials. You work through the many, many different things that may go into the equation. I, I'm not certain that you could ever make a list long enough. I also am afraid of lists that if you make a list too long people begin to think that that's the only things you consider. And that's, quite honestly, my opinion. Number 028 CHAIRMAN ROKEBERG: I think I'm really concerned about the 60 occupants of this building and what they're concerned about. That's.... MR. BOYD: Mr. Chairman, I am only offering my opinion. CHAIRMAN ROKEBERG: Right. And the rest of the people in the state, who we represent. I mean, that's what I'm driving at. That's the only reason we're bringing this up. Number 033 MR. BOYD: I quite understand, Mr. Chairman. Again, I'm only trying to point out both sides of looking at this. I'm not suggesting that you do one thing or another, only that you consider that sometimes lists can be used to knit the rope that hangs you. And sometimes discretion is something that a reasonable person will do in a contract and perhaps you can get it right. Number 040 CHAIRMAN ROKEBERG: Any questions? Representative Finkelstein. Number 047 REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Before we leave this subject, I just want to make sure I fully understand what you're saying here, that if the two choices on when to make this deal on when the royalty goes back up. If the one choice is at the time of the royalty reduction request and the other that, under this idea you'd go and you'd make it as part of the package. You'd say it would go up in the future as oil prices go up a dollar then the royalty goes up X percent, that you would not think, prefer that, that you'd prefer just some indeterminate reopener clause where it could be reopened by the state at a later date, and changed then based on a variety of factors. Is that what I -- am I interpreting.... Number 055 MR. BOYD: Mr. Chairman and Representative Finkelstein. In a sense, yes. Again, it, it may not even come to a reopener. It may be that it's a simple enough deal, say, that you could understand it well enough that you can project things for a life of a certain field. But, in many cases, I think you may have to have trigger points, and I believe Representative Rokeberg has talked about this in terms of sliding scale. It can mean many things. Sliding scales don't have to be linear. Sliding scales can be steps. There's all different ways to, to create things. You may create trigger points in time, or in terms of dollars, or in terms of volume that you would have to consider. But I, again, I'm only afraid that if you specify something in law that becomes, it can become the only think you consider, and I believe that you can craft a better decision through negotiation of the company and the state after it's determined that you need to have a negotiation at all. REPRESENTATIVE FINKELSTEIN: Mr. Chairman. CHAIRMAN ROKEBERG: Representative Finkelstein. Number 072 REPRESENTATIVE FINKELSTEIN: Just a (indisc.), Mr. Chairman. I think I understand it now and I, I don't pretend to understand all the ramifications, but it just seems that, and correct me if I'm wrong, that that, what the state will be giving up is a strategic advantage that when a company is in trying to work out a royalty reduction they're going to be pretty willing at that point to go an make a deal for future. If it goes back up, you know, we're willing to pay more because they're getting a benefit that if it's six years down the road that you're, instead of trying to do this, the company's interests are, leave us alone. You know, they, you're trying to get them to the table. You're trying to negotiate them with more, or impose it if you have to, but all of the political battles and all the kind of battles that go on then, they, it seems to me you've lost your advantage. You've given them the benefit six years ago and now you're asking them to do something and try, and you know, with the ability to impose if you have to, but with a variety of political pressures and a variety of ramifications on your relationship with them, it seems to me you've lost your chance to have an advantage. Number 089 MR. BOYD: Mr. Chairman, Representative Finkelstein. Again, writing the contract does not foreclose any opportunity, I think. And you, you could build in a reopener. You might decide that, depending on the company, the field, the economic conditions at the time, perhaps you need to reopen. But, again, I think it should be an opportunity of the contract rather than the force of law, to say you have to look at it. I'm saying that not every case will you need that. Or perhaps the commissioner may decide in every case you do need that, but I, I don't believe every contract needs to have that provision, but I think it should be, and again, it is, there is no prohibition of reopeners in the bill as it is now. I'm not sure that you have to say that you have to do this because there are some cases where I think if older fields in Cook Inlet, I don't think you would ever need to do that, and it becomes a time consuming and perhaps time wasting process. I believe all the opportunities for negotiation are open under this bill. Number 101 CHAIRMAN ROKEBERG: Mr. Boyd, it appears that you and the commissioner agree that the state would like to have maximum flexibility with not too much intrusion by the legislature and bargaining your arrangements, and I can appreciate that. But, I, we're kind of running down time here and I did have a question for Mr. Wessells, if I can remember it. Let's see now. Oh, what was it now? Well, Paul, if I can remember what it was. Why? No, no, that's my normal one. Something about the, I don't know. Oh yes, I know. Thank God, I remembered. I understood that your firm, and perhaps some other firms, were going to help us out, this committee out, by providing a definition of fields. Does that ring a bell with you? Number 127 MR. WESSELLS: Not with me in particular. I did hear, listening to the testimony from yesterday in which a suggestion was made that the term be expanded to include horizons within an existing field, and I think that is a helpful suggestion. But beyond that, I had not had any conversations with anyone about it. Number 133 CHAIRMAN ROKEBERG: Well, forgive me, because you're the moving target for BP today, that's why I asked you the question. Perhaps you could help us out by tomorrow on that. And I think Unical's got some ideas and I got some from ARCO today too, so, it's something perhaps we can discuss tomorrow morning. Are there any other questions of the committee? Good. Well then, we'll look forward to seeing everybody at 10:00 a.m. tomorrow with bells on our toes. This meeting is adjourned. Meeting adjourned at 6:00 p.m.