Legislature(1995 - 1996)

03/16/1995 10:09 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                            
                         March 16, 1995                                        
                           10:09 a.m.                                          
 MEMBERS PRESENT                                                               
 Representative Norman Rokeberg, Chairman                                      
 Representative Tom Brice                                                      
 Representative Bill Williams                                                  
 Representative Gary Davis                                                     
 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 - 03/16/95                                                               
 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                                                              
 STEVEN R. PORTER, Senior Attorney                                             
 ARCO Alaska, Inc.                                                             
 700 G Street                                                                  
 Anchorage, AK                                                                 
 Telephone:  (907) 265-6132                                                    
 POSITION STATEMENT:  Supported HB 207                                         
 BRADLEY PENN, Advanced Landsman                                               
 Marathon Oil Company                                                          
 P.O. Box 196168                                                               
 Anchorage, AK  99519-6168                                                     
 Telephone:  (907) 564-6400                                                    
 POSITION STATEMENT:  Supported HB 207                                         
 RICHARD FINEBERG (Teleconference)                                             
 P.O. Box 416                                                                  
 Fairbanks, AK  99725                                                          
 Telephone:  (907) 479-7778                                                    
 POSITION STATEMENT:  Opposed HB 207                                           
 KEVIN TABLER, Land Manager                                                    
 Union Oil Company of California                                               
 909 West 9th Avenue                                                           
 Anchorage, AK 99501                                                           
 (907) 276-7600                                                                
 POSITION STATEMENT:  Supported HB 207                                         
 JOHN SHIVELY, Commissioner                                                    
 Department of Natural Resources                                               
 400 Willoughby Avenue                                                         
 Juneau, AK 99801                                                              
 Telephone:  (907) 465-2400                                                    
 POSITION STATEMENT:  Supported HB 207 with amendments                         
 PREVIOUS ACTION                                                               
 BILL:  HB 207                                                               
 SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                  
 JRN-DATE     JRN-PG                  ACTION                                   
 02/27/95       501    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 02/27/95       501    (H)   OIL & GAS, RESOURCES, FINANCE                     
 02/27/95       501    (H)   FISCAL NOTE (DNR)                                 
 02/27/95       501    (H)   2 ZERO FISCAL NOTES (DNR, REV)                    
 02/27/95       501    (H)   GOVERNOR'S TRANSMITTAL LETTER                     
 03/08/95       665    (H)   CORRECTED FISCAL NOTE (DNR)                       
 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                    
 03/15/95              (H)   MINUTE(O&G)                                       
 03/16/95              (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                       
 03/14/95              (H)   MINUTE(O&G)                                       
 03/15/95              (H)   O&G AT 05:00 PM BELTZ ROOM 211                    
 03/15/95              (H)   MINUTE(O&G)                                       
 03/16/95              (H)   O&G AT 10:00 AM CAPITOL 124                       
 ACTION NARRATIVE                                                              
 TAPE 95-12, SIDE A                                                            
 HO&G - 03/16/95                                                               
 HB 207 -  ADJUSTMENTS TO OIL AND GAS ROYALTIES                              
 Number 000                                                                    
 CHAIRMAN NORMAN ROKEBERG:  ...Oil and Gas Committee at 10:09 on               
 March 16th, and for the record, Representative Brice,                         
 Representative Williams, Representative Gary Davis, Representative            
 Bettye Davis, Representative David Finkelstein and Chairman are               
 present.  I would like to apologize for the delay.  We were going             
 to wait for Representative Green to present his bill, 209.  He's              
 tied up in committee so we're going to start with the testimony of            
 Mr. Steve Porter from ARCO.  Steve, if you would come forward,                
 please, state your name, address and affiliation, and proceed, sir.           
 Number 019                                                                    
 MR. STEVEN R. PORTER of ARCO Alaska, Inc.:  Thank you, Mr.                    
 Chairman, members of the committee.  My name is Steven R. Porter.             
 I'm a senior attorney with ARCO Alaska, Inc., 700 G Street.  I do             
 have some prepared remarks that I believe were passed around.                 
 (Materials were handed out.)                                                  
 I can give just one item of background.  Again, I am a senior                 
 attorney with ARCO.  Before that I spent five years in the Attorney           
 General's Office in the Oil and Gas and Mining section, working on            
 such things royalty reductions, unitization, leasing...  Okay. I              
 appreciate the opportunity to appear before this committee and to             
 reiterate ARCO Alaska's support for HB 207.  ARCO Alaska, Inc.                
 testified last week, as you no doubt recall, that HB 207 would be             
 an important first step in providing the state the tools that it              
 needs to increase oil and gas production in Alaska.  HB 207                   
 represents an improvement to an existing royalty reduction statute,           
 and again, that's AS 38.05.180J.  The bill, basically, in our                 
 minds, would do two important things.  The first is to add a new              
 royalty reduction power to supplement the two current powers.  The            
 current statute addresses declining and shut-in fields and this               
 bill would allow the commissioner to also provide some incentives             
 for marginal fields that are about to be started up.  Those                   
 provisions could be found in page two of the bill, lines 28 and 29.           
 The next thing that the bill would do is to revise the technical              
 standards that the commissioner of natural resources must consider            
 when granting royalty relief.  And that's found in page three of              
 the bill, lines 13 through 17, and lines 28 through 30.                       
 Essentially, now the provisions call for an assessment of an                  
 economic rate of return that I believe has proved problematic in              
 the past, and the commissioner has tried to assess royalty                    
 reduction applications, and it would replace that economic standard           
 with a more general standard that the commissioner grant the                  
 royalty reduction only if that reduction would be in the state's              
 best interest.  And that standard, of course, is very similar to              
 the standard that's now in place for lease sales.  The commissioner           
 can only have a lease sale if that sale is found to be in the                 
 state's best interest. ARCO Alaska, Inc. would also like, at this             
 time, to endorse the testimony yesterday from BP Exploration, and             
 Mr. Wessells. One issue with regard to the current bill that there            
 was some discussion on yesterday, is a balancing between the                  
 discretion that's given to the commissioner, and also procedural or           
 other protections that might be in place to protect the public                
 interest and any royalty reduction.  It's my understanding that               
 under the current statute the Division of Oil and Gas has been                
 unable to grant royalty reductions.  There was one royalty                    
 reduction as part of a settlement of litigation, but basically,               
 180J has not been an effective tool for providing incentives to the           
 oil and gas industry.  Acting Director Ken Boyd testified yesterday           
 that royalty reduction requests need to be addressed on a case by             
 case basis, that each field is somewhat different and the                     
 commissioner should have the flexibility in the statute to address            
 each unique situation.  He spoke on behalf of allowing flexibility            
 in the statute and we endorse that position.  We think that the               
 committee and the bill should allow enough flexibility to the                 
 commissioner so that the commissioner can have the ability to                 
 provide meaningful incentives where appropriate.  We also recognize           
 the interest in providing some oversight on decisions made by the             
 commissioner under this statute, and we would endorse the                     
 suggestion made in hearings the other day by Representative Brice             
 that the Attorney General might be charged with ensuring that the             
 commissioner's decision was proper, that both the process and the             
 decision.  ARCO Alaska would appreciate the opportunity to work               
 with the committee or other persons so ensure that the bill, as               
 passed out, will provide incentives to increase oil and gas                   
 production while protecting the public interest.  Thank you for the           
 opportunity to testify, and I'd be happy to address any questions             
 you may have.                                                                 
 Number 124                                                                    
 CHAIRMAN ROKEBERG:  Are there any questions of Mr. Porter by the              
 committee?  Representative Davis.                                             
 REPRESENTATIVE GARY DAVIS:  Thank you, Mr. Chairman.  Mr. Porter,             
 since you have been with the AG's Office previously and have dealt            
 with the current statute that relates to royalty reduction, is                
 there any question or any concern on the constitutionality of that,           
 of that section?                                                              
 Number 136                                                                    
 MR. PORTER:  As in place now?  Or as amended?                                 
 REPRESENTATIVE G. DAVIS:  Yeah, the one, the one that's in place              
 now.  Of course, this is just an expansion of that, an addition to            
 MR. PORTER:  There has been a concern raised that because leases              
 are purchased at competitive bid that there should be some fairly             
 stable rules of the game so that the lessees that weren't able to             
 obtain the lease were on even footing with the lessee that did.  I            
 don't think that rises to the level of a constitutional issue                 
 though.  That's always been a concern about protecting the                    
 integrity of the competitive bidding process as established by                
 statute.  And so, it's our belief that if the legislature chooses             
 to allow incentives to lessees that it's not incompatible with the            
 competitive bidding system and does not raise any constitutional              
 Number 149                                                                    
 REPRESENTATIVE G. DAVIS:  Thank you.  Of course, there's, my mine,            
 Mr. Chairman, there's always, there's always two sides and                    
 everybody, can always be a question in any manner whether it's even           
 right for us to be here today, you know.  And it can be a question            
 of constitutionality too, so, I just wanted to get some                       
 clarification.  Thank you.                                                    
 Number 153                                                                    
 CHAIRMAN ROKEBERG:  Well, Mr., Mr. Porter, referring to the                   
 addition of "convincing" after clearing "convincing" which is on              
 lines 11 and 23 of the third page.  It says that the commissioner             
 may not grant a reduction of royalty unless the lessee requests the           
 reduction, making a clear and convincing showing.  Can you tell me,           
 given your legal background in this, what the inclusion of those              
 words means and why you think they are there?                                 
 Number 163                                                                    
 MR. PORTER:  It's more easy for me to address why they are there.             
 It's my understanding that it's the belief of the attorney                    
 general's office that by adding the words "clear and convincing"              
 that would reinforce the commissioner's discretion to deny royalty            
 relief in cases where it was appropriate.  As far as a legal                  
 matter, I haven't personally done any research on the difference              
 between a clear showing and a clear and convincing showing.  It               
 does appear to have the inference of requiring a greater amount of            
 evidence in support of the royalty reduction (indisc.) though.                
 Number 174                                                                    
 CHAIRMAN ROKEBERG:  Right.  So, that is kind of one of the checks             
 and balances.  We have a higher standard here than we previously              
 had under the former bill.  Is that correct?                                  
 MR. PORTER:  Yes.                                                             
 CHAIRMAN ROKEBERG:  Okay.                                                     
 MR. PORTER:  Yes, definitely.                                                 
 CHAIRMAN ROKEBERG:  I think that's all at this time.  I know we               
 want to hear from -- oh, excuse me.  Representative Finkelstein.              
 Number 180                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  Just                   
 quickly, the, you mentioned that you didn't think the existing                
 statutes work, and what's, what specifically in them is the, what             
 causes companies to not use it?                                               
 Number 186                                                                    
 MR. PORTER:  Mr. Chairman, Representative Finkelstein.  Again, as             
 the bill, or as the statute is currently drafted, it would only               
 allow reductions to reestablish production from shut-in fields, or            
 to prolong production from declining fields.  That, by its nature,            
 is going to limit you to existing fields in which the economics are           
 marginal.  The new prong here would allow the commissioner to                 
 provide incentives for marginal fields that have not yet come into            
 production and may not come into production without the reduction             
 in royalty.  So there is a new prong added on to the list of fields           
 that qualify.  And then, again, the existing standard, it's page              
 three, lines 13 through 17, and 28 through 30, talks about an                 
 economic evaluation of rates of return on production from the                 
 field, and maximum economic returns. It's my understanding that               
 that's proved problematic on at least one prior application in                
 which the lessee had purchased a field from another lessee and did            
 not have the economic data to go back to the beginning of the field           
 life and actually make some sort of showing on what sort of return            
 was arrived from all the production for the life of the field.                
 Again, that would be replaced with the more general best interest             
 finding requirement like the lease sales in which the commissioner            
 could address the totality of the circumstances, not just the                 
 economic rate of return.                                                      
 CHAIRMAN ROKEBERG:  Thank you, Mr. Porter.  We need to move on, at            
 this time, we have further questions if you're going to be around,            
 we'd appreciate it 'cause we'd like to hear from Representative Joe           
 Green, and Representative Green, if you'd like to come forward.               
 I'd just like to preface this by saying that we invited                       
 Representative Green to come this morning because the topics of the           
 testimony from both Marathon Oil and Unocal will be focusing on               
 mature fields in Kuparuk this morning.  So, I thought it would be             
 appropriate if Senator Green could explain his bill and its                   
 relationship, particularly as it relates to mature fields.  So, you           
 got the court there.                                                          
 REPRESENTATIVE JOE GREEN:  Thank you, Mr. Chairman, committee                 
 members.  I have not followed as closely as I might the discussions           
 of House Bill 207, so I'll confine my comments strictly to House              
 Bill 209 as it may have an impact, and hopefully, would be                    
 integrated within House Bill 207, and make one kind of a package              
 so, as it were, to enhancement.  The two issues that I would like             
 to address, and certainly we are talking about mature fields now.             
 We're not talking about how 209 would affect new fields that you              
 have probably been discussing, those marginal fields of development           
 there.  This, this whole set of enhancements has to do only with              
 fields that are on their last legs as all fields ultimately will              
 become (indisc. - papers rattling) technical people, but so, what             
 I would like to address is not so much the precise way the                    
 commissioner might grant the royalty reduction, but rather to give            
 a couple of examples, and perhaps maybe, if that be the will of the           
 committee or the legislature ultimately, that these then could be             
 used as guidelines that the legislature finds appropriate and that            
 the commissioner then could use as kind of, all right, I'm going to           
 negotiate with company or unit A, in a manner that may not be                 
 precisely as this, as these might offer, but they could be used in            
 comparison so that at least he knows he's, he's dealing in the same           
 realm that the whole concept was designed for.  And so, with that             
 in mind, I have a couple of handouts that I'd like to discuss --              
 and do you have a short time frame, Mr. Chairman?  These may take             
 several minutes to discuss.                                                   
 CHAIRMAN ROKEBERG:  The time is yours.  We have a lot of testimony,           
 but I mean, we want make sure you get a proper hearing.                       
 REPRESENTATIVE GREEN:  What's being passed around, and I hope there           
 are some extras for some of the people in the audience to follow              
 along, are two illustrations, and again, I want to make sure that             
 the committee understands that these are not being submitted as the           
 only, but rather as illustrations.  Two things happen as the field            
 reaches its economic limit for that period time when consideration            
 has to be made that we are now in the death throws and may have to            
 plug and abandon.  Illustration number one is a crude attempt at              
 trying to show the costs that cause the field to get to the                   
 economic limit versus time that the field has been on production,             
 and we attempted to shade two different types of costs.  There are            
 those, and it's probably a misnomer to say irreducible, but these             
 are the conf... it's irreducible from the legislature or the                  
 state's standpoint.  This would be something that the company, or             
 the unit operation, or whoever is doing the lease operations would            
 have control over.  Those costs, and certainly we are all painfully           
 aware of what's happened in the oil industry this past year in                
 trying to reduce those very costs as they may, from their office              
 building clear out to their leasehold.  And then above that is a              
 lighter shade, which are the burdens that are against the                     
 operation, which primarily, are royalty and taxes that the state              
 does have control over.  And so, the revenue as it's moving down              
 from the left to the right, is a function of production rate,                 
 obviously, and value of the product that is being produced.  And              
 both of those things have a direct bearing.  Certainly, if it was             
 $40 oil that line wouldn't be as steep as it is, or if for some               
 reason, there was an ability to just continue to maintain and                 
 maintain production, but both of those things, constant value and             
 decreasing rate, or decreasing value and constant rate, or any                
 combination thereof, is going to cause this line to come down at a            
 greater or lessor degree.  And because of production history, and             
 value, those projections can be made.  Now, it may be that there              
 would be, all of us in this room make our own projections and we              
 will probably all come up with a different rate that line would be,           
 but it certainly would be, I think, just as getting very fiercely             
 competitive companies to come to an agreement to form a unit, there           
 could be an agreement between legislature that is passed, the                 
 commissioner's office as it were, and whoever is appealing for a              
 reduction in royalty.  And the concept is that as this approaches,            
 whatever that, that value is for the top line, and it certainly               
 would be incumbent on both the company and the state to lower that            
 to extend the life of the fields.  But, at some time, whatever X              
 may be agreeable to the commissioner and the company is, there                
 comes a time when you're just about to the point that continued               
 operation is going to cost you.  You're going to lose money, as it            
 were.  Prior to that time, or maybe at that time, maybe this X goes           
 to zero.  I don't know.  But, at that time, then it would be                  
 incumbent that the applicant come to the commissioner and suggest             
 that maybe we can drop royalty, whatever the costs that are                   
 available to him to extend the period of life and, and the line               
 shows a rather severe drop.  In reality, that line becomes                    
 asincotic(ph) to the economic limit as you get, it becomes nearly             
 parallel -- that's not a vulgar word.                                         
 (?):  It sounds vulgar.                                                       
 REPRESENTATIVE GREEN:  But, it, it actually has a tendency to taper           
 off.  It comes down sharply and then tapers off and becomes almost            
 parallel with costs, assuming costs stay constant.  And so, a small           
 change, my point is that a small change in that point can extend              
 the field life significantly as has happened in the, in the Inlet.            
 A classic example there where they've been very close to the                  
 economic limit for a long time.  Continued operation is certainly             
 to the best interest of the state, in my estimation, both for jobs            
 that they do, the spinoff from that, the ancillary operations that            
 of with oil field operations.  Certainly, something, even though it           
 be less than 12.5 percent reduction in royalty times something is             
 better than a high rate.  Twelve and a half percent of zero.  So,             
 that's the concept on illustration one, and if there are any                  
 questions I would be glad to answer those before we go to                     
 illustration two.  You want to do both first?                                 
 CHAIRMAN ROKEBERG:  Yeah.                                                     
 REPRESENTATIVE GREEN:  Okay.  Illustration two is a slightly                  
 different concept in that it's tied essentially to production.  It            
 could also be income, but it might be a little bit more difficult.            
 And again, it's plotted against time.  The concept here is that               
 company A comes to the commissioner and says, commissioner, we are            
 rapidly approaching a time, and I'm now pointing at about the                 
 middle where this funny looking line goes up, curved line,                    
 intersects the diagonal line, that we have to do something.  We               
 either have to get ready to plug, or my board of directors has                
 agreed that I could spend X number of dollars to infill drill, to             
 add something, but that at the current royalty, I can't afford                
 that.  It just doesn't pencil out.  Now, if there were a way that             
 I could determine that by spending this money I'm going to get more           
 oil that I would, let's, let's use oil as an example.  I'm going to           
 get more oil that I would if I just let this thing die a natural              
 death.  If there could be a way that I could reduce that burden,              
 then I think my board of directors will allow me to spend this                
 money.  And that again would be I think to the benefit certainly              
 from an AOGCC standpoint prevention of waste.  You ultimately get             
 more blood out of the turnip as it were.  And what this is a very             
 simple component that says that as you project this decline, under            
 current operations, without making this additional investment                 
 you're going to come to a timeout here moving to the right of that            
 intersection, if you will, that say, one-eighth of the straight               
 line is equal to a lessor number, whatever that lessor number may             
 be, of royalty based on the curve line; the increased production,             
 so to speak.  So that, in effect, the state could actually break              
 even here. They wouldn't get the curve line without the investment,           
 the company can't make the investment if they don't get a royalty             
 reduction.  You could actually go from this, let's just take a wild           
 example. Instead of 1/8th it goes to 1/10th, or 1/12th royalty                
 because at sometime to the right of the word forecast those two               
 values would be equal.  And from then on you follow down on the               
 lessor royalty on the greater production.  And that's a concept               
 that works in other states.  It's a concept that perhaps the                  
 commissioner could utilize.  And those are two examples that, that            
 are kind of the driving engine for 209.  And again, it's not that             
 this should be a handcuff on the commissioner.  It should be maybe            
 a standard, a reasonable expectation that if he then is able to               
 negotiate something else that's in the state's best interest it               
 would be a yard stick by which to measure and say, yeah, this is              
 reasonable.  It's completely different than either one of these,              
 but it's certainly equivalent to, or in the best interest, and it's           
 not just some wild off thing that some people have had some concern           
 about.  You've heard the word, there has to be mutual trust, and              
 this whole concept of partnering or working with, between the state           
 and industry, and sometimes that moving from one seat to the next             
 is a little scary.  It's kind of like having one foot in the canoe            
 and one on shore, and you, you've got to get in the canoe, but                
 you're a little nervous about it.  So this is maybe a, a way by               
 which you could move out into the canoe with a little more degree             
 of assurance that it isn't going to get crazy, or the state isn't             
 going to get taken to the cleaners.  And again, we're talking about           
 mature fields here.  So now, if there are any questions, I would be           
 glad to answer them.                                                          
 Number 412                                                                    
 CHAIRMAN ROKEBERG:  Representative Green, I just, these are                   
 excellent graphs, and I want to compliment you.  They're, most of             
 the graphs that we've seen or I've seen recently have the graph               
 going upwards 'cause they're driven by prices whereas this is the             
 reverse because of the marginal fields, 'cause you have costs here            
 as an element on this side against time.  You've got a projection             
 here against time, and for example, in the Conoco case that was               
 before the department a number of years ago, they actually had                
 bargained an investment position here, so.  I know in the, my                 
 approach to try to micro manage this bill, we've discussed a number           
 of different scenarios and so forth, but I think you make an                  
 excellent point that these things really need to be considered, so            
 I think that the commissioner, and please correct me if I'm wrong,            
 needs a certain amount of flexibility to be able to bargain these             
 things. I don't think even, would you agree that we can put these             
 into statute, or give specific direction?  Isn't it better to have            
 a little more flexibility?                                                    
 Number 429                                                                    
 REPRESENTATIVE GREEN:  It definitely is in order to negotiate you             
 have to have negotiating room otherwise you just get pounded.  So,            
 yes, I would certainly suggest that he has to have some                       
 flexibility, and the only reason that these are offered is that it            
 would be perhaps a, okay, I'm going to agree to negotiate out here,           
 but this is the kind of thing that I'm going to have to judge my              
 negotiations against.  That may or may not be advantageous.  I                
 wouldn't say that it should be cut in concrete.  It's just more               
 offered as, as, as I mentioned, bridging the gap between what, what           
 the legislature or the industry, or the commissioner, or any of the           
 parties might feel somewhat more comfortable with.  They, at least            
 then have an idea of what they can expect.                                    
 Number 441                                                                    
 CHAIRMAN ROKEBERG:  One more question from the, from the Chair.               
 If, as the bill is written now it has a, what I call an artificial            
 floor which is inserted because of the (indisc.) I'm not sure                 
 (indisc.) characterize that as.  It seems to me that this type of             
 a illustration shows the problem with that in so much as it does              
 have an artificial floor because in a marginal field it's not                 
 inconceivable that you can get to zero and still would be to the              
 benefit of the state to have that deduction being produced.                   
 Number 449                                                                    
 REPRESENTATIVE GREEN:  It's not the intent of, my intent,                     
 certainly, in 209, to establish a floor.  I think that should be a            
 negotiable item and I think in light, he has that right.                      
 Number 451                                                                    
 CHAIRMAN ROKEBERG:  Wouldn't you agree that artificial floor gets             
 in the way of (indisc. - both talking)....                                    
 Number 452                                                                    
 REPRESENTATIVE GREEN:  Absolutely.  I think that's another, another           
 handcuff that limits his negotiability.  And certainly, I think it            
 would, would ultimately end up with exactly what this is trying to            
 point out, as you did, that we would lose I would think if we                 
 maintained that hard fast rule that he has that floor because it              
 may well be to the state's advantage.  I could conceive of a                  
 situation where you might even get to zero royalty and still be in            
 the state's best interest because of the ancillary spinoff of                 
 continuing to operate.  The state still has taxes, for example.               
 They still have jobs provided for people and that sort of thing,              
 and you get into the social aspect.                                           
 Number 462                                                                    
 CHAIRMAN ROKEBERG:  Questions for Representative will...                      
 REPRESENTATIVE G. DAVID:  Mr. Chairman.                                       
 CHAIRMAN ROKEBERG:  Representative Davis.                                     
 Number 463                                                                    
 REPRESENTATIVE G. DAVIS:  Thank you.  Representative Green, on page           
 two of your bill, line five, it states that, it's a two-year                  
 initial production field report, that you consider field reduction.           
 Is that two years an industry standard, or is there any rationale,            
 or that just some number you came up with.                                    
 Number 468                                                                    
 REPRESENTATIVE GREEN:  It's, it's an arbitrary number and the                 
 reason that I would like at least two years.  I think that's what             
 this, is that it takes a certain amount of time to establish any of           
 these projections.  Two years is probably a minimum, certainly, if            
 you're really in a, in a marginal field you have been on for                  
 significantly longer than that, or you probably made a poor                   
 investment because you cannot develop a field for two-year life. I            
 can't imagine of any field that you would make the investment                 
 necessary for less than two years.  So, this is just by way of                
 saying, if you're coming in under this, this scenario, you've got             
 to be able to establish with some degree of reasonableness what the           
 future holds and that's going to take some amount of time.                    
 Number 478                                                                    
 REPRESENTATIVE G. DAVIS:  Thanks.  I just wanted to make sure there           
 REPRESENTATIVE GREEN:  No, it's not a hard fast rule at all.                  
 REPRESENTATIVE G. DAVIS:  Some professional engineering expertise.            
 REPRESENTATIVE GREEN:  No, and it would vary because there are                
 fluctuations all the way along.                                               
 Number 482                                                                    
 CHAIRMAN ROKEBERG:  Any further questions to ask?  Representative             
 Number 483                                                                    
 REPRESENTATIVE FINKELSTEIN:  Just, just, sort of an obvious point,            
 but how is it that you reach the conclusion that it's in the                  
 state's interest to sell our oil or essentially give it away, and             
 the circumstance for severance taxes would be down to zero, or                
 almost zero, and royalties, if there was no floor on royalties,               
 what reverts to zero.  Why would that be in the state's interest?             
 Number 489                                                                    
 REPRESENTATIVE GREEN:  Why would that be in the state's interest?             
 If that is the way that you can prolong the life of the field, and            
 we're not talking a month or two, as I mentioned, these costs                 
 become asinctoic(ph) that you can extend with a small change an               
 extensive amount of time, and so if, for example, you drop from               
 12.5 percent of simplicity, a hundred barrels a day, but that's the           
 economic limit, and we're going to shut the field in and lose from            
 there on.  We don't have ten more years of life, and drop that to             
 five percent, or three percent of something that would then allow             
 the operator to continue the life of the field, we then would get             
 three percent of something, which is certainly 12.5 percent of                
 zero, or, even if that were zero, there are jobs to be created                
 which, in effect, allow people to spend money, provide services by            
 taxation on their homes that they can maintain, those sorts of                
 social aspects that -- this is money.  Every dollar that's                    
 ultimately comes into this state because of oil that's being sold             
 away has a chamber of commerce spin on it of, I don't know what,              
 but it's anywhere from three to five times it spins in our economy            
 before it goes out.  That's to the state's best interest.  At least           
 in my opinion.                                                                
 Number 508                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman.  Just another thing.               
 Sometimes they provide services through taxes, but few places in              
 the state most of the time they demand services when they cost the            
 state money, and we've got to remember that we need money to run              
 the state.  The cost, if you had the permanent fund, is exchanging            
 your nonrenewable resources for some sort of wealth we can use in             
 the future because we only get this once, and I agree, the                    
 principal applies a little better, as you point out, in the                   
 declining field, but we're also talking here about starting up.               
 Number 515                                                                    
 REPRESENTATIVE GREEN:  No, through the Chair....                              
 Number 516                                                                    
 REPRESENTATIVE FINKELSTEIN:  The concept I mean.  I wasn't, the               
 concept of royalty reduction here and whether it's full or not                
 exists in the whole world of marginal fields.                                 
 Number 519                                                                    
 REPRESENTATIVE GREEN:  Through the Chair.                                     
 CHAIRMAN ROKEBERG:  Go ahead, Representative Green.                           
 REPRESENTATIVE GREEN: I would take exception to that, and from this           
 standpoint then I think you make a very good point, and so many of            
 the things this state does when it encourages people to come in,              
 they quite often end up costing the state more than they provide.             
 Fortunately, for the state, most, if not all, of the full time                
 petroleum oriented jobs are those that benefit, those that                    
 contribute rather than those that take, because of the salaries,              
 for one thing, they actually, and the chances are where they live,            
 their tax rate, if it's like in Anchorage, your house tax rate                
 helps to defray costs.  It's a benefit to the state rather than a             
 detriment, but I think your point is well made in so many cases.              
 CHAIRMAN ROKEBERG:  Representative Brice.                                     
 Number 529                                                                    
 REPRESENTATIVE TOM BRICE:  Thank you, Mr. Chair.  Once this                   
 leveling off has occurred, is, how long generally, or is there a              
 general length of time, I mean, that production might be able to be           
 maintained above the economic factor, the limiting factor?                    
 Number 534                                                                    
 REPRESENTATIVE GREEN:  Well, that, that certainly is a function of            
 how closely paralleled those lines would come. From the,                      
 unfortunately, from a standpoint of Alaska, from fields in say                
 North Texas, shallow fields where they can be innovative, those               
 things last decades where there are very marginal profit, but they            
 can produce for years, and years and years.  Here, it would be less           
 but it still would extend the field, such as has happened in the              
 Cook Inlet.  I mean, they have been so close to economic, as you              
 know, there are several platforms already shut in.  There are                 
 others that they just are hanging by their finger nails and with a            
 slight reduction maybe they can get a hold.                                   
 REPRESENTATIVE BRICE:  Yeah.  Exactly.                                        
 REPRESENTATIVE GREEN:  So, how long that, that would depend on                
 each, each...                                                                 
 Number 545                                                                    
 REPRESENTATIVE BRICE:  But there are, there are instances where it            
 goes quite a ways.                                                            
 REPRESENTATIVE GREEN:  Yes.                                                   
 REPRESENTATIVE BRICE:  There are instances where, as the technology           
 develops those fields can be extended even longer and longer, and             
 provide stability within the labor force for those folks.                     
 Number 548                                                                    
 REPRESENTATIVE GREEN:  If I might digress, Mr. Chairman. One                  
 example of, of one of the things that has happened, and I think               
 it's very appropriate that you mention technology.  This old                  
 blister worked in the oil patch when you had to make connections              
 every time you ran a tubular good in or out of a hole, you had to             
 make connections, but in the last several years they have                     
 protected, perfected, pardon me, a system called coil tubing, and             
 they not only can go in and blow fluids in, they can actually put             
 a motor, or a hydraulically driven pump, motor on the bottom in a             
 bit and actually do well work with this coil tubing.  This                    
 significantly reduces the cost of working a well over, which                  
 maintains the well's life and that sort of thing.  So, yes, you're            
 absolutely right.  If we can extend it five years maybe -- it's the           
 same sort of thing with a cancer patient, you can continue his                
 life.  They may come through with something.                                  
 Number 561                                                                    
 CHAIRMAN ROKEBERG:  Well, thank you, Representative Green.  It's              
 the desire of the Chair to hold over any further testimony on the             
 House Bill 209 at this time.  And perhaps, if necessary, take it up           
 further and as you indicated, look to perhaps integrating it in               
 207, or whatever the committee feels is appropriate.  And I'd just            
 like to comment that from old blister to another old blister, that            
 the chair wants to thank you very much for the input you've had in            
 this consideration and we look forward to your advice, counsel and            
 so forth in the future on this and want to thank you very much.               
 REPRESENTATIVE GREEN:  Thank you, Mr. Chairman, committee.                    
 CHAIRMAN ROKEBERG:  Next the, we'd like to hear from Mr. Bradley              
 Penn, please.                                                                 
 Number 572                                                                    
 Chairman, members of the committee.  We appreciate the efforts of             
 the legislature to develop incentives to encourage investment or              
 development of marginal fields, and to extend the life of mature              
 fields.  Marathon has previously testified before the Senate                  
 Resource Committee that there are currently statutes and                      
 regulations providing for royalty relief; however, this legislation           
 has been ineffective in providing royalty relief.  I'd like to                
 probably give the example, and further, Representative Green's                
 charts, if I may, by an example of called the North Trading Bay               
 Unit in Cook Inlet.  There are two platforms in this unit.  The               
 Spark Platform and now we call it the Spur Platform.  It was                  
 originally the Texaco A Platform, and this will show from Mr.                 
 Green's illustration in number one how that revenue line goes into            
 the black below zero and how a royalty reduction would give the               
 state, or would have given the state something, a percentage of               
 something as opposed to having the well shut-in now, and no                   
 revenue.  I'll just go through a little chronology of what happened           
 in North Trading Bay.  The two platforms were put in in the mid-60s           
 and started producing '68, '69; one put in by Texaco and the other            
 put in by ARCO.  In 1982, Texaco submitted an application and, if             
 I may just back up a minute, I don't know if you have the packet              
 starting with a letter from DNR to L.R. Dartez or Marathon, and               
 there are about 25 pages.                                                     
 CHAIRMAN ROKEBERG:  I believe it was handed out this morning.                 
 MR. PENN:  Okay.  And if you start at page 25 and work forward,               
 that's the Texaco application, and then as we work forward, the               
 Marathon application.  In '82 Texaco submitted that application and           
 that was the sole extent of their application.  The Division of Oil           
 and Gas asked for more information under the existing statutes.               
 Texaco felt that it was too time consuming and, and too much of an            
 accounting burden to get that data and did not pursue the royalty             
 reduction application.  In 1985, Marathon obtained the Spark                  
 Platform from ARCO and produced that platform.  In 1988, Marathon             
 and Unocal purchased the other Texaco A Platform from Texaco and              
 renamed it the Spur Platform, so in some of the correspondence you            
 will see Spur Platform.  And in July of 1989, Marathon applied for            
 a royalty reduction in the North Trading Bay Unit.  In March of               
 1990, I think flip to pages 7, 8, 9 of the, in the lower left there           
 are numbers and they probably are the key items, but applied for a            
 royalty reduction and in March, the DNR Division of Oil and Gas               
 responded that our application was insufficient.  And, if you look            
 on page seven, you will see the legislation that was in effect at             
 the time and under 38.05.180J, the last line reads, "A reasonable             
 rate of return with respect to that lessee's total investment in              
 the field."  Then we go to the regulation on page eight, and number           
 four reads, "...contain the detailed statement covering the entire            
 life of the lease."  So there seems to be something handcuffing the           
 director of the Division of Oil and Gas in the legislation that was           
 passed and the regulations that were promulgated as to how much               
 information you have to submit.  The outcome of the Marathon                  
 application was that we requested clarification of the March letter           
 in July of '90.  The director responded that we needed the entire,            
 or complete revenue costs and expense data from not only Marathon,            
 but from ARCO and Texaco dating back to 1965.  And....                        
 Number 635                                                                    
 CHAIRMAN ROKEBERG:  Excuse me, for the record, 1965?                          
 MR. PENN:  Yes.  From....                                                     
 CHAIRMAN ROKEBERG:  Fifteen years?                                            
 Number 637                                                                    
 MR. PENN:  At that time, right.  And at that time we were, it was             
 just, we wrote letters to ARCO and Texaco, I think after they                 
 divested themselves of the property they got away, they disposed of           
 the financial documents and so we could not pursue that avenue                
 concerning that request.  What this shows is that here we are                 
 approaching, or you know, asking for royalty reductions so that               
 line doesn't hit zero.  And then, in 1992 Marathon, that line went            
 below zero, or had continued to go below zero and we asked the                
 Department of Natural Resources, Division of Oil and Gas in our               
 plan of development for a suspension of operations and production,            
 and that was granted.  The top letter is the grant of that.  There            
 have been subsequent extensions of that and so, right now, as I               
 said, this is an example showing how we tried to use the existing             
 legislation statutes the state might have extended the life of the            
 field getting some percentage of production as opposed to shutting            
 it in and getting no, no revenue from the field.  The oil                     
 production from the platform is shut in and I doubt since it's been           
 shut in since '92 that it will ever come back on.  There would have           
 been, even if the royalty was zero, two people or more per platform           
 plus people on the onshore production facility having jobs, full              
 time jobs and shifts as opposed to having to lay those people off.            
 Talking specifically to the bill now...                                       
 Number 661                                                                    
 CHAIRMAN ROKEBERG:  Mr. Penn, let me, could I just backtrack                  
 slightly here to the correspondence you provided us?  The,                    
 referring to the March 28th letter where, I think that letter from            
 I believe Mr. Eastman(?) to Mr. ...                                           
 MR. PENN:  Kukluff(sp)?                                                       
 CHAIRMAN ROKEBERG:  ...Kukluff(sp), yeah.  It points out the                  
 statute and it also points out the regulations which are in                   
 existence as of this date.  But, what I would like to know is your            
 opinion as to the attachment, which is called "The Information                
 Sheet on Application for Royalty Reduction" and handwritten page              
 ten.  It seems to me in a cursory reading that the requirements of            
 the contents of application far exceed those which were required              
 under statute and the written regulations, and I would like to, is            
 my statement correct?  Or how would you interpret that?                       
 Number 675                                                                    
 MR. PENN:  I think that's, I think that's a good perception of what           
 the information sheet provides when you look at both, or all three            
 of the statutes, the regulations and the information sheet.  I                
 think, and I'll have to reiterate what Representative Green said.             
 You have a statute, you have to allow some discretion to the                  
 director because there are different cases.  You've got North                 
 Slope.  You've got Cook Inlet.  You've got onshore.  You've got               
 offshore.  You've got oil and gas and so it's going to be hard to             
 pin down one formula that will work for royalty reduction.  So, you           
 have to have, I don't think you can overly constrain the director             
 or the commissioner, but you also have to have the checks and                 
 balances, I think.  And in that light, I, one thing that I, you               
 know, our experience has shown that there was an interpretation               
 that data had to be provided for the entire life of the lease as              
 opposed to the statute reading "...from the lessees interests in              
 the lease."  And I guess to clarify that we'd like it to read that            
 the lessee shall be required to submit data for a royalty reduction           
 application for the two-year time period preceding an application             
 it has owned an economic interest in the field.  And we think that            
 that's just a first wash out to the committee, but that may solve             
 some of the problems with interpretation of how much data, how much           
 financial data.  I was talking to people, well, can we say, can we            
 give all of our financial data from a field, and we've been                   
 operating the Trading Bay Unit with Unocal since 1965, 1962 and               
 we'd be hard pressed to go back in our archives to find that                  
 financial data specific to reduction.  It would be easier if we               
 find it with tax returns and financial returns and the records                
 retention associated with those.  It appears that HB 207 does not             
 resolve the problem of the discretion of the commissioner or the              
 director of the division of oil and gas.                                      
 TAPE 95-12, SIDE B                                                            
 Number 000                                                                    
 MR. PENN:  ...the commissioner or his delegate, or director a                 
 certain amount of latitude, but we're a little hesitant to have               
 that nonappealable in some form or fashion and we would suggest               
 judicial would review.                                                        
 Number 008                                                                    
 CHAIRMAN ROKEBERG:  Excuse me, Mr. Penn.  You're talking about the            
 applicant in the event his application was rejected?  Is that what            
 Number 014                                                                    
 MR. PENN:  Yes, I believe, excuse me while I find the....                     
 CHAIRMAN ROKEBERG:  Well, I understand, yeah, we know that's on               
 MR. PENN:  Third or fourth page.                                              
 CHAIRMAN ROKEBERG:  Nonappealable, that's the way it's written out.           
 Number 025                                                                    
 MR. PENN:  We, if, and all I'm saying is for balancing, if you're             
 going give the commissioner more discretion, which in certain cases           
 should have them, then at least have a mechanism for appeal so that           
 discretion isn't abused.  Finally, talking about the other aspect             
 that Representative Green was talking about, and that's marginal              
 fields.  I, I've been talking about mature fields, but for marginal           
 fields instead of allowing the commissioner to increase or                    
 otherwise modify the state's royalty, I think we'd like to see a              
 sliding scale royalty based on product price increases and                    
 operating costs.  There seems to be an arbitrary authority when you           
 allow the commissioner to increase and let's say you had a marginal           
 field, you went in and the existing royalty is 12.5 percent.  You             
 went in for a reduction because your economics showed it was                  
 marginal.  You started producing, prices went up and the                      
 commissioner could, or the director could increase your royalty to            
 50 percent, and if there's no limit on the raising royalty or the             
 time for that, and we think there should be some type of quid pro             
 quo on, on the reduction.  So, we think that a sliding scale based            
 on those factors would, would be more, or less arbitrary.  That               
 concludes my comments, and Marathon appreciates the committee's               
 effort and those of the legislature to encourage new investment and           
 provide relief for mature fields in the state.  And I would be                
 happy to try to answer any questions.                                         
 Number 057                                                                    
 CHAIRMAN ROKEBERG:  If I might, we have several people on                     
 teleconference I want to get in, and if the committee will bear               
 with me If I could ask a couple of quick questions, then we will go           
 over some of them.  How would you define a mature field? In the               
 Cook Inlet needs to be, that's one of the problems we have in                 
 looking at this particular bill here.  There's no clear distinction           
 made between a new field and a mature field and I can see some                
 pitfalls now, downstream here.  I mean, what, what, would you have            
 a recommendation about that?                                                  
 Number 069                                                                    
 MR. PENN:  I think that Representative Green's illustration number            
 one would help in that it's a matter of revenue.  The time frame              
 could be five years you produce the field and it's at its economic            
 limit.  It could be 35 years like we're approaching in the Cook               
 Inlet.  It's a matter of the reserves that are there and not so               
 much a fixed time period but Cook Inlet anything over 20 years are            
 mature fields that we have in Cook Inlet.                                     
 Number 082                                                                    
 CHAIRMAN ROKEBERG:  Just for the record, I want to correct my math;           
 that should have been 25 years and Mr. Brice not, (indisc.) he's              
 sitting here then, right?  The, would you have a recommendation or            
 a thought about trying to define a mature field though?  What would           
 that be, like 25 or 35 years or something like that?                          
 Number 087                                                                    
 MR. PENN:  I think it falls into that category, but I said, also              
 said a mature field might be one that's only produced for ten                 
 years, but you produced all of the reserve, so it, I think....                
 Number 090                                                                    
 CHAIRMAN ROKEBERG:  So there's need for flexibility.  You'd rather            
 be date specific on that.                                                     
 MR. PENN:  Right.                                                             
 CHAIRMAN ROKEBERG:  And then, just to go back to the circumstances            
 revolved around the North Trading Bay, would you characterize the,            
 how would you characterize Marathon's reaction to the demands in              
 the application letters, demands, or I should say the stipulations            
 in that letter?  Did you, did Marathon make a decision not to                 
 pursue further?                                                               
 Number 109                                                                    
 MR. PENN:  Well, I'd like to refer you to page nine of the packet             
 in that Marathon went into the application knowing that there was             
 previous production and accounting and cost data, and in our first            
 sit down meeting we said, we don't think we can get this from ARCO            
 and Texaco if you request it back to day zero, and that was one of            
 the items that we predicated the application on.  And the, you                
 know, in the March letter they're saying that even though we might            
 have had those conversations we were required to provide                      
 information for the entire length of the lease.  So we, I guess we            
 felt we spun our wheels a little bit with what we thought we were             
 going to do and the data we were to provide once we were asked to             
 provide ARCO and Texaco's data we knew that, one, we couldn't, the            
 likelihood of getting it was very small.  It would be the other               
 way, if we sold the platform, we wouldn't have the data to give               
 someone else, you know, back to day zero.  And then, two, as time             
 went on, that revenue hit and went below the zero line.  And so it            
 was a combination of factors.                                                 
 Number 136                                                                    
 CHAIRMAN ROKEBERG:  So, the net result of that, as I think I                  
 mentioned the other day, and I'd like you to verify that, was that            
 you did not pursue the application any further and made a decision            
 and got permission to shut in that oil producing zone, and if you             
 had different circumstances or a reduction was granted, it's                  
 conceivable that field could be producing today.  Is that a correct           
 Number 146                                                                    
 MR. PENN:  I'm not sure that it would still be producing, but it              
 would have, I'm assuming would have extended the production life of           
 that field.                                                                   
 Number 148                                                                    
 CHAIRMAN ROKEBERG:  And so (indisc. - coughing) then existing                 
 statute and the regulations together with the commissioner's                  
 requirement for the application stifled, or caused that field to be           
 shut in more prematurely.  Is that a fair statement?                          
 Number 152                                                                    
 MR. PENN:  Without instituting a royalty reduction it did not                 
 lengthen the life, oil production from that unit.                             
 Number 154                                                                    
 CHAIRMAN ROKEBERG:  I mean, okay, but that's why we're doing this             
 bill here.                                                                    
 MR. PENN:  Right.                                                             
 CHAIRMAN ROKEBERG:  That's, so there's, this is an instance here              
 that (indisc.) possible add some extended production and income?              
 MR. PENN:  Yes.                                                               
 CHAIRMAN ROKEBERG:  Any questions of the committee?  Representative           
 Number 161                                                                    
 REPRESENTATIVE BRICE:  Could you, you had made mention about the              
 appealability by the applicant to the judicial branch on the                  
 decision made by the commissioner.  I guess I'm wondering if you              
 could expound a little bit on that because I'm a little confused in           
 that it's my understanding what we're trying to do here is to set             
 up a negotiation process whereby two people go in and talk about a            
 contract versus some other form of, you know, taking place between            
 the state....  I see industry and the state negotiating as equals.            
 I think when we're saying that the applicant can take that, those             
 negotiations to court that there's going to be some hesitancy, some           
 problems there.  Do you think it might damper the state's desire              
 to, to even enter into these types of negotiations?                           
 Number 188                                                                    
 MR. PENN:  I guess in that aspect, what I was talking about was               
 giving the commissioner and the director more discretion, but with            
 that discretion is judicial review.                                           
 REPRESENTATIVE BRICE:  Uh-huh.                                                
 MR. PENN:  And I think you have that currently.  The problem                  
 currently is that the commissioner and director are also tied up              
 with trying to interpret the legislation, the regulation...                   
 REPRESENTATIVE BRICE:  Uh-huh.                                                
 MR. PENN:  ...and then information sheets that in some instances              
 seem contradictory.                                                           
 REPRESENTATIVE BRICE:  Okay.                                                  
 MR. PENN:  And that was a package.  I wasn't saying that we wanted            
 to negotiate state, company and then appeal it.                               
 REPRESENTATIVE BRICE:  Okay.                                                  
 MR. PENN:  From that, that interpretation, but it wasn't what I               
 REPRESENTATIVE BRICE:  Okay.  Okay.                                           
 CHAIRMAN ROKEBERG:  Any further questions?  Representative                    
 Number 205                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  The                    
 conclusion in that last question from the chair was that it was the           
 existing rules that have kept this from, or caused this well to               
 shut in, but in the existing law isn't the real problem here in the           
 case of the, that you just laid out, is the provision that requires           
 the historic analysis.  That one provision is what bogged down the            
 consideration here that we wouldn't, didn't get to see how the rest           
 of the provisions would work because you couldn't get past that               
 hurdle for lack of (indisc.).                                                 
 Number 217                                                                    
 MR. PENN:  Right. And, and what I'm, I guess what we're saying is             
 it doesn't matter what someone else did.  It's the two years of               
 production and, and the lessee.  So, I guess we interpreted it when           
 someone takes over a lease of a platform they're a new lessee and             
 it's the history of their, it doesn't matter what investments and             
 return ARCO and Texaco got because you were getting, the state was            
 getting royalty.  They were getting revenue and investments were              
 being made.  At least that's our opinion, to clarify.                         
 REPRESENTATIVE FINKELSTEIN:  But, just, I think you made your point           
 well.  The, I was just was clarifying that the whole problem...               
 MR. PENN:  Yes, the crux here.                                                
 Number 228                                                                    
 REPRESENTATIVE FINKELSTEIN:  ...(indisc. - both talking) is the               
 words 'reasonable rate of return' and in respect to the total                 
 investment in the field, which it allows in the historical                    
 analysis.  That was the problem right there.                                  
 MR. PENN:  Well, I think it's the interpretation of that.                     
 REPRESENTATIVE FINKELSTEIN:  If that was changed that would have              
 resulted in a different treatment.                                            
 MR. PENN:  Right.                                                             
 REPRESENTATIVE FINKELSTEIN:  Thank you, sir.                                  
 Number 234                                                                    
 CHAIRMAN ROKEBERG:  I'd like to go on to the teleconference now and           
 unless there's any further questions, and Mr. Penn, hopefully you             
 will be available for any other questions or testimony.  I want to            
 thank you very much (indisc. - coughing). I'd like to welcome                 
 everybody that's listening in Anchorage, Fairbanks and hopefully,             
 Soldotna and other places around the state.  And I would also                 
 specifically like to apologize to the people in Fairbanks.                    
 Yesterday, we had some communication breakdowns and I asked for               
 testimony to find out if anybody else wanted to testify, but I did            
 not have, or did not know you were up there listening in, and I               
 want to apologize.  As a result, I'd like to start out with                   
 Fairbanks and ask for the presentation of Mr. Richard Fineberg, and           
 indicate also, Mr. Fineberg, we do have your written testimony in             
 hand.  So if you would summarize it and tell us your concerns.                
 Number 252                                                                    
 RICHARD FINEBERG, Fairbanks (Teleconference):  Thank you, Mr.                 
 Chairman.  This is Richard Fineberg here in Fairbanks. Since you              
 have my written testimony I will summarize by saying that I have              
 little concerns of the (indisc.).  The rest of the legislation as             
 well as the confidentiality and appealability provisions.  I will             
 not take you through my text, but I'd like to deal with a closely             
 related subject that I think bears directly on HB 207.  Since                 
 leaving the Governor's Office in 1989, every two years or so I have           
 reviewed the North Slope's production trends using state data.                
 Most recently I did so last month. I summarized the results in two,           
 in two graphs, which I shipped to the committee and staff this                
 morning with the work tables from which the graphs were derived.              
 Does the committee have those graphs at this time, Mr. Chairman?              
 CHAIRMAN ROKEBERG:  Yes, I believe we do, sir.                                
 MR. FINEBERG:  Okay, thank you.  I very much appreciate the                   
 staffing and your courtesy, sir.  These are very elemental circles,           
 straightforward and tabulations of state data.  I used the                    
 Department of Natural Resources for the reports, but I believe the            
 Department of Revenue data would show the same trend.  I used                 
 PNF(?) for specific reasons of simplification.  With regard to the            
 assertions, which seem to be taken as fact that the marginal fields           
 just don't pencil out, the historical and current data indicates,             
 to me at least, this is the burden of truth that we approach the              
 intersection of marginality on the North Slope.  Should we whip the           
 industry and the administration?  I believe that case has not been            
 made.  What the two large graphs (indisc.) are showing is that on,            
 reviewing North Slope production forecasts and productions decline,           
 although real, consistently plays out more denying (indisc.) and              
 forecasting.  Specifically, if you will compare the 1980 (indisc.)            
 forecast to the current forecast for production for 1989 through              
 the year 2010 you will find that we never expect produce 3.75                 
 million more barrels of oil through 2010 than we forecasted for               
 1985.  Let me restate that.  Over the last 10 years, the current              
 chance of royalty regime has generated five more years of                     
 production at two million barrels per day than was forecasted in              
 1985.  Each two years we booked one whole year of new forecasted              
 production and surpassed maximum (indisc.).  This, this has trend             
 a slow decline was established in the face of declining (indisc.).            
 More importantly, (indisc.) continues to today despite the dire               
 predictions by the industry and professional observers in the late            
 1980s.  That we obtained the of such entries of that time to                  
 demonstrate that it continues today is why you have my graph B2 of            
 1990, or my table B2, which I did not graph.  That shows that the             
 trend is still continuing today.  Basically, the increased                    
 production I am referring to is the difference between the grey bar           
 in the graphs of one and two, and the white bar.  These are data              
 which are just simple tabulations state data, lead me to the                  
 conclusion that it remains to be demonstrated, but this, this                 
 legislation is (indisc.) either necessary or it reflects the lines            
 of the stewardship of the public resources mandated by the                    
 Constitution.  I'd like to point out, obviously, that, that any               
 bill that increases industry revenue at the expense of the state,             
 state treasury, would tend to stimulate production.  The industry             
 will abdicate such a measure.  That does not mean such legislation            
 is necessary.  In conclusion, I'd like to make one very quick point           
 with regard to Representative Green's testimony and that, of                  
 Marathon's Mr. Penn.  I don't wish to be argumentative.  I'd like             
 to clarify for the committee.  Number one, with regards to                    
 Representative Green's excellent illustration number one, which I             
 received by (indisc.) fax here, and I'm very grateful to receive              
 it.  (Indisc.) we're looking at the North Slope in the, in the plus           
 line for BP and Badami, which is probably the case in point here.             
 The irreducible company operating plus below the line would, would            
 include the (indisc.) lessor pipeline, which has a comfort element            
 of roughly one dollar per barrel; a guaranteed stable profit                  
 element.  That's a joker that belongs in your North Slope deck that           
 doesn't show if you only consider the fields.  Number two, Mr.                
 Penn's examples from Marathon are very probably valid.  I did a               
 report on Cook Inlet profitability in the summer of '94.  You                 
 should note though that Cook Inlet is an entirely different kettle            
 of fish from the North Slope as I'm sure you know, but sometimes we           
 lose sight of the forest for the trees.  Basically, the revenue               
 above the line in Mr. Green's figure one, again, is, and on the               
 North Slope, roughly one hundred times that of Cook Inlet in the              
 aggregate, and that would probably break down for a field                     
 comparison, probably your North Slope marginal fields are one                 
 larger of magnitude, greater, speaking very roughly, a full order             
 of magnitude greater in the revenue generation than historic fact             
 lore to which Mr. Penn referred.  Again, I don't wish to be                   
 argumentative, I just wish to be sure that the committee is not               
 getting overwhelmed with, with language and failing to see the                
 broad parameters of the data, which I believe my graphs                       
 demonstrated.  I thank you very much for your time and your                   
 courtesy, Mr. Chairman.                                                       
 Number 398                                                                    
 CHAIRMAN ROKEBERG:  Thank you, Mr. Fineberg.  I appreciate your               
 testimony and all the efforts you've put into this, and I assure              
 you we will review your written testimony.  I have one question and           
 one only, for myself.  That is to say, with your knowledge of the             
 production forecasting and so forth, can you tell me, or do you               
 have a, that the state, whether the state forecast, or how much the           
 state forecast include new or non-producing fields for their future           
 Number 407                                                                    
 MR. FINEBERG:  I can give you a rough answer.  If you look at my              
 table three that came down this morning, B3, which from my February           
 22 report, you can see that the older fields not producing right              
 now that are in the forecast is West Sak.  In general, the                    
 forecasts are structured conservatively to deal with both                     
 production identified at current technology, and forecasted from              
 that technology.  They are not presuming continued technological              
 gains, and part of the reason for that is that if the forecaster              
 said, oh, we can ration this us 20 or 30 percent because                      
 historically, that has been the case.  You would wind up shooting             
 the forecasters when you had a revenue of, rather than shortfall.             
 The forecasts are conservatively constructed and maybe correctly              
 conservatively constructors.  In terms of long range of planning,             
 however, that does mean that we're not considering when we look at            
 wrong forecast data the probability which I think my new data,                
 again, when you compare '90 to '95 block, shows there will be                 
 continued technological gains like the (indisc.) that                         
 Representative Green referred to.  I'm not sure if that was                   
 responsive to your question, sir.                                             
 Number 434                                                                    
 CHAIRMAN ROKEBERG:  It was right on the mark.  Thank you very much.           
 (Indisc.) questions?                                                          
 REPRESENTATIVE FINKELSTEIN:  Mr. Chair.                                       
 CHAIRMAN ROKEBERG:  Representative Finkelstein.                               
 Number 435                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chair.  Just two quick            
 ones.  Did the, taking the circumstance as it is now, the way the             
 law stands at the current time, and not referring directly to the             
 bill, would it make sense from your point of view to extend the               
 royalty reduction provision to new marginal fields rather than just           
 fields that are on their way out?                                             
 Number 443                                                                    
 MR. FINEBERG:  Mr. Chairman and Representative Finkelstein.  I am             
 a bit baffled by the language of the bill, and I believe the                  
 current statute falls under the Rube Reg, if it ain't broke don't             
 fix it.  I am not clear that broader language would serve a                   
 constructive purpose in terms of management of the resources at               
 this point.                                                                   
 Number 450                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Fineberg, if, the last question              
 is, the, you know, testimony indicates that of the two applications           
 for existing royalty reduction requests or royalty reduction                  
 requests under existing law, one of them failed because of the                
 requirement of historical information when it didn't exist.  The              
 other was the Milne Point case.  From your point of view, is the              
 reason that the royalty reduction hasn't been used before, is it              
 just fact that royalty reductions are a small factor compared to              
 the price of oil, or is there something else out there that's led             
 to them not being used?                                                       
 Number 458                                                                    
 MR. FINEBERG:  Mr. Chairman and Representative Finkelstein.  Let me           
 break that down.  First of all, with regard to the historical and             
 formation question. Should it be the case that DNR is on..., or too           
 onerous and not correctly interpreting the regulations and the                
 statute and the (indisc.) that the representative believes.  I                
 would very cheerfully say that that is one of the reasons that                
 (indisc. - static) and oil and gas, and administration should be              
 (indisc.) by your legislative audit with much more attention, and             
 that's not a statutory matter that you need to fix.  The chance of            
 the historical information.  I cannot read the industry's minds and           
 cannot tell you why various companies have or have not come forward           
 in the past to request statutory royalty relief.  With regard to              
 Milne Point, I believe you were coming very close, Representative             
 Finkelstein, to a significant issue in the barriers to increase               
 production in the future, two, two days ago in the discussion of              
 Milne Point I indicated in my written testimony, but I would be               
 delighted to back up in greater detail.  When you look at the map,            
 that Milne Point is going gang busters at this point without                  
 royalty relief, yet, yet Conoco has requested and been denied                 
 royalty relief some years, years back.  What is the difference                
 between Conoco and BP?  The single material difference, the largest           
 one I submit is that Conoco was the only field operator that did              
 not own a share of the TransAlaska Pipeline; therefore, that one              
 dollar in concept to be paid was paid by Conoco.  It's an handicap            
 that for BP is a profit, which is why, why the pipeline product is            
 below the line in Representative Green's excellent figure one.  As            
 to whether the industry will request royalty relief now, I am                 
 mindful of an old proverb I believe to be Gingrich, which while the           
 Governor was in Great Britain recently, I (indisc.) he heard, it              
 certainly doesn't seem like it, it goes to the effect: the jackals            
 ne'r try, but the lambies nearby.  You'll have to translate, and              
 you will, I submit at this point that we are the lambs and, of                
 course, we're going hear that cry.  Whether this is the boy who               
 cried wolf or the wolf is really at the door, again, the crux of my           
 testimony is that I've not seen a clear and convincing case that              
 the wolf is really at the door.  I only only heard the rhetoric and           
 that is one of the reasons I am very troubled by the                          
 confidentiality provision the administration included in this bill.           
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.                         
 Number 518                                                                    
 CHAIRMAN ROKEBERG:  Thank you, Mr. Fineberg.  We appreciate your              
 testimony.  Now, I'd like to...                                               
 MR. FINEBERG:  Thank you, sir.                                                
 CHAIRMAN ROKEBERG:  ...hear from Mr. Kevin Tabler.  He just blew              
 KEVIN TABLER, Land Manager for Union Oil Company:  It's balmy                 
 weather here.  We had eight inches of snow and two degrees in                 
 CHAIRMAN ROKEBERG:  Well, thank you, Mr. Tabler, for coming.  We              
 appreciate the efforts you did to get here.  Please state your name           
 and affiliation for the record, please.                                       
 Number 520                                                                    
 MR. TABLER:  Yes.  My name is Kevin Tabler.  I'm land manager with,           
 for Union Oil Company of California out of Anchorage.  Good                   
 morning, Mr. Chairman and members of the Oil and Gas Committee.  I            
 appreciate this opportunity to be heard today and to present                  
 Unocal's comments on House Bill 207.  First, I'd like to say that             
 we are very encouraged with the with the positive atmosphere and              
 effort expended thus far by the legislature and the administration            
 in trying to develop incentive legislation to enhance and stimulate           
 further exploration and development throughout the state.  We                 
 recognize and appreciate the concerted in depth effort being made             
 by your committee to fully assess the utilization applicability of            
 this bill prior to subsequent referral.  This time spent early on,            
 understanding the implications of the bill and providing the                  
 opportunity for intended users to clarify and augment specific                
 sections will greatly enhance its acceptability and help ensure its           
 passage into legislation.  By broadening the applicability of AS              
 38.05.180J we believe this bill is a step in the right direction              
 towards revising existing statutes.  This approach provides                   
 additional opportunity for certain marginally economic fields to              
 compete both internally within a company, and externally on a                 
 global basis. But, before I address specifics under Section 2, I'd            
 like to make a brief comment about Section 1.  Unocal is taking a             
 neutral position on this, on the appropriateness or need to revise            
 the funding mechanism previously established for the Alaska                   
 Permanent Fund under AS 37.13.10A.  The sharing of revenues and               
 proceeds derived through leasing exploration development of the               
 state's mineral wealth split between the permanent fund and the               
 general fund is not the focus of our analysis of this bill.  Our              
 focus and concern of this bill is one of clarification, the                   
 administration and utilization as it pertains to our Cook Inlet               
 operations.  Now, on to Section 2.  Last Thursday, I listened to a            
 discussion during the first hearing on this bill regarding the need           
 to define the term "field."  Bill Van Dyke did an excellent job of            
 explaining the differences between fields, pools, horizons and the            
 delineation of same.  In the context of the applicability of each             
 regarding this section, to help clarify and more accurately                   
 describe the aerial extent of an accumulation for which this                  
 section would apply.  We would offer the following suggestions:  On           
 line 29, page two, after the word "field" we would propose to                 
 insert "pool or portion of a field or pool." Incidentally, that               
 happened to be I think word for word, verbatim, what DNR had                  
 proposed, or the OGCC.  On line 30 we would suggest that the word             
 "and" be eliminated and the words "a producing" be inserted between           
 "of" and "oil."  This would help clarify that these, we are talking           
 about existing producing fields.  The same wording as suggested on            
 line 29 would apply after the word "field" on line 30, and that               
 would be "pool or portion of a field or pool."  The application               
 here is that the AOGCC has clearly defined pools and separate                 
 horizons or zones associated with any recognized field.  As I                 
 mentioned, similar testimony was provided Tuesday, and we would               
 support their modification.  Our second comment is related to lines           
 eight through ten on page three.  As a condition of evaluating an             
 application and data, the commissioner may require the lessee to              
 pay the cost of contractors selected by the commissioner to assist            
 in the evaluation.  We feel all attempts should be made to utilize            
 existing DNR staff wherever possible to reduce these costs.  On               
 last Thursday, the commissioner indicated the intent of this                  
 subsection was to have mutual agreement between the applicant and             
 the commissioner as to the selection of contractors.  We believe it           
 is important to spell this out in the bill.  Equally important is             
 the need to mutually agree on the cost contemplated for                       
 expenditures by lessees prior to the hiring of a contractor.  For             
 extremely marginal properties, such as our Stump Lake unit property           
 in Cook Inlet, the cost of hiring a consultant, and we'll say at              
 around $20,000, which is a very likely amount, could eliminate most           
 of the benefit derived from royalty reduction.  This bill currently           
 has no cost control measures.  Alternatively, we heard from                   
 Commissioner Dave Johnson of the AOGCC on Tuesday, recommending               
 that the applicant hire and pay for the contractor in support of              
 its application to control costs.  The commissioner of DNR would              
 provide a list of contractors that would be acceptable to DNR and             
 the applicant would then have the ability to select from for their            
 analysis.  This approach makes the most sense in that the company             
 would then be able to negotiate the best price and thereby have               
 some control on the costs.  We would support this concept.  This              
 preferred approach would also eliminate the need for the costly and           
 time consuming RFP process DNR would have to employ.  The                     
 elimination of the reasonable rate of return criteria on lines 13             
 through 17, page three, is a positive step in cleaning up the                 
 statute.  This determination is too subjective and open to debate.            
 It is unrealistic to think that common agreement will be reached by           
 and between the parties.  This requirement is unnecessary and                 
 therefore, is better left out of the bill.  We need a very clear              
 understanding that modifications made to existing statutes do not             
 inadvertently have a debilitating or limiting effect on the mature,           
 marginally economic future development of Cook Inlet.  There is a             
 monumental difference between the exhausted fields typically found            
 in Cook Inlet as opposed to those on the North Slope.  The next two           
 comments are very important to Unocal and its operations in Cook              
 Inlet.  But, first, I'd like to give an example of one economic               
 reality involving our platform operations.  Four of the ten Unocal            
 operated producing platforms produced less than 2,000 barrels of              
 oil per day each.  One produces less than 900 barrels a day.                  
 Expenses on all these properties make them marginally profitable.             
 In an effort to increase production, Unocal committed over 800                
 million in capital investments over the last two years with a                 
 potential to spend an additional 31 million in 1995 on these four             
 platforms.  At this point, it is difficult to commit additional               
 capital to develop these properties due to their short remaining              
 platform lives and marginal profitability.  Reducing or eliminating           
 state's royalty on these marginal properties could make the project           
 economically viable and significantly increase the economic life of           
 the platforms thereby maintaining employment and the associated               
 community benefits.  For fields or platforms facing abandonment               
 today, such as a platform with less than a thousand barrels of oil            
 per day, complete royalty relief is warranted.  These properties              
 provide minimal income to the state and complete royalty will                 
 instead, extend field life and employment by several years.  Lines            
 17 through 21 provide for a modification and a change to the                  
 existing statute, limiting the commissioner's ability to reduce               
 royalty by specifying certain limits.  We propose this additional             
 language and limitation be taken out in its entirety.  We believe             
 it's in the best interest of the state for the commissioner to have           
 the flexibility to reduce royalty down to zero as currently                   
 provided.  Given a finding on the part of the commissioner,                   
 supported by financial and technical data, which demonstrates the             
 benefits of such action, is warranted.  Lines 23 and 24 need                  
 revisions to eliminate the unilateral right of the commissioner to            
 increase royalty beyond the state's original royalty share prior to           
 any reduction on a previously producing margin, mature field, or              
 re-establishment of commercial production of shut in oil and gas.             
 The big upside potential of a field, as discussed last Thursday,              
 and again on, in Tuesday's hearing, only applies to the delineated            
 but not previously produced fields where one may reasonably expect            
 a pleasant surprise.  A previously negotiated change in royalty, at           
 the time of initial reduction, would, under strict criteria, may be           
 warranted in the case of a delineated field, but not yet previously           
 produced field.  Bids were made on leases and evaluated on known              
 parameters and an economic analysis at the time of bidding.                   
 Companies need the opportunity to evaluate any royalty change                 
 upward in light of field economics and overall company economics,             
 and agree to any royalty modifications prior to committing manpower           
 and capital to a project.  It is not realistic to anticipate that             
 mature producing fields hold the same, the same type of promise.              
 For the commissioner to have unilateral authority to increase the             
 royalty rate to whatever level beyond the royalty originally                  
 specified in the lease, is not warranted in these mature fields.              
 For mature fields the impact of price only affects existing,                  
 extending field life.  If we are opening ourselves to the                     
 possibility of higher future royalty by applying for a reduction              
 today, we may be eliminating the incentive to apply, to apply.                
 Companies need certainty for planning and capital commitment                  
 purposes.  Lines one, or line 1 on page 4 indicates the                       
 commissioner's decision regarding a request is final and not                  
 appealable.  This really is no change from the current statute.  If           
 this provision is a concern to the committee or the legislature               
 then perhaps a peer review of the decision could be conducted.  In            
 Tuesday's hearing the AOGCC provided a couple of alternative                  
 approaches to address the concern of oversight and appealability,             
 both of which would be acceptable to Unocal.  In conclusion, we               
 believe this bill has the potential to add certain attractive                 
 parameters to the administration of the royalty reduction process.            
 For Unocal, at this time, this bill...                                        
 TAPE 95-13, SIDE A                                                            
 Number 000                                                                    
 MR. TABLER:  ...difficult to support in its current form.  With the           
 changes we have proposed, we believe the interests of all parties             
 are protected, while at the same time, afford the commissioner the            
 discretion he is entitled under current statute.  Unocal already              
 has in place a vehicle under current statute to address the                   
 concerns of its marginal fields in Cook Inlet as they reach their             
 economic limit.  Albeit, not an ideal vehicle, at least one which             
 is less onerous than that which is proposed.  Although we like the            
 ability to expand the applicability of the statute and eliminate              
 the requirement for a subjective reasonable rate of return                    
 determination, the potential for increased royalty beyond that                
 which was originally agreed, and an arbitrary floor placed on the             
 amount royalty may be reduced eliminates flexibility and hurts our            
 efforts towards field life extension in Cook Inlet.  We look                  
 forward to working with the legislature as this bill progresses               
 through the legislative process, and I thank you for the                      
 opportunity to speak today.                                                   
 Number 028                                                                    
 CHAIRMAN ROKEBERG:  Thank you, Mr. Tabler.  Before we go on I just            
 want to verify whether there is anybody on line that has not signed           
 up to testify.  Just to make sure that....  According to my                   
 information, there is nobody there, and for the record I'd like to            
 show that Mr. Rick Smith of VECO had been in attendance to testify            
 and had to leave the Anchorage LIO, so, for the record there.                 
 Going on, I'll open up with a couple of questions here, and you,              
 you refer to this vehicle under current statute, what, what are you           
 referring to there?                                                           
 Number 041                                                                    
 MR. TABLER:  Well, it's our, our interpretation that the, that the            
 current statute or regulations provide the mechanism for the                  
 commissioner to reduce royalty down to zero, if need be.  If, if              
 requested, an applicant would recruit request and force a                     
 determination be made that is to the best interest of the state.              
 Number 049                                                                    
 CHAIRMAN ROKEBERG:  It's my understanding, in your testimony, you             
 were saying that the existing J provision, if you will...                     
 MR. TABLER:  That's correct.                                                  
 CHAIRMAN ROKEBERG:  ...would be more favorable than the new J one             
 as, as proposed by the Governor.  Is that, that's your testimony.             
 Number 054                                                                    
 MR. TABLER:  Yes.  That's correct.  As, as I see this...                      
 CHAIRMAN ROKEBERG:  As it's written now, right here.                          
 MR. TABLER:  ...if I understand the bill as proposed on page three,           
 the language for the reasonable rate of return language would be              
 eliminated and you would impose that the commissioner may not grant           
 a reduction on more than 75 percent on a lease, a lease that's                
 prior to 1979.  With an existing 12.5 percent royalty a 75 percent            
 reduction would bring you down to 3.125 percent royalty, which                
 under current, as we view this, we can go down to a zero royalty,             
 and in some cases it may be warranted.                                        
 Number 070                                                                    
 CHAIRMAN ROKEBERG:  In other words, Section 1 and its other                   
 attributes creates an artificial floor there that would be                    
 meaningful to your economic interests.                                        
 Number 072                                                                    
 MR. TABLER:  That's correct.  That's correct, in some cases.                  
 That's right.                                                                 
 Number 074                                                                    
 CHAIRMAN ROKEBERG:  Just for your information, the chair is taking            
 due note of that, and we will intend to do something about it in              
 the future.  Representative Finkelstein.                                      
 Number 078                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  The,                   
 appreciate your testimony and it all  made sense.  The only thing             
 that's confusing gets be the bottom line, which sounds like your              
 position is that you want the commissioner to have discretion to go           
 down from your existing or starting royalty rate, but you don't               
 want them if the various other conditions change, or the market               
 factors go up, you don't want them to have discretion to go up.               
 That is basically, from your point of view, only one direction.               
 Number 090                                                                    
 MR. TABLER:  Partially correct and partially not.  Let me, it may             
 not have been clear in my testimony.  What the intent of that was             
 is that we've created three mechanisms in which you can apply for             
 a royalty reduction.  One is a, a delineated field not previously             
 produced, producing fields, or existing fields, and then those                
 which are shut in.  What I'm advocating is that there may be                  
 applications for a sliding scale or whatever mechanism of royalty             
 that would apply to a delineated not yet previously produced.  I              
 think it's unrealistic to think that this great windfall and these            
 exhausted 30-some plus year fields are going to yield the types of            
 magnitude, the additional production that's going to warrant a                
 royalty increase; therefore, the uncertainty on our part as a                 
 producer in the Cook Inlet is that right now we currently would               
 have our, the uncertainty is that, as I read the bill, there is               
 unilateral authority for the commissioner to raise it above and               
 beyond 12.5, which is what we originally agreed to; therefore, you            
 may not wish to even apply for a royalty reduction if you don't               
 know the uncertainty that he may increase it.  A new                          
 administration, a new commissioner, new interpretation of the                 
 regulations and rules.                                                        
 Number 116                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chair.                                       
 CHAIRMAN ROKEBERG:  Mr. Finkelstein.                                          
 REPRESENTATIVE FINKELSTEIN:  Just to explain my question a little.            
 The, you're saying you wouldn't want to take the risk, but of                 
 course, the state's got to take a risk too in lowering the rate               
 because the price of oil may go up again.  And I agree with you, it           
 may be in some of the fields you're talking about, it may be                  
 unlikely that that's going to go up enough to allow the                       
 commissioner to justify increasing the, the royalty significantly.            
 But they're, who knows what the future is going to hold.  I mean,             
 I'm sure nobody could find a case where the price of oil or other             
 factors would go up enough that you could justify a significant               
 increase in the royalty, and since you had already gained the                 
 benefit of the drop in royalty, it would just seem to be fair play.           
 Number 130                                                                    
 MR. TABLER:  Yeah, I, I am suggesting that there's a difference               
 between you need, we need to recognize the difference between these           
 exhausted fields, and you know, new technology, horizontal                    
 drilling, maybe some new technique may make you the ability to                
 recoup more, more of that oil that we couldn't of, and I, I                   
 recognize that, but he would then have the ability to raise the               
 royalty back up to the original 12.5 percent is what we're saying             
 for those fields.  For the delineated not yet previously produced             
 fields, I would think that it would be a very easy matter that if             
 an applicant came in and applied for royalty reduction, at that               
 point in time you would negotiate on what basis you would have an             
 increase in royalty in the future.  If price, if you want to use              
 production, any number of factors that you come up with, but that             
 way the applicant knows and he can plan, you don't commit manpower            
 and capital investment to the corporate planning.  You know, we're            
 having to keep, these properties in Alaska are having to compete              
 globally, and it's, it's, if you don't know, we're trying to                  
 eliminate some of the uncertainties, is what I'm suggesting.  And             
 that the negotiation take place when, at the time you've asked for            
 the royalty reduction.                                                        
 REPRESENTATIVE FINKELSTEIN:  Thank you.                                       
 CHAIRMAN ROKEBERG:  Representative Williams.                                  
 Number 155                                                                    
 REPRESENTATIVE BILL WILLIAMS:  Yes, this is very new to me and I              
 see the commissioner back there and his counterpart, and I was                
 wondering, Mr. Chairman, if we could get the commissioner to                  
 comment on, on these conclusions and, and...                                  
 Number 166                                                                    
 CHAIRMAN ROKEBERG:  Yes, sir, it's our intention to get him up                
 Number 167                                                                    
 REPRESENTATIVE WILLIAMS:  Also, if you could explain a little bit             
 about the peer review concept of, a little further.                           
 Number 170                                                                    
 MR. TABLER:  Yes, there was quite a bit of discussion I've heard              
 over last Thursday and last Tuesday's testimony regarding the, the            
 review process and the oversight process, and what I'm suggesting             
 is what we do internally at Unocal, is we, no project gets ordered            
 or moved on without a peer review, a peer review of a, you know               
 what I mean by peer review would be of sister agency.  It could be            
 a royalty board.  It could be AOGCC.  It could be whatever is                 
 determined to be not having oversight or approval or denial, but              
 just confirmation; therefore, confirming that you haven't given               
 away the farm.  That type of process, a peer review -- not an                 
 oversight review, if you will.                                                
 Number 185                                                                    
 CHAIRMAN ROKEBERG:  I, I'm really concerned right now, and we're              
 right at the verge of starting drafting a CS here and one of the              
 concerns I have right now, I appreciate your input from this, is              
 the point you make about the monumental difference between mature             
 fields and the new fields.  Before, you were not here,                        
 unfortunately Representative Green did give his presentation on               
 209.  He also showed the audience and committee two drafts showing            
 the downside; we're used to seeing the upside, but also, this as              
 they apply to older fields.  Part of his testimony is that he was,            
 was, wants to require two years of prior investment and production            
 history from an existing field in the application.  Is that, have             
 you got a chance to look at that Bill, and how do you feel about              
 that, that particular....                                                     
 Number 203                                                                    
 MR. TABLER:  We, we have looked at the bill, and, and our feelings            
 are that, that we like the ability, the flexibility that's granted            
 the commissioner under the existing 207 as proposed to be able to             
 evaluate and let companies go in with their data and make an                  
 independent analysis as to, on an individual field by field basis             
 rather than predetermining a requirement at this point because                
 there are unique fields.  There are unique circumstances in                   
 individual fields; not all alike.                                             
 Number 213                                                                    
 CHAIRMAN ROKEBERG:  Well, I think we were aware of that and let....           
 My concern right now is we're trying to a 'one size fits all' bill            
 here, new and old, and I'm not sure that there are not certain                
 circumstances or criteria and then we may want to have statutorily            
 memorialized here that differentiates some of that, I mean, that's            
 what I'm kind of driving at.  And do you see any particular, for              
 example, you were, you've testified your concerns about the                   
 reopeners or the commissioner's ability to increase royalties under           
 this proposed legislation and it's clear that you need, the state             
 needs that protection because of price increases or other, you                
 know, fortuitous circumstances like greater reserves being                    
 discovered, so, but clearly that doesn't come into play necessarily           
 in an older mature field, so, would you prefer to see another bill,           
 or a section of the bill with certain criteria in a related                   
 specifics in (indisc.) fields, it may differentiate that?                     
 Number 232                                                                    
 MR. TABLER:  I, I think that there's enough flexibility that can be           
 drawn from, at least from the language that I would propose in here           
 to apply to, in one bill.  Do we have time to, to have another bill           
 make it through, and the review and exhaustive process that's gone            
 through already.  I think that my only concern is that for shut in            
 wells and for the existing, delineated producing fields today, the            
 older marginal fields, that there's a cap put on that if you get a            
 reduction you can't have an increase beyond what was originally               
 under the lease term, which is the 12.5 percent, and predominately            
 in our fields.  We just don't think its realistic to think that               
 you're going to have this huge upside.                                        
 Number 246                                                                    
 CHAIRMAN ROKEBERG:  Well, we put a provision in that said that                
 fields that are 35 years or older, the commissioner's ability to...           
 MR. TABLER:  No, I would suggest...                                           
 CHAIRMAN ROKEBERG:  ...he couldn't exceed their bargained for                 
 existing royalty or something, I mean, what's....                             
 Number 251                                                                    
 MR. TABLER:  ...well, what I would suggest then is that if we                 
 couldn't have a cap on it back up to the original, that at the time           
 of reduction, as I mentioned for a delineated not previously                  
 produced, apply the same criteria that you negotiate under what               
 circumstances you're going to increase it in the future.  Is that,            
 am I making sense?                                                            
 Number 256                                                                    
 CHAIRMAN ROKEBERG: Probably, but I'm not quite tracking with you.             
 Number 259                                                                    
 MR. TABLER:  Well, we come in.  We make an application for a                  
 reduction in royalty.  We're granted a royalty relief.  We then               
 have, because of technology or something else, determined that                
 whoa, you know, there's really some upside here.  At the time, at             
 the time you ask for royalty relief you then sit down and determine           
 what the criteria is going to be, a very strict criteria for a                
 royalty increase in the future.  That, that's what I am suggesting            
 is that that process take place right then and there, not five                
 years down the road and then you get a letter in the mail and it's            
 determined that we're going to have an increase in royalty because            
 we've already committed the manpower and the capital, and the                 
 people, and invested in that.  The only way a lot of these fields             
 are, are being produced today, the more green or the more dollars             
 you put in the ground the more blacker oil that comes out, and                
 you're going to limit your investments if there's uncertainty as to           
 what the margins, there are very narrow margins today as they are.            
 Number 270                                                                    
 CHAIRMAN ROKEBERG:  All right.  In light of the time right now, I'd           
 like to, if we could get the Commissioner and Mr. Boyd to come up             
 right now and if we could -- oh, we're going to hold over here.               
 We're going to go on until they throw us out of here.  And if we              
 have any more, oh, I'm sorry.                                                 
 (?)  I'll wait.                                                               
 CHAIRMAN ROKEBERG:  Okay.  I apologize.  I know you have some                 
 information you want to bring forward here, and then you have to              
 leave.  I thank you for your patience, sir, and if some there's               
 further information to give to the committee we'd be happy to hear            
 that, and it's the chairman's intent right now to go past noon if,            
 if we can because I want to make sure we get this testimony.  I               
 appreciate if anybody has to leave or has other appointments.                 
 (?) You will be sitting here by yourself.                                     
 CHAIRMAN ROKEBERG:  Well, I might be.  I'll be starving to death,             
 but my body can take it.  Mr. Shively.                                        
 Number 290                                                                    
 Chairman, my name is John Shively.  I am Commissioner of the                  
 Department of Natural Resources and I have with me Ken Boyd, our              
 Acting Director of the Division of Oil and Gas.  I'd like to                  
 clarify something because I think the testimony from Unocal was a             
 little, there was some confusion.  The legislation, as it is                  
 written, says that we may condition a reduction in royalty with an            
 increase or other conditions.  To me, that, that has always meant             
 that it is just what Unocal has asked for.  They know up front what           
 the deal is.  There is no unilateral right in this legislation for            
 me to come along, or some successor of mine, and say ten years from           
 now, we want the royalty to go to 20 percent.  That's not the way             
 the legislation is written.  It's not the intent.  And, and it is,            
 and I, I think could easily be clarified if, if people are                    
 uncomfortable with it with legislative intent language.  But, but,            
 it, it, I can't, there would be no reason to even have this                   
 legislation if the commissioner could unilaterally raise the                  
 royalty rate.  I mean, nobody would take that kind of deal and we             
 know that.  And so it's always been our intent that when the                  
 applicant comes in we would negotiate when the royalty went down              
 and when it went up, and I would submit, Mr. Chairman, that though            
 things may be slightly different for marginal fields, we still                
 don't know what will happen.  What happened in the '70s with OPEC             
 was a major, relatively quick increase that, that lasted over a               
 long period of time, and if you went into a royalty reduction right           
 before an event like that and the prices changed significantly and            
 we had given the, the industry a benefit in the royalty, then I               
 think that we have the right to get a benefit for us on the other             
 side, and we would be opposed to capping the royalty at the old               
 level.  This is part of a negotiated deal, and if we can't                    
 negotiate a deal that is acceptable to the company, of course,                
 there won't be a royalty reduction and it won't go forward, but I,            
 I don't think company have any risk here at all.  That's my                   
 opinion.  But they will know the deal up front.                               
 Number 326                                                                    
 CHAIRMAN ROKEBERG:  Well, it's line 23 of page three where it says,           
 "...including increasing or otherwise modifying the state's royalty           
 share...", I think that's what he's concerned about, but I                    
 appreciate what he just said.  I agree with you that we have to               
 have this ability to go back in a form of reopener or whatever                
 mechanism we have, but on the other hand, there's a concern he has            
 and I appreciate that.  That's why I was trying to see if there is            
 a way we can make a distinction between new and oil fields, if that           
 was appropriate.                                                              
 Number 335                                                                    
 COMMISSIONER SHIVELY:  I don't think it's broke. I think it says,             
 the legislation says the commissioner may condition a royalty                 
 reduction granted under this subsection in a way necessary to                 
 protect the state's best interest, including increasing or                    
 otherwise modifying.  That's conditioning it.  That means you gotta           
 do it up front.  A condition on the reduction is part of the                  
 reduction.  It is part of the deal.                                           
 Number 340                                                                    
 CHAIRMAN ROKEBERG:  For a mature field arrangement...                         
 Number 341                                                                    
 COMMISSIONER SHIVELY:  And we, I think there has been some                    
 discussion of changing "may" to "shall" because people wanted to              
 make sure that we did, we did take these things into account.  Even           
 if we determine as we might that there wasn't a reason to increase,           
 although under certain conditions, certainly price increases, I               
 can't imagine that we would not have a way to increase.                       
 CHAIRMAN ROKEBERG:  Representative Davis.                                     
 Number 348                                                                    
 REPRESENTATIVE G. DAVIS:  Thank you, Mr. Chairman.  If,                       
 Commissioner, yesterday, I think it was indicated that you hadn't             
 been approved of that and so I might ask you know what you, what              
 you think of that change from "may" to "shall."                               
 COMMISSIONER SHIVELY:  That's fine.                                           
 CHAIRMAN ROKEBERG:  Representative Finkelstein.                               
 Number 352                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  The, in the            
 interpretation of this you still see, this is a question, are there           
 still two ways that this could be done.  One is to actually put               
 into the production the exact conditions that are going to occur,             
 a sliding scale or something that says the royalty goes up so much            
 if the price goes up so much, or couldn't you also have just a                
 reopener provision that is, you have the right to increase if                 
 sudden thresholds are made without actually saying (indisc.).                 
 Number 362                                                                    
 COMMISSIONER SHIVELY:  Yeah, you, certainly.  I mean, you could,              
 you could have as part of the grant of reduction the fact that                
 there would be a reopener at certain, under certain conditions if             
 you couldn't agree as a minimum the royalty rate would go back to             
 what it originally was.  And, you know, you try to agree on                   
 something else.  And, you know, trying to predict, particularly for           
 the marginal fields, you know, ten, fifteen, twenty years in the              
 future may be difficult for the shut in or abandoned fields that              
 you'd probably have a little better, better prediction ability,               
 although, as Mr. Fineberg pointed out, due to technology and other            
 things fields have tended to last, fortunately for all of us                  
 including the industry, longer than people originally anticipated.            
 Number 374                                                                    
 CHAIRMAN ROKEBERG:  Well, do you see any way that, other than                 
 maximum flexibility that you could overcome Mr. Tabler's concern              
 about this?                                                                   
 Number 375                                                                    
 COMMISSIONER SHIVELY:  I intend to talk to Mr. Tabler.  I, I                  
 believe we have overcome his concerns.  I mean, I believe the                 
 legislation is not written the way he thinks it is.  It was never             
 our intent for us to have a unilateral right to call up anybody one           
 day and say your royalty rate is hereby raised.  That it has to be            
 part of the agreement, that the only way a comm., a future                    
 commissioner could raise the rate is if it was part of the, the               
 whole agreement that would come about there was all of the royalty            
 reduction, and they would know the conditions under which the                 
 royalty would be raised when they started, which is what he asked             
 for as I understand.  He was not necessarily opposed to the rate              
 going up, but he didn't want, he didn't want it to be a surprise              
 and he wanted to know when and why it would happen, and I think               
 that's fair and I think if it's not clear in the legislation that             
 we can fix that with legislative intent language, but it is, that's           
 the way I read the legislation.                                               
 Number 390                                                                    
 CHAIRMAN ROKEBERG:  Just in order to save some time right now, the            
 references as regard to hiring a consultant and so forth, that                
 we've heard from Mr. Johnston and also confirmed by Mr. Tabler this           
 morning, it's the chairman's intent to incorporate that into our              
 CS, and I'd like to, (indisc.).                                               
 Number 396                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, the suggestion of having the             
 department choose three consultants and having the industry pick              
 one of ours and then pay them and have them, have them carry out              
 the work, we would also, of course, define the scope of work.  And            
 I think that it's very important that we define not only who the              
 three are but what the scope of work we expect, and that may not be           
 as cheap as the industry would like it, but we have to define the             
 scope of work.  We do that, we think that gets at this problem of             
 them having a consulting firm that's totally unacceptable to them             
 and we, we would accept such an amendment.                                    
 Number 406                                                                    
 CHAIRMAN ROKEBERG:  I understand, and we'd appreciate some help in            
 the language and (indisc.).  Representative Finkelstein.                      
 Number 407                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman.  Well, on that point               
 the, I still see that as problematic.  These, the contractor's                
 going to work for the industry and their fee is testimony, would              
 be, the impression, I thought was that as far as the department was           
 willing to go is to give them one veto over who the department is             
 using.  These folks, there's a, any time you got someone paying               
 somebody else, there is a relationship there that (indisc. -                  
 coughing) to the department.                                                  
 Number 415                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, Representative Finkelstein.              
 As a result of the discussion, we've gone back and looked at a                
 couple of things.  One, a decision that was made out in Good News             
 Bay on a platinum mine, and also looking at the system that the               
 federal government uses for EISs and that's, this is precisely the            
 system they use.  So, so there's, I think, a good precedent for it            
 and although it is different than earlier testimony, I agree with             
 that.  We think that it meets the high standards that need to be              
 met in order for the state's interest to be protected.                        
 Number 422                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman, I, we don't, does it               
 concern you at all that this person who is helping the state make             
 a best interest finding is going to be a contractor to the oil                
 company?  Paid directly by the oil companies and not paid by the              
 Number 426                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman and Finkelstein.  As I said, if           
 we define the scope, as long as we define the scope of work and               
 these are professional firms that we have picked, the answer to               
 that question is no.  If, if they were any firms coming from                  
 anywhere and we could not define the scope of work I would have               
 grave concerns.                                                               
 Number 430                                                                    
 CHAIRMAN ROKEBERG:  In the issue of time, we can, we'd like to move           
 on, we can maybe revisit this.                                                
 REPRESENTATIVE FINKELSTEIN:  Yeah, if I could just, through the               
 record, I'm concerned though.                                                 
 CHAIRMAN ROKEBERG:  Okay.  Thank you, Representative Finkelstein.             
 The ...                                                                       
 REPRESENTATIVE WILLIAMS:  Mr. Chairman.                                       
 CHAIRMAN ROKEBERG:  Oh, excuse me.  Representative Williams, Sir.             
 Number 434                                                                    
 REPRESENTATIVE WILLIAMS:  Could I ask you what your thoughts are on           
 the peer review concept?                                                      
 Number 435                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, Representative Williams.  We             
 are willing to work with the committee and the committee substitute           
 to find some kind of peer review.  We think that perhaps the                  
 Royalty Board is appropriate.  I think we've expressed some                   
 interest in that before.  There is, the ARCO testimony I think has            
 suggested that maybe through the Attorney General's office, which             
 could be done either by one of their staff, or by them appointing             
 a hearing officer.  We also though would suggest that in doing                
 that, that the peer review, whatever it is, be a review of the                
 process to make sure that the commissioner followed the process               
 that was spelled out here, that they found that there (indisc.)               
 pool that he found that there was economic reason for the reduction           
 of royalty and that he found that it was in the best interest of              
 the state.  If we were second guessing the economics of the                   
 decision, then it's gonna be a fairly costly provision, and we                
 would also suggest that there be a time limit on any review.                  
 CHAIRMAN ROKEBERG:  Representative Williams.                                  
 Number 451                                                                    
 REPRESENTATIVE WILLIAMS:  Yes, I guess my interpretation of peer              
 review was somebody that's in the business of, the oil companies,             
 that know what, what specifically is happening in that area.  I'm             
 not an expert in that area and I would like to be able to get                 
 someone that is an expert, that is totally outside the State of               
 Alaska.  We may not be in the same position as we are today with              
 having you as a commissioner.  We may be in a position where the              
 state doesn't want to open up any more fields and we, as the                  
 legislature, get this report back from, from the DNR stating that             
 we're not going to accept any more of these projects.  And we're              
 concerned, so what do we do?  How do we address that?  It's not               
 appealable according to the way that bill is written, and so we're            
 sitting here on our, we'd be sitting here on our hands, not being             
 able to do anything about it.  I would like to be able to go to a             
 peer review committee, however it may be.  I think we should do it            
 like the timber industry.  You get scientific people on both sides            
 of it that know and understand the issues, and they are the peer              
 review.  We, we listen to that.                                               
 Number 469                                                                    
 COMMISSIONER SHIVELY:  Well, Mr. Chairman, Representative Williams.           
 Of course, I mean, if you want a whole second decision-making                 
 process then the state is going to have to either be willing to pay           
 for that, or the industry is going to have to be willing to pay for           
 it because there is not the capacity within government as this                
 point to do a total in depth economic review.  There is the                   
 capacity in government in what I would consider peer review, and I            
 think either the ARCO or the Unocal person talked about their                 
 internal peer review, so someone else with similar knowledge                  
 looked, double checked their decisions.  I think there is capacity            
 to make sure that the commissioner carried out the intent of the              
 law in terms of the process as it was envisioned by the                       
 legislature.  I think we can write that, that into the legislation            
 and we're, Mr. Chairman, we're certainly willing to work with you.            
 Number 481                                                                    
 CHAIRMAN ROKEBERG:  To follow up on that point, Mr. Williams,                 
 Representative Williams, I, I know in conversations the last few              
 days there's been some criticism as brought forth by ARCO and Mike            
 had discussions with the director regarding using the AOACC,                  
 (?)  (Indisc.).                                                               
 CHAIRMAN ROKEBERG:  Right, that's the one. ...as, as the peer                 
 review function and then you just mentioned this morning the                  
 Royalty Board.  I, I'd like to get your comments about what your              
 position is on the Conservation Commission vis-a-vis the Royalty              
 Board vis-a-vis another third party.  I think the new third board             
 you just mentioned would be a burden economically and we'd be                 
 setting up more bureaucracy and all that kind of stuff.  I don't              
 think I personally want to pursue that, so if you could comment on            
 that right now I'd appreciate it.                                             
 Number 494                                                                    
 COMMISSIONER SHIVELY:  Yeah.  We think that there is some potential           
 conflicts with the AOGCC because of their responsibilities, also I            
 don't think they really have the capacity to do this particular,              
 but we've done some legal analysis that I think we're willing to              
 share with the committee about why we think that there's, there's             
 a slight conflict because of, what they do is they're interested              
 in, in, one, making sure that people aren't stealing each other's             
 oil, and then two, that they get the maximum amount of oil out of             
 the ground.  Their interest would be the driving royalties as low             
 as possible because they are interested in getting the maximum oil            
 out of the ground.  Driving the royalty to zero despite Unocal's              
 testimony somewhat to the contrary, isn't always in the best                  
 interest of the state.  And that's why we think there's a conflict            
 with the AOGCC.                                                               
 COMMISSIONER ROKEBERG:  Representative Finkelstein.                           
 Number 507                                                                    
 REPRESENTATIVE FINKELSTEIN:  Thank you, Mr. Chairman.  I just have            
 a very philosophical question which hasn't been, I don't recall the           
 answer to.  It's one of the things we're doing with this bill is              
 we're covering these two subjects, you know, both the declining               
 fields and new marginal fields, and they, I get very mixed up                 
 sometimes thinking of the different treatment, but just thinking of           
 the new marginal fields, something that hasn't been developed yet.            
 Someone's coming in for a royalty reduction request.  Why wouldn't            
 it be in the state's best interest just to reopen it for bidding,             
 put it out to whoever wants it and take their royalty reduction               
 request as a bid?  That's what they want it as, and if they don't             
 want any better level, they get it.                                           
 Number 517                                                                    
 COMMISSIONER SHIVELY:  Well, I think there are a couple of reasons            
 for that.  Some, if, someone might bid higher and the, when you               
 come in for a royalty reduction request, as you recall, we have to            
 have a delineated field.  To have a delineated field there will               
 have to be seismic work.  There has to be wells drilled, at least             
 one well.  You could probably, there's some thought that you might            
 be out of one, but probably in several wells, millions and millions           
 of dollars invested, and that company probably will not be willing            
 to share with someone who came in and over bid them in a rebid for            
 the leases.  So, you're back almost to ground zero and you've asked           
 this company to spend all this money.  Now maybe, you know, they              
 turn around and sell that information to the new high bidder and              
 then whether that person comes in and asks for a royalty reduction            
 I don't know.  But, but because of the three-prong test we have we            
 don't think, you know, not every oil field is going to be able to             
 come in and get a reduction.  I mean, there are some pretty high              
 standards here.  And we're asking the industry, the oil companies             
 to have done a fair amount of work before they can even ask for               
 such a reduction.  So, that's why I think it would not be in the              
 state's best interest to just rebid the leases.                               
 Number 534                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman, this, the, the, didn't             
 they make all those investments though with the assumption that               
 they were going to play the existing royalty?  I mean, it's                   
 basically a new game now.  Something's fallen apart, either their             
 finances or the market, or some new condition that exists.                    
 Number 536                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, Representative Finkelstein.              
 Well, several things, but one of the things that often falls apart,           
 and it's the least predictable for anybody when they're bidding on            
 a lease, is the volume of oil that they're going to find.  And, of            
 course, sometimes it's zero.  And what, and a lot of, I think what            
 is going to drive these royalty reduction decisions is the volume             
 piece of that pie and no, there is really no way for the industry             
 to know when they bid a lease is what volume of oil is there.                 
 Number 542                                                                    
 CHAIRMAN ROKEBERG:  Thank you, Commissioner.  Is there anything               
 else that you'd like to bring forward at this time, before we open            
 it to more questions, or?                                                     
 COMMISSIONER SHIVELY:  I don't have anything.                                 
 CHAIRMAN ROKEBERG:  Representative Finkelstein?                               
 Number 546                                                                    
 REPRESENTATIVE FINKELSTEIN:  Just to take that last question and              
 make it even more general, is there any way you can see of                    
 reinserting any element of competitive bidding into this system?              
 Because, you know, I, it isn't such a abstract concept.  Our whole            
 system is built on it.  Here we've got a provision that's, you                
 know, rarely or never been used, and it just seems to me as we move           
 away from it if there is any way to reinsert even a portion of it             
 to get some sort of market test, it's going to help.  You're going            
 to be making a pretty tough decision, right?  I mean, every step              
 along the way you're not really going to know.  You're going to               
 have some proprietary information from industry that will be very             
 little check on.  You won't be able to compare it to the others               
 necessarily, and I don't know how it could be done, but it just               
 seems like it there must be some way to get some market element               
 back into it.                                                                 
 Number 556                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, Representative Finkelstein.              
 I mean, I think one of the ways we look at the market is there is             
 capacity within the department to look at what's going on in other            
 fields, particularly other fields in the state because we have all            
 that information.  So, even when we use an independent contractor,            
 once they come back to us with their analysis of the information,             
 we, we, we're not just going to stop there.  We will have to go,              
 and I think our division of oil and gas has some exceptional people           
 that look at that and say, well, you know, is field B really a lot            
 like field A, and if so, you know, really, field A is doing fine.             
 Why do we need to give a reduction in field B?  So, so we do have             
 the capacity to look at that part of the market.                              
 Number 566                                                                    
 REPRESENTATIVE FINKELSTEIN:  Mr. Chairman, just, I just misstated             
 a little bit.  I so much mean market analysis as I meant market               
 competition, that side of the market.  That, that is what our                 
 system runs on now and I hate to lose it.                                     
 COMMISSIONER SHIVELY:  Well....                                               
 REPRESENTATIVE FINKELSTEIN:  (Indisc.) we might be losing it here.            
 Number 568                                                                    
 COMMISSIONER SHIVELY:  Well, Mr. Boyd thinks I'm not doing a very             
 good job, so he will try to explain it.                                       
 Number 570                                                                    
 MR. BOYD:  I think, Mr. Chairman, Representative Finkelstein might            
 be talking passage a little bit.  Commissioner Shively has talked             
 about the requirement to delineate before you can apply.  But there           
 are preliminary steps.  Let's say there's a lot of leases been                
 leased, and we have terms.  The leases have a set term.  On the               
 North Slope they're quite often ten years.  So, the company really            
 doesn't have to do anything for ten years.  But, let's say it                 
 shoots in seismic and it, and it determines that boy, this is just            
 a dog.  That's the market.  I mean, that's, that's where your                 
 concept comes in, I think.  Whereas in other fields they shoot some           
 seismic, some hope.  They drill some wells.  They begin to                    
 delineate.  They go for the process.  The market itself, you know,            
 the price of oil is X, this structure looks too small, they give it           
 back to the state, and we release it to the company that may wish             
 to work it.  Each company will have a different set of economics              
 that may drive it to a particular place.  I think that is what you            
 were getting at.                                                              
 Number 581                                                                    
 REPRESENTATIVE FINKELSTEIN:  Well, that, thank you, Mr. Chairman.             
 That was, that is very helpful, and the, and that, absolutely, I              
 think that works when we're going to sell some new leases, right?             
 Because all these provisions are going to be part of law.  People             
 are going to realize they're going to have a chance for reduction             
 later, so they might bid more.  There might be more bonus bids.               
 There might be higher royalties because they know someday down the            
 line that if everything goes bad, they are going to have a chance             
 to try to, you know, still get a shot at it at some lower level.              
 So, I think that's fine, but how about applying it to existing                
 leases?  I mean, the ones that are already in place. If someone's             
 already made all those initial investments, they didn't have that             
 assumption in mind.  There wasn't any competition based on these              
 new procedures.  They got it under the understanding that this was            
 their, this was the royalty they're going to operate under.  And              
 unless, you know, they beat (indisc.).                                        
 COMMISSIONER SHIVELY:  Mr. Chairman, let me take a crack at that              
 and then Mr. Boyd can correct me.  I think that actually having               
 this provision probably, at least in the bonus part of the bid,               
 will drive the market up a little bit.  And so that we have a,                
 because it does change it, and so I think there's some potential              
 advantages in the new lease sales because people may feel that they           
 have a better opportunity to develop.  We didn't have that as part            
 of, so you could almost argue that not having this has had somewhat           
 of a negative effect on the market.  That's the way that I would              
 look at it.                                                                   
 Number 599                                                                    
 CHAIRMAN ROKEBERG:  Very good.  Thank you.  The, a couple, in order           
 to move along here quickly here and to get some response so we can            
 help to do some drafting here, just for the committee members and             
 anybody that has to leave, we are scheduled to have a meeting at              
 five o'clock tomorrow here, and we will, hopefully, if you can make           
 it.  If you can't I understand.  But, I would tend to take it there           
 would be any more industry testimony to try to take it at that                
 time, and also, maybe we can discuss any progress we will or will             
 not have made on the CS draft.  I would like to have some kind of             
 just a draft to you, just a working draft; very rough, just to give           
 you an idea of what, what we're, which way we're headed that, and             
 then we'll have to figure out our scheduling for next week.  I'm              
 going to move this bill next week, you know.  But it may require us           
 to meet maybe Monday and Tuesday to do it, I don't know.  I mean,             
 you know they do that.  So, that's a decision we'll have to make              
 today, but just to let you know.  Quickly, if you were to go to the           
 bill, on page three, line five, "The commissioner shall require the           
 lessee entrusting the reduction of royalty..." would it be                    
 appropriate to have lessee and, and/or lessors?  I mean, there are,           
 lessees, I mean, the plurality of that if you have more than two              
 participating companies and a PA or a unit?  Should that be plural            
 in there or something like that?                                              
 COMMISSIONER SHIVELY:  Yeah, I see it.                                        
 Number 620                                                                    
 MR. BOYD:  Mr. Chairman, I don't see that as a substantive change.            
 Maybe just a paren S to recognize the singular with plural.                   
 CHAIRMAN ROKEBERG:  (Indisc. - both talking)  that would be                   
 appropriate just 'cause I....                                                 
 UNKNOWN:  Let's leave it a blank print out.                                   
 MR. BOYD:  I withdraw my....                                                  
 UNKNOWN:  You don't have to.  They're just words.                             
 Number 624                                                                    
 CHAIRMAN ROKEBERG:  And then we've had some discussion about the              
 definition of field.  You had some ideas and you're going to                  
 provide those to the committee.                                               
 Number 625                                                                    
 MR. BOYD:  Mr. Chairman, I believe I read into the record two days            
 Number 626                                                                    
 CHAIRMAN ROKEBERG:  Okay, good.  Okay.  Going on, and the, we've              
 had some, today in particular, I'd like to hear your opinion on               
 the, the provision of 209, a two-year projected deal.  Any                    
 differences we might want to look at in the bill?  We're trying to            
 accommodate the older mature fields versus the new fields.  Any               
 land mines here that we might want to speak to?                               
 Number 632                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, if I might on that.  I mean,             
 I think Representative Green was right in saying that, as we all              
 know, there's a difference between new marginal fields and older              
 abandoned and declining fields.  Very few fields are declining or             
 ready to be abandoned after two years.  So, I don't think the two-            
 year really gets us anywhere.  I think for the marginal fields                
 we're really going to have to make the decision up front based on             
 the best available information, and then on the marginal, or fields           
 that have ben abandoned, I mean, it's in the bill, and the two                
 years doesn't, doesn't really apply to those. I mean, nobody in               
 this state is going to develop an oil field that they think they              
 might shut down in two years.                                                 
 Number 640                                                                    
 CHAIRMAN ROKEBERG:  I think right now, in my opinion, by inserting            
 the two-year requirement, obviates the necessity to go back to the            
 whole historic record that the commissioner brought up in                     
 testimony.  If we, if you went to two years it means that's all you           
 have to do.  You don't have to go back four or five years to...               
 Number 644                                                                    
 COMMISSIONER SHIVELY:  Excuse me, Mr. Chairman.  All right.  I may            
 have misunderstood your question.  What you're saying is you only             
 have to look at the last two year's data in order to make a...                
 CHAIRMAN ROKEBERG:  Production data.                                          
 COMMISSIONER SHIVELY:  Production data on a, on a field that's                
 about to be abandoned under a shut in.  I, we don't have a position           
 on that right now.  I think that probably though, in our mind,                
 might be a little bit short in terms of a time frame, is my initial           
 reaction to that.  But, I, I understand the problem of asking                 
 people to go back to the beginning.  It's one of the reasons, as              
 I've explained before, that we took out this reasonable rate of               
 return, is, is to, that's why we felt we had to go back in that one           
 particular request because the law stated we had to have a                    
 reasonable rate of return on the whole field.  By taking that                 
 language out we no longer are required to do that, so we wouldn't             
 have to require all the information.  If you're concerned about us            
 requiring 30 years of information that might not be available, I              
 think we're willing to accommodate that.  We have not discussed how           
 to do that.                                                                   
 CHAIRMAN ROKEBERG:  Representative Finkelstein.                               
 Number 656                                                                    
 REPRESENTATIVE FINKELSTEIN:  Just on this question of, I'm not sure           
 I understand what the term "production data" means.  I'd assume               
 that there's two things.  One is there's, you know, literally                 
 production data, which is how much was actually produced, you know,           
 and what came out of over what periods versus economic data.                  
 There's costs and various other things that go in here,                       
 calculations, and it seems to me you'd want everything in                     
 production data because the whole case is, where is this thing                
 going?  Right?  In a couple of years.  But that's a relief that               
 that one company was after and may have been more in their economic           
 data.  I suspect that they had their production data.                         
 Number 663                                                                    
 COMMISSIONER SHIVELY:  Yeah, but, Mr. Chairman, Representative                
 Finkelstein.  I was using production data in the more general                 
 sense, not just...                                                            
 REPRESENTATIVE FINKELSTEIN:  I don't know how it's used.                      
 MR. BOYD:  ...number of barrels produced.                                     
 Number 644                                                                    
 CHAIRMAN ROKEBERG:  Mr. Boyd, it's already in the existing                    
 statutes, or was previously?  But to your requirement?  What?                 
 Number 665                                                                    
 MR. BOYD:  Two-year requirement was for, to be on production.                 
 CHAIRMAN ROKEBERG:  Right.                                                    
 MR. BOYD:  It didn't, to my knowledge, it didn't say anything about           
 how much data you had to produce.  You still had to produce the               
 data that was necessary to make the decision.  But you physically             
 had to be on production for two years.                                        
 CHAIRMAN ROKEBERG:  Right.  Okay. Is that...                                  
 MR. BOYD:  ...and actually producing oil.                                     
 Number 669                                                                    
 CHAIRMAN ROKEBERG:  ...is that in the existing statute or regs?               
 Number 670                                                                    
 MR. BOYD:  That was repealed in 1990.                                         
 Number 671                                                                    
 CHAIRMAN ROKEBERG:  That was repealed in 1990.  Was there, do you             
 recall why?                                                                   
 Number 672                                                                    
 MR. BOYD:  It was repealed for Conoco because Conoco had not yet              
 been in production for two years, and they were trying to give some           
 relief to Conoco, and so they repealed that statute.                          
 Number 674                                                                    
 CHAIRMAN ROKEBERG:  So, if it was reinserted for the purposes we're           
 driving at it would, do you see anything, any problems with doing             
 that, or?                                                                     
 Number 675                                                                    
 COMMISSIONER SHIVELY:  Yes, Mr. Chairman.  I see a big problem with           
 that.  We couldn't deal with marginal fields.  Because you're                 
 asking the marginal field to be in production for two years before            
 we can make the decision, and you know, I think what we've                    
 discussed here primarily is a system to allow marginal fields to              
 come in and say, look, we can't produce unless we get this, this              
 Number 679                                                                    
 CHAIRMAN ROKEBERG:  Okay, then how do we deal with the problem with           
 historic data then?  We need to stipulate (indisc.).                          
 Number 682                                                                    
 COMMISSIONER SHIVELY:  I think we, I think we dealt with it.  I, I            
 think we now have the, we no longer are required, if you accept               
 our, our language, to look at the total return on the field, which            
 is what drove that decision to ask for all the historic data.  We             
 don't think...                                                                
 Number 683                                                                    
 CHAIRMAN ROKEBERG:  Well, it's in the regulations right now.                  
 (Indisc. - both talking).  It's in 11 AAC, etcetera, etcetera.                
 What do you do about that?                                                    
 Number 685                                                                    
 MR. BOYD:  Yeah, but the law drives regulation, Mr. Chairman, and             
 we have to use the data that has a clear and convincing showing.              
 The reduction meets the requirements of this subsection is the best           
 interests of the state.  We have the finding process.                         
 Number 686                                                                    
 CHAIRMAN ROKEBERG:  But we have a historic record here where the              
 prior director has added additional data based on the existing                
 statute, existing regulations and added in the applications process           
 additional hurdles to the company.                                            
 Number 689                                                                    
 REPRESENTATIVE FINKELSTEIN:  It would all be gone though.                     
 Number 690                                                                    
 CHAIRMAN ROKEBERG:  Will they be gone?  Is that the case?                     
 Number 693                                                                    
 MR. BOYD:  Just by law.  Once the new law passes, any nonconforming           
 regulations (indisc.).                                                        
 CHAIRMAN ROKEBERG:  Well, I'm sure glad to hear that.  Thank you.             
 But it's still this, by doing, by getting rid of it then, this                
 historic data problem would go away?  Is that what you're saying?             
 I guess we don't need this.                                                   
 MR. BOYD:  Mr. Chairman, to the extent that the data was not                  
 necessary for the company to make a clear and convincing showing,             
 then it would be senseless to ask for data just for the sake of               
 building a pile of paper in our office.  It was never anybody's               
 intent, and a piece of paper that was in the old Marathon or Texaco           
 application actually cites two regulations.  And the other piece of           
 the regulation is a DNR requirement, just for the way paper is                
 submitted.  And the other pieces is the conforming regulation to              
 the old law.  Again, I believe, I believe the commissioner believes           
 that these, these words, "clear and convincing showing" to meet the           
 requirement of the subsection best interests of the state cures the           
 silliness, I'll say, of requiring everything if you don't need it             
 to make a decision.                                                           
 TAPE 95-13, SIDE B                                                            
 Number 000                                                                    
 CHAIRMAN ROKEBERG:  ... or do we need to stipulate, I mean, or just           
 disappear by definition?                                                      
 COMMISSIONER SHIVELY: We'd go, we'd go in and clean that up.  I               
 don't, I think we understand what....                                         
 Number 005                                                                    
 CHAIRMAN ROKEBERG:  We've talked about this, you know, that                   
 relationship between the statute and the regulations.  It was used            
 in the past as a sword, and that's what I want to avoid.                      
 COMMISSIONER SHIVELY:  I understand that.                                     
 CHAIRMAN ROKEBERG:  And, and the regulations exist right there?  I            
 mean, are we supposed to be quiet on those, or can we clean them              
 up, or what?                                                                  
 Number 012                                                                    
 COMMISSIONER SHIVELY:  Well, the executive branch cleans up                   
 regulations.  I commit to you, Mr. Chairman, that I will clean that           
 up if this law passes.  And I believe the law supersedes it anyway,           
 so I don't think it has to be, but we will do that because it                 
 doesn't make...                                                               
 Number 016                                                                    
 CHAIRMAN ROKEBERG:  You're going to assure us that you'd have that            
 done in 60 days after?                                                        
 Number 018                                                                    
 COMMISSIONER SHIVELY:  Mr. Chairman, I will not assure you anything           
 happens in 60 days in government.                                             
 CHAIRMAN ROKEBERG:  That was just a question.                                 
 Number 020                                                                    
 COMMISSIONER SHIVELY:  I will do it as expeditiously as possible.             
 Number 020                                                                    
 CHAIRMAN ROKEBERG:  The, in the appealability situation we've                 
 requested that legal opinion, and that's forthcoming.  Is that                
 right?  Is that correct?  Just make sure we're all on the same page           
 COMMISSIONER SHIVELY:  I'm sorry, Mr. Chairman.                               
 CHAIRMAN ROKEBERG:  The appealability thing, adding the applicant             
 and then you're going to provide us with an opinion, a lawyer's               
 opinion, on that?  And the due process relationships.                         
 COMMISSIONER SHIVELY:  Yes.                                                   
 CHAIRMAN ROKEBERG:  That's forthcoming?                                       
 Number 036                                                                    
 MR. BOYD:  Mr. Chairman, I, you may not have seen it yet, but I               
 provided it to your staff this morning, an opinion on                         
 nonappealability clause.                                                      
 CHAIRMAN ROKEBERG:  Okay.                                                     
 MR. BOYD:  It is not an AGs opinion.  It is an opinion of an                  
 assistant AG.  And we can discuss this further, but it is opinion.            
 I'll cite it here if you haven't had a chance to read it.                     
 Number 040                                                                    
 CHAIRMAN ROKEBERG:  Well, I want to make sure it's clear in the               
 record is all, and we've discussed this, and that's, we don't need            
 to go into it now.                                                            
 Number 041                                                                    
 MR. BOYD:  I, I'll just read the first (indisc.) perhaps for the              
 record, Mr. Chairman.                                                         
 CHAIRMAN ROKEBERG:  Okay, go right ahead.                                     
 MR. BOYD:  It says the nonappealability clause does not give DNR              
 license to make arbitrary capricious manifesting or unreasonable or           
 unconstitutional decisions.                                                   
 Number 050                                                                    
 CHAIRMAN ROKEBERG:  Oh, okay.                                                 
 MR. BOYD:  And it goes on from there.                                         
 CHAIRMAN ROKEBERG:  So, the outside third-party will be able to               
 bring a cause of action under the due process.                                
 Number 051                                                                    
 MR. BOYD:  Mr. Chairman, I believe the way the bill is written now            
 it, it just, it saves us from minor procedural errors and things              
 that would be left upon by parties that just did not want to see              
 this happening at all, but it provides for substantive issues to be           
 brought before the court.                                                     
 Number 057                                                                    
 CHAIRMAN ROKEBERG:  And we were going to insert the applicant in              
 the language.  Is that where we ended up, or we (indisc.).                    
 COMMISSIONER SHIVELY:  No, I don't think we need to do that.                  
 Number 061                                                                    
 CHAIRMAN ROKEBERG:  We don't.  Is that the plan, we don't do that             
 then?  Is that what you're saying?                                            
 Number 065                                                                    
 COMMISSIONER SHIVELY:  I think so.  I think everyone should be on             
 equal footing.  There is no sense to have them on a different                 
 footing than anyone else.  They are the ones that have the most at            
 stake, and if we have a review clause, I mean, what you, I think              
 we've agreed to, then actually that section is going to change                
 Number 072                                                                    
 CHAIRMAN ROKEBERG:  Okay.  Very good.  And, have we, (indisc.) that           
 number.  We discussed reinserting, we remove Section 1, reinserting           
 a floor on new fields and not a floor on old fields?  I mean, do              
 you have an opinion on that?  Example 25 (indisc.)?                           
 Number 078                                                                    
 COMMISSIONER SHIVELY:  We, we have not had a chance, Mr. Chairman,            
 to have an opinion on going to zero on old fields.  We have agreed            
 with you on your floor on the, on the, which will apply to                    
 CHAIRMAN ROKEBERG:  (Indisc.) defined an old field and went to zero           
 on that, would that, would you give us some feedback on that?                 
 Number 083                                                                    
 COMMISSIONER SHIVELY:  I will give you some feedback.  We do not              
 have a position at this time.                                                 
 Number 085                                                                    
 CHAIRMAN ROKEBERG:  Okay, any further questions?  Well, thank you             
 very much.  We will be meeting at five o'clock tomorrow right here,           
 take further industry testimony.  Hopefully, we'll have a, I'm not            
 going to promise a draft, but we're going to hopefully try and get            
 it cleaned up so we have something this weekend.                              
 This committee stands adjourned at 12:24.  Thank you very much.               

Document Name Date/Time Subjects