Legislature(1995 - 1996)
03/16/1995 10:09 AM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 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 SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S) 02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE 02/27/95 501 (H) FISCAL NOTE (DNR) 02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV) 02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER 03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) 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 that. 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 issues. 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 wasn't.... 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 Finkelstein. 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 BRADLEY PENN, ADVANCED LANDSMAN for MARATHON OIL COMPANY: Mr. 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 you're.... Number 014 MR. PENN: Yes, I believe, excuse me while I find the.... CHAIRMAN ROKEBERG: Well, I understand, yeah, we know that's on the.... 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 assessment? 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 Brice. 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 meant. REPRESENTATIVE BRICE: Okay. Okay. CHAIRMAN ROKEBERG: Any further questions? Representative Finkelstein. 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 forecasting. 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 in. KEVIN TABLER, Land Manager for Union Oil Company: It's balmy weather here. We had eight inches of snow and two degrees in Anchorage. 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 here.... 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 JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES: Mr. 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 state? 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, AOAGC... (?) (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 ago. 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 reduction. 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 there. 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 anyway. 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 everything. 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.