Legislature(1997 - 1998)

02/26/1998 10:04 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
       HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                  
                 February 26, 1998                                             
                     10:04 a.m.                                                
                                                                               
                                                                               
MEMBERS PRESENT                                                                
                                                                               
Representative Mark Hodgins, Chairman                                          
Representative Scott Ogan                                                      
Representative Norman Rokeberg                                                 
Representative Joe Ryan                                                        
Representative Con Bunde                                                       
Representative Tom Brice                                                       
Representative J. Allen Kemplen                                                
                                                                               
MEMBERS ABSENT                                                                 
                                                                               
All members present                                                            
                                                                               
OTHER MEMBERS PRESENT                                                          
                                                                               
Representative Ramona Barnes                                                   
                                                                               
COMMITTEE CALENDAR                                                             
                                                                               
* HOUSE BILL NO. 380                                                           
"An Act relating to a temporary reduction of royalty on oil and gas            
produced for sale from fields within the Cook Inlet sedimentary                
basin where production is commenced in fields that have been                   
discovered and undeveloped or that have been shut in."                         
                                                                               
     - HEARD AND HELD                                                          
                                                                               
HOUSE BILL NO. 393                                                             
"An Act relating to contracts with the state establishing payments             
in lieu of other taxes by a qualified sponsor or qualified sponsor             
group for projects to develop stranded gas resources in the state;             
providing for the inclusion in such contracts of terms making                  
certain adjustments regarding royalty value and the timing and                 
notice of the state's right to take royalty in kind or in value                
from such projects; relating to the effect of such contracts on                
municipal taxation; and providing for an effective date."                      
                                                                               
     - HEARD AND HELD                                                          
                                                                               
(* First public hearing)                                                       
                                                                               
PREVIOUS ACTION                                                                
                                                                               
BILL: HB 380                                                                   
SHORT TITLE: REDUCE ROYALTY ON COOK INLET OIL & GAS                            
SPONSOR(S): REPRESENTATIVES(S) HODGINS                                         
                                                                               
Jrn-Date    Jrn-Page           Action                                          
02/04/98      2218     (H)  READ THE FIRST TIME - REFERRAL(S)                  
02/04/98      2218     (H)  OIL & GAS, FINANCE                                 
02/26/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
                                                                               
BILL: HB 393                                                                   
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES                                    
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                   
                                                                               
Jrn-Date    Jrn-Page           Action                                          
02/11/98      2280     (H)  READ THE FIRST TIME - REFERRAL(S)                  
02/11/98      2281     (H)  OIL & GAS, FINANCE                                 
02/11/98      2281     (H)  2 FISCAL NOTES (DNR, REV)                          
02/11/98      2281     (H)  GOVERNOR'S TRANSMITTAL LETTER                      
02/19/98               (H)  O&G AT 11:00 AM CAPITOL 124                        
02/19/98               (H)  MINUTE(O&G)                                        
02/24/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
02/24/98               (H)  MINUTE(O&G)                                        
02/26/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
                                                                               
WITNESS REGISTER                                                               
                                                                               
PAT CARTER, Legislative Assistant                                              
Alaska State Legislature                                                       
Capitol Building, Room 110                                                     
Juneau, Alaska  99801                                                          
Telephone:  (907) 465-2283                                                     
POSITION STATEMENT:  Presented sponsor statement on HB 380.                    
                                                                               
JOHN MIESSE, Representative                                                    
Marathon Oil Company                                                           
P.O. 196168                                                                    
Anchorage, Alaska 99519                                                        
Telephone:  (907) 564-6374                                                     
POSITION STATEMENT: Testified in support of HB 380.                            
                                                                               
KATHRYN THOMAS, Owner                                                          
Construction Service Company                                                   
P.O. Box 3005                                                                  
Kenai, Alaska 99611                                                            
Telephone:  (907) 776-5515                                                     
POSITION STATEMENT:  Testified in support of HB 380.                           
                                                                               
BILL HUTTO, Operations Manager                                                 
Gas-Pro Alaska                                                                 
P.O. BOX 3005                                                                  
Soldotna, Alaska 99669                                                         
Telephone:  (907) 262-4291                                                     
POSITION STATEMENT:  Testified in support of HB 380.                           
                                                                               
KEVIN TABLER, Manager of Land                                                  
Government Affairs                                                             
Union Oil Company of California                                                
P.O. Box 196247                                                                
Anchorage, Alaska 99519                                                        
Telephone:  (907) 263-7600                                                     
POSITION STATEMENT:  Testified in support of HB 380.                           
                                                                               
GARY CARLSON, Vice President                                                   
Forcenergy Incorporated                                                        
310 K Street, Suite 700                                                        
Anchorage Alaska 99501                                                         
Telephone:  (907) 258-8600                                                     
POSITION STATEMENT:  Testified in support of HB 380.                           
                                                                               
KEN BOYD, Director                                                             
Division of Oil and Gas                                                        
Department of Natural Resources                                                
3601 C Street, Suite 1380                                                      
Anchorage, Alaska 99503                                                        
Telephone:  (907) 269-8800                                                     
POSITION STATEMENT:  Testified on HB 380.                                      
                                                                               
REPRESENTATIVE TERRY MARTIN                                                    
Alaska State Legislature                                                       
Capitol Building, Room 502                                                     
Juneau, Alaska  99801                                                          
Telephone:  (907) 465-3783                                                     
POSITION STATEMENT: Testified on HB 380.                                       
                                                                               
PAM LABOLLE, President                                                         
Alaska State Chamber of Commerce                                               
217 2nd Street, Suite 201                                                      
Juneau, Alaska 99801                                                           
Telephone:  (907) 586-2323                                                     
POSITION STATEMENT:  Testified in support of HB 380.                           
                                                                               
ACTION NARRATIVE                                                               
                                                                               
TAPE 98-14, SIDE A                                                             
Number 0001                                                                    
                                                                               
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and            
Gas meeting to order at 10:04 a.m.  Members present at the call to             
order were Representatives Hodgins, Ryan, Bunde, Brice and Kemplen.            
Representatives Rokeberg, Ogan and Brice arrived at 10:08, 10:12               
and 10:23 p.m., respectively.                                                  
                                                                               
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS                                
                                                                               
Number 0068                                                                    
                                                                               
REPRESENTATIVE HODGINS announced the committee would hear HB 380,              
"An Act relating to a temporary reduction of royalty on oil and gas            
produced for sale from fields within the Cook Inlet sedimentary                
basin where production is commenced in fields that have been                   
discovered and undeveloped or that have been shut in."  He asked               
Pat Carter to present the bill.                                                
                                                                               
Number 0098                                                                    
                                                                               
PAT CARTER, Legislative Assistant, read the sponsor statement into             
the record:  The intent [of House Bill 380] is to encourage the                
development of gas reserves within the Cook Inlet region.  In                  
addition to stimulating the development of several known                       
undeveloped fields, most of which were developed more than 30 years            
ago, House Bill 380 has the potential to leverage additional                   
exploration and development in the vicinity of new infrastructure,             
required to develop those known fields.  Any new oil and gas                   
production resulting from the development of these fields will in              
turn reduce the average cost of producing existing reserves, and               
extend the economic life of both existing and new Cook Inlet                   
production and transportation infrastructure.                                  
                                                                               
"Lease holders with leases overlying previously discovered oil or              
gas fields which have remained undeveloped from at least January 1,            
1988 through December 31, 1997, would have an incentive to develop             
those fields as rapidly as possible.  Oil and Gas from these fields            
brought into production before January 1, 2004, would pay a reduced            
royalty of 5 percent, instead of the normal rate of 12.5 percent.              
This royalty holiday would last for a period of 10 years from the              
date from which production begins.                                             
                                                                               
"In order to qualify for the royalty reduction, lease holders would            
have to act almost immediately in order to bring these fields to               
production by the end of the year 2003.  By limiting the royalty               
holiday for the qualifying fields to a 10-year-period, HB 380                  
provides for reasonable limit to the state's foregone royalties in             
exchange for oil and gas production that may otherwise not occur.              
The state's royalties from currently producing Cook Inlet oil and              
gas fields will not be effected by this legislation.                           
                                                                               
"By encouraging the development of existing uneconomic oil and gas             
fields, HB 380 will benefit the state and local economies through              
taxation and royalties, as well as encouraging future development              
of new oil and gas discoveries by lowering the costs of                        
infrastructure, as well as providing jobs for Alaskans.  Some of               
these reserves were discovered more than 30 years ago and this                 
legislation allows us to provide a reasonable incentive to develop             
those reserves so that all of us may realize the benefit.  As they             
say 5 percent of something is better than 12.5 percent of nothing."            
                                                                               
Number 0307                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked if he happened to review the minutes             
of HB 207 from the 19th legislature because it might be                        
illuminating.                                                                  
                                                                               
Number 0448                                                                    
                                                                               
JOHN MIESSE, Representative, Marathon Oil Company, testified via               
teleconference from Anchorage and read the following statement into            
the record;  "As most of you know, Marathon has been an operator in            
the Cook Inlet area for over 30 years and we appreciate your                   
support and interest of the oil and gas industry in the Cook Inlet             
area.  I'd like take a few moments to comment on HB 380, which is              
intended to provided an incentive for oil and gas development in               
Cook Inlet from fields that have previously been undeveloped or                
shut-in.                                                                       
                                                                               
"Marathon supports House Bill 380 and believes that in the long                
term, this incentive will have a positive economic impact on the               
state of Alaska and the local communities.  I would like to point              
out, however, that we believe this bill would have a more immediate            
impact on undeveloped or shut-in fields because of the readily                 
available market for this product.  The ultimate incentive for                 
adding additional reserve capacity, whether it be oil or natural               
gas, is the availability of ready and stable markets.  While such              
a market is certainly available for new oil reserves in the Cook               
Inlet area, the same cannot be said for natural gas.  New markets              
for uncommitted natural gas reserves are not available for the next            
several years, making it difficult to economically justify near                
term drilling expenditures.  Although this bill will provide some              
economic benefit to the industry, we do not believe by itself, will            
be enough to stimulate significant activity for natural gas                    
development at least in the near future.                                       
                                                                               
"I would like now to ask the committee to consider points of                   
clarification that we believe are needed in House Bill 380.  It is             
our understanding that the intent of this legislation is to provide            
the temporary relief to fields that have been undeveloped or shut-             
in.  We would like clarification on the definition of undeveloped.             
Specifically, we would like to know if a field that has produced               
periodically over the last few years, but requires additional                  
drilling to fully develop the field, would be eligible for the                 
temporary royalty relief.  Also we would like to clarify that                  
royalty relief would apply to either a re-entry of an existing well            
or a new well needed to recover undeveloped reserves.  Again, we               
understand the intent of the proposed legislation is to address                
these scenarios, but we would appreciate the department's review to            
make sure the language is explicit.                                            
                                                                               
"In closing, many of the oil and gas producing states enacted                  
similar incentives for oil and gas development in the early 1990's.            
These states have found the programs to be beneficial to all stake             
holders involved and have maintained those programs.  We believe               
incentive programs such as House Bill 380 will also lead to                    
economic gain for our communities and the state, but we recognize              
that market availability is probably the overriding incentive for              
our industry to look for new oil or gas reserves.  Therefore, we               
believe you will see a more immediate impact on the undeveloped oil            
fields in the Cook Inlet area as a result of this proposed                     
incentive.                                                                     
                                                                               
"Thank you for the opportunity to share these comments with you                
today.  I will be glad to answer any questions."                               
                                                                               
Number 0679                                                                    
                                                                               
REPRESENTATIVE JOE RYAN referred to a presentation that showed a               
reduction in amount of gas coming out of Cook Inlet and by 2004 it             
was supposed to be at a level that would support the existing                  
customer base in the Anchorage bowl area.  He asked if this was                
correct.                                                                       
                                                                               
Number 0727                                                                    
                                                                               
MR. MIESSE replied that in the future additional reserves will be              
needed to make deliverabilities in the local markets.  Economically            
it would be hard to justify spending millions today for a product              
that cannot be sold until 2004 or beyond.                                      
                                                                               
Number 0783                                                                    
                                                                               
REPRESENTATIVE NORMAN ROKEBERG asked if Marathon considered any                
application under HB 207 and if not, was it because of the nature              
of their asset mix of gas verses oil.                                          
                                                                               
Number 0817                                                                    
                                                                               
MR. MIESSE replied that is correct, Marathon has sold its oil                  
reserves and HB 207 would probably have a more immediate effect on             
oil production and it is a matter of market.  He stated that their             
gas is committed to long-term markets, currently.                              
                                                                               
Number 0872                                                                    
                                                                               
CHAIRMAN HODGINS stated that HB 380 is a companion bill to a Senate            
bill and there are areas in the bill that might need to be changed.            
                                                                               
Number 0896                                                                    
                                                                               
KATHRYN THOMAS, Owner, Construction Service Company, testified via             
teleconference from Kenai that she has served on the boards of the             
North Peninsula Chamber of Commerce, Alaska Trucking Association,              
Alaska Industry Support Alliance and was the past chairman of the              
Alaska State Chamber of Commerce.  She stated that in all her time             
spent on the boards, a considerable amount of time was spent in                
trying to keep a viable economy and provide jobs.  She stated that             
the gas reserves in the Cook Inlet basin have been in decline,                 
resulting in the loss of many good paying jobs that the gas                    
industry has traditionally provided to the Kenai Peninsula economy.            
She explained that the local communities have made many efforts to             
replace these jobs which work in other fields of industry and                  
resource development but at this time jobs in the development of               
oil and gas are the highest paying.                                            
                                                                               
MS. THOMAS stated that on the Kenai Peninsula they have actively               
sought ways to revitalize what has been perceived as an old oil                
field.  For many years, industry has declined to invest development            
dollars in many Cook Inlet discoveries, citing the rate of return              
on investment of capital dollars as a contributing factor.  House              
Bill 380 provides an opportunity for them to attract these dollars,            
by providing the incentive for companies to make infrastructure                
investments in Kenai projects.                                                 
                                                                               
Number 1105                                                                    
                                                                               
MS. THOMAS stated that the question raised regarding the                       
eligibility of royalty relief for fields that require additional               
drilling to fully develop the fields and if it would apply to re-              
entry of an existing well or if a new well would be eligible at                
this time, she stated that she is not prepared to comment on it.               
House Bill 380 will provide some incentives for them to attract                
investment dollars and provide jobs for the community.                         
                                                                               
Number 1155                                                                    
                                                                               
BILL HUTTO, Operations Manager, Gas-Pro Alaska, testified via                  
teleconference from Kenai, that he has had a few years of                      
experience in Cook Inlet's oil and gas fields.  He stated that                 
their project will have the potential of providing the base with               
the distribution of gas to areas on the Southern-end of the Kenai              
Peninsula.  He stated that this is advantageous to all Kenai                   
Peninsula residents.  He stated that HB 380 provides the                       
opportunity for the company to attract the development dollars                 
necessary to see that the gas can reach a market.                              
                                                                               
Number 1253                                                                    
                                                                               
KEVIN TABLER, Manager of Land, Government Affairs, Union Oil                   
Company of California (Unocal), testified via teleconference from              
Anchorage that Unocal supports HB 380 and has been an active                   
proponent of incentive legislation, specially as it may apply to               
the Cook Inlet area.  Early exploration in Cook Inlet identified               
several oil and gas accumulations which were deemed uneconomic by              
the then current market conditions.  Development of these reserves             
were impacted as much by market conditions as they were by a lack              
of readily available infrastructure.  Development will require                 
expansion and utilization of the existing infrastructure and by                
taking advantage of economies of scale.  He stated that the time is            
right to access the existing accumulations, but in order to do so              
the royalty burden needs to be reduced.                                        
                                                                               
Number 1342                                                                    
                                                                               
MR. TABLER stated that Cook Inlet's economy of scale financial                 
incentives to expend capital as well as simple supply and demand               
economics will be the determining factors in whether or not                    
development of known accumulations will occur.  He stated that as              
the existing Cook Inlet fields are reduced, initiatives such as HB
380 will be critical if the known, but unproduced, areas are to be             
accessed.  He stated that Unocal supports HB 380, as it will                   
enhance and prolong the economic viability of resource development             
in Cook Inlet.                                                                 
                                                                               
Number 1439                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that Unocal was the only company to             
apply for a royalty of modification under HB 207 and asked if he               
could explain any problems faced with that legislation and why HB
380 would be easier to implement.                                              
                                                                               
Number 1465                                                                    
                                                                               
MR. TABLER stated that there are many uncontrollable factors that              
have to be taken into account under HB 207, whereas HB 380 would               
have one factor, purely royalty reduction, a controllable factor.              
In House Bill 207, the recoupment language, for the new field                  
development was very clear but for marginal fields the bill is more            
subjective and requires the negotiation and the determination that             
it is in the state's best interest.  He explained that the                     
commissioner, prior to HB 207, had the authority to adjust                     
royalties for economic relief on the marginal fields as they                   
applied to Cook Inlet.  He stated that the commissioner has the                
mandate to protect the state's interest which could be in direct               
conflict with the analysis the company goes through in making                  
investment decisions.  He explained that companies must provide a              
full economical and technical proposal.  He said, "As long as there            
was a positive NPV or Net Precious Value on any of these projects              
that we proposed, the state was not inclined to grant royalty                  
relief under HB 207."  He stated that a clear, clean, easily                   
administered approach would have more utility, at least for the                
marginally producing fields in Cook Inlet.                                     
                                                                               
Number 1561                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked if under HB 207, he could have                   
started at a lower rate than 5 percent and if he could justify it.             
He stated that it did take in account that if the field could be               
further delineated and had a greater level of profitability, there             
would be a provision for a sliding scale.  He stated that HB 380               
does not provide for a sliding scale, in case the amount of                    
recoverable oil proves to greater then first thought.  He asked if             
Mr. Tabler was saying the requirements in HB 207 were too                      
burdensome, economically and he would prefer to see a simpler                  
calculation.                                                                   
                                                                               
Number 1624                                                                    
                                                                               
MR. TABLER replied that is what he is saying.  The sliding scale               
discussion, as he recalled, was centered around the new field                  
development but in order to make a clear and convincing showing as             
required under HB 207 that royalty relief required that an owner               
must show that the present operations or planned investments will              
clearly destroy value.  He explained that as a result royalty                  
relief is likely to be granted only to those companies which extend            
considerable resources on unattractive projects and are willing to             
refund all or a portion of the rewards that would be gained.  He               
stated that HB 207 results in the discussion of what is a                      
reasonable rate of return as opposed to a straight forward royalty             
reduction.  With HB 380 there is no question, either you get the               
reduction or you do not.                                                       
                                                                               
Number 1692                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that Unocal recently announced that             
they are going to look at the development of coal bed methane                  
fields and asked his opinion of the gas portion in the bill.                   
                                                                               
Number 1722                                                                    
                                                                               
MR. TABLER stated that Unocal believes that there is a need for                
more gas in Cook Inlet and are actively out exploring it.                      
                                                                               
Number 1777                                                                    
                                                                               
REPRESENTATIVE ALAN KEMPLEN stated that this legislation has a time            
horizon of ten years from the date that oil or gas production                  
commences from a particular field and the price of oil and gas has             
fluctuated, sometimes at a fairly significant rate.  He asked if               
during periods of high prices for oil or gas, wouldn't it be                   
appropriate for the state to reap its normal 12.5 percent royalty              
and shouldn't the proposed legislation have language to make that              
adjustment during periods of high prices.                                      
                                                                               
Number 1831                                                                    
                                                                               
MR. TABLER stated that he would disagree somewhat with that                    
statement in that investment decisions are based on the market                 
conditions at that time.  He stated that the decision to make the              
investment was made and the drilling was done back when there was              
a certain price.  As incentive legislation, it would require the               
incentive, in order for companies to spend the money on the                    
undeveloped fields.                                                            
                                                                               
Number  1884                                                                   
                                                                               
CHAIRMAN HODGINS stated that it is his intention to have limits                
placed on the amount of oil and gas that this royalty reduction                
would affect.  For example, if a larger field is found there will              
be a limit and the royalty reduction will no longer occur.                     
                                                                               
Number 1933                                                                    
                                                                               
REPRESENTATIVE CON BUNDE referred Mr. Miesse's written statement               
regarding stimulating significant activity in the near future and              
asked what changes would have to be made and how he would define               
significant activity.                                                          
                                                                               
MR. MIESSE stated that he was referring to the natural gas                     
development, the bill provides a good incentive for oil because of             
it is readily available for sale.  He stated that because the gas              
is committed for the next several years they do not need to find               
new  gas, therefore, a lot of money would be spent at present, but             
the return on the investment would not occur for several years.                
                                                                               
Number 1989                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that the Nikolai Creek field is                 
owned 50 percent by Unocal and 50 percent by Marathon.  He asked if            
HB 380 were in effect would he be more apt to list the gas from                
that creek then otherwise, and wouldn't that replace the 12.5                  
percent royalty gas.                                                           
                                                                               
Number 2016                                                                    
                                                                               
MR. MIESSE replied that Unocal has different needs then Marathon,              
but would still have the problem of selling the new gas reserves.              
He stated that because the royalties would be less, there would be             
an incentive to try and work with Unocal to do something with the              
creek.                                                                         
                                                                               
Number 2044                                                                    
                                                                               
REPRESENTATIVE KEMPLEN stated that Enstar said that they were                  
concerned with the supply of natural gas.  He referred to Mr.                  
Miesse's statement of new markets for uncommitted natural gas                  
reserves are not available for the next several years.  He asked               
when would it be appropriate for his industry to begin drilling for            
natural gas reserves in order to meet the projected demand by                  
Enstar.                                                                        
                                                                               
Number 2075                                                                    
                                                                               
MR. MIESSE replied that at the end of the time-frame stated in the             
bill.  He stated that they would more apt to spend money on gas in             
the 2002 to 2003 time-frame.  He agreed that Enstar has uncommitted            
gas needs beyond the time-frame but he believed that new                       
discoveries would fill those needs in the future.                              
                                                                               
Number 2111                                                                    
                                                                               
REPRESENTATIVE KEMPLEN asked if they just needed a year's lead time            
in order to do the drilling and meet Enstar's demand.                          
                                                                               
MR. MIESSE replied that it depends on where the drilling is located            
and how close it is to the infrastructure.  If the hook-up is                  
close, then a year to two is sufficient.                                       
                                                                               
Number 2138                                                                    
                                                                               
GARY CARLSON, Vice President Forcenergy Incorporated, stated that              
Forcenergy is an independent oil and gas company and started                   
investing money in Alaska about 15 months ago.  He stated that they            
have 22 employees, 18 of them Alaskan residents.  He pointed out               
that Forcenergy was very successful in the Gulf of Mexico by taking            
a strong technical approach to pick up marginal fields that were               
out of the focus of major oil companies. Cook Inlet is in that                 
category.  He stated that in the fifteen months that they have been            
here they have committed $180 million to the state through                     
acquisitions, seismic projects and drilling.  He stated that                   
Forcenergy is in support of HB 380 as it provides the types of                 
incentives that are needed to develop marginal fields.  He stated              
that similar incentives have worked elsewhere as with the coal bed             
methane.                                                                       
                                                                               
CHAIRMAN HODGINS stated that he is appreciative of their commitment            
to local hire and to Cook Inlet.                                               
                                                                               
Number 2276                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that he is pleased with Forcenergy's            
commitment to Alaska.  He asked how much of their strategic                    
planning in the Gulf of Mexico was influenced by federal royalty               
relief and other state royalty relief in that area.                            
                                                                               
Number 2311                                                                    
                                                                               
MR. CARLSON replied that he has only been with Forcenergy for about            
a year but his observation of their success is by strictly looking             
for a technical approach to increase recovery of fields that had               
been developed by others or to take over fields that had lost                  
investments.  It had more to do with the geologic opportunities                
rather that any federal incentives.                                            
                                                                               
Number 2333                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked how much of a difference would this              
royalty reduction make to Forcenergy's desire to lift the gas in               
the West Foreland's field.                                                     
                                                                               
Number 2376                                                                    
                                                                               
MR. CARLSON stated that their general philosophy is to look for the            
opportunities, evaluate them and either invest in them or walk away            
from them.  He stated that the incentives could either encourage               
them to drill a well, that otherwise they would not have drilled or            
after a well was drilled, the incentive would affect whether to                
proceed and put it into production.                                            
                                                                               
Number 2417                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that there is the desire to have                
some sort of cap that relates to the quantity of recoverable                   
reserves in a particular field and asked Mr. Carlson if that is an             
option.                                                                        
                                                                               
Number 2443                                                                    
                                                                               
MR. CARLSON referred to the Redoubt Shoal Field.                               
                                                                               
TAPE 98-14, SIDE B                                                             
Number 0007                                                                    
                                                                               
MR. CARLSON stated that if the field showed 20 million barrels, the            
relief would not matter.  But a range of 40 to 55 million dollars              
and a cap in that range would still provide the incentive to                   
proceed and yet there would be some assurance that if it was a                 
large field the state would recover some of the lost opportunities.            
                                                                               
Number 0031                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked it he could provide some examples of             
fields that might fit into this category.                                      
                                                                               
Number 0095                                                                    
                                                                               
MR. CARLSON stated he would do that.  He encouraged the committee              
to look at a simple cap rather then to try to estimate a cap for               
each field as every one is different.                                          
                                                                               
Number 0146                                                                    
                                                                               
REPRESENTATIVE RYAN stated that he has heard testimony that the                
market is uncertain yet the Oil and Gas Journal stated that the                
liquefied natural gas (LNG) landings have doubled.  He stated that             
the people don't invest money in tankers if they aren't fairly sure            
that the market is going to be there.  He stated that he would like            
to clear up the uncertainty of a gas market not being there.                   
                                                                               
Number 0196                                                                    
                                                                               
MR. CARLSON stated that from the LNG standpoint, the reason for                
substantial investments was a result of the market place driving               
the investment, Japan, Korea and Taiwan were signing upwards of 30             
year contracts at attractive prices.  He stated that it is easier              
to plan on a global scale.                                                     
                                                                               
Number 0261                                                                    
                                                                               
REPRESENTATIVE RYAN asked if Marathon only ships just gas or do                
they ship LNG as well.                                                         
                                                                               
MR. CARLSON responded that Marathon is selling LNG.                            
                                                                               
Number 0306                                                                    
                                                                               
REPRESENTATIVE BUNDE stated that earlier testimony stated that HB
380 would not impact gas production but it would impact oil                    
production.  He stated that Forcenergy has both oil and gas                    
interests and asked if he visualized using this bill as expanding              
both their oil and gas production.                                             
                                                                               
Number 0334                                                                    
                                                                               
MR. CARLSON replied that Forcenergy will look at both oil and gas,             
as they do not have the infrastructure and fixed market that                   
Marathon Oil Company has.  He stated that they hope they would be              
able to negotiate contracts and market gas.  He stated that he                 
hoped the incentive would help clarify the gas situation in Cook               
Inlet.                                                                         
                                                                               
Number 0383                                                                    
                                                                               
REPRESENTATIVE BUNDE asked if it was correct to assume that gas                
production is front-end loaded, in that more is recovered in the               
first ten years than in the second ten years.  He asked what life              
expectancy would he plan for in the Cook Inlet oil fields.                     
                                                                               
Number 0407                                                                    
                                                                               
MR. CARLSON stated that in regards to an oil field they are at the             
latter stage of development in Cook Inlet, as it has been ongoing              
for 30 years.  He stated that a new development would not be                   
planned that would take 30 years, investments would be made to try             
and compact that time-frame.  He stated that gas would depend on               
the contracts and it is possible to end up with a flatter decline              
for gas if there was a sufficient amount of gas and market place,              
investments would be made accordingly.  Probably more wells at                 
first to get it started and then drill wells for deliverability                
later on.  He stated that oil field investments would come very                
early.                                                                         
                                                                               
Number 0457                                                                    
                                                                               
REPRESENTATIVE KEMPLEN stated that there has been talk about the               
concept of a circuit breaker and asked if that concept could be                
extended to price.  He stated that there is a lot of uncertainty in            
the energy market and in the Middle East in the ten year time                  
horizon, various acts could occur that would disrupt the flow of               
energy.  He asked if it would be appropriate to have a similar                 
circuit breaker for price as there has been for volume.                        
                                                                               
Number 0499                                                                    
                                                                               
MR. CARLSON replied that an administration of a price cap would be             
very difficult.  He stated that price strategy would be built in               
deciding to spend extra millions to bring a field to the market                
place.  It would be difficult to administer a price cap easily and             
simply.                                                                        
                                                                               
Number 0559                                                                    
                                                                               
KEN BOYD, Director, Division of Oil and Gas, Department of Natural             
Resources, referred to a letter that the division sent to the                  
Senate regarding the Senate companion to HB 380.  He stated that               
the division does not have a position on the bill.  He stated he               
would outline the division's questions on HB 380 for the committee:            
The bill has no provision to account for changing economic                     
conditions.  If the price of oil were to increase, the relief would            
remain the same.  How does the bill protect the states upside                  
interest.  There is no economic analysis that leads to the terms of            
the royalty reduction described in the bill.  Why is it at 5                   
percent for 10 years.  Are the economic requirements of all                    
companies so similar that the same level of relief is needed for               
each of them, and the same question would pertain to the fields                
themselves.  He asked why not use HB 207 for royalty relief as it              
is the law.  Which fields would qualify for the royalty reduction.             
He stated that those are the questions he has on the bill and he               
would try to answer any of the questions that the committee has.               
                                                                               
Number 0696                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked on the issue of the expansion ability            
of a particular field that may have been granted a royalty                     
reduction, how could further proven reserves work as practical                 
matter and could that be simplified in the bill.                               
                                                                               
Number 0740                                                                    
                                                                               
MR. BOYD stated that it is worth discussing and he would work on               
that as he could not address that on the spot.                                 
                                                                               
Number 0761                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked if he thought a pricing sliding scale            
would be difficult.                                                            
                                                                               
MR. BOYD replied that sliding scales have been used in some of                 
their leases as there as been sliding scale royalties that vary                
with price over time.                                                          
                                                                               
REPRESENTATIVE ROKEBERG asked if price was the major element.                  
                                                                               
MR. BOYD replied that is correct.                                              
                                                                               
Number 0826                                                                    
                                                                               
REPRESENTATIVE KEMPLEN asked if there is a simple way to administer            
a circuit breaker on price.                                                    
                                                                               
Number 0853                                                                    
                                                                               
MR. BOYD replied that he would hesitate to recommend a methodology,            
he stated that there are probably ways to tie price to relief.  It             
would truly be sliding scale that would slide from a low-side to an            
up-side and capped at each end.                                                
                                                                               
Number 0896                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that the bill is limited to the Cook            
Inlet sedimentary basin and asked if it is geologically difficult              
to define.                                                                     
                                                                               
Number 0903                                                                    
                                                                               
MR. BOYD stated that one suggestion would be to use the definition             
from exploration licensing.  He questioned if this bill would apply            
to a coal bed methane unit in Wasilla.                                         
                                                                               
Number 0973                                                                    
                                                                               
REPRESENTATIVE ROKEBERG asked if the administration would rather               
see a fix to HB 207 rather than this HB 380.                                   
                                                                               
Number 0992                                                                    
                                                                               
MR. BOYD replied that he believed that the administration would be             
willing to fix HB 207.                                                         
                                                                               
Number 1047                                                                    
                                                                               
CHAIRMAN HODGINS stated that HB 380 would be held over to a future             
meeting.                                                                       
                                                                               
HB 393 - DEVELOP STRANDED GAS RESOURCES                                        
                                                                               
Number 1069                                                                    
                                                                               
CHAIRMAN HODGINS announced the committee would hear HB 393                     
"An Act relating to contracts with the state establishing payments             
in lieu of other taxes by a qualified sponsor or qualified sponsor             
group for projects to develop stranded gas resources in the state;             
providing for the inclusion in such contracts of terms making                  
certain adjustments regarding royalty value and the timing and                 
notice of the state's right to take royalty in kind or in value                
from such projects; relating to the effect of such contracts on                
municipal taxation; and providing for an effective date."  He                  
stated that he asked his colleagues to present their concerns and              
suggestions regarding the bill.                                                
                                                                               
Number 1080                                                                    
                                                                               
REPRESENTATIVE TERRY MARTIN, stated that he has concerns about this            
issue.  He referred to the history of the issue of financing a gas             
pipeline.  He stated that he had voted against the bill that had               
initiated this because the legislature was giving too much up to               
the executive branch.  He referred to Title 9 of the constitution              
that stated the power of taxation should never be surrendered.  He             
stated that legislators should not force the economy one way or                
another.  He stated that the free market should be allowed to work             
and the legislature should not be in the way.                                  
                                                                               
Number 1282                                                                    
                                                                               
REPRESENTATIVE MARTIN stated that as legislators they should look              
at what is being done with the gas.  He stated that recycling of               
gas is producing more oil resulting in an estimated 2 billion                  
barrels of excess oil received.  He stated that if the pipeline is             
forced the oil will decrease because once gas is taken out the oil             
reserves will be depleted.  He asked how much this will cost the               
state of Alaska in oil royalties.                                              
                                                                               
Number 1401                                                                    
                                                                               
REPRESENTATIVE MARTIN stated that the incentive programs should                
make the participants, "run like mad".  He referred to Section 2,              
"The legislature further intends, however, that any fiscal terms               
agreed to in a contract under this Act in lieu of other taxes will             
fully and fairly compensate the people of the state of Alaska for              
the severance, production, and sale of natural resources belonging             
to the people" and "The value of the infrastructure that may be                
provided by the state to a project, including all the advantages of            
civilized society that may be provided by the state to the sponsors            
of a project."   He stated that clause should cause any investor to            
not participate in the project.  He stated that at the most                    
investors would receive 3 percent of what they invested even with              
the incentive.                                                                 
                                                                               
Number 1581                                                                    
                                                                               
REPRESENTATIVE MARTIN stated that a market should be established               
first and the market should invest in the pipeline if China had                
equity in the pipeline it could be assured that they would uphold              
their contract.  He stated that almost immediately the pipeline                
would be able to put 15 million metric tons on the market which                
will result in a drop in prices.  He stated that we are willing to             
give away gas to get more jobs.                                                
                                                                               
Number 1618                                                                    
                                                                               
REPRESENTATIVE MARTIN referred to the Alaska hire issue and feared             
that there would be a influx of people coming to Alaska to live off            
our welfare system and fill the residency requirement in order to              
work on the pipeline.  He stated that Alaska does not have 5,000               
top quality welders needed for the pipeline.  He stated that                   
Alaskan hire is misleading.  He asked that the reasons motivating              
the project be looked at.                                                      
                                                                               
Number 1946                                                                    
                                                                               
REPRESENTATIVE RAMONA BARNES stated that she was just here to                  
listen in on the committee process and did not intend to comment.              
She then stated that a big concern that she has with the bill is               
that it is called stranded gas legislation instead of the gas                  
pipeline legislation.  She stated that gas-to-liquids subject                  
should not be in this bill as it is a different tax regime.  She               
stated that a taxing regime for using the pipeline that exists is              
different from building a new one.  She asserted that the socio-               
economic aspect of the bill should be deleted and the section                  
dealing with local government needs a lot of work.  She stated that            
there is a section in the bill dealing with the commissioners                  
laying their plans before the Budget and Audit committee, she                  
objected to that and stated that any plan needs to come before the             
entire legislature.                                                            
                                                                               
Number 2157                                                                    
                                                                               
PAM LABOLLE, President, Alaska State Chamber of Commerce, stated               
that she did not have the expertise to speak to any of the details             
of the bill.  She stated that her testimony is in support of the               
concept of bringing the stranded natural gas into production and               
specifically their resolution on the subject urges the legislature             
and the administration to continue to take those steps to provide              
a stable appropriate fiscal and regulatory environment which will              
give the project the best opportunity to become commercially viable            
thus enabling the earliest possible development of the resource.               
                                                                               
Number 2266                                                                    
                                                                               
REPRESENTATIVE RYAN stated that the committee has asked a lot of               
questions to which the answers were not forthcoming because there              
has not been any conceptual engineering done, no one knows what the            
market is and who the investors may be et cetera.  He stated that              
these basic fundamental questions need to be answered.  He                     
reiterated his concerns on the bill and stated that he needs to                
know that we would be operating on a more secure basis.                        
                                                                               
TAPE 98-15, SIDE A                                                             
Number 0013                                                                    
                                                                               
CHAIRMAN HODGINS stated that the committee is trying to get answers            
to those questions.                                                            
                                                                               
Number 0038                                                                    
                                                                               
REPRESENTATIVE BARNES stated that the van Meurs' study went into               
great detail as to what is needed to be done to make the project               
economically feasible and it is known that there is at least 15                
trillion cubic feet of gas at Prudhoe Bay and 6 to 11 estimated                
trillion feet of gas at Point Thompson.  She asserted that it is               
known that 15 million metric tons a year would be needed to be put             
into the system to make the gas line economically feasible.  It is             
necessary in order get the gas into the market place, Alaska has to            
be in the market place by 2005.  She stated that some of the                   
purchasers are interested in holding an equity position in the                 
pipeline such as China Petroleum and would purchase 25 percent of              
the gas that Alaska would put into the market place.  She stated               
that Alaska is competing with the world market and the several gas             
projects that are scheduled to come on line.  If they get into the             
market before Alaska does, our gas "will sit up there in what they             
call a stranded gas hold for eternity I suspect."                              
                                                                               
Number 0290                                                                    
                                                                               
REPRESENTATIVE KEMPLEN stated that this proposed legislation is                
establishing a framework by which the Administration and the                   
private sector can move forward with this complex project.  He                 
pointed out that the legislation lays out the process for how the              
project is to be done and identifies the key issues that needs to              
be addressed by the sponsor group.  He stated that it gives                    
permission for the Administration to negotiate with a qualified                
sponsor group.  He stated that it will take a few years before                 
there is a contract presented to the legislature.  He stated that              
it is important to move forward with this bill and to make sure the            
project does happen.                                                           
                                                                               
Number 0456                                                                    
                                                                               
REPRESENTATIVE ROKEBERG advised everyone to read the memorandum by             
the Honorable Kay Brown.  He stated that area of interest is if                
there are going to be any equity issues as it relates to the                   
affected municipalities of the state, a decision on what is to be              
done on this needs to be made.  He stated that the financing                   
mechanisms need to be looked at, as it is key to this project.  He             
suggested that the bill may need to be sent to a subcommittee                  
because there will not be any progress until the committee starts              
making its changes.                                                            
                                                                               
Number 0622                                                                    
                                                                               
CHAIRMAN HODGINS stated that he agreed and would consider a                    
subcommittee.                                                                  
                                                                               
Number 0678                                                                    
                                                                               
REPRESENTATIVE BARNES referred to Representative Martin's statement            
raising the issue of gas re-injection to raise oil.  She stated                
that should not be an issue because if Point Thompson was developed            
first, we would not need any of the gas in Prudhoe Bay but beyond              
that, there is a tremendous amount of excess gas that is being put             
back into the holds.  She addressed the question of equity interest            
and if taxes are deferred in the up-front portion of the gas line              
to recoup at the back-end, that is an equity interest.  She stated             
that would be Alaska's contribution to making the project                      
financially feasible.                                                          
                                                                               
Number 0783                                                                    
                                                                               
CHAIRMAN HODGINS stated that he would talk with Representative                 
Martin to inform him on past meetings.  He stated that it is a big             
project for Alaska and a lot of work regarding the enabling                    
legislation will be done in this committee.                                    
                                                                               
ADJOURNMENT                                                                    
                                                                               
Number 0821                                                                    
                                                                               
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and              
Gas meeting at 11:55 p.m.                                                      
                                                                               
                                                                               

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