Legislature(1995 - 1996)
03/14/1995 10:06 AM House O&G
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 14, 1995
10:06 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Scott Ogan, Vice-Chair
Representative Gary Davis
Representative Bill Williams
Representative Tom Brice
Representative Bettye Davis
Representative David Finkelstein
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HB 207: "An Act relating to adjustments to royalty reserved to the
state to encourage otherwise uneconomic production of oil
and gas; relating to the depositing of royalties and
royalty sale proceeds in the Alaska permanent fund; and
providing for an effective date."
HEARD AND HELD
HO&G - 03/14/95
HB 209: "An Act relating to the authority of the commissioner of
natural resources to allow reductions of royalty on oil
and gas leases; and providing for an effective date."
SCHEDULED BUT NOT HEARD
WITNESS REGISTER
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801
Telephone: (907) 465-2400
POSITION STATEMENT: Discussed HB 207
KEN BOYD, Deputy Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, AK 99503-5948
POSITION STATEMENT: Discussed HB 207
DAVID JOHNSTON, Chairman
Alaska Oil and Gas Conservation Commission
3001 Porcupine Drive
Anchorage, AK 99501
POSITION STATEMENT: Discussed HB 207
PREVIOUS ACTION
BILL: HB 207
SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
JRN-DATE JRN-PG ACTION
02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE
02/27/95 501 (H) FISCAL NOTE (DNR)
02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV)
02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER
03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) #3
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
03/09/95 (H) MINUTE(O&G)
03/14/95 (H) O&G AT 10:00 AM CAPITOL 124
BILL: HB 209
SHORT TITLE: OIL & GAS ROYALTY REDUCTION
SPONSOR(S): REPRESENTATIVE(S) GREEN,Rokeberg
JRN-DATE JRN-PG ACTION
02/27/95 503 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 503 (H) OIL & GAS, RESOURCES, FINANCE
03/01/95 551 (H) COSPONSOR(S): ROKEBERG
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
03/09/95 (H) MINUTE(O&G)
03/14/95 (H) O&G AT 10:00 AM CAPITOL 124
TAPE 95-9, SIDE A
Number 000
HO&G - 03/14/95
HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES
CHAIRMAN NORMAN ROKEBERG: called the House Special Committee on
Oil and Gas to order at 10:06 a.m. For the record, committee
members present are, Representative Tom Brice, Representative Gary
Davis, Representative Bettye Davis, and the Chairman, myself, a
quorum is present. On today's calendar is a continuation our
meeting from last week, last Thursday that is, March 9, 1995, on HB
207, the royalty reductions for oil and new fields. If I could ask
Commissioner Shively to come forward -- and perhaps Mr. Boyd also,
if you want to, if that's convenient -- why don't you pull a chair
up there, sorry about that. If you would be so kind, gentlemen, as
to clearly state your full names, affiliations, and titles for the
records please. Good morning to you.
Number 030
JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES: Good
morning Mr. Chairman my name is John Shively. I'm Commissioner of
the Department of Natural Resources.
Number 031
KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF
NATURAL RESOURCES: Good morning Mr. Chairman, and I'm the Acting
Director for the Division of Oil and Gas.
Number 032
CHAIRMAN ROKEBERG: Commissioner, is there any particular things
you would like to start out with this morning that would help
clarify any of the testimony of last week, or anything that has
come up in the interim that you would like to make an opening
statement?
Number 038
COMMISSIONER SHIVELY: Yes, Mr. Chairman, if I might. We had a
fairly lengthy discussion last time of whether or not we could deal
with a pool of oil that was at a different level or horizon in --
that was over -- a field that was currently producing, and I think
I led the committee to believe that we felt that this legislation
would allow us -- in fact, I know I led the committee to believe
that we felt that the legislation would allow us to do that. We
have gone back and looked at that and have decided that we really
can't do that. That was just some of my own lack of familiarity
with how oil fields are structured. We, if it is the committee's
desire to want to deal with separate pools under leases that are
part of a producing field, we can provide language to the committee
that would allow the legislation to cover that, and we don't have
a strong feeling either way, but certainly if the committee wanted
it covered, or if you think that the testimony supports having
those pools of oil covered we will provide you language to do so.
Number 070
CHAIRMAN ROKEBERG: Commissioner I, in my discussions with various
members of the industry, I believe that would be the case, so I
would ask that you provide us with some language and also for your
information I have had some discussions, I believe with British
Petroleum about defining a field (indisc. -- coughing) would that
be part of the....
Number 079
COMMISSIONER SHIVELY: This is, part of, yeah, it's part of how you
define a field and it has to do with us stating in the legislation
that one of the triggering events would be a delineated field...
CHAIRMAN ROKEBERG: Right.
COMMISSIONER SHIVELY: ...and that probably does not allow us to
deal with a separate pool of oil that's in a field that's produced.
CHAIRMAN ROKEBERG: Right.
COMMISSIONER SHIVELY: We have -- I can-- a suggested language.
I can either have Mr. Boyd tell you what it is or we can provide it
to your staff later, whatever your (indisc. -- paper shuffling)
are.
Number 090
CHAIRMAN ROKEBERG: If you wouldn't mind going ahead because I want
to make sure everybody on the committee understands the concept of
field. I think it's, from my position an example would be like
Kaparuk as a unit, and when you have the Westsak(ph) formation has
a different horizon and field even though it's in one unit then, I
want to make sure everybody understands that concept. Mr. Boyd did
you....
Number 099
MR. BOYD: Yes, Mr. Chairman, just to clarify, even at a lease
level that we're talking about, -- same field as Commissioner
Shively has said -- if you could imagine the lease, let's say it is
a three by three mile lease, just extending to the center of the
earth and everything that is contained in that lease then is
considered to be a field and the way the bill is written, as
Commissioner Shively has said, doesn't allow us to separate
individual pools. In other words, if something were under
production it would not allow us to give a royalty relief for
something that was not under production. So the suggested change
that I believe would cure that is on Page two of the bill. I'll
begin with line 28. I want to be sure we are all on the same sheet
music here, we're amending 3.05.180J. It's a new J begins on line
28 beginning with underlined bold text. "To allow for production
from a delineated but not previously produced field," add the words
pool or portion of a field or pool "that would not otherwise be
economically feasible to prolong the economic life of an oil and
gas field," and then insert that same language after the word
field. So the words pool, or portion of a field or pool then would
appear after the word field on lines 29 and 30 following the word
field.
Number 130
CHAIRMAN ROKEBERG: Do you have that in writing for us?
Number 131
MR. BOYD: I have it in poor writing.
Number 132
CHAIRMAN ROKEBERG: Okay, no problem. It will be reflected in the
record, so we'll have that when we start drafting our committee
substitute. As I mentioned, some members of the industry are going
to make some recommendations on this line too obviously, and we can
synthesize that particular language. Is there any questions of the
committee on this particular area here? Excellent, moving on...
Number 145
COMMISSIONER SHIVELY: In terms of my issues, that's it. We'd be
glad to answer any further questions.
Number 146
CHAIRMAN ROKEBERG: Mr. Boyd, is there anything -- as you return to
the process -- is there anything you'd like to say about this
particular bill?
Number 148
MR. BOYD: No Mr. Chairman, but again, we're prepared to answer any
specific questions the committee might have.
Number 152
CHAIRMAN ROKEBERG: Okay, yeah. One thing that has come to light,
and given the further studies, if the committee members would drop
over to page three of the bill then we can, shall adopt regulations
to (indisc.--paper shuffling) and also today there has been handed
out to the committee members a copy of the Alaska Administrative
Code, Section 11 AAC 83.185 Royalty Reduction. And, just prior to
the meeting I gave the commissioner and the director copies of this
and I asked them about this. One of my concerns right now is the
legal effect of the deletion in the bill as proposed and the
existing regulations, and also the fact that the bill calls for a
(indisc.) part of industry of confidentiality in their application.
And the regulations as I read them are really pretty fundamental in
terms of just pointing out what information is required to be in
the application, and also the public hearing process. So I guess
my first question, which is kind of a legal question, is what is
the effect of the deletion? Does that have any effect on the
existing regulations, and the interplay between the two bills? And
secondly, to follow up on that is the provisions for public notice
in here because of confidentiality seem to be, they would seem to
be needed to be deleted.
Number 189
COMMISSIONER SHIVELY: Let me respond to that. Deleting the
requirement for regulations does not prohibit the department from
having regulations so I don't see a conflict there. In terms of
the public notice for public meetings, I haven't really actually
had much time to think about this. I would say if the information
is confidential, the information would not be made available at a
public hearing. The confidential information is covered by the
requirements of state law and so if we had a public hearing we
would have it only on those aspects of the application that the
applicant agreed to have public. And the parts of my decision --
there will be parts of my decision, clearly, that are public, the
best interest findings and things like that. But, so, I don't know
that this is unworkable the way it's presently structured in
regulation.
Number 205
CHAIRMAN ROKEBERG: Well could we get some feedback from you...
COMMISSIONER SHIVELY: We will get a legal opinion for you.
COMMISSIONER ROKEBERG: ...how this all works. As well as, it
might be, in addition under that section, and variously under
existing regulations, I take due note that there is a sliding scale
royalty at point 183. A definition there that may prove
troublesome, or may be okay. You need to take a look at that to
see how that may effect anything in the future. (indisc.) the
provisions for confidentiality throughout the regulations and
various other things. I think what you need to do is review the
regs. and see how they mesh with the bill. Mr. Boyd.
Number 220
MR. BOYD: Mr. Chairman, 11 AAC 83.183, the sliding scale royalty
has been on the books for a long time. It is actually a method of
bidding. It is something that is available now, it has been
available for some time but it has been, if it has been used it has
been very little used and I, it would be an up front sort of thing
in the bidding process, it's brought in later, and it's a
contractual obligation of the lease.
Number 228
CHAIRMAN ROKEBERG: Rather than have the committee wade through the
regs, why don't you guys do it and tell us what we need to do about
it.
MR. BOYD: Okay.
CHAIRMAN ROKEBERG: Representative Ogan.
Number 230
REPRESENTATIVE SCOTT OGAN: Thank you, Mr. Chairman. This method
of bidding, there's four of them is that correct?
MR. BOYD: I believe there's six.
REPRESENTATIVE OGAN: Is it my understanding that every time a new
lease sale comes up that DNR spends a fair amount of time deciding
what method, looking at what method is best to use to bid?
Number 239
MR. BOYD: Mr. Chairman, Representative Ogan, that is exactly
right. The commissioner receives a partly confidential briefing at
some point in the lease sale process, after the preliminary
finding, and before the final finding is issued. The preliminary
finding has a lot of issues, community impact, and things that we
discuss. We discussed with the commissioner the issues of title
and be sure the land is all clear and able to be sold, but during
that briefing the commissioner is given information regarding what
we perceive to be the economics of the area, the leaseability of
the area, if you like. What we would suggest to the commissioner
would be the proper terms and conditions and they would concern
things like: what is the proper bidding method? And quite often,
in the past, we've selected a royalty rate of 12.5 percent with a
variable bonus. That has not been the case always in the past.
Other leasing methods in different areas may have different
applications. At the same time we pick a term of the lease. On
the North Slope it's often ten years, in the Cook Inlet it is often
seven years; and that just reflects the amount of time it takes to
work, to mobilize in the limited drilling season and things like
that. So, the commissioner considers all these things in each, as
you say, at each lease sale those are then put into the final
finding and those are the terms and conditions under which the
leases are issued and they may vary from sale to sale.
CHAIRMAN ROKEBERG: Representative Ogan.
Number 262
REPRESENTATIVE OGAN: Thank you Mr. Chairman. Is it my
understanding that generally they use the same method all the time.
Number 265
MR. BOYD: Mr. Chairman, Representative Ogan, more recently that is
the method that is used with, I'll say, a slight twist. The
exploration incentive credit program, which is on the books, is
another piece which is often added into the equation, leases that
are being offered that are far from infrastructure or areas that we
perceive to have relatively weak geology, we may offer an
exploration incentive credit, and I think you know that gives the
state the opportunity to offer a certain percentage of the well
cost up to a certain limit. And this usually provides that the
lessee drill in a certain period of time. But, in the near past,
the 12.5 percent with sixty and two-thirds in some cases, or a
mixture of those, the terms of the lease sale need not be the same
for every lease and in some cases we've had leases that carry a
12.5 percent royalty with a variable bonus, and some that had a
sixty and two-thirds royalty with a variable bonus. And that has
been deemed by our economists and our staff to be the method that
was most likely to be in the state's best interest.
Number 290
CHAIRMAN ROKEBERG: If you go back to the existing regulations,
section four, there's contained a detailed statement covering the
entire life of the lease showing all expenses and costs of
operating the lease including all the royalties and over-riding
royalties, and all income from all produced minerals from the
lease. That's section four of 11.AAC.83.185 for the record. Could
you, one of the concerns that's come to light is the information we
got in (indisc.) basis from Marathon Oil about their North Trading
Bay application which was turned down as every application in the
history of the state for this provision has been turned down. I
have finally been able to verify there never has been a grant of a
royalty reduction to the to my knowledge. Is that correct?
Number 304
MR. BOYD: (indisc.) my recollection that's true but I believe
there have been, I'm sorry, there have been three applications to
my knowledge: the Trading Bay, there was one from Texaco, and then
there was then Conoco Oxy. But, Conoco Oxy, which went through, as
you know, litigation and negotiation finally settled for a past
value but there was a royalty reduction granted to Occidental from
twenty percent to twelve and a half percent but only to Occidental
and only on some leases. I believe it was six or seven leases. I
could get those numbers.
Number 314
CHAIRMAN ROKEBERG: I sit corrected. I'm glad, we've been trying
to get at that...
MR. BOYD: Yes.
CHAIRMAN ROKEBERG: ...actual fact.
Number 316
MR. BOYD: That's quite recent, that decision was in 1993, I
believe, late 1993. I can get you some details on that,
Representative.
Number 318
CHAIRMAN ROKEBERG: We'll go back to my question. What happened
with Marathon was they had purchased a lease and platform in the
inlet and which had gone through two sets of ownership apparently
over a period years. Also, when they purchased the property they
really didn't have all the historic operating data that went with
it, and so when they applied for reduction under J, and basically,
it was refused in the process because the then director asked them
to provide this historic data which they didn't have, so therefore
they couldn't go forward with their application for reduction. And
what's occurred with that particular formation, the North Trading
Bay one, as I understand it, it is that well, the oil production on
that well field was shut in, and because of the geology there will
never be able to be reopened. Therefore, the, what seems to me an
obstacle, was put up by the bureaucracy, overcame the intent of
this statute, and that particular field is probably blocked forever
because of that. Therefore, I'd appreciate it if we could look at
the regulations, or in the statute and make some provision that
would allow for an instance like that whereas if the data was not
readily available to the applicant, particularly for an older
field, that they wouldn't be necessarily penalized, because it
seems to me that even the lay person could understand the economics
of the equation of an older field for the granting of a reduction.
I don't think you necessarily have to go to all the historic
economic investment there to be able to view that instant
situation, to be able to go forward with the proper decision,
whether to grant a reduction or not because the life of the field
is very finite. Mr. Commissioner.
Number 352
COMMISSIONER SHIVELY: Yeah, that's why we took out the language
that talked about the rate of return with respect to the lessees'
total investment in the field. Under the old law, I think you were
required to get that kind of information in order to make the
finding that was required on the rate of return. That's precisely
because of that kind of problem, and the problems we talked about
before about what happens when you get close to shut-in or
abandonment why you don't take in the total rate of return on the
field. So, I think that that change does, would allow us to go
back and change the regulations, but I think under the current law
we had no choice.
Number 362
CHAIRMAN ROKEBERG: Right. Well, I think we need to....
COMMISSIONER SHIVELY: We would make such a choice.
CHAIRMAN ROKEBERG: How do you stipulate an accommodation for that
instance particularly as it relates to existing producing fields or
older fields? How are we going to (indisc.) for that. I think
that's, it's more than unfortunate. You have all the sum costs in
an actual offshore platform and they may, as I understand it,
produce some gas from there but their not, they will probably never
be able to produce any more oil. And that's because of political
decision. I don't know. I'm not going to editorialize, excuse me.
Number 371
COMMISSIONER SHIVELY: It may or may not. I'm not going to try to
second guess my predecessors but, but I think that the law was
somewhat constraining in that regard as it was then written and
that's one of the reasons were taking that section out, because it
provides just the kind of restraint that we were talking about.
Number 376
CHAIRMAN ROKEBERG: I can appreciate that. I spent most of this
weekend trying to come up with a definition of reasonable rate of
return, and ultimately, after much reaction on the part of several
people in the industry, I may have to scrap the whole idea because
it may be the wrong approach even, and that may be... I mean your
argument about why you -- if you remove that from the statute --
may hold more water and we can talk about that later. At any rate,
so therefore, that was a point I wanted to make on these
regulations. And also under four, right now if that regulation,
that line wasn't changed it may create a, you know, major burden on
the part of an applicant depending in particular old fields, but I
don't know what other ramifications there are. How would you
perceive the process? I mean, as I mentioned, you would have to
have all the costs....
Number 394
COMMISSIONER SHIVELY: Let me go through what I see, you know, the
process being, because there are really three major events that
happen. The first thing is that the applicant would have to come
in and I would have to find that there is a delineated field, or if
we make the change we talked about earlier, a pool. That is the
first thing that I have to find, and if that doesn't exist then the
process stops. If we determine that, then we have to determine
whether or not a royalty reduction would change the economics so
that a marginal field could start development or an old field could
keep going. In that case, I have to look at all the economic data
that the applicant wants to make available to the department, some
of which may be public and some of which may be confidential. So,
and then we will determine whether or not the royalty reduction we
think affects the economics, so that a field can go forward. Once
we've made that decision we still have to make a decision of
whether or not, even if we believe that the economics are improved,
that it's in the state's best interest to go forward and give them
that reduction. So there are really three steps to the process.
Number 412
CHAIRMEN ROKEBERG: Very Good. Because one of my concerns is that
it quite clearly states that the application will include a
statement covering the entire life of the lease showing all
expenses and costs of operating the lease. I mean, that's a very
broad requirement. And let me, let me go on to say that for the
information of the committee members what I'm concerned about here
is if after the department reviews this, the bill and existing
regulations to find out the relationship, that, rather than to
have, ask the department to go back and rewrite the regulations, I
believe it's going to be my recommendation that these regs, which
are not real long, be revised to meet this new bill and then put in
the statute so then they don't have to go through the regulatory
process. So I'm going to ask for a recommendation from the
division on that, and that way, that does a couple things. It
speeds up the whole process. We don't have to wait six months for
them to write one page of regulations, if you will, and go through
the approval process and the approval by the Lieutenant Governor
and various other things. I mean, that's what I'm thinking of.
And in doing so, when we do that, then these, then these standards
might take on a much higher impact. So, if we do it we need to be
careful about what we are putting in there. Mr. Commissioner.
Number 435
COMMISSIONER SHIVELY: Mr. Chairman. I do not find section four to
be particularly constraining even with the change. I mean, this is
the kind of information we will need, they'll have to estimate the
life; they'll have to estimate their expenses, their costs,
including the royalties overriding currents. All that information
is going to have to be in the application. So I don't, although
it's sort of written a little bit to take care of the existing law,
which is fields that are about to be shut-in or abandoned fields,
I think, I think it's workable, but we will go back and look at
them.
Number 442
CHAIRMAN ROKEBERG: Well how about -- but you would have to revise,
I would think, based on a new field. In other words, their
performance or other models they may have to demonstrate to you.
Number 445
COMMISSIONER SHIVELY: It says a detailed statement can tell you,
cover the entire life of a lease showing all expenses. Well, if
the lease is just starting it's their projected expenses.
CHAIRMAN ROKEBERG: Right.
COMMISSIONER SHIVELY: So, I, I don't think that that language is
(indisc.--papers shuffling).
Number 452
CHAIRMAN ROKEBERG: Very good. So, if you could give us, get back
to us on that section. There is one think I would like to clear up
right now. It's a little bit of a bookkeeping thing. It goes down
to the third-party contractor. I'm trying to see where that is.
COMMISSIONER SHIVELY: Oh yeah.
Number 464
CHAIRMAN ROKEBERG: On line, page three, line eight I believe. The
condition of evaluating application and data, the commissioner may
require lessee to pay the cost of contractors selected by the
commissioner to assist in the evaluation. I've had some
conversations with the various members of industry and there is,
has been raised some concerns about the fact that a contractor may
be selected by the commissioner's office, but they may have to have
had some bad experience, or the commissioner applicant does not
like the contractor selected by the commissioner, and I, there has
been a request for him, well, here's some tests for the future
about mutual agreement or something like that. You care to comment
on this process?
Number 465
COMMISSIONER SHIVELY: I would. It think it's important that we
understand what we're doing here. Ordinarily, if we have the staff
capacity, the application comes into the commissioner, goes to the
division of oil and gas and it will be the staff of the division of
oil and gas that will make the determination. The industry,
whether they like our staff or don't like our staff, really doesn't
have the ability to choose which of our staff members review that.
In the case where we feel we cannot cover the, take care of the
application internally we would say that we wanted to use an
independent contractor and that the applicant would pay for it. I,
believe the independent contractor has responsibility to the state
really. I mean, that's who they are working for. They're make
assessment for the state, not for the industry, as to whether or
not this proposal is accurate. We have to control that decision.
So, the most that I would be willing to look at for a change there
would be a one-time veto of one contractor. So, if they, if we
named a contractor and they said no, we don't want that, sort of
like the lawyers and judges where, where you get sort of an
opportunity to get one judge in. I mean, I, we haven't really made
a position on that internally. I haven't discussed that, but
that's the furthest I would go. But I, we are not prepared to sit
and negotiate with the industry over who should review an
application that has to be reviewed for the public interest.
Number 485
CHAIRMAN ROKEBERG: Well, could, could you give that some thought
and get back with a recommendation to the committee on that so we
can, you know, perhaps compromise and take your method and then
make a... Mr. Boyd.
Number 490
MR. BOYD: Mr. Chairman, I would only add to Commissioner Shively
the testimony that generally speaking, I believe the, the
contractor would be used in a purely technical sense. We would be
feeding him the company numbers and it would be the hard grinding
of numbers. The contractor wouldn't be making policy. The numbers
we get back I think would be a matter of equations and, and facts,
and not of speculations so much. I mean, the speculation, if you
want to use that word, is in deciding whether when the numbers come
back, its in the interest of the state to grant the reduction. The
contractor is not in the position to make that decision.
Number 500
CHAIRMAN ROKEBERG: Well, I think it, as I took it, was that the
confidential nature of the data was sensitive and they were
concerned about who was looking at it. I mean, that's kind of
common sense. I think that was a concern, really. Not so much the
competence or something like that, or perhaps a bad experience with
them and yeah, there is multiple reasons. Those requests are
coming so if we can kind of nip it in the bud.
REPRESENTATIVE FINKELSTEIN: Mr. Chairman.
CHAIRMAN ROKEBERG: Mr. Finkelstein.
Number 505
REPRESENTATIVE FINKELSTEIN: Just while we're on that subject, I,
you know, while you're thinking about it, I think it might be worth
reflecting on how we do this in the rest of government. Is there
an example anywhere in government where we allowed any regulated
industry to have some say under both employees and the contractors
that state government chooses to make its decisions because its of,
well, I could understand, you know, the reasons some might want to
have something like this in there. I think it could be a horrible
precedent. I've certainly never heard a place in government where
we let industry veto, even once, the choices the state government
makes as far as its employees and its contractors. Maybe there is
some place in government I'm missing, but I, I certainly haven't
seen it before.
Number 515
COMMISSIONER SHIVELY: Well, the only, certainly the only place I
know of, and I haven't done any research on this, is the judicial
system, which is fortunately or unfortunately, part of government
and they do it all the time.
Number 517
REPRESENTATIVE FINKELSTEIN: In a court proceeding? Jury
selection.
Number 519
CHAIRMAN SHIVELY: Also judge selection. I mean, you're allowed to
kick out a judge, and either side can do; both sides can do it.
Number 529
REPRESENTATIVE FINKELSTEIN: Right. There's two parties. Here
there's one party. Okay, in fact, it turns out in this case its an
unappealable decision before a regulatory agency. There is no
other party. You are both parties. You're making a decision and
you're representing the public interest, so.
Number 525
CHAIRMAN ROKEBERG: The, I would like to just open up discussions
on the confidentiality and the whole review system. I know that
Mr. David Johnston is going to be testifying this morning from the
Alaska Oil and Gas Conservation Commission, and I'd like, before he
testifies, I'd like to have your input on the idea, and let me try
to articulate what the chair's thinking is right now. One of the
concerns under the bill is that the commissioner will have almost
untrammeled discretion in making the grant. Therefore, it's I
think, in the best interest of the state that the, we expand the
overview and oversight of the decision-making process, particularly
in order to reassure the public that the decision made by the
commission is in, is in keeping with his charge. And in certain
ways to do that is to have more people involved in the decision-
making process. However, because of the confidentiality nature
here, that review has to be limited somehow to an in camera or
confidential hearing basis. As a result, having talked to a number
of people, and I've asked Mr. Johnston to testify this morning,
it's my thought that I'd like your views on bringing the
conservation commission into the loop as either a, the group from
which an appeal could be made by the applicant and/or a competitor
or somebody else with stipulated standing to make a complaint and
then have the commission act as the oversight agency and the appeal
board there. Or, in addition, or, and/or have the commission act
as either the final arbiter whereas say you've made the best
interest finding and recommended that they, you know, you grant the
application and perhaps send it to the commission, have them review
it to make sure it's, in their opinion, a proper decision and
accept, reject or send it back for modifications. In other words,
it's my intention to try to open up that area of oversight then
conflicting the commission, in my opinion, I think is important
because they're normally, they're, the nature of the commission
will find out about that later is such as they are used to working
with this type of information. They are also used to working on a
confidential nature because their primary charge is the unitization
and the conservation of, of the hydrocarbons that are produced in
the state, and there is, I take it, there is, I believe there a
(indisc.) engineer and geologist public memo on the (indisc.). In
addition, there are people that are appointed for six years and
they can only be removed for cause, so there's a political
installation (indisc.). We already have them there. They, you
know, you don't have to create this thing. And there is the
royalty board too, which is a different, so. I'd like to have your
comments on pursuing that idea at this stage and then in a few
minutes we'll take some comments from Mr. Johnston and talk about
this.
Number 571
COMMISSIONER SHIVELY: Yeah, well, I mean, you know, if you feel
you need a review process, I mean, that's a decision obviously for
the committee to make. We, we have said that we do not think so,
that any review process increases as a minimum the time, and
probably the cost of, of this, and I, I guess in terms of who you
use, AOGCC is certainly a candidate. They certainly can determine
and know how to determine what a field is, a delineated field or
what a pool is. I don't, they certainly have the expertise for
that. I do not believe that they have the expertise on staff to
make the economic determination, which is, I think, critical to the
whole decision here, and that in terms of reviewing the best
interest findings probably they could do that because the best
interest findings are really a statement of, of my beliefs or any
other commissioner's beliefs as to why they should take place. So,
I think the question for any review panel is how they would be
prepared to deal with the economics and what would be the cost to
government, and then whether or not whether or, I think another
consideration for you and for industry is whether or not you want
to put any constraints in term of time limits for review because if
you're going to have a process where the commissioner or the
royalty board can keep bouncing things back and forth, I mean,
we've seen government operate that way and I, it ends up I think
with potentially a fair amount of waste for both government and
industry.
Number 571
CHAIRMAN ROKEBERG: I certainly agree with you on the time frame
issue there. Representative Brice.
Number 592
REPRESENTATIVE BRICE: Just for clarification, Mr. Chair, of what
you're trying to get at. You're looking at overview, or having
somebody look over the commissioner's shoulder to, number one, make
sure he doesn't give away the barn, or/and to make sure that
industry has an appeal process outside of the commissioner. Is
that right?
CHAIRMAN ROKEBERG: That's essentially it.
REPRESENTATIVE BRICE: Okay, okay. So, for those two times. Okay.
Number 600
CHAIRMAN ROKEBERG: Matter of fact is if I could read, I received
a letter last Friday from an individual's attorney in Anchorage.
It's a pretty good letter. In it he indicates that the one thing
we need to be careful, and this is kind of more, if I could be
permitted to read a sentence here. It says, "A governor's bill
would substitute for a free market for us as an entirely private
process open to outright skullduggery to the subtleties of
political favoritism and influence peddling, or just plain stupid
decision making." I mean how does he really feel about this?
Yeah, how does he really feel about it?
REPRESENTATIVE BRICE: Well, Mr. Chair, what I don't understand
then, I guess then, is why the concern is for that, or for royalty
reduction, which has probably a limited, of limited actual benefit
to the state, particularly when we're looking at when the attorney
general's office has their sole ability to go in and close out on
oil settlements, you know, which have, then you know, billions and
billions of dollars to the state. It might be something to
consider having the attorney general provide the overview of the,
of the commissioner in these times.
CHAIRMAN ROKEBERG: No.
Number 620
REPRESENTATIVE OGAN: Mr. Chairman, on that point.
CHAIRMAN ROKEBERG: Representative Ogan.
REPRESENTATIVE OGAN: The attorney general has, you know, has gone
in and closed out a lot disputed cases after the fact and I think
with a little bit of foresight having the advantage of looking in
the past with 20-20 vision, if things were more clearly set out and
maybe some safeguards were put in place in the first place there
wouldn't have been all these, this litigation, and I think it's,
personally, I, I kind of agree with a little bit of extra
oversight, not, with all due respects to the commissioner, I think
our whole system of government is, is set up on, on the idea of
checks and balances and I think it would certainly behove us to...
We're talking about a serious amount of money here and, and a
really long impact on, on the state. My concerns for this are the
fact that, you know, the fact that we've spent so much time in
court and so much money resolving disputes in the past that clearly
there's areas for dispute. Number two is that assuming everyone is
playing by the rules nobody knows how much oil is underneath the
ground and, and if there is, you know, it's an educated guess at
best, and plus technology has continued to increase and as the
fields lose more oil, assuming that they may, I think it would be
good to have some, some extra oversight there and, and, and some
safeguards for those fields that do produce more than they
originally are expected.
Number 635
REPRESENTATIVE BRICE: Mr. Chair, I think that's why we want to
delineate between review to make, oversight of the commissioner, to
make sure that he doesn't give the farm away to begin with. And
the process by which somebody can appeal the decision of, because
they are wholly two different things. I mean, you know, there's
various different appeal processes that we have, have, I mean they
are only limited by your imagination for the most part as far as
relevant. I guess I'm concerned that if there is a concern that
the commissioner is going to give away all our royalty then to, in
the, in the need to make sure that it's done in a timely fashion,
that it's done, you know, in an appropriate fashion, that somebody
is, and that's why I keep coming back to the AG, you know, I think
I see that's a role that the attorney general could more than
adequately fulfill versus, you know, throwing it to another long
process of through the conservation commission. And, but you know,
in times of dispute and the need for an appeal process, you know,
that's something else that, you know, we can discuss.
Number 660
CHAIRMAN ROKEBERG: Right. The, one point, early on I think last
week I think, I discussed with the commissioner -- we can get his
comments on it -- I also though of, I call it the triad of having
the commissioner of revenue the AG and the commissioner of natural
resources do that, but then I think there's some structural
problems, I mean various problems and perhaps commissioner Shively
would like to comment on what his perception there is.
Number 666
COMMISSIONER SHIVELY: Well, I, I, again it depends on what kind of
process you want. If you want a review by two other officials that
obviously have some background in, in oil and gas development and
leasing, those would be the two, or at least the economics of it,
would be the two obvious ones, and, and if that gives people extra
comfort I think it could work, but the problem I have with the
review process is that once you open it up, I mean, if, you either
have one or you don't, and so if, if you have one then, you know,
if, let's say its Exxon that came in and asked for the royalty
reduction, yes, they would get to appeal if they thought I was
unfair. If BP thought they were getting too good a deal and had a
competitive problem, they'd take it up. If Trustees for Alaska
just doesn't like the whole development they get involved. What
happens, my experience, and this is one of the things that drives
me nuts about the judicial system is whenever you ask a judge to
solve a problem he thinks he has, he or she thinks she has to
change something, and so you're asking, whenever you're asking a
body to review you're really encouraging them to make changes. So,
I, I mean you're going to have to make that decision. It's a tough
choice. One is a more open process, more comfort, and the other is
getting a decision and getting on with it. We obviously prefer the
latter, but I certainly understand the concerns of you and others
have raised about, about a process that provides more review. It's
just, it's just not an easy, easy decision to make either way.
There are dangers on both sides.
Number 685
CHAIRMAN ROKEBERG: So, you're suggesting it's something we need to
struggle with ourselves?
Number 686
COMMISSIONER SHIVELY: Well, we're certainly pleased to help. We,
of course, have our position, so...
Number 688
CHAIRMAN ROKEBERG: If I might, if the committee would indulge my,
me a (indisc.) that in my long years of being in business,
particularly the real estate business, I found that whenever an
attorney got involved in the deal they'd screw it up. I bring in
the AG and stuff like that kind of worries me.
Number 692
REPRESENTATIVE BRICE: I think the AG though has a lot of
background historically, in oil and gas disputes and is considered,
I mean, the state's primary negotiator in terms of those disputes,
and it's just a logical process.
CHAIRMAN ROKEBERG: I had a similar idea, Representative...
REPRESENTATIVE BRICE: Yeah, the triad thing, like you're talking
about, could be something with, that could be worked on.
Number 696
CHAIRMAN ROKEBERG: The problem there, as I see it, however, is all
three of these people work for the same boss, and therefore, you
know, what, really what point, what level of review are you going
to get. I mean, once the, I would say the commissioner of Natural
Resources make a decision (indisc.) it's still a possibility. I
think there's some other problems with it. I think we need to
discuss it when we are doing a markup later.
TAPE 95-9, SIDE B
Number 000
REPRESENTATIVE G. DAVIS: We were talking about something different
in back tax litigation compared to understanding the oil reservoirs
and things like, you know, that geological nature, and I think
there was also a lot of, of contracting and consultation on the AGs
part, which, again, adds to expense and time. So, I don't know,
maybe the commissioner can, can, you know, talk about that a little
bit. I don't see the AG, I think, I think you're laying out a lot
more the confidentiality aspect out of a lot more people's desks
going through the Ags Office than, than someone else specifically
knowledgeable about the technical nature of, of the situation.
Number 019
COMMISSIONER SHIVELY: Mr. Chairman, Representative Davis. I think
you've hit on the problem. There really isn't anyone else in
government with the full expertise to make this decision. There
are people that understand oil and gas pools and fields, and
clearly, the AOGCC does that. Really, in terms of the economics of
the field, certainly the division, the department of natural
resources has it. I think the department of revenue may have it to
a lesser extent because of their tax responsibilities. The Ags
office has it in people, but they have it in people largely that
would be advising us on whether or not we should go forward with
making a positive recommendation on the application. So, if you
want to buy the same kind of expertise to make this decision that
we're going to use initially, it's going, somebody is going to have
to go out and spend some extra money to do it, and whether that's
the applicant, the appellee or the extra government agency I guess
is an issue that you would have to address.
Number 043
CHAIRMAN ROKEBERG: Look, as long as we're on that subject, I think
that, well, let's, let's haul about here. Let me do some little
housekeeping here. I'd like the record to show that Representative
Finkelstein arrived at 10:10 and Representative Williams at 10:15.
I think I could, oh... Representative Ogan, he showed up too.
REPRESENTATIVE OGAN: I'm not sure. I thought we might have had
some (indisc.).
CHAIRMAN ROKEBERG: I thought you were already been on the roll
though (indisc.).
REPRESENTATIVE OGAN: It's my job as vice chairman to keep him in
line.
CHAIRMAN ROKEBERG: That's correct.
REPRESENTATIVE OGAN: Tough job, but somebody's got to do it.
Number 060
CHAIRMAN ROKEBERG: The, there's a few things I'd like to talk
about today. They have, they revolve around the confidentiality
issue and then there's a number of other things, but I think I'd
like to take, if you don't mind, testimony from Mr. Johnston
because we're on this topic and if you could just, and if you could
just hang with us or do you have any other scheduling problem?
Number 070
COMMISSIONER SHIVELY: Mr. Chairman, I have to be in the Governor's
Office for a bit. Mr. Boyd will stay here. He's fully capable of
staying and I will try to come back as soon as I am done upstairs.
CHAIRMAN ROKEBERG: Good. And there's, actually a number of things
I want to discuss, but they're almost more in the way of queries
also that I would like to get some additional information too, so
that would be certainly okay. Mr., Representative Ogan.
REPRESENTATIVE OGAN: Mr. Chairman. Commissioner Shively, would
you have time to answer one question before you go?
COMMISSIONER SHIVELY: I certainly will.
Number 077
REPRESENTATIVE OGAN: Would you define what would be in the best
interest of the state?
CHAIRMAN ROKEBERG: You don't have time for the answer. Do you
have time? Would you like to think about that and come back?
Number 087
COMMISSIONER SHIVELY: Representative Ogan. Actually, sort of term
of art of virtually everything the department does for major
decisions and it's something, to be perfectly frank, I'm still
trying to get comfortable with. If we do a timber sale, or oil and
gas lease sale (indisc. - someone coughing) assets, we, and I
believe it's sort of a constitutional requirement. There's a, if
I recollect correctly, that when we do these things that it be in
the best interest of the state. When you make a best interest
finding you're probably going to take a number of things into
account. You're going to take into account whether or not the
state is receiving any revenue. You may take into account
environmental impact. You're going to take into account whether or
not you're creating jobs. You're going to take into account
probably whether local governments feel that there is some
advantage here. You're going to take into account whether in an
oil and gas field where they're keeping that additional production
on assist both in keeping production facilities going that might
also otherwise be shut down or may have an impact on the tariff on
the pipeline. So, there are a whole list of issues that one looks
at to see whether or not on the whole this is, this is, it's better
for the state to do this than not to do it. But, there's not a
formula.
REPRESENTATIVE OGAN: Thank you.
CHAIRMAN ROKEBERG: Very good.
REPRESENTATIVE FINKELSTEIN: Mr. Chairman.
CHAIRMAN ROKEBERG: Representative Finkelstein.
Number 112
REPRESENTATIVE FINKELSTEIN: I had questions I can hold off until
later, but they are to follow up on the discussion we had earlier
about the existing royalty reduction provisions and the attempts to
use them in the past.
CHAIRMAN ROKEBERG: Right.
REPRESENTATIVE FINKELSTEIN: So I could ask them now or ask them
later, whatever is better for you.
Number 115
CHAIRMAN ROKEBERG: Why don't we -- I indicated to Mr. Johnston
that we would be taking his testimony around 11 o'clock, so I'd
like to do that and then we can go back if that's okay. Thank you,
commissioner. We hope you can get back and join us.
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman.
Number 124
CHAIRMAN ROKEBERG: You're leaving us in good hands. Mr. Johnston,
are you there?
DAVID JOHNSTON: Yes, I am.
CHAIRMAN ROKEBERG: Thank you for your patience and I really
appreciate your coming out and testifying today, and hopefully, you
have heard some of the discussions leading up to this right now and
given that, if you'd like to go ahead and make some comments about
it we'd appreciate your input.
MR. JOHNSTON: Okay. (Indisc.) to Representative Rokeberg and
members of the House Oil and Gas Committee. For the record my name
is David Johnston, Chairman of the Alaska Oil and Gas Conservation
Commission. I appreciate this opportunity to comment on House Bill
207. Just a little bit of background on the Oil and Gas
Conservation Commission. We are an intended quasi-judicial agency
of the state. We primarily serve as the chief regulator of
Alaska's oil and gas industry. The commission acts to ensure that
maximum ultimate recovery is obtained; to prevent the physical
waste to crude oil and natural gas; and to protect the correlative
rights of persons owning oil and gas interests and land subject to
Alaska's police powers. The commission is headed by three
commissioners appointed by the Governor and confirmed by the
legislature. Each commissioner serves a six-year term. The terms
are staggered. By statute, one commissioner must be a registered
engineer, another must be a petroleum geologist and the third need
not have any particular expertise. I want to commend Governor
Knowles for his leadership in encouraging oil and gas development
in the state, providing the means to reduce royalties on marginal
accumulation, sponsor investment and jobs and recovery of oil and
gas that may otherwise be lost to the state. As with any bill,
some fine tuning of this legislation may be appropriate, however.
For example, I suggest that the committee consider whether to allow
royalty reductions on leases that are compulsory unitized by the
commission under AS 31.05.10. This can be (indisc. - background
noise) by asserting this provision in line three on page three.
What the, line three essentially reduces the royalty on individual
leases, or leases unitized as described in T of this section, but
leaves out the compulsory unitization process that we engaged in on
AS 31.05.10. I believe it would be appropriate to include it in
the compulsory unitized leases as well. Another change, and there
was some mention of this earlier, but a change that may be
appropriate is to require the lessee to hire a third party
independent contractor acceptable to the commission, the
commissioner to assist in the evaluation. This change, of course,
would apply to eight, nine and ten on page three. As now written,
the commissioner would hire the contractor and the lessee would pay
the cost. My suggestion would take government out of the hiring
circle, eliminate the burdens of R&E process and allow industry to
directly negotiate the best contract. (Indisc.) the commissioner
to condition a royalty reduction with the means of increasing or
otherwise modifying the state's royalty share to certain factors
such as oil, excuse me, such as the price of oil and gas and
change, the price of oil and gas and change. It may be appropriate
to time this prevention so that arbitrary revisions do not occur
with each fluctuation in oil price. For this incentive program to
work industry must have some assurance that a royalty reduction
granted today will not be arbitrarily altered by a future
commissioner solely because the price of oil may have changed by a
few cents. The commission is also aware of the concerns expressed
by some about putting such power in the hands of one person,
especially, especially when the royalty reduction decision is not
appealable. Should the legislature identify a role for the
commissioner addressing these concerns we standing willing and able
to offer our services as an independent quasi-judicial agency
(Indisc.). This concludes my direct testimony and I would be happy
to answer any questions (Indisc. - coughing).
Number 209
CHAIRMAN ROKEBERG: Well, thank you, Mr. Johnson. How you, could
you explain to me how you conceive the process? I think there's
two different ways we can look at it right now. One where you
would be like a standby oversight in case there was an appeal
requested or if you would be specifically in the loop as a, as
oversight. There's two different ways to, to use your, your
commission here. I'd like to have your viewpoint on that.
Number 217
MR. JOHNSTON: Well, as I understood the conversation, it appears
that there is concern that, that this process being broadened and
I believe that the Oil and Gas Commission can be considered as an
appropriate agency to look to our board to provide this wall. I
think it would probably be only appropriate though for us to either
confirm or deny the position of the commissioner as having a
reasonable basis and that the process was all above board. I don't
think it would necessarily be a problem though for the commission
to substitute its judgement for that of the commissioner of natural
resources and charge them whether a royalty reduction should be
applied as the extent of their reduction.
Number 230
CHAIRMAN ROKEBERG: I agree. I think that's the way to go myself.
And that's, as I brought up earlier about plain stupid decision-
makings and other skullduggery, that, that's where you bring the
light of day. I mean, you know, I think I, I'm comfortable with
that type of approach. Could you talk about the time frames
involved in this or how you see that working?
Number 239
MR. JOHNSTON: I would just like to mention that as well under our
statutory authorities the commission is required to render a
decision within 30 days after a hearing. So, presumably if, if
there was some entity out there that wanted to have our review we
would go forward with a hearing. Once that hearing was held then
within 30 days we would issue a decision.
Number 248
CHAIRMAN ROKEBERG: Good. And, I'm not sure. Did you answer my
question? I was trying to make some notes here about what your
preference in the process just as, just an over... just as the
appeal, or just...
Number 254
MR. JOHNSTON: Yeah, I'm not sure. I'm not following that.
Basically, you know, I see us working I guess one or two ways
depending on how the legislature would like to structure it. One,
we could only be brought into the picture if there was an actual
appeal or, or somebody protesting the decision, or two, we could
look at all royalty reductions decisions that are rendered by the
commissioner and just, you know, vote up and down, or vote the
proposal up and down after a review, after a public review, to
assure that the process was aboveboard.
Number 263
CHAIRMAN ROKEBERG: How about modifying it and sending it back if
you...
Number 265
MR. JOHNSTON: Yeah, I think that would, could be something that
could be done. It could be sent back to the commissioner for
further work...
CHAIRMAN ROKEBERG: Right.
MR. JOHNSTON: ...if we felt that, I don't necessarily know if the
commission themselves would want to get into the modification
process, but we could express our concerns and request that the
commissioner direct some attention to that.
CHAIRMAN ROKEBERG: Representative Brice has a question for you.
Number 270
REPRESENTATIVE BRICE: Could you please clarify what you had just
said? You had just said something that, these decisions would be
under public review? Or did you mean commission review?
Number 274
MR. JOHNSTON: Well, what I meant is we have a public process. We
would put out a notice and then convene a hearing. We would ask
people to come before. We would swear those people to testimony,
and we would review the process that was engaged, you know, that
the commissioner engaged in, in granting the royalty reductions.
That is a, a public process that we would conduct. In terms of
protecting the confidentiality of data we also routinely deal with
that and in those cases we would close the hearing so the people
that have a right to hear that public, or confidential data.
REPRESENTATIVE BRICE: Okay, okay.
Number 286
CHAIRMAN ROKEBERG: Well, that was my next question is how you
handle that confidential data and how that fits into the whole
process? And I think you've pretty much covered that.
Number 290
MR. JOHNSTON: We routinely deal with confidential data all the
time, and we have processes to, to address those concerns.
Number 293
CHAIRMAN ROKEBERG: Very good. So, you guys are willing to take
this on. Will it create a burden for your commission? Or, is it
something you think you can handle in your normal workload?
Number 298
MR. JOHNSTON: Well, I, I think again it would depend on the nature
of how the legislature structured the review process. Commissioner
Shively was correct when he indicated that we do really have a lot
of expertise in the commission when it comes to economic analysis
and evaluation. And if that was a desire of the legislature to
look at that type of, to that level of detail then basically, we
would have to request additional money for a, for an office, for
example. On the other hand, you know, judges make decisions all
the time based upon the reasonableness of the decision and not
necessarily a detailed analysis, and I would think that that is
probably the approach that we would desire to take. We would just
review it to make sure that there was, that the Commissioner of
Natural Resources acted properly, that there was no shady dealings
involved in that thing and provide the assurances to the, to the
residents of the state that this process was done all aboveboard.
CHAIRMAN ROKEBERG: Representative Brice.
Number 314
REPRESENTATIVE BRICE: Maybe it's not necessarily a question for
you, but a comment. Okay, then after the commission, conservation
commission makes this determination that the commissioner, you
know, they confirmed that the commissioner, commissioner's logic
was, was appropriate and everything else, and accepts it, and then
somebody comes in an says, "We want to appeal that decision.".
Where would that appeal go to, or would that decision be
appealable?
Number 328
CHAIRMAN ROKEBERG: Well, I think that we're going to request of
the department to have their legal, legal opinion...
REPRESENTATIVE BRICE: Okay.
CHAIRMAN ROKEBERG: ...legal opinion as it relates to all these,
all these matters of appealability, the outside fair party due
process...
REPRESENTATIVE BRICE: Yeah.
CHAIRMAN ROKEBERG: ...from the AGs office through the commissioner
of natural resources here a full legal analysis of these
ramifications to go with this bill, or make any changes, and I'd
like to get that as soon as we possibly can because I think in our
last hearing, on last Thursday, there was, we brought up those
questions and frankly, the answers are not, weren't really
satisfactory, you know, to me, and I'm sure that there's other
questions of the members of the committee in that regard, and so,
we really should get that cleared up so we under... there's full
understanding in this committee process at this time of what, what,
what happens there. It's entirely conceivable that we may want to
recommend that the standing for anybody to appeal that decision be
extremely limited. Let's say for example, to the applicant
himself, and/or a let's say competitor or somebody with a clear
economic interest in that particular field, or you know, for
example, you know, there's an adjacent field or a sort of
production field (indisc.) that area that clearly that other
company may have a compelling interest or reason to make a
complaint, but a minimize outside type complaining about it. I
mean, there's, that's something we need to talk about. In order to
have that conversation a legal opinion (indisc.). Representative
Finkelstein.
Number 356
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Though we
also, we want to have some ability to deal with the kind of things
you deal with in that letter of mistakes and, you know, deals that
are improper. There has to be some way for someone other than a
competitor to, or a actual company to review the deal because if
it's just the companies involved they have no incentive to ask for
any review. (Indisc.)
Number 362
CHAIRMAN ROKEBERG: Well, that's why we're talking to the, the
Conservation Commission here for that very purpose and as I
understand it, at this stage, there is nothing that would bar a
citizen of the state of Alaska to make a challenge based on the
constitution to something like this. In other words, if they
thought the commissioner was giving away the store, under our
constitution it's, I think, fair enough they may all be able to
bring a cause of action against it. So, there may be nothing we
can do about that, so, but we need to understand that going in here
what,...
REPRESENTATIVE BRICE: That's right.
CHAIRMAN ROKEBERG: ...what happens. Representative Finkelstein.
Number 371
REPRESENTATIVE FINKELSTEIN: Thank you, Chair. Just a question for
the commission. The, you mentioned that the, at this time, you
don't have much experience in the world of pricing and those sort
of things. Does the commission have any authority or any
involvement now in anything having to do with royalties, taxes, or
any of these other pricing mechanisms?
Number 378
MR. JOHNSTON: What we focus on is the actual production of the
resource. We do not enter into discussions having to do with
royalty or taxation.
REPRESENTATIVE FINKELSTEIN: Okay. Thank you, Mr. Chair.
Number 380
CHAIRMAN ROKEBERG: Okay, one thing, Mr. Johnston, one thing before
I forget it. If we are, if we're going to put you into the statute
on oversight basis, could you, could you make a, submit a memo to
us as soon as possible about any statutory changes, or scope, or
enabling statutes that may, that you see may be necessary to get
you in the loop?
Number 389
MR. JOHNSTON: I would be very pleased to.
CHAIRMAN ROKEBERG: Okay. Representative Davis.
Number 390
REPRESENTATIVE G. DAVIS: Thank you, Mr. Chairman. So, the
question here isn't, it seems to me there's two phases in this
thing. There's the, there's the findings that are going to
determine whether an adjustment should be made, and then, there's
the size of the adjustment. So there's two things. There's the,
the technical geological aspect and there's the economic aspect.
So, and where is our concern? Is it in both or is it in one
because it seems like the decision on the feasibility of the
request is going to be made in the findings aspect, and then, then
it says, yes, there is some grounds for some review here. So then,
the commissioner drops it off -- well, that would be in your lap
too -- even that decision would involved in the findings, so it
seems like, like that's one phase of the deal. Then the other
phase is determining the size of the adjustment. If...
Number 405
MR. BOYD: Mr. Chairman, Representative Davis. That's, it's
exactly right and that also falls within our shop because we have
the geologists and the geophysicists because, as you recall from
the bill, it's on delineated fields and you can say that in a
particular field you do things on a lease by lease basis, and
that's a part of the decision-making process, as you say, to decide
not only how much is the reduction but on which leases it might
apply. And that's part of the finding process and that goes back
to the economics; an economic decision.
Number 413
REPRESENTATIVE G. DAVIS: Well, Mr. Chairman, if I might continue.
The division of oil, those people on the line...
CHAIRMAN ROKEBERG: Conservation commission.
REPRESENTATIVE G. DAVIS: ...okay, conservation commission, their
expertise is strictly in, would be dealing in the first phase, in
the findings aspect, whether there is rational to consider an
adjustment rather than the economic aspect. Or is it just
backwards?
Number 419
REPRESENTATIVE BRICE: It'd be both. It could be neither.
Number 420
REPRESENTATIVE G. DAVIS: Well, you said, my understanding is that
Mr. Johnston indicated that they would, for the economic aspect,
they would probably need to contract that.
CHAIRMAN ROKEBERG: Representative Finkelstein.
Number 422
REPRESENTATIVE FINKELSTEIN: Mr. Chair, just to clarify the, it
isn't there at the first phase, which you're right, it's two
phases, isn't a geologic decision, it's still an economic decision.
The decisions that we're talking about here and about these
royalties are economic decisions. The unitization and all the
decisions about the fields, the geologic ones are made. Now the
question is should we lower the royalties? So, the commission is
going to have a problem with both those decisions. They're going
to have to get new information, or new contractors, or some new
expertise because they've never dealt with anything having to do
with pricing of oil. Basically, decisions on what, what we should
get for the state haven't been before them. And I'm not saying
it's not possible they could get that, but I, I think there's a
cost and I think no matter what they say, they can probably give
these kind of additional duties, which something being done by the
division, we should ask the division how much it's cost them in the
past to make these decisions when an appeal has been made. I mean,
it's, they're big decisions, you know. Multi, multimillion dollar
decisions.
CHAIRMAN ROKEBERG: Representative Ogan.
Number 436
REPRESENTATIVE OGAN: Mr. Chairman. There's two things I like
about having the, entertaining the idea of having the Oil and Gas
Conservation Commission get involved in this. Number one, it
involves a little bit more of the public process for public review.
And number two, I think some oversight is appropriate given the
fact that for example, Prudhoe Bay was, I believe if I'm not
mistaken, was originally delineated -- is that an appropriate term
for this -- at nine billion barrels I think they're going to end up
producing twenty, or somewhere just about. So, I, I, you know, my
concern with this whole process is the fact that because of maybe,
again, I'll reiterate at this point that's unforeseen deals, they
end up producing more than they anticipated, or the technology gets
better with, they produce it, and I really want some safeguards
that if the field, if we're going to give somebody a break because
this field is being treated as a marginal field and then we find
out that it has a heck of a lot more oil in it than we originally
thought, there should be some oversight of that, and there should
be some remuneration for the fact that that field turned out to be
larger.
Number 456
CHAIRMAN ROKEBERG: No question. We'll be discussing that,
Representative Ogan, and let's call here any relevant factors, and
we'll be working on that real hard when we get to it, but that's
exactly right (indisc.). Let's see where, Representative
Finkelstein.
Number 460
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. President. Just a, Mr.
Chairman, I have a question for the commission. The, do you have
the authority right now, I assume, to contract anyone necessary for
you to complete your decisions? Is there any limit that exists now
in your ability to contract?
CHAIRMAN ROKEBERG: You're referring to Mr. Boyd?
REPRESENTATIVE FINKELSTEIN: No, no. The Conservation Commission.
CHAIRMAN ROKEBERG: The Conservation Commission. Dave, are you
there?
MR. JOHNSTON: Yeah (Indisc.).
REPRESENTATIVE FINKELSTEIN: Well, let me ask you again, Dave, the,
do you have any limitations on your ability to contact, contract
for any expertise or background necessary in your decisions?
Number 470
MR. JOHNSTON: Under our statute we're specifically allowed the
ability to contract with third parties. The only limitations, of
course, would be the availability of funds to the commission under
the budget process.
Number 473
REPRESENTATIVE FINKELSTEIN: And do you now select, generally, you
use a contractor? Do you select them through a sole source
process, or through bidding?
Number 475
MR. JOHNSTON: No, we would go through the same procurement rules
and go through the RFP process and solicit them.
Number 477
REPRESENTATIVE FINKELSTEIN: And do you have a, any sort of cost
recovery mechanism in the statutes to get from industry the cost of
those experts?
Number 479
MR. JOHNSTON: Well the, I guess the only cost recovery factor that
we have is the fact that the state charges an Oil and Gas
Conservation tax on the industry to fund the other programs of the
commission. That's currently four mills per barrel of oil
produced, and per fifty on state (indisc.) gas. Currently brings
in about $2.1 million and our budget is currently about $1.6 or
$1.7 million.
Number 489
CHAIRMAN ROKEBERG: Oh, we got cush. Does the balance go on the
general fund?
MR. JOHNSTON: Pardon me?
CHAIRMAN ROKEBERG: Does the balance go on the general fund?
Number 486
MR. JOHNSTON: Yes. Those monies go into a special account in the
general fund.
Number 488
REPRESENTATIVE FINKELSTEIN: Well, Dave, isn't the amount available
to you in a year the one point five? That's the amount we
appropriate, not the two point one.
Number 489
MR. JOHNSTON: No, no. You're right. The amount that our budget
is about one point six right now. That's being considered by the
legislature.
Number 490
REPRESENTATIVE FINKELSTEIN: So, it's just sort of a, it's a happy
coincidence that more money comes in. You couldn't use it unless
we appropriate it?
MR. JOHNSTON: Unless it was appropriated. That's right.
Number 492
REPRESENTATIVE FINKELSTEIN: And in your decisions about use of a
contractor, it's purely your decision? That's correct? There's no
involvement by the regulated party.
Number 494
MR. JOHNSTON: No, that's right. We would look at the case before
us and then make the determination that a contractor was
appropriate, and then we would start submitting the proper or
current paperwork through the commission of the Department of
Administration under which we are housed. That would then go to
OMB for approval, and then presumably on to the legislature.
Number 499
REPRESENTATIVE FINKELSTEIN: And is that, has that been a big
issue? Has there been some, has there been in the past that any
great level of unhappiness with the contractors that the commission
has chosen?
Number 501
MR. JOHNSTON: Well, it's been quite a few years since the
commission has secured a contract. In fact, I think you'd have to
go back quite a few years to the early '80s when we last employed,
you know, contractors to aid us in an evaluation.
Number 500
REPRESENTATIVE FINKELSTEIN: Do you recall at that time whether
that, I mean, it seems to me that the system works for you, at
least in the past.
Number 507
MR. JOHNSTON: Well, I, I think, you know, there's just a problem,
we worked pretty efficiently, but then the state was rolling in a
lot of money now. I think the problem that we have today is just
the reality that monies are tight and if, when I come before the
legislature with a request it's closely scrutinized and many times
I can make the case, but what our experience has also been is that
with across the board reductions then you may grant the approval on
one hand, but an across the board reduction wipes it out on the
other hand. So, lately it's been a real difficult thing as you can
all appreciate, the tight budgets.
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman.
Number 516
CHAIRMAN ROKEBERG: As long as we're on that subject, Mr. Boyd,
there is a fiscal note attached to this bill. Could you comment on
that, and also, how you proceed with requiring applicants to offset
that so Chairman Hanley doesn't have hemorrhage up there in
Finance.
Number 521
MR. BOYD: Mr. Chairman, we included a fiscal note of, as I recall,
$91,000 plus some miscellaneous expenses as I recall, $15,000 that
might require travel or whatever, for a petroleum engineer, a range
26A. In my experience, the analysis of these kinds of requests,
again, using the Conoco perhaps as an example, requires looking at
a lot of well data, petroleum engineers sometimes have economic
backgrounds. The other money was strictly for travel or incidental
expenses. At the moment, I don't believe we have anything to
offset that cost although in unitization we've done that by
charging five thousand dollars per unit application. I don't
believe you can assess a high enough fee for each of these wells
reduction applications to completely offset the cost. I would only
add that if we believe that this project is a benefit and the new
fields are developed that would not have been developed after this
legislation, and I believe in a sense the program begins to pay for
itself, hopefully many times over.
Number 534
CHAIRMAN ROKEBERG: Then presumably it also (indisc.) industry
paying $2 billion a year in taxes here. I'd really kind of like to
get something for my money too, I think. You know, I am concerned
about this cost and we should probably, you know, discuss it
further and ...
Number 538
MR. BOYD: Again, Mr. Chairman. It's a matter of how many
applications are received, whether we can do it with, with existing
staff among other things that may have to be done in the division.
We do have two petroleum engineers, one of which is our unit
manager, one an economist. A lot of these applications would begin
to overload, although we do have the opportunity as the bill is
written to use third parties. But I still believe to make the
determinations of state's interests you need people that are
working in the state to do that work. I really see the contracting
as a very technical job, a number crunching type job, and not some
philosophical advice that we're asking.
Number 547
CHAIRMAN ROKEBERG: Someone you can, okay. You can even hire an
accounting firm, if you will, rather than petroleum.
Number 550
MR. BOYD: There are firms that probably would do this kind of
work, and again, it's a matter of what kind of data is being
submitted, but I would see it more as an accounting function than
I do as a, as anything else.
Number 552
CHAIRMAN ROKEBERG: Okay, are there any other questions for Mr.
Johnston? Mr. Johnston, we look forward to getting your memorandum
here and any further ideas you have on this, this regard, and I
appreciate your testifying here. I'm going to ask a question of
Mr. Boyd you might be interested in hearing right now. Mr.
Johnston indicated he would recommend that the company hire that
consultant because then we could avoid the RFP process and the
state procurement code. What, what would be your initial reaction
to that? You want to think about that? Or...
Number 558
MR. BOYD: I'd prefer to talk to the commissioner about that, Mr.
Chairman.
Number 561
CHAIRMAN ROKEBERG: Why don't you get back on it. It seems like
one way to expedite things. It also would take out the problem of
who was being hired, but then perhaps the commissioner would have
the veto then. He might want to give us a recommendation on two
ways to go on that one. The, I'd like to just bring to the
attention of the committee there's a number of other issues we want
to get on. It's my intention right now to go until noon today. I
notice, we notice for a carry over, we will not be meeting anymore
today; however, tomorrow at 5 p.m. in the Beltz Room we will have
a teleconference there and my intention would be to run about one
hour there so we don't spend too much time. I know we're all busy
with budget markups and various other things, but this to me I
think still is the most important bill that the legislature is
going to be considering this session and because of the testimony
involved, what I intend to do, particularly for people who are in
the audience or to let other people know is that I'd like them to,
everybody to contact my Chief of Staff, Shirley Armstrong, and more
or less try to make appointments that, for your testimony so we can
make arrangements to make it the most convenient as possible. In
addition, I, I hopefully will at least have a working draft of a
committee substitute by the end of the week and as soon as we
circulate it to the committee members and, you know, to get some
input on that. So, that's kind of what's on my mind, to let
everybody know, in case anybody has to get up and leave, so. And
we will, like the, even the Friday night meeting, if in fact we
have it, it will just be like an hour. I don't want to disturb
everybody, but I think if we can continue and get this stuff
cranked through and get the testimony behind us then we can start
marking things up. And then we're going to generate questions
probably from when we work on marking the bill up too, so we'll
probably have to have, I see us going into just the first part of
next week hopefully and maybe moving the bill next week if we can,
but I know it's an inconvenience on everybody on the schedule, but
I think this really is an important bill so, if there's any
problems or conflicts please let me know. Okay, Mr. Boyd, as long
as you're in the line of fire, what we, I'm kind of trying to move
down the billing a little bit. Could you talk to the commissioner
about, Representative Ogan asked a very good questions, that is,
what, what (indisc.) and there's a question I had, is there any
kind of setting up some type of criteria for best interest either
in the regulations or at least a statement of intent from them,
like you just did. I'd like to get some feedback later on about
what that means and how we will even approach that because one of
my concerns is that the language that was deleted from the bill
previously set some standards that related to cost and reasonable
rates returned, and things like that. And, as a result, you know,
I think we need to discuss that further. As long as we're on that
I might mention to the committee some of my struggles over this
past weekend to try to confront what a reasonable rate of return is
and so forth, if you will indulge me for a few minutes. One thing
that, that caught my attention was reading the record, particularly
of the Conoco application, was the fact that the people in the then
Division of Oil and Gas Commissioner's Office to come up with a
statement that they thought a reasonable rate of return was the
average, three-month average of six-month T-bills, which at the
time was between four but not in excess of six percent, and to say
that that was a reasonable rate of return I find somewhat
offensive. The reasonable rates of return are always in the eye of
the beholder, and I think it's, so I thought, I struggled all
weekend to get my brain churning and came up with an idea about
taking a composite rate of various T-bills. For example, the two-
year, ten-year and thirty-year note and going back five years,
getting an average, making differentials between integrated
producers on the North Slope, non-North Slope areas, old fields and
adding different basis points to the, to the baseline composite
rate; all these kind of things, you know, which ultimately, I think
is like I was out tilting windmills and chasing, chasing the tail
here a little bit because, and I've discussed it with various
people. And that's one of the problems right now is what a
reasonable rate of return is. I think certainly a reasonable rate
of return for a older existing field would be lower than for a
newer frontier field, which a company would have a higher hurdle
rate for, and then, than an older field. But, I think that's part
of the decision-making process the commissioner has to go through
when he's making his findings. And what's, I've found problematic
was in the particularly the Conoco application was that with the
language that has been deleted in the last two, the reasonable rate
of return in the lessee's total investment in the field have caused
difficulties in the past. And I think that was the motivation on
the part of the Governor to remove that, those things from the
bill. And I, I've been trying to work to put them back in my own
mindset, but I'm thinking maybe that that's wrong. I mean, maybe
you guys are right. I don't know at this point. I'm only going
through that process to try to understand it myself and everybody
on the committee thinking hopefully it falls because what has
struck me about this whole thing is the intention of this
legislation. And I believe the intention of this legislation is to
create an environment and also with economic inducements for the
petroleum industry to, to risk and make the investments in their
worldwide capital allocations. In other words, we need to send a
message to the petroleum industry that we're open for business and
we're very serious about this, and we want to in certain instances
provide a modest inducement for them to come to Alaska and make
those investment decisions and put their dollars here. And that's
the message we want to send, but, and I think that's a proper
message, but to try to define everything in detail is a problem
because right now from a board room in London to the board rooms in
L.A. there's going to be a reduced, and there's a difference in
their hurdle rates, their expectations. Every company and every
project is going to have a different set of numbers. There's no
question about that. And here I think properly that the commission
should have some discretion because you have to look at them. If
you try to draft a bill here and try to be too specific then it's
just going to cause more problems.
TAPE 95-10, SIDE A
Number 000
CHAIRMAN ROKEBERG: The commissioner needs to have that flexibility
to make some of his decisions. And I just wanted to make that
point to the members of the committee here what the process we've
been going through here on working with the bill. The, I'd like to
move on to what I think is the heart of the bill right now and I,
I, we may not finish all of this, but plug in the, line 24 on page
three, that range there, 23, the commissioner may, (indisc.) grant
this section when really necessary to protect the state's best
interests and also including increasing or otherwise modifying the
state's royalty share any relevant factor such as the price of oil
changes. To me, this, this is what I, almost the heart of the bill
because this is what you end up doing in terms of a sliding scale
or something like that. I'd like to ask you and to get the
feedback from the commissioner as to whether you think that we
should mandate a sliding scale price royalty scheme right into the
bill, or we should come up with a statement of some of these
various factors as they relate to this in a more narrative form.
We haven't even... Go ahead.
Number 049
MR. BOYD: Mr. Chairman. I believe my reading of the bill would be
that the otherwise modifying would include the option for the
commissioner to something on a sliding scale, again on a negotiated
basis. And your second part, if I understand you correctly, your
wanting more clarity on relative factors, we have presite(ph) one.
CHAIRMAN ROKEBERG: Right, price.
MR. BOYD: Price. I mean, obviously there are other things.
Number 060
CHAIRMAN ROKEBERG: Well, as Representative Ogan rightly points out
in our, even in the sliding scale of regulations now that
production volume should be taken into account. I've had
discussions with various people and you don't necessarily build
this into one mathematical formulation, but it can be reduced to a
quantifiable set of numbers or additional graphs and charts as you
will. So I'd like to have, I, I know that industry is going to
bring forward some statements in this area, so. And I see this as
something that this committee needs to focus on and add to because
by doing so I think we, we're building our fences a little more,
and we're also helping define what we're looking for to give the
commissioners a charge when we should be focusing on it. You know,
obviously the production volume here is conspicuous by its absence,
you know. We need to look at that. And also, I think we need to
have, and I'd like to get your input on the clear statement that
the commissioner could raise the royalty. And the reason I say
that is this: In existing leasehold interests that have been
granted to lessees there are stipulated royalty rates, be they 12.5
percent or be they higher and an argument could be made legally
that albeit the commissioner may be granting a reduction initially,
in, in, under section J here that we're doing, that a company would
argue that later on or something you couldn't raise the royalty
higher, for example, if oil prices were to go up. It seems to me
that when a company comes in here and asks for this relief that
they, they're opening up their leads and if the terms should be
able to be modified throughout the lease. I think we need to get
some feedback on what your perception of that is. And also, I
think we need to stipulate right in here where it says modifying,
including increase and your other items modified by the state's
role is here. So, you can increase it?
Number 114
MR. BOYD: Yes. I believe, Mr. Chairman, I believe line 23 gives
the commissioner that ability.
CHAIRMAN ROKEBERG: Right, okay. Also, there has been some
conversations that I've heard from members in this (indisc.) that
there are existing like 103 net profit leases in the state, or
there's a large number.
MR. BOYD: There's a large number. I don't know the numbers.
CHAIRMAN ROKEBERG: Quite a number of leases that were issued over
the years under the net profits type formulation and we've, I think
we're going to receive some testimony requests from the industry
that not only the basic royalty provision but also the net profits
portion of the leases be able, the commissioner be able to adjust
those? Well, let me tell the committee why. There's a number of
leases out there that have a 90 percent net profit provision, which
is real burdensome to a, to a marginal field situation,
particularly if you're going to the chairman of the board saying,
I need $300 million bucks to open up this field, but it has a 90
percent net profits field. Where's the beef? I mean, you know,
there's not going to be any real return there if there's this high
net profits provision. I mean, I, that's kind of the worst state
case scenario, but I think we need to redress it, and I'd
appreciate the input from the, the department on that. Go ahead,
Representative Finkelstein.
Number 148
REPRESENTATIVE FINKELSTEIN: On that, just on that point 'cause a
lot of us, including myself, aren't very familiar with the net
profit ones. Mr. Boyd, were they, I assume that there's somebody
out there with a 90 percent net profit lease that it came through
competitive bidding and other people bid 70 or 80 or 60 or 50 and
they all lost. The person with the 90 is the one we want (indisc.)
the others (indisc. - papers rattling) lower levels. They just
didn't get the bid. Were they, is that how they did those?
Number 157
MR. BOYD: Yes, Mr. Chairman. That isn't always the case. There
was some certainly where the net profit share was the variable in
the bidding process, and one of the variables, you'd have a fixed
bonus perhaps, X number of dollars and you pay that regardless, and
the variable that you would win the bid on was your net profit
share and in a former life I worked for Marathon Oil Company and I
can tell you that we were involved in some of that bidding and
dropped out when it got above 70 percent, and there, are as
Representative Rokeberg says, some out there with 90 odd percent
net profit shares. But I believe there are also some leases where
there is a fixed net profit share, where there was another
variable. I just can't cite that off the top of my head, but there
are some leases that carry, for instance, a 30 percent net profit
share and that was agreed to at, there would be another variable
that they won the bid on, but that would have been carried along
with it. In fact, I can cite one in Thetis Island where it carried
12.5 percent royalty and a 30 percent net profit share.
Number 176
CHAIRMAN ROKEBERG: Well, the net profit share, that's not, is that
part of calculating the royalty payment?
MR. BOYD: No.
CHAIRMAN ROKEBERG: Or is that a separate...
Number 178
MR. BOYD: No, it's a separate calculation on top of the royalty.
If, in fact, the royalty is a variable in the bid. I mean, if the
lease carries a royalty it has a royalty it has a royalty, and that
net profit share is not part of the royalty. The net profit share
will pay out when, in time, there is a net profit to count against.
Endicott Field being an example that we're looking at now, which is
a net profit share, wondering where the net profits.
Number 187
CHAIRMAN ROKEBERG: Right. I mean, to me, I'd love to be able to
utilize the net profit formulation even in this bill, but I'm very
reluctant to do so because of the problems involved around the
definition of what net profit is. To see, and have you had any
litigation, or is there producing fields now? You said...
MR. BOYD: Endicott.
CHAIRMAN ROKEBERG: ...Endicott. Is that the only one that's under
production with a net profit?
MR. BOYD: I believe there are others that have producing, but I
can't cite them off the top of my head.
CHAIRMAN ROKEBERG: I mean, isn't there like, aren't there
problems? Or is this, you...
Number 199
MR. BOYD: The problem is what point in time, or how do you count
it? How do you account for the profit? What is the profit? What
is... The profit is net by definition. When does the state begin
to collect its share? I think you have to look out in time. It is
a bid variable. It seems to me the company has taken a longer
view, decided that they can live with a certain amount of profit
from this field and bid that as a variable. And then to come back
and say, well, we'd like to reduce that, I think it's something
that needs to have some hard thought.
CHAIRMAN ROKEBERG: Well, I appreciate that. Representative
Finkelstein.
Number 208
REPRESENTATIVE FINKELSTEIN: This question is a step back, but we
were talking before about increasing the ability to increase the
royalties in some of these provisions. Under this bill, would you
be able to increase it above the original level? The level that
they (indisc.) that?
Number 212
MR. BOYD: Mr. Chairman, Representative Finkelstein. In my view,
that's exactly right. And even the current bill at utiniz...
excuse me, current law allows us in a sense to do that now. We, we
could, under unitization, under P, as an example, is Thetis Island
where we removed a net profit share and increased the royalty rate
from 12.5 to 16 2/3.
Number 220
CHAIRMAN ROKEBERG: That is not true that under unitization
provisions that you can modify the royalty payment, but it,
historically, you've only increased it twice and never decreased
it?
Number 224
MR. BOYD: The word, the operative word, Mr. Chairman, is change.
And it was discussions with the Department of Law and many hours of
discussion with industry and others, we felt that the word change
did not mean decrease, and there is no historical basis for
decreasing whether you decided that was just because that was what
you wanted to do or because everybody believes that you couldn't
lower it.
Number 231
CHAIRMAN ROKEBERG: Was that, well, obviously with the revision in
P on page four of the (indisc.--background noise). That corrects
that problem. Is that right?
Number 233
MR. BOYD: Yes, Mr. Chairman, because really all, all pieces if you
want a royalty reduction, if you want a royalty change in
unitization go to J.
Number 236
CHAIRMAN ROKEBERG: Right. And that's what the case law says about
Conoco too in a way; that's one of the rationales.
MR. BOYD: Conoco over...
CHAIRMAN ROKEBERG: But we couldn't grant a reduction under
unitization P because the higher standards were in section J so the
division used that as a sword to deny Conoco their relief because
they felt there was a higher standard in J than in P.
Number 244
MR. BOYD: That was also... Mr. Chairman, that was also decided in
court. That's part of it. There was also, Conoco's history is
beyond just that decision because it goes back to, they didn't
produce for two years. There are other parts and pieces of the
Conoco decision which have a very long and fairly complicated
history, which was eventually resolved in the court.
CHAIRMAN ROKEBERG: So, you could look at historically with the
exception of the Oxy Settlement, even with these provisions on the
books for a number of years like from `78 is it?
MR. BOYD: There have been provisions for royalty reductions since
Statehood.
Number 255
CHAIRMAN ROKEBERG: And so, in that period of time, since Statehood
40 years, there's been one reduction of royalty as a settlement in
a law suit. Is that correct?
MR. BOYD: That's correct. I believe there have been two or three
denials.
CHAIRMAN ROKEBERG: Yeah. But, even in unitization there've been
increases in not(?) normal deductions.
Number 259
MR. BOYD: That's correct. Again, we believe that the word change
does not mean decrease.
Number 261
CHAIRMAN ROKEBERG: Then that's what we're here about today --
change, isn't it?
REPRESENTATIVE FINKELSTEIN: Mr. Chairman
Number 263
REPRESENTATIVE FINKELSTEIN: This is the question I was trying to
ask and I would like to ask it again of Mr. Shively, but your
mentioning two or three. Of those two or three, one of them's the
Conoco, right? One of them's the other one which revolves around
the issue of past information, the Marathon case where they had
past information, which didn't get pursued because they felt they
didn't have past information, which I think is an easily corrected
thing. So, we just don't have many examples in all of these. The
only one we've really got is Conoco and what was the eventual
disposition of that? What's happening with that, that lease
currently? Is it under production?
Number 273
MR. BOYD: Yes. I mean, well...
REPRESENTATIVE FINKELSTEIN: Milne Point.
MR. BOYD: ...Milne Point, it was denied. The field was sold to,
Conoco's interest in the field was sold to BP who picked it up with
the prevailing royalty rate. Conoco, in the court decision, or as
a settlement of the court decision, we settled with Occidental
saying, we don't owe each other any money for the past. Any of the
bills we may think we owe each other are done, and in consideration
of that we'll lower your royalty from 20 percent to 12.5 percent
on, I believe it's six or seven leases. But now, British
Petroleum, BP, has picked up the Milne Point field at the current
royalty rates of Conoco, the 20 percent, and has within, I guess
it's been two years now, has doubled the production of that field.
Number 289
REPRESENTATIVE FINKELSTEIN: My point, Mr. Chairman, is it's hard
to look at the past in condensed laws because we've only had one
case where they actually had the information and they were able to
proceed under the royalty reduction, and that case, although it was
turned down, that same area is now in production at the existing
royalty rates, so it would have been a bad decision if the state
had lowered the royalties because we'd be losing a load of money,
millions and millions of dollars.
Number 293
CHAIRMAN ROKEBERG: I, I think I take somewhat of exception to
that, Dave, because we were, when you're really talking right at
the point of, of a policy decision that has been made. That may
not necessarily be the case because the circumstances of BP and
Conoco were different, plus the fact of the matter is when Conoco
asked major application they asked to from major application they
asked to go from 20 percent to 5 percent. It's like I don't know
why they never bargained at a different rate or why didn't they
just go down to 12.5 percent or something like that?
Number 302
MR. BOYD: Mr. Chairman, I would only interject that there was a
lot of discussion with the division on exactly that, of sliding
scales and other ways to get to the end that were never -- a
successful negotiation was never reached.
CHAIRMAN ROKEBERG: I mean, we were talking with Conoco about that?
MR. BOYD: Yes.
CHAIRMAN ROKEBERG: And they didn't, because the record just shows
the five percent.
MR. BOYD: I don't know, Mr. Chairman, personally, whether that
might be in the confidential section that would have required us to
make those kind of negotiations revolving around confidential data
from Conoco, and then trying to reach some agreement. I can find
that out for you certainly, but I just, I just personally wasn't
involved in that case, but I believe that, I know that the case,
that there was negotiation about other ways to find a common
ground.
Number 307
CHAIRMAN ROKEBERG: Seemingly, you read the record and it looks
like the five percent was there and there's not really much
discussion about looking at alternate formulations and that's why
I thought minor, major impact. I thought they might have been,
being a little greedy and overreaching in their request, you know.
So, perhaps not.
Number 319
MR. BOYD: No, I believe we can say that we started off, the
royalty rate was raised, you know, at unitization from 12.5 to 20
and then they reapplied for five, but there was an attempt to reach
middle ground. It was never accomplished.
Number 324
CHAIRMAN ROKEBERG: Wait a minute. You said that's where the 20
came from, that unitization?
MR. BOYD: Um-hmm.
CHAIRMAN ROKEBERG: Oh, very interesting.
MR. BOYD: I forget what year that was.
CHAIRMAN ROKEBERG: Oh, so they didn't bid that to begin with.
MR. BOYD: No.
CHAIRMAN ROKEBERG: So you guys jammed 'em up. Can you tell us
why, just in a nut shell, why that would happen? Just generically.
Number 327
MR. BOYD: Mr. Chairman, as I recall the history, this goes way
back before me.
CHAIRMAN ROKEBERG: No, I mean just as a rule. I mean, not,
that's....
MR. BOYD: The rule, I believe anecdotally I would say that the idea
was that they bought the leases at a time when oil prices were at
a relatively modest level, and when the time for unitization came
oil prices did nothing but go up and the commissioner decided that
if you want to unit the state wants a larger share because the
price of oil has nowhere to go but up. Of course, what happened
was -- and I think everybody believed that -- I worked in industry
at the time and everybody believed in the early `80s that the price
of oil had nowhere to go but up, but of course, it does have places
to go but up. And when it went down is at exactly the time when
Conoco was trying to put Milne Point into production and that's
when the royalty reduction request became in earnest. So, I think
there was a good faith message on the part of the commissioner at
the time to raise the royalty rate. It was agreed to by Conoco in
terms of unitization to go to a 20 percent rate.
Number 344
CHAIRMAN ROKEBERG: Now, isn't that, doesn't the tremendous
leverage at that point in time when they are trying to unitize?
MR. BOYD: Mr. Chairman, I just, I just simply don't know the...
Number 347
CHAIRMAN ROKEBERG: I mean generally, not that case, but I mean,
I'm talking about generically, isn't there, isn't it to the
advantage of the lessees to unitize?
MR. BOYD: Absolutely. And to the advantage of the state as well.
Number 350
CHAIRMAN ROKEBERG: (Indisc. - both talking) has significant power
right at that point to make demands which may be, how you say,
avarice in nature, depending on your perspective. Is that, is that
a fair statement, or...
Number 352
MR. BOYD: Mr. Chairman, I guess I wouldn't care to respond to
that.
Number 354
CHAIRMAN ROKEBERG: Okay, I'm sorry. I appreciate that candor.
Representative Finkelstein.
Number 356
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. I wasn't
attempting to say that the Conoco case was simple, but if there's,
if we're going to look backwards there's so few cases to look back
on. There's basically just one that had any sort of proceeding to
it and then that case I think, you know, I was, could you conclude
that, forgetting the interest of any one company, just looking at
the state's interest and all overall maximizing revenue that the
state's, it turns out by the way events have occurred since then
that we now know that the right decision was made and we, by not
granting the royalty reduction were actually maximizing state
revenue because production is doubled under the 20 percent. Is
that the case?
Number 365
MR. BOYD: Mr. Chairman, again, it goes to every point I believe
that's been addressed here this morning: whose crystal ball works
the best? If you look into it early on it's hard to guess. Had we
reduced the royalty would Conoco have stayed and done something
else? Chairman Rokeberg is exactly correct in that this goes back
to reasonable rate of return. What BP may do that Conoco can't do
or because of its size, its ownership, and the pipeline, its
ability to own its tankers, all has to be taken into the decision-
making process. That's why I believe it's very difficult to come
up with a formula. Conoco, on the other hand, if they had stayed
who knows what other fields, they're a smaller company. They may
have been able to move more quickly into something else. It
becomes an impossible dilemma to somehow roll all this together,
but these things do have to be considered.
Number 377
CHAIRMAN ROKEBERG: Kinda to follow up on those points that
Representative Finkelstein is making, isn't it conceivable that the
industry didn't make applications for reductions because they felt
that they'd just be spinning their wheels because of the prior
history and the state's attitude at the time?
Number 381
MR. BOYD: Mr. Chairman, I've not known very many companies that
would ever be afraid to ask.
CHAIRMAN ROKEBERG: But they didn't. I mean, there's, I mean, they
thought their odds were pretty slim, (indisc.) I mean, is it fair
to...
Number 384
MR. BOYD: I could not speak for the company, Mr. Chairman.
CHAIRMAN ROKEBERG: I know it is a speculative question. I
appreciate that. Maybe we'll ask them when they testify.
Representative Ogan.
Number 387
REPRESENTATIVE OGAN: Thank you, Mr. Chairman. Something I would
like to see just for future reference would be a breakdown of what
fields that we already know are delineated and, and marginal, and
what the costs, what the revenues would be if those fields were
developed as marginal fields. Of course, I assume they aren't
going to be developed 'cause they are marginal, but just to get an
idea of how big a scope of a picture we have out there. I've got
some pretty current maps I could bring in, or I assume DNR would
have some too, but, I'd like to get a feel for what we've got out
there.
Number 398
CHAIRMAN ROKEBERG: Perhaps a list of the fields, I think. It may
already be in the data and you can just maybe pull it out. We've
got so much stuff it's hard to wade through it sometimes.
Number 400
MR. BOYD: Mr. Chairman, if what Representative Ogan is asking for
is a list of fields that are discovered but not produced, I believe
we can get that to you, that part of it, fairly quickly.
REPRESENTATIVE OGAN: Okay.
MR. BOYD: When you get to delineated, then you become back to the
bill, and I think again, in the same sense that you have to think
of reasonable rate of return, it's something you have to look at,
maybe on an individual basis. I believe that delineation is
something that each field will have to stand on its own. Older, I
don't want to use the word older, structural fields may be easier
to delineate. You may have a greater, higher comfort level earlier
on that they've delineated the field. The newer fields, what I'll
say is the future fields of Alaska, the stratigraphic type fields
I think require a different level of delineation before you have a
comfort, that you're actually able to bring under production. So,
I can certainly get you the list of those fields, but I think to
have a further discussion we would need to sort of look at them
individually and say, this one has this characteristic, and that
one has this characteristic. Other things, distance from
infrastructure, of course, it's hard to just shine a light on it
and say, it's this kind of field.
Number 418
CHAIRMAN ROKEBERG: Okay. In the interest of time, if you, if the
committee will allow me, I'd like to just go over some other topics
that we want to discuss later, and to alert the division and the
committee members of where we're heading with this. The first is
the, I'd say the development of a more narrative definition of the
other relevant factors, and whether or not the commission would
like to, my preference right now would be to stipulate the
commissioner has a right to set a fee, a flat fee, or he also would
have the right and would be, we prefer to see a sliding scale
royalty based on royalty and oil prices, number one. And then
additionally, that our next session would be the identification of
other key variables that the commissioner would have to, have to
review. And those would be things like capital cost, the amount of
the reserves, rate of return without putting reasonable or anything
else. Just a, to stipulate what these other variables could be so
that a, perhaps even a secondary chart or scale could be developed
that would be connected to the first, and so we can stipulate in
the bill what those things would be, and that's kind of where I'm
going on that one. These are the other relevant factors, and
clearly the production and reserves of what they.... Then, I'd
like to talk about the possibility of a five sets, five-year sunset
clause in the bill that I would, I think somewhere like December
31st, 1999 or something. And we'll get some industry testimony on
that. And, one reason I'm going back to the sunset clause is this:
The recommendations in the historic record from your department has
said that the sunset clause can be, the reason to have it would be
as a message to the industry that you have this amount of time to,
to come in and ask for your reductions and make the investments.
So, I'm looking at the sunset clause as an inducement for near-term
investment. That's, that's one reason. But, I'm willing to, you
know, listen to both sides there. And then I would like to
implement a stipulated reopener clause in the document and then get
your feedback on that and then look at the prime(indisc.), maybe
three years, five years or whatever.
Number 460
MR. BOYD: Mr. Chairman, if I may.
CHAIRMAN ROKEBERG: Yes, go ahead.
MR. BOYD: Stipulate a reopener on which provision? On, on the
raising, or the loan...
Number 461
CHAIRMAN ROKEBERG: On anything. I would like to see like a
bilateral right of reopeners by either party.
MR. BOYD: I understand.
CHAIRMAN ROKEBERG: But, not, you need to have certain stability
there. You don't what everybody to just come in and, you know,
day-to-day, from time-to-time. You need to have horizons of
stability, if you will. And I'd like to have your comments on
that, whether you think that would be workable or how that would
work. And also, the Chair is contemplating, in their CS, removing
section one, which is the Permanent Fund hold harmless, and if we
did that in section one now, there is, because of the way it's
drafted there's a floor which is relatively high bytake, six and a
quarter percent, and I'd like to have your opinions on setting a
floor at say 25 percent of the bargained for royalty in the lease.
Number 479
COMMISSIONER SHIVELY: I can give you our position on that now.
CHAIRMAN ROKEBERG: Oh, okay.
COMMISSIONER SHIVELY: I mean, I think that's acceptable. In fact,
I know it's acceptable. If you want to put a different kind of
floor in terms of the total royalty instead of a Permanent Fund
floor that, we have no problem with that change.
CHAIRMAN ROKEBERG: I appreciate that. What do you think about 25
percent?
Number 483
COMMISSIONER SHIVELY: I mean, you name a number. I have a number
in there now that's either that or higher depending on the lease,
so I don't think that changes the entire legislation.
Number 485
CHAIRMAN ROKEBERG: One of my concerns about the floor, as written
now, was that 50 percent really, I thought, impacted any kind of a
bail out sliding scale on older fields. I think that's wrong. And
it ties your hands in terms of formulating any kind of a agreement.
But, however, by putting a floor underneath there, part of the
(indisc.) again, but it's lower because it will recognize these
older fields, but still says you can't, we're not going to get into
this thing and get zero-zero revenue 'cause clearly, if you're,
particularly in an older field, you're going to be ELFed out there
anyway. You're going to be zero severance taxes.
Number 502
COMMISSIONER SHIVELY: `Cause older fields also return with five
percent revision.
Number 503
CHAIRMAN ROKEBERG: I mean, there used to be a minimum royalty
regulation too, so. I think it's been deleted or repealed, but, I
mean, I'd like to, you know, it seems to me that you want to keep
it the percentage rather than say stipulate three and an eighth
percent or something, 3.125...
COMMISSIONER SHIVELY: But then...
CHAIRMAN ROKEBERG: ...so if somebody bid historically on the
higher royalty in their bidding process they're going to have to
live with that, you know.
COMMISSIONER SHIVELY: (Indisc.) allows us to adjust to the
whatever the...
CHAIRMAN ROKEBERG: Right.
COMMISSIONER SHIVELY: ...royalty base.
CHAIRMAN ROKEBERG: Right. So, that's where I'd be coming from
there. Let's see, there's, I see one more thing here. Oh yeah.
In terms of the talking, go back to the subject of what I call the
integrity of the bidding process. I would like to get the
department's opinion on stipulating all future bidding that only
the 12.5 percent royalty, I mean, you'd have to just stick with the
12.5 percent royalty. I guess the rationale being that I want to
try to avoid the 'bait 'n switch' bidding by the part of the
industry where they would involve a higher royalty if you had that
as a flux(?) variable in the bidding processes, and come back later
and ask for a reduction. And, that's the thing I've thought of
that goes to this integrity issue. And any other ideas you have on
this line, I mean I would appreciate it. I don't know. Any other
questions of the committee? I'm ready to adjourn this thing until
tomorrow at 5 p.m. in the Beltz Room for about an hour at which
time we can take some additional testimony. I believe Mr.
Quesnel(?), are you going to be there for tomorrow night? Is that
(indisc.)?
PAUL QUESNEL(?): (Indisc.)
CHAIRMAN ROKEBERG: But you intend to testify tomorrow? Very good.
I want to thank the commissioner and director both for coming, and
this committee stands adjourned.
Adjourned at 12:07 p.m.
| Document Name | Date/Time | Subjects |
|---|