03/11/2003 03:23 PM House O&G
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 11, 2003
3:23 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Mike Chenault, Vice Chair
Representative Hugh Fate
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Jim Holm
COMMITTEE CALENDAR
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28
"An Act relating to adjustments to royalty reserved to the state
to encourage otherwise uneconomic production of oil and gas; and
providing for an effective date."
- MOVED CSSSHB 28(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 28
SHORT TITLE:OIL & GAS ROYALTY MODIFICATION
SPONSOR(S): REPRESENTATIVE(S)KOHRING, ROKEBERG
Jrn-Date Jrn-Page Action
01/21/03 0039 (H) PREFILE RELEASED (1/10/03)
01/21/03 0039 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0039 (H) O&G, RES, FIN
02/19/03 0246 (H) SPONSOR SUBSTITUTE INTRODUCED
02/19/03 0246 (H) READ THE FIRST TIME -
REFERRALS
02/19/03 0246 (H) O&G, RES, FIN
02/20/03 (H) O&G AT 3:15 PM CAPITOL 124
02/20/03 (H) Heard & Held
02/20/03 (H) MINUTE(O&G)
03/11/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During hearing on SSHB 28, offered the
division's and DNR's support for Conceptual Amendment 1 and
concerns about Amendment 2; said the amended version is workable
but not ideal; gave no official position from the
administration.
ACTION NARRATIVE
TAPE 03-14, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:23 p.m. Representatives Kohring,
Chenault, Rokeberg, Fate, Crawford, and Kerttula were present at
the call to order. Representative McGuire arrived shortly after
the meeting began. Also present was Representative Holm.
HB 28-OIL & GAS ROYALTY MODIFICATION
Number 0049
CHAIR KOHRING announced that the committee would hear SPONSOR
SUBSTITUTE FOR HOUSE BILL NO. 28, "An Act relating to
adjustments to royalty reserved to the state to encourage
otherwise uneconomic production of oil and gas; and providing
for an effective date."
CHAIR KOHRING, joint sponsor with Representative Rokeberg of
SSHB 28, noted that substantial testimony had been heard at the
hearing [on February 20, 2003].
Number 0093
CHAIR KOHRING offered a recap, noting that the intent of SSHB 28
is to spur development of marginal oil fields and to establish a
more understandable and usable royalty-adjustment method for
fields that might otherwise prove uneconomical. It clarifies
and simplifies the 1995 legislation that established the current
royalty-reduction method, especially with regard to the role of
the commissioner of the Department of Natural Resources (DNR),
who, under the bill, will be given greater flexibility to
negotiate deals that are more financially viable for drilling
and exploration companies. Existing law is simply too
burdensome and costly for industry, he suggested, and thus
discourages the filing of drilling applications; as a result,
oil is left in the ground that otherwise could be extracted to
add to the state's economic base. Essentially, the bill extends
the life of existing, uneconomical fields.
Number 0229
CHAIR KOHRING continued with his recap, offering his belief that
[SSHB 28] protects the public interest by maintaining
individuals' ability to comment on preliminary findings of the
commissioner; it also maintains the legislature's involvement
through the Joint Committee on Legislative Budget and Audit,
which holds meetings year-round. Chair Kohring asserted that
the public process isn't compromised by this bill. He also said
Alaska needs to remain competitive in the global market by
encouraging development of its oil and gas resources, and that
he believes this legislation moves [the state] closer to that
goal. He added that the bill is basically intended to jump-
start drilling activity.
Number 0288
CHAIR KOHRING turned attention to the fiscal note [from the
Division of Oil & Gas] for more than $30 million. He suggested
representatives from the division could address it. He offered
his belief, however, that the bill has essentially a zero
[fiscal impact], because without development of these marginal
fields, there won't be oil royalties going into the state
treasury. Suggesting it's another way of looking at it, he
added, "In my mind, the note reflects an amount of money the
state wouldn't get if this bill simply didn't become law."
Number 0379
CHAIR KOHRING moved to adopt [Conceptual] Amendment 1, which
read [original punctuation provided]:
Delete all references to: or portion of a field or
pool
REPRESENTATIVE CHENAULT objected for discussion purposes.
Number 0440
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, told members that the division and DNR
support Conceptual Amendment 1. Calling attention to the scale
in terms of size, he pointed out the inherent flexibility in
using "field or pool" in customizing royalty relief. Pools are
individual, separated reservoirs, whereas a field commonly
consists of multiple pools. In this legislation, the state can
grant royalty relief for a field producing through common
facilities - multiple different reservoirs - and have a royalty
reduction on an individual reservoir. That gives a lot of
flexibility, since it isn't for the entire infrastructure
related to [production] in that field, but can be tailored to a
heavy-oil zone or a gas pool, for example, if it's separate from
the main oil reservoir.
Number 0537
MR. MYERS explained that going to [a portion of a field or pool,
as proposed in SSHB 28], brings up multiple problems, both
administratively and, to his belief, in [terms] of purpose.
Using an analogy of an oil field as a flying saucer with a thin
edge, he explained that the thicker part - the middle of the
field - will be developed first, since it is the only economical
area to develop: it has the thickest accumulation of oil, and
the wells have the highest rates of return and flow rates. As
the field life continues - with more infrastructure built,
including drilling pads - thinner and thinner parts of the field
become economical.
MR. MYERS continued, noting that the natural evolution is to
produce the thickest, best, most economical part first, and
later on to produce the thinner edges of the field. He
expressed concern, therefore, that at some point in time an
operator could claim that only the "thickest part of the pie"
was economical, and thus request royalty relief for the thinner
edge.
Number 0631
MR. MYERS told members:
Historically, what we've seen is, on the North Slope,
Prudhoe Bay, originally, the economic limit was 100
feet of oil thickness, of oil column or net pay. That
is now down to about 10 feet. So both as the field
production moved on and also as technology changed, it
became more and more economic, through a natural
evolution of the oil field, to produce the thinner
edges. So ... by using "parts of fields," an operator
could always claim a royalty relief at any given point
for part of the field: a small, isolated fault block
within the field that might have thinner "pay" on,
certainly, the fringe parts of the field.
MR. MYERS offered that at some point in the field life, only
uneconomical oil will be left; that is when an incentive is
desired. Reiterating that the fine scale of "[portion] of a
field or pool" is problematic from both an administrative and an
"intent" standpoint, he added, "I could even see cases where it
might lead to improper reservoir management, where you actually
don't produce the core part of the field first, or maximize
production, because you're ... producing those areas where you
get a royalty reduction." From an operational standpoint, he
suggested, it doesn't make sense.
MR. MYERS pointed out another problem with the language [being
deleted by Conceptual Amendment 1]: early in the life of a
field, there isn't the data necessary about the fringe areas to
determine whether they are economically viable. As a field is
developed, however, more and more information is obtained, he
said, "moving out to these peripheral areas of the field; then
you can quantify the value of that."
Number 0772
REPRESENTATIVE KERTTULA indicated technological advances start
to make areas economically viable that weren't previously. She
asked Mr. Myers what the state would have lost in revenues if
economic incentives had been granted when [the economic limit
for oil] was 100 feet, rather than the 10 feet it is currently.
MR. MYERS replied:
The only example that I know of on a royalty-relief
case where you could have tested that was at Milne
Point, ... prior to ConocoPhillips, when Conoco was
originally operating the field [in] the 1980s, and
they applied for royalty relief, I think, in [the]
'89-to-'90 timeframe. The state denied the
application, but the analysis showed that if it would
have been granted, it would have cost the state
between $64 [million] and $120 million. But that was
at Conoco's 20,000-barrel-per-day rate of production.
Currently, the field produces nearly 50,000 barrels
per day, without that royalty relief.
So, in this case, we could quantify about 128 million
[dollars]. But, in reality, what we got was a new
operator with additional capital to spend in the field
that has really done a good job of developing it. So
... that is sort of the upside risk early in the life
of ... the field, is in the $100 million-plus range.
Later in the life of fields, near the end of
production life, there's much better data to quantify,
the risks are significantly lower, and the dollars
involved ... can be significantly lower.
Number 0886
REPRESENTATIVE KERTTULA asked whether the bill is structured so
this determination is only made at the end of the life of a
field, or whether something may happen at the beginning. She
noted that page 1 places some sidebars with regard to economic
feasibility.
MR. MYERS responded:
I think ... there is a risk early in the life of the
field, because ... you have uncertainty about the
actual recoverable reserves, the changes in
technology, future oil prices. On the other hand, the
bill allows the flexibility to condition royalty
relief, so that when conditions [change] there can be
payback ... if it's deemed appropriate in the
mechanism, or the royalty relief can end. So the bill
does allow ... a lot of flexibility and discretion [to
the] DNR commissioner to customize it. And I believe
that was Representative Rokeberg's intent, there, ...
to give those tools for flexibility so it could be
managed in such a way ... to minimize the risk.
But there is risk early in the life of the field. You
simply ... don't have the data to know; on the other
hand, you risk the field, in some cases - and I can
use a Badami-type-field example, where even though
you're relatively early in the life of the field, it
doesn't have very good economics, i.e., have
sufficiency of data to know that it's a very
challenged field. So there are cases at all ends of
the spectrum. ... This is not an easy thing. That's
why it takes a lot of detailed analysis. That's why
the data requirements are here in the bill.
Number 1016
REPRESENTATIVE ROKEBERG, joint sponsor of SSHB 28, referred to
discussion at the previous hearing about the judgment of then-
Commissioner Harold Heinze in denying the Milne Point
application from Conoco; he asked Mr. Myers whether the state
would have foregone substantial income [if the application had
been approved], and requested details.
MR. MYERS answered that it was for the heavy oil as well as the
Kuparuk River formation, the main producing reservoir; it wasn't
limited to heavy oil. Indicating DNR had reviewed the
substantial technical data that was provided, he said Conoco did
a good job, had identified a lot of additional reserves in the
field, and had actually pioneered some of the heavy-oil work.
However, Conoco determined that its internal economics were
"more challenged," particular in relation to the higher tariffs
the company was paying TAPS [the Trans-Alaska Pipeline System]
and the Kuparuk pipeline. He added:
When ... the state reviewed that application, ... the
data showed what the state thought was a reasonable
rate of return for the [operator] at the time. I
think the operator saw a better economic fit with
trading that for some property in the Gulf of Mexico;
BP saw a good economic fit. But as far as the
reserves and the technology, BP has done an excellent
job in developing the field. The potential was
clearly recognized by Conoco, which had [itself] done
a good technological job in looking at those reserves.
Number 1157
REPRESENTATIVE ROKEBERG remarked that Mr. Myers had refreshed
his memory. He asked whether the true reason for the original
application [for royalty modification] was that Conoco wasn't a
participant in TAPS and therefore would have had to "pay through
the nose" compared with TAPS participants.
MR. MYERS replied:
It certainly hurt their economics, although the
state's analysis, and the determination, wasn't based
on all those economics; it was based on [Conoco's]
confidential, internal economics. ... I think the
public-interest decision by Commissioner Heinze was
also based on [the assumption that] ... little
behavior modification was going to occur with Conoco.
They weren't going to ... incrementally increase
production in the field, even though they identified
the reserves, by any significant amount.
So ... one of the things, I think, with royalty
reduction: if you give the royalty reduction, will
the field produce longer? And we knew the reserves
were there. So, would it enhance the production?
Would ... investment pour back in the field to
increase and create a win-win situation, a symmetrical
situation where we gave up royalty relief and then
received additional revenue? Conoco's case on that
was pretty poor, in that it was business as usual. It
was clear, even though the amount of dollars for the
royalty reduction were substantial, [that] it was
still less than $10 million per year, which wasn't
sufficient money to allow them to invest ... more
capital for enhanced oil recovery, which is one of the
limitations, I truly think, the state has, again, with
our royalty share being a [small] percentage of that.
Number 1292
MR. MYERS continued:
The relief can help, and it particularly helps against
the operating cost standard. But against the total
investment in the field - which at that time, the
royalty reduction had to be used against - it was
relatively small, a small incremental change to the
company that couldn't change the behavior. But even
with all that said, the economic analysis showed that
they made a reasonable rate of return, in the state's
interpretation. And that's why the application was
denied.
Number 1320
REPRESENTATIVE ROKEBERG offered his belief that Conoco had
swapped interests with BP, which had a better position with
regard to tariffs, and left Alaska because of an inability to do
business here. He said it doesn't speak to this bill, but to
access with regard to infrastructure, for example. He suggested
[ConocoPhillips Alaska] is back only because of "international
corporate deal making."
Number 1438
REPRESENTATIVE McGUIRE mentioned a concern expressed at the
previous hearing [by Representative Rokeberg] about the concept
beginning on page 2, line 5 - which refers to delineation to the
satisfaction of the commissioner - with regard to whether the
commissioner might "overdemand for a delineation about fields"
and then never make a decision. She asked if that had been
addressed.
Number 1545
CHAIR KOHRING asked Mr. Myers whether he had any concerns about
that provision.
MR. MYERS replied:
No, I don't. I think, actually, the sufficiency-of-
data standard's important here early, particularly
because that results ... in potential royalty
reduction early in the life of the field. So you need
to have an idea of the size of the reserves, the
economics, the production. And we need to ... do a
"due diligence" to be reasonably ... confident that we
can either agree with their numbers or do some
independent assessment of that. So ... it's always
going to be a judgment as to the sufficiency of data,
and it's a professional judgment. But ... early in
the life of the field you're going to have a lot less
data to work with.
I think the bill has ... a real positive aspect [in
that] it allows you to customize the relief ... to
deal with some of those uncertainty issues. But you
still fundamentally need to ... know whether your
field is 200 million barrels or 400 million barrels
recoverable, the gravity of the oil, ... the
producibility, the net cost for producing that oil.
So ... there is definitely a sufficiency-of-data
standard [and] that any prudent operator will have
that data if they've sanctioned the project and ...
are going ahead with development of that project. So,
... again, I think it's sort of ... self-policing. I
guarantee you, the companies can't make those
decisions ... on skinny data. They're spending
hundreds of millions or billions of dollars, and they
will have ... that sufficiency of data.
Number 1646
REPRESENTATIVE McGUIRE, again referring to her notes from the
previous hearing, mentioned a concern about the appearance or
reality of a guaranteed result in picking from a list of
qualified consultants.
REPRESENTATIVE ROKEBERG requested that attention return to
Conceptual Amendment 1.
REPRESENTATIVE CHENAULT removed his objection.
Number 1722
CHAIR KOHRING asked whether there was any further objection to
adopting Conceptual Amendment 1. There being no objection, it
was so ordered.
CHAIR KOHRING suggested that Representative Rokeberg's
Amendment 2 should address Representative McGuire's concerns.
Number 1736
REPRESENTATIVE ROKEBERG moved to adopt Amendment 2, labeled 23-
LS0177\D.3, Chenoweth, 3/11/03, which read:
Page 5, line 20, following "data;":
Insert "the commissioner may require use of the
services of an independent contractor if the
commissioner determines that the estimated costs of
the contractor's services do not exceed 10 percent of
the estimated value of the royalty reduction to the
lessee or lessees making application for it, except
that the commissioner may require use of the services
when the estimated costs of the services equal or
exceed 10 percent of the estimated value of the
royalty reduction with the applicant's agreement; if,
under this paragraph, the commissioner requires
payment for the services of an independent contractor,
CHAIR KOHRING objected for discussion purposes.
Number 1759
REPRESENTATIVE ROKEBERG said this is in the same area brought up
by Representative McGuire. He pointed out that there is a
difference in the view of the Division of Oil & Gas and his own
view of the bill. He explained, "They've requested that the
commissioner have the right here to make the selection of the
consultant."
REPRESENTATIVE ROKEBERG told members that Amendment 2 really has
to do with use of the services of an independent contractor. He
offered for the record a three-page letter from Kevin Tabler of
Union Oil Company of California (Unocal) dated March 7, 2003
[which also contained testimony by Unocal submitted on March 16,
1995, to the House Special Committee on Oil and Gas and on April
28, 1995, to the Senate Resources Standing Committee with regard
to HB 207].
REPRESENTATIVE ROKEBERG told members the issue is that if the
commissioner had full sway to select the contractor and to
determine the relevant scope of work, [the commissioner] could
ask the contractor to spend more money than the royalty relief
would be worth. He suggested that might have happened with
regard to the only application he was aware of under HB 207, the
current law. Referring to Mr. Tabler's letter, Representative
Rokeberg said the consultant cost something like $250,000,
whereas the total benefit to Unocal was only about $600,000. He
suggested a 5-to-1 ratio might be worthwhile, and mentioned high
hurdle rates because of the higher level of risk. He suggested
taking great care when drafting the statutes to try to make them
reflect the real world.
Number 1950
REPRESENTATIVE ROKEBERG noted that Amendment 2 restricts the
cost of these contracts, and that the commissioner can still
determine the relevant scope of work to be performed. He asked:
if the relevant scope to be demanded by the commissioner exceeds
a valuation and there is no cost-benefit ratio here, why proceed
with the application? He said the 10 percent admittedly is "an
estimate of a reasonable number," and that although he wasn't
"wed to that number," it has been recommended. He called it a
commonsense addition, suggesting that there could be a scenario
wherein a commissioner demands that "you study this thing to
death" and it costs more than it is worth.
REPRESENTATIVE ROKEBERG requested feedback from [Mr. Myers] on
Amendment 2 and the relevant section of the bill, but again
referred to Mr. Tabler's letter, page 2 in particular, about why
Mr. Tabler believed this to be necessary.
Number 2060
MR. MYERS responded:
I believe this amendment creates an on-off switch ...
of whether or not the state can hire a contractor, not
the expenses the contractors can [incur]. In other
words, I don't believe, under this amendment, we could
actually hire them unless we've demonstrated the 10
percent, which you won't know until you've hired the
contractor. So ... I believe that ... probably isn't
the intent, but, again, I don't see that as very
workable in the sense it wouldn't allow us to hire the
contractor at all.
I'm sympathetic to the concern that the costs, with a
contractor, ... can be quite expensive. ... I'd like
to note, though, that on the Unocal case, the state
did not hire a contractor, so Mr. Tabler must be
referring to internal costs [incurred] ... by Unocal.
Again, we had no contractor on board for that.
REPRESENTATIVES McGUIRE and ROKEBERG referred to the fact that
Mr. Tabler's letter says Unocal hired its own consultant,
Gaffney Cline.
Number 2116
MR. MYERS said that was for [Unocal's] internal analysis, not
for reimbursable expenses to the department. "So, again, we
handled that case internally," he said. He added that it's
likely, for a field late in its life, that [the department]
would have sufficient data and the costs in the contract would
be less. On a larger field early in its life, however, the
amount of analysis inevitably would be a lot more and the
potential [royalty] reduction would be more. He said he is
sympathetic to Representative Rokeberg's concern that [the
state] not charge too much or do extensive analysis that isn't
necessary, and has some sympathy for the applicants if the costs
are large for a contractor. If a royalty structure were
designed with a payback or shut-off mechanism, however, it would
be price-dependent, and estimating 10 percent of the relief
wouldn't be an easy task, either.
MR. MYERS reiterated his two concerns. First, this sets up a
situation whereby [the department] isn't allowed to hire a
contractor unless it either demonstrates or estimates that the
costs don't exceed 10 percent. And, second, it will be hard in
some cases, depending on how the relief is structured, to
actually quantify the value of that relief, because of using a
sliding-scale mechanism, a price-sensitive mechanism, or a
payback - all of which could be used under this.
Number 2198
REPRESENTATIVE ROKEBERG responded that he didn't entirely agree.
He said he'd seen no evidence that the Division of Oil & Gas is
reluctant to create fiscal notes with estimates with regard to
potential oil revenues lost; he cited [this year's] HB 57 as an
example. He disagreed with the characterization that this is an
on-off switch, unless the desire is to use it as a mechanism to
foil the attempt of the applicant.
REPRESENTATIVE ROKEBERG offered his belief that the language [in
Amendment 2] is sufficient to provide flexibility, and that the
10 percent could be exceeded if the applicant gave consent.
Noting that he'd worked on it for a couple of weeks, he said it
seemed easier to try to set some quantifiable standard based on
preliminary estimates of what could happen. He added, "This
could be really problematic because the bill does provide for
this to an undeveloped field." Suggesting that the word
"estimates" is clear statutorily, he offered to modify the
language if it could include the concept of "cost-benefit
analysis of value engineering." He cautioned that great harm
could result if two parties in a semi-adversarial situation were
saying who could be used as consultants, what lists were to be
chosen from, and so forth; he suggested that is a collateral
issue about which there has been past disagreement.
Number 2332
MR. MYERS replied:
If I have an ... initial application for this and I
know I'm going to need a consultant, I'm ... probably
going to hire the consultant on an hourly basis, based
on how much analysis he's going to be doing. This
says that I have to know what these costs are going to
be ... ahead of time, prior to it, and have done
enough analysis to know what the royalty relief is
going to be worth, all of which ... would be
preconditions for my authority ... to hire the
contractor or to get a contract with him.
So I'm stuck in the case of ... thinking, "How do I
possibly, going into [an] application, know what data,
(a), is available to me through the applicant, and,
(b), what sort of analysis I'm going to need, and what
that analysis is going to cost me." In addition, I
don't know what the royalty relief is, because I'm
first seeing this application cold, with a lot of
data.
So, under this scenario I'd have to work the data
internally, extensively, [to the] point that I was
comfortable enough that ... the 10-percent number
would work, and then I could hire the consultant to
work on those particular problems. That's going to
cause a lot of internal analysis, a lot of delay ...
in the work on the application.
MR. MYERS offered to work with Representative Rokeberg,
reiterating that he understood and sympathized with the intent
from the applicants' standpoint of wanting certainty that [DNR]
won't use this as a mechanism to deny it; Mr. Myers said that
clearly isn't the intent.
Number 2409
REPRESENTATIVE KERTTULA asked how many times this actually has
been a problem that [DNR] has asked for [a consultant] and been
told it would be too expensive.
MR. MYERS indicated that the times when DNR went through these
analyses, it never hired an independent assessment. He said, "I
do note, the Conoco case took a long time to do internally." He
reiterated that if there is a lot of data late in the life of
the field, this is not a difficult problem. Early in the life
of the field, however, engineering analysis and technical,
upfront analysis must be done. It really will vary, he added.
Number 2449
REPRESENTATIVE ROKEBERG replied to Representative Kerttula by
referring to [AS 38.05.180(j)] and saying the provision that
required the independent consultant was added in 1995 by HB 207;
thus the commissioner [of DNR] under the Conoco scenario didn't
have this mandate. He suggested that any hiring of consultants
is "probably discretionary as to the commissioner on any other
type of circumstance," but said only the Conoco application, to
his knowledge, has done this in eight years. He added, "That's
why we're doing this bill. The statute doesn't work now. We're
trying to clean it up so it's workable and so it can have some
impact and effect on our oil and gas production here in the
state."
REPRESENTATIVE ROKEBERG indicated he could envision what Mr.
Myers was thinking, although he didn't entirely agree. He did
agree that in a new field, in particular, or where there isn't
sufficient data, it can be extremely difficult to make some of
these estimates, even with regard to the amount of royalty
reduction. He suggested that both [he and Mr. Myers] agree with
the need for some sideboards with regard to "value engineering"
and how to accomplish that.
Number 2541
REPRESENTATIVE ROKEBERG requested, rather than holding the bill
further, that the committee accept Amendment 2 in order to
introduce the concept into the bill, but with the proviso that
he'd work with Chair Kohring and the Division of Oil & Gas to
try to make it workable.
MR. MYERS offered technical support.
Number 2583
REPRESENTATIVE KERTTULA objected, stating her preference for not
including Amendment 2, which could be added on the House floor
if necessary.
CHAIR KOHRING withdrew his own objection.
A roll call vote was taken. Representatives Rokeberg, Fate,
McGuire, and Kohring voted in favor of Amendment 2.
Representatives Crawford and Kerttula voted against it.
Representative Chenault was absent for the vote. Therefore,
Amendment 2 was adopted by a vote of 4-2.
The committee took an at-ease from 4:02 p.m. to 4:03 p.m.
Number 2624
REPRESENTATIVE ROKEBERG referred to Mr. Tabler's letter and
conversations with Ken Boyd, Mr. Myers' counterpoint when the
original legislation came before the House Special Committee on
Oil and Gas eight years ago. With regard to paragraph (6) on
page 5 of SSHB 28, Representative Rokeberg said it reads that
the applicant pays for the services of an independent contractor
selected from a list of qualified consultants provided by the
commissioner. In existing law, by contrast, the commissioner
selects the consultant and the applicant has to pay for it. He
offered his belief, from past conversations, that Mr. Myers and
his staff were in disagreement [with Representative Rokeberg] on
this point.
REPRESENTATIVE ROKEBERG said he would "stick by this position
because it's been reconfirmed by the testimony, in talking to
various people ... in the industry that have ... gone through
the situation, where I think that ultimately the companies
paying for the contractor - who's going to be working under the
direction of the commissioner - should be the one to select
whoever they're going to be paying for." Calling it a "basic
axiom of business," he also offered his understanding that
relatively few companies would even qualify [for the list].
REPRESENTATIVE ROKEBERG noted that proposed language on page 5,
lines 20-21, of SSHB 28 [which immediately follows the language
inserted by Amendment 2], says, "the commissioner shall
determine the relevant scope of the work to be performed by the
contractor". He pointed out that [DNR] would use this
information to evaluate the application. He said he saw no
reason to change this, but acknowledged that Mr. Myers might
feel otherwise.
Number 2776
REPRESENTATIVE CRAWFORD said it seems this will be a somewhat
adversarial relationship between the contractor and the
applicant, and that the most qualified contractor that the
[commissioner] chooses might be unacceptable to the applicant
because of being too tough an adversary. He asked the reasoning
behind allowing the applicant to choose who the adversary is.
REPRESENTATIVE ROKEBERG replied that it is supposed to be an
independent consultant - a gatherer of technical data and an
analyst. He suggested an adversarial relationship, if any,
would be between the commissioner and the applicant.
Characterizing this as a "pretty small business sphere," he
remarked that if the commissioner told him to hire a particular
person that he'd had a bad experience with, he wouldn't
appreciate it. He offered that the commissioner has a say in
the selection process by providing the list; the applicant
selects [from] the list and pays for [the consultant]; the
commissioner then gets to use the consultant.
Number 2890
REPRESENTATIVE FATE said it seems that allowing the contractor
to assume the selection and to bypass the department removes the
responsibility of the division and perhaps even some
responsibility from the [Alaska Oil & Gas Conservation
Commission (AOGCC)] when it comes to production. It is placed
solely in the hands of the [applicant], he suggested, by
allowing that person to select the consultant to do the very
things specified in the bill. He asked whether his reading was
correct.
Number 2955
REPRESENTATIVE ROKEBERG replied that perhaps Representative Fate
was reading too much into it, since he didn't believe AOGCC had
anything to do with it. He said it is an application made by
the lessee to the commissioner of DNR. He added, "Frankly, the
testimony I have is that the people in the industry believe that
... the commissioner and [the Division of Oil & Gas] should be
able to do this in-house. They don't even need to hire a
contractor." He pointed out that "may" is in the language; it
is discretionary, therefore, driven by whether the commissioner
believes there is a need for an independent consultant.
TAPE 03-14, SIDE B
Number 2974
REPRESENTATIVE ROKEBERG said the applicant pays for it, under
the current statute or the bill. The question is who makes the
shortlist and who gets to make the decision. He clarified, "I'm
saying that the applicant should make the final decision because
he's paying for it." He asked that Mr. Myers address the issue.
The committee took an at-ease at 4:11 p.m. that lasted a few
seconds.
Number 2913
MR. MYERS told members:
We can live with ... the amended version. Again, it's
not ideal, but we understand Representative Rokeberg's
concerns, and it's workable. I will say that we have
a ... fairly small consulting community in Alaska.
It's one thing to consider, that most of the work for
that consulting community will come from the
producers, of various sorts. So contractors have to
be careful ... when they work for us that they don't
hurt their other business opportunities out there.
So, the more [autonomy] we have to select contractors,
the better. Again, we would be looking for someone
who's objective, someone that can maintain
confidentiality, above all, because that's absolutely
critical. ... We very seldom bring in contractors on
detailed technical evaluations. ... One thing is
funding, but the second thing is the ... concern over
confidentiality of data. You are allowing them to see
some very sensitive data, both from a sense of
technical information, but also from commercial
economic information on an individual company:
information on their rates of return, information on
the profitability of the field, et cetera. So this is
a very, very sensitive analysis. And to that point,
we can understand the companies' concern, but it's our
concern as well. There's a liability for showing them
that data and allowing them to use that data.
Number 2851
MR. MYERS continued:
The quality of ... consultants varies widely,
depending on their experience, their background. So
all we want is to get ... a good, unbiased, qualified
person - ... or people or firm - in there. And,
again, one of the issues is, that's a pretty short
list in Alaska. I'm not trying to defame anyone, but
[this is] very specific, narrow, technical expertise,
and there's only a limited market. So we have limited
folks in-state. ... So chances are, our shortlist and
a producer's shortlist would be very similar, but not
identical.
And, I think. the compatibility for us to work with
folks - it's [nice] to know that ... they are high-
quality [and that] I won't be spending all our staff
time bringing someone up to speed in terms of training
them to get them to the point they can do the
analysis, and then that we can trust them, forward
looking. So, ... again, from a selfish standpoint, we
like to maintain the flexibility. But I understand
Representative Rokeberg's concern, and ... we could
work with it.
Number 2800
REPRESENTATIVE KERTTULA requested confirmation that the idea
behind the contractor is someone who basically takes the
division's place in order to provide the information so the
commissioner can make a reasonable decision.
MR. MYERS responded:
The way I understand it is, ... it won't be a broad-
based, do-everything kind of consultant, necessarily.
It may be ... specific aspects. There may be a
question on recoverability of the reservoir, reserve
estimates, in which case you might bring a reservoir
engineer in. It may be an economic run, in which case
you might want to bring ... an economics firm in to do
it. ... There's seldom "one size fits all." If so,
... if we hire one of these all-encompassing firms,
typically, the cost will be very expensive to the
applicant, and that's ... not the intent here at all.
So we'll probably narrow the focus, when we hire
consultants, to specific issues where either our in-
house expertise is not available in a timely manner or
... it's specific issues where it doesn't exist. So I
see it as augmenting, ... not replacing, the
division's analysis.
Number 2728
REPRESENTATIVE McGUIRE said she'd struggled with this issue and
supports Representative Rokeberg's position. She offered an
analogy from her childhood: when two kids fight over pieces of
pie, the parents can resolve it by having one child cut the
pieces and the other choose which piece he or she wants.
Returning to the bill, she said this gives each an opportunity
to enter into the equation when both have a lot at stake, both
from a proprietary point of view and from the desire to have the
results be good.
REPRESENTATIVE McGUIRE said she'd originally been concerned
about it, but likes how broad and general it is: a list is
chosen, but there aren't limits on how many or where they are
chosen from, for example. She suggested this gives [the
commissioner of DNR] a great amount of power because of the
unlikelihood of putting someone on the list without believing
the person would protect confidentiality requirements and so
forth. She also said she'd been concerned about the appearance
of impropriety; given how much discretion there is in creating
the list, however, Representative McGuire said she believes that
giving [the applicant] the opportunity to pick [the contractor]
- since the applicant is ultimately paying the bill - is
probably a fair tradeoff.
Number 2649
REPRESENTATIVE CRAWFORD expressed concern about the timing of
the "pick" because it seems there could be too much allegiance
[by the contractor] to the applicant who made the final choice
from the list that was put forward. He offered that it would be
fairer if the applicant put together the shortlist and the
commissioner selected the final contractor.
REPRESENTATIVE ROKEBERG said that's what current law says, which
he doesn't like.
Number 2604
REPRESENTATIVE CRAWFORD remarked, "I think that our job here is
to make sure that the state's interests are best protected. And
... I believe that if we change it to the way that
Representative Rokeberg wants to, that ... the pendulum swings
towards the side of the applicant."
REPRESENTATIVE ROKEBERG acknowledged that this can be
contentious, with the applicant on one side and the commissioner
and the state on the other. Noting that the independent
contractor is intended to provide an independent voice, he
agreed with Representative Crawford about the question of bias.
He suggested, however, that the state should be able to do this
in-house, and only use an independent contractor for something
highly technical, if staff is tied up elsewhere, or if there is
"a failure by DNR to be able to meet its requirements." He
asked why an applicant should be penalized by "giving the
default benefit to the commissioner rather than to the
applicant, when the commissioner should have done the job in the
first place and ... it's going to cost the guy money."
Number 2507
REPRESENTATIVE CRAWFORD, noting that this is an honest
disagreement, surmised that the reason for using an outside
contractor was to enhance or speed up the process because the
Division of Oil & Gas, from what he has been told, is
shorthanded. This slows the process because the division
doesn't have enough staff to handle these, he suggested. He
again expressed concern that it could tend to bias the outside
contractor who was chosen by the applicant. He reiterated his
belief that the outside contractor should be chosen by the
state, which is doing the hiring. "This is for the state's side
of the argument," he added.
Number 2452
REPRESENTATIVE KERTTULA remarked, "They're asking for a huge
break in some cases. ... It's to their benefit to be able to get
someone that the commissioner feels confident of, and it's the
state's responsibility." She said Representative Crawford's
point was well taken. She asked Mr. Myers whether the
administration supports the bill.
MR. MYERS said that to his knowledge, the administration hadn't
taken a position on the bill.
REPRESENTATIVE KERTTULA asked what the positions of previous
administrations have been on similar legislation.
MR. MYERS responded, "I think it's been recognized by previous
administrations that we needed an effective royalty-reduction
bill as a tool." He indicated the division was only providing
technical support on the current legislation.
CHAIR KOHRING pointed out that the original legislation was
signed into law by then-Governor Knowles.
REPRESENTATIVE ROKEBERG said HB 207 in 1995 was the centerpiece
of the entire Knowles Administration, but that the Senate
Finance Committee "screwed it up."
Number 2335
REPRESENTATIVE KERTTULA referred to the analysis on page 2 of
the division's fiscal note, which says HB 28 opens the door to
the possibility that every oil or gas reservoir would be
eligible. She asked whether that stands.
MR. MYERS specified that with [Amendment 1, deleting "or portion
of a field or pool"] it wouldn't stand. He added the following
with regard to independent contractors:
Our goal is not to have [an] independent contractor as
an advocate for a state position. It's to do the
technical analysis. Again, the state's not opposed
... to royalty reduction. We just want to make sure
it meets the statutory requirements and we give the
commissioner the ability to do the analysis. So,
again, ... we're not hiring a law firm to advocate a
position for us. We're [hiring] technical experts.
We're just trying to get "the best" to verify the data
and to do the proper analysis. That determination has
to be made by the commissioner; it won't be made by
the contractor.
Number 2271
REPRESENTATIVE CHENAULT moved to report SSHB 28 [as amended] out
of committee with individual recommendations and the
accompanying fiscal note(s). There being no objection,
CSSSHB 28(O&G) was reported from the House Special Committee on
Oil and Gas.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
4:29 p.m.
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