Legislature(2003 - 2004)
03/18/2004 03:25 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 18, 2004
3:25 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Cheryll Heinze
Representative Jim Holm
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
Representative Lesil McGuire
COMMITTEE CALENDAR
HOUSE BILL NO. 531
"An Act relating to natural gas exploration and development and
to nonconventional gas, and amending the section under which
shallow natural gas leases may be issued; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 531
SHORT TITLE: CONVENTIONAL & NONCONVENTIONAL GAS LEASES
SPONSOR(S): RESOURCES
03/04/04 (H) READ THE FIRST TIME - REFERRALS
03/04/04 (H) O&G, RES, FIN
03/16/04 (H) O&G AT 3:15 PM CAPITOL 124
03/16/04 (H) Heard & Held
03/16/04 (H) MINUTE(O&G)
03/18/04 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE BEVERLY MASEK
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as co-chair of the House
Resources Standing Committee, sponsor of HB 531.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions relating to HB 531;
spoke in support of Amendment 1.
REPRESENTATIVE PAUL SEATON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Participated in discussion of HB 531 and
related issues; offered Amendment 1.
JAMES HANSEN, Title/Lease Administrator
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions relating to HB 531.
SETH LITTLE
Alaska Center for the Environment
Anchorage, Alaska
POSITION STATEMENT: Called HB 531 a good step in the right
direction for the long term, but expressed concern because it
doesn't address problems with the leases already issued.
ACTION NARRATIVE
TAPE 04-11, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:25 p.m. Representatives Kohring,
Holm, Heinze, Crawford, and Kerttula were present at the call to
order. Representative Rokeberg arrived as the meeting was in
progress.
HB 531-CONVENTIONAL & NONCONVENTIONAL GAS LEASES
[Contains discussion of HB 395 and SB 312, the companion bill]
Number 0060
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 531, "An Act relating to natural gas exploration
and development and to nonconventional gas, and amending the
section under which shallow natural gas leases may be issued;
and providing for an effective date."
Number 0105
REPRESENTATIVE KERTTULA advised members that she'd wanted to
offer an amendment regarding notice prior to leasing, but hadn't
had time to talk to the division. Thus she'd continue to work
with the sponsor and the division, and would prepare an
amendment for the House Resources Standing Committee.
CHAIR KOHRING emphasized the need to ensure that good
legislation leaves this committee that all members are
comfortable with. He said he saw no need to rush it, and if the
decision is made to hold the bill to address various amendments,
that would be acceptable to him. He acknowledged the arrival of
Representative Rokeberg.
Number 0293
REPRESENTATIVE BEVERLY MASEK, Alaska State Legislature, spoke as
co-chair of the House Resources Standing Committee, sponsor of
HB 531. Indicating some amendments would be offered that day,
she expressed hope that once they're addressed, the bill will
move forward. She said time is of the essence; suggested there
will be impacts relating to other resource-development projects
statewide; mentioned creating a more sustainable atmosphere for
businesses; noted that the Department of Natural Resources (DNR)
had conducted workshops in the Matanuska-Susitna area and would
come out with a preliminary report; said the bill highlights
areas of concern by the public; and told members she hopes
they'll "compromise with all the amendments and support for this
bill" and pass it out as soon as possible.
CHAIR KOHRING asked why this bill would be better than HB 395,
for example.
REPRESENTATIVE MASEK replied that it eliminates over-the-
counter, "first come, first served" shallow gas leases,
replacing those with areawide leasing or exploration licenses.
It requires a best interest finding (BIF) before any oil and gas
leasing or exploration licensing occurs. This will give DNR
control of what land is leased, avoiding unnecessary surface-
owner conflicts. Noting that best interest [findings] are a
time-tested public process, she said this also creates a gas-
only section of areawide leasing and exploration licensing
identified in a BIF by DNR.
REPRESENTATIVE MASEK continued, saying it differentiates between
conventional and nonconventional gas resources for the purposes
of lease rentals; defines conventional and nonconventional gas
development, and treats each distinctively; recognizes that
lease rights shouldn't be determined by depth criteria only;
enhances production opportunities; encourages exploration
licenses with a BIF as a method for nonconventional gas
exploration outside of the areawide leasing program in rural
Alaska; makes leasing and regulatory criteria fit the
appropriate activity; and ensures a competitive process, thereby
maximizing the state's best interests.
Number 0536
CHAIR KOHRING expressed concern about whether a BIF could be
used as a tool one way or another, depending on political
considerations, philosophies, and so forth.
REPRESENTATIVE MASEK deferred to Mr. Myers.
Number 0615
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, offered his experience through four different
administrations, Republican, Democratic, and Independent, giving
his overall perspective that because the state is so dependent
on oil and gas leasing as a key part of the economy, all
administrations have been supportive. In his experience, he
said, the BIF has been truly a management tool, not a political
tool. It does provide additional public notice, with the
balancing test being the state's public interest. Given
everything, he said, it's a successful, proven tool no matter
what the philosophy of the administration is, because Alaska is
an oil and gas state by nature.
CHAIR KOHRING acknowledged perhaps he shouldn't have suggested a
BIF could be used for political reasons, and proposed that a
better way of stating it might have been that based on
philosophical grounds, a BIF could be produced that would
reflect a philosophy less inclined to encourage development. He
thanked Mr. Myers for his thoughts.
Number 0769
REPRESENTATIVE KERTTULA brought attention to perhaps 20 years of
case law defining the process. "It's a pretty solid one at this
point," she remarked.
MR. MYERS concurred, noting that the statutes have changed,
perfecting the process, over those 20 years as well.
CHAIR KOHRING pointed out that HB 531 has an identical companion
bill [SB 312] and again suggested there isn't an immediate need
to move this forward. Stating his understanding that the
industry isn't very amenable to this legislation and prefers HB
395, he asked whether [Representative Masek] had received
feedback from the industry. He explained that he wants a law
that will result in development in the future, one the industry
looks upon as reasonable and that encourages investment and
development.
Number 0913
REPRESENTATIVE MASEK answered, "They have been involved with it,
yes." In further response, she said as far as she knows, the
Alaska Oil and Gas Association (AOGA) supports it, as does the
administration.
CHAIR KOHRING asked about individual companies such as explorers
and developers, the independents.
REPRESENTATIVE MASEK said she didn't know.
Number 0941
CHAIR KOHRING, in response to Representative Heinze, explained
that he'd heard objections to this legislation from "several
players in the industry."
REPRESENTATIVE ROKEBERG added that he'd recently been in
communication with a number of people who have an interest or to
some degree have participated in the current shallow gas leasing
program; they'd voiced concerns about this legislation as it
relates to the current program and activities, particularly in
rural Alaska. Representative Rokeberg said he has some
reservations relating to activities underway; to the intention
of the original bill to establish the program; and to impacts on
future exploration for shallow gas or nonconventional gas in
rural areas, especially.
REPRESENTATIVE ROKEBERG surmised that because of the
"incendiary" nature of this legislation, people have some
reluctance to voice concerns openly. He suggested the
legislature needs to take a hard look at this in the context of
completely deleting the shallow gas program in rural Alaska and
seeing whether the exploration-licensing aspect will truly
accomplish the legislature's policy objective in making lands
available under the leasing programs.
REPRESENTATIVE ROKEBERG mentioned concern of people from the
Red Dog Mine "shale area." He also said he'd met with people
from Usibelli Coal [Mine, Inc.] who'd expressed concern because
they'd used the "self-initiated shallow gas program" to let
certain properties in their vicinity and had voiced concern
about "the deletion of the prohibition of top leasing over
existing coal leases, which is deleted in this particular bill."
He also mentioned "the prospect ... by the 'Holitna LLC Corp.'
that's working in the Donlin Creek area," saying it is an
enormous potential hard-rock mining area where electrical power
is needed but perhaps cost-prohibitive if it requires long-
distance transmission lines; thus there is a need to produce
low-cost energy on the site, which may be provided by shallow
gas prospects.
Number 1203
REPRESENTATIVE ROKEBERG noted that one intention of the shallow
gas bill was to provide a low-cost energy source to rural
Alaska. He cautioned against throwing the baby out with the
bathwater. Acknowledging that issues relating to surface
[ownership] in semi-urban and urban places like the Matanuska-
Susitna area and Homer may not be served best by the original
shallow gas program, Representative Rokeberg suggested "the
perfect world" would be to amend this bill to allow rural-type
shallow gas activities that don't have to go all the way to the
exploration licensing, which would require a BIF.
REPRESENTATIVE ROKEBERG said one factor, to his understanding,
is that applying for an exploration license "basically puts that
property that the applicant would nominate, if you will, on the
block, and then it has to be competitively bid." He said he
doesn't necessarily mind that, because it maximizes the return
to the State of Alaska. However, he said, it seems to run
counter to the idea of opening up low-cost power and a resource
in some areas of Alaska, because of the requirement for a BIF.
REPRESENTATIVE ROKEBERG cited the Fort Yukon example again. He
went on to say that if something like this were done, however,
it would require sideboards to make sure public notification and
those processes are carried out differently from those found
inadequate under the current shallow gas leasing program. At
the time of the original legislation, he said, the assumption
was that "the default provisions" were in the conventional oil
and gas regulations, which, he opined, are some of the toughest
and most stringently controlled, environmentally, in the world.
Thus it hadn't been believed there was a problem with actual
production and so forth. However, it was found that the public
wasn't properly informed, for example.
Number 1439
REPRESENTATIVE ROKEBERG asked Mr. Myers whether bifurcating the
current program had been looked at, in particular, maintaining a
shallow gas program in rural Alaska and then specifying in
statute those areas applicable to areawide leasing. He
mentioned possibilities such as expanding the boundaries of
existing areas that are under areawide leasing or excluding
larger population centers statutorily. Again mentioning
sideboards if there is shallow gas leasing in rural Alaska, he
asked Mr. Myers for feedback.
Number 1589
REPRESENTATIVE KOHRING said he shared Representative Rokeberg's
thoughts on this and has wondered whether the program should be
scrapped, perhaps an overreaction to concerns expressed in the
Matanuska-Susitna and other areas this last year. He mentioned
perhaps accomplishing the objectives through less radical means
and using [HB] 395 as a vehicle, since it addresses issues such
as public notice. He said he needs a greater justification, to
raise his comfort level, before supporting the legislation in
its current form. He called upon Mr. Myers.
Number 1653
MR. MYERS replied that he appreciates members' concerns about
energy development in rural Alaska, a critical element of the
state's energy picture that he understood to have been the
intent of the legislature in passing the original shallow gas
leasing program. Saying he'd spent many nights thinking about
how to produce energy in rural areas where the economics aren't
as good as they are closer to the infrastructure, near a higher
population base, Mr. Myers also mentioned listening to the
public's concerns about notice and the balancing test used for
issuing leases, which [the public] doesn't believe is balanced.
MR. MYERS pointed out that if the shallow gas program in rural
Alaska is amended to provide adequate notice and more balancing
in the testing, the end result is similar to the current BIF.
He observed that people are upset not about public notice
itself, but their lack of ability to change or impact decisions
made by the department - that the balancing test hasn't had any
meaning in the process. He said notifying people that there'll
be leasing on their lands despite their objections gets the same
result.
Number 1762
MR. MYERS said the BIF process uses "that different balancing
test," has worked, and is court-tested. He told members he
believes the result is that "you end up with an over-the-counter
program, I think, once you amend it into something that looks
like a best interest finding for every over-the-counter lease
application ... in rural Alaska."
MR. MYERS observed that historically the program has been used
"credibly by the folks at the Red Dog Mine, I think very
credibly in the Holitna area in the applications, and very
credibly in the Cantwell-Healy area." However, it has been used
by speculators elsewhere who apply for leases; [the state] does
the title work, and then the applicant doesn't accept the
leases. He added, "We have, by far, the highest rejection rate
on accepted leases in this program." Cautioning that the over-
the-counter nature of the program would mean the state must do a
BIF or its equivalent on every single [lease], he remarked,
"Quite honestly, administratively we're not equipped to do it."
Number 1820
MR. MYERS explained that he believes exploration licensing is a
better tool. He acknowledged disagreement by some of the
miners, but said the industry, including Evergreen Resources
("Evergreen") and AOGA, have supported this approach. The
competitive nature of the program provides more dollars for the
state. A work commitment is bid on competitively; if someone
wants to spend $500,000 in an area but another wants to spend
twice that, the larger amount will get the work done, and the
gas will be discovered and produced that much more quickly.
MR. MYERS opined that serious applicants will bid a reasonable
work commitment; that's dollars going into the ground, not to
the state treasury. The application fee of $1 per acre stays in
place, and the license term usually is 7 to 10 years. He
explained that shallow gas leases have been problematic because
of the depth restrictions; many prospects extend beyond 3,000
feet. Furthermore, the two-year timeframe is inadequate to
permit, explore for, and develop gas resources. Although it was
a credible attempt, Mr. Myers said the program failed with
respect to the lease terms, the depth, and the public process.
Number 1903
MR. MYERS continued, saying exploration licensing costs the
applicant less "in dollars of today"; provides a longer period;
involves exclusive rights over a larger area, if applied for;
has a public best-interest-finding process up front; and has an
exclusive right to convert to leases at an established royalty
rate. If [a company] uses gas-only leasing and nonconventional
gas terms and if it converts to leases, it will end up with
exactly the same terms it would have under shallow gas leasing,
but it will have all the rights and will have obtained the lease
through a process that will withstand appeal processes and be
publicly acceptable.
MR. MYERS returned briefly to the idea of an over-the-counter
program, emphasizing that [DNR] could never administer it
without a significant increase in staff, a request he indicated
the department wasn't prepared to ask for. Again addressing
exploration licensing, he said the planning, organization, and
ability of applicants to solicit the license provides them
flexibility. Pointing out that there wasn't competition for the
four exploration licenses DNR has given out or the fifth
[application], he said a single applicant has received the
license with a negotiated work commitment. He remarked, "So I
think it's unfounded that there's a lot of competitive risk, but
there is a substantial commitment to do work ... and explore the
acreage, which is, I think, in the intent of the program."
MR. MYERS summarized that he believes licensing is a better
vehicle, provides better value to the applicant, and provides
the upfront processes; he surmised that this is why the majority
of the industry is willing to accept it. Noting that people in
the "Usibelli area" are concerned, however, he explained that
the shallow gas leasing program, if someone owned a coal lease,
prohibited that person from getting a shallow gas lease; it
prohibited getting an exploration license over the area.
MR. MYERS remarked, "Thus that person's mineral rights are
actually not protected. They really have exclusive rights with
respect to one program. If someone [has] a coal lease and
someone else applied for an exploration license ... over that
coal lease, we would have granted that license for all gas
rights on that lease." He added, "They're only protected if
someone tops off a shallow gas lease, on top of that coal lease,
not a conventional lease or an exploration license."
Number 2025
MR. MYERS reported that there'd been similar staff discussion
internally about how far to go to amend this and how to end up
with something both manageable [for DNR] and acceptable to the
public. The approach arrived at was that licensing is a better
deal for rural Alaska. He mentioned the desire to have those
same terms with respect to lower rentals and the 6.25 percent
royalty for noncompeting gas, saying this could be accomplished
through a showing to the commissioner or the director.
MR. MYERS noted that when geological analyses are done of basins
with potential for coal bed methane for villages or mines, there
are perhaps only half a dozen places where the state owns the
subsurface estate in proximity to villages or reasonable
proximity to a mine, and where this program might be effective.
He suggested it wouldn't be unreasonable to accomplish licensing
[for those].
Number 2091
REPRESENTATIVE HEINZE requested clarification about Mr. Myers'
statement that someone's rights wouldn't be protected with
respect to top filing.
MR. MYERS explained that under the shallow gas leasing program,
if someone had a coal lease on state land, only the lessee could
apply for the shallow gas lease rights under that program.
Someone [else] who applied for an exploration license under the
same area, however, would be allowed to get the license, which
would provide exclusive rights to all gas on the lease.
Although the coal lessee was protected in the program under
"177" for someone top filing on a lease for limited-depth
rights, [that lessee] wouldn't be included in the license, which
is for all depth rights.
MR. MYERS pointed out that areas in Cook Inlet, for example,
have traditional gas-only leases and coal leases as well; it
hasn't really been a problem, but is a reasonable concern if
coal seams are shallow in the area where the miner wants to
mine, since there might be a surface conflict. The same
conflict could occur under exploration licensing, however, under
the current program.
MR. MYERS surmised that concerns relating to mining operations
are that [those mining companies] may want to exploit the gas
resources in the future under the shallow gas program; under
current law, if they applied for a shallow gas lease, they'd get
an exclusive right to apply and thus someone else couldn't top
file on the coal lease. Under exploration licensing, though, at
any point in time someone could come in and apply for a license
over the top of the coal leases, which would provide an "all
depths right" to all the gas, regardless of the coal lease.
Number 2211
REPRESENTATIVE ROKEBERG said it seems reasonable, as a matter of
public policy, that any state leaseholder for coal exploration
rights should be protected for shallow gas exploration on the
same property, because there'd be subsurface conflicts if there
could be top leasing under conventional or exploration licensing
[as described by Mr. Myers] over an existing coal lease. He
asked whether it's correct that currently someone "could exploit
shallow gas" under conventional and exploration licensing.
MR. MYERS affirmed that. He explained that under Alaska law,
the gas belongs to the oil and gas lessee, not the coal lessee,
with an exception: if someone mining the coal lease needs to
remove gas because it's a hazard, that person can take the gas.
He said, "There's no royalty cost to the state. You could take
the gas and you could burn it, or you ... could actually sell
it. That's incidental to your mining operation and for safety
purposes." If it's for any other purposes, however, that coal
lessee has no rights to that gas. It actually belongs to the
oil and gas lessee, or to the state.
Number 2292
REPRESENTATIVE ROKEBERG said he doesn't know what depth coal
leases go to, but reiterated that it seems logical, if there is
a coal lease, that anywhere there are coal deposits should be
reserved or restricted in terms of exploration for gas in order
to prevent conflicts between coal mining and gas mining, unless
the lessee is one and the same. He added, "That's what we did
with the shallow gas, by prohibiting anyone else from top
leasing unless they owned the coal. It seems to me that should
also be applicable to any other kind of lessee."
MR. MYERS addressed access to the surface estate if there is a
conflict with subsurface access. Noting that someone with a
coal lease in place generally has a preferential right to use
the surface, he explained, "Both parties are allowed, but if
there's a conflict, it goes to the coal mine. So I think that
really their surface rights are protected if the coal lease
existed prior to the oil and gas lease." He reiterated that if
it's an issue of actually producing the gas, then [the coal
lessee], by Alaska law, doesn't have the right to the gas.
Number 2366
REPRESENTATIVE ROKEBERG posed a situation involving a coal lease
"where the miner hadn't got to that area yet, and then you could
punch ... a coal bed methane drill stem down there and
production equipment, and you'd be there, and then the coal
miner would want to come along ... and mine that, and then you'd
be in the way." Suggesting this is just asking for a conflict,
he inquired: Wouldn't it be a wise policy of the legislature to
prohibit dual-leasing subsurface estates for different minerals?
MR. MYERS highlighted the need to look at the resource in terms
of the state's maximizing its economic value. It depends on the
area; in Cook Inlet, for example, gas probably has significantly
more value. He offered his understanding that there is no depth
limitation on coal leases, but said [for economic reasons]
mining occurs only the first few hundred below the surface. If
the gas lessee removed the gas from the coal, he noted, it would
eliminate a hazard for the miner.
MR. MYERS said the only exception probably would be conflict
with the surface-pad placement of the gas wells or surface
facilities. He related his understanding that if the coal lease
was there first, (indisc.) the state. He added that only a
small percentage of coal leases are actually being produced.
They last a long time and are sitting there, nonproductive.
That would block any oil and gas development in an area.
Number 2451
REPRESENTATIVE HEINZE asked why the rest of the committee hasn't
heard the concerns reported by the two Representatives, and
wasn't brought in on the discussions.
CHAIR KOHRING replied that [the concerned parties] had come to
him personally to talk about the legislation.
REPRESENTATIVE HEINZE said she could understand that, since he's
the chair.
CHAIR KOHRING offered to invite them to come forth publicly to
the committee, which he suggested would be prudent. "All I'm
hearing is that there is not any support out there for this
legislation from industry," he remarked.
REPRESENTATIVE ROKEBERG brought attention to testimony [from
Representative Masek] that AOGA and Evergreen support this.
CHAIR KOHRING clarified that he was referring to "independents."
Four had come to him and said they'd rather not see the bill go
through and, at most, would prefer [HB] 395, he reported. Chair
Kohring also said he wondered whether the objective of
addressing the public's concerns about notice, input, water
protection, property rights, and local-control matters could be
clarified in statute, rather than changed, since the previous
year's HB 69 "didn't greatly affect that issue." Thus perhaps
those points could be addressed in a piece of legislation less
dramatic than this.
Number 2560
REPRESENTATIVE ROKEBERG noted that HB 395 cleans up discrete
issues in the current program, whereas [HB 531] is prospective;
he suggested there is validity to having two separate bills. As
for the original intent of the shallow gas program, he said he's
"happy in the main" that rural areas are looking to take
advantage of it. Unfortunately, there has been controversy in
more populated areas. He said he doesn't see it as unintended
consequences; rather, it relates to a "totality of things" for
which he wouldn't assign blame. He maintained that the original
concept is valid, and said it's up to [the legislature] to
adjust it, to ensure the public is protected and has a level of
comfort with it. He emphasized the desire to provide low-cost
energy throughout the state.
Number 2652
REPRESENTATIVE ROKEBERG asked Mr. Myers whether there is a way
to amend the legislation to prohibit exploration for shallow gas
or nonconventional gas within a depth limit if there is an
existing coal lease, and then allow exploration for
conventional, deeper gas.
MR. MYERS replied that he thinks it possible to argue, but
believes it's unlikely, for instance, to have shallow gas
leasing much below 1,000 feet under the surface. Acknowledging
he isn't a miner, Mr. Myers said he doesn't know of cases of
conventional mining much below 200 feet under the surface,
because of economics; he suggested it probably would be fine to
preclude the "very shallow part" of a section in terms of
limiting the rights in those areas. He noted it touches on how
that gas gets produced, however. The miner doesn't have the
right to produce the gas; it sits there, with no one having a
mineral right to it, other than the state. He surmised that a
coal miner could produce it, but only for safety reasons.
Number 2730
MR. MYERS, in response to a question from Representative
Rokeberg, agreed that with a shallow gas program [a coal lessee]
could apply for a shallow gas lease over the [coal] lease.
REPRESENTATIVE ROKEBERG observed, "Not if we pass this bill, is
the trouble in the future."
MR. MYERS concurred, but noted that any applications received
before the end of the year would be considered valid
applications. He said in most cases where the coal lessees
already have leases or have applied for them - such as in the
Holitna area, as well as the Usibelli mine area, where there has
been application in adjoining areas, but not exactly over the
coal leases, and the Red Dog Mine area - those leases would
remain intact. "So, realistically, you're talking about the
Fort Yukon area, those few areas over ... actual, existing coal
leases, which would be eligible for a license if they wanted to
apply over them," he noted.
MR. MYERS again suggested this can be administered successfully
through exploration licensing. Licensing does require a work
effort, whereas shallow gas leasing does not, but he said he
believes it's in the state's interest for a licensee to be
committed to actually doing something with the lease, rather
than taking it for speculative reasons or just to prevent
something from happening. Mentioning "a concern of the $5,000
payment," he said people could buy leases for lots of other
reasons.
MR. MYERS said one unintended consequence of the program was an
incredible amount of speculation in shallow gas leases, some in
environmentally sensitive areas, some in populated areas, and
some perhaps to prevent someone else from doing something. He
remarked, "We have a problem there with the over-the-counter
nature of the chief cost of the lease with no work commitment."
Number 2815
MR. MYERS said he guessed his recommendation would be that the
current shallow gas program, even in rural Alaska, be changed to
deal with public noticing and probably the balancing test, and
to try to limit the rampant speculation that has occurred along
with legitimate applications. He added, "Plus it has to do, I
think, with the limited depth and the short period of the
lease."
Number 2835
REPRESENTATIVE ROKEBERG asked how Mr. Myers characterizes
"rampant speculation" and how many people have applied for
leases.
MR. MYERS indicated he was obtaining a list, and said there were
25 or 26 individuals. At one time, there were 480,000 acres or
so under application, to his belief; about half of those
applications were for leases that weren't accepted. Noting that
it was for that program, he said currently the number is zero.
In further response, he clarified that more than half were
approved; after the state did the title work, however, they
refused to take the leases.
REPRESENTATIVE ROKEBERG questioned using the phrase "rampant
speculation" for a dozen people.
CHAIR KOHRING agreed.
Number 2896
REPRESENTATIVE HOLM asked whether the shallow gas program has
been an appropriate way to allow a lower threshold of leasing
for developing this natural gas or coal bed methane.
MR. MYERS replied yes, saying it made lands available in rural
areas where there were traditional gas-only sales, for instance.
In addition, the applicant-driven nature was positive in the Red
Dog Mine area in particular, and possibly at Holitna; he also
mentioned the Usibelli area. He said in those cases he believed
it helped to stimulate economic progress.
MR. MYERS pointed out that, to date, the only drilling he knows
of on shallow gas leases has been a couple of core holes drilled
this winter by Evergreen; other than that, there hasn't been a
single well drilled in the years of the program. That's not to
say they're not making good progress in the fractured shale up
by the Red Dog Mine, at Holitna, and in the Usibelli area, he
added. He also opined that it was an element in bringing
Evergreen to the [Matanuska-Susitna area] in the first place; he
mentioned the relatively low cost.
MR. MYERS observed that as companies have looked at using the
program from a practical standpoint, however, they've had
problems. For instance, the 3,000-foot depth was a major
problem for just about everybody looking to use it. That's why
an amendment was made a few years ago, although [HB] 395 takes
it back to a solid depth floor, for example. He noted there's a
lot of potential for fractured shale below 3,000 feet.
TAPE 04-11, SIDE B
Number 3003
MR. MYERS mentioned having major difficulty with unitization
issues when looking at combining different shallow gas lease
rights with different depth criteria. Expressing hope that the
production stage will be reached, Mr. Myers said when he looks
at the practical management of the program, there are real
problems because of the depth criteria. The over-the-counter
nature makes it difficult to try to accelerate development in a
short period of time, and doesn't give the applicant much time.
All in all, Mr. Myers said, he doesn't think it's very efficient
or effective for an oil and gas program. He added, "We've also
looked ... over the rest of the country and found no other
programs like it." He said he thinks it was well-intentioned
and helped stimulate initial activity, but in the longer
analysis isn't a practical program.
Number 2960
REPRESENTATIVE HOLM asked what would happen to existing leases
if HB 531 abolishes [the program].
MR. MYERS answered that if the leases are explored on in their
primary term or if there is progress toward development, they
can be extended another three years, based on the director's
discretion. If something is discovered in the first three years
and there is a determination that the well can pay for its
operating costs, basically, [the lessee] is entitled to keep the
lease and there's no time period for its expiration. Mr. Myers
continued:
If they also are making good progress and they want to
form an oil and gas unit with multiple leases
together, they'll come to us and request a unit. ...
And more than likely, if their plan of development or
exploration is reasonable, we'll unitize the acreage
together, and it could be together with state or ...
other leases, like in the Red Dog area it's expected
to be joint state-NANA [Regional Corporation] leases.
Then they would hold those leases as long as they were
actively pursuing development under the plan of
development, or exploration under the plan of
exploration.
And then, once they go into production, the area ...
that's productive will be put in what's called a
participating area. And as long as they're producing,
that area's held, basically, forever. And that's the
same progress as on a conventional oil and gas lease.
... The same procedural parts of going into normal
production are there. ... The problem is their limited
depth rights and the limited amount of time they have
to get to that stage of exploration ... that makes a
unit viable.
Number 2874
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, mentioned
the correlative rights problem and complications of trying to
figure out who would own gas at various depths. He said
[HB 531] tries to get around that by having a gas-only lease at
any depth.
REPRESENTATIVE ROKEBERG pointed out that there can be different
leases at different depths, and that in the Lower 48 it is
common practice to have a clause in a lease that provides for
the ability to "underlease." He asked Mr. Myers to comment,
offering his belief that deep gas won't be trapped under shallow
gas, even in Alaska.
MR. MYERS shared his experience with segregated mineral rights,
noting that he'd worked in Louisiana, where it wasn't uncommon
to see different rights; however, those related to a geologic
formation, not a fixed depth below the surface.
REPRESENTATIVE ROKEBERG remarked that he'd just "signed one" in
Oklahoma that had a depth clause.
MR. MYERS surmised the depth is probably "subsea" or some other,
better method of doing depth. In Oklahoma, he said, there isn't
a lot of difference in some of the flatter areas.
REPRESENTATIVE ROKEBERG related his belief that there is a big
difference in the geological formations "at depth down there."
Number 2737
MR. MYERS responded:
In my mind, it is ... very problematic, particularly
in the areas where we have surface relief. And the
surface relief ... reflects the geology below. So
your coal seam could be flat in the subsurface; your
surface could be undulating. So that 3,000-foot-depth
... owner could go in and out of the same formation,
even though at depth it's flat, just because of the
difference the surface elevation has.
So the way ... the program works, I think, really is
problematic for correlative rights issues. Because of
that reason, when we do an exploration license area,
if there's shallow gas leases in the area, we actually
do not allow the deeper rights to be leased, because
we do think it's going to lead to correlative rights
problems.
If it was ... through a geologic formation or some
other mechanism, other test, other than surface depth,
we ... probably would be able to sort through some of
those rights. But ... the way the leases are written,
... I don't think we really can, technically, just
because, again, the geological surface you're using
doesn't reflect, very often, the geology underneath
the surface at 3,000 feet.
Number 2682
MR. MYERS explained that if the seismic data is poor, for
example, it leads to a correlative-rights argument about whether
the gas below belongs to the lessee above or below. A lot of
this has been avoided in Alaska by having "depth rights." He
suggested it is one of the more positive attributes. Noting
that he'd sat in hearings of conservation commissions in the
Lower 48, he said the value of the resource, particularly for
conventional gas, is "really worth the fight." He continued:
So, what happens is, ... we've decided not to license
underneath it. If there's a conventional lease in the
area, ... you can't do a shallow gas lease; so we
don't have that conflict in our conventional lease
areas. It's only where a license would overlay ... a
shallow gas lease.
So I guess my recommendation would be, if you're going
to keep the shallow gas lease, at minimum, give all
depth rights to the shallow gas lease.
Number 2634
REPRESENTATIVE ROKEBERG asked whether it is a matter of statute,
regulation, or policy to prohibit depth rights below other
leases.
MR. MYERS specified it's a matter of policy that [DNR] doesn't
issue an exploration license over a shallow gas lease.
REPRESENTATIVE ROKEBERG said it's a good way to avoid arguments,
but questioned whether it's good public policy. He suggested
it's germane if the state maintains any kind of shallow gas
program. He cited the situation in Homer as an example of what
might arise from having a statutory depth level and going in
"hot pursuit" of a formation that might start at 3,000 feet and
go deeper. He said this problem needs to be addressed.
REPRESENTATIVE ROKEBERG then remarked to Mr. Myers, "You might
be able to win me over if ... you can talk me into having a
short-form BIF for unconventional gas." Recalling that
Mr. Myers had testified it might cost $250,000 for a BIF,
Representative Rokeberg characterized a BIF as "a study to lease
a few acres out in the Bush somewhere so we can pump some gas in
the town." Thus he asked whether there is a way to accommodate
that and still meet the demands of the public and the balancing
test without reinventing the wheel every time or spending a huge
amount of money on a BIF.
Number 2542
MR. MYERS replied that he'd thought about it quite a bit. Part
of the reason BIFs have been so expensive is that typically a
license is for 500,000 acres; most people go for the maximum.
If the area were smaller, the finding would be easier, and thus
he surmised the cost would be less. Mr. Myers reiterated that
he doesn't believe there are many areas in Alaska where the
state owns the subsurface and it is economically suitable for
nonconventional gas - only half a dozen communities.
MR. MYERS mentioned looking at the geology carefully. Many of
those areas would have underlying conventional gas, he noted, so
a license would actually be a better approach. For example, he
said he'd argued that Holitna has probably a better conventional
gas play than a coal bed methane play. Mentioning it's
applicant-driven, Mr. Myers said if he were an "explorationist,"
though, he'd rather have a license in that area in order to go
to deeper depths and lock up a lot of that basin. He
elaborated:
They're going to really have a problem if they can't
show the gas at 3,000 feet's connected down below,
because they'll basically have to come back and apply
for a license over their same area in order to get
those deeper rights. So they'll now have a shallow
gas lease and a license over the area, from a
practical standpoint. If they do produce the gas
that's deeper that's not part of the field, then
they'll owe the state 100 percent royalty on that gas,
and I have no way to transfer the mineral rights to
them.
MR. MYERS concluded by saying if someone wants 10,000 or 20,000
acres, he believes the BIF will be reasonably cheaper because of
the limited scope. Given the limited number of areas where he
actually thinks this will be applied and screening out folks who
can't put together money to go ahead and drill, he suggested the
opportunity will be limited to those who are out there now in
the areas mentioned previously, as well as perhaps some in the
Fort Yukon area or a few others.
Number 2395
REPRESENTATIVE ROKEBERG mentioned Copper Center and Bristol Bay.
He remarked that he hopes there are more than half a dozen.
MR. MYERS noted that when viewing the state's land position in
those areas, two things must be looked at: the geology of the
coal and the associated population base.
Number 2374
REPRESENTATIVE HEINZE asked what a BIF would cost for a 5,000-
acre lease in rural Alaska.
MR. MYERS pointed out that there is a minimum of 10,000 acres
under current exploration licensing.
REPRESENTATIVE HEINZE asked about 10,000 acres, then.
MR. MYERS suggested a scenario with a gas-only lease.
REPRESENTATIVE HEINZE requested information for all scenarios.
MR. MYERS offered a rough estimate, including staff time, of
$50,000 to $100,000. He added, "I will say, though, in
developing the stipulations and mitigation measures and holding
the public meetings that we do now, our costs aren't a whole lot
less in issuing ... shallow gas leases in places like Holitna or
Usibelli; that's been our experience." He mentioned the need to
fly people out there and take time to do it, in order to find
any local acceptance through the process at all.
MR. MYERS clarified that the state pays for the BIF. Someone
with a 10,000-acre license would pay $10,000 to the state and
would have to guarantee a work commitment satisfactory to the
state, including geological fieldwork or drilling a few core
holes, for example. The company then would get a 7- to 10-year
commitment to hold that acreage and the right to convert to a
conventional or gas-only lease, depending on what was
negotiated, for another period of probably 10 years "where they
just pay a rental, ... no upfront bonus."
Number 2238
CHAIR KOHRING brought attention to a letter from the Alaska
Miners Association, Inc. [dated March 13, 2004 from Steven C.
Borell, executive director], which says eliminating the program
isn't prudent at this point and that passing the bill would be
throwing the baby out with the bathwater. Chair Kohring
highlighted points from the letter including elimination of the
right of self-initiation, which will effectively lock out
individual prospectors and gas developers from participating in
business; concern that the BIF may take 18 months or more to
conclude; and concern about eliminating incentive for individual
entrepreneurs. Chair Kohring again opined that the committee
should pass legislation that the industry is amenable to, and
that laws should help accomplish the goal of resource
development.
Number 2164
REPRESENTATIVE ROKEBERG said he appreciates the miners'
concerns, but miners typically don't drill for gas. He
suggested the time period of six years is relatively short for a
new type of project. He asked Mr. Myers whether paying
quantities must be under production to extend beyond six years.
MR. MYERS answered that the state standards are that a well
would be drilled and would have operating costs less than the
value of the gas produced; this allows holding the lease under
the "paying quantity" standard. It isn't that production is
required; rather, a test must demonstrate gas at a certain rate.
Unitization is the other way to do this and is commonly done in
the last year of a term. Mr. Myers pointed out that there are
30-some units in Alaska now for conventional oil and gas,
mentioned a $5,000 fee and the need to show a logical course of
progression toward development, and said he thinks it's an
appropriate statutory process for shallow gas leases as well.
Number 2017
REPRESENTATIVE ROKEBERG asked whether current leases could be
extended if paying quantities were found, even in the Red Dog
area.
MR. MYERS explained the three instances in which a leasehold can
be extended. First, at the [director's] discretion, the three-
year period can be extended another three years; that has been
done in the Red Dog area, where multiple core holes were drilled
on adjoining NANA [Regional Corporation] land, with good
progress toward exploring "the appropriate interval that was
effective on the state land as well." Second, "if you drill and
you maintain quantities," it is mandatory that the director
extend the lease; it's on a lease-by-lease basis. And third, if
progress toward development is being made, an oil and gas unit
can be formed through combining multiple leases.
MR. MYERS said virtually all production in the state is in
units. The state looks at the unit's size and shape and then
negotiates a plan of exploration and development. He explained,
"They hold that acreage for that period of time, and then once
they actually get production, they hold the area that's
productive until they stop producing." He added, "Those are all
necessary because no one produces all their gas out of a lease
in the primary term."
Number 1916
REPRESENTATIVE HEINZE returned attention to the BIF. She asked
whether "little guys get left along the wayside timeline-wise."
MR. MYERS answered that [the state] tries to prioritize and
juggle the workload. He indicated some things are scheduled on
a routine basis such as areawide leases, looked at every 10
years but also when there are significant changes to the
findings. He cited Bristol Bay as an example where the
timeframe will be less than a year for a nearly 500,000-acre
license in a brand-new area where there hadn't been a best
interest finding.
MR. MYERS mentioned the Susitna area and said it depends on
environmental sensitivities and how the agencies respond to the
findings. With the streamlined internal state processes, he
reported, things are going more quickly and being decided better
at the staff level. Regarding shallow gas leases, however, he
pointed out that stipulations and mitigation measures still must
be put in; thus shallow gas leases aren't a whole lot cheaper to
issue. The initial ones didn't involve public meetings, which
was one point of contention and led to the current process.
Looking forward, Mr. Myers said, he sees a process that probably
will cost nearly as much for the shallow gas leases, just
without producing a large document, in order to get public
acceptance and deal with the realities of the program.
Number 1737
REPRESENTATIVE HEINZE again expressed concern about "the little
guy, the 10,000-acre guy" being put at the bottom of the list.
MR. MYERS replied, "In reality, they are now because, again, I
have to look at timing of issuing areawide leases where we're
deferring thousands or hundreds of thousands of dollars of money
if we don't get the leases out." He said the priority has been
getting the conventional leases out as quickly as possible and
then getting the exploration licenses out; the shallow gas
leases have been the slower process. Furthermore, now
recognized is that a lot of the timing issues for a BIF relate
to the public process, including public notification, the
preliminary finding, and then going to a final BIF.
MR. MYERS said, realistically, the timeline cannot be shortened
to much less than 8 to 12 months no matter what, because there
are interim periods of public notice and [opportunities for]
public comment provided for statutorily. He pointed out that
the time was shortened for shallow gas leasing, but because of
all the work required behind the scenes, the costs weren't a
whole lot different except for those relating to not having to
fly folks out to the public meetings, "which we're having to do
now because of the public outcry."
Number 1608
REPRESENTATIVE ROKEBERG asked how many different areawide
leasing programs there are, and when their expiration dates are
for the purposes of having to redo the BIFs.
MR. MYERS deferred to Jim Hansen, leasing manager.
Number 1570
JAMES HANSEN, Title/Lease Administrator, Division of Oil & Gas,
Department of Natural Resources, answered that the 10-year North
Slope finding was done in 1998, and the ones for Cook Inlet and
Beaufort Sea were done in 1999. In order to stagger these out,
the scheduling will be Cook Inlet in 2007, North Slope in 2008,
and Beaufort Sea in 2009. In addition, the North Slope
foothills is scheduled in 2011, and for Bristol Bay the license
is scheduled in 2004 and the lease sale in 2005.
REPRESENTATIVE ROKEBERG remarked that hopefully this bill, if
passed, will require more BIFs.
Number 1465
SETH LITTLE, Alaska Center for the Environment (ACE), explained
that ACE is a "homegrown environmental organization" with more
than 7,000 dues-paying members across the state. He said this
companion bill to SB 312 is a good step in a long-term solution
to fix the current problems with coal bed methane development by
attempting to find a balance between industry interests and
public residents. Noting that a BIF is needed for coal bed
methane development, he said he's happy to see it as part of
this bill such that socioeconomic and environmental impacts of
development will be considered just as for conventional oil and
gas development.
MR. LITTLE pointed out that the bill lacks a mechanism for
leases already issued in the Matanuska-Susitna and Homer areas,
however; thus it helps for future leases without fixing problems
faced today. He also expressed support for the "previous
notice" that Representative Kerttula was working on, and agreed
landowners should be given notice prior to when leases are
issued on their land. Referring to DNR's efforts to include the
public, he suggested that needs to be a component for shallow
gas leases, and said he believes the BIF is a way to do it.
Number 1279
REPRESENTATIVE ROKEBERG noted that Representative Seaton had an
amendment to offer.
CHAIR KOHRING related his understanding that Representative
Kerttula had an amendment she was still working on as well. He
suggested it could be brought up at a later meeting.
REPRESENTATIVE ROKEBERG said he thought the bill should move
along, though he had some reservations.
Number 1221
CHAIR KOHRING announced that he had a variety of reasons for
wanting to hold the bill for now. He said there wasn't a high
comfort level among several committee members, according to his
private conversations. He added:
I just keep getting more and more feedback from those
in the industry who say this is not a good bill. And
with all due respect to the Alaska Center for the
Environment, Mr. Little, and this is not derogatory
toward their organization, but they seem to be in
support of the bill; the industry is against the bill.
So that might be saying something to those of us who
are more inclined to support a more proactive approach
toward gas development.
REPRESENTATIVE ROKEBERG questioned that the entire industry
opposes this.
CHAIR KOHRING replied that he hadn't heard of anybody who is a
player in the business who has said, "Yes, we like this bill."
REPRESENTATIVE ROKEBERG asked whether AOGA supports it.
REPRESENTATIVE MASEK answered in the affirmative.
REPRESENTATIVE ROKEBERG suggested that's a large part of the oil
and gas industry. He said he didn't know whether Evergreen had
weighed in, and surmised they were trying to "keep their head
down."
CHAIR KOHRING answered in the affirmative, saying he'd talked to
them.
REPRESENTATIVE ROKEBERG suggested any objections should be
stated publicly.
CHAIR KOHRING acknowledged that point.
Number 1083
REPRESENTATIVE SEATON asked whether there were questions about
Amendment 1, labeled 23-LS1818\D.2, Chenoweth, 3/17/04, which
read:
Page 21, following line 10:
Insert a new bill section to read:
"* Sec. 27. AS 38.05.177(d) is amended to read:
(d) A lease
(1) shall be automatically extended if and
for so long thereafter as gas is produced in paying
quantities from the lease and the lessee continues to
meet all requirements of the lease; a [. A] lease
issued under this section covering land on which there
is a well capable of producing gas in paying
quantities does not expire because the lessee fails to
produce gas unless the lessee is allowed reasonable
time to place the well on a producing status; if [.
IF] drilling has commenced on the expiration date of
the primary term of the lease and is continued with
reasonable diligence, including such operations as
redrilling, sidetracking, or other means necessary to
reach the originally proposed bottom hole location,
the lease is extended for one year and for so long
thereafter as gas is produced in paying quantities; a
[. A] gas lease issued under this section that is
subject to termination by reason of cessation of
production does not terminate if, within 90 days after
production ceases or a longer period determined at the
discretion of the director, reworking or drilling
operations are commenced on the land under lease and
are thereafter conducted with reasonable diligence
during the period of nonproduction;
(2) issued under former (c) of this section
before January 1, 2004, may be extended at the
discretion of the director; a lease may be extended
under this paragraph [. IN ADDITION,] upon
application by the lessee; [,] the director may once
extend the [A] lease [ISSUED UNDER (c) OF THIS
SECTION] for a period of not more than three years; in
exercising discretion to extend a lease under this
paragraph, the director may not extend the lease
unless the director considers
(A) the extent of the shallow natural gas
exploration activity already conducted on the lease
and on adjacent areas;
(B) the probability that further shallow
natural gas exploration activity will occur on the
lease and will lead to shallow natural gas development
and production; and
(C) whether extension of the lease's
primary term will accelerate the eventual production
of shallow natural gas from the lease."
Renumber the following bill sections accordingly.
Page 44, line 21:
Delete "38.05.177(d),"
Page 44, line 27, following "AS 38.05.177(a)":
Insert ", (d)(1),"
Page 44, line 28:
Delete "secs. 26 and 27"
Insert "secs. 26 - 28"
Page 44, lines 29 - 30:
Delete "AS 38.05.177(b) - (h)"
Insert "AS 38.05.177(b), (c), (e) - (h)"
Page 44, line 30:
Delete "sec. 56"
Insert "sec. 57"
Number 1055
REPRESENTATIVE SEATON, in response to Chair Kohring, clarified
that this amendment gives discretion to the director of Division
of Oil & Gas, and specifies conditions under which the director
may issue a three-year extension on shallow natural gas. It
eliminates the possibility of a "takings claim" being issued
against the state, he said, adding that it has all three
conditions that the director had talked about, including paying
quantities and whether there is work going forward. Those are
the conditions under which the lease would be extended;
otherwise, there wouldn't be speculative holding.
Number 0989
REPRESENTATIVE CRAWFORD requested that Representative Seaton
speak further on Amendment 1. As far as Representative
Kerttula's amendment, he noted that she'd said she could put it
forward in the House Resources Standing Committee.
Representative Crawford said he'd like to see the bill move and
characterized it as a good step.
CHAIR KOHRING commended Representative Seaton's efforts in
responding to constituents in Homer, and said he himself takes
this matter seriously. He noted that after Amendment 1 was
addressed, the bill would be held to look at other issues and
solicit additional input from folks in the industry.
REPRESENTATIVE HEINZE expressed concern that some members were
absent [although there was still a quorum].
REPRESENTATIVE ROKEBERG requested that Mr. Myers comment on
Amendment 1.
Number 0825
MR. MYERS said DNR would support the amendment, which basically
defines the discretion of the director. He explained that the
director has discretion under shallow gas leasing to extend
leases up to an additional three years, but how that discretion
is to be used hasn't been defined. Amendment 1 defines it in a
reasonable way, using criteria of the type the department uses,
such as making solid progress toward exploration development.
Mr. Myers said the amendment is well written, reasonable, and
follows "logical practice." He said he doesn't believe it would
take away from the lessee's rights, but further explains
legislative intent with regard to the director's discretion.
Number 0742
REPRESENTATIVE CRAWFORD moved to adopt Amendment 1 [text
provided previously].
REPRESENTATIVE SEATON, in response to Chair Kohring, noted that
[Mr. Myers] had said it would work with the current processes.
Number 0695
CHAIR KOHRING asked whether there was any objection to adopting
Amendment 1. There being no objection, it was so ordered.
CHAIR KOHRING thanked Mr. Myers for his analyses. He noted that
there'd be a new proposed committee substitute (CS) at the next
bill hearing. [HB 531 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned
at 4:55 p.m.
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