Legislature(1995 - 1996)

04/15/1996 08:15 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
               HOUSE RESOURCES STANDING COMMITTEE                              
                         April 15, 1996                                        
                           8:15 a.m.                                           
                                                                               
                                                                               
 MEMBERS PRESENT                                                               
                                                                               
 Representative Joe Green, Co-Chairman                                         
 Representative William K. "Bill" Williams, Co-Chairman                        
 Representative Scott Ogan, Vice Chairman                                      
 Representative Alan Austerman                                                 
 Representative John Davies                                                    
 Representative Pete Kott                                                      
 Representative Don Long                                                       
 Representative Irene Nicholia                                                 
                                                                               
 MEMBERS ABSENT                                                                
                                                                               
 Representative Ramona Barnes                                                  
                                                                               
 COMMITTEE CALENDAR                                                            
                                                                               
 SPONSOR SUBSTITUTE FOR SENATE BILL NO. 42 am                                  
 "An Act allowing a person to hold more than one entry permit for              
 certain fisheries and amending the definition of `unit of gear' for           
 purposes of the commercial fisheries limited entry program; and               
 providing for an effective date."                                             
                                                                               
      - MOVED OUT OF COMMITTEE                                                 
                                                                               
 CS FOR SENATE BILL NO. 112(RES)                                               
 "An Act establishing a discovery royalty credit for the lessees of            
 state land drilling exploratory wells and making the first                    
 discovery of oil or gas in an oil or gas pool in the Cook Inlet               
 sedimentary basin."                                                           
                                                                               
      - HEARD AND HELD                                                         
                                                                               
 PREVIOUS ACTION                                                               
                                                                               
 BILL:  SB  42                                                               
 SHORT TITLE: LIMITED ENTRY & UNITS OF GEAR                                    
 SPONSOR(S): SENATOR(S) TAYLOR                                                 
                                                                               
 JRN-DATE     JRN-PG           ACTION                                          
 01/23/95        71    (S)   READ THE FIRST TIME - REFERRAL(S)                 
 01/23/95        71    (S)   RES, FIN                                          
 02/06/95              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 02/06/95              (S)   MINUTE(RES)                                       
 02/06/95              (S)   MINUTE(RES)                                       
 02/06/95              (S)   MINUTE(RES)                                       
 03/18/96      2774    (S)   SPONSOR SUBSTITUTE INTRODUCED-REFERRALS           
 03/18/96      2775    (S)   RESOURCES                                         
 03/27/96              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/28/96      2938    (S)   RES RPT  1DP 3NR                                  
 03/28/96      2938    (S)   ZERO FISCAL NOTE  (F&G)                           
 03/29/96              (S)   RLS AT 12:05 PM FAHRENKAMP RM 203                 
 04/02/96      3013    (S)   RULES TO CALENDAR  4/2/96                         
 04/02/96      3015    (S)   READ THE SECOND TIME                              
 04/02/96      3015    (S)   AM NO  1     MOVED BY TAYLOR                      
 04/02/96      3015    (S)   AM NO  1     ADOPTED UNAN CONSENT                 
 04/02/96      3016    (S)   ADVANCED TO THIRD READING UNAN CONSENT            
 04/02/96      3016    (S)   READ THE THIRD TIME  SSSB 42 AM                   
 04/02/96      3016    (S)   PASSED Y20 N-                                     
 04/02/96      3016    (S)   EFFECTIVE DATE(S) SAME AS PASSAGE                 
 04/02/96      3030    (S)   TRANSMITTED TO (H)                                
 04/03/96      3615    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 04/03/96      3615    (H)   FISHERIES, RESOURCES                              
 04/10/96              (H)   FSH AT  5:00 PM CAPITOL 124                       
 04/10/96              (H)   MINUTE(FSH)                                       
 04/11/96              (H)   FSH AT  5:00 PM CAPITOL 124                       
 04/12/96              (H)   RES AT  8:00 AM CAPITOL 124                       
 04/12/96      3703    (H)   FSH RPT  3DP 1NR                                  
 04/12/96      3703    (H)   DP: ELTON, MOSES, AUSTERMAN                       
 04/12/96      3703    (H)   NR: DAVIS                                         
 04/12/96      3703    (H)   SENATE ZERO FISCAL NOTE (F&G) 3/28/96             
 04/15/96              (H)   RES AT  8:00 AM CAPITOL 124                       
                                                                               
 BILL:  SB 112                                                               
 SHORT TITLE: DISCOVERY ROYALTY CREDIT                                         
 SPONSOR(S): RESOURCES                                                         
                                                                               
 JRN-DATE     JRN-PG           ACTION                                          
 03/07/95       516    (S)   READ THE FIRST TIME - REFERRAL(S)                 
 03/07/95       516    (S)   RES, FIN                                          
 03/08/95              (S)   MINUTE(RES)                                       
 03/15/95              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/17/95              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/17/95              (S)   MINUTE(RES)                                       
 03/27/95              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/27/95              (S)   MINUTE(RES)                                       
 04/07/95              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/06/96              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/06/96              (S)   MINUTE(RES)                                       
 03/11/96              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/13/96              (S)   RES AT  3:30 PM BUTROVICH ROOM 205                
 03/20/96      2802    (S)   RES RPT  CS  4DP          NEW TITLE               
 03/20/96      2803    (S)   FISCAL NOTE TO SB (DNR)                           
 03/20/96      2803    (S)   INDETERMINATE FN TO SB (REV)                      
 03/25/96      2861    (S)   FN TO CS (DNR)                                    
 03/26/96              (S)   FIN AT  9:00 AM SENATE FINANCE 532                
 03/27/96      2921    (S)   FIN RPT  5DP 2NR (RES)CS                          
 03/28/96              (S)   RLS AT  1:30 PM FAHRENKAMP RM 203                 
 03/29/96      2963    (S)   INDETERMINATE FN TO CS (REV)                      
 03/27/96      2921    (S)   PREVIOUS FN (DNR)                                 
 03/29/96      2966    (S)   RULES TO CALENDAR  3/29/96                        
 03/29/96      2968    (S)   READ THE SECOND TIME                              
 03/29/96      2968    (S)   RES  CS ADOPTED UNAN CONSENT                      
 03/29/96      2968    (S)   ADVANCE TO THIRD READING FLD Y12 N7 E1            
 03/29/96      2969    (S)   THIRD READING 4/1/96 CALENDAR                     
 04/01/96      2995    (S)   READ THE THIRD TIME  CSSB 112(RES)                
 04/01/96      2996    (S)   PASSED Y18 N2                                     
 04/01/96      2999    (S)   TRANSMITTED TO (H)                                
 04/02/96      3557    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 04/02/96      3557    (H)   RESOURCES, FINANCE                                
 04/15/96              (H)   RES AT  8:00 AM CAPITOL 124                       
                                                                               
 WITNESS REGISTER                                                              
                                                                               
 FRANK HOMAN, Commissioner                                                     
 Commercial Fisheries Entry Commission                                         
 Department of Fish and Game                                                   
 8800 Glacier Highway, Suite 109                                               
 Juneau, Alaska  99801-8079                                                    
 Telephone:  (907) 789-6160                                                    
 POSITION STATEMENT:  Testified on SSSB 42 am                                  
                                                                               
 SENATOR ROBIN TAYLOR                                                          
 Alaska State Legislature                                                      
 State Capitol, Room 30                                                        
 Juneau, Alaska  99801                                                         
 Telephone:  (907) 465-4906                                                    
 POSITION STATEMENT:  Sponsor of SSSB 42 am                                    
                                                                               
 ANNETTE KREITZER, Legislative Aide                                            
            for Senator Loren Leman                                            
 Alaska State Legislature                                                      
 State Capitol, Room 115                                                       
 Juneau, Alaska  99801                                                         
 Telephone:  (907) 465-2095                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 KENNETH A. BOYD, Director                                                     
 Central Office                                                                
 Division of Oil and Gas                                                       
 Department of Natural Resources                                               
 3601 C Street, Suite 1380                                                     
 Anchorage, Alaska  99503-5948                                                 
 Telephone:  (907) 762-2547                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 DAVE LAPPI, President                                                         
 LAPP Resources, Incorporated                                                  
 4900 Sportsman Drive                                                          
 Anchorage, Alaska  99502                                                      
 Telephone:  (907) 248-7188                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 DON GILMAN, Mayor                                                             
 Kenai Peninsula Borough                                                       
 144 North Binkley                                                             
 Soldotna, Alaska  99669                                                       
 Telephone:  (907) 262-4441                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 ROBERT WARTHEN, Geologist                                                     
 9350 Nordic Drive                                                             
 Anchorage, Alaska  99516                                                      
 Telephone:  (907) 346-1840                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 WALTER WELLS, Geologist                                                       
 12800 Shelburne Avenue                                                        
 Anchorage, Alaska 99516                                                       
 Telephone:  (907) 345-2203                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 WILLIAM R. STEWART, President                                                 
 Stewart Petroleum Company                                                     
 3530 West 31st Street                                                         
 Anchorage, Alaska 99517                                                       
 Telephone:  (907) 243-6563                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 SARA HANNAN, Executive Director                                               
 Alaska Environmental Lobby                                                    
 419 6th Street                                                                
 Juneau, Alaska  99801                                                         
 Telephone:  (907) 463-3366                                                    
 POSITION STATEMENT:  Testified on CSSB 112 (RES)                              
                                                                               
 ACTION NARRATIVE                                                              
                                                                               
 TAPE 96-55, SIDE A                                                            
 Number 000                                                                    
                                                                               
 CO-CHAIR BILL WILLIAMS called the House Resources Committee meeting           
 to order at 8:15 a.m.   Members present at the call to order were             
 Representatives Green, Williams, Ogan, Austerman, Davies and Long.            
 This meeting was teleconferenced to Anchorage and Kenai.  A quorum            
 was present.                                                                  
                                                                               
 CO-CHAIR WILLIAMS announced the agenda was SSSB 42 am and CSSB 112            
 (RES).                                                                        
 SB 42 - LIMITED ENTRY & UNITS OF GEAR                                       
                                                                               
 Number 0017                                                                   
                                                                               
 CO-CHAIR WILLIAMS announced the first item on the agenda was SSSB
 42 am, an act allowing a person to hold more than one entry permit            
 for certain fisheries and amending the definition of `unit of gear'           
 for purposes of the commercial fisheries limited entry program; and           
 providing for an effective date.                                              
                                                                               
 Number 0095                                                                   
                                                                               
 FRANK HOMAN, Commissioner, Commercial Fisheries Entry Commission,             
 Department of Fish and Game (DFG), was first to testify.  He said             
 DFG has been working with the Dungeness fishermen and Senator                 
 Taylor's office as well as with Co-Chair William's office on this             
 issue of the Dungeness crab moratorium and limitation.  He said,              
 four years ago, the legislature imposed a moratorium and the                  
 provision for a tiered pot system.  He said SSSB 42 am is a minor             
 adjustment to that moratorium.                                                
                                                                               
 Number 0176                                                                   
                                                                               
 MR HOMAN said SSSB 42 am is sponsored by the Southeast Dungeness              
 Crab Coalition, the Petersburg Vessel Owners Association and a                
 number of other crab fisherman.  He said the commission is                    
 supporting SSSB 42 am and the work that has been done on it.                  
                                                                               
 Number 0214                                                                   
                                                                               
 MR. HOMAN said in a tiered pot system, which we have with Dungeness           
 crab, an A,B,C, or D permit would be more restrictive than the                
 Board of Fish limitation of 300 pots.  He said SSSB 42 am would               
 allow the combination of two permits as long as it did not go over            
 the 300 pot maximum.  He said the bill would allow people to work             
 up through the system and allow them to retain some entry level               
 permits.                                                                      
                                                                               
 Number 0291                                                                   
                                                                               
 REPRESENTATIVE ALAN AUSTERMAN asked if SSSB 42 am would only affect           
 Southeast Alaska.                                                             
                                                                               
 Number 0295                                                                   
                                                                               
 MR. HOMAN said, at this time, the only fishery that would be                  
 affected by SSSB 42 am would be the Southeast Dungeness fishery as            
 it is the only one with a tiered system.                                      
                                                                               
 Number 0309                                                                   
                                                                               
 CO-CHAIR JOE GREEN asked how many permits are currently held by               
 Alaskans as compared to those owned by non-residents of the state.            
                                                                               
 Number 0322                                                                   
                                                                               
 MR. HOMAN said he did not know the precise figure, but 80 percent             
 to 90 percent of the permits would be owned by Alaskans.                      
                                                                               
 Number 0348                                                                   
                                                                               
 SENATOR ROBIN TAYLOR, sponsor of SSSB 42 am, gave some legislative            
 background on the bill.  He said both he and Representative                   
 Grussendorf introduced identical legislation last year because it             
 was felt that the Dungeness fishery had reached an economic level             
 where this was possible.  He said the fishery had gone through a              
 boom and bust cycle and a flood of boats had come up from the                 
 states of Washington and Oregon where the fishing was poor.  He               
 said, during that time, the number if licensed crab fisherman                 
 doubled and then redoubled the following year.  He said, at that              
 point, if a limited entry system was installed all of those                   
 fisherman would have been included in that system.  He said the               
 states of Washington and Oregon have experienced strong Dungeness             
 crab fishing in recent years and it has left the state with a                 
 resident Dungeness fishery.  At the resident fisherman's request,             
 a limited entry system was installed to prevent non-residents from            
 fishing in Alaskan waters.                                                    
                                                                               
 Number 0483                                                                   
                                                                               
 SENATOR TAYLOR said, as last years legislation moved through the              
 system, a consensus was reached that a tiered system should be                
 installed.  He said people with lower entry permits wanted to be              
 assured that over time they could buy additional permits, called              
 the stacking provision.  He said when the limited entry system                
 legislation passed out of the House, the title was too narrow to              
 make an amendment for a permit stacking to occur.  He said there              
 was not the time to get a two-thirds vote to get a title change               
 resolution.  He said SSSB 42 am is clean-up language and follows up           
 with the commitment that everyone made during the process from last           
 year.                                                                         
                                                                               
 SENATOR TAYLOR said the stacking provision would be limited by the            
 300 maximum gear limitation that the commission had set.  He said             
 there has been some discussion regarding the stacking provision by            
 those who had received what they wanted from last years                       
 legislation, as a result a compromise was reached that only two               
 permits would be allowed to be stacked.  He said limiting the                 
 permits to two allows for more permits to be obtained at the lower            
 level, because that is where the largest number of permits is                 
 located.  He said having more permits at the lower level allows               
 people to get involved in the industry with a limited investment.             
                                                                               
 Number 0668                                                                   
                                                                               
 REPRESENTATIVE JOHN DAVIES asked if this was a strict limited entry           
 situation where there is only a finite number in all of the                   
 classes.                                                                      
                                                                               
 Number 0678                                                                   
                                                                               
 SENATOR TAYLOR said this was correct and referred to information in           
 the committee packet.  He said the smallest number involved was 300           
 and then it goes down with a 75 pot permit where the largest number           
 of permits is found.                                                          
                                                                               
 Number 0698                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked if a person held one of the 75 pot                
 permits would it be possible for the fisherman to buy one of the              
 higher pot number permits and relinquish the 75 pot permit.                   
                                                                               
 SENATOR TAYLOR said if a 300 pot permit became available, he would            
 need to sell the 75 pot permit.  He said there are brokers who                
 handle these transfers and as a result there wouldn't be any risk             
 involved in the transfer of permits.                                          
                                                                               
 Representative Kott joined the committee at 8:24 a.m.                         
                                                                               
 REPRESENTATIVE AUSTERMAN made a motion to move SSSB 42 am with the            
 accompanying fiscal note and individual recommendations.  Hearing             
 no objections SSSB 42 am was moved from the House Standing                    
 Committee on Resources.                                                       
 SB 112 - DISCOVERY ROYALTY CREDIT                                           
                                                                               
 Number 0823                                                                   
                                                                               
 CO-CHAIR GREEN announced the next item on the agenda was CSSB 112             
 (RES), an act establishing a discovery royalty credit for the                 
 lessees of state land drilling exploratory wells and making the               
 first discovery of oil or gas in an oil or gas pool in the Cook               
 Inlet sedimentary basin.                                                      
                                                                               
 Number 0851                                                                   
                                                                               
 ANNETTE KREITZER, Legislative Aide for Senator Loren Leman, said              
 CSSB 112 (RES) was introduced by the Senate Resources Committee as            
 a result of testimony focusing on what the legislature could do to            
 improve the climate for oil and gas development.  She said                    
 reinstatement of the discovery royalty language, language that was            
 repealed in 1969, was one thing that was identified.  The Senate              
 Resources Committee introduced SB 112 with the repealed language,             
 but after litigation concerns addressed in discussions with the               
 Administration and the oil companies SB 112 was altered to avoid              
 confusion in terms that were identified as problematic.  The                  
 confusion surrounding these terms include what constitutes first              
 discovery, what are commercial quantities, what is a geologic                 
 structure, and what is the discovery date.  She said another                  
 problem was that regulations were not adopted until a long time               
 after the law had been in effect.  She said the committee felt that           
 these things contributed to the misunderstandings of how royalty              
 discovery was supposed to work and members of the committee created           
 several versions of discovery royalty.  She said the version that             
 passed out, CSSB 112 (RES) is one of compromise.                              
                                                                               
 Number 1015                                                                   
                                                                               
 MS. KREITZER referred to CSSB 112 (RES), version K, Section 1 and             
 said this would apply to exploration licenses and said legislation            
 was passed, a couple of years ago, which created an exploration               
 license program.  She said, when those licenses are converted to              
 leases, this discovery royalty could apply because CSSB 112 (RES)             
 is limited to the Cook Inlet sedimentary basin.  She said in                  
 conversations with the Department of Natural Resources (DNR) it was           
 determined that the Cook Inlet sedimentary basin is envisioned to             
 be "larger than the box" created by exploration licensing.  As a              
 result of this situation, language was included specifying that               
 discovery royalty could apply when those licenses convert to                  
 leases.                                                                       
                                                                               
 Number 1057                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked if it was only for those portions                 
 outside the exclusion.                                                        
                                                                               
 Number 1088                                                                   
                                                                               
 MS. KREITZER concurred, but deferred the question to Mr. Boyd.  She           
 referred to page two, Section 1, and said there is language                   
 involved which limits CSSB 112 (RES) to the Cook Inlet sedimentary            
 basin.  She said an operator has to be certified by the                       
 commissioner to be the first to drill a well discovering oil and              
 gas.  She said "first discovery" was taken out of the bill because            
 of litigation over what that term meant.  She said this same                  
 language is found in Section 2, beginning on line 3.                          
                                                                               
 MS. KREITZER referred to Section 2, page 2, line 18 down to page              
 three, line 25, and said this language was just the drafter                   
 cleaning up the language.  She said this language is unimportant to           
 what the bill does, until you get to page three, line 25, when it             
 refers to, "not withstanding a requirement in the leasing method              
 chosen of a minimum fixed royalty share on and after a date that is           
 180 days following the effective date of this act, the lessee under           
 a lease issued in the Cook Inlet sedimentary basin", et cetera.               
 She said the "180 days following the effective date" was the Senate           
 Resources feeling that the date should be effective six months                
 after the passage of the bill.                                                
                                                                               
 Number 1167                                                                   
                                                                               
 MS. KREITZER said the parallel language of who is certified by the            
 commissioner to be the first to drill a well discovering oil or gas           
 in a previously undiscovered oil or gas pool is language used to              
 get around the controversy over first discovery.  This language is            
 even further narrowed in line 30, "shall pay a royalty of 5 percent           
 on all production of oil or gas from that pool attributable to the            
 lease."  She said this language was used to make sure it was narrow           
 and that people understood that the five percent roylaty was only             
 for that lease and only applies to oil or gas attributable to that            
 pool.                                                                         
                                                                               
 Number 1209                                                                   
                                                                               
 MS. KREITZER said a royalty of 5 percent is given on all production           
 attributable to that lease for a period of ten years following the            
 discovery, afterwards the royalty "shall be determined and payable            
 as specified in the lease."  She said the reduced royalty is                  
 subject to the following conditions; they have to be the first one            
 discovering oil or gas in a previously undiscovered oil or gas pool           
 and there is only one reduction in royalty per lease.                         
                                                                               
 Number 1255                                                                   
                                                                               
 MS. KREITZER referred to (c) and said if there is a lease that is             
 non-producing and non-unitized, you can apply for a discovery                 
 royalty if you meet the conditions of (a) and (b) of Section 4.               
 She referred to Section 4(d), "if application for a royalty                   
 reduction is made under this paragraph for a lease" and said this             
 language says that only one program prevails, because there are               
 leases that are still out there that have the old discovery                   
 provision.  She referred to Section 4(e) and said the language                
 allows the commissioner to adopt regulations setting out the                  
 standards, criteria and definition of terms.  She said discussion             
 was held on whether or not the legislature should define what the             
 Cook Inlet sedimentary basin is and it was decided that the                   
 commissioner should have that flexibility to determine that                   
 criteria in regulations.                                                      
                                                                               
 Number 1333                                                                   
                                                                               
 REPRESENTATIVE DAVIES said the term "discovering" as in "drill a              
 well discovering oil and gas" might be problematic, although the              
 regulations would be helpful in defining it.  He asked for an                 
 explanation regarding this choice.                                            
                                                                               
 Number 1361                                                                   
                                                                               
 MS. KREITZER said this word was chosen to reward someone who makes            
 the first discovery.  She said a person could make the discovery,             
 hold it for a year or so, then come back in an apply for it, but an           
 application must be made proving that you were the one discovering            
 oil or gas.  She said the language was made in consensus with the             
 Department of Law (DOL) and DNR to get at the intent of the bill,             
 to reward those who go out, explore and discover oil or gas.                  
                                                                               
 Number 1423                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked for information regarding the language,           
 "only one reduction royalty on each lease".  He said he inferred              
 that there would only be one lease per oil or gas pool subject to             
 this reduction.                                                               
                                                                               
 Number 1445                                                                   
                                                                               
 MS. KREITZER said the intent is that if you have a lease, no matter           
 how many wells you have on that lease, no matter how many pools you           
 have on that lease, you get one reduction in royalty for production           
 per lease.                                                                    
                                                                               
 Number 1462                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked what happened when leases were unitized           
 and asked if they were still counted as one.  He asked if they                
 still maintained their individual identity.                                   
                                                                               
 Number 1474                                                                   
                                                                               
 MS. KREITZER said the language, adopted in the Senate Resources               
 Committee, says that this reduction is for non-unitized, non-                 
 producing leases.  She said they can form a unit later and if they            
 do, it is still for that lease on which the discovery royalty is              
 granted.                                                                      
                                                                               
 Number 1499                                                                   
                                                                               
 CO-CHAIR GREEN said dissimilar royalties are not uncommon in units.           
                                                                               
 Number 1504                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked if it would be Ms. Kreitzer's                     
 understanding that in a given pool there would be only one                    
 discovery lease.                                                              
                                                                               
 Number 1518                                                                   
                                                                               
 MS. KREITZER said her understanding is that pools can cross over              
 lease boundaries and the language in CSSB 112 (RES) states that per           
 lease you are going to have one discovery royalty allowed.  She               
 said, in testimony in the Senate Resource Committee, that for every           
 lease there is one discovery royalty allowed.                                 
                                                                               
 Number 1558                                                                   
 CO-CHAIR GREEN said there can be more leases on a pool, but there             
 is one lease that gets the discovery royalty and the rest of those            
 leases have conventional royalty.                                             
                                                                               
 Number 1573                                                                   
                                                                               
 REPRESENTATIVE SCOTT OGAN referred to Section 4(b), page four, and            
 asked if this paragraph only authorizes the reduction of royalty              
 allowed on each lease, no matter how many wells are drilled.                  
                                                                               
 Number 1607                                                                   
                                                                               
 MS. KREITZER said the caveat is that you get one application, so              
 whatever well you want to apply the reduction on, is all                      
 attributable to that lease.  She referred to the bottom of page               
 three, "thereafter the royalty payable on all production of oil or            
 gas from the pool attributable to that lease" and said you only get           
 that one royalty reduction for all of the production from the pool            
 attributable to that lease.  She said, if you are the first to                
 drill a well discovering oil or gas which has never been discovered           
 before, you get to pay 5 percent on all production from that pool             
 which is attributable to that lease.  She said you are looking at             
 the pool on the lease and you could have drilled 30 wells into that           
 pool, as long as it is the same pool on that lease, but you only              
 get one discovery royalty application.                                        
                                                                               
 Number 1669                                                                   
                                                                               
 REPRESENTATIVE OGAN said all the particular wells that are drilled            
 on that lease, in that pool, are at the 5 percent.                            
                                                                               
 MS. KREITZER said yes, attributable to that pool.                             
                                                                               
 Number 1685                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked how you dated the discovery of the pool           
 and asked if this would create the same type of past problems as to           
 who the first discoverer was.                                                 
                                                                               
 Number 1708                                                                   
                                                                               
 MS. KREITZER referred to page three, line 25, "notwithstanding a              
 requirement in the leasing method chosen of a minimum fixed royalty           
 share, on and after a date that is 180 days following the effective           
 date of this act" and said this language limits it to Cook Inlet              
 sedimentary basin.  She said it is the "the lessee who is certified           
 by the commissioner to be the first to drill a well discovering oil           
 or gas".  She said the difficulty surrounding these terms is why              
 the decision was made to leave it up to the commissioner to develop           
 regulations to say how they are going to certify who was the first            
 to discover a well.  She said this language was deemed much better,           
 by DOL and DNR, than "first discovery" because it actually says               
 that you have to be the first to drill a well.                                
                                                                               
 MS. KREITZER said there was discussion about requiring the person             
 applying for this discovery royalty to have to submit something to            
 DNR saying they believed they were the first to drill a well and              
 discover oil in this pool, in the event that you have several                 
 people drilling in the same area.  She said this is something the             
 commissioner could do under regulations.                                      
                                                                               
 Number 1769                                                                   
                                                                               
 REPRESENTATIVE DAVIES said this was clear to him, but asked her how           
 the date of discovery would be established.                                   
                                                                               
 Number 1772                                                                   
                                                                               
 MS. KREITZER said this follows the date of discovery for that pool            
 and said it was felt that DNR could establish this in regulations.            
 She said this issue has been problematic for DNR in the past, but             
 the Senate Resources Committee felt this language, requiring                  
 certification by the commissioner and the narrow and clarifying               
 language, would help guide the commissioner as compared to the                
 language in the previous law.                                                 
                                                                               
 Number 1804                                                                   
                                                                               
 REPRESENTATIVE DAVIES, "suppose that company A announces discovery            
 of a pool from geophysical methods, doesn't actually drill a well             
 and then some years later company B goes in and drills the first              
 well which is certified by the commissioner to be the discovery               
 well.  Is the date of discovery the drilling or the well or the               
 announcement of the discovery?"                                               
                                                                               
 Number 1822                                                                   
                                                                               
 MS. KREITZER said similar scenarios were brought up in discussions            
 with DNR and DOL and it is her understanding that they would                  
 attempt to identify those obvious concerns which could be addressed           
 in regulation.  She said, certainly, there is a need in regulation            
 to clarify that point.  She said Mr. Boyd might be able to address            
 how the Administration plans on addressing this point.                        
                                                                               
 Number 1848                                                                   
                                                                               
 REPRESENTATIVE DAVIES clarified that CSSB 112 (RES) is                        
 intentionally silent on this language with the intention that this            
 language will be clarified in the regulations.                                
                                                                               
 Number 1852                                                                   
                                                                               
 MS. KREITZER said this statement was correct.                                 
                                                                               
 Number 1875                                                                   
                                                                               
 KENNETH A. BOYD, Director, Central Office, Division of Oil and Gas,           
 Department of Natural Resources, said the questions raised by                 
 Representative Davies point to the type of questions which will               
 occur as a result of CSSB 112 (RES).  He said discovery royalty               
 goes back to statehood, adopted from federal law in 1959 and                  
 carried in the Alaska statutes until 1969, when the legislature               
 realized that discovery royalty was needed.  He said, at that time,           
 all Cook Inlet discoveries were made, and ten years after this                
 repeal they eliminated (indiscernible) regulations.  He said CSSB
 112 (RES) has discovery royalty being put into a basin that is very           
 mature and well-known.  He expressed concern that nothing is                  
 defined and law suits will arise to determine what a previously               
 undiscovered field or pool is and what the first date of discovery            
 is.  He predicted a flood of applications for well known formations           
 that are not discoveries in the sense that the legislature intends            
 "discovery" to means.                                                         
                                                                               
 Number 1945                                                                   
                                                                               
 MR. BOYD said HB 207 has some sort of economic analysis to show               
 need and said CSSB 112 (RES) shows no need, it just says that all             
 leases will have a 5 percent royalty.  He said, if you believe that           
 every well that is drilled in Cook Inlet will be a discovery, then            
 there is no need to have a 12.5 percent royalty because everything            
 will be reduced to 5 percent.                                                 
                                                                               
 Number 1962                                                                   
                                                                               
 MR. BOYD said drafting regulations in 180 days is an impossibility.           
 He cited his experience and said he did not believe that the                  
 process could be limited to 180 days.  He said the task is to                 
 define something in regulation which has been unsuccessfully                  
 defined for a period of nearly 40 years.  He concluded that CSSB
 112 (RES) is a litigation generator with a small, side potential              
 benefit.                                                                      
                                                                               
 Number 1995                                                                   
                                                                               
 CO-CHAIR GREEN asked if there were regulations in statute now that            
 state that if a well is drilled and certified capable of producing            
 in commercial quantities it will hold a lease.                                
                                                                               
 Number 2005                                                                   
                                                                               
 MR. BOYD said if it is (indiscernible), that is correct.                      
                                                                               
 Number 2009                                                                   
                                                                               
 CO-CHAIR GREEN asked if that same terminology could be used as far            
 as determining the discovery royalty date, the requirement that a             
 well drilled in a lease be capable of producing in commercial                 
 quantities.                                                                   
                                                                               
 Number 2023                                                                   
                                                                               
 MR. BOYD said this was one option, but said he did not see how a              
 well drilled into something certified capable of producing had                
 anything to do with a discovery.                                              
                                                                               
 Number 2029                                                                   
                                                                               
 CO-CHAIR GREEN said merely finding the structure does not mean that           
 anything is found, it just says that a structure is there.  A                 
 structure does not even positively indicate that there is anything            
 there.  He said, a well certified capable of producing in                     
 commercial quantities is a discovery and couldn't that language be            
 utilized to alleviate this plethora of litigation which might                 
 occur.                                                                        
                                                                               
 Number 2073                                                                   
                                                                               
 MR. BOYD said he did not see how this language relates to                     
 discovery.  He said because you have a paying quantity                        
 (indiscernible) in a well known formation he did not understand why           
 you would pick that day.                                                      
                                                                               
 Number 2085                                                                   
                                                                               
 CO-CHAIR GREEN asked him what date he would pick.  He said when a             
 well is drilled there is no indication that it will find anything             
 and said discovery of a formation is not applicable for the                   
 discovery royalty.  He said there has been oil found in the water             
 lakes, in formations, but not in paying quantities which is needed            
 to allow it to be deemed a discovery.                                         
                                                                               
 Number 2111                                                                   
                                                                               
 REPRESENTATIVE DAVIES said his question was in Co-Chair Green's               
 line of questioning that CSSB 112 (RES) needs to be much more                 
 specific regarding these terms.                                               
                                                                               
 Number 2140                                                                   
                                                                               
 DAVE LAPPI, President, LAPP Resources, Incorporated, testified next           
 via teleconference from Anchorage.  He said he supported CSSB 112             
 (RES) and said that Alaska has just a handful of independents                 
 operating in the state and need all the help they can get to                  
 produce more oil.  He said there should be more companies involved            
 producing that oil.  He said the Federal Department of Energy                 
 estimates 8,000 independent oil companies operating in the Lower 48           
 states and said there are just a handful of independents operating            
 in Alaska.                                                                    
 Number 2180                                                                   
                                                                               
 MR. LAPPI said he was involved in the formation, in December of               
 1995, of a non-profit organization, Royalty Owners and Independents           
 for Alaska.  He said the organization has seven members, but it is            
 growing.  He said Alaska is a favorable location for independents             
 to operate as it has favorable geology and 23 basins on-shore and             
 13 basins off-shore, only two of which produce oil and gas.  He               
 said Alaska has a reputation, over the last decade, as a costly               
 place to produce oil and gas and to develop an infrastructure.  He            
 said the TransAlaska Pipeline was expensive to develop and operate            
 and cited the legal costs and the costs involved in the court                 
 settlements.                                                                  
                                                                               
 Number 2214                                                                   
                                                                               
 MR. LAPPI said Alaska needs additional oil and gas companies to               
 produce revenue.  He said the Governor has begun to promote this              
 concept and the legislature can also promote it by passing                    
 legislation enacting discovery royalty.  He said, if the discovery            
 royalty did pass and is successful in producing extra revenue for             
 the state, the legislature might consider having this legislation             
 apply throughout Alaska, south of the Umiat baseline.  He said a              
 discovery royalty would go some way to bring independent companies,           
 as well as major companies, to look at exploring some of Alaska's             
 other sedimentary basins, either through exploration licensing or             
 standard oil and gas leasing.                                                 
                                                                               
 Number 2252                                                                   
                                                                               
 MR. LAPPI said Great Britain has been reducing their royalties as             
 a result of declining North Sea oil production and the government             
 does not charge royalties onshore coal bed gas production.  He said           
 the government has been leasing acreage, at a low cost, on on-shore           
 leases and there is no cash bonus bidding system, but an                      
 exploration license system charging 15 cents an acre for an annual            
 rental on that acreage.  He said Alaska should be seen as a                   
 favorable place for oil development as compared to investment                 
 alternatives overseas.  He said the man-made impediment can be                
 reduced and create new incentives through legislation like CSSB 112           
 (RES).                                                                        
                                                                               
 Number 2294                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked if the definition of discovery was                
 changed to "the drilling of the first well capable of producing"              
 and asked what the justification would be for maintaining the ten             
 year time span.                                                               
                                                                               
 Number 2314                                                                   
                                                                               
 MR. LAPPI said a date can be developed using the certification of             
 well capable of producing in paying quantities and said this would            
 be an excellent definition.  He said this definition is already set           
 out in law, has been litigated and if the discovery royalty was               
 set, ten years from that date, everyone would be happy.                       
                                                                               
 Number 2331                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked, under normal circumstances, what the             
 time lag between a discovery, in the sense that there is a                    
 significant geological play, the bidding and winning of leases and            
 then going ahead and drilling a well.                                         
                                                                               
 Number 2351                                                                   
                                                                               
 MR. LAPPI said it can be several years between the actual award of            
 a lease and the drilling of a first well.  He said many companies             
 try to reduce that time to less then a year and said work needs to            
 be done on the permitting process before that lag time can be                 
 reduced significantly.  He said CSSB 112 (RES) is clear that a well           
 must be drilled to make a discovery.  He said it is not possible              
 technically, geologically or legally to make a discovery without              
 drilling a well and having a well, capable of producing in paying             
 quantities.  He said the definition proposed by Co-Chair Green                
 would be very clear.  He said there is variable lag time between              
 the physical drilling of the well and penetrating the formation,              
 then certifying that the well is capable of producing in paying               
 quantities.  He said the time depends on how aggressively the                 
 operator is seeking that certification.                                       
                                                                               
 Number 2396                                                                   
                                                                               
 REPRESENTATIVE DAVIES asked if the period was usually measured in             
 the space of a year to three years.                                           
                                                                               
 Number 2399                                                                   
                                                                               
 MR. LAPPI said it could be measure in months if operator was                  
 aggressive and "keen" to produce the formation.                               
                                                                               
 Number 2410                                                                   
                                                                               
 REPRESENTATIVE DAVIES said the point of CSSB 112 (RES) was to get             
 this aggressiveness, but asked without this aggressive quality what           
 the normal time lag.                                                          
                                                                               
 Number 2414                                                                   
                                                                               
 MR. LAPPI said the DNR would be better qualified to answer that               
 question.                                                                     
                                                                               
 Number 2430                                                                   
                                                                               
 MR. BOYD said he does not have a specific answer, but said CSSB 112           
 (RES) does not give any impetus for quick development of a well.              
 He said if you use a certified well it would include all the pools            
 on the lease and asked what that would have to do with the                    
 discovery royalty pool.  He said you have to be careful when using            
 the word pool to avoid "gaming" the well.  He said this would be              
 where a company could drill, in a well in a known formation, claim            
 some discovery of (indiscernible) hole and then claim a discovery             
 royalty for the entire lease.  He said, "we have made it very clear           
 that it is just the pool, so I presume the date of discovery has to           
 be for the pool it should be certified from the pool to pool only,            
 not from the well."                                                           
                                                                               
 Number 2458                                                                   
                                                                               
 CO-CHAIR GREEN said that was correct, but the pool, which is                  
 described, is the pool which has not been discovered.                         
                                                                               
 Number 2465                                                                   
                                                                               
 MR. BOYD said the provisions for paying quantities apply to an                
 entire well and all the pools which the well might penetrate.  He             
 said it might take several pools in order to produce a well                   
 certified as producing in paying quantities.  A previously                    
 undiscovered pool.                                                            
                                                                               
 TAPE 96-55, SIDE B                                                            
 Number 0000                                                                   
                                                                               
 CO-CHAIR GREEN asked if DNR was capable of working around that                
 problem.                                                                      
                                                                               
 Number 0016                                                                   
                                                                               
 MR. BOYD said you would have to go to a well and dissect the well,            
 into its component parts, in order to decide whether a well was               
 capable of producing from a previously undiscovered pool, absent              
 any other production from the part of the well.  He said the                  
 problem is more complicated than might be imagined.                           
                                                                               
 Number 0041                                                                   
                                                                               
 DON GILMAN, Mayor, Kenai Peninsula Borough, was next to testify via           
 teleconference from Kenai.  He said this topic is of interest to              
 the Cook Inlet region, but said the Kenai Borough Assembly has not            
 taken a particular position on CSSB 112 (RES) or the discovery                
 royalty issue.  He said, as was said by the Division of Oil and Gas           
 (DO&G), discovery well royalty was part of the Cook Inlet                     
 exploration development incentive that went to the first                      
 developments in Alaska.                                                       
                                                                               
 Number 0083                                                                   
 MR. GILMAN said as a result of the past discovery royalty, Cook               
 Inlet has an existing infrastructure which is much more extensive             
 than the Prudhoe Bay infrastructure if the associated Cook Inlet              
 gas production is considered.  He said the independents will be a             
 major part in continuing development of Cook Inlet as the major               
 producers are in the process of leaving.                                      
                                                                               
 Number 0118                                                                   
                                                                               
 MR. GILMAN said this Administration is in the process of "writing             
 off" Cook Inlet as an area to expand the state's resources.  He               
 said this feeling is underscored by this morning's Alaska Oil and             
 Gas Reporter, published by the Alaska Journal of Commerce.  He read           
 from this report, "(indiscernible due to paper shuffling)                     
 exploration, the best way to know what we think of Alaska is to               
 look at what we are doing.  We have an exploration program, we                
 continue to have that program, we continue to focus on the North              
 Slope, we don't work in Cook Inlet because BP can't be competitive            
 there."  He said, if BP can't be competitive, something should be             
 done as there still can be major exploration programs.                        
                                                                               
 Number 0170                                                                   
                                                                               
 MR. GILMAN said "we" support CSSB 112 (RES) and the amendment to              
 replace discovery wells after December 31, 1990.  He said the state           
 can work out the language to determine when a discovery well goes             
 into effect.  He said Stewart Petroleum would have a major interest           
 in the legislation and it would help the company finance prospects            
 in the Cook Inlet region.  He said every time a drill rig goes up             
 in this community it represents 50 to 100 jobs.                               
                                                                               
 Number 0238                                                                   
                                                                               
 ROBERT WARTHEN, Geologist, cited his experience in the Alaska                 
 petroleum industry, starting in 1967 until his retirement in                  
 November of 1992.  He said he and other employees were transferred            
 to Alaska as a direct result of the discovery royalty process.  He            
 said the company was taking advantage of the ten year time limit to           
 develop leases where oil was discovered in 1965 and 1967.  He said,           
 since 1992, he has acted as a consultant and has had many                     
 opportunities to develop prospects in the Cook Inlet.  He said many           
 people have contacted him, from outside Alaska, who are interested            
 in developing leases in the Cook Inlet and if there were                      
 incentives, the price increased or expenses decreased.                        
                                                                               
 Number 0310                                                                   
                                                                               
 CO-CHAIR WILLIAMS asked if he had any comments on the time frame.             
                                                                               
 MR. WARTHEN clarified that this related to Mr. Boyd's comments.  He           
 said, "it is a very easy process directing his questions to                   
 pooling.  A pool is not restricted to one producing zone, a pool              
 can be undefined and contain many zones like in the Beluga                    
 Formation which is over 2,500 feet thick that has several zones               
 that are capable of production.  That can be designated as one                
 pool, so I don't see a conflict there.  As to the timing of the               
 discovery, there is no such thing as a discovery until a well is              
 drilled and produced.  All the interpretations from seismic are               
 strictly interpretations, those are prospects and interpretations             
 until the well is drilled and certified by a state engineer that it           
 is capable of producing commercial quantities, that establishes the           
 date of discovery."                                                           
                                                                               
 Number 0378                                                                   
                                                                               
 REPRESENTATIVE OGAN asked if he had been involved in past                     
 litigation and asked if this litigation was helpful in describing             
 the discovery royalty or would there be more contention regarding             
 this definition in the future.                                                
                                                                               
 Number 0402                                                                   
                                                                               
 MR. WARTHEN said he was involved in the litigation through his                
 company, Union Oil Company.  He said the major litigation                     
 surrounded whether the pools or the discovery wells were on                   
 separate structures.  He said several applicants applied for                  
 discoveries on a same structure such as Middle Ground Shoal where             
 there was two applicants.  He said there were three applicants for            
 the McArthur River and again said the issue surrounded the date of            
 the very first discovery.                                                     
                                                                               
 Number 0459                                                                   
                                                                               
 REPRESENTATIVE OGAN asked what methodology was used to determine              
 who was first.  He asked if they used seismic data, chemical                  
 analysis of oil, or some other method.                                        
                                                                               
 Number 0485                                                                   
                                                                               
 MR. WARTHEN said it is the responsibility of the applicant to                 
 provide whatever data they can gather to support their application            
 to the Oil and Gas Commission, or previously to the DNR and the Oil           
 and Gas Commission, to define the structure they are on.  He said             
 this data can consist of chemical analysis of the oils, seismic,              
 all the well data that is involved to prove that it is on the same            
 structure, or if it is on the same structure to prove the date of             
 discovery.  He said, in the case of UNOCAL, they withdrew an                  
 application because what they originally thought was two separate             
 structures turned out to be one.                                              
                                                                               
 Number 0551                                                                   
                                                                               
 CO-CHAIR GREEN said Cook Inlet is viewed as a mature field and that           
 there is no need for discovery royalty, yet within the past few               
 years there have been two isolated discoveries.  He asked him, as             
 a professional geologist, if there were more pools to be discovered           
 in the Cook Inlet area.                                                       
                                                                               
 Number 0575                                                                   
                                                                               
 MR. WARTHEN said many of the discoveries are adjacent to known                
 producing properties, and what is commercial to one company might             
 not be commercial to another company.  He referred to Stewart                 
 Petroleum's discovery west of the McArthur River field to prove his           
 point as UNOCAL chose not to develop that site because it was too             
 small.  He said there are other prospects in that basin and that              
 basin could be capable of producing as much oil as has already been           
 tapped.                                                                       
                                                                               
 Number 0612                                                                   
                                                                               
 MR. WARTHEN said a lot of the early discoveries in the Cook Inlet             
 were gas which was not marketable.  He said the discovery of oil              
 was needed to develop an infrastructure which assisted the natural            
 gas market.  He said the major oil producers are looking at the               
 global market and said it is now the independent oil producers who            
 will create an infrastructure of smaller producing oil wells.                 
                                                                               
 Number 0692                                                                   
                                                                               
 CO-CHAIR GREEN to back up his statement said the state has an                 
 independent producing oil at 5,000 barrels a day and a discovery of           
 very high quality by a major oil company shut in because it is not            
 economic.                                                                     
                                                                               
 Number 0702                                                                   
                                                                               
 MR. WARTHEN said yes, nevertheless he supported CSSB 112 (RES).               
                                                                               
 Number 0714                                                                   
                                                                               
 WALTER WELLS, Geologist, said his experience in Alaska began in               
 1992 when he conducted a study which concluded that the Cook Inlet            
 basin had an extensive history of high quality production, the type           
 of production which would bring independents, but that it was an              
 undiscovered basin with many prospectives.  He said he is a partner           
 in an oil company called Escapade Oil and Gas Corporation with                
 extensive investment leases in the Cook Inlet.  He said his company           
 does on-going geological subsurface studies, on-going seismic                 
 studies and will participate in drilling additional wells.  He said           
 a discovery royalty situation will be helpful in bringing                     
 independents in this area.                                                    
                                                                               
 MR. WELLS said the prospects in the area are subtle prospects which           
 will require deeper drilling, high angle drilling, certain types of           
 seismic and subsurface work all of which cost money.  He said                 
 things in Alaska are three times more expensive than what it would            
 cost to drill in Texas or Louisiana, under comparable conditions.             
 He said independents make about 75 percent to 80 percent of oil               
 discoveries and said this situation will not change dramatically as           
 the major oil companies are going overseas.  He said a royalty                
 reduction would bring a number of independents to come into the               
 state.                                                                        
                                                                               
 Number 0909                                                                   
                                                                               
 WILLIAM R. STEWART, President, Stewart Petroleum Company, was next            
 to testify.  He read from a prepared statement, "Our company is a             
 small Alaska based independent company active in Alaska and other             
 states.  Our primary area of interest within Alaska is Cook Inlet             
 basin.  In late 1991, we were fortunate in discovering the West               
 McArthur River field, a field of significant size on the west side            
 of Cook Inlet.  We are in the development stage at the present                
 time, we have a pipeline in place and production from three wells             
 is under way.  Our current production is a little under 5,000                 
 barrels per day, with the advanced age of Cook Inlet's other                  
 fields, we are the second biggest producer in the basin at this               
 point.                                                                        
                                                                               
 By industry standards, here in Alaska, our project is very small.             
 It would be sizeable almost anywhere else.  We have managed to                
 attract and invest more than $50 million in the project to date.              
 Taxes and royalties paid, thus far to the state, total about $3.3             
 million.  We employee only Alaskans, between 15 and 60 depending on           
 the level of activity and we do business, at all times possible,              
 with Alaska vendors and service companies who also employ Alaskans.           
                                                                               
 Having said all that the operation is somewhat on the marginal side           
 due to remoteness and the high operating costs per barrel that are            
 involved.  According to available information, we were the first              
 independent to establish commercial oil production in Alaska in               
 modern times.  I say modern times because oil production was                  
 established by independents much earlier at Katalla, near Cordova,            
 in 1902.  The field produced low gravity crude until their on-site            
 refinery burned in 1933.  In fact, it may interest you to know that           
 about 60 wells have been drilled in Alaska by independents, that              
 includes the first well in Alaska.  That well was drilled by                  
 independents in 1988 on the Iniskin Peninsula and they used cable             
 tools and undoubtedly were following up on the natural oil seeps              
 that still exist there today.  There is a seep in that area that              
 produces about a half a barrel a day, every day, a half barrel goes           
 right into Cook Inlet.  If I did that, Mr. Chairman I think know,             
 that I would get about two weeks in the electric chair, but it                
 happens every day.                                                            
                                                                               
 Back to modern times, I was asked to testify on 112 which would re-           
 establish a discovery royalty program.  As you know from today                
 testimony the state had a discovery royalty program in effect                 
 throughout the sixties, until it was repealed.  Under that program,           
 the royalty burden, and that applies to the, applied to the                   
 discovery lease only was reduced from 12.5 percent to 5 percent for           
 a period of ten years commencing with date of discovery.                      
                                                                               
 Most of the Cook Inlet discoveries made during the sixties were               
 made on state leases which provided for discovery royalty benefits.           
 I was there at the time just getting started and my opinion, as was           
 the opinion of Mr. Warthen, the discovery royalty program resulted            
 in implementation of very aggressive development schedules by the             
 operators, much more aggressive would otherwise have occurred.                
 Assuming the overall field economics were there, pipelines were               
 built, platforms were built without delay in order that the                   
 discovery royalty benefit could be realized.  Equally as important            
 as development, new prospects were drilled by the operating                   
 companies which led to other discoveries.  So, activity led to                
 activity.  Bottom line, there might have been a legal skirmish or             
 two, I don't know how many probably less than two or three, the               
 bottom line was the discovery of seven major oil fields totalling             
 1.3 billion barrels of oil and 15 gas fields totaling 6.4 trillion            
 cubic feet of gas.  From those fields, the state of Alaska has                
 realized taxes and royalties far in excess of the incentive that              
 was granted by the discovery royalty.  Remember that the discovery            
 royalty was a temporary benefit which applied only to the discovery           
 lease and not to the surrounding acreage.  Equally important were             
 the jobs that were created by industry activity.                              
                                                                               
 On December 19, 1967, ARCO's Prudhoe Bay State Number 1 discovered            
 hydrocarbons in obviously commercial quantities, also on a                    
 discovery royalty lease, ADL-28303, and as the extent of the giant            
 Prudhoe Bay field became known, industry focus shifted from Cook              
 Inlet to the North Slope.  The first wave of exploration in Cook              
 Inlet therefore ended, ended early despite substantial remaining              
 potential.  ARCO's discovery at Sunfish, along with our discovery             
 at West McArthur River, both in 1991, could mark the beginning of             
 a second way of exploration in Cook Inlet.  Regional geology tells            
 us there could be another 1.3 billion barrels of oil and 6.4                  
 trillion cubic feet of gas yet to be discovered in the basin.  On             
 the upside we have 1960s potential with 1990s technology.  On the             
 downside we have both natural and man-made obstacles.  The natural            
 obstacles include logistics and remoteness.  The man-made obstacles           
 include a regulatory system which is improving but is still filled            
 with road blocks to development.  The man-made obstacles are                  
 tougher and both result in high cost.  Each operating company,                
 large or small, has to weigh those factors prior to exploration and           
 encouragement from state government is needed at this time.                   
                                                                               
 I believe that SB 112 with modification to include current leases             
 would provide at least part of the needed encouragement for renewed           
 activity in Cook Inlet basin.  I know my own activities at West               
 McArthur River and elsewhere in the basin would accelerate.  I                
 can't speak for the majors, but I am specifically aware that other            
 independents would take a new look at Cook Inlet basin with                   
 discovery royalty in place.  As an independent producer, I am in              
 touch with other producers there is about 10,000 members of IPAA,             
 Independent Petroleum Association of America.  Most of those                  
 members won't come up here.  But in the wake of our success over              
 there at West McArthur River we are beginning to hear expressions             
 of interest from quite a few.  Independents can function in Alaska,           
 despite the obstacles that are here, but incentives are necessary             
 and especially necessary in an older province like Cook Inlet                 
 basin.                                                                        
                                                                               
 With respect to the specific language of SB 112, much of the bill             
 deals with leasing matters not related to discovery royalty.  The             
 language that does relate to discovery royalty, in my opinion,                
 needs modification if is to be effective in attracting investment             
 by the independent sector.                                                    
                                                                               
 If the act is to encourage exploration and development activities             
 in the near future, it is important that the applicability                    
 provisions include currently issued leases.  In many cases, those             
 leases are ready for exploration and development activity now.  If            
 the act applies only to future leases, operators can only hope for            
 future lease sales in a five year plan which is a moving target.              
 Schedules change, law suits happen, and then when you go to the               
 lease sale you may or may not obtain a lease.  Planning is pretty             
 well impossible under that arrangement.  Finding oil takes time.              
 Geological studies, geophysical field work, integration of                    
 geological and geophysical data to define prospects, selection of             
 bottom hole objective, well planning, permitting activities,                  
 drilling rig arrangements, acquisition of supplies and actual                 
 drilling ar among the activities involved, not to mention huge sums           
 of money and luck involved in oil.                                            
                                                                               
 I understand that Section 4 of the bill, under a current amendment,           
 that I saw for the first time this morning, provides for a                    
 discovery applicability date of December 31, 1990 effective upon              
 date of the act.  I think that it is very important to note that              
 that section has to do with applicability only and is not                     
 retroactive as to royalty benefit.  No refunds or credits require             
 payments are being sought by my company or by any other company I             
 know of.  This incentive benefit would be realized from the date of           
 the act forward until the tenth year following the date of                    
 discovery.  Say in our case that would be 2001, so that is five               
 years from now.  Both West McArthur River and Sunfish would benefit           
 from that provision.  In the case of West McArthur River,                     
 development would definitely continue at a more rapid pace.  We               
 have about three more wells to drill on that structure, we're                 
 drilling an injection well starting next month for pressure                   
 maintenance.  Equally important, other projects in Cook Inlet                 
 basin, ours as well as others, would commence earlier.  These items           
 translate into jobs and long term benefit for the state.                      
                                                                               
 In other words, I propose and support reinstatement of the original           
 ten year  program, which would apply to discoveries made after                
 December 31, 1990, but would not be effective until date of the               
 act.  And we'd be pleased to work on language changes that may be             
 necessary to accomplish that.                                                 
                                                                               
 Enactment of SB 112 with these modifications could help continue              
 the fledgling second wave of exploration in Cook Inlet.  It is my             
 sincere hope that by the upcoming new millennium 5,000 barrels                
 would be a pretty insignificant number in Cook Inlet, rather than             
 the daily production of the second biggest producer, whoever that             
 might be then.                                                                
                                                                               
 Thank you for inviting me.  I will try to answer any questions."              
                                                                               
 Number 1593                                                                   
                                                                               
                                                                               
 SARA HANNAN, Executive Director, Alaska Environmental Lobby, was              
 next to testify.  She expressed concerns about oil and gas policy             
 in the state of Alaska.  She said, last year, most of the committee           
 sat through an extensive amounts of time, testimony and detail work           
 relating to HB 207, which substantially amended the state policies            
 about royalties in the state of Alaska regarding oil and gas.  She            
 said, through the extensive process of hearings, even the                     
 environmental community came to agree that there was reason to                
 change a competitive lease arrangement to address situations where            
 the state might not want to consider a competitive bid.  She said             
 these cases were dependent on the different oil company's                     
 economics.                                                                    
                                                                               
 MS. HANNAN said, this morning, two petroleum experts testified that           
 every company's economics are different and what may be commercial            
 to one company may not be commercial to another.  She expressed               
 concern that CSSB 112 (RES) places, in statute, the same royalty              
 favor to every company, whatever their economics and whether or not           
 it is needed.  She referred to Mr. Stewart and said he is probably            
 the prime example of the type of company we want working in Alaska.           
 She referred to comments he made about how every employee is an               
 Alaskan and everything that he can buy in Alaska is bought in                 
 Alaska.  She said Mr. Stewart has not sought different favors and             
 different negotiated royalty agreements to get those favors, it is            
 the way he has done business in Alaska for 30 years and it should             
 be applauded.  She questioned whether this should be applauded in             
 statute by allowing every company the same incentives, whether or             
 not they have followed those same good business practices.                    
                                                                               
 Number 1762                                                                   
                                                                               
 MS. HANNAN said those differences between companies can be                    
 accommodated through a variety of different individual                        
 circumstances that DNR can decide given some flexibility.  She                
 believed this was available under current statutes put into law               
 last year under HB 207.  She stated that she did not think this               
 goal was accomplished by CSSB 112 (RES) retroactively placing an              
 incentive to go discover.                                                     
                                                                               
 Number 1772                                                                   
                                                                               
 MS. HANNAN said her primary objection to CSSB 112 (RES) is the                
 retroactive provision to 1990.  She said the leaseholders knew what           
 the terms of the lease were going to be and they agreed to those              
 terms when they purchased the lease.  She said, if we change the              
 terms of the leases, we need to approach all the companies that bid           
 on those leases.  She said the state is giving away royalty profits           
 due to Alaska on leases and added that changing them, without going           
 out to bid to see what someone else would give the state, is short            
 sided.                                                                        
                                                                               
 MS. HANNAN said it is a complex issue, oil royalties have taken the           
  committee time last year, this year, and will continue to occupy             
 time.  She said oil and gas policy is complex, the state has been             
 at it 30 years, the state has not done a bad job, but the state is            
 becoming panicked by paying people who should be paying us.                   
                                                                               
 Number 1884                                                                   
                                                                               
 CO-CHAIR GREEN said that some people feel there needs to be a                 
 return to the days when an incentive was needed to bring in oil               
 companies.  He said it was only after the discovery at Swanson                
 River that the federal government felt the state was capable of               
 taking care of itself as a state.  He said the 90 percent royalty             
 the state received from federal land was to supply the needs of the           
 state through oil production.  He said we are still an oil                    
 producing state and unfortunately there is a need to turn the                 
 exodus of oil companies, majors and independents, around.                     
                                                                               
 Number 1960                                                                   
                                                                               
 MS. HANNAN said, she hoped, that when developing state policies               
 legislation could be enacted to encourage companys like Stewart               
 Petroleum without "giving away the farm" to big companies that                
 don't need it.                                                                
                                                                               
 Number 1989                                                                   
                                                                               
 CO-CHAIR GREEN said there was concern expressed from the                      
 Administration and the environmental community, whereas                       
 professionals have expressed a need and his feeling is that this              
 issue needs to go to a subcommittee to review the various                     
 information.  He appointed Representative Ogan, as chair,                     
 Representative Davies and Representative Green to the subcommittee.           
 ADJOURNMENT                                                                   
 There being no further business to come before the House Standing             
 Committee on Resources, the meeting was adjourned at 9:40 a.m.                
                                                                               
                                                                               

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