Legislature(1995 - 1996)
04/15/1996 08:15 AM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.