Legislature(1995 - 1996)
03/11/1996 08:09 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
March 11, 1996
8:09 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 Ramona Barnes
Representative John Davies
Representative Pete Kott
Representative Don Long
Representative Irene Nicholia
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 394
"An Act authorizing a program of natural gas and coal bed methane
development licensing and leasing; relating to regulation of
certain natural gas exploration facilities and coal bed methane
exploration facilities for purposes of preparation of discharge
prevention and contingency plans and compliance with financial
responsibility requirements; amending the duties of the Alaska Oil
and Gas Conservation Commission as they relate to natural gas
exploration activities and coal bed methane exploration activities;
and amending the exemption from obtaining a waste disposal permit
for disposal of waste produced from coal bed methane drilling."
- HEARD AND HELD
HOUSE BILL 511
"An Act relating to deposits into the fish and game fund."
- SCHEDULED BUT NOT HEARD
HOUSE BILL NO. 447
"An Act providing that state land, water, and land and water may
not be classified so as to preclude or restrict traditional means
of access for traditional recreational uses."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 394
SHORT TITLE: GAS & COAL METHANE LICENSES & LEASES
SPONSOR(S): REPRESENTATIVE(S) OGAN, ROKEBERG, James, Kohring
JRN-DATE JRN-PG ACTION
01/05/96 2369 (H) PREFILE RELEASED
01/08/96 2370 (H) READ THE FIRST TIME - REFERRAL(S)
01/08/96 2370 (H) O&G, RESOURCES, FINANCE
02/08/96 (H) O&G AT 10:00 AM CAPITOL 124
02/08/96 (H) MINUTE(O&G)
02/13/96 (H) O&G AT 10:00 AM CAPITOL 124
02/13/96 (H) MINUTE(O&G)
02/21/96 2846 (H) COSPONSOR(S): JAMES
02/27/96 (H) O&G AT 10:00 AM CAPITOL 124
02/27/96 (H) MINUTE(O&G)
02/28/96 2909 (H) O&G RPT CS(O&G) NT 2DP 4NR 1AM
02/28/96 2910 (H) DP: ROKEBERG, OGAN
02/28/96 2910 (H) NR: BRICE, B.DAVIS, G.DAVIS, WILLIAMS
02/28/96 2910 (H) AM: FINKELSTEIN
02/28/96 2910 (H) FISCAL NOTE (DNR)
02/28/96 2910 (H) ZERO FISCAL NOTE (DEC)
02/29/96 2972 (H) COSPONSOR(S): KOHRING
03/08/96 (H) RES AT 8:00 AM CAPITOL 124
WITNESS REGISTER
JAMES HANSEN, Leasing/Evaluations
Division of Oil and Gas
Department of Natural Resources
State of Alaska
3601 C Street, Suite 1380
Anchorage, Alaska 99503-5948
Telephone: (907) 269-8804
POSITION STATEMENT: Provided information from the DNR with
regard to HB 394
TUCKERMAN BABCOCK
Alaska Oil and Gas Conservation Commission
3001 Porcupine
Anchorage, Alaska 99501
Telephone: (907) 279-1433
POSITION STATEMENT: Provided information with regard to
HB 394
DAVID LAPPI, President
Lapp Resources, Incorporated
4900 Sportsman Drive
Anchorage, Alaska 99501
Telephone: (907) 246-7188
POSITION STATEMENT: Provided information with regard to
HB 394
KURT FREDRICKSON, Director
Division of Spill Prevention and Response
Department of Environmental Conservation
State of Alaska
410 Willoughby, Suite 105
Juneau, Alaska 99801-1795
Telephone: (907) 465-5142
POSITION STATEMENT: Testified with information and concerns
regarding HB 394
DAVE HUTCHINS
Alaska Rural Electric Cooperative Association
703 West Tudor, Suite 200
Anchorage, Alaska 99503
Telephone: (907) 561-6103
POSITION STATEMENT: Testified in support of HB 394
SARA HANNAN, Lobbyist
Alaska Environmental Lobby
P.O. Box 22151
Juneau, Alaska 99802
Telephone: (907) 463-3366
POSITION STATEMENT: Testified with concerns regarding
HB 394
ACTION NARRATIVE
TAPE 96-30, SIDE A
Number 000
CO-CHAIRMAN JOE GREEN called the House Resources Committee meeting
to order at 8:09 a.m. Members present at the call to order were
Representatives Green, Ogan, Davies, and Long. Representatives
Barnes, Kott, Williams, Austerman and Nicholia arrived late.
CO-CHAIRMAN GREEN stated that only four members were present at the
call to order, but that he believed enough members could be rounded
up to establish a quorum. He then announced that three bills were
on the calendar, HB 394, HB 511, and HB 447.
HB 394 - GAS & COAL METHANE LICENSES & LEASES
CO-CHAIRMAN GREEN stated the first order of business to come before
the House Resources Committee would be HB 394, "An Act authorizing
a program of natural gas and coal bed methane development licensing
and leasing; relating to regulation of certain natural gas
exploration facilities and coal bed methane exploration facilities
for purposes of preparation of discharge prevention and contingency
plans and compliance with financial responsibility requirements;
amending the duties of the Alaska Oil and Gas Conservation
Commission as they relate to natural gas exploration activities and
coal bed methane exploration activities; and amending the exemption
from obtaining a waste disposal permit for disposal of waste
produced from coal bed methane drilling." He called on
Representative Ogan, sponsor of HB 394, to come forward.
Number 080
REPRESENTATIVE SCOTT OGAN explained that he introduced HB 394
because of the tremendous problem which exists in rural Alaska of
leaking storage tanks holding diesel fuel, as well as the power
cost equalization issue. Fuel storage facilities in rural Alaska
are failing, causing economic and environmental problems. Clean-up
and restoration alone is estimated to cost upwards of $500 million.
Each year, approximately $20 million is spent on power cost
equalization for rural residents. Transporting diesel fuel is
environmentally hazardous. Barges currently haul a one-year supply
of fuel, usually up rivers, which are difficult to navigate.
REPRESENTATIVE OGAN further explained that HB 394 would authorize
a shallow gas leasing program, above 3,000 feet. The origin of the
shallow gas could be coal bed methane, as in the majority of cases,
or other sources. Natural gas occurs in many parts of rural
Alaska. It is very clean. Rural homes could be heated by natural
gas, and electricity could be generated. The existing diesel fired
generators could be converted to burn natural gas.
Number 394
REPRESENTATIVE OGAN stated that the purpose of HB 394 is to
encourage shallow gas development for use within the state of
Alaska, not for export. The proposed legislation relieves the
bonding and regulatory burdens placed upon those who would develop
this resource for rural communities. The committee substitute
represents a concerted effort between the sponsor, private
enterprise, and the administration, to arrive at a plan that will
be good for everyone involved. Representative Ogan commented that
this dialogue should have been initiated years ago.
REPRESENTATIVE OGAN then referred to a packet, "Alaska Rural Energy
Initiative," prepared by the Division of Energy. He also indicated
a map (not included in the packet) showing shaded areas of known
coal reserves. Many of these deposits are located along the Yukon
and other river systems, where many villages are located. These
include areas in the Interior, Southcentral, and Kenai Peninsula.
He indicated that an energy problem in the Glennallen area could
possibly be mitigated by coal bed methane. Representative Ogan
reiterated that the primary purpose of the bill is to provide
affordable energy for rural Alaskans.
Number 567
REPRESENTATIVE OGAN explained that the bill currently before the
committee is CSHB 394, Version M. Section 1 sets out the
legislative findings and statement of purpose. Section 2 states
the program is applicable to recovery of natural gas from any
source located within 3,000 feet of the surface. It is not
applicable to areas that cannot be leased under oil and gas
exploration and licensing and leasing programs, also known as the
North Slope and Cook Inlet, banned under an exploration license or
lease, or already leased under AS 38.05.180, and land under
existing coal leases. There is no minimum size requirement. One
change in the proposed CS makes the maximum lease size smaller, to
coincide with the existing lease program. This was done at the
suggestion of the Department of Natural Resources (DNR), in order
to minimize the need for new regulations. The bill also
establishes a public comment period. The lease will automatically
be extended if production of gas at paying quantities continues.
Rent and royalty rates are set out in 38.05.177(f) and (g). There
are several conditions and restrictions on shallow gas leases,
including limitations on lease assignment and on insertion of gas
into an in-place transmission system. Representative Ogan
reiterated that the proposed bill minimizes regulatory hurdles, and
is primarily targeted at rural Alaska. The bill gives the
Commissioner of the DNR the ability to adopt only those regulations
necessary to implement the operations.
Number 639
REPRESENTATIVE OGAN went on to explain that Section 3 exempts the
requirement of the best interest finding. Considering the
tremendous problem which already exists with leaking diesel fuel
storage tanks, minimal risks in developing alternatives are
acceptable. Section 4 exempts shallow gas from competitive bidding
requirements. This will make it easier for developers to begin
operations. Section 5 includes natural gas drilling to depths of
3,000 feet as an activity. Section 6 lists a general requirement
in state law that pipelines and exploration production facilities
may not be operated unless an oil discharge prevention contingency
plan has been developed. The amendment made by the section
establishes an exemption from requirements for on-shore well
drilling for shallow natural gas, so long as the facility does not
encounter a formation capable of producing oil. Section 7 sets out
steps that an owner or operator of a shallow gas well must take if
the operator encounters a formation capable of producing oil.
Section 8 sets the financial responsibility requirement at $25,000.
Representative Ogan emphasized that the likelihood of encountering
oil at less than 3,000 feet is remote at best. The only oil that
has been discovered in the state above 3,000 feet is heavy oil, at
Prudhoe Bay, which will not come to the surface. Section 9
requires the operator or owner to stop operating, with exceptions,
when a formation capable of producing oil is encountered. Section
10 sets out exemptions from the laws establishing oil discharge
prevention and contingency plans and financial responsibility
requirements. Section 11 prohibits the use of the oil and
hazardous substance release prevention response fund, the 470 fund,
as a source of money to clean up any release attributable to a
shallow natural gas well. Section 12 affirms that persons holding
coal leases in effect on the effective date of this act have the
right to develop the coal bed methane and gas held in association
with coal. Representative Ogan then invited questions from the
committee.
Number 935
CO-CHAIRMAN GREEN noted that Representatives Austerman, Williams,
Nicholai and Kott had joined the meeting.
REPRESENTATIVE ALAN AUSTERMAN asked, with reference to Section 11
and the 470 clean-up fund, how we know that there is no oil between
3,000 feet and the surface. He asked if there is any possibility
of striking oil at less than 3,000 feet, and what sources of
funding could be used for clean-up if a problem did develop.
Number 974
REPRESENTATIVE OGAN reiterated that there are no known reserves of
oil in the Cook Inlet Basin above 3,000 feet, and that the only
known reserves at less than 3,000 feet are on the North Slope, and
that is heavy oil. There is no guarantee that a developer won't
run into oil, but it is unlikely. Studies show that, world-wide,
since 1986 the number of oil spills in excess of 10,000 gallons
from on-shore drilling has been zero. He referred to a graph
contained in committee members' packets, which shows world-wide
numbers of oil spills. During the same time period, spills over
10,000 gallons from vessels other than tankers totaled
approximately 300. Representative Ogan reiterated that the
likelihood of encountering oil at less than 3,000 feet is extremely
remote, and the likelihood of a spill from drilling is even more
remote. The likelihood of a spill occurring from diesel fuel being
shipped up rivers in Alaska is much higher. With small companies
going into small villages, in marginally profitable situations, and
the vast majority of drilling occurring in coal beds, the benefits
of providing low-cost energy far outweigh any potential risks.
Number 1180
REPRESENTATIVE AUSTERMAN stated that the answer was not responsive
to his question. He asked if the 470 fund were not exempted from
the bill, and a spill occurred, would the 470 fund then help with
clean up? If there is no potential problem, why is the exemption
included?
Number 1218
CO-CHAIRMAN GREEN asked if the exemption was possibly included to
avoid operators having to contribute to the 470 fund.
Number 1266
REPRESENTATIVE OGAN requested that the question be raised at a
later time.
REPRESENTATIVE DON LONG asked if the 470 fund was based on the
production of oil.
REPRESENTATIVE OGAN responded that lease operators producing coal
bed methane or other natural gas would not contribute to the 470
fund. He reiterated that the likelihood of oil being encountered
was low, and added that the exemption was included to avoid
excessive regulations.
Number 1302
REPRESENTATIVE AUSTERMAN stated that he had no problem with
exempting the 470 fund, so long as the fund only applies to oil,
but he would like to know that.
REPRESENTATIVE LONG asked about exempting the North Slope and Cook
Inlet from the proposed legislation. He stated that communities in
those areas could also benefit from the program.
REPRESENTATIVE OGAN responded that the areas were exempted because
of problems with existing lease schedules. If an oil company has
rights to the oil and gas below 3,000 feet, and someone is allowed
to get a lease for above 3,000 feet on top of their lease, then
there is a problem with legal ownership of the gas produced.
Number 1424
REPRESENTATIVE JOHN DAVIES stated that he understood why the
provisions relating to existing leases were included. But the
stipulations basically exclude everything north of the Umiat
parallel, which covers a lot of territory not covered by existing
leases. He asked why villages were excluded.
REPRESENTATIVE OGAN replied that this was based on input from the
administration, and suggested that the question should be directed
to the DNR.
Number 1481
CO-CHAIRMAN GREEN asked about areas that would be associated with
the large block leasing area. If an operator was working in an
area, and someone wanted to include it in a large block lease, what
would happen? Also, does the legislation address Native as well as
state lands?
REPRESENTATIVE OGAN responded that, with regard to the first
question, he was not sure. He stated that the DNR would be better
qualified to answer the question.
CO-CHAIRMAN JAMES stated that a representative of the DNR was
available via teleconference, in Anchorage.
Number 1540
JAMES HANSEN, Division of Oil and Gas, Department of Natural
Resources, stated that he could respond to the question. How a
shallow lease would be affected by large block exploration and
licensing is also a concern of the DNR. As far as the North Slope,
leasing efforts in that area are located above the Umiak meridian.
Anything south of the meridian would be included in the same
category as the rest of the state. Shallow bed leasing below the
Umiak meridian would not necessarily interfere with oil and gas
leasing.
Number 1590
REPRESENTATIVE DAVIES asked, with respect to the North Slope
leases, what percentage of land north of the Umiak meridian is
under lease or proposed lease sale.
MR. HANSEN stated that as far as proposed lease sales, (indisc.,
coughing). So far as land that is currently under lease, possibly
one-fourth.
Number 1625
REPRESENTATIVE DAVIES then asked what are the possibilities of
doing this under the National Parks and Refuge Act. Would it be
possible to do this under federal regulations?
MR. HANSEN responded that he was not sure, but that he thought it
would be an appropriate place. For example, Native Corporations
are testing for coal bed methane in Northwest Alaska.
CO-CHAIRMAN GREEN asked if Mr. Hansen knew of any shallow gas
located in the National Petroleum Reserve in Alaska (NPRA).
MR. HANSEN replied that he was not aware of any.
Number 1690
REPRESENTATIVE LONG asked if HB 394 included any provisions that
would allow the smaller communities to tap into existing gas
fields. The village of Nuiqsut, for instance, is located in the
middle of a large field, where gas is being re-injected. Yet,
residents are paying exorbitant prices for heating fuel. Does HB
394 allow any possibility of tapping into some of that re-injected
gas?
REPRESENTATIVE OGAN replied that nothing in HB 394 would help with
that problem. He stated that he could understand Representative
Long's frustration, but the gas is owned by the companies that are
producing it. There is nothing that the state can do about the
situation.
Number 1766
REPRESENTATIVE LONG asked what percentage of the re-injected oil
and gas belonged to the state.
CO-CHAIRMAN GREEN noted that the cost of transporting the gas would
probably be prohibitive, even if the state were to take its royalty
gas in-kind.
REPRESENTATIVE LONG then asked if there would be any way to include
a provision in HB 394 relating to the extraction of re-injected gas
by local communities.
CO-CHAIRMAN GREEN reiterated that he felt Representative Long had
a valid point. The state does have the ability to take oil and gas
in-kind.
Number 1820
REPRESENTATIVE AUSTERMAN asked if the original leases would have to
be renegotiated in order to do this.
CO-CHAIRMAN GREEN concurred. He then asked about the various
exemptions referred to by Representative Ogan. Would any of these
exemptions cause a conflict with existing regulations?
REPRESENTATIVE OGAN responded that all legal issues have been
addressed. He stated that HB 394 represents a policy call for the
legislature. A major problem already exists in the rural areas,
which more than mitigates the extremely small risk posed by the
proposed operations. If the program is successful, it could result
in a reduction of the yearly appropriation for power cost
equalization. Adding regulatory requirements to the bill would
result in fewer villages being served. In Fort Yukon, for example,
it is well-established that coal sites exist underneath the
village. Chances are that the drill sites will be located very
close to the villages. This is the only way the program can be
economically feasible. A public comment requirement is included,
so that local people can decide if they want the wells drilled near
their communities.
Number 1974
CO-CHAIRMAN GREEN stated that he agreed philosophically with the
idea, but that his question was aimed at potential legal conflicts.
He asked Mr. Hansen if there would be any conflict with existing
laws or regulations.
MR. HANSEN replied that this was a concern of the DNR. The current
version of the bill is a vast improvement over the original, but
the DNR feels that some portions still require a closer look. The
department has not had time to thoroughly examine all aspects of
the bill for potential conflicts. Therefore, there is no way to
know if problems exist.
Number 2037
CO-CHAIRMAN GREEN responded that the committee should determine if
it was on a collision course.
REPRESENTATIVE OGAN commented that the DNR had made extensive
comments on the previous version of the bill, which the CS attempts
to address. The new CS reflects many of the DNR's concerns. The
basic policy calls, however, were not changed.
Number 2094
REPRESENTATIVE AUSTERMAN asked if someone could discuss the leasing
royalties set out on page 3 and 4 of the CS. The rates are 50
cents per acre and 6.25 percent royalties. How do these compare to
other gas lease royalties?
CO-CHAIRMAN GREEN asked if this was a question for now, or for the
future.
REPRESENTATIVE AUSTERMAN responded that it was for now.
Number 2122
REPRESENTATIVE OGAN stated that the figure of 50 cents per acre was
for a non-competitive, across-the-counter lease. The drafters
wanted to make sure that the leases would not be tied up for
speculative reasons. Without production, the leases would be
voided after a five-year period. The operations would be
marginally profitable, which is why the cost is kept low. A higher
cost would result in greater expense, greater regulation, and fewer
villages served.
REPRESENTATIVE AUSTERMAN stated that he would simply like to
compare the cost of other leases with those in the bill.
REPRESENTATIVE OGAN responded that those figures could be obtained
from the DNR.
Number 2200
REPRESENTATIVE PETE KOTT asked about page 5, line 30, which states
that "The Commissioner of DNR may adopt only the regulations that
are reasonably necessary to implement provisions ..." Since the
bill does not have a Judiciary Committee referral, is the language
reasonable and consistent with other areas of the law? He
commented that the language might offer an opportunity for
litigation.
REPRESENTATIVE OGAN responded that it is a high standard of
regulation, in that it delegates authority to the DNR. He stated
that he had asked the drafting attorney to come up with appropriate
language, and this was the result.
REPRESENTATIVE KOTT then asked if the language was consistent with
other lease sales.
REPRESENTATIVE OGAN responded that he didn't know, but that the
language was an attempt to give the DNR some regulatory authority.
Number 2321
CO-CHAIRMAN GREEN stated that it was his hope that only reasonable
and necessary regulations are ever adopted. However, ten people
would have ten different views. Who would determine if the
regulations were reasonable?
REPRESENTATIVE OGAN responded that the authority was given to the
commissioner to implement reasonable and necessary regulations. He
reiterated that all regulations should be reasonable and necessary.
CO-CHAIRMAN GREEN then called on the next witness, Tuckerman
Babcock, via teleconference from Anchorage.
Number 2352
TUCKERMAN BABCOCK, of the Alaska Oil and Gas Conservation
Commission (AOGC), stated he would try to answer some of the
committee's questions. There is a shallow gas involvement in the
West Colville area. On the North Slope, there are deposits of
shallow gas in conventional reservoirs, but not in coal bed methane
reservoirs. He noted that it would not be impossible for an
operator to sell or assign a portion of their lease, to a certain
depth, to another operator. In that light, he did not anticipate
problems with companies attempting to search for oil and methane
gas, even on a conventional lease. This could be done by
arrangement with a larger operator. The difficulty would largely
be confined to surface facility arrangements. Mr. Babcock directed
the committee's attention to Section A, line 2, page 2, which
limits the ability to obtain a lease to areas that are not
otherwise committed.
CO-CHAIRMAN GREEN noted that the reference was "to coal reserves or
otherwise." He asked if this referred to any kind of shallow gas
accumulation, or was it limited strictly to coal beds.
REPRESENTATIVE OGAN replied that the legislation was specifically
designed to include all types of shallow gas.
Number 2464
CO-CHAIRMAN GREEN announced that the next witness, DAVE LAPPI,
would testify via teleconference, from London.
DAVID LAPPI, President of Lapp Resources, Incorporated, stated that
he was in Great Britain primarily to investigate how shallow gas
extraction was done there.
TAPE 96-30, SIDE B
Number 035
MR. LAPPI explained that the possibility does exist for producing
gas on the North Slope within the shallow limit being discussed,
without conflicting with existing lease programs. He stated that
he would like to see the areas available for shallow gas leasing be
limited to those areas not specifically mentioned in a five-year
oil and gas leasing program. As far as the area-wide leasing
programs on the North Slope are concerned, certainly all areas that
are being considered for a lease sale should be excluded from the
shallow gas leasing program. For an area considered an exploration
licensing area, a shallow gas leasing program would pose
significant conflicts. The tracts that would be considered for
shallow gas leasing are extremely small compared to exploration
licensing areas. Thus, allowing shallow gas leases in these areas
could restrict development. Mr. Lappi explained that as far as the
oil companies are concerned, shallow gas leasing would not be
financially feasible for most companies in most areas. He believes
it would be in the state's best interest to encourage local
production and local involvement. If royalties can be reduced to
encourage this type of development, the state will be financially
better off in the long run.
Number 195
MR. LAPPI further commented that on page 3, line 13, there needs to
be a limit on the amount of acreage a party can hold under shallow
lease agreements. This would help prevent speculators from taking
advantage of the program. Page 5, line 18 refers to existing gas
pipeline or distribution systems to the population centers in
Southcentral Alaska. It may be useful to add "in Northern Alaska"
to this section. Line 21 states that the applicant for a lease
"shall conduct a title search." Existing state policy on oil and
gas leases is that there is no guaranteed title to any type of oil
and gas lease. The same policy should apply to the shallow gas
program.
Number 333
REPRESENTATIVE RAMONA BARNES joined the meeting.
MR. LAPPI continued his discussion of HB 394. He noted that one of
the proposed amendments may affect the section on page 5, lines 29
- 30. On page 8, the section dealing with discharge should be
modified, beginning on line 7, by adding the word "undisposable"
after the word "discharges." He further added that Section 5(f)
could be amended, to clarify the legislature's intent in 1985.
Number 496
CO-CHAIRMAN GREEN asked if the language being suggested by Mr.
Lappi was included in any of the proposed amendments before the
committee.
MR. LAPPI responded that it was not. He continued discussing the
bill. Page 9 mentions activities that may be required by the AOGC.
At line 13, he suggested changing the line to "permission to ... "
(indisc.). In closing, Mr. Lappi urged the committee to continue
working on the bill. He stated that it was good legislation for
the state of Alaska.
Number 713
CO-CHAIRMAN GREEN asked if there was any likelihood of mining a
coal seam which contained enough methane to be exploitable. He
stated this would seem to be an extremely hazardous situation.
MR. LAPPI responded that he believes there are coal seams in Alaska
which have demonstrated, in past mining operations, that they have
significant quantities of gas. In other areas of the world, coal
bed gas from underground mining operations is used as a fuel for
running coal mines, and is also exported through pipeline
operations and used as normal natural gas. He stated that he
believes opportunities do exist in Alaska for safely using this
type of gas.
Number 794
CO-CHAIRMAN GREEN asked if there would be some way to separate gas
rights from oil rights, should oil accumulations be found above
3,000 feet.
MR. LAPPI stated that the question was handled in a variety of ways
by other states, but would probably not be a big problem, at least
initially, because of the unlikelihood of oil being found above
3,000 feet.
CO-CHAIRMAN GREEN responded that he had asked the question because
a section of HB 394 exempts shallow gas leasing from bonding and
other requirements, since oil would not be associated with the
production. If there was a gas cap associated with oil, this could
create a problem. He asked if this section of the bill might need
to be reviewed.
MR. LAPPI replied that the AOGC would have the regulatory authority
to make decisions necessary to protect subsurface reservoirs from
contamination. They would also be able to accommodate the intent
of the bill with the actual conditions underground. As long as the
AOGC continues to do the job that they've been doing, he doesn't
foresee any problem.
Number 955
CO-CHAIRMAN GREEN asked if the language regarding discharges or
disposal on page 8, line 7, could possibly create problems with
aquifer pollution.
MR. LAPPI responded that the AOGC has the responsibility to protect
against such problems, and maintains strict restrictions. The
exemptions contained in HB 394 would not apply to discharges into
surface water bodies. The exemption referred to on page 8 refers
to discharges associated with the act of drilling. Water produced
as part of the production process would not come under that
exemption. Instead, it would be treated as a point source
discharge and would require a National Pollutant Discharge
Elimination System (NPDES) waste water permit.
CO-CHAIRMAN GREEN stated that he understood. But what about the
fluids used to drill the well? It is not an uncommon practice to
inject those wastes into the Cretaceous zone. Under HB 394,
drilling would be limited to the upper 3,000 feet. Would operators
be allowed to discharge the drill cuttings into a stream?
Number 1135
MR. LAPPI replied that the exemption would not allow any discharge
into a surface water body. The cuttings and possibly drilling
fluid would be ground into the road, or work pad. This would not
represent a threat to the environment, because drilling fluids used
in modern practice are not hazardous. All operators are very
keenly aware of what drilling fluids are environmentally correct,
and they are not using hazardous fluids when drilling shallow
holes. Bearing that in mind, the exemption is appropriate.
Number 1295
MR. BABCOCK stated that the AOGC had no additional testimony, other
than to note that Mr. Lappi correctly identified the AOGC's
responsibilities. He suggested that the AOGC might at some point
request a subsurface setback, to protect other owners' rights to
produce their oil and gas. In the same fashion, there is already
a surface setback. The practicality might be that the geologic
formation itself would limit drilling to 2,500 or 2,000 feet. If
that were the case, a setback might be required.
CO-CHAIRMAN GREEN asked if Mr. Babcock would envision the AOGC
provisions applying to drain hole drilling techniques.
MR. BABCOCK responded that, yes, they would apply to any well
drilled in search of oil or gas.
Number 1423
REPRESENTATIVE DAVIES asked what would be the typical depth at
which the AOGC would require well cuttings to be re-injected.
MR. BABCOCK replied that it was a function of the geology. On the
North Slope, for instance, the injection levels are much deeper
than the wells envisioned by this legislation.
REPRESENTATIVE DAVIES then asked if such shallow wells would
preclude re-injection of cuttings.
MR. BABCOCK responded that they might. It would depend upon the
AOGC's assessment of the geology, and whether or not there was any
potential threat to water.
REPRESENTATIVE DAVIES asked what would be a typical re-injection
depth along the annulus.
MR. BABCOCK replied that it would depend upon the surface casing,
which can range from 400 to 600 feet, down to 6,000 feet. He
explained that the injection into a Class II well is limited to a
volume of 35,000 barrels, to avoid over-pressuring a shallow drill
and affecting fresh water.
Number 1585
REPRESENTATIVE DAVIES stated that the previous discussion related
to materials used for drilling, and not to water produced by the
drilling process. He noted that with methane production, there is
often a large amount of produced water. How would that be handled?
Number 1650
KURT FREDRICKSON, Acting Deputy Commissioner for the Department of
Environmental Conservation (DEC), and Director, Division of Spill
Prevention and Response, DEC, responded to the question. He stated
that, as noted by Mr. Lappi, the produced waters would be treated
as a point source discharge, and would be regulated by the DEC
under an NPDES waste water permit. He stated that the specific
technology applied would be on a case-by-case basis. One way of
handling the waste water is through the use of evaporation ponds.
MR. FREDRICKSON further testified that providing rural communities
with natural gas as an energy source could actually be an
environmentally preferable alternative to the current dependence on
diesel fuel. His division deals with many diesel spills, which
pose a significant risk to public health and to the environment.
There is a possibility of spilled diesel fuel entering the
freshwater streams that people use as a water source. The DEC does
have one problem with the bill. In section 11 of the current
draft, the DEC's access to the spill response fund would be
restricted. However, the DEC is currently directed by law to
respond to spills in those cases where the responsible party is
either incapable or unwilling to mount an adequate spill response.
The DEC would then have to respond, but its resources are dependent
upon accessing the response fund. By restricting access to the
fund, HB 394 would conflict with AS 46.08.030, which is a stated
policy of the legislature to make the fund available for those
spill situations where the responsible party is not coming forward.
Number 1845
CO-CHAIRMAN GREEN noted that if the DEC did respond, they would
then attempt to recoup from the spilling party.
MR. FREDRICKSON responded that the DEC is obligated by statute to
recover the costs, and they take that responsibility very
seriously.
Number 1874
REPRESENTATIVE OGAN inquired, if the natural gas wells were to be
included in the 470 fund, what would be the drilling operators'
contribution to the fund?
MR. FREDRICKSON replied that the response fund currently is
supported through the 5 cents per barrel surcharge. That money is
directed into two accounts, prevention and response. Two cents per
barrel goes into the response account. When the account balance
exceeds $50 million, then no surcharge is collected. The balance
is currently at $58 million, so no funds are currently being
deposited.
CO-CHAIRMAN GREEN asked if Mr. Fredrickson was aware of any case
where there has been an oil spill related to shallow drilling
activities, above 3,000 feet.
MR. FREDRICKSON replied that he was not aware of any spill from the
drilling itself, but that other types of spills could occur.
Operational spills, for instance, from storage of fuel, occur
frequently. Both drilling and related operational activities are
covered by the response fund.
Number 1974
REPRESENTATIVE OGAN asked if the required $25,000 bond would be
adequate to cover operational spills.
MR. FREDRICKSON replied that the financial responsibility
requirement was intended to provide a demonstrated capability of
the responsible party to respond to a spill. The cost of
responding to a spill is extremely problematic. For incidental
spills, $25,000 may be adequate. Current financial responsibility
for an exploration well, being drilled for the purpose of locating
oil, is one million dollars. The DEC has never experienced a spill
from a shallow well, but the risk appears very low. However, if
crude oil was accidentally released through a gas well drilling
operation, the cost would be significantly higher than $25,000.
REPRESENTATIVE OGAN reiterated that the probability of such a spill
occurring through shallow drilling, such as contemplated by HB 394,
was extremely unlikely. That being the case, he did not understand
the DEC's concern with HB 394's exemption of shallow gas operators
from contributing to the spill fund.
MR. FREDRICKSON responded that the DEC was concerned that this
represents a major policy change with respect to the fund. The
fund was created to respond to spills, of whatever source. The DEC
receives spill reports in excess of three thousand per year, and
thus is quite concerned that there might be any prohibition on its
use of the fund. It is correct that, to date, no spills have
occurred through natural gas drilling, but such a spill could occur
at any time.
Number 2348
REPRESENTATIVE DAVIES asked about the possibility of a holding pond
containing slightly saline water being breached, possibly due to an
earthquake or flood. Would the DEC access the fund to respond to
such an event?
TAPE 96-31, SIDE A
Number 000
MR. FREDRICKSON stated that it was difficult to imagine such an
event occurring. However, if saline water was released into a
fresh water environment, it would be cause for concern. If the
spill was related to a major disaster, the DEC would probably turn
to the Department of Military and Veterans' Affairs.
REPRESENTATIVE AUSTERMAN asked if the DEC used the 470 fund to
clean up oil spills related to transfer of fuel from one tank to
another, in the event of a ruptured fuel tank, regardless of where
the spill occurred.
MR. FREDRICKSON replied that this was correct. The DEC responds on
an emergency basis when necessary, such as in the event of a
pipeline rupture. They also respond to non-emergency situations,
such as contamination resulting from a long-standing leak.
Number 158
REPRESENTATIVE AUSTERMAN asked if the DEC would then try to collect
costs from the responsible party.
MR. FREDRICKSON responded that this was correct.
Number 229
DAVE HUTCHINS, of the Alaska Rural Electric Cooperative Association
(ARECA), stated through a spokesperson (Hugh Chumley) that ARECA
supports HB 394.
SARA HANNAN, Lobbyist, Alaska Environmental Lobby (AEL), testified
that the AEL supports the idea of energy independence for Alaskans.
She stated that it is a shame to live in a state that is a major
energy producer, and still have some of the highest energy costs
for local users of anywhere in the country. Bringing energy
independence to rural Alaska is a laudatory goal. However, HB 394
contains major policy shifts that need to be explored more fully.
Most oil and gas regulation within the state is based on high
volume production. In talking about coal methane production, we
are looking a very small fields. However, this does not mean there
is no economic risk. Exempting such developments from all current
regulation, and reducing economic bonding to $25,000, requires
caution. The AEL believes that exempting the 470 fund from use,
and lowering the bond to $25,000, puts local communities at extreme
risk. This amount is probably not enough to cover the cost of
cleaning up even one spill. The risk is not from potential gas
spills, but from the operational spills that inevitably result when
dealing with large equipment.
MS. HANNAN further testified that the 470 fund is only paid into by
crude oil production, but it was designed by law to clean up spills
of oil and other hazardous substances. If there is a chlorine
spill, for instance, related to a water treatment facility, the DEC
has the authority to tap the 470 fund. The 470 fund is the fire
drill fund, and gives DEC the ability to respond immediately.
Without access to the 470 fund, and only $25,000 bond required, the
AEL believes that a small community could be devastated. All the
gas producers who are interested in going forward today, such as
Mr. Lappi, are experienced and reputable. However, operators may
come in who are not experienced. They could suddenly decide in the
middle of a project that they cannot afford to go forward. Half
finished projects and rusty equipment could then create a very
expensive problem for a small community. This could be remedied by
providing access to the 470 fund, or by requiring a higher bond.
Ms. Hannan urged the committee to remedy this problem with the
bill, to assure that the state's general fund would not have to be
tapped. What it comes down to is who pays when the liable party
has gone bankrupt or gone out of business.
Number 600
REPRESENTATIVE OGAN thanked Ms. Hannan for her testimony, but noted
that the villages are already getting shafted, due to problems with
leaking fuel tanks. In one case, a tank exploded due to poor
operational procedures. The more regulatory prohibitions that are
applied to shallow gas operations, the longer the current problems
in rural Alaska will continue.
MS. HANNAN urged the committee to remember that swinging the
pendulum from over regulation to no regulation would probably
result in disreputable people going into business, who are not
aware of the complexities of gas development in rural Alaska. The
bottom line would be that it would be a local community, with
production facilities very close to its residence base, that would
experience a problem. The AEL would like to see gas development in
rural Alaska, but does not believe that $25,000 bond is an adequate
financial protection. If 300 rural Alaskan communities are to have
local production of natural gas, there must be some controls.
Without best interest findings, without contingency plans, and
without access to the 470 fund, there must be a greater financial
guarantee.
Number 792
REPRESENTATIVE RAMONA BARNES asked if Ms. Hannan was familiar with
the Native corporations.
MS. HANNAN responded in the affirmative.
REPRESENTATIVE BARNES stated that many Native corporations are
already involved in oil and gas drilling, and would probably be
going into the local communities to do shallow gas drilling. The
corporations would not be likely to demolish their own villages.
MS. HANNAN responded that no one would purposely put in a shoddy
system. However, accidents happen because we cannot always foresee
human error or natural disasters. All potential situations cannot
be anticipated. The proposed legislation prohibits access to the
deep pocket of the 470 fund, and only requires a $25,000 bond.
Perhaps a mechanism where a collective bond could be shared,
similar to the 470 fund, would address the problem. She stated
that she would not want to see a Native corporation's assets put at
risk for the subsidiary operation of gas production in one village.
Like most bonds, this is to ensure that if there is a problem, the
mechanism exists to remedy it.
Number 910
REPRESENTATIVE BARNES noted that there is coming a time in the very
near future when power cost equalization will be a thing of the
past. The villages must become energy independent, and HB 394 is
one mechanism to encourage such independence.
REPRESENTATIVE AUSTERMAN stated that the AEL appeared to be in the
same position as some of the committee members, in that they favor
HB 394, but share the same concerns regarding the 470 fund. He
suggested an amendment to allow access to the 470 fund.
Number 1030
CO-CHAIRMAN GREEN announced that, there being no further witnesses,
public testimony on HB 394 was closed. He asked the sponsor if it
was his wish to adopt version M.
REPRESENTATIVE OGAN responded that version M had already been
adopted. He stated that the amendments proposed today were
appropriate to version M.
CO-CHAIRMAN GREEN noted that the scheduled meeting time was almost
up.
REPRESENTATIVE OGAN stated that, due to time constraints, some of
the proposed amendments could be grouped together.
CO-CHAIRMAN GREEN stated that the amendments would be taken up at
the next House Resources Committee meeting.
ADJOURNMENT
Number 1120
CO-CHAIRMAN GREEN announced that House Resources Committee meeting
was adjourned at 9:58 a.m.
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