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