05/07/2003 08:10 AM House RES
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= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
May 7, 2003
8:10 a.m.
MEMBERS PRESENT
Representative Hugh Fate, Chair
Representative Carl Gatto
Representative Cheryll Heinze
Representative Bob Lynn
Representative Carl Morgan
Representative Kelly Wolf
Representative David Guttenberg
Representative Beth Kerttula
MEMBERS ABSENT
Representative Beverly Masek, Vice Chair
COMMITTEE CALENDAR
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 198
"An Act providing for a reduction of royalty on certain oil
produced from Cook Inlet submerged land."
- MOVED CSSSHB 198(O&G) OUT OF COMMITTEE
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28
"An Act relating to adjustments to royalty reserved to the state
to encourage otherwise uneconomic production of oil and gas; and
providing for an effective date."
- MOVED CSSSHB 28(RES) OUT OF COMMITTEE
CS FOR SENATE BILL NO. 151(L&C)
"An Act relating to the regulation of natural gas pipelines
under the Pipeline Act; and providing for an effective date."
- MOVED CSSB 151(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 246
"An Act relating to the limitation on upland acreage that a
person may take or hold under oil and gas leases; and providing
for an effective date."
- SCHEDULED BUT NOT HEARD
HOUSE BILL NO. 267
"An Act relating to the Alaska Railroad; authorizing the Alaska
Railroad Corporation to provide financing for the acquisition,
construction, improvement, maintenance, equipping, or operation
of facilities for the transportation of natural gas resources
within and outside the state by others; authorizing the Alaska
Railroad Corporation to issue bonds to finance those facilities;
and providing for an effective date."
- BILL HEARING POSTPONED [See 1:40 p.m. minutes for this
date]
HOUSE BILL NO. 277
"An Act relating to the powers of the Regulatory Commission of
Alaska in regard to intrastate pipeline transportation services
and pipeline facilities, to the rate of interest for funds to be
paid by pipeline shippers or carriers at the end of a suspension
of tariff filing, and to the prospective application of
increased standards on regulated pipeline utilities; allowing
the commission to accept rates set in conformity with a
settlement agreement between the state and one or more pipeline
carriers and to enforce the terms of a settlement agreement in
regard to intrastate rates; and providing for an effective
date."
- BILL HEARING POSTPONED [See 1:40 p.m. minutes for this
date]
CONFIRMATION HEARINGS
Board of Fisheries
Floyd F. Bouse, D.D.S. - Fairbanks
Robert (Ed) Dersham - Anchor Point
- CONFIRMATION HEARINGS POSTPONED [See 1:40 p.m. minutes
for this date]
PREVIOUS ACTION
BILL: HB 198
SHORT TITLE:ROYALTY REDUCTION ON CERTAIN OIL
SPONSOR(S): REPRESENTATIVE(S)KOHRING
Jrn-Date Jrn-Page Action
03/17/03 0560 (H) READ THE FIRST TIME -
REFERRALS
03/17/03 0560 (H) O&G, RES, FIN
03/26/03 0654 (H) COSPONSOR(S): CHENAULT
04/03/03 (H) O&G AT 3:15 PM CAPITOL 124
04/03/03 (H) -- Meeting Canceled --
04/10/03 (H) O&G AT 3:15 PM CAPITOL 124
04/10/03 (H) -- Meeting Canceled --
04/24/03 1093 (H) SPONSOR SUBSTITUTE INTRODUCED
04/24/03 1093 (H) READ THE FIRST TIME -
REFERRALS
04/24/03 1093 (H) O&G, RES, FIN
04/24/03 (H) O&G AT 3:15 PM CAPITOL 124
04/24/03 (H) Moved CSSSHB 198(O&G) Out of
Committee
04/24/03 (H) MINUTE(O&G)
04/25/03 1138 (H) COSPONSOR(S): HOLM, MCGUIRE
04/28/03 1154 (H) O&G RPT CS(O&G) 6DP
04/28/03 1154 (H) DP: HOLM, FATE, CRAWFORD,
KERTTULA,
04/28/03 1154 (H) MCGUIRE, KOHRING
04/28/03 1155 (H) FN1: (DNR)
05/02/03 (H) RES AT 1:00 PM CAPITOL 124
05/02/03 (H) -- Meeting Canceled --
05/05/03 (H) RES AT 1:00 PM CAPITOL 124
05/05/03 (H) Scheduled But Not Heard
05/06/03 (H) RES AT 0:00 AM CAPITOL 124
05/06/03 (H) Scheduled But Not Heard
05/07/03 (H) RES AT 8:00 AM CAPITOL 124
BILL: HB 28
SHORT TITLE:OIL & GAS ROYALTY MODIFICATION
SPONSOR(S): REPRESENTATIVE(S)KOHRING, ROKEBERG
Jrn-Date Jrn-Page Action
01/21/03 0039 (H) PREFILE RELEASED (1/10/03)
01/21/03 0039 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0039 (H) O&G, RES, FIN
02/19/03 0246 (H) SPONSOR SUBSTITUTE INTRODUCED
02/19/03 0246 (H) READ THE FIRST TIME -
REFERRALS
02/19/03 0246 (H) O&G, RES, FIN
02/20/03 (H) O&G AT 3:15 PM CAPITOL 124
02/20/03 (H) Heard & Held
02/20/03 (H) MINUTE(O&G)
03/11/03 (H) O&G AT 3:15 PM CAPITOL 124
03/11/03 (H) Moved CSSSHB 28(O&G) Out of
Committee
03/11/03 (H) MINUTE(O&G)
03/14/03 0536 (H) O&G RPT CS(O&G) 6DP 1AM
03/14/03 0536 (H) DP: CHENAULT, MCGUIRE,
ROKEBERG,
03/14/03 0536 (H) CRAWFORD, FATE, KOHRING; AM:
KERTTULA
03/14/03 0537 (H) FN1: ZERO(DNR)
04/30/03 (H) RES AT 1:00 PM CAPITOL 124
04/30/03 (H) <Bill Hearing Postponed to
Fri. 5/2>
05/02/03 (H) RES AT 1:00 PM CAPITOL 124
05/02/03 (H) -- Meeting Canceled --
05/05/03 (H) RES AT 1:00 PM CAPITOL 124
05/05/03 (H) Scheduled But Not Heard
05/06/03 (H) RES AT 0:00 AM CAPITOL 124
05/06/03 (H) Scheduled But Not Heard
05/07/03 (H) RES AT 8:00 AM CAPITOL 124
BILL: SB 151
SHORT TITLE:REGULATION OF NATURAL GAS PIPELINES
SPONSOR(S): SENATOR(S) WAGONER
Jrn-Date Jrn-Page Action
03/20/03 0550 (S) READ THE FIRST TIME -
REFERRALS
03/20/03 0550 (S) L&C, RES
03/27/03 (S) L&C AT 1:30 PM BELTZ 211
03/27/03 (S) Heard & Held
03/27/03 (S) MINUTE(L&C)
03/27/03 (H) MINUTE(O&G)
04/01/03 (S) L&C AT 1:30 PM BELTZ 211
04/01/03 (S) Moved CSSB 151(L&C) Out of
Committee
04/01/03 (S) MINUTE(L&C)
04/02/03 0663 (S) L&C RPT CS 5DP NEW TITLE
04/02/03 0664 (S) DP: BUNDE, DAVIS, FRENCH,
04/02/03 0664 (S) SEEKINS, STEVENS G
04/02/03 0664 (S) FN1: INDETERMINATE(DNR)
CORRECTED
04/02/03 0664 (S) FN2: ZERO(CED)
04/14/03 (S) RES AT 3:30 PM BUTROVICH 205
04/14/03 (S) Heard & Held
04/14/03 (S) MINUTE(RES)
04/16/03 (S) RES AT 3:30 PM BUTROVICH 205
04/16/03 (S) Moved CSSB 151(L&C) Out of
Committee
04/16/03 (S) MINUTE(RES)
04/17/03 0891 (S) RES RPT CS(L&C) 4DP 3NR
04/17/03 0891 (S) NR: OGAN, ELTON, LINCOLN;
04/17/03 0891 (S) DP: SEEKINS, STEVENS B,
WAGONER, DYSON
04/17/03 0891 (S) FN1: INDETERMINATE(DNR)
04/17/03 0891 (S) FN2: ZERO(CED)
04/25/03 0971 (S) RULES TO CALENDAR 4/25/2003
04/25/03 0971 (S) READ THE SECOND TIME
04/25/03 0971 (S) L&C CS ADOPTED UNAN CONSENT
04/25/03 0971 (S) ADVANCED TO THIRD READING
4/28 CALENDAR
04/28/03 1012 (S) READ THE THIRD TIME CSSB
151(L&C)
04/28/03 1013 (S) PASSED Y19 N- E1
04/28/03 1013 (S) EFFECTIVE DATE(S) SAME AS
PASSAGE
04/28/03 1015 (S) TRANSMITTED TO (H)
04/28/03 1015 (S) VERSION: CSSB 151(L&C)
04/29/03 1177 (H) READ THE FIRST TIME -
REFERRALS
04/29/03 1177 (H) RES
05/05/03 (H) RES AT 1:00 PM CAPITOL 124
05/05/03 (H) <Bill Hearing Postponed to
05/07/03>
05/07/03 (H) RES AT 8:00 AM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE VIC KOHRING
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of SSHB 198 and as one
of the sponsors of SSHB 28.
GARY CARLSON, Senior Vice President
Forest Oil Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified on SSHB 198, focusing on the
benefits of maintaining the infrastructure in Cook Inlet; said
the bill provides a way for the state to make a difference.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions about SSHB 28.
REPRESENTATIVE NORMAN ROKEBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as one of the sponsors of
SSHB 28.
KEVIN BANKS
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During hearing on SSHB 28, answered
question relating to Amendment 1 to Version U.
SENATOR THOMAS WAGONER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of SB 151.
ACTION NARRATIVE
TAPE 03-37, SIDE A
Number 0001
CHAIR HUGH FATE called the House Resources Standing Committee
meeting, which had been recessed on May 5, back to order at
8:10 a.m. Representatives Fate, Heinze, Morgan, and Wolf were
present at the call to order. Representatives Gatto, Lynn,
Guttenberg, and Kerttula arrived as the meeting was in progress.
HB 198-ROYALTY REDUCTION ON CERTAIN OIL
CHAIR FATE announced that the first order of business would be
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 198, "An Act providing for
a reduction of royalty on certain oil produced from Cook Inlet
submerged land." [Before the committee was CSSSHB 198(O&G).]
Number 0089
REPRESENTATIVE VIC KOHRING, Alaska State Legislature, sponsor,
explained that this bill is intended to help prevent offshore
oil platforms in Cook Inlet from shutting down. Rapidly
reaching the end of their economic lives, the platforms were
built mostly in the 1960s; two of the thirteen rigs have
suspended production because they no longer break even. He
offered his belief that it isn't in the state's best interest to
abandon these fields, because of the negative economic effects
that would occur mostly on the Kenai Peninsula.
REPRESENTATIVE KOHRING noted that the bill reduces the royalty
rate paid to the state, on a sliding scale. Two primary
categories encompass two different groups of offshore platforms
that will benefit from this legislation: Dolly, Grayling, King
Salmon, Steelhead [and Monopod], which are wells with high
overhead; and Granite Point, Anna, Bruce, Baker, Dillon, [XTO.A,
and XTO.C], which have lower operating costs. He told members
that without this bill, the state eventually will receive zero
in royalty income because there will be no production and the
state will be receiving 12.5 percent of nothing. With passage
of the bill, however, the state can receive between 5.5 percent
and 12.5 percent of something, since it encourages owners of the
platforms to continue with production.
Number 0365
REPRESENTATIVE KOHRING called attention to the fiscal note
[prepared by Mark Myers of the Division of Oil & Gas, Department
of Natural Resources (DNR)]. Representative Kohring said the
estimated $600,000 is a relatively modest amount that the state
would lose because production isn't high for the rigs; Mr. Myers
could address that and details about the sliding-scale system.
Representative Kohring said the trade-off for the $600,000 lost
from the state treasury will be hundreds of jobs involved with
running these oil rigs; millions of dollars spent on goods and
services, mostly on the Kenai Peninsula; and continuation of
property-tax revenues to local governments there that provide
for roads, schools, and public safety.
REPRESENTATIVE KOHRING highlighted the expensive infrastructure.
If the lives of the platforms can be extended through this
legislation, the owners may be able to use that infrastructure
to further develop the [oil] fields by using directional
drilling techniques. Instead of shutting down, being
mothballed, and eventually being towed away, these rigs could be
kept in place as a base for future drilling. He closed by
offering his belief that the legislation is relatively urgent.
Number 0573
GARY CARLSON, Senior Vice President, Forest Oil Corporation,
noting that he has been a major investor in Cook Inlet in the
past five years, told members:
My testimony on this bill will focus on the
maintenance of critical and scarce infrastructure
associated with the mature oil fields in the Cook
Inlet. The platforms, associated pipelines, and
related onshore facilities ... represent irreplaceable
infrastructure which may facilitate the exploration,
discovery, and development of as yet undiscovered
reserves if their useful lives can be extended. Any
delay in abandoning and decommissioning of this
infrastructure will provide opportunities to the
industry to develop smaller-scale oil and gas
prospects that won't stand the economics if new
infrastructure needed to be developed.
As mature fields approach their economic life, the
operators need to get creative and manage ... costs
carefully, ... including managing their vendors and
their contractors to share in these efforts. And I
believe it is appropriate for the state to step in as
a partner also. This bill would provide a way for the
state to make a difference.
Keeping the current Cook Inlet oil fields on line a
few more years will maintain good jobs, provide local
taxes, and [provide] the possibility of new
development. And it could easily exceed the
anticipated future shortfall in state revenues
resulting from the reduced state royalty. I want to
commend the bill sponsors and the Department of
Natural Resources for their foresight in supporting
this bill.
Number 0722
REPRESENTATIVE HEINZE said she thinks this is a good bill, but
inquired about the 14 months' extension and the economic
feasibility for companies that keep these platforms going.
MR. CARLSON answered that the length of time to keep a platform
producing, depending upon the decline rates and who analyzes the
data, could be one to three years. Knowing the royalty rates
would help a company plan, keep the facilities on line another
year or two, and stay above the red line. He suggested that the
operators of the platforms can plan the decommissioning much
better [if the bill passes], which should delay shutting down.
Number 0842
CHAIR FATE asked whether the cost of maintaining the platforms
after their useful production life will offset revenues made
before they are shut down, especially if those platforms aren't
utilized in the near future.
MR. CARLSON explained that the cost of shutting in the platforms
without abandoning them will be tremendously different for each
facility. He offered his belief that some have been operated in
the red for a short time prior to being shut in because of that
cost. Once they've been decommissioned to where they can be
left intact without abandoning them, the cost of maintaining the
platforms is relatively low.
CHAIR FATE suggested that even if the cost is low, paying that
cost over 10 years, for example, without [operating the
platform] will begin to erode the profit made in the 14 months
it was kept alive. He asked whether it would be worth it, other
than extending jobs and the local economy for those 14 months.
MR. CARLSON answered:
It's difficult to say if that's the case. And I
appreciate the question ... that the amount of
additional revenue that would come to the operator as
a result of this could be marginal at best. I think
it's the spirit of what the state is trying to do here
... that's critical. And as ... [an] operator in the
inlet that ... is looking at exploring for new oil and
gas, the fact that that facility - even if it's been
shut in two or three years - ... [is] there, it's
possible for us to bring the field on and maybe pipe
the oil to this idle platform. And at that point, ...
the value of that facility comes back to the operator
or, if not the operator, somebody that's out there
like Forest Oil [Corporation], where we would pay for
access ... to the infrastructure. So there's ...
those unknowns out there that I think offer more ...
opportunities than the actual savings, ... in
equivalent of ... the 750-barrel-a-day platforms, ...
[a] savings of roughly 50 barrels a day.
Number 1063
CHAIR FATE asked whether those platforms, even if shut in, might
help facilitate smaller fields or exploration around the
vicinity; he mentioned possible lateral drilling.
MR. CARLSON answered in the affirmative.
The committee took an at-ease from 8:25 a.m. to 8:27 a.m.
Number 1142
REPRESENTATIVE HEINZE moved to report [CSSSHB 198(O&G)] out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSSSHB 198(O&G) was
reported from the House Special Committee on Oil and Gas.
HB 28-OIL & GAS ROYALTY MODIFICATION
[Contains discussion of SSHB 198]
Number 1170
CHAIR FATE announced that the next order of business would be
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28, "An Act relating to
adjustments to royalty reserved to the state to encourage
otherwise uneconomic production of oil and gas; and providing
for an effective date." [The bill was sponsored by
Representatives Kohring and Rokeberg. Before the committee was
CSSSHB 28(O&G); in packets was a new proposed committee
substitute (CS), Version U.]
Number 1196
REPRESENTATIVE VIC KOHRING, Alaska State Legislature, one of the
sponsors, noted that he chairs the House Special Committee on
Oil and Gas. He explained that SSHB 28 is an "incentive bill"
that provides for royalty reduction. The intent of the
legislation is to spur development in what are considered
marginal fields, which are prospective fields where there is no
facility that is drilling already; where there is an existing
facility producing oil that may be close to being uneconomical;
or where the facility is mothballed and shut in, not producing
because the lease owners feel they aren't making money. He
specified that the intent is to provide a royalty break for oil
and gas for marginal fields anywhere in Alaska.
CHAIR FATE requested a motion to adopt the proposed CS before
Representative Kohring continued.
Number 1290
REPRESENTATIVE LYNN moved to adopt the proposed CS, Version 23-
LS0177\U, Chenoweth, 4/30/03, as a work draft. [No objection
was stated, and Version U was treated as adopted.]
The committee took an at-ease from 8:28 a.m. to 8:31 a.m. to
distribute copies of Version U.
REPRESENTATIVE LYNN announced that he needed to go to another
meeting, but was generally in support of this bill.
The committee took a brief at-ease.
Number 1491
REPRESENTATIVE KOHRING continued, advising members that he would
incorporate Version U during his presentation. He said 1995
legislation had enacted the current royalty-reduction system for
these marginal fields, but clarification and simplification are
needed. The intent is to create a more understandable, flexible
royalty-adjustment method that is more simplified with respect
to the procedure and paperwork, and to give authority to the
Department of Natural Resources (DNR) commissioner to make
decisions relating to royalty reduction, to encourage
development of these marginal fields. Hence this gives the
[DNR] commissioner the tools to negotiate with drilling and
exploration companies to make both oil and gas production
financially viable. He explained, "We feel that the existing
law is simply too burdensome and costly for the industry and
thus discourages filing of drilling applications."
REPRESENTATIVE KOHRING reminded members that the state's royalty
share usually is 12.5 percent, but sometimes as high as 20
percent, depending on the field. Royalty reduction under
SSHB 28 will depend on changes in oil prices, fuel recovery,
production rates and volumes, and development and operating
costs. He said the new rate will be set at the discretion of
the commissioner, who will evaluate each project independently
and then decide the rate; it could be as low as about 3 percent
and perhaps as high as 12.5 percent.
Number 1661
REPRESENTATIVE KOHRING emphasized a key part of the legislation:
the decision by the commissioner as to whether a field is
profitable will be based on an evaluation done either internally
by DNR's Division of Oil & Gas or through an independent
contract, if the applicant wants to expedite the process and so
chooses. Criteria regarding whether the fields are economically
viable include the hydrocarbon potential and costs associated
with drilling [and] production. The commissioner will decide
whether it's justifiable to grant a royalty reduction and, if
so, at what rate. If the study shows the field as uneconomic,
then the commissioner can structure a royalty rate that will
improve the field's profitability.
REPRESENTATIVE KOHRING informed members that the standards of
the contract and who [the contractor] will be are to be
determined by DNR. Although he'd heard there are few [potential
contractors], he expressed confidence that they are competent
and qualified, and said he'd discussed this with Division of Oil
& Gas personnel. If the evaluation is done internally, unless
there are unusual circumstances, there won't be any cost to the
applicant that would have to be reimbursed to the state. But if
it's done through an independent contract, the applicant must
pay the state a reimbursement fee not to exceed $150,000.
REPRESENTATIVE KOHRING explained that if the commissioner hires
an independent contractor, the current royalty-reduction statute
exempts the hiring process from the state's normal competitive
bidding process. This provides the applicant with some
certainty about who will do the professional evaluation, and it
will expedite the commissioner's decision. He asserted that the
public process is protected with this legislation because the
public has access and the ability to comment on the
commissioner's preliminary findings. Furthermore, SSHB 28
retains legislative involvement through the Joint Committee on
Legislative Budget and Audit, which meets year-round and through
which detailed audits can be requested to examine individual
applications and royalty adjustments that are granted.
REPRESENTATIVE KOHRING offered his expectation that SSHB 28 will
result in more oil being produced and not left in the ground.
He said he believes Alaska needs to remain competitive in the
global market by encouraging development of oil and gas, and
that this legislation moves the state closer to that goal. He
noted that Representative Rokeberg had sponsored similar
legislation in the past and was the impetus behind SSHB 28.
Number 1893
CHAIR FATE asked about provisions for increasing the royalty if
improvements in technology make a field less marginal and more
productive.
REPRESENTATIVE KOHRING deferred to Mr. Myers.
Number 1939
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, responded:
The bill ... gives the commissioner broad latitude to
structure the royalty reduction and actually have the
choice, under this bill, to either try, on the upside,
to recover some of the ... royalty reduction,
structuring it that way, or not to. And it depends on
the individual circumstances. So the bottom line is,
the commissioner can structure the royalty, if prices
go up and the field's more economic, to recover it or
to change and raise the royalty back up to what it
was, which are ... likely mechanisms. ...
It's hard to individualize ... the specific mechanism
because ... royalty reduction under this bill can come
under fields that [have] just been delineated, and you
don't have a lot of geologic information yet - you
have enough to know that it's developable, but you
don't fully have the wells drilled; you don't fully
have an understanding of the size and shape of the
accumulation. So in that [case] ... you'd have a
rough idea, but not real accurate numbers. And in
that case, it takes a lot more scrutiny to do the
analysis and you would want to condition the royalty
with a lot more upside protection.
Conversely, very late in the life of the field you'll
have a lot of data, you'll have lots of wells, you'll
have good seismic data, you'll have a good production
history and [know the] decline of the field. And
you'll be able ... to be a lot more precise ... on the
royalty production. You may not need as many caveats
to protect the upside.
So it all depends on ... the individual data set
available [for] the field, the economics of the field,
the oil price, obviously. So ... there are a lot of
abilities in this bill to customize the royalty
reduction and protect the state ... on the upside.
Number 2029
REPRESENTATIVE NORMAN ROKEBERG, Alaska State Legislature, one of
the sponsors, agreed with Mr. Myers, noting that page 2, lines
24-28, [paragraph] (3), is the key to this legislation. He
pointed out that the sliding scale is a key element of the bill
and read from the paragraph, which states:
(3) shall provide for an increase or decrease or
other modification of the state's royalty share by a
sliding scale royalty or other mechanism that shall be
based on a change in the price of oil or gas and may
also be based on other relevant factors such as a
change in production rate, projected ultimate
recovery, development costs, and operating costs
REPRESENTATIVE ROKEBERG said there is an upside that should be
anticipated under any kind of agreement entered into; that was
the fundamental basis of the 1995 changes proposed in HB 207.
Number 2111
REPRESENTATIVE GUTTENBERG asked whether Mr. Myers had said the
royalty reduction could be given before the field went into
production or before the geological structure was understood.
MR. MYERS directed attention to page 2, line 5, sub-subparagraph
(i), which talks about a field that has been sufficiently
delineated to the satisfaction of the commissioner. He said
there must be some "reasonable geologic information," but that
for a field not yet in production there is a higher level of
uncertainty. There will be test data, but not necessarily
representative of the entire field. He elaborated:
So there's a substantial amount of uncertainty, but
you do believe you have captured the range of possible
oil and gas that's in the field. But ... as you get
more data, the range of uncertainty decreases. So the
commissioner has to make a decision without [its
being] sufficiently delineated, and ... that's a real
important ... issue. He's not going to know he's
right or not - that's why the conditioning that
Representative Rokeberg talks about in these early
stages are important; that's why the ability of the
state to get an outside consultant to look at
engineering data as well becomes really critical.
So ... in those cases where you have a reasonable
amount of information but not a huge amount of
certainty, you really want to be careful on how you
condition it to capture the upside again ... as
development of the field goes. Typically, oil and gas
fields increase in their ultimate recoverable reserves
due to changes in technology ... and due to capturing
the upside. That's ... historically, if you look at
all our major fields, with the exception of fields
like Badami, in which case ... there was more downside
than upside.
So, generally, the upside's larger than initially
calculated, and the state needs to be keenly aware of
that when they model it. That's not to say there
aren't other cases where it goes the other way, or the
uncertainty. So I guess [the] long and short is, the
applications under that section, under "delineated but
not yet in production field," are the most
challenging, ... 'cause you have less information.
But you can still do it, particularly if you
condition, as Representative Rokeberg suggested, in
the other section.
Number 2259
REPRESENTATIVE GUTTENBERG asked, in that scenario, whether it
would be prudent for developers to say, at a certain point in
their exploration, that they would stop looking and didn't have
enough data, in order to get the royalty reduction.
MR. MYERS responded that, first, it's been learned from royalty
reduction in other scenarios that other factors involving
profitability of the field generally outweigh the royalty
reduction; external factors such as fluctuations in the price of
oil and uncertainty about the size of the reservoir dominate a
company's discussions in terms of whether or not to develop.
Thus he opined that only development at the margins can be
affected in most cases.
MR. MYERS said, second, there is definitely some risk, which is
why it needs to be structured. He explained:
We independently review the data. We have the seismic
data; we look at the well data. Will an applicant try
to leverage this? Possibly. But, again, you would
condition such a royalty reduction as production
increases or as reserve base increases or as price
changes - a sliding scale. So we would capture that.
And probably, in many of these cases, ... we would ask
for an increase in royalty to offset any decrease in
royalty earlier on, again, to balance that. So it's a
delicate balance.
You have to be very diligent to ... do a good
technical evaluation to protect the interest. There's
clearly a desire by the operator to pay as little
royalty as possible; that's ... only nature. We are a
cost ... to the structure. It's our job, in terms of
our technical analysis, to make sure we get our fair
share, and that if we do structure a deal that we do
recover any royalty [relief] that was granted that was
not appropriate. ...
Number 2385
MR. MYERS said the other big factor that no one controls is
price, a big [determinant] in how the evaluation is done with
regard to whether royalty reduction is justified economically.
Noting that generally most mechanisms under royalty reduction
would take price into consideration, he said:
I guess where this is useful, in cases where the field
size is "on the bubble" in terms of whether it's
economic or not and the price is depressed for a
while, this would provide ... a little bit of
certainty ... that they might be able to go ahead with
development and improve their economics slightly. ...
That's the kind of issues ... we play with here.
This is very difficult, ... very tough stuff to do.
It takes really detailed analysis; we don't take it
lightly. And ... the history of this is, we have
denied applications under this when we haven't seen it
as appropriate or in the public interest, under the
previous [AS 38.05.]180(j) and (p).
Number 2440
REPRESENTATIVE HEINZE offered her understanding that the
commissioner is bound by law to act in the state's best
interests and has the right to set the royalty at the time of a
lease sale. She asked whether the commissioner can reduce it
only through this bill.
MR. MYERS said that's correct, but there are other conditions
under which royalty might be reduced. For example, some fields
in Cook Inlet are affected by [SSHB] 198, heard during this
meeting; there are other mechanisms, but those are site-
specific. With regard to SSHB 28, he said it truly is designed
to be customized royalty relief for each field, based on its
individual economic criteria.
REPRESENTATIVE ROKEBERG pointed out that this is statewide in
application, whereas most of the other bills have specifically
targeted a particular basin, area, or circumstance. He said
this portion of the statute is the central, historic, long-term
statutory authority for any modification, and that the other
bills are additions to it.
Number 2530
CHAIR FATE surmised that SSHB 28 will induce exploration in
areas that are marginal or where little data has been obtained
from previous exploration, even though the geology may indicate
a high potential. He opined that the ability to recapture a
previously reduced royalty if a field becomes highly productive
bodes well for this legislation. He suggested this might be a
good device for the Nenana basin in his own region, for example.
Number 2577
REPRESENTATIVE GUTTENBERG asked whether this bill is universal
enough to cover all oil and gas situations in the state.
REPRESENTATIVE ROKEBERG replied that he wouldn't go so far as to
say that. He characterized this as the root or foundation, with
general applicability, but offered his belief that there should
be other, targeted types of programs. He cited [SSHB 198] as an
example that deals with the actual production equipment and is
unique to Cook Inlet and its declining production in certain
older fields. He indicated SSHB 28 is intended to look at older
fields, but could have general applicability as an incentive to
drill. He explained that the language passed in 1995 had become
unworkable and that the intention is to straighten that out.
CHAIR FATE announced that he was closing public testimony.
Number 2741
CHAIR FATE drew attention to Amendment 1, which read [original
punctuation provided]:
Insert new section after (6):
(7) may, with the mutual consent of the lessee or
lessees making application for the royalty reduction
under (1)(B) or (1)(C) of this subsection, request
payment for the services of an independent contractor,
selected from a list of qualified consultants to
evaluate hydrocarbon development, production,
transportation, and economics by the commissioner to
assist the commissioner in evaluating the application
and financial and technical data; if, under this
paragraph, the commissioner requires payment for the
services of an independent contractor, the total cost
of the services that may be paid for by the lessee or
lessees may not exceed $150,000 for each application,
and the commissioner shall determine the relevant
scope of the work to be performed by the contractor;
selection of an independent contractor under this
paragraph is not subject to AS 36.30;
REPRESENTATIVE ROKEBERG noted that it goes on page 5, line 24,
and also should say "renumber accordingly".
Number 2821
REPRESENTATIVE GUTTENBERG moved to adopt Amendment 1.
CHAIR FATE asked whether there was an objection.
REPRESENTATIVE GUTTENBERG said just for discussion purposes. He
asked whether anything covers a conflict of interest for an
independent contractor for this evaluation, who would most
likely have ties to the industry or considerable contractual
relationships with such entities.
Number 2863
REPRESENTATIVE ROKEBERG agreed that the number of firms with
this expertise is limited. He said the issue of who gets to
select whom had been an arm-wrestling match of sorts between him
and the division for a prior draft of the bill, and that he'd
deferred to the division "to give them a little more sway in
terms of the selection of who was going to be doing it,
notwithstanding the fact that the applicant still pays the
freight."
MR. MYERS added:
We want to be sure that the qualified consultant ...
isn't biased. Generally, they work for a large number
of folks in the industry because there's ... certainly
not enough government work up here to support
contractors. And you clearly want a qualified one
that has good experience with the industry. That
said, ... we've worked with contractors before;
they've been good. We have a confidentiality
agreement, obviously, with them, and we've seen a
pretty good professional relationship.
The other thing is, the decision will still made by
the commissioner. ... This isn't "we just farmed this
... analysis out." We will ask them specific
questions, evaluate, and maybe ask a question on the
seismic on the upside. It may be a question on the
cost of facility construction and auditing, ...
looking at what data: "Take a look; give us an expert
opinion on the financial data submitted by the
applicant."
So, generally, when we use a contractor - and we never
have for a royalty reduction, but it's anticipated we
would be using one - we would target specific
questions and their specific qualifications.
TAPE 03-37, SIDE B
Number 2965
MR. MYERS mentioned unbiased information and the intention to
"trust but verify." He also offered his experience that the
high-quality contractors have been able to compartmentalize
their work "between folks" and are ethical. He concluded by
saying he thinks the system is workable, and emphasized that the
commissioner has the say in the selection process, although the
applicant has a partial say as well. He added:
I think in most cases we probably won't hire [an
independent contractor]. It's primarily in two cases.
One, the workload is so high that we physically can't
... do the work in a timely manner, so the applicant
may ... want to hire somebody to help us with some of
the analysis.
Secondly, in the case of the delineated cases ... we
talked about, there is a tremendous amount of upside
work to do in order to craft something or to fully
understand the economics of the field to the best we
can with a limited data set. At that point, ... you
can't rely on production forecasts, production
history; you've got to look at the "what ifs." The
scenarios become very broad ... early in the life of
the field, [for example] ... the price of oil you have
to forecast or risk over a long period of time in
order to craft something. So there is just a
tremendous amount of work in the early ... life of a
field. To that case, we would be targeting them to do
a bunch of the modeling, probably, for us. But,
again, ultimately, that modeling would have to be
compiled and looked at heavily by our commercial
section.
MR. MYERS deferred to Kevin Banks for further comment.
Number 2878
KEVIN BANKS, Division of Oil & Gas, Department of Natural
Resources, indicated Amendment 1 is a companion to
paragraph (6), wherein if the commissioner decides an evaluation
is needed, he/she can require that an independent contractor be
hired and paid for by the applicant, up to $150,000. He said
[paragraph (7), proposed by Amendment 1] would provide the
option "to have an independent contractor hired and, with the
consent of the applicant, have the applicant contribute to ...
paying for it." Mr. Banks related the experience that in-house
evaluations take a lot of time away from regular work, and said
he believes the ability to hire an independent contractor will
"serve the process" and expedite the applicant's application.
Number 2817
REPRESENTATIVE KERTTULA asked for verification of her
understanding that under previous bill versions the commissioner
could require the payment, whereas this would change it so
payment could be requested with mutual consent.
MR. MYERS answered:
Under the cases where the royalty reduction is for a
field already in production and for shut-in
production, it'd have to be mutual agreement. For a
case where it's delineated but not yet in production,
the commissioner has the sole discretion. That was,
again, I think, part of this arm-wrestling match that
Representative Rokeberg referred to. And we looked at
it practically, and ... in these later cases we
believe we have sufficient technical expertise to do
the work. ...
I think there was some concern by AOGA [Alaska Oil and
Gas Association] and some other folks of the cost,
potentially, that could be incurred there. We tried
to assure them that we're not likely to have high
costs on those types of applications. They wanted
assurance that they would have some say ... in the
application. So we balanced [it], to say that "if we
both agree to it." So ... it seemed like a reasonable
compromise, recognizing that in cases of royalty-
reduction requests previously under those two types of
royalty reduction, we have not ... used an independent
contractor.
Number 2729
REPRESENTATIVE KERTTULA requested clarification on the two types
of royalty reduction he'd mentioned.
MR. MYERS specified that the three cases are on page 2, lines 5-
12. The "sufficiently delineated" case has the most uncertainty
in all aspects: clearly, there is a lot of work and modeling to
be done, and no production in those fields. The second case is
that oil or gas production for the field wouldn't be
economically feasible: there has been production for a while
but the economics are no longer sufficient and the operator
wants to "shut in." Royalty reduction might extend that. The
third case is when it has already been shut in and the desire is
to bring it back on line. There is a lot more data involved in
those decisions. He said it is sort of like the discussion for
[SSHB 198], where the production decline can be tracked and
there are delineated reservoirs. It still would be a lot of
work, but there would be a better data set and less uncertainty.
Thus the department would have reasonable confidence of being
able to do it without the independent contractor, although the
contractor would clearly speed up the process.
REPRESENTATIVE ROKEBERG noted that (1)(A), starting on page 1,
line 13, is new fields; (1)(B), starting on page 2, line 13, is
existing fields; and (1)(C), starting on page 2, line 18, is
shut-in fields. He said that's why there are slight
distinctions about different types of conditions.
Number 2629
REPRESENTATIVE GUTTENBERG removed his objection.
CHAIR FATE announced that there was no objection and that
Amendment 1 was adopted.
REPRESENTATIVE KERTTULA referred to the top of page 5 and
expressed concern about taking out the sections regarding
confidentiality and producing the information to the
legislature. She said she doesn't care whether the legislature
approves it or not, but asked whether there are other avenues
for legislators to get this information if they sign
confidentiality agreements.
MR. MYERS deferred to Mr. Banks, but said [the Joint Committee
on Legislative Budget and Audit] has a role in the review, if
requested.
REPRESENTATIVE ROKEBERG brought attention to page 7, line 5
[paragraph (8)].
REPRESENTATIVE KERTTULA acknowledged that, but said she wanted
certainty that legislators, if they sign confidentiality
agreements, can somehow get access to the information.
Number 2550
MR. BANKS referred to the language pointed out by Representative
Rokeberg on page 7, and said he believes there are other avenues
available, "with a specific confidentiality waiver, that the
legislature can see the information that's been presented to
us." He added, "My concern only is that in striking out the
section on page 5, that there might be some kind of legislative
intent to erase that, but ... I don't know the answer to that
question."
REPRESENTATIVE KERTTULA surmised that it was Representative
Rokeberg's intention not to wipe out the legislature's right to
receive confidential information, but only to remove the [role
of the Joint Committee on Legislative Budget and Audit].
REPRESENTATIVE ROKEBERG said that's correct. Noting that in
1995 it became much too cumbersome, he referred to the review by
the [Joint Committee on Legislative Budget and Audit] and to
page 7, line 18 [paragraph (9)]. He said the findings and
[determination] still are specifically directed by statute to be
delivered to the legislature for review. He offered his
experience, specifically relating to the Northstar case, that
whoever chairs that particular committee can request a
confidential executive session if the information is
proprietary, if there is a need to go to that extent. He said
the legislative purview is still very much a part of this [under
Version U], but isn't as cumbersome as it was before with
respect to the governor and so forth.
Number 2420
REPRESENTATIVE KERTTULA emphasized that she wants to be positive
that the legislature isn't giving up any right of access to
confidential information. She said she knows that isn't the
intent, but she would double check with Mr. Banks later and then
clear it up with the [sponsors]. She clarified that she had no
problem with the intent to streamline the approval system.
REPRESENTATIVE ROKEBERG referred to page 7, lines 12-17, which
deleted language [in paragraph (8)] and which read:
[IF, UNDER (6)(B) OF THIS SUBSECTION, THE FINANCIAL
AND TECHNICAL DATA MUST BE KEPT CONFIDENTIAL AT THE
REQUEST OF A LESSEE OR LESSEES MAKING APPLICATION FOR
THE ROYALTY MODIFICATION, THE COMMISSIONER MAY APPEAR
BEFORE THE COMMITTEE IN EXECUTIVE SESSION;]
He said, "I think that's just assumed. ... Deleting that
particular section doesn't mean it can't be done."
REPRESENTATIVE KERTTULA again acknowledged the intention, but
reiterated that she would talk to Mr. Banks and then return to
the sponsors.
Number 2358
REPRESENTATIVE KERTTULA referred to page 4, line 15, noting that
it removes a line that says the royalty modification is not
assignable [without the prior written approval of the
commissioner]. She asked whether the bill allows it to be
assignable without the prior written approval of the
commissioner or not.
MR. MYERS replied that he believes removing that language does
do that.
REPRESENTATIVE KERTTULA asked what Mr. Myers thinks about that.
MR. MYERS said he thinks one of the important things is that the
commissioner really look at the issue and the value of the
assignability as part of the royalty reduction, and that it not
be assignable if the commissioner thinks it's inappropriate.
Number 2316
REPRESENTATIVE ROKEBERG explained that it had been removed at
his request because he believed it would cloud or restrict the
alienability of any leasehold assets a company might have.
REPRESENTATIVE KERTTULA said she wasn't sure she agreed, but
could deal with that issue later.
Number 2281
REPRESENTATIVE HEINZE moved to report CS for SSHB 28, Version
23-LS0177\U, Chenoweth, 4/30/03, as amended, out of committee
with individual recommendations and the accompanying fiscal
notes. There being no objection, CSSSHB 28(RES) was reported
from the House Resources Standing Committee.
[There was an announcement that the previously recessed meeting
was being adjourned and that the May 7 meeting was beginning,
with a quorum present. However, these minutes treat it as one
meeting, which is how it was scheduled.]
SB 151-REGULATION OF NATURAL GAS PIPELINES
[Contains discussion of HB 204, the companion bill]
Number 2160
CHAIR FATE announced the final order of business, CS FOR SENATE
BILL NO. 151(L&C), "An Act relating to the regulation of natural
gas pipelines under the Pipeline Act; and providing for an
effective date."
Number 2155
SENATOR THOMAS WAGONER, Alaska State Legislature, sponsor, noted
that SB 151 is a companion bill to HB 204, which this committee
had heard recently. He said the only change in the Senate Labor
and Commerce Standing Committee was the addition of an immediate
effective date.
CHAIR FATE asked whether there were any questions. [None were
offered.]
Number 2091
REPRESENTATIVE KERTTULA moved [to report CSSB 151(L&C) out of
committee with individual recommendations and the accompanying
fiscal notes]. There being no objection, CSSB 151(L&C) was
reported from the House Resources Standing Committee.
ADJOURNMENT
The House Resources Standing Committee was recessed at 9:21 a.m.
to a call of the chair. [The meeting was reconvened at
1:40 p.m.; see 1:40 p.m. minutes for this date.]
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