04/14/2004 01:40 PM House RES
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= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 14, 2004
1:40 p.m.
MEMBERS PRESENT
Representative Nancy Dahlstrom, Co-Chair
Representative Beverly Masek, Co-Chair
Representative Carl Gatto
Representative Bob Lynn
Representative Nick Stepovich
Representative Kelly Wolf
Representative Beth Kerttula
Representative David Guttenberg
MEMBERS ABSENT
Representative Cheryll Heinze, Vice Chair
COMMITTEE CALENDAR
HOUSE BILL NO. 531
"An Act relating to natural gas exploration and development and
to nonconventional gas, and amending the section under which
shallow natural gas leases may be issued; and providing for an
effective date."
- HEARD AND HELD; ASSIGNED TO SUBCOMMITTEE
HOUSE BILL NO. 395
"An Act relating to shallow natural gas leasing and the
regulation of shallow natural gas operations."
- HEARD AND HELD; ASSIGNED TO SUBCOMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 531
SHORT TITLE: CONVENTIONAL & NONCONVENTIONAL GAS LEASES
SPONSOR(S): RESOURCES
03/04/04 (H) READ THE FIRST TIME - REFERRALS
03/04/04 (H) O&G, RES, FIN
03/16/04 (H) O&G AT 3:15 PM CAPITOL 124
03/16/04 (H) Heard & Held
03/16/04 (H) MINUTE(O&G)
03/18/04 (H) O&G AT 3:15 PM CAPITOL 124
03/18/04 (H) Heard & Held
03/18/04 (H) MINUTE(O&G)
03/22/04 (H) RES AT 1:00 PM CAPITOL 124
03/22/04 (H) <Pending Referral>
04/01/04 (H) O&G AT 3:15 PM CAPITOL 124
04/01/04 (H) Moved CSHB 531(O&G) Out of Committee
04/01/04 (H) MINUTE(O&G)
04/05/04 (H) O&G RPT CS(O&G) 7AM
04/05/04 (H) AM: HOLM, KERTTULA, MCGUIRE, ROKEBERG,
04/05/04 (H) CRAWFORD, HEINZE, KOHRING
04/14/04 (H) RES AT 1:00 PM CAPITOL 124
BILL: HB 395
SHORT TITLE: SHALLOW NATURAL GAS/ OIL AND GAS
SPONSOR(S): REPRESENTATIVE(S) HARRIS
01/23/04 (H) READ THE FIRST TIME - REFERRALS
01/23/04 (H) O&G, RES, JUD, FIN
02/05/04 (H) O&G AT 1:00 PM CAPITOL 124
02/05/04 (H) Heard & Held
02/05/04 (H) MINUTE(O&G)
02/24/04 (H) O&G AT 3:15 PM CAPITOL 124
02/24/04 (H) Heard & Held
02/24/04 (H) MINUTE(O&G)
02/26/04 (H) O&G AT 3:15 PM CAPITOL 124
02/26/04 (H) Heard & Held
02/26/04 (H) MINUTE(O&G)
03/09/04 (H) O&G AT 3:15 PM CAPITOL 124
03/09/04 (H) Moved CSHB 395(O&G) Out of Committee
03/09/04 (H) MINUTE(O&G)
03/12/04 (H) O&G RPT CS(O&G) NT 1DP 3NR 1AM
03/12/04 (H) DP: KOHRING; NR: ROKEBERG, CRAWFORD,
03/12/04 (H) HOLM; AM: KERTTULA
03/19/04 (H) RES AT 1:00 PM CAPITOL 124
03/19/04 (H) -- Meeting Canceled --
04/07/04 (H) RES AT 1:00 PM CAPITOL 124
04/07/04 (H) Heard & Held
04/07/04 (H) MINUTE(RES)
04/14/04 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
ELEANOR WOLFE, Staff
to Representative Beverly Masek
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 531 on behalf of
Representative Masek, Co-Chair, House Resources Standing
Committee which sponsored HB 531, and answered questions from
the members.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395, answered
questions.
MERLIN THOMPSON, Chairman
Ogan is So Gone Recall
Sutton, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395.
ROBIN McLEAN, Sutton Community Council
Sutton, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395.
ROBERT CRANDALL, Petroleum Geologist
Alaska Oil and Gas Conservation Commission
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 531.
JEFF ARNDT, Friends of the Mat-Su
Palmer, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395.
MARY BARRETT
Palmer, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395.
MIKE McCARTHY
Kachemak Bay Property Owner's Alliance
Homer, Alaska
POSITION STATEMENT: Testified on HB 531 and HB 395.
KEN BOYD, Chairman
Lands Exploration and Operations Committee
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Testified on HB 531 and answered questions
from the members.
RICK VANDERKOLK, Staff
to Representative John Harris
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified on HB 395 on behalf of
Representative Harris, sponsor.
ACTION NARRATIVE
TAPE 04-20, SIDE A
Number 0001
CO-CHAIR BEVERLY MASEK called the House Resources Standing
Committee meeting to order at 1:40 p.m. Representatives Masek,
Dahlstrom, Gatto, Lynn, Stepovich, Wolf, Guttenberg, and
Kerttula were present at the call to order.
HB 531-CONVENTIONAL & NONCONVENTIONAL GAS LEASES
[Also contains discussion of HB 69]
Number 0049
CO-CHAIR MASEK announced that the first order of business would
be HOUSE BILL NO. 531, "An Act relating to natural gas
exploration and development and to nonconventional gas, and
amending the section under which shallow natural gas leases may
be issued; and providing for an effective date."
Number 0080
ELEANOR WOLFE, Staff to Representative Beverly Masek, Alaska
State Legislature, presented HB 531 on behalf of Representative
Masek, Co-Chair, House Resources Standing Committee, which
sponsored HB 531, and answered questions from the members.
Number 0100
CO-CHAIR DAHLSTROM moved to adopt CSHB 531, 23-LS1818\U,
Chenoweth, 4/12/04, as the working document. There being no
objection, CSHB 531, version U, was before the committee.
MS. WOLFE read the sponsor statement as follows:
The intent of original shallow gas leasing legislation
in 1995, HB 394, was to expand development of our
state's marketable natural gas resources, as well as
to promote private-sector employment, generate less
expensive energy alternatives for rural Alaskan
consumers, and enhance local tax bases for
municipalities. Shallow gas legislation was inspired
by the need to tailor the particular economies of this
resource opportunity to available market
opportunities. This type of gas extraction does not
conform to the same economies of scale as conventional
deep-hole oil and gas drilling.
Original legislation provided for leasing on a first-
come, first-served basis so that development of the
resource in areas away from the energy grid could take
place. With a well-known shortage of natural gas
development opportunities in South Central Alaska,
prospects of leasing on-shore fields in the Cook Inlet
Basin became very attractive. Two unintended
consequences of this sudden interest materialized.
One it sparked leasing of the state-owned subsurface
mineral estate in uneconomic areas, and two, it
encouraged leasing in areas where divergent interests
between gas development and established local
residential and business activities came into
conflict.
Without HB 531, a subsequent gas development entity
could immediately lease land relinquished by the
original lessee. In addition, land not currently
leased remains subject to current over-the-counter
standards. This bill initiates a permanent solution
to these problems. It has been brought forward in
response to strong citizen interest in the Mat-Su and
on the Kenai Peninsula, with input from several public
meetings held at one time or another by the Alaska
Department of Natural Resources (DNR), and the Senate
Resources Committee.
MS. WOLFE said that the highlights of the legislation are as
follows:
Eliminates over-the-counter, first-come, first-serve
shallow gas leases and replaces it with area-wide
leasing or exploration licensing.
Requires a best-interest finding before any oil and
gas leasing or exploration licensing. This will give
DNR control of what land is leased, avoiding
unnecessary surface-owner conflicts. Best-interest
finds are a time-tested public process.
Creates a gas-only section of area-wide leasing and
exploration licensing identified in a best-interest
finding by DNR.
Differentiates conventional and non-conventional gas
resources for the purposes of lease rentals.
Defines conventional and non-conventional gas
development, and treats each distinctly. Recognizes
that lease rights should not be determined by a depth
criteria only. Enhances production opportunities.
Encourages exploration licenses with a best-interest
finding as the method for non-conventional gas
exploration outside of the area-wide leasing in rural
Alaska.
Makes leasing and regulatory criteria fit the
appropriate activity.
Ensures competitive processes, thereby maximizing the
state's interests.
Number 0386
MS. WOLFE said she would be happy to answer any questions, but
suggested that technical questions be directed to staff of the
Division of Oil and Gas.
Number 0420
REPRESENTATIVE LYNN asked how the best-interest finding is
different than what is currently in place.
MS. WOLFE replied that no best-interest finding currently exists
for the shallow gas program; it is simply a lease program. Ms.
Wolfe commented that there have been some concerns about the
hydro fracturing and the aquifers. She told the members that
she retrieved a report [Study of Potential Impacts of Hydraulic
Fracturing of Coal bed Methane Wells on Underground Sources of
Drinking Water, EPA 816-D-02-006, dated August 2002] off of the
Internet from the Environmental Protection Agency (EPA) that has
determined that there is no damage to water aquifers from hydro
fracturing. There were a number of complaints that were
investigated and it was found that the complaints were baseless
and there was no need for further investigation, she explained.
Ms. Wolfe suggested that this report may put some minds at ease.
Number 0510
REPRESENTATIVE KERTTULA questioned if there was still concern
about the fluids used, but not the activity itself. She asked
if there was any distinction made on this issue.
MS. WOLFE clarified that the fluids were addressed by the EPA
report. She explained that it is maintained that while there
are problem fluids used in hydro fracturing, once the water is
pumped out of the well a low pressure area exists. Anything
could be sucked into it and will not go out of it, she
explained. Ms. Wolfe pointed out that there have been no
difficulties with this in Colorado, Montana, or Wyoming.
REPRESENTATIVE KERTTULA commented that she will talk with Ms.
Wolfe more about this issue later.
Number 0600
REPRESENTATIVE GATTO said it is his understanding that diesel
fuel is being used, which is considered a hazardous material.
However, when considering the volume of water that is pumped the
amount of hazardous material left behind would be virtually
immeasurable. He commented that he believes that makes sense.
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, testified on HB 531 and answered questions.
He told the members that it is his understanding that the EPA
draft report, not final report, found no examples where hydro
fracturing had caused problems with the aquifers. Mr. Myers
commented that he believes the statements that have been made
are pretty accurate. While there are a couple of risks, the
mechanics of it have not shown it to be problematic. He
clarified that diesel fuel is not used with coal bed methane
(CBM).
Number 0790
REPRESENTATIVE GUTTENBERG asked what [is used in] the process of
hydro fracturing. Is it an impact hammer or drill.
Number 0842
MR. MYERS responded that the process is usually one where a
liquid is pumped down under high pressure. He explained that it
is actually the pressure that drives the drives the fracturing
of the rock. The purpose is to fracture the coal and make it a
more permeable pathway to move the gas out of the coal. In
order to commercially produce coal by methane a couple of
elements are necessary. One element is that coal with a
sufficient quantity of gas must be present; and two, the gas has
to have a pathway to get out of the coal, Mr. Myers said. There
have to be interconnected pathways, and hydro fracturing is a
method of stimulating the removal of gas from the coal, he
added.
Number 0882
REPRESENTATIVE STEPOVICH asked what the differences are in the
criteria for gas exploration leasing as opposed to oil leasing.
MR. MYERS commented that this eliminates an over-the-counter
profit and replaces it with two different processes. One is
areawide leasing which provides competitive processes for lands
in a specific area that have been approved by the best-interest
finding. That is a competitive process that comes up every ten
years. He explained that the advantage of that program over the
over-the-counter shallow gas program is the biggest thing is
defining its self with more public process and a different
balancing test on where it is appropriate to lease. It also
allows DNR to say that certain areas are beyond limits that are
appropriate.
[The quality of the recording for the remaining testimony from
Mr. Myers on HB 531 is of poor quality due to background noise
in the room.]
MR. MYERS continued his testimony as follows:
The other way to (indisc.) licensing has been used in
areas where we do not use the conventional leasing
program. That is a program which recognizes that
economics are different in rural areas Alaska and in
frontier bases where you do not have sufficient
information to really hold an areawide sale or the
potential isn't there (indisc.) ... It is a worldwide
method used, it is a variation on a worldwide method.
(indisc.) large amount of land it asks for anywhere
between 10,000 and 500,000 acres to a single
applicant. Other people can submit competing
(indisc.) so it is and can (indisc.) in fact it is
applicant driven. Or the state can open an area up
for it. But it allows then for (indisc.) process for
the state to issue exclusive rights to explore lands.
You don't pay a bonus bid like (indisc.) you pay a
one-dollar fee per acre. So if you had a 20,000 acre
site, say out in the (indisc.) or whatever then you
might pay $20,000 and then you negotiate the work
permit. Then you (indisc.) "X" amount of dollars for
the right to explore here. So the state gets
(indisc.) per acre, the applicant the for that fee
gets (indisc.) hold typically for five or ten years on
a license and has an exclusive right to explore, but
they have to spend the money they committed to on
exploration. So (indisc.) licenses that have been
issued have been fairly large and have been (indisc.)
acre limit and are typically then commitment to spend
a few million dollars in actual exploration work. If
the selections were smaller, on the order of a couple
of coal bed methane leases, we would expect that the
(indisc.) would be much smaller than that in terms of
dollars. But that guarantees that the person who is
speculating is actually going to do some work or
partner with someone else who is going to do work on
the sites evaluated. Then after they finish their
evaluation and spend the X amount of dollars they
committed, they have a right to convert
noncompetitively to a lease.
Number 1128
One of the things that this bill does is it recognizes
that nonconventional gas does not necessarily have the
same economics that conventional gas or conventional
oil does. So a lot of the efforts are showing that it
is nonconventional in nature and that it will result
in the (indisc.) and allow them to have (indisc.) to
12.5 percent royalty (indisc.) if the gas is
noncompeting oil and gas. That puts it on the same
economic footing as if you had gotten a noncompetitive
shallow gas lease. The program recognizes that the
role after licensing is better because it brings
interest while we talk about (indisc. paper shuffling)
process. You can include the right to explore in a
substantial area if you desire and then you can
convert to a lease in very reasonable terms. We think
it is a better way to do nonconventional gas leasing
in rural Alaska. In large part because the applicant
has more (indisc.) rights (indisc. noise in room) and
then the economic terms are actually more favorable to
the applicant because the (indisc.) to occur. So that
is why really we prefer licensing in the rural areas
and then (indisc.) agency (indisc.) program. I know
this is long winded and hopefully that may be
(indisc.).
REPRESENTATIVE STEPOVICH commented that he is worried about the
local, generational Alaskan being included in the speculative
process that major {companies enjoy]. He said he believes that
this bill puts the it back where an individual would have to put
up millions of dollars in improving the land. He asked Mr.
Myers to comment on that.
Number 1339
MR. MYERS replied that he can respond to that. There are a lot
of folks that are purchasing leases in the competitive sale that
are primarily locally driven. They can be very successful in
buying leases, but it can be very competitive so that the state
gets the best dollar for the value. Typically the leases are $5
minimum bid and often the typical fee will be between $5 and $10
per acre. A lot of Alaskans are very successful and have made a
lot of money reselling the leases. A net profit is still
allowed in this process, he said. He explained that the
exploration license realistically in a rural energy type project
what we have seen is the interest has been by the individuals
that really want to get the energy or that is being underfunded
by the (indisc.) ... For example, the Red Dog Mine area the
interest in the Healy area, the interest in the (indisc.) area,
they are all folks that are doing it because they believe they
can either make money doing it, or they are directly related to
(indisc. coughing) ... So I think it does provide the
opportunity. It doesn't create a great market for resellers.
But we do have cases where people have picked up a license and
the first thing they do after they get the license is go out and
look for partners. I have seen it both ways. So people who do
not have the money are willing to buy a license and then find
partners who do. I do think the program will work successfully
and he does think there is plenty of room in the way we are
doing competitive bidding ... (indisc. paper shuffling) minimum
bid of $5 per acre that allows for local Alaskans to be involved
in the process and there is a history of that.
CO-CHAIR MASEK asked why miners would object to the provision of
this bill. She asked for Mr. Myers to comment on ways the
miners can protect their interests with respect to HB 531.
Number 1413
MR. MYERS replied that the miners perspective they want to make
sure they have the first shot at having access to the gas that
might be contained within the surrounding gas and coal leases
(indisc. paper shuffling and coughing) Another divider is the
Red Dog mine which is really looked at as a separate energy
source. Two cases, coal miners who have active coal leases and
folks that are mining that need local energy. He explained that
the gas does not belong to (indisc.) lease, it does goes with
coal lease. It stays with the state until issued in an oil and
gas lease, he said. The old shallow leasing program had some
exclusivity with respect to the issuance of shallow gases. For
example, if you owned the coal lease, no one else could apply or
get the shallow gas lease. At the same time nothing precluded
someone from getting an exploration license over that exact same
acreage and they are not guaranteed that they would get the
license unless they did the work on it. In reality what we see
the person likely to get the benefit again is the coal miner who
is actually mining the coal near it (indisc.). They are very
concerned about the conflict there, are better off with a
license, and better off with a best interest finding. That is
their concern that right now (indisc. paper shuffling and
coughing) to get that lease. What they do not realize is that
at any time that right can be taken away (indisc.) ... .
Number 1521
REPRESENTATIVE KERTTULA asked if he was saying that in the "old
way" if an individual owned the coal lease an individual could
get the exclusive right to get the gas.
MR. MYERS replied that under the current shallow gas leasing
program there is language that requires that if an individual
holds a coal lease the state couldn't issue a shallow gas lease
unless the applicant was the same individual who held the coal
lease. So it gave exclusive rights to the coal leaseholder, he
clarified. There are lots of other areas in the state, Cook
Inlet for example, where there are coal leases making
conventional oil and gas (indisc.).
REPRESENTATIVE KERTTULA said that there was an exclusive right
under the current program.
Number 1616
MR. MYERS replied yes, but only for the shallow gas lease. They
do not have exclusive rights on an exploration license for the
same land. Another person could come in and get a license over
that same coal lease, and that person would own all the gas in
the lease, he explained.
REPRESENTATIVE KERTTULA asked for further clarification. If an
individual can get an exploration license, how is it that
licensee cannot lease the gas.
MR. MYERS responded that we would lease the gas. He explained
that by creating the two different programs over the same
ground, a conflict situation has been created. Administratively
the department has (indisc.) two licenses for shallow gas leases
when one exists on the area. The license rights are greater and
more valuable because they address all depths and have a greater
life span, he commented. What has been created is a high
quality program and a low quality program that conflicts with
each other, he summarized. There could be a shallow gas lease
to a 3,000-foot [depth] and an exploration license over the top,
he reiterated.
Number 1708
CO-CHAIR MASEK asked how [shallow gas lease holders] can protect
their interests under this bill.
MR. MYERS replied that it can be done in several different ways.
The easiest way is to apply for an exploration license. In the
case where an individual had existing shallow gas leases and if
he/she is making progress toward development and producing the
gas would allow the individual to hold those leases, he
explained. He summarized that those individuals holding
existing leases are grandfathered in and have those rights. All
they have to do is drill a well. Nothing will exclude an
individual for applying for an exploration license if he/she
holds the lease on the land. He posed a hypothetical example
where a coal mine held five or six shallow gas leases now,
(indisc.) they could apply for a license for the entire area,
and then when the license is granted could relinquish the
shallow gas leases. (indisc. paper shuffling)
CO-CHAIR MASEK commented that in a letter to the editor it has
been stated that leases could be bought back by the state for
approximately $200,000 to $300,000. She asked Mr. Myers if that
is a true statement.
Number 1854
MR. MYERS replied that would be determined by how the buy back
was structured. If that is the amount of money that was paid
for the leases that would be a true statement. The bill also
allows for compensation for the amount of work done on the
leases. For example, in the Matanuska-Susitna valley millions
of dollars have been spent. (indisc. paper shuffling) If that
was not adequate the state could reclaim the leases under
eminent domain which means that just compensation would be paid
for the lease, he said. There is a series of evaluations or a
standard methodology which is used to determine the value of the
lease. He summarized that he could not say what the numbers
would be but it could be quite substantial under the eminent
domain claim.
Number 2089
MERLIN THOMPSON testified on HB 531. He told the members that
he has not been able to get a copy of the latest CS so his
comments are based upon an older version of CSHB 531. Mr.
Thompson said that he opposes the (indisc.) of the best interest
finding (BIF). He urged the members to add a provision to
repeal the local over ride provision of HB 69, and add a
provision (indisc.) moratorium over the reissuance of leases
that are on non-producing wells. Mr. Thompson told the
committee that he had a meeting with the AOGCC recently and
found that the commission does not oppose the use of toxic
extracting fluids. He commented that he would like to see a
mail notice provision and a bill of rights added to the bill.
Mr. Thompson said he supports a buy back provision, but is not
sure about the eminent domain provision. There needs to be some
sort of mechanism in the bill which provides for the buy back,
he reiterated.
CO-CHAIR MASEK asked Mr. Thompson if he is located near a
legislative information office (LIO).
MR. THOMPSON responded that he was at the LIO earlier today, but
the offices are under construction and it was not possible to
get a room. The new version of HB 531 was just coming off the
fax when he was there, but he said he left because he feared he
would miss the meeting.
CO-CHAIR MASEK stated that this is the first hearing of HB 531,
and last week there was a meeting on HB 395. She announced that
the two bills will be sent to a subcommittee where all the
changes will be made. Co-Chair Masek appointed members of the
subcommittee; Co-Chair Dahlstrom will serve as chair and
Representatives Stepovich and Kerttula will also serve. The
subcommittee will bring back new versions of both bills to the
committee. There will be adequate time for review and testimony
then, she added.
Number 2273
ROBIN McLEAN, Sutton Community Council, testified on HB 531.
She asked if she understands correctly that interested parties
will be able to testify in front of the subcommittee.
CO-CHAIR MASEK replied that is up to the chair of the
[subcommittee]. In response to Co-Chair Dahlstrom's response,
Co-Chair Masek told Ms. McLean that she would be able to testify
before the subcommittee.
MS. McLEAN reiterated her comments during an earlier meeting
[April 7, 2004] on HB 395. She told the members that she
believes that the most important elements to be included in
these bills is the mail notification to property owners and the
owners' bill of rights. She said she is opposed to the best
interest finding because it makes citizens who live in rural
areas of the state second-class citizens. Ms. McLean shared
that she was at a meeting in Healy a month ago and found that
the people there are just as concerned about their homes and
water wells as those who live in Matanuska-Susitna Borough. She
stated that these people want the same protections as other
citizens in the state.
MS. McLEAN told the members that she very much favors provisions
that would repeal the (indisc.) of HB 69 from last year. That
is a very repugnant provision to many people, she commented.
She said we (indisc.) provisions from Representative Seaton's
bill, HB 364, which would put a moratorium on (indisc.). She
said she supports the prohibition of the use of toxic fracturing
fluids. Ms. McLean said that during the Senate Resources
Standing Committee meeting the commissioner [of DNR] stated that
the use of these fluids is fine; however, she urged the members
to amend any bill that allows for the use of toxic fracturing
fluids. She went on to say that she believes the buy back is
fair and right. It is important that all people have the same
fair treatment from the government, Ms. McLean summarized.
ROBERT CRANDALL, Petroleum Geologist, Alaska Oil and Gas
Conservation Commission (AOGCC), answered questions on HB 531.
He told the committee he does not have testimony to present, but
is available to answer questions.
REPRESENTATIVE KERTTULA asked if Mr. Crandall heard the previous
testifier say that AOGCC stated in a senate hearing that it
would not be opposed to the restriction of toxic fracturing
fluids. She asked if he would comment on that statement.
MR. CRANDALL said AOGCC would not agree with the term "nontoxic"
because he believes a better term for the restrictions would be
on "nondiesel." He explained that some of the components of a
fracturing fluid are, for example, potassium chloride which can
be used as table salt in certain cases. The concentration of it
in the fluid could be considered toxic, he commented. Mr.
Crandall reiterated that AOGCC does not believe toxic is the
appropriate term.
Number 2595
JEFF ARNDT, Friends of the Mat-Su, testified on HB 531. He told
the members that he is representing a group called the Friends
of the Mat-Su which has about 350 members. He explained that he
is handling coal bed methane issues. Mr. Arndt shared that he
is in complete agreement with Ms. McLean and Mr. Thompson. He
said he believes that by providing an exclusion zone it is
creating this two-tiered system to please the citizens in this
area, but it is then allowing the trashing of the rest of the
state. Friends of the Mat-Su believe the rules should be the
same everywhere and that there should be stringent regulations.
There should be a best interest finding no matter where it is,
he added.
MR. ARNDT commented that he believes Mr. Myers testimony made a
very strong case for the buy back provision. He commented that
the state basically gave the resources away at $1 per acre. In
looking around the Southwest United States he could not find any
lease that sold for less than $2 per acre. He told the members
that he does not agree with the supposition the that state would
have to pay the price of the value of the resources in a buyback
before the industry has even stated what they want. If the
buyback is for the value of the resource, then the state should
be taxing the industry on the value of the resource, he said.
MR. ARNDT told the members that he had a talk with Tony Knowles
about this issue. Mr. Knowles said it is a bunch of baloney and
questioned why the lessees should get any more than they paid
for the leases, plus the costs for any activities they have.
Right now that is practically nothing, he added. Mr. Arndt said
it is waste of time, money, and brainpower in discussing how
much money the buyback will be.
MR. ARNDT commented on toxic fluids and said that it is his
opinion that anything that would be put in and could come out at
any time and destroy any form of life is toxic. This is a bad,
secretive system. Make the system as simple as possible by
saying only water can be used, he urged. Mr. Arndt said he
believes that AOGCC does not look out for the people of Alaska;
it is looking out for industry.
CO-CHAIR MASEK asked Mr. Arndt to restrict his comments to HB
531.
MR. ARNDT said in the future he would like to have more than one
hour to review new versions of bills because it makes it
difficult to address specific points.
CO-CHAIR MASEK commented that there have been many versions of
this critical legislation. She added that the best interest
finding is no longer in HB 531.
Number 2819
MARY BARRETT testified on HB 531. She said she is very
concerned that the state can still override local ordinance such
as HB 69. If local governments want stricter regulations to
protect the quality of life of a particular area, local
governments' wishes should take precedence. Ms. Barrett said
she is also concerned that there is no ban on toxic fracturing
fluids. If it is not widely used in the industry then there
should be no problem with ban fracturing fluids. She commented
that she agrees with a previous suggestion offered that just
water should be used as a fracturing fluid. She told the
members that she remembers when the Clean Air and Clean Water
Acts were passed in the 1970s. A common thing that was said is
"dilution is not the solution to pollution." Ms. Barrett went
on to say that she is still concerned that there is no direct
notice being given to landowners that their land is being
leased. She said she believes there are still a lot of
landowners who are unaware of the fact that their land has been
leased. It is difficult to obtain maps of leased areas which is
another reason why landowners need direct notification, she
commented. Ms. Barrett went on to say that she believes the
buyback of coal bed methane (CBM) leases are important. Ms.
Barrett questioned why these leases were sold for a dollar per
acre if there are high potential earnings. She also questioned
why the taxes are so low if the there is such a high value.
Number 2908
REPRESENTATIVE GUTTENBERG asked Ms. Barrett if she could suggest
a way to provide adequate notification.
MS. BARRETT responded that a certified letter in the mail with a
map showing what areas are leased.
Number 2936
MIKE McCARTHY, Kachemak Bay Property Owner's Alliance, testified
on HB 531. He told the members that he represents more than
1,000 members of the Kachemak Bay Property Owner's Alliance. He
shared that he is a Homer resident and a retired geologist.
TAPE 04-20, SIDE B
MR. McCARTHY told the members that Jack Chenoweth, Legislative
Legal and Research Services, testified that there was nothing in
the ten points of the bill of rights that could not be amended
in the lawful language and placed in statute form this year. He
read a portion of a letter that was written by a local realtor
as follows:
I am writing this letter to express my recent
professional experience in regard to the coal bed
methane lease issue. Because of the leases that were
activated without proper public notice or input and
the ensuing controversy the markets for raw land in my
opinion have been compromised. I have personally
experienced a solid buyer, that is an investor who has
purchased property through me in the past, who decided
to forget several purchases when he found out they
were in an area where the subsurface rights had been
leased. I also have clients who purchased property
through me last summer, call me, and express grave
concern and alarm because they had just found out that
property that they had purchased off East (indisc.)
Road was part of the lease. They had anticipated
moving their young family to this property to enjoy a
quiet rural lifestyle not available to them in
southern Massachusetts. They are now discussing
changing their plans and selling their property.
However, the threat now of not being able to resell
and recoup their losses is very real, since more and
more buyers are refusing to purchase properties
affected by these leases. In my opinion this was a
very ill advised decision made within the state of
Alaska bureaucracy and it is impacting me personally
and my ability to do business as well as impacting the
property values and the ability of owners to sell
their property.
Number 2882
MR. McCARTHY commented that he would skip a few paragraphs in
the letter and continued to read the letter as follows:
The Homer leases have impacted owners in 32 separate
states who were never notified by the state, but in
turn were notified by the Kachemak Bay Property
Owner's Alliance at our own expense and time. The
accessed value of these 1,029 properties amounted to
$66,432,700, and for that the state received, for
22,000 acres, a total of $28,000. That seems like a
very poor cost benefit ratio especially when you
consider that director Mark Myers testified earlier,
last month I believe, that approximately half of all
royalty would be used to administer CBM development
and at present there are not sufficient personnel on
staff to do that job. This again does not take into
account the property values that would impact the
borough property tax intake which would be several
million dollars. Again, a far larger amount than what
it's going to generate in terms of royalty. We are
not unrealistic in our concern for improperly
regulated CBM development. We have obtained
resolutions from the City of Homer dated 12/1/03,
resolution 03-0147, and another resolution from
Kachemak City, resolution number 2003-1280.
Number 2799
CO-CHAIR MASEK interrupted Mr. McCarthy and explained that there
are others who wish to testify. She asked if he would submit
any written testimony to the committee.
MR. McCARTHY continued:
Kachemak City passed a similar resolution, as did the
Kenai Peninsula Borough, which is extremely impressive
if you consider the percent of tax base, et cetera,
that the Kenai Peninsula Borough has involved in oil
and gas. They passed that on 12/16/03. A resolution
to place a moratorium on CBM development and also call
attention to improper public notice by which it was
started.
MR. McCARTHY said he would like to end his testimony by saying
he believes there needs to be a moratorium on coal bed methane
development in the state until regulations are in place to
properly proceed.
Number 2728
KEN BOYD, Chairman, Lands Exploration and Operations Committee,
Alaska Oil and Gas Association (AOGA), testified on HB 531 and
answered questions from the members. He told the members that
AOGA is a private non-profit trade organization whose 19 member
companies represent the majority of the oil and gas operations
in the state. He commented that he just got a copy of version U
of the bill a little earlier this afternoon and prefaced his
comments by saying that AOGA is very much in favor of this
legislation.
MR. BOYD told the members that he has a problem with language on
page 40, line[s] 8 [and 9], which reads as follows:
(3) for a nonconventional gas lease, if a bond is
sought under AS 38.05.130, ...
MR. BOYD explained that this language was largely removed from
version S of the bill, but seems to have reappeared. He
commented that there has to be a bond before a lease can be
issued. Mr. Boyd referred to page 40, line [10 and] 11, which
reads as follows:
(A) before the amount of the surety bond to be posted
is determined by the director, require, as a condition
for issuing the lease, ...
MR. BOYD pointed to additional language on page 40, lines [17]
through 19 as follows:
(B) in addition to the coverage for actual damages
required by that section, provide for payment of
reasonable compensation to the owner for any loss by
the owner of the owner's use and enjoyment of the
property.
MR. BOYD told the committee that terms such as "reasonable
compensation" and "use and enjoyment" are undefined terms. He
said that other than these sections AOGA can support the bill.
Mr. Boyd stated that AOGA is on record as supporting the best
interest finding for oil and gas leasing and exploration
licensing which is contained in HB 531. Alaska Oil and Gas
Association believes there are adequate safeguards for shallow
gas leasing under existing law, but also believes that a higher
level of public policy is achieved by adopting the best interest
finding approach. A best interest finding is used in all oil
and gas programs in Alaska and works well for both the members
of the public and the private companies that are investing in
Alaska, he stated. The best interest finding process allows the
state to incorporate all public input into a single legally
defensible document that will address all concerns in a
comprehensive manner, Mr. Boyd summarized. The existing shallow
gas-leasing program was crafted with bipartisan support during a
democratic administration. This support was justified since
this program has the potential to provide new sources of clean
efficient energy to the state as well as provide jobs and taxes
for local economies, he said. He told the members that AOGA
hopes that further discussion of these issue will facilitate a
better understanding of the environmental and property right
protections already in place and the historical successes in
state development. Mr. Boyd said the Department of Natural
Resources has conducted extensive workshops and discussions
related to CBM shallow gas development in the Matanuska-Susitna
valley.
Number 2567
CO-CHAIR MASEK welcomed Marilyn Crockett who is present in the
audience listening to testimony.
CO-CHAIR MASEK reiterated that HB 531 will be assigned to a
subcommittee. That ends public testimony on the bill for the
day, she said.
REPRESENTATIVE KERTTULA stated for the record that she may have
a conflict of interest in HB 531 because her family owns land in
the Matanuska-Susitna valley. She said it appears that one
piece of land is in a leased area.
HB 395-SHALLOW NATURAL GAS/ OIL AND GAS
[Also contains discussion of HB 69.]
Number 2507
CO-CHAIR MASEK announced that the next order of business would
be HOUSE BILL NO. 395, "An Act relating to shallow natural gas
leasing and the regulation of shallow natural gas operations."
Number 2488
CO-CHAIR DAHLSTROM moved to adopt CSHB 395, 23-LS1314\O,
Chenoweth, 4/13/04, as the working document. There being no
objection, CSHB 395, version O was before the committee.
CO-CHAIR MASEK directed the members attention to written
testimony included in their packets from a [Ms]. Wieland of
Homer, as follows:
[original punctuation provided]
Thank you for hearing this bill and opening it to
public testimony - glancing quickly at HB 395, there
seems to be a number of good provisions. I'd like to
see removal of use of fracturing fluids to protect our
aquifers. I'm still concerned about the amount of
power the DNR commissioner has, and I'd like to see
that lessened. Please allow a second opportunity for
public to testify.
Although this bill provides several good provisions,
I'd still like to see all the leases bought back so we
don't have this sword hanging over our South Peninsula
and Mat-Su heads. Then, consider starting over with a
best interest finding and stay far away from private
property unless owners want (indisc.). Thank you.
Number 2469
RICK VANDERKOLK, Staff to Representative John Harris, Alaska
State Legislature, testified on HB 395 on behalf of
Representative Harris, sponsor. He told the members that in
compliance with Co-Chair Masek's request a review has been done
on comments by John Norman of the Alaska Oil and Gas
Conservation Commission (AOGCC). A couple of housekeeping
changes have been made with respect to that review. He pointed
to page 3, line 23, the word "punitive" was removed and replaced
with the word "actual", so it now reads as follows:
(c) If a developer fails to give notice as provided in
this section, the surface owner may seek any
appropriate relief in the court of proper jurisdiction
and may receive actual damages.
MR. VANDERKOLK explained that the prior language was redundant
because it is already covered under AS 38.05.130.
MR. VANDERKOLK then referred to page 4, line [10 and] 11, as
follows:
(4) "oil and gas operations" means an activity for
which a permit is required by AS 31.05.090 that
requires entry upon the surface estate;
MR. VANDERKOLK explained that the AOGCC was concerned that the
language be very specific as to the definition of oil and gas
operations so the reference to AS 31.05.090 was inserted which
refers to permits and fees to drill wells. Mr. VanderKolk
summarized that those are the only two changes made to version
O.
Number 2333
JEFF ARNDT, Friends of the Mat-Su, testified on HB 395. He said
he likes that the 3,000-foot well depth limitation was
reinserted in the bill, rather than the convoluted language
about waivers. In Section 6, [page 5,] beginning on line 12,
there is language which discusses the water well testing
requirements which states it is limited to one-quarter mile
radius around the drill site. He said he does not believes that
even comes remotely close to taking into account how water
travels. He stated he believes this is way to small an area.
Section 10 still does not provide direct notification of
property owners in leased areas. He asked that there be a
certified letter to every landowner in the area. Mr. Arndt
commented that he likes Section 11 where there is a repeal of
the state's override policy. He told the members that he
believes the committee should consider limiting DNR's discretion
to reissue current leases. He reiterated that he would like to
see the bill amended to include the buyback of the leases
because none of the bills address the 230,000 acres of the
Matanuska-Susitna valley that have already been leased.
Number 2215
MARY BARRETT testified on HB 395. She told the members that she
agrees with what was just said and wishes that HB 69 be
repealed. Ms. Barrett emphasized that she believes a certified
letter of notification to all landowners in the leased areas is
appropriate. All wells should be tested, not just the one-
quarter area around drill site, she said. People are very
concerned about their wells being contaminated or their wells
drying up. The property owners' bill of rights should be
adopted because that would provide the protection the property
owners' desire. It would remove the perception that industry's
rights take precedence over property owners, Ms. Barrett stated.
The bill doesn't address current CBM leases and urged the buy
back of these leases. Please tax the companies on what is owed
until the buy backs are done, she asked.
Number 2131
MERLIN THOMPSON, Chairman, Ogan is So Gone Recall, testified on
HB 395. He told the committee that he supports the comments
made by the prior testifiers. Mr. Thompson referred to page 5,
line 19, and said he believes that testing should be expanded
beyond the drill site. He suggested that testing include
conductivity as well as solvents. There should be extra concern
and testing for any disposal well because of the amount of
contaminants that are put in them, he emphasized. Mr. Thompson
commented that he believes the $1 per acre cost in leasing is
extremely low. He added that he believes that there should be a
buyback provision included in the bill. The bonds that have
been posted are outrageously low, he said. Mr. Thompson stated
for the record that he received a copy of version O of the bill
at 1:53 p.m., a copy of version U at 2:40 p.m., and this
committee was scheduled to start at 1 p.m. He stated that it
makes it tough to testify on the particulars of any bill if an
individual does not receive the bill until after the meeting
starts.
Number 1977
ROBIN McLEAN, Sutton Community Council, testified on HB 395.
She told the members that she spoke last week and gave a couple
of specific suggestions, as did Mr. Norman from the AOGCC. It
is troubling when hundreds of people have testified at meetings
and workshops in the valley and the people speaking today are
speaking for them. They unanimously agree on many things, but
none of those suggestions that were made to the committee last
week have been included in the new version, whereas the AOGCC
representative's suggestions were addressed. Ms. McLean said
she wanted to note that point. She emphasized that the people
in the valley want actual notices for these leases before they
happen. People want a letter, she stated. Ms. McLean said she
hopes the subcommittee will include that element in the bill.
There is concern about the vague language in the bill. For
example on page [5, lines 27 through 29] which reads:
...the terms of the lease must require the lessee or
lessee's agent to negotiate to meet the requirement of
this paragraph, but the owner may not unreasonably
withhold agreement;
MS. McLEAN emphasized that the language is very vague and
strongly urged the committee to revise it. This language
creates an amazing feeling of insecurity with people. She urged
the committee and subcommittee to add the buy back provision and
a moratorium on the reissuance of leases of nonproducing
(indisc.). She commented that Mr. Myers testified that 60
percent of the leases were bought on speculation. If the leases
aren't valuable let the property owners have the weight off
their mind that the leases will sunset in two and a half years.
It would be a great relief to many property owners, she
reiterated. Ms. McLean suggested that someone besides DNR
testify on the buyback provision because hundreds of people in
the valley want the buyback.
Number 1763
MIKE McCARTHY, Kachemak Bay Property Owner's Alliance, testified
on HB 395. He reiterated that he is in agreement with the prior
testimony. Mr. McCarthy pointed to page 5, [lines 12 through
18], Section 6, subsection (2), which reads as follows:
(2) a water well testing requirement for each lease
that contains one or more wells that serve as a source
of potable water; the testing requirement of this
paragraph applies to each water well that is located
within a square that bounds a circle with a radius of
one-quarter mile around the drill site and the sides
of which are parallel or perpendicular to the four
cardinal directions and are tangent to the circle;
under this paragraph, the lessee shall, before
commencement of production testing and production
activities on the lease, ...
MR. McCARTHY commented that he does not believe that is
equivalent when thinking about hydrologic fracturing pressure
that can be as much as 10,000 pounds per square inch. He stated
that is a phenomenal amount of pressure to contain in one-
quarter mile and is not adequate. Mr. McCarthy reminded the
members of the alliance's desire for all property owners to be
notified by certified mail. He said that is the same standard
by which Minerals Management Services operates and he said he
believes the state should do no less.
REPRESENTATIVE GUTTENBERG commented that he has not heard much
in the way of testimony on setbacks, terminations, and
abandonment's of exploration and development operations. He
questioned what the position is of Kachemak Bay Property Owner's
Alliance on these issues. Does the bill adequately address the
alliance's concerns, Representative Guttenberg asked.
Number 1615
MR. McCARTHY responded that he received the latest draft five
minutes before testimony began so he cannot comment on the
difference between this version and the prior one. The problem
of abandonment and the possibility of companies going under,
which in the typical lifespan of the lower 48 CBM business the
initial companies that come in are the cream of the crop. They
are the best of the CBM producers. As they draw down on the
reserves the property gets passed down to less and less
reputable companies. The potential for a company that is not
financially solvent just walking off and leaving all sorts of
potential danger to the property owner needs to be taken into
account, he said. Mr. McCarthy summarized that he does not know
if that point is addressed in the latest version of the bill.
Number 1584
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources (DNR), during bill hearing on HB 395, provided
information and answered questions. He explained that what the
state has adopted has been a policy of having bonded (indisc.),
but recognizing that the transfer of the property that delves
sinking funds or bonding mechanisms to get the significant
bonding requirements. The problem that Mr. McCarthy mentioned
is one that is commonly seen in conventional oil and gas leasing
in places like Texas where companies will sell its property when
it reaches the end of field life to smaller operators that are
less financially secure and not capable of doing the reclamation
work, he commented. The department has two mechanisms, he said.
When leases are transferred it is required that there be bonding
or sinking funds particularly for the financially weaker
companies. Secondly, the liability does not go away with the
transfer. The parent company of the original lessee is still
held responsible, he explained. The division is very cognizant
of the issue and has done a good job of avoiding the abandonment
risk. It has been accomplished through the way the leases are
written and the bonding process, he added.
MR. MYERS told the members that DNR supports HB 395 as written.
There are a lot of protections in HB 395. The department sees
HB 395 as a companion bill to HB 531 which addresses the leasing
issues, while HB 395 addresses the overall regulation of CBM
activity, he said. Where there is CBM activity, no matter where
it is in the state, these are the kinds of requirements that
provide additional protections, he said.
MR. MYERS commented that the water-testing requirement where
there is a quarter-mile issue is not that clear. There is no
magic number, he added. Mr. Myers explained that the quarter-
mile was established because if there are effects from these
activities these wells would be the first to experience
problems. Mr. Myers pointed out that this does not preclude
other testing. He reiterated that DNR supports this bill. The
process is advancing in the [Matanuska-Susitna] valley and there
will be a draft next week which will reflect the public's
recommendation.
Number 1246
REPRESENTATIVE KERTTULA asked what he said about next week.
MR. MYERS replied that the division expects to have the draft
report from the five meetings in the [Mat-Su] valley available
next week. It will be available for a period of time and the
division will accept public comment on the recommendations.
Those comments will be finalized and final findings and
regulations will be issued by the DNR commissioner.
CO-CHAIR MASEK asked if Mr. Boyd would like to comment.
Number 1186
MR. BOYD replied that he has no additional comments on HB 395.
CO-CHAIR MASEK announced that HB 395 will be held in committee.
The subcommittee will work on HB 531 and HB 395 and report back
to the chair with revised bills, she said.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:02 p.m.
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