Legislature(1997 - 1998)
04/16/1998 04:37 PM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE 16 April 1998 4:37 p.m. TAPES SFC-98, Tape #124, Side A and B CALL TO ORDER Senator Bert Sharp, Co-chairman, reconvened the meeting at approximately 4:37 p.m. PRESENT In addition to Co-chair Sharp, Senators Pearce, Phillips, and Adams were present when the meeting was reconvened. Senators Torgerson, Parnell and Donley arrived respectively thereafter. Also Attending: REPRESENTATIVE NORM ROKEBERG; REPRESENTATIVE MARK HODGINS; SUSAN BURKE, Esq., Law Firm of Gross and Burke, Juneau; CAROL CARROLL, Director, Division of Administrative Services, Department of Military and Veterans Affairs; PAM LABOLLE, President, Alaska State Chamber of Commerce; KYLE PARKER, Esq., Law Firm of Patton Boggs, Anchorage; ASHLEY REED; GARY CARLSON, Vice- President, Force Energy; PAUL FUHS, Alaska Resource Alliance; KEN BOYD, Director, Division of Oil and Gas, Department of Natural Resources; fiscal analysts, Division of Legislative Finance; and aides to committee members and other members of the Legislature. SUMMARY INFORMATION Co-chair Sharp reconvened the meeting at approximately 4:37 p.m. He called HB 380. HOUSE BILL NO. 380 "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from fields within the Cook Inlet sedimentary basin where production is commenced in fields that have been discovered and undeveloped or that have been shut in." SENATE CS FOR CS FOR HOUSE BILL NO. 380(RES) "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from certain fields described as being located within the Cook Inlet sedimentary basin, as having been discovered before January 1, 1988, and as in from at least January 1, 1988, through December 31, 1997." Co-chair Sharp noted there was a work draft in the file and asked that it be moved before calling on the sponsor. Senator Pearce moved SCS CSHB 380() the version "P" draft by Mr. Glover, dated 4/16/98. Senator Adams objected. He asked the difference between the Resources Committee substitute and the work draft. Senator Pearce asked the committee look at the Resources version, page three, lines nine through nineteen and said the RES CS added a section under the Alaska Royalty Oil and Gas Development Advisory Board which gives them an approval within forty-five days after receipt of the changes based on and in order to require local Alaska contractors, Alaska residents, but also Alaska purchase, Alaska fabrication. The chairman of the Resources Committee in offering this as an amendment said there had been discussion back and forth as he tried to get something drafted, because there was concern about setting up another opportunity for any entity to file suit against this sort of approval of a temporary reduction of a royalty based on a decision made by an advisory board. The version now before us as a work draft changes the language, and we have gone through it. Looking on page three, lines ten and eleven, while the advisory board is still certifying receipt of a plan, the entity that comes and asks for the reduction is voluntarily forced to give a written plan that would require local hire, local fabrication, as best they can. The advisory board would hold a public hearing on the plan within forty-five days of receipt. The entity would still be required to make their best effort, as we all support using Alaska fabrication and Alaskans on the job. However, there still would not be a situation where the advisory board decision could become reason for a suit by whatever entity. That was the intent of going in this direction. She advised Senator Adams that was the only change. Senator Adams withdrew his objection and therefore, without objection it was adopted as the working draft. REPRESENTATIVE MARK HODGINS, sponsor of the bill, was invited to join the committee. He said the bill would be an incentive bill for six specific oil fields in Cook Inlet that have been shut in for approximately thirty years. No royalty has ever been received. Hopefully, the bill would allow some royalties to flow and open up new areas. In the case of the three southern fields, Anchor Point field, specifically, any amount of gas that has hit there could have the added benefit of gasifying Homer. Senator Adams asked about the reference to the bill being an incentive bill. What did it do to Alaskans with regards to their permanent fund dividends if the correct royalty was not received? Representative Hodgins said nothing had been received to the permanent fund program from any of these fields. There had been no production and no royalties paid in. This was because these were small fields, they were far from infrastructure and they've been uneconomical. The best economic analysis was the oil and gas had been known to be there and has not been developed since they've been discovered approximately thirty years ago. Senator Adams asked what this year's State deficit in the operating and capital budget? Representative Hodgins said he did not know. Senator Adams asked if it was in the area of five to six hundred million dollars? Representative Hodgins said he would think that was correct. Senator Adams asked if there was such a large deficit in the State's return to their coffer should the resources be just given away? Representative Hodgins said the point was they had not received any money at all from the fields and he contended that five percent was better than nothing. He also noted that as the State revenues were being diminished municipal assistance was also being diminished. He said if any one of the six fields were developed, the infrastructure that would be put in would help the municipalities. As an example he cited the Kenai Peninsula Borough, that had approximately twelve mills, would leave an extra eight mills for the State. The incentive for Alaskans was that it would create some jobs and hopefully create some revenue in a place that no revenue had been received up to this point. Senator Adams further noted that he had mentioned revenue assistance and that it was going down. Representative Hodgins concurred. Senator Adams said this was the fault of the Legislature that this had occurred. It was a loss of about twenty-four million dollars. Representative Hodgins explained that no monies had been received from these fields other than the lease amounts. He further said these fields would not be developed unless there was some sort of incentive. Oil prices had been up to twenty-five dollars a barrel and these fields still had not been developed. He felt it was prudent for them to go forward as shepherd to the State's assets and resources in order to get some revenue out of them. But for the past thirty years they had not received any revenue. Senator Adams asked about justification and wasn't this necessary to explain a royalty reduction as was in HB 207? Representative Hodgins said that HB 207 had never been used because it was too cumbersome and provided no incentive. He said with the present bill they were trying to help the six fields so they could become operative. The discovery bill offered a five- percent royalty and an unlimited amount of production for ten years with a twenty-five million barrel oil cap and thirty-five billion cubic feet of natural gas that does protect the State's interest. Senator Phillips asked if there was going to be any testimony from the oil companies. Co-chair Sharp advised Gary Carlson, Paul Fuhs, and Ken Boyd were signed up to testify. Senator Phillips said his constituents were concerned about giving the oil companies a royalty break. Therefore he wanted to hear from the oil industry on why they needed this incentive. (miscellaneous conversation at the table) Senator Pearce said she was not approached by any oil company to introduce this bill. She said it came after an Anchorage caucus meeting, which was where gas shortages and Cook Inlet were talked about and how to get ahead of the market rather than have the gas prices go way up. GARY CARLSON, Vice President for Force Energy, an independent oil company, was invited to join the committee. He said the company started investing in Alaska in the latter part of 1996. He said the company supported the bill since the beginning and felt it was a clear incentive to invest. He said the advantages to the State would set a time frame to cause the investment to take place because the fields have been fallow for over thirty years after discovery. He felt there would be some response from the industry with this incentive. It is simple and clear and the industry can plan around it. There were no problems trying to anticipate cost of development and the oil and gas prices were not in issue. The cap that was adopted was fair and protected the State but still provided incentive to develop these marginal fields. He also supported the committee substitute as introduced today. He said his company felt the substitute included good business. He felt the company was basically an Alaska company because they had originally hired nineteen Alaska residents, local consultants and contractors had been used, and they planned to utilize local manufacturers and contractors as they go ahead. Senator Phillips said his district was questioning whether they should do royalty breaks or not. He said the people in his district were hardworking. He asked what the industry was doing to convince the people of Alaska they needed this royalty break. He felt this dissatisfaction could be a forewarning of what could happen in the next few years. Mr. Carlson responded that he could not answer the question on how to influence the thinking of his constituents. It was beyond the realm of his role in Alaska. Senator Phillips was concerned about being asked to vote for something that Mr. Carlson now considered to be out of his realm. Senator Phillips again voiced his concern and said there was no support back home for this bill. He felt the industry should spend more time with the shareholders of Alaska and educate them on what they were trying to do. Co-chair Sharp said perhaps they may be differentiating between the "big three" and giving them a break and small marginal fields. Senator Phillips reminded the Co-chair that Cook Inlet was mentioned specifically. Senator Torgerson said contrary to Senator Phillip's district, his district was in support of this bill. He noted empty buildings and loss of jobs in his area. He said the Administration was making no effort to promote any deals using HB 207 or any other bills passed for incentives. He asked if this bill would speed up production? Mr. Carlson, speaking for his own company, said there were landholders and individuals who had leases in the Kenai area; also ARCO and UNICAL had interest in these fields. He said the clock was already running as far as they were concerned and wanted to look at these fields as quickly as possible. They felt the bill offered great incentive. He noted the caps spoken about earlier were valid. However, there was still some distance between the resource and the market. He was not sure what the other companies were looking at. Senator Torgerson said part of the criticism in Senate Resources was there was not a cap on the price per barrel. He wanted to know if there should be a sliding scale on the cap put in the bill. Mr. Carlson said he had seen similar incentives utilized in other states and countries. However, what happens was that it becomes difficult to plan investments because it has to be built into the risk in capital. He said the nice thing about this bill was that it was clear the industry took the risk on the oil price and on the cost, and it was understood what the royalty was. This was a good tool for industry to evaluate the prospects. Senator Adams asked when they purchased Marathon Oil in 1996 and then bid and won in 1997 approximately seventeen tracks, did they anticipate starting or getting into an incentive program like this? Mr. Carlson said he personally came to work for Force Energy three months after they came to Alaska and started investing in Alaska. Therefore, he could not answer on these specifics. He generally related the company strategy now under his leadership in Alaska. He said they felt Alaska had a progressive business attitude with the discovery royalty, HB 207, area-wide leasing concept and this was very consistent. The fields were left behind for thirty years and they anticipated a good business environment. Senator Adams asked about ANS crude prices and what price would his company need in order to be able to develop a particular field. Mr. Carlson said that at the latest ANS crude price there was no incentive for them. He said they were still trying to get some cost estimates. Senator Adams asked if they had looked at the royalty relief versus without the royalty relief. Mr. Carlson indicated they had. Senator Adams further inquired as to what they had come up with. Mr. Carlson said the economic model they looked at included the difference in the size of the field, if capital could be attracted to Alaska and the possibility of a thirty-five million barrel field not being developed. He did note that a fifty-five million barrel field could probably be developed at twelve and a half percent royalty. He said this could all change depending on the oil price, the capital costs and the timing. The attempt to put a cap in the range of forty plus or minus million barrels would give the incentive for industry to go out and look for marginal fields. They further felt they could do something with Cook Inlet as left behind by the majors. Senator Adams asked if they would continue to develop the oil fields if this bill did not pass or if they would consider working under HB 207 as passed a couple of years ago? Mr. Carlson said there was no incentive through HB 207. It would not apply to these six fields because they are not delineated. Senator Torgerson asked about Lease/Sale 85 and if anything purchased under this would be covered under this bill? Mr. Carlson said he was not a geologist and did not really understand the extent of that prospect in the field. He did not know if there were any 85-A leases that would be affected. Senator Torgerson asked if they were talking about shut-in wells and that particular field? Mr. Carlson said the field was probably originally discovered and then abandoned. Senator Phillips said he felt there was a serious problem creeping up and it had to be dealt with here. He felt the public needed to be in the loop also. PAUL FUHS, representing Alaska Resource Alliance was invited to join the committee. He said they were a newly formed business in Alaska of twenty-three oil fields, supply and service companies, single-point ordering system and a comprehensive consolidated shipping and logistics tracking. He said they supported the bill because of the potential offered Alaska oilfields service and supply companies. In response to Senator Phillips earlier concerns he said it was simply a matter of how the bill was presented to constituents. He knew it was difficult for them to understand all the complexities of particular economic arrangements. He noted the House Oil and Gas Committee did reduce the caps substantially to twenty-five million barrels, which makes for a skinny incentive. However, it was still worth considering. He asked the committee to support the bill. KENNETH A. BOYD, Director, Division of Oil and Gas, Department of Natural Resources was invited to join the committee. He said the division did not support the bill. There were wells drilled in the 1980's that no one understood and now with the help of technology, 3-D seismic and figured it out. He referred to an article from John Barnes, Manager for Marathon who said some of the changes in drilling technology being seen on the North Slope will help drive costs down in Cook Inlet. Just because a field has been shut in for twenty-five years is reason enough to grant a sixty percent royalty reduction for ten years. The State was not protected under this bill and would not get their fair share. He wanted to make clear to the committee that he was not against royalty reduction as he worked on HB 207 and worked directly with UNICAL. Companies should have time to work under the new technology. Several million dollars of new leases were sold last year. He urged the committee to consider some sort of price mechanism to go along with the barrel cap. Senator Adams asked Mr. Boyd if he agreed with the sponsor statement that more jobs were being provided and that was helpful to local taxes? Mr. Boyd said there was always the argument of "what would they do anyway"? If it were true that the oil fields would not be developed without this relief, then some number of jobs would be created. Senator Adams asked who gets the profit from royalty relief? He felt the State was the loser. Mr. Boyd said that if the field needed royalty relief an economic analysis should be done to decide what the relief was and fine tune it to create a balance between the State and the company. He said the company deserved a return on its investment for taking a risk. However, it is the State's resource, the people's resource, and they too must be protected. Senator Torgerson asked Mr. Boyd if the 3-D technology drove costs down because there wouldn't be so many dry holes drilled? Mr. Boyd concurred. He gave a brief explanation of 3-D. It was used both as an exploration and production tool. Senator Torgerson asked if 3-D were employed would location of small fields keep them shut in? Mr. Boyd indicated that was correct. Shooting 3-D over a field did not make it better. It made it easier to understand. 3-D is a tool that will help to drive costs down. Senator Torgerson asked how incentive would be offered to companies who keep 3-D seismic in complete confidentiality? Mr. Boyd said the division did have the right to that information. They could use this data to make the analysis. He said a price needs to be set. One is looking for value, which is volume times price. Senator Torgerson said he understood the testimony to be that since the fields have been shut in for such a long time period of time they are not economical, but that Mr. Boyd is saying because they have 3-D technology now the past thirty years can be ignored. Mr. Boyd explained that if the fields in fact were not economical he could not explain why the oil companies were spending money shooting millions of dollars of 3-D seismic over them. (Tape #124, Side A switched to Side B.) Senator Pearce referred to HB 207 and explained why it was not useful. The bill presently before the committee gave specific reduction for specific amount of time with a cap in the number of barrels. She did not feel the State was taking that large of a risk on specific deals for a specific period of time. However, they have to be in production by 2004, which is a short period of time in the industry when there is no infrastructure or a certain immediate availability of getting to production in any of these places. She also finds herself as puzzled as Senator Torgerson to the continuing pitched opposition and to the tone of the pitch they've been hearing. Particularly when the Administration is in favor of huge concessions for a gas line. But somehow it is different in this matter of six oil fields that will keep people working. Senator Sharp said that Senator Adam's pitch on why it shouldn't be done was exactly his pitch against HB 207 that passed big time. The farm should not have been given away. He said his concern was to get some kind of small independent producers successful in the State. However, it was never going to happen with existing law and the present way things were being handled. He felt the Legislature needed to force the issue in getting some kind of activity going. Senator Phillips commented briefly to Mr. Boyd. Senator Adams MOVED amendment #1. Senator Torgerson OBJECTED. He spoke briefly to his amendment which had to do with the deficit and that it was not a good public policy to give away some of the State's resources. By a roll call vote of 1 yea (Adams) and 5 nays (Sharp, Pearce, Donley, Torgerson, Parnell, Phillips) the amendment FAILED. Senator Donley MOVED SCS CSHB 380(FIN). Senator Adams OJBECTED. By a roll call vote of 5 yeas (Sharp, Pearce, Donley, Torgerson, Parnell) the bill was REPORTED OUT with individual recommendations and accompanying zero fiscal note from the Department of Natural Resources, Division of Oil and Gas. ADJOURNMENT Co-chair Sharp reviewed the schedule for tomorrow's meeting noting the committee would meet at 9:00 a.m. He recessed the committee at 5:30 p.m. SFC-98 -1- 4/16/98
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