Legislature(1997 - 1998)

04/16/1998 04:37 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE                                                       
16 April 1998                                                                  
4:37 p.m.                                                                      
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.                                                        
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                    
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                   
(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                      
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                      
Mr. Carlson said there was no incentive through HB 207.  It                    
would not apply to these six fields because they are not                       
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                           
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                     
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.                                                                       
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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