Legislature(1995 - 1996)
05/01/1995 07:48 PM Senate RES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE
May 1, 1995
7:48 p.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Robin Taylor
MEMBERS ABSENT
Senator Rick Halford
Senator Georgianna Lincoln
Senator Lyman Hoffman
ALSO IN ATTENDANCE
Senator John Torgerson
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 207(FIN) am
"An Act relating to adjustments to royalty reserved to the state to
encourage otherwise uneconomic production of oil and gas; and
providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
HB 207 - See Resources minutes dated 4/22/95, 4/26/95, & 4/28/95.
WITNESS REGISTER
Commissioner John Shively
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1796
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
Keith Burke, General Manager
The Alliance
4220 B St., Suite 200
Anchorage, AK 99509
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
Joe Mathis, General Manager, Oil Field Operations
NANA Development Corporation
1001 E. Benson
Anchorage, AK 99508
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
Carl Marrs, President
Cook Inlet Regional Corporation
2525 C St., Suite 500
Anchorage, AK 99509
POSITION STATEMENT: Supports CSHB 207(FIN) am
Terry O'Beney
British Petroleum
P.O. Box 196612
Anchorage, AK 99519
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
Carl Portman, Communications Director
Resource Development Council
121 W. Fireweed
Anchorage, AK 99503
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
George Findling
ARCO Alaska, Inc.
Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Testified in support of CSHB 207(FIN) am
Jim Branch, Production Manager
Exxon, Alaska
Box 196601
Anchorage, AK 99519
POSITION STATEMENT: Supports CSHB 207(FIN) am
Kevin Tabler, Land Manager
Union Oil Co.
P.O. Box 196247
Anchorage, AK 99519
POSITION STATEMENT: Outlined concerns with SCS CSHB 207(RES)
Ken Boyd, Director
Division of Oil & Gas
Department of Natural Resources
3601 C St., Suite 1380
Anchorage, AK 99503-5948
POSITION STATEMENT: Offered information on CSHB 207(FIN) am
Richard Fineberg
P.O. Box 416
Fairbanks, AK 99725
POSITION STATEMENT: Does not support passage of any version
of HB 207
Tom Lakosh
P.O. Box 100648
Anchorage, AK 99510
POSITION STATEMENT: Believes HB 207 is unconstitutional
ACTION NARRATIVE
TAPE 95-52, SIDE A
CSHB 207(FIN) am ADJUSTMENTS TO OIL AND GAS ROYALTIES
Number 001
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 7:48 p.m., and stated the meeting was being
teleconferenced.
SENATOR LEMAN brought CSHB 207(FIN) am before the committee and
said the committee would be working on a draft Resources SCS dated
4/29/95, version "B." Because the committee lacked a quorum, he
said a motion to adopt the committee substitute as a working
document would be delayed until a quorum was established.
Number 060
COMMISSIONER JOHN SHIVELY, Department of Natural Resources, said in
drafting the original legislation, the administration felt it was
important, early on, to send a message to the oil industry that
they wanted to be able to do things that would encourage
responsible development, particularly in having to deal with much
smaller fields than Prudhoe Bay. At the same time, it was
important to protect the state's interest in income because of the
fact that the income is declining. The administration thinks that
the CSHB 207(FIN) am achieves their goals, although not precisely
in the way they had originally designed the legislation.
Addressing the Resources SCS, Commissioner Shively said although it
is an improvement over the original committee substitute, there are
still three major problems with the bill:
(1) The sunset provision sends a bad message, particularly to
new investors who might want to look at the state.
(2) The original legislation dealt both with fields and pools
of oil. Sometimes there are going to be pools or horizons in oil
that might lie within a lease where there is already a producing
field, but that pool itself, in order to be developed, could need
some assistance. The House bill provides for that, but the
Resources SCS does not.
(3) The legislative oversight provision raises constitutional
questions and it sends a message to the industry that this is a
political decision and not an economic decision.
Commissioner Shively stated that the administration thinks the
Resources SCS makes the system much more complex and it is going to
be very difficult to administer, but they are prepared to continue
to work with committee staff to improve the legislation. However,
he reiterated that the version that passed the House is acceptable
to the administration.
Number 150
SENATOR LEMAN pointed out that royalty oil contracts, as well as
state leases over $10 million, have provisions for legislative
approval, so it is not an unusual activity for the legislature to
create some authority to do a review. COMMISSIONER SHIVELY
responded that he recognizes and understands the reasons for
wanting to do this, but, in this case, these could be fairly
technical economic decisions and he wasn't sure the legislature was
the best arena to make the final decisions.
Number 210
KEITH BURKE, General Manager of The Alliance in Anchorage, stated
it is critical for the legislation to pass the Senate, but as an
organization and workers in Alaska they are disappointed with the
proposed Resources SCS.
Outlining problems with the Resources SCS, Mr. Burke said they
believe the Legislative Budget & Audit Committee would be a much
more effective and expeditious process as opposed to the
legislative approval and oversight provision in the Resources SCS.
He also suggested it would be of benefit to the Senate to install
a reporting tracking mechanism within the commissioner's office
back to the legislature once a negotiated deal is realized. He
also spoke against a sunset provision because it would send the
wrong message to the industry.
Concluding his comments, Mr. Burke said CSHB 207(FIN) am is a more
workable version, and he recommended moving more in that direction.
Number 242
SENATOR PEARCE said one of the concerns of the industry on
oversight appears to be the question of confidentiality of
information and not letting operating and tax information go out to
the entire Senate. She asked Mr. Burke how he would cover the same
confidentiality question with a tracking mechanism because she
didn't think the companies are going to be any more interested in
the legislature having the information after the fact than they are
before the fact. KEITH BURKE responded that he wasn't suggesting
tracking reservoir information or technical engineering information
of that nature. He was speaking more to the financial aspects of
the reservoir itself, on the productions of the reservoir and any
updates they may have on anticipated reserves. He thinks having an
ongoing reporting working relationship with the commissioner would
be just as beneficial as an oversight by the legislature on the
front end.
SENATOR PEARCE pointed out that it is very hard to go in and change
a statute once a law has passed, so the legislature would be in the
situation of it being real tough to come in and take the program
away. With no sunset date and no way to effect any changes, she
asked where the public trust would be of having some sort of
confidence that the legislature can act should an administration
make a poor decision. KEITH BURKE answered that if the program
works and it creates jobs, revenue and production, he is convinced
that there will not be a credibility problem with the general
public.
Number 321
SENATOR LEMAN asked Mr. Burke if he was aware of anywhere else in
the world where they have a provision of royalty flexibility for
new untested fields, and KEITH BURKE answered that he was not.
Number 340
JOE MATHIS, General Manager, Oil Field Operations, NANA Development
Corporation, spoke to the significant decline in revenues and the
layoff of employees NANA and its subsidiaries have been
experiencing because of the downturn in oil field activity in the
state. They are trying to survive and they need development of
marginal fields.
Mr. Mathis stated NANA feels that the original HB 207 is good
legislation. He said he finds it incredible that he is testifying
before the committee, given the makeup of the legislature, and he
would not have been surprised if it had happened eight years ago.
He has heard many of the members speak to The Alliance during
campaigns saying that they want to make a change in government and
help industry get back on its feet, and he now feels that they are
betraying their words. He asked that the senators rise above
politics and do the right thing by passing HB 207 in its original
form.
Number 385
SENATOR LEMAN said the major areas of difference in the Senate
version are the legislative oversight provision and the sunset
provision. He asked if these were the areas where Mr. Mathis feels
the legislators are "betraying their words." JOE MATHIS responded
that there are several areas such as addressing social issues. He
said it is an invitation for Trustees of Alaska and Greenpeace to
bring suit and delay development of oil fields. Any time that a
business decision is brought into the political arena, it is going
to be subjected to not making a good decision. He added that he
doesn't have a problem with legislative oversight, but he has
problems with putting political delays into a system.
Number 425
SENATOR PEARCE noted that best interest findings by the
commissioner are always subject to appeal to the courts, and she
questioned what the difference was with the best interest finding
in the proposed Resources SCS that it is not appealable.
COMMISSIONER SHIVELY said the concern is with paragraph (9) and
what the commissioner can address in any findings and
determinations. Allowing the commissioner to make a general best
interest finding leaves it with the commissioner to decide what
needs to go into those best interest findings. Listing things is
always dangerous because you don't know whether you've included
everything and you don't know how the courts are going to interpret
those lists, he said.
SENATOR PEARCE pointed out that the lack of lists is at least as
dangerous. That was the reason SB 308 was before the legislature
last year, because the courts came back and said that caribou
hadn't been discussed enough when caribou on the North Slope were
something that might someday be affected. COMMISSIONER SHIVELY
observed that SB 308 dealt with development issues and this is not
a development issue, but, instead, an economic determination. He
conceded that in new and marginal fields, the issues addressed in
the Resources SCS probably all would be in the best interest
findings by the commissioner. However, he added that he can see
situations in fields that are about to be abandoned where a number
of those issues might not be important. SENATOR LEMAN responded
that he made a good point and it was something he would want to be
thinking about.
Number 495
CARL MARRS, President, Cook Inlet Regional Corporation, said one of
the company's principle lines of business is natural resource
development. The development of CIRI's lands and resources will
play a significant role in the future economic growth and
development of Southcentral Alaska, especially in its oil and gas
interests on the Kenai Peninsula, where unemployment is
historically high and long-term job opportunities are few and far
between. CIRI has been working to increase employment in the areas
by marketing its lands on the Kenai Peninsula for oil and gas
exploration, and it has been successful in bringing new exploration
to its lands and adjoining state lands, but more needs to be done.
Mr. Marrs said HB 207 is important to CIRI and they are asking that
the committee pass the version that was passed by the House. In
their view, the Resources SCS does not represent progress in the
area of royalty adjustment and it sends a message to the industry
that the State of Alaska is not yet serious about encouraging new
high risk exploration and development dollars into the state. He
outlined CIRI's concerns with the sunset provision, the non-
assignability clause, and the extended legislative review and
approval of the royalty adjustment application. He reiterated his
request that the committee adopt CSHB 207(FIN) am.
TAPE 95-51, SIDE B
TERRY O'BENEY, Manager of New Developments for British Petroleum in
Alaska, testifying from Anchorage, stated the House version of HB
207 would give the commissioner of the Department of Natural
Resources clear authority to modify the terms of the state's oil
and gas royalties in a variety of ways in order of facilitate and
encourage the new investments that need to be made in order to
bring marginal new fields into production and to sustain production
from existing fields that are in decline. At the same time, it
contains safeguards to protect the state's best interests. He said
it is a good bill and it has British Petroleum's full support.
Speaking to the Resources SCS, Mr. O'Beney said it is badly flawed
and seriously out of touch with the realities of a mature oil
industry in Alaska. Their number one concern is the requirement
that any royalty adjustment be ratified by the legislature. This,
combined with the extensive findings that the commissioner must
make, is an invitation for long delays in final approval and
litigation. The second major concern is that of encouraging
development of new pools within existing fields which could have
the effect of discouraging investment and development. Their third
concern is with the sunset provision, and he suggested if the
committee is set on having a sunset provision, it should be for a
minimum of five years.
Mr. O'Beney said that effective legislation can have a big impact
on BP's decisions to develop both Badami and Northstar. It is
expected that both of these decisions could be made in 1995 and
lead to significant production and revenue by 1998.
Number 200
Responding to questions from Senator Leman, Mr. O'Beney expanded on
BP's development plans for Northstar and Badami.
Number 300
SENATOR LEMAN asked if BP is asking the legislature to look at
revisions that will allow the Alaska projects to compete with BP
projects around the world. He said he assumed BP is establishing
some type of economic threshold and then economic viability depends
on how Alaska can compete via return with those other projects.
TERRY O'BENEY replied that was correct. He said the economic
thresholds that different projects would require in different parts
of the world would depend on a lot of things in the equation.
SENATOR LEMAN asked if when they negotiate with the commissioner on
a project who is to say that they can't raise those expected rates
of return on other projects to make the Alaska projects less
economic unless revisions are made, or is there enough other
worldwide competition in the marketplace to keep them from doing
that. TERRY O'BENEY responded that there is more than enough
competition for capital resources.
Number 357
SENATOR TAYLOR said it is his understanding that the enabling act
that allowed for the construction of the Trans-Alaska Pipeline
provides that if oil flow drops below 300,000 barrels a day, the
pipeline itself must be torn down. He asked what rate of reduced
tariff TAPS is offering on marginal fields to keep up their flow.
TERRY O'BENEY responded there is none, and he believes that TAPS
does not have that discretion. As a common carrier, it has to
charge the same rate for every barrel going through that pipeline.
SENATOR TAYLOR wondered if some form of global incentive could be
achieved so that we could get the price down to where we could
really be talking about serious reduction in overall cost for
marginal fields. TERRY O'BENEY said the common carrier pipelines
are regulated and that's something that can't be done. There is
more flexibility on shipping, but the cost to ship that incremental
barrel is higher than shipping the base barrels.
Number 450
SENATOR PEARCE asked how the commissioner is going to make an
economic decision before the permitting process of a project,
before an environmental impact statement has been completed, etc.
TERRY O'BENEY answered that obviously, they have to do as much as
they can concurrently. As an example, he pointed out that in a
situation like Northstar, it wouldn't make a lot of sense talking
in detail about the royalty scheme until the basic concept of
development has been firmed up. He added that he thinks it is
important to begin with these discussions as early as possible,
even when there are a lot of uncertainties.
SENATOR PEARCE noted that as the bill came over from the House,
there is no legislative oversight and there's language that tells
the court they have no oversight, so it ends up as a plan that has
no oversight on either end. TERRY O'BENEY said he would remind the
committee that the commissioner already had some power to make
changes to royalty under certain conditions, so there is already
some precedence out there for empowering the commissioner to deal
with some of these issues. SENATOR PEARCE responded that she
didn't disagree with that, but she pointed out that the present
statute provides that the commissioner's decision is appealable to
the court.
Number 530
SENATOR LEMAN asked Mr. O'Beney if they have enough information
from the wells to have delineated the Badami field. TERRY O'BENEY
said there are currently four wells in the immediate field and
there are other wells surrounding the field. They believe two of
the wells have provided sufficient delineation, but they don't know
for certain until all the interpretation is done, and they expect
to complete that work by mid-summer. He added that they certainly
would not go inside BP and request the other $300 million for
sanction unless they thought the field is being sufficiently
delineated.
Number 575
SENATOR TAYLOR made a motion to move CSHB 207(FIN) am from
committee and then objected to his motion. He stated he didn't
necessarily support the House version or the proposed Resources
SCS, but he thinks it is essential at this late date to move the
legislation to the Senate Finance Committee. SENATOR FRANK
objected to the motion. SENATOR TAYLOR withdrew his objection to
the motion. SENATOR LEMAN stated there were insufficient votes to
move the bill out of committee.
Number 600
CARL PORTMAN, Communications Director, Resource Development
Council, stated RDC's strong support for CSHB 207(FIN) am, because
it provides the flexibility needed for the state and industry to
work together to change the economic equation for marginal fields.
It provides the flexibility for working with investors on a case-
by-case basis to make new development and reduction a reality.
However, the Resources SCS risks undermining the original purpose
of the legislation because it opens the door to potential delays
and uncertainty. He said he is not aware of anyone in their
membership that is supportive of the Senate version.
Number 690
SENATOR LEMAN commented that the only people who are pushing to
have this done this year is BP with the Badami project, so he fails
to see why the sunset provision jeopardizes any new field projects
when the issue can be revisited next year or the year after.
TAPE 95-53, SIDE A
Number 001
GEORGE FINDLING, representing ARCO Alaska, Inc., voiced support for
CSHB 207(FIN) am and stated opposition to the Resources SCS.
Mr. Findling said Alaska leaders have said it is in the state's
best interest to compete successfully for more capital. To
accomplish this, the first step is to quickly signal to investors
that the state has the desire and ability to change, and, if passed
this year, this is what the House version will do. The second step
is to harvest a major opportunity to increase industry investment.
The third step is to implement a long-term process that would give
the state the flexibility to have a competitive position, even if
worldwide competition or market conditions change rapidly.
Although the new Resources SCS is a slight improvement over the
first version, it would still water down the effectiveness of the
bill that passed the House. He said they find the Resources SCS to
be less helpful than current law and do not support its passage.
Number 190
JIM BRANCH, Production Manager, Exxon, Alaska, stated they have
supported efforts by the Administration and the legislature that
attempt to provide clarity, predictability and a reasonable balance
to the commissioner's existing authority to grant royalty relief.
The Administration's original bill, HB 207, and the substitute
reported out of the House had that intention. However, the current
Resources SCS appears to send a very negative signal to the
industry.
Mr. Branch said an incentive is ineffective if an investor
concludes it can be taken away over time, it has a hidden price
tag, or creates an environment for future disputes, and the
Resources SCS would do all of that. The suggestion of reopeners,
sunset provisions, legislative review and repeated references to
"value" and marketing of oil and gas are enough to discourage any
serious investor.
Mr. Branch said investors are prepared to assume the traditional
risks associated with finding and developing oil and gas, but not
those created by the state in the form of concerns over increased
taxes or uncertainty over an incentive granted under the Resources
SCS. He urged that the committee reconsider the changes made in
the committee substitute.
Number 244
KEVIN TABLER, Land Manger for Union Oil Co., of California in
Alaska, reviewed sections of concern in the Resources SCS.
Referring to the sunset provision in the bill, Mr. Tabler related
that most of the Unocal leases held today are located within
producing fields, some of which are nearing the end of their
economic viability. However, they do not endorse the concept of
sunset provisions.
Unocal believes the requirement for legislative approval will be a
time consuming and unnecessary requirement resulting in an
administratively burdensome process.
Mr. Tabler suggested there needs to be clarification of the
language "in amount or value of the production." He said if this
is to mean a net 3 percent floor or a maximum 76 percent reduction
of the current royalty rate, then Unocal is opposed to this
revision. He pointed out that the House version of the bill
established the floor for producing and shut-in fields at 90
percent.
Mr. Tabler said that although Unocal appreciates the attempt in the
Resources SCS to address the assignability question, they believe
a strong argument still exists for elimination of this restriction
all together.
Unocal would like to see the subsection relating to contractor
selection that was in the House version reinstated.
Mr. Tabler also testified that Unocal believes that the
commissioner should have the discretion to provide for the contents
of the best interests finding and determination in a royalty
adjustment application. He suggested that if the committee and the
legislature feel the need to include the details of the finding and
determination, they should only be suggestions and not
requirements.
In his concluding comments, Mr. Tabler said Unocal believes that
legislative approval is unnecessary, time consuming and
administratively burdensome.
Number 350
SENATOR TAYLOR asked for a clarification of the difference in the
defining of the term "economic feasibility" in subparagraph (B) on
page 2 of both the Resources SCS and CSHB 207(FIN) am.
COMMISSIONER SHIVELY stated the department has a problem with that
language because it doesn't capture exactly what might happen. He
said there are possibilities at the end of a field, depending how
long that could be, where you might also need to make a capital
investment. The language in the Resources SCS would not allow that
capital investment to be taken into account, and, therefore, would
nullify that particular opportunity to make this legislation work.
Number 375
SENATOR FRANK asked if a field's operating costs and a field's
operating revenues are defined in law. COMMISSIONER SHIVELY
answered that they are not. The department has suggested that
there are language problems in the Resources SCS, and they would
like to continue working with committee staff on them, but they
also believe CSHB 207(FIN) am is adequate to resolve these
problems.
KEN BOYD, Director, Division of Oil & Gas, Department of Natural
Resources added that the language in the House version is more
general. It gives the commissioner the latitude that says that if
there is cost increase or decrease, if you can't make your
production feasible then a royalty reduction is warranted to
prolong the economic life of an oil or gas field.
SENATOR FRANK commented that he would like to see a hypothetical
example of the components of cost, how much royalty is, how much
severance is, how much transportation is, etc., in order to get
some understanding of this and how it would work. COMMISSIONER
SHIVELY said he thinks BP is going to provide an example and the
department will look it and give its comments as well.
Number 500
SENATOR PEARCE said she doesn't understand the administration's
fear of having some kind of oversight. COMMISSIONER SHIVELY
responded that he thinks the protection for the state is right
where it ought to be, which is in the rank and file of the Division
of Oil and Gas where those professional people will be making these
decisions. That is why the administration feels strongly that
there should not be other kinds of oversight where there is not the
expertise to make the decision.
TAPE 95-53, SIDE B
Number 030
SENATOR FRANK said if we're not going to have an oversight, as a
legislator he would like to know more about the methodology that
will be utilized by the experts that make these decisions. He is
looking for some greater comfort level that the right decisions get
made for the right reasons. COMMISSIONER SHIVELY responded that
different companies have different ways of viewing projects, and he
couldn't provide one methodology that would be used. However, he
said he could provide the information on how they made the decision
on Conoco at Milne Point, but it is not necessarily going to be the
way they always do it.
Number 065
RICHARD FINEBERG, testifying from Fairbanks, expressed his
appreciation for the way the Resources SCS has been carefully
drafted, although he does not support it. He said the House
version has huge defects and he believes the committee has made a
good faith effort to cure some of them.
Mr. Fineberg said a defect he believes that will continue to be of
concern to the public is the blanket application granting the
industry, in statute, automatic confidentiality on request, which
deprives the public of their right to know.
Mr. Fineberg, speaking to an earlier question by Senator Taylor on
pipeline tariffs, said, for the record, he believes it should be
made very clear that the regulated tariff is a maximum pipeline
tariff, and nothing prevents the carrier from lowering the tariff,
which is a very crucial point of pipeline rate making. He said
this is not the time to deal with it, but rather than looking at
incentives that might be offered, he thinks careful observation of
pipeline tariffs and careful scrutiny might find much more fertile
fields for promoting future state development of the public
resource.
Addressing an earlier discussion on the definition of "marginal
field," Mr. Fineberg he said he wanted to make it clear for the
record that in a 1995 study that compares approximately 210 regimes
from 135 countries, a marginal field is defined as one that yields
the producer a net present value of $2.20 per barrel or less at a
15 percent discount rate.
In his concluding remarks, Mr. Fineberg suggested that if
legislators want to increase production and save time, simply go
home and do nothing because it is happening.
Number 220
TOM LAKOSH, testifying from Anchorage, stated his objection to
passage of HB 207, which he believes is in direct contravention of
Article I, Section 15 of the Alaska Constitution because it grants
special privileges and immunities to the oil industry.
Mr. Lakosh said he upset that there have been several suggestions
that the legislative oversight should be withdrawn for the sole
purpose of denying the pubic an opportunity for due process. He
said it is a clear attempt to take the resources of Alaskans
without due process.
Mr. Lakosh said he would request that the attorney general
specifically investigate whether there is an attempt to repair
contracts with this legislation or provide special privileges or
immunity from law.
There being no further witnesses to testify on HB 207, SENATOR
LEMAN adjourned the meeting at 10:40 p.m.
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