Legislature(2003 - 2004)

02/23/2004 03:38 PM Senate RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 23, 2004                                                                                        
                           3:38 p.m.                                                                                            
                                                                                                                                
TAPE(S) 04-14, 15                                                                                                             
                                                                                                                              
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Scott Ogan, Chair                                                                                                       
Senator Thomas Wagoner, Vice Chair                                                                                              
Senator Ralph Seekins                                                                                                           
Senator Ben Stevens                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Fred Dyson                                                                                                              
Senator Kim Elton                                                                                                               
Senator Georgianna Lincoln                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 312                                                                                                             
"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                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 312                                                                                                                  
SHORT TITLE: CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                          
SPONSOR(s): RESOURCES BY REQUEST                                                                                                
                                                                                                                                
02/09/04       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/09/04       (S)       RES, FIN                                                                                               
02/23/04       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Mr. Mark Myers, Director                                                                                                        
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT: Supports SB 312.                                                                                          
                                                                                                                                
Mr. Carrol Martin                                                                                                               
Soldotna AK                                                                                                                     
POSITION STATEMENT: Opposes SB 312.                                                                                           
                                                                                                                                
Mr. Doug Carney                                                                                                                 
Sleetmute AK                                                                                                                    
POSITION STATEMENT: Supports SB 312.                                                                                          
                                                                                                                                
Ms. Michelle Church                                                                                                             
Palmer AK                                                                                                                       
POSITION STATEMENT: Opposes SB 312.                                                                                           
                                                                                                                                
Jeanne Walker                                                                                                                   
Homer AK                                                                                                                        
POSITION STATEMENT: Opposes SB 312.                                                                                           
                                                                                                                                
Mr. Ken Boyd, Chairman                                                                                                          
Alaska Oil and Gas Association (AOGA)                                                                                           
POSITION STATEMENT: Supports SB 312.                                                                                          
                                                                                                                                
Mr. Jeff Arnot                                                                                                                  
Palmer AK                                                                                                                       
POSITION STATEMENT: Commented on SB 312.                                                                                      
                                                                                                                                
Ms. Roberta Highland                                                                                                            
Homer AK                                                                                                                        
POSITION STATEMENT: Commented on SB 312.                                                                                      
                                                                                                                                
Mr. Myrl Thompson                                                                                                               
Palmer AK                                                                                                                       
POSITION STATEMENT: Commented on SB 312.                                                                                      
                                                                                                                                
Mr. Robert Archibald                                                                                                            
Homer AK                                                                                                                        
POSITION STATEMENT: Commented on SB 312.                                                                                      
                                                                                                                                
Mr. Chris Rose                                                                                                                  
Palmer AK                                                                                                                       
POSITION STATEMENT: Opposes SB 312.                                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-14, SIDE A                                                                                                            
        SB 312-CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                    
                                                                                                                                
CHAIR SCOTT  OGAN called the Senate  Resources Standing Committee                                                             
meeting  to order  at 3:38  p.m. Present  were Senators  Wagoner,                                                               
Stevens,  Seekins  and  Chair Ogan.  Senators  Elton,  Dyson  and                                                               
Lincoln were excused. The first  order of business to come before                                                               
the committee was SB 312. He  announced that the hearing had been                                                               
noticed  on  February  12,  one  week  longer  than  the  minimum                                                               
requirements to give people adequate time to respond.                                                                           
                                                                                                                                
SENATOR THOMAS WAGONER moved to  adopt CSSB 312(RES), version \S.                                                               
There were no objections and it was so ordered.                                                                                 
                                                                                                                                
MR.  MARK MYERS,  Director, Division  of  Oil and  Gas, said  the                                                               
administration very much supports CSSB 312.                                                                                     
                                                                                                                                
The following is a verbatim transcript on CSSB 312.                                                                             
                                                                                                                                
MR.  MYERS:  The bill,  in  essence,  repeals or  eliminates  the                                                               
current   over-the-counter  shallow   gas  leasing   program  and                                                               
provides  a  vehicle  to  replace   it  with  existing  programs,                                                               
including  the competitive  leasing program  and the  exploration                                                               
licensing programs.                                                                                                             
                                                                                                                                
I guess  the first  question is  why would you  want to  do that.                                                               
There are multiple reasons we  recommend this approach. The first                                                               
is one of the criticisms of  the shallow gas program has been its                                                               
public process.  Up prior to  leasing, it is an  applicant driven                                                               
over-the-counter  program. It  was originally  passed in  1996 by                                                               
the  Legislature  with  the  intent  of  providing  rural  energy                                                               
opportunities   in  rural   remote  parts   of  Alaska.   It  was                                                               
anticipated  to  be  a  relatively small  program  used  only  on                                                               
occasion surrounding  bush Alaska communities that  could benefit                                                               
from natural gas.  Most of these communities  are currently still                                                               
using fuel  oil. So, it's  seen as an  environmentally preferable                                                               
option.                                                                                                                         
                                                                                                                                
In order  to make the program  as simple as possible,  it created                                                               
an  over-the-counter  program  thinking  again  relatively  small                                                               
usage  in  areas  of low  population  density  surrounding  rural                                                               
Alaska.                                                                                                                         
                                                                                                                                
The  program  was a  success;  the  program had  some  unintended                                                               
consequences. One  of those unintended  consequences was  that it                                                               
allowed leasing  any place  that didn't  have a  current areawide                                                               
lease sale in it, which  meant in areas adjoining areawide sales,                                                               
in relatively high-populated  areas like the Mat  Valley, down by                                                               
the  Homer area,  it allowed  people to  apply for  the over-the-                                                               
counter  leases.  It  led to  confusion  over  the  notification,                                                               
because   the  original   shallow  gas   [legislation]  did   not                                                               
contemplate  a  long-term  up  front   public  process  prior  to                                                               
leasing.                                                                                                                        
                                                                                                                                
Folks really were  caught kind of by surprise even  though it was                                                               
noticed  properly  by the  law.  The  notice [requirement]  isn't                                                               
nearly as  rigorous as  it is under  the other  leasing programs.                                                               
Therefore, the leasing that occurred  was driven by the applicant                                                               
rather than  in a planned  and organized fashion in  these areas.                                                               
What we ended  up with is the  current issues we have  in the Mat                                                               
Valley and  the Homer area.  This bill steps back  and recognizes                                                               
that  we need  a more  robust systematic  type approach  in these                                                               
areas of higher population densities.                                                                                           
                                                                                                                                
The other  part of the equation  was in rural Alaska  at the time                                                               
those passed,  there were other  than areawide sales,  which have                                                               
the finding and the major  process and are competitive in nature.                                                               
We  didn't  have   another  vehicle  for  leasing.   So,  it  was                                                               
restricted to places where sales  were on the five-year schedule,                                                               
went to this robust process.                                                                                                    
                                                                                                                                
At the  same time  in '96,  another program  was passed  that was                                                               
called  "Exploration Licensing."  That  program allows  exclusive                                                               
licensing  in  rural  areas  up  to 500,000  acres  to  a  single                                                               
licensee. It  is a  competitive process in  the sense  that folks                                                               
bid a  work commitment for  that exploration. But  in retrospect,                                                               
we believe  the combination  now of  the exploration  licenses in                                                               
rural  areas  outside  our  areawide   sales  combined  with  the                                                               
areawide  sales will  bring, in  fact, a  better up  front public                                                               
process  and ultimately  allow for  development  of resources  in                                                               
rural areas as  well as in areas close into  the current areawide                                                               
sales.                                                                                                                          
                                                                                                                                
One  of  the other  problems  we  recognize  in the  shallow  gas                                                               
program was for  shallow gas, but using a 3,000  ft. depth cutoff                                                               
or a modified version of that,  as the bill later was modified to                                                               
allow for, part of the field  was above 3,000 ft. Then they could                                                               
produce  down further.  It still  isn't a  very good  solution in                                                               
terms of  resource development.  It will work  in some  cases for                                                               
coalbed methane  - maybe, for  some shallow  gas - maybe;  but it                                                               
isn't an  economical, reasonable way  to explore and  produce for                                                               
oil and gas.  You'd like them to  be able to produce  all the gas                                                               
off  a  given  lease  just  for  the  economics  of  it  and  for                                                               
maximizing the benefit to the people of the state.                                                                              
                                                                                                                                
So,  the concept  of limited  depth is  problematic. The  lack of                                                               
public process up front in  the leasing has been problematic and,                                                               
quite  honestly,   a  lack  of  competitive   process,  has  been                                                               
problematic with  the program.  In areas other  than -  there's a                                                               
few  areas  in  rural  Alaska  where  it  has  been  used  pretty                                                               
effectively. So, this program  recognizes those limitations. This                                                               
bill  recognizes  those  limitations and  replaces  the  existing                                                               
program with this program.                                                                                                      
                                                                                                                                
We  think -  the first  thing  was -  we used  the best  interest                                                               
finding  process. Why  is that  important? Again,  it allows  for                                                               
enough  up  front public  planning  and  notification so  no  one                                                               
should  be caught  off guard.  Local communities  will have  full                                                               
input into  the process and do  under those two programs.  It's a                                                               
better balancing  test. Under the shallow  gas program, basically                                                               
the Legislature  assumes that  if the gas  in the  area benefited                                                               
the folks in the region, it was  a goal that you had to lease it.                                                               
The best  interest finding  is a more  robust process.  It weighs                                                               
all  the   environmental  effects;  it  weighs   the  subsistence                                                               
effects; and  it comes out  with a conclusion. Rather  than being                                                               
applicant driven, it  allows the DNR to customize  the lease sale                                                               
to  do more,  to have  environmental  safeguards associated  with                                                               
responsible  development. So,  again, the  best interest  finding                                                               
process is integral to that.                                                                                                    
                                                                                                                                
In  your packets  there are  several pieces  of information.  The                                                               
first compares - this spread sheet -  as you can see - I won't go                                                               
through  it in  detail, but  it compares  the processes  involved                                                               
with issuing  a shallow gas  lease versus an  exploration license                                                               
or an  areawide lease.  You can  see on the  top the  shallow gas                                                               
lease is non competitive  over-the-counter; it's applicant driven                                                               
as opposed  to competitive  in the  areawide and  the exploration                                                               
licensing  and more  of  a coherent  determination  of where  the                                                               
acreage is actually acquired for the lease.                                                                                     
                                                                                                                                
The process of  the fees - shallow gas leasing  has a filing fee;                                                               
areawide sales have  a minimum bid per acre and  a licensing fee.                                                               
The  best   interest  finding,  again,   is  one  of   the  major                                                               
differences present  in exploration licensing and  areawide lease                                                               
sales.  There is  a difference  in the  way ACMP  (Alaska Coastal                                                               
Management  Plan)[consistency]   determinations  are   done;  the                                                               
public notice is  much more extensive in the  areawide process. A                                                               
lot of that [indisc.] and the  exploration license, a lot of that                                                               
related to the best interest finding.  So, you can then, a lot of                                                               
the concerns we are seeing addressed  in the Mat Valley and Homer                                                               
and other  areas concerning this  program are addressed,  n fact,                                                               
in the process of going to  a best interest finding. So, we think                                                               
it's a better public process;  it's a better management tool. The                                                               
competitive  nature  of the  program,  I  think, will  ultimately                                                               
bring  in more  money  for  the state.  So,  we  see this  having                                                               
positive fiscal effect.                                                                                                         
                                                                                                                                
The leases  issued are typically  longer than  three-year leases.                                                               
There are  a number  of 7  to 10-year  leases in  the competitive                                                               
sale. Exploration  licenses go from  5 to  10 years and  then the                                                               
applicant is allowed to lease after  that. So, it has benefits to                                                               
the industry  as well. All  of the BIFs (best  interest findings)                                                               
are available rather than limited to  3,000 ft. or deeper if some                                                               
of the gas is above 3,000 ft. and the term is longer.                                                                           
                                                                                                                                
In  areas,  particularly   adjoining  conventional  lease  areas,                                                               
unlimited  depth makes  for better  management  when shallow  gas                                                               
leases are produced in adjoining  areas to conventional leases in                                                               
production. So, it's  better for oil and gas  management. So, all                                                               
in all, we have a much better program.                                                                                          
                                                                                                                                
One  of  the other  features  -  the  concern  was that  for  non                                                               
conventional  gas,   for  coalbed  methane,  for   gas  hydrates,                                                               
fractured shales,  these projects  do have  potentially different                                                               
economics. So, it  was their mechanism available  to support less                                                               
economically viable projects as these  may be. This bill has that                                                               
mechanism in  there. Basically,  the lease  terms on  the rentals                                                               
normally start at a  $1 and normally go up to  $3 over time. They                                                               
are  accelerated 50  cents at  a time  per year.  There is  a way                                                               
under this  bill that if  someone has  a gas-only lease  and they                                                               
can  reasonably estimate  that the  gas presently  leased is  non                                                               
conventional to  the commissioner, he  can keep that  rental rate                                                               
at $1 and then also can  use the 6.25 percent lower royalty terms                                                               
not competing  with other gas in  the market. So, it  preserves a                                                               
lot  of  the  economic  incentives present  in  the  shallow  gas                                                               
leasing   program   for   that  potential   production   of   non                                                               
conventional gas.                                                                                                               
                                                                                                                                
It  also, as  I  mentioned,  has a  term  that  is not  available                                                               
currently to  the commissioner on either  exploration licenses or                                                               
areawide leases  - that of  a gas  only lease. In  certain areas,                                                               
because of  the concern about oil  spills or risk or  some unique                                                               
environmental conditions,  it may be  appropriate to use  the gas                                                               
only terms;  in other areas  we pretty  much know there's  no oil                                                               
potential. So,  it allows the  commissioner at the time  to issue                                                               
that  lease  as  a  gas   only  lease.  It's  just  another  good                                                               
management  tool that's  present that's  not available  under the                                                               
current two programs.                                                                                                           
                                                                                                                                
So, what we've  tried to do, and what I  believe Senator Ogan has                                                               
tried  to do  in his  bill,  is to  meld  the best  parts of  the                                                               
shallow   gas  leasing   program  into   the  areawide   and  the                                                               
exploration licensing programs.                                                                                                 
                                                                                                                                
A couple  more sheets -  I won't go into  great detail -  but the                                                               
best  interest  finding,  it  shows  the  contents  of  the  best                                                               
interest  findings  are  11  different  things.  It  is  truly  a                                                               
balancing test. I have an example  here if people want to see it.                                                               
It's a  pretty thick  document. But it  balances things  like the                                                               
petroleum  potential  versus  the  fish  and  game  and  wildlife                                                               
resources,  the subsistence  resources, economic  effects of  the                                                               
area.  It  develops  the  stipulations  and  mitigation  measures                                                               
appropriate to the lease; it  allows for customizing the size and                                                               
shape  of  leases -  for  instance,  limiting surface  access  to                                                               
certain areas,  allowing the producer  the oil or  gas underneath                                                               
that area. So,  it gives the state a tremendous  amount of tools.                                                               
It  also has  multiple  points  of public  access  and entry  for                                                               
comments.  The  document  isn't produced  as  a  final  document;                                                               
there's an  initial call  for comments  that goes  out -  that is                                                               
noticed. Then there's a preliminary  document, which is developed                                                               
in which the  public is free to comment on  and is actually urged                                                               
to comment on. All those comments  from the public, no matter who                                                               
it comes  from, has  to be  answered in  the final  best interest                                                               
finding. So, again, lots of public process.                                                                                     
                                                                                                                                
There are  two other  pages here that  show the  areawide leasing                                                               
public process and the exploration  licensing public process that                                                               
show  all those  points of  public  input. So,  anyway, that's  a                                                               
long-winded version  of what's  sort of in  this bill,  what it's                                                               
intended to  do. To summarize  it -  it replaces the  shallow gas                                                               
leasing program with programs that  are more tried and tested and                                                               
it has  better public input  and has a different  balancing test.                                                               
It also provides  for financial lease payments  and royalty rates                                                               
that are commensurate  with non conventional gas.  Also, by using                                                               
the term 'non conventional gas,' I  think, it puts us back on the                                                               
right track. We were separating  shallow gas leasing. It's really                                                               
the activity you want to look  at - whether it's coal bed methane                                                               
or  it's hydrates  or those  are the  production techniques.  The                                                               
depths  really aren't  material in  the sense  of a  strict depth                                                               
limitation. So, it gets us kind  of back into the mainframe where                                                               
you regulate  the activity,  not the lease  type. Does  that make                                                               
sense? The use  of the term 'non conventional' -  defining that -                                                               
helps in  that. So,  it cleans  up some  of the  confusions we've                                                               
allowed  to creep  into our  statutory  and regulatory  framework                                                               
over time and put this back on a  course. It also - we have taken                                                               
seriously the public  process that's occurring out  in the Valley                                                               
and many  of those comments do  relate to public notice  prior to                                                               
leasing and helps much in those areas.                                                                                          
                                                                                                                                
If  you're  interested, the  comments  being  developed in  those                                                               
workshops are all available on our  website to look at. With that                                                               
I would answer any questions, Mr. Chairman.                                                                                     
                                                                                                                                
CHAIR  OGAN:  Any  questions  from  the  committee  members?  [no                                                               
questions] I  have a couple. Let's  talk a little bit  about some                                                               
of  the   unintended  consequences.  The  original   program  was                                                               
designed to  attract the industry  here and primarily  focused on                                                               
rural Alaska.  Since then,  there has  been an  increasingly high                                                               
awareness of  a coming gas  shortage in  Cook Inlet and  then the                                                               
associated price  increases. Maybe  you can  talk about  what the                                                               
price of  gas has  gone to  and where  it's at  now and  where we                                                               
think  it's  going and  what  the  short-term and  long-term  gas                                                               
shortage supply issues are in the Cook Inlet basin.                                                                             
                                                                                                                                
MR. MYERS: Mr. Chairman, a  lot of different questions there. The                                                               
first thing is  the need to determine whether  we have commercial                                                               
coal bed methane is very  important, particularly in Southcentral                                                               
Alaska. As we look at the  conventional gas supply, we are seeing                                                               
that  supply being  stretched very  hard.  You can  see that  the                                                               
Agrium Plant  is operating at  about half  capacity now due  to a                                                               
lack of supply in the short term.  If we look out longer term, we                                                               
have about  a nine-year reserve  life left in the  known reserves                                                               
in the  Cook Inlet. If  that reserve supply isn't  maintained, if                                                               
that life isn't maintained  through pretty aggressive exploration                                                               
and development of what resources  may be there, then we'll start                                                               
seeing effects in the market. For  instance, in the winter we use                                                               
a lot more  gas for commercial and residential  uses. That supply                                                               
is  determined by  not storing  a lot  of gas  in the  ground and                                                               
having  it  ready;  it's determined  by  having  more  production                                                               
capacity. So, the first pinch  you'll see is potential production                                                               
supply or shortages in the winter  months when we really need the                                                               
gas. To accommodate  that, that requires industrial  users to cut                                                               
back on  their supply  and the first  [indisc.] we'll  see coming                                                               
back are the people who can afford  to pay the least for the gas.                                                               
And  that's what  we're seeing  happening to  the Agriums  of the                                                               
world  -  particularly in  the  winter  months, they  are  losing                                                               
supply.                                                                                                                         
                                                                                                                                
The next  bite happens  to the  LNG export plant.  If the  gas is                                                               
there available  for local  use in  2009, the  federal government                                                               
has  to renew  the  LNG  export license.  I  would  say with  the                                                               
existing  reserve  base, if  that  reserve  base isn't  replaced,                                                               
there's very little  chance of them approving that.  So, the next                                                               
thing we  would see  is the  shutdown of the  LNG plant  and huge                                                               
effects to the economy on the Kenai and to Southcentral Alaska.                                                                 
                                                                                                                                
Next we  would see effects  with shortages outboard of  that with                                                               
the  remaining supply  for local  use  in Cook  Inlet. Without  a                                                               
supply of  gas, we're  going to  see a real  pinch in  any future                                                               
growth in industrial  users in Southcentral Alaska. So,  we see a                                                               
tremendous  pinch  -  it's  interesting in  the  area  where  the                                                               
coalbed  methane potential  - although  not  proven commercial  -                                                               
appears to  be the best in  the area where the  population growth                                                               
is the highest.  Again, a lot of those areas  are not plumbed and                                                               
are not available  to the current ENSTAR system and  we need some                                                               
expansion to the north, in  particular to the north Mat-Su Valley                                                               
area. Again, that is the area of current exploration interest.                                                                  
                                                                                                                                
So, it's interesting that the gas  aligns with a lot of the local                                                               
population growth needs, as well.  So, it would be very important                                                               
and probably the first place that  that gas would be used - would                                                               
be to  supply that local use,  which would take pressure  off the                                                               
gas that's closer to the LNG and the fertilizer market.                                                                         
                                                                                                                                
When you  look at it out  in 2009, 2010, and  2011, for instance,                                                               
ENSTAR's  charts show  they have  most of  their gas  supply they                                                               
need  is  unaccounted for  at  this  time. Aggressive  commercial                                                               
exploration onshore is being successful  to some degree, but it's                                                               
not offsetting  - not finding  these very large fields  that will                                                               
offset that  for much a period  of time. So, for  Southcentral to                                                               
be in a position where we know  actually how much gas is going to                                                               
be available  and what our  other options  are we really  have to                                                               
understand  what's  there  in  terms  of  coalbed  methane.  It's                                                               
crucial. If  it is there,  it will probably  be some of  the real                                                               
upside  potential  for  residential  users in  the  area  in  the                                                               
vicinity  of the  coalbed exploration  itself. We  consider it  a                                                               
very important resource  - it needs to be  explored and exploited                                                               
if it works. That's the first question.                                                                                         
                                                                                                                                
The  second question  was on  the shallow-gas  leasing program  I                                                               
think  did lead  to a  recognition  of the  potential in  Alaska,                                                               
which brought companies like Evergreen.  The availability of land                                                               
was an  important issue with them  and they were able  to acquire                                                               
significant  land position.  Enough  so  that if  it  were to  be                                                               
commercial,  they could  make  -  if it  were  to be  technically                                                               
possible they could  make a commercial go of it  - because you do                                                               
need fairly large-scale  operation to justify it  on a commercial                                                               
basis. Cuz  the wells are  generally fairly low  productivity for                                                               
each well.                                                                                                                      
                                                                                                                                
So, the  program did help  stimulate industry interest.  I think,                                                               
by-and-large, when  we look at  the areas in the  northern valley                                                               
though, we  have outgrown  it. Again you  have the  public notice                                                               
and process problems, but we're  better served by an extension, I                                                               
believe, in  that area of  our competitive leasing  program. That                                                               
way truly you  get the most value for the  leases. The leases are                                                               
longer term. If there is  conventional gas at deeper depths, then                                                               
that can be  exploited as well in those  areas. So, by-and-large,                                                               
the  value   to  the  industry,   I  think,  is   increased.  The                                                               
competition will lead to more  revenue to the state. The planning                                                               
process  will be  more suitable  for the  local residents  of the                                                               
region. So,  that I think  is the evolution  of why this  bill is                                                               
here.                                                                                                                           
                                                                                                                                
CHAIR OGAN:  Could you  possibly clear up  some issues?  Tell you                                                               
what;  maybe we'll  touch  base on  some of  those  a little  bit                                                               
later.                                                                                                                          
                                                                                                                                
Maybe you could  talk a little bit about your  experience of what                                                               
you saw  that was good  when you traveled  in other parts  of the                                                               
country about coalbed  methane and what you saw that  was bad and                                                               
what we can do to make sure that it's done right in Alaska.                                                                     
                                                                                                                                
MR.  MYERS: Mr.  Chairman,  I  think, again,  first  of all  it's                                                               
particularly to  Southcentral Alaska and  in some areas  of Rural                                                               
Alaska - you know, coalbed methane  could be the most viable, the                                                               
most economic and in some  areas, maybe the only available source                                                               
of gas.  Which again, environmentally, is  probably the preferred                                                               
fuel for  us, or  certainly for  residential and  commercial home                                                               
use. So,  we need to  find, I believe  we need  to find a  way to                                                               
make it work if it, in fact, is commercially viable.                                                                            
                                                                                                                                
When we looked at coalbed  methane operations elsewhere and we've                                                               
done quite a  lot of extensive work including  visiting the areas                                                               
in Wyoming  and Colorado, which  it's very - are  currently under                                                               
active coalbed development.  You could see things  that were done                                                               
well and  things that were done  not as well. One  of the biggest                                                               
issues  down   there  is  surface   land  use   management;  that                                                               
facilities need  to be done  in an  orderly fashion. Look  on the                                                               
North Slope. We try; we use  large-unit units. One of the reasons                                                               
for those large units is  to minimize, for environmental reasons,                                                               
to minimize the  amount of surface impact. You do  that by having                                                               
a single  operator over a  relatively large area and  that single                                                               
operator  has  limited  facilities.  They  maximize  the  use  of                                                               
existing infrastructure and minimize  its footprint. There aren't                                                               
redundant  pipelines   running  here   and  there.  They   use  a                                                               
systematic orderly approach of  expanding the existing pipelines.                                                               
Pad sizes are kept to  the minimum, they're located - compressors                                                               
and stations are shared and  used to the maximum extent possible.                                                               
When  a new  field  comes online,  they try  to  share that  same                                                               
facility when it's in close  proximity with the new participating                                                               
[indisc.] reservoir's brought on line.                                                                                          
                                                                                                                                
So,  by  maximizing  existing infrastructure,  you  minimize  the                                                               
surface use. Some  places in the Lower 48, they  hadn't done such                                                               
a good job  of that. You had  an operator - you  know operator A,                                                               
B, C  and D  operating the  same area.  They would  use different                                                               
pipelines; they  would have  more surface impact.  So one  of the                                                               
lessons we  learned was to  minimize the surface impact,  to bury                                                               
pipelines  underneath  existing   roads  and  the  infrastructure                                                               
rather than have separate pipelines.                                                                                            
                                                                                                                                
There are cases where a company  would put the road in, but would                                                               
then opt  to put the  pipeline parallel to  it [and] off  a ways.                                                               
That  doesn't  make  any  sense.  These  are  low  pressure,  low                                                               
volatility lines  at a  few psi.  They're not  like the  big TAPS                                                               
line or  a big high-pressure gas  line. So, you can  bury most of                                                               
those  pipes  underneath  the roads.  In  the  good  developments                                                               
they've done  exactly that. They've minimized  the impact working                                                               
well  with landowners.  The  good operators  work  well with  the                                                               
landowners to  provide an uplifted  value to the  landowner. They                                                               
compensate them  where appropriate and they  operate responsibly.                                                               
So encouraging that activity becomes really important.                                                                          
                                                                                                                                
Produced  water is  an  issue  down there.  A  lot  of times  the                                                               
ranchers  want  to  use  the produced  water.  Sometimes  it's  a                                                               
different  - it  doesn't  meet drinking  standards.  It has  more                                                               
dissolved salts of various types.  Often it's not terribly toxic,                                                               
but over  a long term in  agricultural uses it can  change the PH                                                               
and value to the soil. So it has to be monitored very carefully.                                                                
                                                                                                                                
In Alaska we  really don't have that shortage of  water. We don't                                                               
have the  need for the  water and the  plan would be  to reinject                                                               
the water.  Again, we don't  have the same  issue they do  in the                                                               
semi-arid  West  with the  water  production.  But that  was  one                                                               
takeaway  lesson; make  sure produced  water  is run  adequately.                                                               
Aquifer  protection is  important  and again,  Alaska has  pretty                                                               
good standards for protection of underground aquifers.                                                                          
                                                                                                                                
When we  went to the  checklist of  issues, the number  one issue                                                               
was  to  maximize efficiency,  the  use  of facilities,  facility                                                               
placement.  The  good  operators   would  take  their  compressor                                                               
stations, they  would sound insulate  them - they would  put them                                                               
in closed buildings  and they would put them in  the valleys. The                                                               
bad operators  stick them on  top of the  ridge and have  an open                                                               
framework facility.  So, how the  operators manage  the facility,                                                               
design  of  structure  is  a probably  the  number  one  takeaway                                                               
message.                                                                                                                        
                                                                                                                                
In Alaska  we have  a great record  of doing that  in a  way that                                                               
minimizes environmental  impact. Unitization,  we do have  a fair                                                               
amount of  say over that. So  one of the takeaway  messages - the                                                               
good  operators really  minimize  impact. The  state  has a  role                                                               
there. We have  to make sure we protect the  water supply and the                                                               
aquifers.  A lot  of the  issues, though,  with water  aren't the                                                               
same as  down there because  we'll see the water  reinjected here                                                               
and we don't have a lot of surface demand for use of that water.                                                                
                                                                                                                                
CHAIR OGAN: What comes up in  the water with the produced water -                                                               
at least  with the wells that  have been drilled so  far. I think                                                               
there is  a lot  of fear  about it  and like  you said,  in other                                                               
areas  the water  has been  oftentimes  put in  holding ponds  or                                                               
evaporation techniques. You  know, they run a pipe up  in the air                                                               
and they  spray it  out like  a big  sprinkler. It's  supposed to                                                               
evaporate in  and those  kinds of things.  And there's  been some                                                               
water  issues   in  the  Lower   48  that  are   contentious  and                                                               
problematic.                                                                                                                    
                                                                                                                                
What's in produced water and how will that be handled here?                                                                     
                                                                                                                                
MR. MYERS: Generally the produced  water can vary from very fresh                                                               
potable water  to water  that has elevated  levels of  chloride -                                                               
saltier.  Along  with  that  water  can  be  elevated  levels  of                                                               
potassium  or  sodium  or ratios  of  potassium/sodium  that  are                                                               
different  than the  surface water.  That  seems to  be the  most                                                               
dominant affect to the water.                                                                                                   
                                                                                                                                
Basically,  it's not  toxic in  the  sense of  what we  typically                                                               
think of toxic substance, but over  a long term, can have affects                                                               
to  the  plant growth  if  discharged  in  large amounts  to  the                                                               
surface - depending on the  water quality. Because the operations                                                               
in Alaska  - the  wells are  drilled a  deeper depth.  In Wyoming                                                               
they're only drilled a few hundred  feet. We're looking at over a                                                               
thousand feet  typically - in  the three thousand,  four thousand                                                               
feet depth  here. The water will  be inherently saltier -  as you                                                               
move down the water gets progressively saltier.                                                                                 
                                                                                                                                
It also  means the water from  production - of course,  the water                                                               
from the Mat Valley will  be significantly separated from what is                                                               
normally the aquifers. So, one  of the big differences down there                                                               
is they're  producing the  shallow gas from  the same  zones that                                                               
are sometimes used as aquifers.  The coals are actually dewatered                                                               
- used  for drinking water. Here,  that is very much  of a rarity                                                               
and the  actual zones  from any  coals -  produce any  water from                                                               
coals - I guess there are a few  cases, but it's very rare in the                                                               
Valley. They're producing from the  sandstones, not from the coal                                                               
so the coalbed methane wouldn't be in conflict.                                                                                 
                                                                                                                                
The  second part  is the  zones they're  producing from  are much                                                               
deeper here  than are  normally the aquifers.  So, again  I don't                                                               
expect  the same  level of  problems, it  doesn't mean  you don't                                                               
want to monitor and have good  water quality data. But it's truly                                                               
a manageable  issue up here.  I think particularly  because we're                                                               
not looking  at surface  discharging the same  way they  are down                                                               
there.                                                                                                                          
                                                                                                                                
CHAIR OGAN:  I think that's all  the questions I have.  Oh, there                                                               
is one more. It's come to  my attention there is some information                                                               
being distributed  about a development  in Rifle,  Colorado. It's                                                               
being portrayed  as though it's  coalbed methane and  that's what                                                               
it will  look like in Alaska.  Have you done any  research on the                                                               
Rifle Colorado and  what they do there and  what that development                                                               
actually is?                                                                                                                    
                                                                                                                                
MR.MYERS: I believe  the developments in question,  the fields in                                                               
question, are conventional  type sands gas. So  they're gas sands                                                               
that  are  being  produced   from  very  low-quality  reservoirs.                                                               
Because of  the nature of the  reservoirs, the size and  shape of                                                               
the  reservoirs  are  very  linear in  shape  rather  than  being                                                               
widespread over  an area. They  require a  well into each  one of                                                               
the  individual  sands.  Because  of   the  low  quality  of  the                                                               
reservoir, the wells have to be relatively closely spaced.                                                                      
                                                                                                                                
The better quality reservoirs require  less wells to produce. So,                                                               
I believe,  in that  area they are  producing wells  fairly close                                                               
spaced for conventional gas at depths  in the 6,000 to 7,000 foot                                                               
range.  But  they're  requiring wells  that  are  fairly  closely                                                               
spaced. I  believe they  are directionally  drilling them  from a                                                               
more centralized pad. So, in an  area you'll see a bunch of heads                                                               
but  they're spread  out to  an area.  But the  spacing of  those                                                               
wells are  relatively close -  10 to 20  acre type spacing  is my                                                               
understanding.                                                                                                                  
                                                                                                                                
CHAIR OGAN: What do you anticipate  spacing to be in say, the Mat                                                               
Valley for coalbed methane?                                                                                                     
                                                                                                                                
MR.  MYERS:  I   would  expect  development  -   again,  if  it's                                                               
commercial, we  don't know that. They  haven't demonstrated that,                                                               
yet. If it  were commercial, probably typically  about five wells                                                               
per  square mile  would  be  the initial  -  and  about 160  acre                                                               
spacing would be  where they would start. It might  go down to 80                                                               
acre spacing, but we certainly  don't anticipate anything in that                                                               
10 acre, 20 acre kind of spacing.                                                                                               
                                                                                                                                
CHAIR OGAN: About one well per 20 acres?                                                                                        
                                                                                                                                
MR. MYERS:  That's initially  where I  believe they  would start.                                                               
They may go down to 80 acre spacing.                                                                                            
                                                                                                                                
CHAIR OGAN: That would be eight  per square mile. Okay. Any other                                                               
committee  members have  anything?  A number  of  people want  to                                                               
testify on the bill  and I just want to say up  front that we are                                                               
going to  limit the testimony to  the bill only. If  you have any                                                               
other issues, those are maybe  issues for another day and another                                                               
place, but if you  stray off the bill, I'll ask  you to come back                                                               
and  talk  about  the  bill.  I'll start  with  Carol  Martin  in                                                               
Soldotna. I'm going  to skip around the state and  try to let the                                                               
various people....                                                                                                              
                                                                                                                                
MR.  CARROL  MARTIN:  This  is Carrol  Martin  in  Soldotna.  I'm                                                               
interested  in this  and  really quite  surprised  that this  has                                                               
become  such a  controversy, because  I grew  up in  Colorado and                                                               
still  own  property  in  Colorado, three  parcels.  There  is  a                                                               
methane well on all three parcels,  plus there is a disposal well                                                               
on one parcel. In all cases,  the BP Amoco and Evergreen, whether                                                               
they had  to by law,  I don't know, but  they did ask  me exactly                                                               
where  I wanted  the well  placed so  that I  could get  the most                                                               
benefit from the improved road. In  all cases, they gave one free                                                               
domestic hookup. So,  instead of having to burn  coal, my brother                                                               
doesn't have  to burn coal  and wood  anymore. He's got  free gas                                                               
and so  that well  [was] placed  on a high  rocky spot  above the                                                               
main  house. It  was close  and didn't  mess up  any pastures.  I                                                               
think they  had actually paid  me well  over $50,000 in  the last                                                               
six years  and they  have probably  done even  more than  that in                                                               
road improvements.  Right now,  you can't  hardly see  where they                                                               
ever were and  the actual sites they come back  in and revegetate                                                               
those and  improved gravel roads, which  used to be a  muddy road                                                               
and  free gas.  I  think  there's 4,000  wells  in the  [indisc.]                                                               
county and  of the  three on  my property, only  two of  them are                                                               
actually being  used for  domestic purposes.  My neighbor  has 80                                                               
acres and I've  got 80 acres and  on that well I'm  not using it,                                                               
but he  is for his  household gas  [indisc.]. The other  one, the                                                               
disposal  well, there's  nobody close  enough to  have a  well to                                                               
qualify for a hookup to it.                                                                                                     
                                                                                                                                
If we  had to wait  for some gas company  like ENSTAR to  come in                                                               
and deliver  gas, it would  never ever happen. The  high pressure                                                               
gas line  that El Paso  Natural Gas has  runs east and  west from                                                               
L.A. to St.  Louis is 14 miles  south of there and  nobody - none                                                               
of the  smaller communities [indisc.]  has domestic  gas, because                                                               
it's not  feasible to tap  in to that  big line. Because  of that                                                               
big line and  the shortage of gas, they drill  all of these wells                                                               
putting gas  into that  line and everybody  between the  well and                                                               
the main pipeline is tied in [indisc.] to gas.                                                                                  
                                                                                                                                
It is  interesting if it  would be true  in Homer or  Wasilla and                                                               
the  Valley. Twenty  years from  now,  everybody is  going to  be                                                               
thanking old  Scott Ogan for  his long-range insight  and they're                                                               
going to be  burning gas and not having to  chop wood. I've lived                                                               
in Alaska for  forty-some years and I chopped wood,  I worked for                                                               
Unocal in the gas field, on the  edge of the gas field and had to                                                               
chop wood  and burn coal for  years because it was  too expensive                                                               
to bore under  [indisc.] Beach Highway. Anyway,  we've got enough                                                               
people on  my side of the  highway to bore under  the highway and                                                               
we finally got natural gas.                                                                                                     
                                                                                                                                
CHAIR  OGAN:   Thank  you,  Mr.   Martin.  Do  you   support  the                                                               
legislation?                                                                                                                    
                                                                                                                                
MR. MARTIN: I support development of  the gas. I think people who                                                               
are opposed to it  in their own back yard would  be happy if they                                                               
had natural gas  [indisc.]. On the properties I  have down there,                                                               
I don't get  royalty on two of them because  the rights were sold                                                               
or  went with  the  previous owner  and were  sold.  So, even  in                                                               
Rifle,  where  my   wife's  family  has  property   -  oil  shale                                                               
development  there, they  ruled that  oil shale  was oil  and not                                                               
coal, because  on that property  we didn't have the  coal rights,                                                               
but we had  the oil rights. And so, those  royalties were held up                                                               
for years and years and years before they finally paid on that.                                                                 
                                                                                                                                
The same  way in Kansas  - the helium was  held up for  years and                                                               
years and years and we finally  got paid for the helium. So, here                                                               
people don't have  the oil and gas rights under  them. The Native                                                               
corporations,  the state  and federal  governments  got them.  It                                                               
surprises me that people didn't know that.                                                                                      
                                                                                                                                
CHAIR OGAN: I think it surprised  a lot of people. Thank you, Mr.                                                               
Martin. Do you have anything else you wanted to add?                                                                            
                                                                                                                                
MR. MARTIN:  Just that  I'm sure  that it's  going to  happen and                                                               
after it  does, everybody is going  to forget who was  opposed to                                                               
it.                                                                                                                             
                                                                                                                                
CHAIR  OGAN: Do  you  think  it's appropriate  to  have a  better                                                               
public process  to lease these leases  given the fact that  a lot                                                               
of people aren't aware that they might not own the subsurface?                                                                  
                                                                                                                                
MR. MARTIN: I don't think so. I  look back 30 some years ago when                                                               
everybody in  Homer wanted  to force  the state  to buy  back the                                                               
[indisc.]  gas  or  oil  leases or  whatever,  and  there's  been                                                               
[indisc.]  trying to  get gas  into  Homer and  there's ARCO  and                                                               
[indisc.] all over  the North Fork. There's gas down  there - the                                                               
[indisc.]  center  has  been  used in  shallow  bed  methane  gas                                                               
[indisc.]  Homer for  years and  I can't  believe that  all these                                                               
people don't want shallow gas. It  could be used if they tap into                                                               
it, but they'll never lay a pipeline from Ninilchik to Homer.                                                                   
                                                                                                                                
CHAIR OGAN:  About 29  years ago I  came to Homer  and went  to a                                                               
friend's house out  in the East End Road and  I didn't smoke, but                                                               
he warned me  not to smoke in  the bathtub while I  was using his                                                               
bathroom, because  I could blow up.  I said, 'What do  you mean?'                                                               
He went  over and lit  his faucet and I  was amazed, but  I guess                                                               
that's kind of  a standard occurrence out there  and other places                                                               
where the coals  are pretty shallow. Anyway, thank  you very much                                                               
for testifying today.                                                                                                           
                                                                                                                                
Also,  I wanted  to announce  that Jim  Hanson is  here with  the                                                               
Division of  Oil and  Gas, but  he's not here  to testify.  He is                                                               
here  to answer  questions. Jim,  for the  record was  the person                                                               
that  worked on  the  original legislation  and  could have  some                                                               
insight on  why we're there  and what happened. Let's  see. We'll                                                               
go to Doug Carney in Sleetmute.                                                                                                 
                                                                                                                                
MR. DOUG CARNEY: Can you hear me?                                                                                               
                                                                                                                                
CHAIR OGAN: How's the weather out in Sleetmute today?                                                                           
                                                                                                                                
MR. CARNEY: I  don't know; I'm in Anchorage.  I'm concerned about                                                               
these  gas  leases [indisc.]  They  haven't  been approved,  yet.                                                               
There's  a moratorium.  However, DNR  was going  to issue  - Nana                                                               
Energy applied for land use permits  to do core drilling, but the                                                               
people  in the  area from  several of  the villages  - Sleetmute,                                                               
Cripple Creek and  on down the river are real  concerned. This is                                                               
a  high   subsistence  area,   critical  habitat   for  migratory                                                               
waterfowl,  moose and  salmon spawning  streams. We're  concerned                                                               
about the  dewatering process. We  have reports from down  in the                                                               
western  states on  how  even processed  water  has affected  the                                                               
ecoculture and egg  hatching - things like that. We  think it's a                                                               
good bill, what  you're doing here, but I think  it should apply,                                                               
certainly  statewide and  the best  interest  findings should  be                                                               
required  on all  state lands  and  include the  lands where  the                                                               
leases have  been approved and  also the ones where  they've been                                                               
applied for and not yet approved.  So, we have the people who are                                                               
part of the  process on whether this was done  or not, especially                                                               
considering  the wording  about local  communities that  left out                                                               
the  commissioner,   I  believe.  People  got   wind  out  there,                                                               
particularly because they  want the benefits of -  I mean there's                                                               
plenty of lumber  out there - they're concerned  for firewood and                                                               
things like  that and  the animals,  also. They're  worried about                                                               
the  habitat.  Reinjection,  we believe,  I  believe,  should  be                                                               
mandatory - what to do about the water, the produced water.                                                                     
                                                                                                                                
We  wouldn't want  to see  bad judgment  used out  here in  these                                                               
areas neither.  We want  the people  to be  part of  the process,                                                               
although  it's definitely  a rural  area.  Most of  this area  is                                                               
state land,  also. So, I  guess I  have a couple  questions about                                                               
the best  interest finding  and would that  apply to  rural areas                                                               
and  also if  this doesn't  apply to  - I  see this  bill doesn't                                                               
apply  to the  approved  leases or  to the  ones  that have  been                                                               
applied for  and not yet  approved. I  would urge you  to include                                                               
those areas in those leases in this legislation.                                                                                
                                                                                                                                
CHAIR OGAN: Thank  you. The best interest finding  under the bill                                                               
for future  leases would be  statewide whether it  be exploration                                                               
license or in  the areawide leasing program.  You're correct. The                                                               
bill does not include the  existing leases that have been applied                                                               
for or granted.                                                                                                                 
                                                                                                                                
MR. CARNEY: So, what about the -  I mean is there a problem there                                                               
- particularly I don't understand  why they couldn't be [indisc.]                                                               
for  the ones  that have  been applied  for. There's  no problem,                                                               
yet, but  there will  be a  problem if they  go in  there without                                                               
public input.                                                                                                                   
                                                                                                                                
CHAIR OGAN: I hear what you're saying.                                                                                          
                                                                                                                                
MR. CARNEY: Okay, I hope they amend this bill to include that.                                                                  
                                                                                                                                
CHAIR  OGAN: Okay,  Mr. Carney.  Let's  go to  Mat-Su -  Michelle                                                               
Church.                                                                                                                         
                                                                                                                                
MS. MICHELLE  CHURCH: Thank you.  My name is Michelle  Church and                                                               
I'm a resident of the Mat-Su Valley.  And in regards to SB 312, I                                                               
am -  first of  all I'd like  to say that  we're very  happy that                                                               
Senator  Ogan   has  finally  recognized  that   coalbed  methane                                                               
development  in the  Mat-Su  Valley is  likely  to have  negative                                                               
consequences  on the  lives of  those of  us who  live here  and,                                                               
therefore, needs to be a  regulated industry. Unfortunately, this                                                               
realization in  the form  of SB  312 comes  too late  for Senator                                                               
Ogan's  constituents and,  in fact,  comes too  late for  all the                                                               
constituents of  all Mat-Su  legislators who,  in my  mind, stand                                                               
equally culpable  of allowing  the legislative  process to  be so                                                               
grossly  manipulated for  allowing the  public process  to be  so                                                               
grossly avoided  in the interests  of benefiting one  industry at                                                               
the  expense of  all competing  industries and  interests in  the                                                               
Mat-Su Borough and  throughout the state of  Alaska where coalbed                                                               
methane extraction takes place.                                                                                                 
                                                                                                                                
Senator Ogan  states that this  bill intended to  undo unintended                                                               
consequences  of  earlier  actions  in  regards  to  the  coalbed                                                               
methane industry and  it, in fact, does not do  that. It does not                                                               
undo anything.  The reality is  that the  unintended consequences                                                               
of  Senator Ogan's  earlier legislative  action  are that  valley                                                               
property owners lost  the right to control our  own property. The                                                               
unintended  consequence  is that  there's  loss  of control  over                                                               
activities  occurring  on  private properties,  happened  without                                                               
public  notice   and  without  any  ability   to  participate  in                                                               
development of the  regulatory regime that would  have required a                                                               
best interest  finding to be  conducted before those  leases were                                                               
let.  While SB  312  provides the  beginnings  of protection  for                                                               
future coalbed  methane (CBM) leases,  SB 312 is  unacceptable as                                                               
it's  written  and  it's  unacceptable as  it  has  been  amended                                                               
because it  provides nothing  for the  leases that  occurred when                                                               
Senator  Ogan,  Representative  Kohring and  Evergreen  Resources                                                               
were  huddled in  the  backrooms of  the  state capitol  crafting                                                               
legislation that  would allow  unfettered CBM  development across                                                               
the state of Alaska.                                                                                                            
                                                                                                                                
In order for  CBM legislation on the coalbed methane  issue to be                                                               
acceptable, it  must include a  complete remedy for  the property                                                               
owners [indisc.].  It must  include a  best interest  finding for                                                               
those leases for the residents of  the Mat-Su Borough and for the                                                               
residents  of  the  Kenai  Peninsula.  And  those  best  interest                                                               
findings need  to be conducted  prior to any leases  being relet.                                                               
It  must include  provisions for  state  supported local  control                                                               
over the industry; it must  include base line data collection and                                                               
adequate bonding for  damages that are almost  certainly to occur                                                               
somewhere  due  to  the technology  used  in  extracting  coalbed                                                               
methane. I do  have some questions regarding  statements that Mr.                                                               
Myers made as far  as the gas supply and how  this relates to the                                                               
state's  pursuit of  a  gasline  from the  North  Slope. With  35                                                               
trillion cubic  feet of  gas available on  the North  Slope right                                                               
now,  it seems  that this  cry  of we're  running out  of gas  is                                                               
simply  a ruse  to get  people to  support an  industry that  may                                                               
cause major damage to the community.                                                                                            
                                                                                                                                
ENSTAR  has told  us that  they  will not  be hooking  up to  our                                                               
communities outside of where they  already have their lines laid.                                                               
We're not going to see any  local benefits from this gas. So, all                                                               
of the  work that DNR  has undertaken in reviewing  the realities                                                               
of coalbed  methane have  been after the  current leases  are let                                                               
and the community became aware of the extent of this.                                                                           
                                                                                                                                
I  have another  concern that  in this  legislation, there  is no                                                               
fiscal  note. I  do not  understand how  a bill  that's going  to                                                               
provide protection  from an industry  that has the  potential for                                                               
that kind of  [indisc.] impacts cannot have a fiscal  note to it.                                                               
What is going to insure that  there is going to be adequate funds                                                               
to monitor and  enforce. In fact, every day we  read about budget                                                               
cuts  that are  coming down  that will  affect DNR  [indisc.] and                                                               
other regulatory agencies that are  going to supposedly implement                                                               
the things that  are in here. I am curious  to see that addressed                                                               
- how can this have no fiscal note.                                                                                             
                                                                                                                                
TAPE 04-14, SIDE B                                                                                                            
                                                                                                                                
MS. CHURCH: No,  I asked you a question. I  wanted you to address                                                               
how this cannot have a fiscal note.                                                                                             
                                                                                                                                
CHAIR OGAN: Well it does have a fiscal note.                                                                                    
                                                                                                                                
MS. CHURCH: [Indisc.].                                                                                                          
                                                                                                                                
CHAIR OGAN: Right. Have you read it?                                                                                            
                                                                                                                                
MS. CHURCH: I'm looking at it right now.                                                                                        
                                                                                                                                
CHAIR OGAN: I think they explain it there.                                                                                      
                                                                                                                                
MS. CHURCH: Well can  you explain it to me then?  I guess I don't                                                               
understand it.                                                                                                                  
                                                                                                                                
CHAIR  OGAN: I  think that's  the appropriate  thing to  have the                                                               
director  explain, however,  we're not  -  this is  - I'm  taking                                                               
comments for  now and  I'm sure  you can contact  him and  if you                                                               
have  questions at  the next  hearing, if  your questions  aren't                                                               
answered, but I'd like to take...                                                                                               
                                                                                                                                
MS. CHURCH: Is  your committee then going to not  take any action                                                               
on this until after I've spoken with....                                                                                        
                                                                                                                                
CHAIR  OGAN: Yea.  I'm sorry.  I apologize.  I meant  to announce                                                               
that  I  do not  intend  to  pass  the  bill out  today.  Senator                                                               
Seekins?                                                                                                                        
                                                                                                                                
SENATOR SEEKINS:  Mr. Chairman,  I noticed  that the  fiscal note                                                               
that  I  have  has  an  analysis  attached  to  it  that's  self-                                                               
explanatory.                                                                                                                    
                                                                                                                                
CHAIR OGAN: Correct.                                                                                                            
                                                                                                                                
MS. CHURCH: Well, I  guess I'm not very bright and  so I was just                                                               
asking as a member of the public for you to explain it to me.                                                                   
                                                                                                                                
SENATOR  SEEKINS: The  only  thing you  can do  is  read it.  Mr.                                                               
Chairman, I would - I think it's self-explanatory.                                                                              
                                                                                                                                
CHAIR OGAN: I couldn't - I'm afraid I couldn't....                                                                              
                                                                                                                                
SENATOR SEEKINS:  It's contained within  the four corners  of the                                                               
document.                                                                                                                       
                                                                                                                                
CHAIR  OGAN: Thank  you Senator  Seekins. I  don't think  I could                                                               
explain  it better  than it's  written. Does  that conclude  your                                                               
testimony?                                                                                                                      
                                                                                                                                
MS. CHURCH: Yea. Do you have any questions for me, Senator Ogan?                                                                
                                                                                                                                
CHAIR  OGAN: No,  I don't.  Thank you.  Next let's  go to  Johnny                                                               
Walker -  Jenny Walker, I'm sorry.  I might have made  a Freudian                                                               
slip - or Jeannie Walker.                                                                                                       
                                                                                                                                
MS. JEANNE WALKER: Hello, this is Jeanne Walker.                                                                                
                                                                                                                                
CHAIR OGAN: I really haven't had any Johnny Walker today so...                                                                  
                                                                                                                                
MS. WALKER: That's good - maybe after the meeting.                                                                              
                                                                                                                                
CHAIR OGAN: Although  I feel a little punch  drunk sometimes down                                                               
here.                                                                                                                           
                                                                                                                                
MS. WALKER: Right. I live in  the Homer area and I appreciate the                                                               
opportunity to address the committee  about this bill. My home is                                                               
one  of  the  properties  that's  been  leased  for  shallow  gas                                                               
development and  that brings me to  why I'm so interested  in the                                                               
public process  part of this  bill. My  husband and I  bought our                                                               
property this  summer in  July. The property  was leased  at that                                                               
time and we didn't  know it was leased. Not only  did we not know                                                               
it was  leased; we presumed  the owners didn't know.  Our realtor                                                               
didn't  know and  the title  company  that did  the title  search                                                               
didn't know. Now  I should make it very clear  that we understood                                                               
that we didn't own the subsurface  of the property we were buying                                                               
but, nevertheless,  we did not know  that it had been  leased for                                                               
natural shallow  gas development.  I think  that this  bill helps                                                               
kind  of redress  some  of the  public  notification issues  that                                                               
earlier legislation had led us into  a real mess with but I don't                                                               
feel that  the expedited public  process in the last  notice that                                                               
earlier legislation created  is being taken far  enough with this                                                               
bill.  I really  feel that  individual surface  owners should  be                                                               
notified   and  I   feel   the  state   really   needs  to   take                                                               
responsibility  here and  make sure  that all  individual surface                                                               
owners are notified so they can  actually take part in the public                                                               
process that  will be partially  fixed for future leases  by this                                                               
bill. The  problem, of course, as  I see it is  this bill doesn't                                                               
help  those of  us in  the Homer  community because  of the  mess                                                               
that's already been  created by earlier legislation.  So I really                                                               
almost  feel that  allowing the  Homer community  to have  a best                                                               
interest finding, even at this  late stage, may only mean through                                                               
a buyback to  start the whole process over again.  And that's all                                                               
I have to say.                                                                                                                  
                                                                                                                                
CHAIR  OGAN:  Thank you  and  if  anybody  has any  testimony  in                                                               
writing it would be really helpful  if we could get that and that                                                               
way we can have time to  thoughtfully consider your remarks so if                                                               
anybody has  it in writing that'd  be great. If you  could get it                                                               
to my committee  aide Linda Hay. Okay, let's see  - let's go back                                                               
to Anchorage - Ken Boyd.                                                                                                        
                                                                                                                                
MR. KEN  BOYD: Thank you  Mr. Chairman. Mr. Chairman,  members of                                                               
the committee,  for the record  my name is  Ken Boyd and  I chair                                                               
the  Lands Exploration  and Operations  Committee for  the Alaska                                                               
Oil and  Gas Association. AOGA,  as you  well know, is  a private                                                               
trade  association  of  19   member  companies  representing  the                                                               
majority of  oil and  gas operators in  the state.  AOGA supports                                                               
the  concepts embodied  in SB  312.  Our only  hesitation in  not                                                               
giving  absolute approval  is the  lands committee  simply hasn't                                                               
had  a chance  to review  the  large number  of -  the amount  of                                                               
conforming language within the bill but  I think this is really a                                                               
minor point. We fully support the  major concepts of the bill and                                                               
I  think these  concepts  are fully  outlined  in the  chairman's                                                               
sponsor statement.                                                                                                              
                                                                                                                                
In  particular,   returning  to   the  established   leasing  and                                                               
licensing programs  with their best  interest findings  creates a                                                               
comprehensive, coherent  and legally defensible process  that has                                                               
been used  successfully by  the state for  many, many  years. The                                                               
best interest finding allows the  state to incorporate all public                                                               
input into a  single document that addresses all  the concerns in                                                               
a comprehensive  manner. This is preferable  to addressing issues                                                               
one at  a time and drafting  a process that satisfies  nobody. We                                                               
hope SB  312 [will] be  passed and  that this [indisc.]  be given                                                               
the  opportunity  to  address  all  the  issues  in  the  finding                                                               
process.  It  will  take  some  time  but,  in  the  end,  should                                                               
accomplish all  of the goals  necessary to satisfy  both industry                                                               
and the  public. That concludes  my testimony, Mr.  Chairman, and                                                               
I'd be happy to answer any questions.                                                                                           
                                                                                                                                
CHAIR OGAN:  Thank you.  Does anyone have  any questions  for Mr.                                                               
Boyd? Hearing none, let's move to Mat-Su. Eddie Grasser.                                                                        
                                                                                                                                
[The LIO moderator noted Mr. Grasser had to leave suddenly.]                                                                    
                                                                                                                                
CHAIR OGAN: Okay - Jeff Arnot?                                                                                                  
                                                                                                                                
MR.  JEFF ARNOT:  Yes. My  name is  Jeff Arnot.  I'm representing                                                               
Friends of  Mat-Su and all  of our  members. We're more  than 300                                                               
strong. I'm working  on coalbed methane issues right  now and the                                                               
first thing  I want to tell  you is that I'm  getting calls every                                                               
single day. I'm going  to all the meetings that we  can go to, in                                                               
terms  of  DNR,  community  council   and  the  borough  assembly                                                               
meetings and there's a couple  themes that are very predominant -                                                               
they emerge  again and again. You've  heard it a couple  of times                                                               
today. You're  going to hear  it again  and again until  you make                                                               
the changes that need to be made.                                                                                               
                                                                                                                                
As far as  Senate Bill 312 goes,  I think there's a  lot of great                                                               
things in  there but  it's maybe  50 percent  and I'm  looking at                                                               
some figures - 300,000 acres  of the Mat-Su, 80,000 acres applied                                                               
for, 22,000 acres leased in Homer  and 47,000 in Healy, 20,000 in                                                               
Chulitna, 20,000 in Red Dog. This  is a - even for Alaska amounts                                                               
to a  vast amount of  acreage that your  bill does not  apply to.                                                               
These are already leased lands.  You've got to do something about                                                               
this. You've  got to make  it retroactive - you've  heard buyback                                                               
and I  know you  guys are sick  to death of  hearing -  let's say                                                               
nullify the  leases, however  you want  to put  it, but  you guys                                                               
have got to address all this  land that has been leased that your                                                               
bill does not apply to. It's never, ever, ever going to go away.                                                                
                                                                                                                                
We've  just heard  recently that  the  multiple listing  service,                                                               
which,  if  any  of  you  folks don't  know,  is  something  that                                                               
realtors use to list property and  right now in the Mat-Su Valley                                                               
the multiple listing  service has a CBM code. What  this means is                                                               
that  they  have a  way  of  designating a  perspective  property                                                               
that's going to  be for sale in  a CBM leased area  so that's how                                                               
big  it's getting  here. They've  done some  studies down  at San                                                               
Juan County  in Colorado and they  found that one in  four people                                                               
are not interested  in purchasing property that is  leased by CBM                                                               
so that's  a pretty big thing.  This is going to  be something in                                                               
the Valley with many, many  possible downsides in property values                                                               
and  the perception  among  residents  and prospective  residents                                                               
that  this  is not  a  good  place to  raise  a  family and  send                                                               
children to  school so  you guys  have got  to address  all these                                                               
properties right  now that  have been leased,  which SB  312 does                                                               
not address. Thank you very much.                                                                                               
                                                                                                                                
CHAIR  OGAN:  Thank  you  very  much,  Jeff.  I  appreciate  your                                                               
testimony. Let's go back to Homer - Roberta Highland.                                                                           
                                                                                                                                
MS. ROBERTA HIGHLAND: Hello, can you hear me?                                                                                   
                                                                                                                                
CHAIR OGAN: Loud and clear.                                                                                                     
                                                                                                                                
MS.  HIGHLAND:   All  right.  This is  Roberta  Highland and  I'm                                                               
actually   representing  the   Kachemak   Bay  Property   Owners'                                                               
Alliance.  There are  approximately 800  private properties  that                                                               
have been leased. We've got about  1,000 signatures so far on the                                                               
buy  back. I  think -  looking at  what legislation  is going  on                                                               
right  now, I  do  believe it's  a recognition  that  there is  a                                                               
problem and I  certainly appreciate the work that has  gone on. I                                                               
attempted  to  read SB  312  and,  to  be  honest, I  got  pretty                                                               
confused so  I have  got the other  one - I  haven't had  time to                                                               
look at  it - that gives  a better summary. But,  they are pretty                                                               
difficult to  read. I  believe the  others have  made it  kind of                                                               
clear that this  one still does not cover the  problem that we've                                                               
got right  now, and that  is with  the property that  has already                                                               
been leased.  And I just ask  of you to try,  if there's anything                                                               
you can think  of, to fix that.  I'm trying to think of  it and I                                                               
haven't come up  with anything yet but a retroactive  date. And I                                                               
guess there's a hope that industry  would not really want to come                                                               
and get  into, shall we  call it a mess,  so there would  be that                                                               
hope  that maybe  something  horrible wouldn't  happen  but I  do                                                               
think a  retroactive date somehow,  someway, and - so  that these                                                               
leases can  be taken care  of that  have already happened  and as                                                               
the prior person just mentioned  that we're talking thousands and                                                               
thousands and thousands of acres across the state.                                                                              
                                                                                                                                
I think that's  a major issue. Other ones are  the bill not going                                                               
far  enough for  water rights  and just  some thoughts  - I  keep                                                               
worrying  the state  is being  shortsighted. In  the long  range,                                                               
we've  got to  look that  way too.  I know  we're in  a financial                                                               
crunch but  if we just continue  to go down the  road of resource                                                               
development over  and above so  many other things, I  think we're                                                               
going to have a  big loss for us in the future  and I think we're                                                               
going to  be sorry.  We have  to look at  this in  a long-sighted                                                               
way.  Diversification -  we've been  told  to do  that. Homer,  I                                                               
believe, has done a quite good  job on diversifying our economy -                                                               
marine   education,  arts,   recreation,   fishing.  We've   made                                                               
ourselves  a special  - we're  quite specially  known across  the                                                               
nation for what we  have down here and I don't  think it would be                                                               
in  our  best interests,  which  kind  of  brings back  the  best                                                               
interest  findings. Maybe  that is  one idea  that we  could stop                                                               
everything and  do a best  interest finding  and get back  to the                                                               
drawing board for public process. So thank you.                                                                                 
                                                                                                                                
CHAIR OGAN:  Thank you Roberta.  I appreciate you taking  time to                                                               
come down and testify today. Let's  see. Let's go back to Mat-Su.                                                               
Myrl Thompson?                                                                                                                  
                                                                                                                                
MR. MYRL THOMPSON: Hello.                                                                                                       
                                                                                                                                
CHAIR OGAN: We can hear you.                                                                                                    
                                                                                                                                
MR.  THOMPSON:  Okay,  great.  My name's  Myrl  Thompson.  I'm  a                                                               
property owner and I sell land out  here in the Valley and I also                                                               
represent about  2200 registered  voters from  District H  and we                                                               
have  a number  of problems  with  this bill  as basically  being                                                               
inadequate  in its  totality  and the  exclusion  of the  already                                                               
leased lands and already applied for  lands. It doesn't do us any                                                               
good out here  in the Valley. I think it  is probably pretty good                                                               
that you  guys are starting  to figure  out that there  were some                                                               
major problems with  the HB 69, or actually [indisc.]  SR 69. And                                                               
we  gotta get  that straightened  out you  guys. I  mean it's  an                                                               
uproar out  here in the  Valley and it's  gonna get worse  if you                                                               
guys are just going to get  watered down bills and half issues on                                                               
stuff like  this, it's never  gonna get fixed. Probably,  I don't                                                               
know how many of you have  even contacted DNR about the workshops                                                               
that  have been  going  out here  but you  could  probably get  a                                                               
pretty good drift of where we're coming from.                                                                                   
                                                                                                                                
As far  as a couple of  things that I've heard  in testimony that                                                               
low supplies  of gas for  Agrium, I  think that's a  red herring.                                                               
You guys know  quite well that Agrium gets subsidized  gas at low                                                               
prices and nobody wants to  give them that subsidized gas anymore                                                               
and  that's   the  reason  they're  having   problems  with  that                                                               
[indisc.] that we  have to do this out here  in the Valley. We're                                                               
shipping most of our gas out of  state so if you want to save gas                                                               
for the Alaskans  and ship it to  the Alaskans and not  to out of                                                               
state -  and you guys know  darn well that  a lot of this  gas is                                                               
projected to go to Taiwan and Japan  and the Lower 48 and the big                                                               
business and  actually a very, very  small amount of it  is going                                                               
to the Alaska  market and we have enough gas  underground to last                                                               
Alaskans for  probably 1,000 years but  if you guys are  going to                                                               
ship all out of  the state and then come back  15 years later and                                                               
say that  we have a shortage,  we're going to have  to import gas                                                               
at even  a higher price, it's  going to be a  nightmare. I'll let                                                               
you go with that, boys.                                                                                                         
                                                                                                                                
CHAIR OGAN: Does that conclude your testimony?                                                                                  
                                                                                                                                
MR. THOMPSON: Yes.                                                                                                              
                                                                                                                                
CHAIR OGAN:  Thank you sir.  We really appreciate you  coming in.                                                               
Robert Archibold?                                                                                                               
                                                                                                                                
MR. ROBERT ARCHIBOLD:  Good afternoon. Can you hear  me okay down                                                               
there?                                                                                                                          
                                                                                                                                
CHAIR OGAN: Yes sir, loud and clear.                                                                                            
                                                                                                                                
MR. ARCHIBOLD: Well  thank you for taking this -  what we have to                                                               
say. My name  is Robert Archibold and I've been  a citizen of the                                                               
State  of  Alaska  since,  well,  since a  few  years  after  the                                                               
earthquake I've been  here. Back in those days  everybody used to                                                               
pull together.  That's what  kept this  state alive  and working.                                                               
I'd like  to say a couple  of words. I don't  think we're pulling                                                               
together on  this one. We're  fractured. The community  down here                                                               
is  finding it  highly appalling  and your  bill, in  its present                                                               
form,  does not  cover some  of the  things that  are true  to my                                                               
heart.  I heard  earlier  that  they were  speaking  of a  single                                                               
[indisc.] acre  parcel possibly. Well,  there's a lot  of parcels                                                               
around here that have been leased  and we were talking about that                                                               
[indisc.] earlier that maybe somebody  at DNR was nipping at some                                                               
of that because why else would  you lease the land out of Homer's                                                               
drinking water reservoir or the LDS  church? So I think DNR needs                                                               
to do  a little homework  before they even  come up with  a lease                                                               
area.                                                                                                                           
                                                                                                                                
It's too  bad somebody  didn't take  a little time  to do  a best                                                               
interest   finding  and   see  what   they   were  leasing.   The                                                               
environmental protection that is being drawn  up by you folks - I                                                               
think there's  a lot of things  that are taken for  granted. Down                                                               
in Colorado you  can look at that operation and  think that it'll                                                               
be safe here.  Coalbed methane up in this area  is probably going                                                               
to be  considerably different than  down there. Our roads  in the                                                               
Homer  area are  pretty  sensitive  to weight  loads.  If we  let                                                               
coalbed methane  develop and  use our roads,  we're not  going to                                                               
have much  for roads  so I  guess we've got  to think  about that                                                               
one. And I have a real - a  lot of heartburn about the areas that                                                               
have been  leased that are  not being covered  in this bill  so I                                                               
think you  need to go  back to work on  some of this.  Thanks for                                                               
letting me talk to you.                                                                                                         
                                                                                                                                
CHAIR OGAN:  You're welcome sir,  and thanks for taking  time out                                                               
of  your day  to come  and let  us know  your views  and we're  -                                                               
again, I'm not  intending to move this bill out  today and as far                                                               
as Roberta's comment about how she  read it and it's kind of hard                                                               
to read, basically what we did  is we took Title 38.05.177, which                                                               
was the  shallow gas leasing,  and we  transposed a lot  of those                                                               
things into 180, which is the  areawide leasing. And so, a lot of                                                               
the language  is existing language and  the highlighted language,                                                               
the darker language,  is the new language that  was inserted into                                                               
the existing language.  So, that's why it looks as  long as it is                                                               
but  most  of  it's  what  we  call  conforming  language,  which                                                               
basically  makes  it  work.  But we're  taking  the  shallow  gas                                                               
leasing program  and pretty  much doing away  with that  and then                                                               
making it,  you know, under  this best interest  finding. Anyway,                                                               
so I thought I'd save the best for  last and Mr. Chris Rose - are                                                               
you still with us Chris?                                                                                                        
                                                                                                                                
MR. CHRIS  ROSE: I'm sorry, the  LIO person wasn't here  to press                                                               
the right button  for me. My name's Chris Rose.  I live in Sutton                                                               
and I'm  testifying on  behalf of  myself. I  wanted to  just put                                                               
into context  some of the  things that were spoken  about earlier                                                               
in terms  of gas  supplies that  Mr. Myers  was talking  about. I                                                               
agree  that  about two-thirds  of  Cook  Inlet gas  is  currently                                                               
exported either to  the Agrium plant or as LNG,  which means only                                                               
one-third  of our  current gas  being produced  in Cook  Inlet is                                                               
used domestically, which  I think - it's  a distribution problem.                                                               
That's  not to  say that  jobs at  the LNG  plant and  the Agrium                                                               
plant are not  important but I think that there  shouldn't be any                                                               
fear that we don't have enough gas right now.                                                                                   
                                                                                                                                
The other  thing I wanted  to put into  context is just  how much                                                               
gas coalbed  methane, if  it were viable,  could produce  in this                                                               
area. Evergreen  has stated numerous  times that  they're talking                                                               
about  perhaps  1 trillion  cubic  feet.  Now  to put  that  into                                                               
context, every year Municipal Light  and Power, Chugach Electric,                                                               
and  Enstar use  almost  120 billion  cubic feet  of  gas in  the                                                               
Anchorage  area  so  that  means the  trillion  cubic  feet  that                                                               
Evergreen might  get is a little  under 10 years worth  of supply                                                               
of gas  for our  area. So,  even though  that might  happen, it's                                                               
only a real short-term solution  and when we're talking right now                                                               
about having only  nine years left of Cook Inlet  gas, a trillion                                                               
cubic feet just doesn't do a lot  more for us. Over the course of                                                               
the  25-year  coalbed methane  field,  we're  only going  to  get                                                               
about,  at the  most, 40  billion cubic  feet of  gas out  of the                                                               
coalbed methane in  this area. That's about one-third  of what we                                                               
use currently  in the Anchorage  area.  So,  you can see  that in                                                               
context,  coalbed methane  is  not going  to put  a  dent in  our                                                               
energy future.  I think that  goes to the  point of not  being so                                                               
myopic and looking  only at oil and gas as  sources of energy. We                                                               
have  lots of  renewable energy  resources in  this area  that we                                                               
should be looking at.                                                                                                           
                                                                                                                                
Now, to  get to the  bill itself,  generally I'm real  happy that                                                               
the best  interest finding process  is going  to be used  if this                                                               
bill is  passed for all  future coalbed methane  leases. However,                                                               
as has been  stated by many people earlier, it  doesn't help that                                                               
several hundred thousand acres have  already been leased. And, to                                                               
be honest,  I don't  know whether  or not  there's any  other big                                                               
areas  that  have coalbed  methane  potential  that haven't  been                                                               
leased because  this program was  so wide  open for a  while that                                                               
the companies  have pretty  much moved in  and they  have already                                                               
leased,  or  have applied  for  leases,  in areas  where  there's                                                               
coalbed methane potential.  So, even if this bill  applies to the                                                               
future leases, it's  probably going to be a  very tiny percentage                                                               
of the total coalbed methane  that could possibly be developed in                                                               
the state. It  really doesn't help us at all  unless these leases                                                               
are completely  reissued under the  new best interest  finding if                                                               
this passed.                                                                                                                    
                                                                                                                                
A couple  of specifics -  I really  believe that there  should be                                                               
higher royalties and higher rents.  We're dealing with this right                                                               
now with, you know, the arguments  about whether or not we should                                                               
tax oil companies more or less but,  you know, if you look at the                                                               
amount of royalties  the state's giving out on  coalbed methane -                                                               
6  ¼  to  12  ½  percent,   it  may  barely  cover  the  cost  of                                                               
administrating these programs. And the  reason is that there's so                                                               
much more  infrastructure involved  in these  kinds of  wells. As                                                               
Mr.  Myers put  it earlier,  you  know, usually  these wells  are                                                               
generally  of low  productivity, meaning  that we  get 1  to 1  ½                                                               
billion cubic  feet out  of each coal  bed methane  well. Compare                                                               
that to  a typical conventional  well that's gonna get  well over                                                               
100 billion  cubic feet. You can  see that there's 100  times the                                                               
infrastructure necessary to get that  same 100 billion cubic feet                                                               
of gas  if you use coalbed  methane and the technology  to get at                                                               
it. And  that's not  even to mention  the concerns  about getting                                                               
water problems  because of  the dewatering  process but  just the                                                               
sheer infrastructure because each one  of these wells has to have                                                               
a road  and has to have  pipelines. And so, per  well, we're just                                                               
not  going  to  get enough  gas  out  of  each  well to  make  it                                                               
something  that's in  the  state's best  interest  unless we  are                                                               
charging a lot  of money up front  so I would like  to see higher                                                               
royalties and higher rents.                                                                                                     
                                                                                                                                
Another point that  I'd like to make to support  that is the Mat-                                                               
Su Borough has recently determined  that over 12,000 private lots                                                               
have been  leased, excuse  me, 12,000 lots  have been  leased and                                                               
they have not all been private  but a high percentage of them are                                                               
private land out  there in the Valley. Over 12,000  of those lots                                                               
have been leased under this program.  The assessed value - we all                                                               
know the  assessed value is  low compared to the  appraised value                                                               
or fair  market value -  the assessed  value of this  property is                                                               
$235 million  and Evergreen leased  those lands for $30,000  - 60                                                               
leases at $500. Of course they have  to pay the yearly rent of $1                                                               
per acre per  year but, essentially, what Evergreen  got was $235                                                               
million worth  of surface value  for $30,000. That is  a travesty                                                               
and that's the kind  of thing that we have to be  able to look at                                                               
in the  best interest finding to  determine whether or not  it is                                                               
in the best interest of the  community or the state in general to                                                               
be leasing  this land out because  as property values go  down in                                                               
the borough,  it's going  to quickly erase  any kind  of economic                                                               
gains that we can get from coalbed methane.                                                                                     
                                                                                                                                
I also think that there should  be more public comment period and                                                               
I understand  that that would  have to apply to  the conventional                                                               
oil and gas too, if that  were increased. I don't know if there's                                                               
a way  to break it  out but I  think because coalbed  methane can                                                               
happen in places where there  are homes and neighborhoods that it                                                               
cannot hurt to  increase the days that people have  to comment. I                                                               
also believe  there should be higher  bonding requirements. There                                                               
is still only a $25,000  per incident bonding requirement in this                                                               
bill and that just doesn't cut it  and there has to be a lot more                                                               
put up by these companies. If they  are so careful and they do it                                                               
right then  they shouldn't  have any  problem putting  that money                                                               
up.                                                                                                                             
                                                                                                                                
There's  also a  few  things  that really  would  never apply  to                                                               
conventional gas, and  I'm sure I'm not going to  cover them all.                                                               
There has  to be  included somehow  in the  analysis when  a best                                                               
interest finding  is done concerning  coalbed methane  or shallow                                                               
gas, of  course one of  them was  already mentioned by  Mr. Myers                                                               
and that is  the same source drilling, which has  occurred in the                                                               
Lower 48  where shallow  gas wells are  drilled right  into areas                                                               
where  aquifers -  where people  get their  water wells.  Another                                                               
thing that can  occur with conventional oil and gas,  but it's of                                                               
great  concern  to  people  about   coalbed  methane  is  methane                                                               
seepage.  It's   particularly  a  concern  in   areas  that  have                                                               
fractured and  tilted geology like we  do out in the  Sutton area                                                               
where  basically  you have  thousands  of  communications to  the                                                               
surface from deep below because  all of a sudden [indisc.] layers                                                               
have been tilted up so it's  not sedimentary layers way below the                                                               
ground.  And the  methane, once  released,  once the  de-watering                                                               
process occurs, is [indisc.] into  people's wells and their homes                                                               
and other buildings.  So, methane seepage is  something else that                                                               
I'm hoping will be particularly analyzed.                                                                                       
                                                                                                                                
I also think  that the concern about how much  money stays in the                                                               
state has  got to be  part of  this best interest  finding. Right                                                               
now, the company  that has most of the leases  in the Mat-Su area                                                               
is  a company  that's based  in Denver  and they're  going to  be                                                               
taking 92 to 88  percent of the profit out of  the state and that                                                               
has to be looked at because we are  the owner state. We do have a                                                               
lot of  natural resources. We  want to make  sure that we  have a                                                               
good deal for the  people of the state that if  there is going to                                                               
be anything like this done, we've got  to make sure that a lot of                                                               
this money stays in the state.                                                                                                  
                                                                                                                                
And  another issue  that I  hope would  be analyzed  in the  best                                                               
interest finding is how much  infrastructure of ours do they use.                                                               
It's clear  that what  happened here is  somebody swooped  in and                                                               
leased  these  areas where  taxpayers  like  myself maintain  the                                                               
roads, rather than having to  pay for those roads themselves. Mr.                                                               
Myers mentioned  earlier how things  are done on the  North Slope                                                               
to  minimize  the  infrastructure   because  it's  costly.  We've                                                               
already got  a lot of infrastructure  and I hope that  the impact                                                               
on  our  infrastructure,  including  our public  safety  and  our                                                               
emergency services and  our water supplies and  sewer systems and                                                               
our roads are  all taken into account when these  kinds of things                                                               
are anticipated and analyzed in residential areas.                                                                              
                                                                                                                                
In conclusion I'd  just like to say that  unfortunately this bill                                                               
admits all the  faults of the original House Bill  394, which was                                                               
the  original shallow  gas program.  There are  many and  some of                                                               
them were identified  by Mr. Myers earlier.  And it's unfortunate                                                               
that this  bill is not aimed  at really helping those  people who                                                               
have  been impacted  by those  faults because  it does  not apply                                                               
retroactively. And it  is amazing to me that  the drafting errors                                                               
of 394 were  not found because it could have  easily been written                                                               
so  that this  kind of  thing would  have been  precluded because                                                               
everybody  back in  1996 was  talking about  rural areas  and the                                                               
sloppy  drafting  of  that  bill  has basically  put  us  in  the                                                               
position now where  we have to deal with a  mistake that was made                                                               
18 years ago  and we are dealing  with it in a big  way and we're                                                               
not going  to stop  dealing with  it until  all these  leases are                                                               
reissued  and then  analyze those  best interest  findings. Thank                                                               
you.                                                                                                                            
                                                                                                                                
CHAIR OGAN: Thank  you Mr. Rose. Does anyone  have any questions?                                                               
Hearing none, is  there anybody else that's not signed  up on the                                                               
teleconference network  that wishes to testify?  Hearing none, is                                                               
there anybody here  in the audience? We didn't  have anybody sign                                                               
up  to testify  today.  Is  there anybody  in  the audience?  Mr.                                                               
Myers, do  you care to  address us? We'll close  public testimony                                                               
today however we'll  leave the option open for,  you know, future                                                               
work done  on the bill  and whatnot,  for people to  comment. Mr.                                                               
Myers?                                                                                                                          
                                                                                                                                
4:55 p.m.                                                                                                                       
                                                                                                                                
MR.  MYERS:  Mr. Chair,  I  heard  a  lot  of concerns  over  the                                                               
statements  made about  the gas  supply  in Cook  Inlet. I  think                                                               
that's, again, important  to put in perspective. In  the same way                                                               
1  trillion   cubic  feet  -   and,  you  know,  that's   not  an                                                               
unreasonable number for  the Mat Valley part alone -  needs to be                                                               
looked at as  a significant amount of gas for  the same arguments                                                               
that  you've heard  of  - whether  the  Arctic National  Wildlife                                                               
[Refuge] replaces  all of the  potential Iranian or  [Iraqi] oil.                                                               
You've heard  that argument and  you heard it's only  a six-month                                                               
supply. There is  no single point source  that magically supplies                                                               
the energy needs. Certainly if  there were a trillion cubic feet,                                                               
it would be a huge boost to  the energy supplies. As to the issue                                                               
of  replacing   those  supplies  -  using   those  supplies  only                                                               
domestically, that's not  our right to dictate.  We can't dictate                                                               
that the gas the lessees have  doesn't go to Agrium or it doesn't                                                               
go to the  LNG export plant. That  is the right of  the lessee; a                                                               
contract  right   to  sell   their  gas   where  they   think  is                                                               
appropriate. So again, we don't  control that distribution of gas                                                               
in government. That's  a lessee contract right.  They will review                                                               
the  LNG   export  license   in  2009   but  that's   really  the                                                               
determination  [indisc.]  made.  So  from  that  perspective,  an                                                               
additional 40 bcf per year would be substantial.                                                                                
                                                                                                                                
As for North Slope gas, first  of all, we're in the process under                                                               
the Stranded  Gas Act  of negotiating  with separate  entities. I                                                               
cannot  guarantee you  we're going  to end  up with  a successful                                                               
project at the end of the day.  I cannot guarantee that if we had                                                               
a successful project, the project will  end up with export of gas                                                               
to Southcentral Alaska.  That is an unknown,  which we're working                                                               
hard to  achieve but we simply  cannot count on that.  So, again,                                                               
you're  looking  at  hypothetical  resources  but  certainly  the                                                               
distribution and  placement of that  gas ultimately  controls how                                                               
and where it  gets used. And again,  I think as you  heard one of                                                               
the first gentlemen  testify, maybe Enstar for a  small number of                                                               
consumers won't extend their pipeline  system but if that coalbed                                                               
gas is  produced in that  local area, it's generally  almost pure                                                               
methane. It  generally takes very little  conditioning. It's very                                                               
likely that  that gas would  be used  locally. It makes  the most                                                               
sense  that another  local distribution  company would  take over                                                               
and provide  that service in that  area and it would  be the most                                                               
economic market  because it would have  the lowest transportation                                                               
costs. So, again,  I think it's very probable that  you would see                                                               
the gas  used in  the local  area as the  best and  highest value                                                               
market  for that  production company  and, secondly,  it wouldn't                                                               
necessarily have to be Enstar.                                                                                                  
                                                                                                                                
CHAIR OGAN: Thank you. Senator Wagoner had some questions.                                                                      
                                                                                                                                
SENATOR WAGONER: While you're there  I'm glad you addressed that.                                                               
I was going to say something  before the meeting was over just so                                                               
there's  no  misunderstanding. Why  don't  you  explain to  these                                                               
folks that are listening in the  breakdown of the gas that Agrium                                                               
gets and  where it comes  from and  what percentage is  the state                                                               
required - what prices on the price structure.                                                                                  
                                                                                                                                
MR.  MYERS:  Senator  Wagoner,   through  the  chair,  the  third                                                               
breakdown  is approximately  correct.  Of course  it's less  now,                                                               
significantly  less from  the Agrium  side. Agrium  buys its  gas                                                               
through contract  relationships. The state royalty  share is kept                                                               
in-value  as a  proportion, typically  12 ½  percent of  that gas                                                               
going to the market. The gas you  say is low subsidized is not at                                                               
all. That  is gas that  - another way to  look at it  Agrium paid                                                               
for it  in advance when  they bought  the plant. They  bought the                                                               
plant from Unocal with a  guarantee of supply from certain leases                                                               
at a  price. But that  price, the value  of that gas,  versus the                                                               
value of  the gas in  the market in  the future, was  included in                                                               
that sales price. So it's like  they prepaid at the pump for part                                                               
of that  gas, is a  way to look  at it, or  at least part  of the                                                               
price of that gas, and then  they were guaranteed a certain price                                                               
from gas from those leases.                                                                                                     
                                                                                                                                
Any future  gas -  Agrium - they  have to go  to the  market like                                                               
anyone else, go out to the lessees  and try to buy it and they're                                                               
buying it  on an as-needed basis  from folks. They try  to buy it                                                               
as cheaply  as possible  because the  financial condition  of the                                                               
fertilizer plant  can't pay  the full  market value  because they                                                               
can't  pass  the  price  on   directly  as  a  residential  or  a                                                               
commercial gas  consumer could. So  they end up  inherently being                                                               
the lower end  of the market with the LNG  market falling between                                                               
the new  Enstar type contract  and the  Agrium. But, it's  a free                                                               
market system we  operate on. Those lessees are  entitled to sell                                                               
their gas. The state  can use its royalty gas but  it's only 12 ½                                                               
percent of that gas so it's not the bulk of that supply.                                                                        
                                                                                                                                
CHAIR OGAN:  Thank you Mr. Myers.  One of the concerns  I have is                                                               
some of the speculation that's  gone on with the existing leasing                                                               
program and  some of  the areas that  were leased  with virtually                                                               
little to  no economic resource  there, you know,  Lazy Mountain.                                                               
I've been  all over Lazy  Mountain with the geologists  and found                                                               
out I have a fault directly  behind my house. That was good news.                                                               
The nice  little canyon I  have that provides  my view -  I could                                                               
end up at the bottom of it one  of these days. But, in fact, I've                                                               
been told  that it  will be  used if  there's a  gas seep  test -                                                               
methane  seeping  test that  they'll  use  Lazy Mountain  as  the                                                               
baseline because there's  not coal up there so -  and other areas                                                               
have  tremendous amount  of  overburden. And  you're  a Ph.D.  in                                                               
geology, correct?                                                                                                               
                                                                                                                                
MR. MYERS: Yes, Mr. Chairman.                                                                                                   
                                                                                                                                
CHAIR OGAN: There's a lot of  overburden in Sutton and, you know,                                                               
obviously the  geology uplifts where  the coals are  and surfaces                                                               
and  daylights, but  in  Sutton proper,  in  downtown Sutton  and                                                               
where most  of the people  live, there's thousands of  - millions                                                               
of years of  overburden and glacial junk, boulders  and all kinds                                                               
of things dumped there. So there  were some concerns about how we                                                               
address the  leases that  are already issued  and those  are very                                                               
legitimate concerns. Some of them  aren't economic and never will                                                               
be. Is there a way that we can  work on a bill so that at the end                                                               
of that lease cycle if they're  uneconomic or the geology is poor                                                               
that we can - you have  some authority or there's some motivation                                                               
for  the  lessee  to  give  them back  to  the  state?  And  then                                                               
obviously, if  it's a best  interest finding deal you'll  look at                                                               
the geology  to see if  there's anything there worth  leasing but                                                               
do you care to comment on that?                                                                                                 
                                                                                                                                
MR. MYERS: Yes I would, Mr.  Chairman. I think when you step back                                                               
and look at the bigger  perspective historically, no matter which                                                               
leasing program -  most leases never get an  exploration well. Of                                                               
those that get an exploration  well, the majority of those leases                                                               
never see  production because it's  a risky business. So  we look                                                               
historically that,  under this program,  our expectation  is that                                                               
most of  those leases  will never  see exploration  drilling, let                                                               
alone development  drilling. That's just historical  fact. So, as                                                               
those leases  - those are  3-year leases, as those  leases expire                                                               
under  this  bill,   they  could  only  be   reoffered  under  an                                                               
exploration license or as part  of a competitive areawide sale so                                                               
the public  process the folks  are saying won't affect  them will                                                               
affect them.  So the expectation is  the majority of the  area of                                                               
the  Valley  at  the  end  of the  day  would  fall  under  these                                                               
programs. And  actually a majority  of the area currently  in the                                                               
Pioneer Unit, where some of the  coalbed pilots are going on, are                                                               
within a conventional oil and gas  area with a finding and within                                                               
an existing unit.  Once the unit is formed, if  a unit is formed,                                                               
then  there has  to be  a  plan of  development. If  the plan  of                                                               
development isn't met, acreage contracts out of that unit.                                                                      
                                                                                                                                
So,  you will  see either  successful development  and right  now                                                               
there are  many areas of  the Valley that  do not look,  based on                                                               
the pilot work done, do  not look commercially viable for coalbed                                                               
methane that those  leases will contract out. And in  the case of                                                               
the shallow gas leases, under this  bill they would not be re-let                                                               
or you could  not reapply for a new lease  application. So by and                                                               
large,  your  bill  corrects,  I  think,  for  the  most  part  a                                                               
successful mechanism to  convert those areas into an  area with a                                                               
finding and that's the process you'll see.                                                                                      
                                                                                                                                
Now there  is the director's  ability, the discretion,  to extend                                                               
those leases  three years but  you have to see  positive movement                                                               
toward development and,  if the legislature wanted  to they could                                                               
restrict -  right now the  discretion is pretty  loosely defined.                                                               
They  could restrict  my authority  through DNR  to extend  those                                                               
leases and then could describe those circumstances.                                                                             
                                                                                                                                
5:05 p.m.                                                                                                                       
                                                                                                                                
CHAIR OGAN:  Okay, and  one of  the other  things was  the fiscal                                                               
note but  maybe I could  hit on one  thing. So, in  your opinion,                                                               
many  of these  leases, and  I know  it's probably  impossible to                                                               
tell how  many, will probably  go back  within - so  they've been                                                               
leased about year  now or a little bit less,  so within two years                                                               
a lot of these leases will be off the table.                                                                                    
                                                                                                                                
MR.  MYERS: Mr.  Chairman, that's  what I  believe unless  we see                                                               
activity. Drilling  activity takes  time to  do. Then  you'd also                                                               
want to  be able to  test and evaluate  and that takes  time. So,                                                               
given  that, a  three-year  lease is  a very  short  time to  use                                                               
unless you  see early development  activity, you're  probably not                                                               
likely to see it with this  particular type of lease. Folks could                                                               
ask to expand  units. Then they would need an  organized plan for                                                               
development as well.  So, again, my belief is that  most of these                                                               
shallow gas leases  will go away. And, in fact,  you've seen that                                                               
process. We  had a whole bunch  of leases applied for  in the Big                                                               
Delta area  in the Fairbanks area  and many of those  leases were                                                               
not  accepted  so  there  is  a high  probability,  a  high  rate                                                               
historically, of turnover of these  leases.  And, quite honestly,                                                               
you mentioned  there - I  believe a lot  of them were  bought for                                                               
speculation.                                                                                                                    
                                                                                                                                
CHAIR OGAN:  Yea. I'm going to  hit on two other  things while we                                                               
have  your expertise  here.  HS  - there  was  a rather  scathing                                                               
                              2                                                                                                 
article in one of the  papers that talked about hydrochloric acid                                                               
gas  and this  person  emphatically stated  that coalbed  methane                                                               
companies, and  they named one  in particular,  uses hydrochloric                                                               
acid gas  to enhance  production of coalbed  methane and  that in                                                               
the town that  they lived in nine people were  killed by this gas                                                               
that  slipped out  in the  middle of  the night  and people  were                                                               
killed in  their beds  and, you  know, there  were bodies  in the                                                               
yard  and, you  know, really  put the  fear of  God in  a lot  of                                                               
people about  living next  to anything related  to this  stuff. I                                                               
did some  research on  it and  found out which  well it  was. The                                                               
incident did indeed  happen and it wasn't  hydrochloric acid gas,                                                               
it was hydrogen sulfide. I think  the source of that fear was the                                                               
fact that the company announced  that they used hydrochloric acid                                                               
to wash the cement  out of the casing. So, maybe  it would be two                                                               
things  -  what's  the  hydrochloric acid  used  [for]  and  what                                                               
happens to it when  they put it down hole. Is  there such a thing                                                               
as hydrochloric  acid gas and  talk about what the  actual thing,                                                               
HS,  hydrogen sulfide,  actually is and  does and whether  or not                                                               
 2                                                                                                                              
it's associated with Cook Inlet and coalbed methane at all.                                                                     
                                                                                                                                
MR.  MYERS:  Mr.  Chairman,  the hydrochloric  acid  is  used  to                                                               
dissolve out some of the cement  that's in there. When they drill                                                               
a well, they  pump cement down the outside of  the well casing to                                                               
cement  it  in  and  separate  it   from  the  zone  -  from  the                                                               
surrounding rock  layers and  so there's a  pipe laid  - multiple                                                               
layers actually, of pipe laid down  in various stages down to the                                                               
producing zone. That  pipe then is cemented  into the surrounding                                                               
ground so there's  no way for fluid to escape  around the pipe on                                                               
the outside  of the  pipe. Then  when they want  to get  the coal                                                               
open to  production, they  use what's  called a  perforation gun.                                                               
They  bring  a device  down  there  that  shoots holes  into  the                                                               
casing. At  the same time  they might then  - later they  come in                                                               
and they  fracture the rock. They  bring in sand grains  down and                                                               
put them in  a slurry under high pressure to  fracture the holes.                                                               
In order  to clean up  - again,  when they perforate,  they shoot                                                               
the cement guns through the pipe  through the cement. In order to                                                               
clean those holes up they will  put in very dilute - it's usually                                                               
10 percent  or 10 [indisc.-  molal] hydrochloric acid.  It's very                                                               
dilute. What that  does is it dissolves out the  cement and it is                                                               
very  quickly  neutralized under  that.  It's  the same  thing  a                                                               
geologist uses  in an outcrop with  a bottle to see  if the rocks                                                               
contain   calcium   carbonate.   Cement  is   basically   calcium                                                               
carbonate, as  is limestone and  other rock types. So,  it's very                                                               
dilute  hydrochloric acid.  It's  almost immediately  neutralized                                                               
and it's used in relatively small quantities.                                                                                   
                                                                                                                                
So that's  totally separate  - that  process is  totally separate                                                               
from the process  that produces HS  or sulfuric acid.  That is in                                                               
                                 2                                                                                              
certain  types  of crude  oils.  Through  biodegradation you  can                                                               
create  sulfuric  acid. Sulfuric  acid  is  a deadly  poison.  It                                                               
actually  occurs on  the North  Slope  in a  few cases  - in  the                                                               
Lisbourne formation in  particular. I think it  is extremely rare                                                               
in Cook  Inlet and  I think  it's very  unlikely to  encounter in                                                               
Cook  Inlet  Basin  generally and  specifically  in  the  shallow                                                               
coalbed methane  section. When they  drill, the equipment  has to                                                               
have,  if  there's  any  chance  of  encountering,  equipment  to                                                               
monitor for sulfuric  acid. Again, it's very deadly.  It can kill                                                               
-it's  a  pretty   dense  gas  and  can  kill   in  pretty  small                                                               
quantities. So it is  a hazard but it is a hazard  that has to be                                                               
taken into  account for  conventional oil  and gas  in particular                                                               
and  particularly in  the North  Slope  or in  areas where  there                                                               
might  be   what's  called  sour   crude  and   there's  specific                                                               
monitoring equipment on the rigs to handle it.                                                                                  
                                                                                                                                
CHAIR  OGAN: But,  people  I've  talked to  in  the industry  and                                                               
regulators from  other states  to the best  of my  knowledge have                                                               
never  heard of  hydrogen sulfide  being associated  with coalbed                                                               
methane and shallow gas.                                                                                                        
                                                                                                                                
MR. MYERS: Mr. Chairman, I'm not aware of it either at all.                                                                     
                                                                                                                                
CHAIR  OGAN: I  just wanted  to put  that on  the record  in case                                                               
anyone was curious. Anything else? Senator Seekins?                                                                             
                                                                                                                                
SENATOR SEEKINS: Let  me clarify in my mind -  Mr. Myers you said                                                               
something about  the findings already  being available  or having                                                               
been completed in certain of these  areas. Are you talking - what                                                               
kind of findings particularly are  you looking at? These are best                                                               
interest findings?                                                                                                              
                                                                                                                                
MR. MYERS:  Senator Seekins, through  the chair, yes and  in part                                                               
of the Mat Valley there was  a best interest finding done because                                                               
the leases  actually Evergreen  owns are  part of  a conventional                                                               
oil and gas  unit. Again, those leases were leased  back, most of                                                               
them  over 10  years  ago so  it's on  an  earlier best  interest                                                               
finding.  But,  then, in  the  northern  part  of the  unit,  the                                                               
northern part just  north of the Pioneer Unit,  north of Wasilla,                                                               
there are  additional shallow  gas leases that  were not  part of                                                               
the best  interest finding. So  it's a mixture. The  current best                                                               
interest finding did not - the  area considered did not go as far                                                               
south as Homer. It sort of  just [indisc.] a point area. South of                                                               
that was not considered in the  finding so no decision was made -                                                               
determination of  leasing and no  finding down in that  area. The                                                               
process  of  limiting  the  area in  the  best  interest  finding                                                               
created  an  opportunity in  the  shallow  gas leasing  to  lease                                                               
everything outside  of that  area so  in the  Mat Valley  we have                                                               
some part of the area under the best interest finding, some not.                                                                
                                                                                                                                
SENATOR SEEKINS: Mr. Chairman?                                                                                                  
                                                                                                                                
CHAIR OGAN: Senator Seekins.                                                                                                    
                                                                                                                                
SENATOR  SEEKINS:  When the  state  looks  at this  resource  and                                                               
considers it  in terms of  potential income, and maybe  this goes                                                               
to  the heart  of the  question on  the fiscal  note, what's  the                                                               
greatest potential - the lease income or royalty income?                                                                        
                                                                                                                                
MR.  MYERS: Senator  Seekins, through  the chair,  royalty income                                                               
far exceeds  the potential  value of the  initial bonus  bids and                                                               
the  rentals historically.  Of the  $1.3  billion collected  last                                                               
year on  the royalty  side - royalties,  bonuses and  leases, the                                                               
majority of that, well over $1  billion, was on the royalty side.                                                               
What  you really  want is  the production.  The advantage  of the                                                               
competitive process though  is you get the highest  value for the                                                               
lease at the time of leasing  because you get the most optimistic                                                               
person. I  should back off.  When folks do  geologic assessments,                                                               
they vary based on the quantity of data.... [END OF TAPE]                                                                       
                                                                                                                                
TAPE 04-15, SIDE A                                                                                                            
                                                                                                                                
5:13 p.m.                                                                                                                       
                                                                                                                                
MR. MYERS:  In that  case, the one  who sees it  is going  to pay                                                               
more for that  lease than someone who assesses there  is any less                                                               
potential.  It's  a function of the data; it's  a function of the                                                               
interpreters.   The advantage of the  competitive process though,                                                               
is you  generally - you  always get the  bidder who has  the most                                                               
optimistic  view.   So that  puts, more,  so we'd  expect to  see                                                               
significantly more  dollars bid up-front  than you would  under a                                                               
straight filing fee type system.                                                                                                
                                                                                                                                
CHAIR OGAN:  That's a zero fiscal note, right?                                                                                  
                                                                                                                                
MR. MYERS:   Yes, the zero fiscal note  actually is indeterminate                                                               
positive.   There  are two  aspects. Will  this cost  us more  to                                                               
administer?  Are there, basically  more administrative costs with                                                               
this?   I  think  given the  time  and the  effort  put into  the                                                               
process in the  Valley, given the effort dealing  with folks with                                                               
the  speculative leases,  that  didn't take  them  doing all  the                                                               
title work for that.  With  the best-interest finding, it's a lot                                                               
of work, but it's probably no  more work than we've done with the                                                               
conventional shallow gas  program.  So I don't  think our finding                                                               
or up-front costs  are going to be substantially  more than we've                                                               
historically seen on  the revenue generation side  because of the                                                               
competitive nature of the process.   We would see a higher bonus,                                                               
we believe, for those leases.   If there is both conventional and                                                               
non-conventional gas potential, the rentals  would be higher than                                                               
under  the coal  bed program.    So there  is additional  revenue                                                               
there.   And  then finally,  if  the [indisc.]  gas, the  royalty                                                               
rates will  be the  same.   We also  think ultimately,  this will                                                               
accelerate the opportunity for development  by true operators and                                                               
limit speculation, bringing in more money as well.                                                                              
                                                                                                                                
SENATOR SEEKINS:  Would you believe  that a great number of these                                                               
leases  that are  out there,  and we  talk in  terms of  the huge                                                               
amount  of  acreage  that's  around  it, most  of  that  is  just                                                               
speculative  to try  to -  they don't  really have  an idea  that                                                               
there's a  great gas deposit there,  but there just might  be, so                                                               
we'll tie it  up for a little while, and  hopefully somebody else                                                               
will find something that will benefit us?                                                                                       
                                                                                                                                
MR. MYERS:  If I look at  the majority of shallow gas leases, the                                                               
folks purchasing them are not  traditional oil and gas operators.                                                               
They've been folks doing exactly,  buying the lease and hoping to                                                               
sell  them to  someone  else  for uplifted  value  or percent  of                                                               
production of it occurs.  So  we have seen a tremendous amount of                                                               
speculation under the program.  I  think there are a lot of folks                                                               
buying leases without  a lot of background in  geology, without a                                                               
lot of  expertise, and just buying  on the hope that  they may be                                                               
right.   Buying in proximity  to other leases without  doing much                                                               
assessment  work.    Generally   companies  will  do,  have  done                                                               
assessment work  and they buy it  at least on a  geologic concept                                                               
or pattern.   Here we  approach folks  who could afford  the $500                                                               
and who just  thought, "I'll take the  risk and if I  can turn it                                                               
to someone else,  maybe I can."  So it's  highly likely that many                                                               
of these were  bought in areas that don't have  a lot of geologic                                                               
potential.                                                                                                                      
                                                                                                                                
SENATOR  SEEKINS:  If  title  companies  have  a  requirement  to                                                               
register on their  title report, or report on  their title report                                                               
if there is a subsurface lease on the land.                                                                                     
                                                                                                                                
MR.  MYERS:   I believe  there is  no requirement.   There  is no                                                               
single recording  office either, for  this information.   I think                                                               
again, that a  diligent title company ought to  have checked with                                                               
DNR, would  find out where and  why we don't have  leases applied                                                               
for, or  in issuance.   I can't speak  to the fact  that realtors                                                               
would or  wouldn't do that.   I don't think they're  required to.                                                               
I  would like  to address  the issue  even of  surface ownership.                                                               
The title  is not  required to  be recorded  in Alaska,  for land                                                               
ownership, a title transfer.  In  some cases we have tax records.                                                               
When folks ask  us to notify the folks, we  notify a resident who                                                               
lives there  or the  absentee landlord who  owns the  property or                                                               
which owner  has 20 percent  or 30 percent  of the property.   So                                                               
you can  see the issue of  trying to actually notify  the surface                                                               
landowners  in  all cases.  How  do  we do  it?    Do we  send  a                                                               
certified letter  to the tax owner,  which again, may not  be the                                                               
person actually  living on or  owning the property.   How current                                                               
are the  records?  In  unorganized boroughs, there  aren't really                                                               
even tax records.   So we have a tremendous  problem in the state                                                               
of  not  having  adequate  or accurate  data  to  notify  surface                                                               
owners.  That's one of the reasons  we don't do it.  And the cost                                                               
is probably  $1 per  mailing, as  well.   Effectively, this  is a                                                               
very  difficult process.   As  an alternative,  we notify  anyone                                                               
[who] sends  in a request to  DNR, to be notified  for actions in                                                               
their area.  We're totally willing to  do it, but we have to rely                                                               
on some  voluntary compliance by the  folks to let us  know, "Hey                                                               
this is  where I live  and if there  is anything happening  in my                                                               
area, let me know."                                                                                                             
                                                                                                                                
SENATOR  SEEKINS:   Any  lack  of  notification,  or in  a  title                                                               
report,  is not  at  the  fault of  the  state  because it's  not                                                               
required,  and it's  just something  that you  would hope  that a                                                               
title company would exercise the  due diligence to check with you                                                               
guys before they issued the report.                                                                                             
                                                                                                                                
MR. MYERS:   Senator Seekins, that's exactly right.   Also in the                                                               
Valley, for instance, less than  half the subsurface of the state                                                               
is  owned by  the state.   If  it's private  parties, we  have no                                                               
record of it as well.                                                                                                           
                                                                                                                                
CHAIR OGAN:  I want to state,  for the record, that when I bought                                                               
my  property, I  was  informed and  very aware  that  I was  only                                                               
buying  the surface  rights and  remembers  thinking that  nobody                                                               
will drill a  well or [indisc.] gold mine under  my property, so,                                                               
maybe it was naïve  thinking at the time, but I  was aware that I                                                               
wasn't  buying the  subsurface.   I think  more people  are aware                                                               
today, so  we can thank this  issue for educating the  folks, for                                                               
better or for worse.  Thank you very much.                                                                                      
                                                                                                                                
ANNOUNCEMENTS                                                                                                                 
                                                                                                                              
CHAIR  OGAN:    There  will  be a  very  interesting  meeting  on                                                               
Wednesday;  [MidAmerican] will  be here  presenting, from  3:30 -                                                               
5:00.  So stay tuned and don't touch that dial.                                                                                 
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                              
CHAIR OGAN adjourned the meeting at 5:15 p.m.                                                                                   
                                                                                                                                
                                                                                                                                

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