Legislature(1995 - 1996)

04/17/1996 04:10 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                   SENATE RESOURCES COMMITTEE                                  
                         April 17, 1996                                        
                           4:10 P.M.                                           
                                                                               
 MEMBERS PRESENT                                                               
                                                                               
 Senator Loren Leman, Chairman                                                 
 Senator Drue Pearce, Vice Chairman                                            
 Senator Steve Frank                                                           
 Senator Rick Halford                                                          
 Senator Georgianna Lincoln                                                    
 Senator Lyman Hoffman                                                         
                                                                               
  MEMBERS ABSENT                                                               
                                                                               
 Senator Robin Taylor                                                          
                                                                               
  ALSO IN ATTENDANCE                                                           
                                                                               
 Representative Beverly Masek                                                  
 Representative Joe Green                                                      
                                                                               
  COMMITTEE CALENDAR                                                           
                                                                               
 CS FOR HOUSE BILL NO. 325(FIN) am                                             
 "An Act relating to modification of royalty to encourage production           
 from an oil pool containing heavy oil; and providing for an                   
 effective date."                                                              
                                                                               
 CS FOR HOUSE BILL NO. 59(RES)                                                 
 "An Act relating to raffles and auctions of certain permits to take           
 big game; and providing for an effective date."                               
                                                                               
 SENATE BILL NO. 180                                                           
 "An Act authorizing the commissioner of the Department of Natural             
 Resources to negotiate and enter into timber sale contracts that              
 provide for local manufacture of high value-added wood products;              
 and establishing an Alaska Forest Products Research and Marketing             
 Program within the Department of Commerce and Economic                        
 Development."                                                                 
                                                                               
 CS FOR HOUSE BILL NO. 265(FSH)                                                
 "An Act relating to the export of live dungeness crab."                       
                                                                               
 HOUSE BILL NO. 329 am                                                         
 "An Act providing for restitution to the state for the unlawful               
 taking of game."                                                              
                                                                               
 CS FOR HOUSE BILL NO. 447(RES)                                                
 "An Act relating to traditional means of access for traditional               
 outdoor uses and to the classification and the sale, lease, or                
 other disposal of state land, water, or land and water."                      
 CS FOR HOUSE BILL NO. 547(RES) am                                             
 "An Act relating to a four-year moratorium on entry into Southeast            
 Alaska dive fisheries; and providing for an effective date."                  
                                                                               
 SENATE BILL NO. 285                                                           
 "An Act relating to management of discrete salmon stocks and to a             
 salmon management assessment; and providing for an effective date."           
                                                                               
 SENATE BILL NO. 318                                                           
 "An Act authorizing, approving, and ratifying the amendment of                
 Northstar Unit oil and gas leases between the State of Alaska and             
 BP Exploration (Alaska) Inc.; and providing for an effective date."           
                                                                               
  PREVIOUS SENATE COMMITTEE ACTION                                             
                                                                               
 HB 325 - No previous action to consider.                                      
                                                                               
 HB 59 - See Resources minutes dated 4/10/96 and 4/12/96.                      
                                                                               
 SB 180 - See Resources minutes dated 4/10/96.                                 
                                                                               
 HB 265 - See Resources minutes dated 4/12/96.                                 
                                                                               
 HB 329 - See Resources minutes dated 4/3/96, 4/10/96 and 4/12/96.             
                                                                               
 HB 447 - See Resources minutes dated 4/12/96 and 4/15/96.                     
                                                                               
 HB 547 - See Resources minutes dated 4/12/96.                                 
                                                                               
 SB 285 - See Resources minutes dated 3/13/96 and 4/12/96.                     
                                                                               
 SB 318 - See Resources minutes dated 3/29/96, 3/30/96, 4/3/96,                
          4/11/96, 4/13/96 and 4/15/96.                                        
                                                                               
  WITNESS REGISTER                                                             
                                                                               
 Ed Bain, Heavy Oil Asset Team Leader                                          
 OXY USA                                                                       
 Midland, TX.                                                                  
  POSITION STATEMENT:   Supported on HB 325.                                   
                                                                               
 Jon Tillinghast, Attorney                                                     
 Oxy USA                                                                       
 One Sealaska Plaza                                                            
 Juneau, AK 99801                                                              
  POSITION STATEMENT:   Commented on HB 325.                                   
                                                                               
 Tom Boutin, Director                                                          
 Division of Forestry                                                          
 Department of Natural Resources                                               
 400 Willoughby Ave.                                                           
 Juneau, AK 99801-1724                                                         
  POSITION STATEMENT:   Commented on SB 180.                                   
                                                                               
 Cheryl Sutton, Legislation Aide                                               
 House Resources Committee                                                     
 State Capitol Bldg.                                                           
 Juneau, AK 99801-1182                                                         
  POSITION STATEMENT:   Supported HB 547.                                      
                                                                               
 Frank Hohman, Commissioner                                                    
 Limited Entry Commission                                                      
 8800 Glacier Hwy., Ste 109                                                    
 Juneau, AK 99801-8079                                                         
  POSITION STATEMENT:   Supported HB 547.                                      
                                                                               
 Tom Neiswander                                                                
 Milne Point Commercial Manager                                                
 BP Exploration                                                                
 Alaska                                                                        
  POSITION STATEMENT:   Supported HB 325.                                      
                                                                               
  ACTION NARRATIVE                                                             
                                                                               
  TAPE 96-57, SIDE A                                                           
                                                                               
 Number 001                                                                    
                                                                               
  CHAIRMAN LEMAN  called the Senate Resources Committee meeting to             
 order at 4:10 p.m and announced that the Confirmation Hearing for             
 J. David Norton, Commissioner, Alaska Oil and Gas Conservation                
 Commission, would be rescheduled for April 18 at 5:00 p.m.                    
                                                                               
                                                                               
  CSHB 325(FIN) am No. Slope Heavy Oil Royalty Modification                  
                                                                               
  CHAIRMAN LEMAN  announced  CSHB 325(FIN) am  to be up for                  
 consideration.                                                                
                                                                               
  ED BAIN, OXY USA,  explained that Oxy has an 8.8 percent interest in         
 the Milne Point Unit.  They were one of the original owners and               
 have participated in the commercial development since it was                  
 initiated about 12 years ago.  He said the shallow well oil sands             
 were not economic to develop and current production occurs only               
 from the Green Area Tract 14, about 3,000 barrels per day for 21              
 wells.  They support the Oil and Gas Policy Council's recognition             
 that an incentive is needed for heavy oil and, therefore, support             
 HB 325.                                                                       
                                                                               
  SENATOR FRANK  asked Mr. Bain to explain some of the company's costs         
 that were exhibited to the committee on an overhead projector.                
                                                                               
  MR. BAIN  said that he thought HB 325 went too far with the two              
 percent floor that was added to the holiday.  He provided other               
 scenarios like 450 barrels per day with a two percent royalty which           
 would add one year of royalty reduction to HB 325.  A total of                
 three percent royalty for a period of eight years would be required           
 to get to the same level of profitability for a $4 million                    
 investment.                                                                   
                                                                               
 Number 147                                                                    
                                                                               
  SENATOR FRANK  asked what exactly made heavy oil more expensive to           
 produce.   MR. BAIN  replied that the biggest hurdle is the up-front          
 cash flow rates.  They also produced at a low rate.  He illustrated           
 that a North Slope well might bring in typically 5,000 barrels a              
 day, but the very best heavy oil wells produce less that 600                  
 barrels per day.  They expect a 40 year life with heavy oil and               
 they get about 1/2 the recovery compared to lighter oils.                     
                                                                               
  SENATOR PEARCE  asked if they paid a penalty on the quality bank for         
 the pipeline.   MR. BAIN  replied that it's a poor crude and their            
 tariff cost is higher.  They currently have a $6 deduct going to              
 the West Coast market.                                                        
                                                                               
 Number 299                                                                    
                                                                               
  SENATOR FRANK  asked how the Schrader Bluff accumulation related to          
 West Sak.   MR. BAIN  replied that the two sand groups they produce           
 are basically West Sak sands.                                                 
                                                                               
  MR. BAIN  explained that the next figure shows the progression of            
 time with ARCO's first West Sak pilot well done where they spent              
 over $100 per barrel trying to get heavy oil to work.  They spent             
 about $10 per barrel when Conoco was the operator and the analysis            
 he is showing them for a typical well is about $3 per barrel.  The            
 reason it's much cheaper is because they are doing further                    
 development from existing pads.                                               
                                                                               
 Number 351                                                                    
                                                                               
  CHAIRMAN LEMAN  asked him to explain the difference between $2.90            
 and the $1.80 that was represented last week by BP.   MR. BAIN                
 replied that their difference is based on cost demonstrated to date           
 and BP's involved more speculative goal type of costs and a                   
 projected business plan.  He said that their operating expenses               
 would be about the same level as the capital expenses, about $2.80            
 or $2.90 per barrel.                                                          
                                                                               
  MR. BAIN  said the last figure was a synopsis of the University of           
 Alaska study done to assess the fiscal impact of significant heavy            
 oil development such as full or partial development of the Milne              
 Point Unit's heavy oil.  He said essentially there would be the               
 creation of 322 nine-year jobs associated with the capital phase,             
 which would a drilling of 20 to 40 over a nine-year period of time,           
 and then the creation of 122 41-year jobs, basically careers.                 
 Although this is not a royalty for jobs bill, there are a lot of              
 jobs associated with this level of expenditure over this period of            
 time.                                                                         
                                                                               
 Number 401                                                                    
                                                                               
  SENATOR LINCOLN  asked how he defined "Alaska resident."                     
                                                                               
  MR. JON TILLINGHAST,  Milne Point Unit Attorney, explained the term          
 was from the UAA of study and they didn't give a definition of                
 Alaska resident.  He thought it meant long-term resident, because             
 the jobs were so long-term.                                                   
                                                                               
  SENATOR LINCOLN  said she would be interested to compare what their          
 company projects with resident and non-resident employees.   MR.              
 TILLINGHAST  replied that the UAA report broke down the number of             
 jobs that would go to residents and non-residents based on their              
 analysis and experience.  The jobs listed on the chart are only the           
 jobs projected by UAA.  There would be additional jobs going to               
 non-residents and the UAA's conclusions were that of the total                
 jobs, 75 - 80 percent would be filled by Alaska residents.                    
                                                                               
 Number 428                                                                    
                                                                               
  MR. TILLINGHAST  added that they feel the 15 percent hurdle rate was         
 within the realm of industry standard when they presented it to the           
 Oil and Gas Policy Council.  Arthur D. Little did a report for them           
 that mentioned several times that to encourage new projects you               
 need to get over 15 percent to get most oil companies to look at              
 it.  Also, in reference to Senator Frank's earlier question about             
 what made heavy oil more expensive to produce, he said that low               
 production rates and high transportation costs were mentioned, but            
 added that some of the attributes which make heavy oil particularly           
 on the North Slope difficult to produce is that it lifts slowly               
 because it is heavy and it needs artificial lift to pump from the             
 beginning and also the oil is entrained in sand.  Gravel packs need           
 to be installed to separate the sand from the oil.  These get                 
 clogged and need to be replaced.  Another thing is that because the           
 oil is so shallow the oil is very cold and heat tapes are needed to           
 keep the oil warm enough.                                                     
                                                                               
  SENATOR FRANK  asked what he thought was the most expensive                  
 producing field was.   MR. TILLINGHAST  replied that he didn't know           
 and thought BP could give him an answer, but he cautioned against             
 giving an across-the-board comparison, because of each unit's                 
 unique features.                                                              
                                                                               
  MR. TILLINGHAST  said he had an amendment which clarifies the intent         
 of the royalty which is if you take advantage of the oil relief               
 granted by this bill, you can't apply for a royalty over the next             
 20-years for the heavy oil well you have already gotten relief for            
 under this legislation.                                                       
                                                                               
  REPRESENTATIVE GREEN  commented that he hadn't seen the amendment.           
                                                                               
  CHAIRMAN LEMAN  asked him to review it and give them his opinion.            
                                                                               
  CHAIRMAN LEMAN  announced they would set CSHB 325(FIN) am aside and          
 deal with some other issues.                                                  
                                                                               
      CSHB 59(RES) Raffle or Auction of Big Game Permits                      
                                                                               
    CHAIRMAN LEMAN  announced  CSHB 59(RES)  to be up for considerat        
 and there was a proposed committee substitute that incorporates an            
 amendment by Senator Taylor to add elk.                                       
                                                                               
  SENATOR HALFORD  moved to adopt SCS CSHB 59(RES).  There were no             
 objections and it was so ordered.                                             
                                                                               
  SENATOR HALFORD  moved to pass SCS CSHB 59(RES) from committee with          
 individual recommendations.  There were no objections and it was so           
 ordered.                                                                      
                                                                               
         SB 180 Value-Added Timber Sales; Marketing                         
                                                                               
   CHAIRMAN LEMAN  announced  SB 180  to be up for consideration.  H        
 explained that the proposed committee substitute adds the Alaska              
 Forest Products Research and Marketing Program.                               
                                                                               
  ANNETTE KREITZER,  Staff to Senate Resources, explained the changes          
 in the Resources CS.                                                          
                                                                               
  TOM BOUTIN, Director, Division of Forestry,  said he didn't support          
 deleting the "J" relating to letting an individual have more than             
 one contract.  He did support the other changes and was pleased               
 that it included the Alaska Forest Products Research and Marketing            
 Program.                                                                      
                                                                               
  SENATOR FRANK  moved to adopt CSSB 180(RES).  There were no                  
 objections and it was so ordered.                                             
                                                                               
  SENATOR LINCOLN  objected to find out what "J" meant.  MS. KREITZER          
 explained that Senator Taylor requested the amendment and the last            
 time the bill was before the committee a constituent testified                
 against it.   SENATOR LEMAN  added that deleting "J" would mean there         
 is no limit.                                                                  
                                                                               
  SENATOR LINCOLN  said she wanted to hear the Department's opinion.           
  MR. BOUTIN  explained that the chief reason they don't support             
 taking that out is that the Board of Forestry went through a very             
 extensive public process on this value-added bill and that wasn't             
 one of the recommendations they made.                                         
                                                                               
  SENATOR FRANK  said he thought the concern was that it wouldn't              
 allow for joint ventures.   MS. KREITZER  agreed and said even with           
 this provision taken out the Commissioner can say no.                         
                                                                               
  SENATOR FRANK  asked if  MR. BOUTIN  could accommodate the joint             
 venture concern, but still prevent a monopoly of all the available            
 timber.   MR. BOUTIN  replied that he didn't think the bill precluded         
 having a single dry kiln that people like Northland and Al Peg                
 could ship lumber to out of these contracts.                                  
                                                                               
  SENATOR FRANK  moved to pass CSSB 180(RES) from committee.                   
                                                                               
  SENATOR PEARCE  said she wanted it on the record that her husband            
 works for one of the regional corporations that has timber                    
 interests in the State and she didn't know if this would create any           
 opportunities for the company.                                                
                                                                               
  SENATOR LINCOLN  commented, then, that she is also on a regional             
 corporation board that enters into timber sales.                              
                                                                               
 There were no further objections to CSSB 180(RES) and it was passed           
 from committee.                                                               
                                                                               
            CSHB 265(FSH) Export of Dungeness Crab                           
                                                                               
  CHAIRMAN LEMAN  announced  CSHB 265(FSH)  to be up for consideratio        
 He said they had heard this bill and there was no opposition to it.           
                                                                               
  SENATOR FRANK  moved to pass CSHB 265(FSH) from committee with               
 individual recommendations.  There were no objections and it was so           
 ordered.                                                                      
 Number 580                                                                    
                                                                               
                                                                               
      HB 329 am Restitution For Certain Game Violations                      
                                                                               
  CHAIRMAN LEMAN  announced  HB 329 am  to be up for consideration.          
                                                                               
  SENATOR PEARCE  moved to adopt SCS HB 329(RES).  There were no               
 objections and it was so ordered.                                             
                                                                               
  SENATOR PEARCE  moved to pass SCS HB 329(RES) from committee with            
 individual recommendations and a $0 fiscal note.  There were no               
 objections and it was so ordered.                                             
                                                                               
   CSHB 447(RES) Protect Access For Tradit'nl Outdoor Uses                   
                                                                               
    SENATOR LEMAN  announced  CSHB 447(RES)   to be up for consider        
                                                                               
                                                                               
  REPRESENTATIVE MASEK,  sponsor, said she would answer any questions          
 regarding the bill.                                                           
                                                                               
  TAPE 96-57, SIDE B                                                           
 Number 580                                                                    
                                                                               
  SENATOR HALFORD  moved to pass CSHB 447(RES) from committee with             
 individual recommendations.  There were no objections and it was so           
 ordered.                                                                      
                                                                               
      CSHB 547(RES) am Moratorium on S.E. Dive Fisheries                     
                                                                               
  CHAIRMAN LEMAN  announced  CSHB 547(RES) am  to be up for                  
 consideration.  He said the bill was heard and there was                      
 substantial interest in moving it. However, it was not unanimous.             
 At least one person would be affected by it and he thought the bill           
 was now represented a reasonable consensus on limiting the number             
 of divers for abalone, sea urchins, sea cucumbers, and geoducks.              
                                                                               
  SENATOR HOFFMAN  said there was concern that the people who                  
 pioneered the fishery would be left out and there was testimony               
 that half of them were Alaskan residents.                                     
                                                                               
  SENATOR PEARCE  asked if the catch was limited in any of the                 
 fisheries.                                                                    
                                                                               
  CHERYL SUTTON,  Legislative Aide, House Resources Committee,                 
 answered that the purpose of the bill is to establish a moratorium            
 on four of the dive species in Southeast so the development of the            
 fisheries can be observed and consistent, sustained yield                     
 management plans can be devised.  She said the bill is widely                 
 supported and they had worked closely with all the communities and            
 divers in Southeast Alaska.  There is a lot of compromise contained           
 in this bill.                                                                 
                                                                               
  CHAIRMAN LEMAN  asked her to comment on the fisherman who would be           
 excluded from the fishery as a result of this bill.   MS. SUTTON              
 explained that he was basically a Kodiak fisherman and this is a              
 Southeast Alaska moratorium on specific species in Southeast                  
 Alaska.                                                                       
                                                                               
 Number 540                                                                    
  SENATOR FRANK  moved to pass CSHB 547(RES) am from committee.                
                                                                               
  SENATOR HALFORD  objected because he didn't want to limit                    
 participation in any more fisheries.   SENATOR HOFFMAN  pointed out           
 that this did not limit fisheries, but it was a four-year                     
 moratorium so that the resource could be further evaluated.                   
                                                                               
  MS. SUTTON  commented that there was a lot of assessment work that           
 needed to be done with these developing fisheries and that funding            
 had been cut for this.  The participants in this fishery are                  
 interested in looking at a self-funding mechanism to have on-going            
 management and stock assessment.  She said there are already too              
 many participants in the fishery.                                             
                                                                               
  SENATOR FRANK  asked if they already limit the catch.   MS. SUTTON           
  replied that they do have quotas already.                                    
                                                                               
  SENATOR FRANK  asked if the openings could be structured so that             
 they would favor Alaskan residents.   MS. SUTTON  replied that the            
 Department was trying to do that, but there is such a rush from               
 folks in failing fisheries that a sound management cannot be                  
 developed because of the unknown number of participants.  A                   
 moratorium would fix some numbers and give them the opportunity to            
 develop more effective management.                                            
                                                                               
  SENATOR FRANK  suggested closing the fishery down altogether and let         
 the stocks come back and have surprise openings.                              
                                                                               
 Number 484                                                                    
                                                                               
  REPRESENTATIVE WILLIAMS,  sponsor of HB 547, said he couldn't add            
 much more to what Ms. Sutton said.                                            
                                                                               
  SENATOR HALFORD  said he was concerned that half the participants            
 now are outsiders.   MS. SUTTON  replied that that was incorrect.             
                                                                               
 Number 458                                                                    
                                                                               
  FRANK HOHMAN,  Limited Entry Commissioner, explained that in three           
 of the fisheries a substantial majority are resident fishermen.  In           
 the geoduck fishery their latest statistics indicate 50/50 and this           
 is the newest fishery.  He explained that the rush to get into the            
 open fisheries has mushroomed and the reason for the moratorium is            
 to cap it to have time to study it.                                           
                                                                               
  SENATOR HALFORD  suggested having the fisheries managed for resident         
 participation while the information is gathered, use those                    
 participants as a starting point, and then make the permits non-              
 transferable.  He noted that all the other fisheries with                     
 transferable permits have a huge debt-load and they are all going             
 down hill.                                                                    
                                                                               
  MR. HOHMAN  answered that those things had been tried and the                
 abalone fishery, for example, is down to one day per year.  He said           
 that 95 percent of the harvesters in that fishery are residents.              
 He added that this moratorium might be an opportunity for them to             
 investigate some of the methods he just mentioned.                            
                                                                               
 Number 415                                                                    
                                                                               
  SENATOR FRANK  asked the status of the moratorium on the dungeness           
 crab fishery they instituted a few years ago.  MR. HOHMAN answered            
 that was completed and it was operating with the input from people            
 within the fleet and the Department.  They developed a new type of            
 limited entry system which has a new phase called the tiered pot              
 system.  Each participant, based on their past production, is given           
 a number of pots they can fish.  This preserves the resource and              
 allows a certain number of pots to be fished and it preserved the             
 economic opportunity for those who are in it.  He thought this was            
 a very successful conclusion to that fishery.                                 
                                                                               
  MR. HOHMAN  added that there would likely be some non-transferable           
 permits within that fishery, but there would also be transferable             
 ones.  It is based on a complicated point system.                             
                                                                               
  SENATOR HALFORD  asked why we should ever create another                     
 transferable fishery.   REPRESENTATIVE WILLIAMS  said that he agreed          
 with him, but the dive fishery required large boats to service the            
 divers and fishermen from down south are equipped to handle that.             
 This makes it difficult for the residents to invest money if they             
 are not assured they will have a fishery.  That is what basically             
 is happening.                                                                 
                                                                               
  SENATOR LINCOLN  asked what the objection was to having the                  
 moratorium reviewed in two years instead of waiting for four years.           
  MR. HOHMAN  replied that the reason for the four years is to give            
 time to the Commission.  This isn't the only issue before them and            
 their last experience with the Southeast Dungeness Crab fishery               
 took a four year period of time.  He said it took at least three              
 public hearing phases throughout Southeastern to come to agreement            
 there.                                                                        
                                                                               
    SENATOR HALFORD  withdrew his objection with the condition that he         
 would come up with a floor amendment that prohibits the creation of           
 new transferable fisheries.                                                   
                                                                               
  CHAIRMAN LEMAN  asked if there was further objection to the motion           
 to pass CSHB 547(RES) am from committee.  Hearing none, it was so             
 ordered.                                                                      
                                                                               
      SB 285 Discrete Salmon Stock Managmt & Assessment                      
                                                                               
  CHAIRMAN LEMAN  announced  SB 285  to be up for consideration.             
                                                                               
  SENATOR HALFORD  said they needed to come up with some changes for           
 the financing mechanism, but he thought that could be done in                 
 Finance.  He moved to pass SB 285 from committee with individual              
 recommendations.                                                              
                                                                               
  CHAIRMAN LEMAN  objected to say that he thought the bill needed              
 substantial work.  He wanted to be consistent with our positions              
 before Congress regarding the Endangered Species Act and with                 
 Canada regarding the U.S.-Canada Salmon Treaty.   He also noted               
 that not all salmon spawn in rivers and this bill suggests that               
 they do.                                                                      
                                                                               
  SENATOR HOFFMAN  said he thought that sports fishermen benefit from          
 this fishery and there should be some fees associated with it.                
                                                                               
 SENATOR HALFORD  agreed and said they were looking at some ways to            
 do that.                                                                      
                                                                               
  SENATOR LINCOLN  said she thought this was a resource piece of               
 legislation and if there were any amendments, they should be made             
 in the Resources Committee.                                                   
                                                                               
  CHAIRMAN LEMAN  requested a roll call vote on the motion to move SB          
 285 out of committee.   SENATORS HALFORD, FRANK, PEARCE, AND HOFFMAN          
 voted yes;  SENATORS LINCOLN AND LEMAN  voted no; and so, the motion          
 carried.                                                                      
                                                                               
 Number 290                                                                    
                                                                               
 CHAIRMAN LEMAN  announced  CSHB 325(FIN) am   to be back up for             
 consideration.                                                                
                                                                               
  MR. TILLINGHAST  explained that Oxy thought there were a number of           
 criteria that are important for an effective incentive.  One is               
 that it is sufficient to materially impact project economics.  The            
 second thing is that it should be an up-front incentive because               
 they are trying to encourage new capital investment.                          
                                                                               
 Other states have found that royalty holidays and severance tax               
 holidays are the most effective way of encouraging new investment             
 as opposed to having a reduced royalty over the life of the field             
 which is more effective if you are trying to reduce somebodies                
 operating costs over the long run.                                            
                                                                               
 The virtue of the "purple option" is that the three percent royalty           
 is about 25 percent of Oxy's lease royalties.  Therefore, if it's             
 the legislature's desire to assure that the Permanent Fund's                  
 constitutional share of royalties continue to go into it, it gives            
 the legislature the ability to do that.                                       
                                                                               
  CHAIRMAN LEMAN  asked on page 1, line 15, at what point it was               
 intended that the $15 price be measured.   MR. TILLINGHAST  answered          
 at the well-head lack meter.                                                  
                                                                               
  CHAIRMAN LEMAN  asked on page 2, line 22, why a two-year period was          
 selected for the production records instead of using the same                 
 period the State has for its audit rights for taxes and royalties.            
  MR. TILLINGHAST  replied that they ought to be consistent whatever           
 they are.  He said the issue came up in the House and they couldn't           
 find out what the audit period was for royalty records in                     
 generally.                                                                    
                                                                               
  CHAIRMAN LEMAN  asked on page 3, line 8, if the 450 should be                
 changed to 500.   MR. TILLINGHAST  said that was correct and he added         
 there was another correction needed on page 2, line 3 in the                  
 definition of "actual initial drilling", but the subparagraph only            
 refers to "initial drilling."  "Actual" should be deleted, he said.           
                                                                               
 Number 205                                                                    
                                                                               
  REPRESENTATIVE GREEN  said he had no problem with their first                
 proposed amendment.                                                           
                                                                               
  CHAIRMAN LEMAN  asked on page 3, line 9, what happens if oil with            
 the higher gravity is blended with lower gravity oil to produce a             
 blend that is higher than the low gravity oil, but lower than the             
 20 degrees API cutoff in the bill.   MR. TILLINGHAST  replied that            
 wouldn't be a problem at Schrader Bluff because there are no dual             
 completions.   REPRESENTATIVE GREEN  answered that they are really            
 talking about a very small area.                                              
                                                                               
  MR. TILLINGHAST  added that an up-front incentive is superior from           
 the State's perspective because heavy oil fields have a very slow             
 decline rate and an up-front incentive will net the State more                
 royalties than a similar incentive spread out over the life of the            
 field.                                                                        
                                                                               
  TOM NEISWANDER , Milne Point Commercial Manager, BP Exploration,             
 said this is a resource they have known about for a very long time.           
 It is undeveloped despite three tries.  They have developed 15                
 million barrels out of that 26 billion that are in-place.  The                
 reason for that is that heavy oil reserve is uneconomic. Their                
 bottom line on development costs is $2.75 per barrel.  Add that to            
 the other typical characteristics of this project and that makes it           
 uneconomic.                                                                   
                                                                               
  TAPE 96-58, SIDE A                                                           
  Number 001                                                                   
                                                                               
  MR. NEISWANDER  said that the industry needs to continue to work at          
 bringing its costs down and increasing the initial production rates           
 of those wells.  He said it takes spending money to figure out how            
 to do these things.  He thought the State should encourage those              
 types of initiatives and HB 325 is a simple, clear tool to help               
 them do that.                                                                 
                                                                               
  CHAIRMAN LEMAN  apologized for interrupting, but said there were             
 other time constraints and he thanked him for his testimony.  He              
 said they would prepare a Resources SCS to HB 325 and set it aside.           
                                                                               
         SB 318 North Star Oil & Gas Lease Amendment                         
                                                                               
  CHAIRMAN LEMAN  announced  SB 318  to be up for consideration.  He         
 said a committee substitute had been prepared which included the              
 "findings" from their hearings and had the agreement with a few               
 suggested changes dealing with enforceability of Alaska-hire,                 
 Alaska contracting provisions and the effective date.                         
                                                                               
  SENATOR HALFORD  moved to adopt CSSB 318(RES), version "C."  There           
 were no objections and it was so ordered.                                     
                                                                               
 CHAIRMAN LEMAN  recessed the meeting at 6:00 p.m.                             
                                                                               

Document Name Date/Time Subjects