Legislature(1995 - 1996)
04/17/1996 04:10 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.