Legislature(1997 - 1998)
02/20/1998 03:40 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE February 20, 1998 3:40 P.M. MEMBERS PRESENT Senator Rick Halford, Chairman Senator Lyda Green, Vice Chairman Senator Loren Leman Senator Bert Sharp Senator John Torgerson MEMBERS ABSENT Senator Robin Taylor Senator Georgianna Lincoln COMMITTEE CALENDAR SENATE BILL NO. 236 "An Act extending the termination date of the Citizens' Advisory Commission on Federal Areas in Alaska; and providing for an effective date." - SCHEDULED BUT NOT HEARD SENATE BILL NO. 286 "An Act relating to actions to quiet title to, eject a person from, or recover real property or the possession of it, and to acquisition of real property by adverse possession; and providing for an effective date." - HEARD AND HELD SENATE BILL NO. 256 "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from fields within the Cook Inlet sedimentary basin where production is commenced in fields that have been discovered and undeveloped or that have been shut in." - HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION SB 236 - No previous action to record. SB 286 - No previous action to record. SB 256 - No previous action to record. WITNESS REGISTER Mr. Dave Gray, Staff Senator Jerry Mackie State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Supported SB 286. Mr. Richard Harris Sealaska Corporation One Sealaska Plaza, Ste. 400 Juneau, AK 99801 POSITION STATEMENT: Supported SB 286. Mr. Steve Sorenson, Council Sealaska Corporation One Sealaska Plaza, Ste 400 Juneau, AK 99801 POSITION STATEMENT: Commented on SB 286. Mr. Charles McKee P.O. Box 243053 Anchorage, AK 99504 POSITION STATEMENT: Opposed SB 286. Senator Drue Pearce State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of SB 256. Mr. Gary Carlson, Vice President Forcenergy POSITION STATEMENT: Supported SB 256. Mr. Kevin Tabler, Manager Land and Government Affairs Unocal P.O. Box 196247 Anchorage, AK 99519 POSITION STATEMENT: Supported SB 256. Mr. John Miesse Marathon Oil P.O. Box 196168 Anchorage, AK 99519 POSITION STATEMENT: Supported SB 256. ACTION NARRATIVE TAPE 98-12, SIDE A Number 001 SB 236 - CITIZENS ADVISORY COM ON FED AREAS IN AK CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 3:40 p.m. and said that the sponsor for SB 236 was not available to testify and the bill would be rescheduled. SB 286 - ADVERSE POSSESSION CHAIRMAN HALFORD announced SB 286 to be up for consideration. MR. DAVE GRAY, Staff to Senator Mackie, sponsor, said SB 286 was introduced to bring attention to the State's current laws governing adverse possession of private property and its suitability to land ownership and to modern advances in the location, description, and recording of private lands. The legislation addresses two conditions of adverse possession. The first is the "squatter" situation where a person knowingly and with intent occupies another person's property. After ten years of use, the occupant can claim ownership by adverse possession under current law. In addition, there is no compensation to the real owner for his or her loss. In the second instance, the person's occupancy of the property is under a good faith belief that they have clear title or other documentation establishing their ownership. This instance also includes the adjacent property owner who mistakenly locates on neighboring land. In each situation, the property can be claimed after seven years of adverse possession. Much of the private land in the State is now located in remote, wilderness areas of the State because of the ANCSA settlements and other properties associated with historical mining activities. Because of their remoteness, these properties are more subject to inattention by their owners and therefore susceptible to adverse possession. SB 286 proposes to eliminate any adverse possession claim by a person who knowingly and intentionally occupies land they do not own. When the occupancy is inadvertent, the legislation increases the standards for adverse possession. In the latter case, the original owner must be compensated. MR. RICHARD HARRIS, Sealaska Corporation, said they are the largest private land owner in Southeast Alaska. He said the adverse possession doctrine was born in the middle ages and has little applicability to the 20th Century. State and federal lands cannot be divested of title through adverse possession. Neither can native corporation lands that are in an undeveloped state. However, all private lands, including ANCSA lands, if they are in a developed state, are subject to adverse possession. Sealaska has had some direct adverse possession experience with its non ANCSA lands and is aware of other private land owners with similar problems. The "squatter" statute requires the squatter to possess the property for 10 years and, thereafter, the actual owner of the property is barred from either bringing any action against that individual to throw them off the property or to seek any compensation. You effectively lose title to your property. The other type is the "color of title" which is an honest belief that the possessor really owns the land. The State Supreme Court has stated the doctrine serves a useful public purpose. If the owner leaves land idle, it should be put to some beneficial use and if it is done by a squatter, so be it. The court also justifies adverse possession because it keeps stale cases out of court. Neither of these justifications keeps cases out of court, Mr. Harris said. SB 286 abolishes the squatters statute, though it reserves any rights a person has acquired under the law before it was abolished. It also limits the availability of this doctrine to two narrow circumstances where there are arguable good policy justifications for allowing adverse possession. There is a good public policy qualification for a situation where the property owner in good faith occupies the property beyond the boundaries. After 20 years of open adverse possession the possessor could acquire quiet title to the property. It has to be done in a good faith manner and the possessor must prove entitlement and pay the land owner. The payment makes it equitable. It is very difficult to police lands when they are in large remote areas to assure yourself that no squatter has taken residence. They have had experience that even though the squatter has taken residence, the difficulty of moving people off a property is also very frustrating and quite time consuming. The Attorney General's Office indicates that under some circumstances this might create new litigation or may place additional burdens on the court, but they agree that this is speculative and there is no evidence to support this. SENATOR TORGERSON asked how this would affect rights-of-way or roads that are built on other properties that have been there for a number of years. MR. SORENSON, Council for Sealaska, answered that any interest that has been there for over 10 years would not be affected by this legislation. Up until 10 years, however, the Supreme Court rules that it is trespassing. SENATOR TORGERSON asked if they had squatters on their land. MR. SORENSON answered yes, one in Cordova which has been taken care of. They tried to sell land that people were squatting on to the city of Cordova and finally, in order to clear the title for transfer of title, they had to buy someone off. Another circumstance happened near Wasilla with a squatter. They see this occurring in various locations. SENATOR TORGERSON asked if they were grandfathering anyone in under this legislation. Number 230 CHAIRMAN HALFORD said the answer was no unless there was a perfected right. SENATOR TORGERSON asked if there were any notice requirements. MR. SORENSON answered no. He added if a land owner discovers that someone is using their property, there is the right to give them a notice to quit under the statute, and then you can bring an action for unlawful detainer or ejectment. This is a straightforward procedure. From the possessor's standpoint, their actions have to be fairly open and notorious. SENATOR SHARP asked if the squatters were on the land when it was acquired in the instances in Cordova and Wasilla. MR. HARRIS answered in Cordova the property was used frequently by the summer people coming in and processing fish in a camp. Out of that there were people beginning to establish year-round occupancy, so they were able to claim they were in possession of that property. They went through several efforts to evict which was very awkward and difficult. They ended up buying one person off before they could trade the land to the city. He said the 10 years doesn't run against any one particular owner; it's a continuous 10- year period. CHAIRMAN HALFORD said that action has to have been taken before 10 years; you don't actually have to get them off. MR. HARRIS agreed that was correct. SENATOR TORGERSON asked what the impact would be on the University, the Railroad, and municipal governments. Number 300 MR. HARRIS replied that it wouldn't affect any land except private lands. There is a specific statute that says the title to University land cannot be gained through adverse possession and another specific statute that says municipal lands are not subject to adverse possession. CHAIRMAN HALFORD said he didn't know of any western state that has eliminated adverse possession. There are differences in the number of years it requires. He thought it was legitimate for people who own land to be able to get people off the land they own, but the adverse possession rule came from one of the basic tenets of ownership which is control. MR. HARRIS said he was right that Alaska would be the first state to take this kind of action. CHAIRMAN HALFORD said he was interested in looking at ways to make this work, but the laundry list on page 2 was so complete that he couldn't think of a single thing to add to it to make sure it didn't happen. MR. CHARLES MCKEE said he wished they would have noted that this is common law they are discussing and opposed SB 286. CHAIRMAN HALFORD noted that although this is based on common law, there are two Alaska statutes that deal with adverse possession. He said he would talk to the sponsor to see if there was something that could help with regard to enforcement actions that would be a little bit less extensive than the list on page 2. SB 256 - REDUCE ROYALTY ON COOK INLET OIL & GAS CHAIRMAN HALFORD announced SB 256 to be up for consideration. Number 440 SENATOR PEARCE, sponsor, said it offers a royalty holiday specific to Cook Inlet to help make sure that the oil and gas industry remains strong and is a response to concerns put forward by our largest gas distributer, Instar, about long term supplies of gas. Her bill doesn't deal with exploration; it deals with production of fields that have already been discovered, but haven't been brought on line for various reasons. The Kenai Field, the area's largest and oldest producing gas field, is more than 88 percent depleted. This could lead to gas shortages which would lead to rapid price increases for residential and commercial consumers. This would threaten the viability of Unocal's fertilizer plant and the Phillips/Marathon LNG export facilities at Nikiski, both of which provide substantial employment opportunities and vital revenues for South central Alaska communities. She also stated that the bill applies to oil as well as gas. Oil and gas produced from undeveloped or shut-in fields brought into production before January 1, 2004 would pay a reduced royalty of five percent instead of the 12 + specified in the lease for a period of 10 years following the date on which production began. SB 256 isn't intended as a one way street. In order to qualify for a reduced royalty, the lessees have to act immediately to delineate the fields and bring them into production by 2003 - a fairly fast track in the oil and gas industry. A preliminary review shows eligible fields will include Falls Creek (gas), Nicolai Creek (gas), North Fork (gas), Redoubt Shoal (oil), Starichkof (oil), and West Forelands (gas). The goals of the bill are simple - to develop new sources of natural gas and oil to offset declining production in the Inlet. This will mean more jobs for Anchorage and Kenai Peninsula area residents. Having production in the near future rather than the far out future will help keep productions at a level that will insure that the industry stays on track and will continue to support the commercial entities that have built up around the industry. In the fiscal note, the Department says that they can't estimate the numbers, but they have an analysis. One of the points they have is why can't these fields just apply for a royalty reduction under HB 207. She said it wasn't their intent, but they may have built HB 207 in a way that it didn't really work. It set out an opportunity for closed door negotiations between any administration and any company and could have led to decisions on whatever happened to be politically correct or in vogue at the time. SB 256 leads to no closed door negotiations. It's very clear. If you are eligible under some very specific rules, you get a straight royalty holiday of a certain amount for a certain period of time. She noted that there was no relief for the Badami Field. One of the problems with HB 207 is that until you can drill more delineation wells, you can't give the Department enough information to give you the HB 207 relief. SENATOR PEARCE noted that the top of page 2 in the letter from Mr. Boyd, the Department brings up a particular point about a Redoubt Unit agreement with Forcenergy. The Department says that at no time during negotiations with Forcenergy was the issue of royalty reduction raised. She understands that Forcenergy did raise the question with Patrick Coughlin of the Division of Oil and Gas and there is record of that. Number 530 SENATOR SHARP commented isn't it true that five percent of something is better than 0 percent of nothing. SENATOR PEARCE responded that this is a case where we know there are fields, they haven't been brought on line, and they are small. If some people are uncomfortable in not seeing an upside, you could cap the size and number of barrels you want to give a royalty holiday to. She said we are not betting on exploration; we are talking about accumulations we know about, but aren't economic at present. CHAIRMAN HALFORD said sometimes production has more to do with what the market can absorb at that time than it does with the economic viability of a particular source of whatever that product is. He asked if that was a factor. SENATOR PEARCE answered that there was no real way to know that. Waiting for the market is great, but in this particular case, we're waiting for the market and while we wait, we may see South central energy prices go up dramatically. She wanted to act before that happens. She didn't know if there was an answer to his question and noted that the answer might be different for gas and oil. SENATOR TORGERSON asked if this royalty relief goes deeper than what is in HB 207. SENATOR PEARCE said she didn't remember exactly. It wasn't in the same terms. There were three categories: exploration, already producing fields, and shut-ins. She is not sure if a field that was there, but had never been produced fit in anywhere. SB 256 is more definitive. She intends to ask the Department to figure the relief based on all six fields coming in. SENATOR TORGERSON asked what happened to Unocal's request. MR. KEN BOYD, Director, Division of Oil and Gas, said he is not prepared to take a position on the bill. It doesn't have a provision to account for change in economic conditions and he disagreed with her opinion on HB 207 with Unocal. They worked hard and long with them and amicably, but HB 207 sets a pretty high hurdle. If Unocal gave up, they never told him. He said it isn't clear to him which fields would qualify for the royalty reduction. The six listed probably would. Others could be included, but that might need further definition of what undeveloped is. In the recent announcement by Phillips at the North Cook Inlet, it's arguable how a holiday reduction would work since there are shut-in wells in that field. It might also apply to the Pioneer Unit (Unocal). SENATOR TORGERSON asked if he had given any royalty relief under HB 207. MR. BOYD answered no and the only application they have received is from Unocal which sits in limbo at Unocal. TAPE 98-12, SIDE B SENATOR TORGERSON asked if HB 207 was all smoke and mirrors for Badami. MR. BOYD replied that he had no comment on that. The bill was debated a long time in the legislature. If you meet the requirements of the bill, relief can be granted. SENATOR TORGERSON said he would like to call Unocal and get the other side of the story. MR. BOYD responded that he was sitting right across from someone at Unocal now. SENATOR PEARCE clarified that the six fields she is talking about came from Mr. Richard Kornbrath, DNR, who did an analysis of historical oil and gas lease sale and exploration data for Alaska in 1995. They are the six fields the Department, itself, called undeveloped. There are other abbreviations including producing, abandoned, shut-in, and discovered prior to competitive leasing. She took the undeveloped list and the ones that fit into the time- frame. MR. BOYD responded that the words in that pamphlet are not a matter of law; it's a matter of common usage. It's merely descriptive terminology. SENATOR PEARCE said she didn't mind putting definitions in the bill. CHAIRMAN HALFORD asked Mr. Boyd to carry the fiscal note out to some other conclusion than the example of one project. MR. GARY CARLSON, Vice President, Forcenergy, said they were new to Alaska about 15 months ago. They came to look for opportunities to develop assets that might have been left behind by larger companies. They are very active and are a major lease holder in the State now. They have made some acquisitions and committed $180 million and are real investors in Alaska. All that $180 million is in Cook Inlet. They have 22 employees here; 18 were residents when they came to work for them; three of them had lived here before and one they recruited out-of-State. They are going to grow their company in Alaska. They have made liberal use of local contractors and consultants. He supported SB 256 saying he has seen these types of incentives work well in other places in the world. It attracts capital investment in a timely fashion. He thought we have less than five years to make investments to take advantage of an opportunity to develop fields that might have been left behind by the majors. There will be activity soon, at least for them, if this bill goes through. SB 256 will clarify the gas supply concerns. Any additional infrastructure that is developed as a result of trying to develop these shut-in fields will support other fields. Number 498 SENATOR TORGERSON asked if he would oppose some identification of how big a field could go up to before the royalty relief would end. MR. CARLSON answered setting a cap on the volume of barrels or billion cubic feet (bcf) of gas would still fit the spirit of the bill. Redoubt Shoal, for instance, would take a certain number of barrels to make an attractive return - even with the royalty holiday. If the volume was selected thoughtfully, it would work and the State would benefit, if it is a huge field. SENATOR TORGERSON asked what the volume would be or was he suggesting a by well figure. MR. CARLSON answered from a planning standpoint the total volume would probably be a good cap. At current prices that would be between 40 million and 50 million barrels, even the royalty, to have an attractive investment. He was sure they could come to a comparable volume of bcf of gas. CHAIRMAN HALFORD said it seems the capacity for State support of a field has peaked; and on the trailing end, Forcenergy would get the royalty relief to avoid shutting it in later. MR. CARLSON said obviously you would want to keep the fields on as long as possible. CHAIRMAN HALFORD asked if there were any other costs to them and income to the State, other than royalty, that is more profit sensitive. Royalty is essentially a gross fee on amount. MR. CARLSON said he would have to think about that a little bit, but when you look at the burdens you put on a project, royalty comes off the top. As a matter of course, he's encouraged Forcenergy to make an up-front investment to buy out overriding royalties, because the ongoing burden is what takes you out of business when the oil prices are tough. Another area that would apply similar to that would be any burdens they would have in moving oil around, like tariffs, which is an issue in Cook Inlet where they pay a couple dollars per barrel just to move it from one part of the pipeline system to another, then put it on a boat to move it across the Inlet, which is another dollar. CHAIRMAN HALFORD said he was surprised he didn't mention income tax. MR. CARLSON responded that they hadn't reached that point, yet. Number 400 MR. KEVIN TABLER, Unocal, supported legislation which he said creates incentives for the exploration and development of the State's natural resources. Cook Inlet is Unocal's primary area of focus and they are encouraged that responsible incentives are being discussed which will increase activity and possibly increase the development of several known shut-in fields, some of which were discovered over 30 years ago. Today's declining Cook Inlet reserve base has created a need for discovery of new reserves and the development of known accumulations. This will require expansion and utilization of the existing infrastructure in taking advantage of economies of scale. The time is right to access the existing accumulations, but access alone will not make these reserves economically viable. The Cook Inlet, with its mature and declining fields low margin property, high operating costs and regulatory uncertainty, creates a challenging environment in which to stay profitable. Unocal's investments are continually threatened by global competition for investment dollars. Product price plays a key role in field development, but in undeveloped or shut-in fields which are marginally economic, product prices and other uncontrollable conditions limit development opportunities unless adequately offset by some other factor. A clear, certain and easily administered way to reduce start-up costs of undeveloped fields and improve their overall economic viability is to reduce the royalty burden. This factor, alone, is controllable, creates certainty, and reduces risk. SENATOR TORGERSON asked him to update their application for HB 207. MR. TABLER answered that although he was not directly involved in the negotiation of it, he is familiar with what took place. They concluded that the amount of relief they would have qualified for was not worth the time and effort they had spent to date. In fact, it wouldn't even pay for the cost of going through the technical analysis that was required. He said they hadn't pulled their application, but they just haven't pursued it. He said that language in HB 207 for marginal fields was subjective and requires negotiation and the determination of what is in the State's best interest. Prior to HB 207, the Commissioner only had the authority to adjust royalties; HB 207 sought to provide further adjustment for economic relief. It's a difficult position for the Commissioner to be in, because he has a mandate to protect the State's interest. This is in direct conflict at times with the analysis that the company goes through in making an investment decision. They concluded that as long as there was a positive net present value on any of the projects they proposed, the State was not inclined to grant royalty relief. There are very few companies engaged in fully designing and analyzing money losing ventures. As a result, royalty relief is likely to be granted to those companies that have spent considerable resources on unattractive projects to show the clear and convincing evidence. MR. JOHN MIESSE, Marathon Oil, supported SB 256 and said in the long term it would have positive economic impact on the State of Alaska and local communities. However, he thought it would have a more immediate impact on undeveloped or shut-in oil fields because of the readily available market for this product. The ultimate incentive for adding reserve capacity is the availability of ready and stable markets. Such a market is available for new oil reserves in the Cook Inlet area, but the same cannot be said for natural gas. New markets for uncommitted natural gas reserves are not available for the next several years making it difficult to economically justify near-term drilling expenditures. Although this bill provides some economic benefit to the industry, it won't be enough by itself to stimulate significant activity for natural gas development in the near future. It's his understanding that the intent of this legislation is to provide the temporary relief to fields that have been undeveloped and shut-in and they would like to know their definition of undeveloped. Specifically, they would like to know if a field that has produced periodically over the last two years, but requires additional drilling to fully develop the field, would be eligible. Also, they would like to clarify whether royalty relief would apply to reentry of an existing well or a new well needed to recover undeveloped reserves. MR. MIESSE said that many of the oil and gas producing states enacted similar incentives for oil and gas development in the early 1990s. These states have found the programs to be beneficial to all stake holders involved and have maintained those programs. CHAIRMAN HALFORD thanked everyone for their comments and said they would bring this bill up again. He adjourned the meeting at 5:00 p.m.