Legislature(2003 - 2004)
05/19/2003 10:35 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
May 19, 2003
10:35 p.m.
MEMBERS PRESENTG
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Ralph Seekins
MEMBERS ABSENT
Senator Kim Elton
Senator Georgianna Lincoln
COMMITTEE CALENDAR
HOUSE BILL NO. 283
"An Act relating to limitations on coal leases."
MOVED HB 283 OUT OF COMMITTEE
CS FOR HOUSE BILL NO. 24(JUD)
"An Act relating to intergovernmental agreements with the
federal government regarding management of fish or game in the
state."
MOVED CSHB 24(JUD) OUT OF COMMITTEE
CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28(FIN)
"An Act relating to adjustments to royalty reserved to the state
to encourage otherwise uneconomic production of oil and gas; and
providing for an effective date."
MOVED CS SSHB 28(FIN) OUT OF COMMITTEE
PREVIOUS ACTION
HB 283 - See Resources minutes dated 5/16/03 and 5/18/03.
HB 24 - See State Affairs minutes dated 5/17/03 and Resources
minutes dated 5/18/03.
HB 28 - No previous action to record.
WITNESS REGISTER
Representative Bruce Weyhrauch
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HB 24
Mr. Steve White
Assistant Attorney General
Department of Law
PO Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Told members HB 24 will not affect existing
agreements
Mr. Ron Somerville
Advisor to the House & Senate Majority
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Answered questions about HB 24
Representative Norm Rokeberg
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Co-sponsor of HB 28
Representative Vic Kohring
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Co-sponsor of HB 28
Mr. Ken Boyd
Alaska Oil and Gas Association (AOGA)
121 West Fireweed Lane
Anchorage, Alaska 99503
POSITION STATEMENT: Supports CS SSHB 28(FIN)
Mr. Kevin Banks
Division of Oil and Gas
Department of Natural Resources
550 W. 7th Ave. Ste 800
Anchorage AK 99501-3560
POSITION STATEMENT: Answered questions about CS SSHB 28(FIN)
Mr. Mark Myers, Director
Division of Oil and Gas
Department of Natural Resources
550 W. 7th Ave. Ste 800
Anchorage AK 99501-3560
POSITION STATEMENT: Answered questions about CS SSHB 28(FIN)
Mr. Kevin Tabler
Manager, Land and Govt. Affairs
Union Oil Company of California (Unocal)
909 W. 9th Ave
Anchorage, Alaska 99501
POSITION STATEMENT: Supports CS SSHB 28(FIN)
ACTION NARRATIVE
TAPE 03-49, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 10:35 a.m. Senators Wagoner, Stevens, Dyson
and Chair Ogan were present. The committee took up HB 283.
HB 283-ACREAGE FOR COAL LEASES
CHAIR OGAN informed members that at the last hearing on this
legislation, he was concerned about coal leases overlaying
traditional oil and gas leases because coal is available in
areas that are also available for areawide leasing for oil and
gas in the Tyonek Basin. He noted the language on page 1, line
11, reads, "The coal deposits in the land covered by the
application shall be temporarily set aside" therefore the coal
leases will not affect deep hole oil and gas leases. He said he
discussed the matter with Division of Oil and Gas staff and
learned that a company with a coal lease can exploit the shallow
gas for either production or safety reasons. He said his
concerns have been addressed.
SENATOR WAGONER moved HB 283 from committee with individual
recommendations and its attached zero fiscal note.
CHAIR OGAN announced that all members were present except
Senators Lincoln and Elton. He then announced that without
objection, HB 283 moved from committee.
CHAIR OGAN announced an at-ease. Upon reconvening, the committee
took up HB 24.
CSHB 24(JUD)-AGREEMENTS ON MANAGEMENT OF FISH AND GAME
REPRESENTATIVE BRUCE WEYHRAUCH, sponsor of HB 24, told members
HB 24 follows on the heels of legislation introduced by Chair
Ogan that said the state will in no way cooperate or spend funds
on the Glacier Bay lawsuit. He explained that in the early
1980s, in the Alaska Wildlife Alliance versus Jensen case, the
District Court of Alaska and the Ninth Circuit Court indicated
that ANILCA did not prohibit commercial fishing in Glacier Bay
but that the National Park Service could prohibit it by
regulation. Thereafter, the National Park Service began a
process of promulgating regulations to prohibit and restrict
commercial fishing in Glacier Bay National Park. Senator Ted
Stevens then introduced legislation, which Congress adopted,
that said commercial fishing should be closed in certain areas
of the park and restricted to those who have a lifetime access
permit for the tanner, halibut and salmon troll fisheries. That
is the status of fishing in Glacier Bay now. Congress also
established a compensation program related to those closures and
restrictions. Senator Frank Murkowski then introduced
legislation, S 501, which Congress adopted, that said the State
of Alaska and the National Park Service shall enter into co-
management agreements on the management of commercial fisheries
in the outside waters of Glacier Bay National Park.
REPRESENTATIVE WEYHRAUCH told members HB 24 was originally
introduced to prohibit the State of Alaska from entering into
any co-management agreement with the federal government or a
sovereign entity. If it did enter into those agreements, the
legislature would have to review the agreements. During the
hearings in the House, it became apparent that certain co-
management agreements between the federal and state governments
benefit the State of Alaska, such as the management of bowhead
whales or waterfowl, so the House did not want to prohibit or
require legislative review of all co-management agreements. CSHB
24(JUD) now says the State of Alaska may not enter into an
agreement that cedes jurisdiction to the federal government. He
stated:
You do not want to have any state...public servant or
bureaucrat, having a co-management agreement with the
federal government that cedes jurisdiction by
contract, which we can't do by Constitution or
statute. And, tactically, the reason you want to do
that is because eventually if the federal government
says we have management jurisdiction over this
resource, and you agreed to that in a contract, then
that may undermine any argument that says no, federal
government, you don't have management jurisdiction
over our resources - the State of Alaska does. So, by
passing this statute, tactically, you can say if there
were a co-management agreement and it ceded
jurisdiction of management over a fishery, it would
have been void as against public policy of the State
of Alaska. And I think that's, sort of as a tactical
reason, why this was introduced, to prohibit by
contract what we can't do by statute or regulation,
the secession of our management and jurisdiction of
our resources to the federal government.
CHAIR OGAN said he toured the Situk River in Yakutat a few years
ago, an area with some conflicts. A federal permit is required
to float a state river. He said he got an earful from the locals
in the area and had to hold his tongue while the federal
officials were checking everyone's permits. He asked if this
legislation will deal with that problem.
REPRESENTATIVE WEYHRAUCH said it would if the State of Alaska
and the National Park Service said the federal government has
jurisdiction to manage the [riverbed] on behalf of the state or
if [the state] cedes jurisdiction of fish and game management on
that river. It is narrow on those issues. It arguably could
address the co-management agreement between the National Park
Service and the state if the state, by management agreement or a
memorandum of understanding, says it will give the federal
government the authority to do so, whether or not that is
allowable under the Alaska Constitution. He said the legislation
is intended to make any admission by the state void if the
federal government intends to use it against the state later in
court.
CHAIR OGAN asked a representative of the Department of Law to
comment on the legislation and describe its application "in the
field."
MR. STEVE WHITE, Assistant Attorney General, Department of Law
(DOL), told members he talked to staff at the Alaska Department
of Fish and Game (ADF&G) who could not identify any agreements
this legislation would apply to at this time. HB 24 would be
preventive for future agreements. He said as Representative
Weyhrauch said, the intent is not to interfere with the state's
interaction with the federal government on cooperative
management that does not give away the state's authority in any
manner. For example, the state cooperates with the federal
government to implement fishery management plans under the North
Pacific Fisheries Management Council and it shares research
information for subsistence management on federal lands. The
state and federal governments also have agreements involving
migratory waterfowl. In those situations, the state cooperates
with the federal government, which was given the authority by
Congress through the Supremacy Clause, to regulate in those
areas. The state assists to make sure its interests are
involved.
MR. WHITE said if ADF&G attempted to give away the state's
management authority, the contract would be subject to being
voided by the courts because it would be outside of the state's
authority to do so.
CHAIR OGAN said he begs to differ that no existing agreements
have given away authority. He said a recent ruling by the
federal subsistence board for subsistence fishing for rainbow
trout in western Alaska is egregious, according to some
biologists. He also referred to the 20 halibut per day
subsistence catch established by the federal subsistence board.
He said he is concerned that while the state might not
technically be ceding its authority, the federal subsistence
board does not have a mandate to manage for sustained yield.
Therefore, the state is allowing the federal government to
manage its resources in state waters and submerged lands by
doing nothing, which is ceding by default.
SENATOR SEEKINS asked if the state has cooperative agreements
with the federal government for the management of fish for any
purpose within the navigable streams or within three miles of
the coastline of the state at this time.
MR. WHITE said he is personally not aware of any. He noted that
Mr. Williams of ADF&G was shaking his head "no."
SENATOR SEEKINS asked, if the federal government claims it has
management authority over fish for subsistence uses in the Yukon
River, whether ADF&G recognizes that claim and enters into a co-
management agreement.
MR. WHITE said the situation on subsistence is very difficult
because the federal government has management authority over
some navigable waters but not all.
SENATOR SEEKINS said in the Totemoff case, the Alaska Supreme
Court said that is not true.
MR. WHITE agreed.
SENATOR SEEKINS asked if Mr. White is saying the Totemoff case
is tolled so that the state can have these agreements.
MR. WHITE replied, "No. The Ninth Circuit ruled contrary to the
state supreme court on the Totemoff case."
SENATOR SEEKINS disagreed. He said the Totemoff case was never
brought to the Ninth Circuit Court. The Alaska Supreme Court
said, in the Totemoff case, that the State of Alaska did not
have to recognize the federal claims.
CHAIR OGAN clarified the decision said that is the situation
unless the case goes to the U.S. Supreme Court.
SENATOR SEEKINS again asked if the state is now involved in any
co-management agreements in violation of the Totemoff decision
made by the Alaska Supreme Court.
MR. WHITE said he does not believe the state has any agreements
along those lines. ADF&G is closely watching the federal
government's exertion over subsistence management and, if the
federal government goes beyond what ANILCA allows, the state
would challenge.
SENATOR SEEKINS said that is his concern. He again asked if the
state is complying, via contract, or spending any money to
assist the federal government to exert management authority over
fish on the state's submerged lands.
MR. WHITE said he does not believe the state has any formal
agreements. He said the state shares research and comments on
proposals, such as the subsistence halibut fishery. He said
ADF&G objected to a recent proposal before the federal
subsistence board to allow for customary trade. He told members
to the extent the federal subsistence board is taking action,
ADF&G is commenting to protect the state's interests but it has
not entered into any agreements to assist the federal board.
CHAIR OGAN stated, "I'd like to add a comment. I can't resist
taking the bait. You said they were just watching it and the
department just sat back and watched while the feds undermine
the sovereign rights of our state to manage our resources and
the Governor rolled over - the last Governor rolled over and, in
my opinion, violated his oath in the process...."
SENATOR SEEKINS said he was just curious whether any existing
contracts would violate HB 24, if it is enacted.
MR. WHITE again said no existing contracts would.
SENATOR WAGONER asked Representative Weyhrauch whether the
lifetime permits in Glacier Bay include the halibut fishery and
whether they are transferable or restricted to the current
owners. He questioned whether [Congress] made a withdrawal so
that the state will never again be able to go into Glacier Bay
and harvest its resources.
REPRESENTATIVE WEYHRAUCH said the congressional action means
that no more commercial fishing operations will take place in
Glacier Bay. Sport fishing, charter fishing, cruise ships,
kayaking and hiking, among other activities, will be allowed in
Glacier Bay.
SENATOR BEN STEVENS said he believes the permit holders were
compensated as well.
REPRESENTATIVE WEYHRAUCH told members that $23 million was
awarded to people who made claims for compensation under the
portion of the congressional act that closed and restricted
commercial fishing in Glacier Bay. Those commercial fishermen
who received lifetime access permits may or may not have
received compensation; they could have applied. Some lifetime
access permit holders applied but were denied either initially
or because they initially obtained money but were then reversed
to zero on appeal because the National Park Service tinkered
with the numbers for the compensation program.
SENATOR BEN STEVENS stated, "If the federal government had a
clause like this in their law, the FMPs [Fisheries Management
Plans] and North Pacific and civil co-management agreements that
we manage for the feds now would not be able to exist."
REPRESENTATIVE WEYHRAUCH said outside of the three-mile
boundaries, those could still exist, particularly for the crab
FMP in the Bering Sea. The State of Alaska and federal
government could still enter into those co-management agreements
because that is a federally managed resource. The intent of HB
24 is to address state waters and to say if a co-management
agreement cedes management or jurisdiction unauthorized by
statute or the Alaska Constitution, an agreement could not be
made by contract.
SENATOR BEN STEVENS said if the table was turned and the federal
government could not cede management authority to the state, the
state could not enter into a management agreement with the
federal government.
REPRESENTATIVE WEYHRAUCH said the state could enter into an
agreement with the federal government if the State of Alaska had
a claim over the management and jurisdiction by constitutional
right. That jurisdiction would exist no matter what the
management agreement said. The jurisdiction and management,
whether federal or state, still exist. If the state has a claim
on the management and jurisdiction over those fishing rights
under law, it could not give those away by contract.
SENATOR BEN STEVENS asked if the state could not give away
management by contract.
REPRESENTATIVE WEYHRAUCH replied:
It can't give it away - it can't say we give you the
right to have management and jurisdiction of our
resources by contract because if that was prohibited
by Constitution or statute, the state couldn't give it
away by contract. The state couldn't cede that
jurisdiction by contract what it can't cede now by law
or Constitution. So, by entering into a co-management
agreement, or - if you want to call it a co-management
agreement - an agreement with the federal government
of federal fisheries, the state isn't ceding any
jurisdiction over those fishery resources because the
state by Constitution doesn't have jurisdiction over
those resources. It's a federal resource.
SENATOR BEN STEVENS said he was suggesting a role reversal so
the federal government could not cede its authority to manage to
the state. The state manages federal resources, in certain
instances, but the state would not be able to cede to them.
REPRESENTATIVE WEYHRAUCH said the state could allow the federal
government to manage the resource in the state. CSHB 24(JUD)
would prohibit any assertion that the state has given up its
management and jurisdiction over those resources by contract. If
the state has a dispute with the federal government over who has
the right, the federal government could not claim it in court
via the contract. The contract cannot override the state's
plenary ability to manage and have jurisdiction over the
resources and nothing by contract diminishes the legal argument.
SENATOR SEEKINS said he believes Representative Weyhrauch's
argument parallels a decision in an early 1990s case named New
York State versus United States of America. That decision
basically said a sovereign cannot realign the boundary between
these sovereigns by agreement. It would have to be done by
constitutional amendment.
REPRESENTATIVE WEYHRAUCH added, "Or to say that we have the
legal authority to do that - nothing diminishes that."
SENATOR SEEKINS agreed and said CSHB 24(JUD) is a restatement of
that decision. He said he likes that approach because it is also
consistent with the Dinkum Sands case. He asked if the State of
Alaska is involved in a [U.S.] Supreme Court case right now on
the ownership of the submerged lands in Glacier Bay.
REPRESENTATIVE WEYHRAUCH said that case is Alaska versus United
States, which is a quiet title action filed in the U.S. Supreme
Court.
SENATOR SEEKINS asked if CSHB 24(JUD) merely says that no
agreement the state enters into affects its sovereign control.
REPRESENTATIVE WEYHRAUCH said that is correct. He noted that Mr.
Somerville has provided him with several examples of how it
works with the federal fisheries.
SENATOR SEEKINS maintained that CSHB 24(JUD) will not prevent
the state from entering into a contract with the federal
government. It just allows the federal government to manage if
it has the manpower and will but it retains ownership by the
state.
CHAIR OGAN said his concern in the past has been that the state
has been terribly inconsistent with assertion of sovereignty on
navigable waters. He commented:
We're saying on one hand we want to assert sovereignty
in Glacier Bay because we all agree on that one. But,
losing by default by not appealing to the Supreme
Court, we gave up sovereignty of the rest of the
submerged lands - it's a pretty schizophrenic state
position and set a terrible precedent and it's
probably one of the reasons we're here now.
SENATOR BEN STEVENS pointed out that the reference to AS
16.20.010, on page 2, line 5, relates to legislative recognition
of a state game refuge. [Section 1] says the state has
jurisdiction over all fish and game in the state except in those
areas where it has assented to federal control but the state has
not assented to control of fish and game in Glacier Bay National
Park.
REPRESENTATIVE WEYHRAUCH asked that Mr. Somerville address some
of the federal issues that Senator Stevens raised.
MR. RON SOMERVILLE, advisor on natural resource issues to the
House and Senate Majorities, told members that the state has
concurrent jurisdiction but it can adopt regulations within the
regulations adopted by the federal agencies related to marine
mammals, waterfowl, and halibut. In other cases, such as federal
jurisdiction beyond the state's waters, the federal agencies
delegate authority to manage those areas; they do not cede that
authority to the state. The federal government allows the state
to manage halibut under the treaty, but it has not ceded
authority to the state.
CHAIR OGAN remarked, "In other words, we roll over but not
without kicking a little bit."
MR. SOMERVILLE said that is one way of putting it but, in some
cases, such as with marine mammals, the state is preempted so
anything it gets at the preemption process the federal
government can delegate back to the state.
SENATOR SEEKINS asked if the supremacy clause overrides the
state in the management of fish and game in state waters.
REPRESENTATIVE WEYHRAUCH said the State of Alaska came into the
Union with the promise that it would be on an equal footing with
other states. That was affirmed in a Utah lands case before the
U.S. Supreme Court. The state was in a constant battle with the
federal government to assert that it should be on equal footing
with the other states and colonies and that Alaska should have
control and management over its submerged lands and waters at
statehood. That has been a defining moment in the state's
history and the dispute will continue of who should control,
own, manage and have use of lands in the state. He said he
cannot answer Senator Seekins' question but he is very concerned
about the issue. He repeated that the intent of the legislation
is to make it clear that no agent of the state, who is not an
elected official, or through constitutional and statutory
amendment, is allowed to diminish our ability to claim
management and jurisdiction of our resources.
CHAIR OGAN commented that the state not only gained control of
submerged lands [at statehood] but it also gained title to those
submerged lands. The equal footing provision was specifically
included in the Statehood Act: the quitclaim of title to
submerged lands and with it the right to control not only the
lands but the water columns and fish and game in it.
REPRESENTATIVE WEYHRAUCH clarified that title case is before the
U.S. Supreme Court's master at this time.
CHAIR OGAN stated, "But the goofy ruling of the Ninth Circuit
saying the reserved water rights doctrine - because this
molecule of water ran across federal lands somehow gets them to
control all of the fishing downstream, is what the last Governor
dropped the ball on."
SENATOR SEEKINS asked if the Statehood Act provided that the
State of Alaska was the beneficiary of the 1953 Submerged Lands
Act in equal footing with all other states.
REPRESENTATIVE WEYHRAUCH said he could not answer that question.
SENATOR SEEKINS said it is his understanding that it did.
SENATOR BEN STEVENS asked why AS 16.20.010 is referenced on page
2 since it has no definition of management.
SENATOR SEEKINS pointed out the words, "added by Sec. 1 of this
Act." follow.
SENATOR BEN STEVENS said his point is that the language [in
Section 1] is restricted to AS 16.20.010, which pertains only to
Glacier Bay.
REPRESENTATIVE WEYHRAUCH said he continually queried George
Utermohle, who drafted the legislation, about Sec. 2. Mr.
Utermohle said Sec. 2 was necessary as a transitory provision
for existing agreements and was "phase-out" language to put the
agencies on notice. He said the "meat" of the legislation is
Sec.1, which addresses management.
SENATOR BEN STEVENS said the way he reads the bill, subsection
(c) only applies to AS 16.20.010.
REPRESENTATIVE WEYHRAUCH said that is correct.
SENATOR BEN STEVENS said then all of the talk about other fish
and game on state lands does not apply because AS 16.20.010
applies only to Glacier Bay National Park, bird and national
wildlife refuges or navigable waters within or adjoining the
park and preserve.
REPRESENTATIVE WEYHRAUCH replied:
...what happened in this committee is exactly the
dynamic that happened in House Judiciary, where people
wanted to make it very broad and the discussion got
very broad and philosophical and you bring in every
agency and every agreement. But the intent of this
bill was to deal with the co-management agreements in
Glacier Bay National Park and S 501 by Senator Frank
Murkowski, which required co-management agreements
between the state and federal government.
MR. SOMERVILLE said Senator Stevens is correct in that the
sponsor's intent was to cover Glacier Bay and the mandatory co-
management agreements. The request of the House committee to
expand it to include all state lands and waters should have been
placed in a separate section.
SENATOR BEN STEVENS said that is what he was trying to clarify.
REPRESENTATIVE WEYHRAUCH told members that the [House]
committees wanted to make the bill apply to every agreement with
every agency. However, that would have made the bill unwieldy
and could have harmed some of the potentially beneficial
ministerial contracts the state has entered into. He said the
focus was on Glacier Bay because of S 501, which mandated co-
management agreements with the state. He believes the Alaska
Department of Fish and Game should never cede management
jurisdiction that might somehow decrease the state's ability to
defend it later in court.
SENATOR DYSON said he appreciates the sponsor's efforts and
believes the legislation is narrowly aimed and well crafted. He
said his last comment characterized the feelings of legislators
in that they would all like to expand the legislation but it is
inappropriate to do so at this time. He then moved CSHB 24(JUD)
out of committee with individual recommendations and its zero
fiscal note.
CHAIR OGAN announced that without objection, the motion carried.
He then announced an at-ease.
CS SSHB 28(FIN)-OIL & GAS ROYALTY MODIFICATION
REPRESENTATIVE NORM ROKEBERG, co-sponsor of HB 28, told members
that HB 28 is a "tune-up" of AS 38.05.180(j). That section of
statute pertains to royalty modifications of marginal fields. In
1995, the new Governor brought forth this legislation as a major
centerpiece of his Administration to try to increase oil
production in Alaska. That bill was crafted in such a way that
it created impossible barriers for it to work. During that nine-
year period, no grants of royalty reduction have been granted by
the state. This bill modifies that statutory section to remove
some of those barriers and it simplifies the language. He
directed members' attention to the language on page 2, beginning
on line 24. That particular language embodies, in one paragraph,
the discretionary ability of the commissioner to grant a royalty
modification under the terms set forward in it. It deletes
language that indicates that if a royalty modification is
granted, the state would have to ultimately recover. The intent
was to increase oil exploration but it required that the state
recover its money even though it was reopening a dry hole by
royalty reductions. He said the provisions of the bill became
almost unintelligible.
TAPE 03-49, SIDE B
REPRESENTATIVE ROKEBERG said HB 28 removes that language and
provides for a sliding scale royalty to be determined by the
commissioner who, under the Constitution, must act in the best
interest of the state. It provides that relevant factors be
taken into consideration, such as a change in the price of oil
and gas, in production rates, production ultimate recovery,
development costs and operating costs. Therefore, if the price
of oil increases, the state's share will increase on a sliding
scale basis. It contains other provisions that remove some of
the oversight. He said the Administration supports the
legislation.
CHAIR OGAN said he instantly recognized this legislation from
his participation on the House Oil and Gas Committee years ago.
He asked if there has been any use of the statute.
REPRESENTATIVE ROKEBERG said there was one application from
Unocal that did not go through. Although the public believes the
legislature gave big incentives to the oil industry, the North
Star modification was the only thing that occurred. He pointed
out that other specific royalty bills targeted certain fields,
particularly in the Cook Inlet area, that had to be enacted
because the statute did not work.
11:30 a.m.
REPRESENTATIVE VIC KOHRING, co-sponsor of HB 28, told members
the sliding scale would likely be between 3 and 12.5 percent.
The general royalty rate has been 12.5 percent. The commissioner
is granted discretion to determine the rate. The commissioner
can make that decision based on an in-house evaluation, or
through an independent contractor. The evaluation will consider
operating costs, field recovery, production rate and volume.
REPRESENTATIVE ROKEBERG commented that the fiscal note indicates
program receipts at $150,000. He stated:
I caution you - it's just program receipts because of
the requirement of a maximum ceiling on any applicant
where they can hire a third party consultant.
Actually, I think the fiscal note's not correct. It
should be a zero fiscal note. Only if there's an
application would there be any program receipts
generated. So I just wanted to point that out. This
bill is not going to cost the state anything - only in
foregone royalties that we wouldn't perhaps get
otherwise if they're bringing a shut-in well back on
production.
MR. KEN BOYD, an oil and gas consultant, said he was testifying
on behalf of the Alaska Oil and Gas Association (AOGA). He
stated support for CS SSHB 28(FIN) and said he participated with
Representative Rokeberg and Senator Ogan and a cast of hundreds
seven or eight years ago who worked on the existing law. He said
the current royalty reduction statute is awkwardly worded and
very difficult to implement.
SENATOR SEEKINS asked if a model already exists for the sliding
scale or whether this bill will give the commissioner the
discretion to set a sliding scale for each particular field.
REPRESENTATIVE KOHRING said it is his understanding this bill
gives the commissioner that discretion. He deferred to Mr. Myers
for an answer about an existing model.
SENATOR SEEKINS asked if a cap exists for the state's overall
agreement with an oil company or whether there is a seller
price.
MR. KEVIN BANKS, Division of Oil and Gas, Department of Natural
Resources (DNR) said, regarding whether a model exists, DNR uses
fairly standard discount cash-flow models. DNR would more than
likely tailor a sliding scale royalty provision to the specifics
of each applicant. He said he can't say the bill contains a cap.
DNR could conceivably trade a 12.5 percent royalty for a royalty
modification that would allow for some sliding scale that could
exceed, in rare instances, the 12.5 percent rate. However, that
would depend upon the kind of project and the unknowns at the
time of application.
SENATOR SEEKINS asked if the oil companies will pay more during
the "boon" years.
CHAIR OGAN said as memory serves him, he believes there was an
upside in the original legislation.
MR. BANKS said the original HB 207 contained some complicated
language that directed the commissioner to develop a system that
would pick up on the upside. Unfortunately, it was written so
that it removed any projected royalty modification benefits to
the applicant. In CS SSHB 28(FIN), the commissioner can
negotiate an upside but is not required to do so. He said he can
think of cases where a sliding scale between 3 and 12.5 percent
would provide sufficient incentive to get production on line.
The state's reward for giving up some of its royalty on the
front end would be to get more production out of the prospect.
CHAIR OGAN said subsection (3) on line 24, page 2, seems to be
the key to the legislation. It says "sliding scale royalty or
other mechanism" so it provides broad latitude. He added that it
provides for an increase or decrease and asked if it gives that
discretion to the commissioner.
MR. BANKS said that is correct.
SENATOR BEN STEVENS asked if this legislation prevents or allows
the commissioner to make rate adjustments to specific platforms
[in Cook Inlet] without coming to the legislature for
legislation.
REPRESENTATIVE KOHRING said the answer is yes but this
legislation does not apply to platforms. He noted that SB 185
pertains to platform royalty reduction and differs from this
legislation. He explained that the intent of CS SSHB 28(JUD) is
to encourage the industry to develop three types of fields
because they are not profitable: new fields, existing fields, or
mothballed fields.
SENATOR BEN STEVENS said if this legislation is not enacted,
separate pieces of legislation would be brought forward, such as
SB 185, asking for royalty rate reductions for specific fields.
He said instead, CS SSHB 28(JUD) defers all legislative
authority for rate reductions to the commissioner.
REPRESENTATIVE KOHRING said that is correct, for marginal fields
only. He said the legislation is not specific to certain fields;
it applies to any field in the state considered to be
unprofitable. He said the commissioner will determine whether a
field is profitable after doing an analysis of each field.
SENATOR BEN STEVENS asked Mr. Myers to describe what kinds of
fields fall under those three categories.
MR. MARK MYERS, Director of the Division of Oil and Gas, DNR,
told members this bill amends an existing royalty reduction
statute. It does not create a new program; it fixes some
problems in the existing statute. That statute was modified but
the last set of modifications created unintended consequences
that were problematic. CS SSHB 28(JUD) applies in three
situations: to new fields that are not economic where reducing
the state's royalty share would make the field go; to fields in
a later stage of production where operating costs exceed the
value of production; and to fields that have been physically
shut in so there is no production flowing. Reducing the royalty
would change the economics sufficiently to start up production
of the field again. This bill gives broad authority to the
commissioner to set terms to recapture upside.
MR. MYERS said once a field is in development, a few things
might improve its economics - operating costs remain the same
but an increase in oil prices creates a dramatic increase in
profits. Under this bill, rising oil prices can be structured
into the royalty rates. Second, if production itself increases,
which is only likely in a new field, the state needs a mechanism
to capture the upside as more data comes in. This bill allows
for all of the adjustments by giving the commissioner a lot of
flexibility. However, the agreements still require legislative
approval. He said an example of a field that is not yet in
production would be the small field at Umiat; a field that is
producing but is close to shut-in is Badami, which is currently
producing about 1400 barrels per day. He said SB 185, the
platform bill, addresses a unique set of circumstances in Cook
Inlet where some fields are late in life with a 30-year
production history. DNR was comfortable with the data about that
area and did not feel it needed a mechanism to recover the
upside. That legislation contains a customized approach for Cook
Inlet platforms that do not require this same process. The
advantage of that approach is to retain the infrastructure in
Cook Inlet.
SENATOR WAGONER asked how CS SSHB 28(FIN) will apply to
abandoned oil wells.
MR. MYERS said they could fall under all three categories,
because of the term "field or pool." A deeper reservoir of oil
under a shallow gas reservoir could be a separate reservoir.
Depending on whether that gas had been produced before by field
or pool, it could qualify under any of the three categories. He
said the operator would have to justify that the economics did
not support operation without the royalty reduction. He
explained that the process for approving the royalty reductions
would be a little different. The preliminary decision would be
submitted to the legislature during the public comment period,
however the legislature does not vote to approve royalty
reduction under this bill.
SENATOR BEN STEVENS asked if that provision is in Section 8.
MR. MYERS said that is correct.
CHAIR OGAN pointed out there is a $150,000 cap on the amount
that can be paid by the lessees and asked whether that reflects
program receipts. He also asked if that amount is appropriate or
whether it will cost DNR more than $150,000 to administer.
MR. MYERS said that money would come from the applicants so
there should be no additional cost to the state if the program
receipts are authorized. He said that amount was negotiated with
the sponsor and he cannot say whether it is totally adequate. In
the past, all of the royalty reduction requests have been
handled internally. DNR recognizes that a lot of analysis will
have to be done on new fields, where little data is available.
DNR believes $150,000 is an adequate amount.
CHAIR OGAN asked what fields this might apply to. He noted a
bill just passed the Senate that deals with severance tax breaks
for certain wells. He questioned how the two pieces of
legislation dovetail and whether CS SSHB 28(FIN) is targeted
toward heavy oil.
MR. MYERS said it is targeted at any producing field. He said
fields go through various stages. At a field's end stage, the
operator and the state must determine when it becomes
uneconomic. He said royalty reductions are truly effective at
the very tail end of declining production. He expects this
legislation to eventually apply to all fields in the state. He
pointed out in the other cases, DNR will have to look at the
individual economics of each field. He said with heavy oil, as
the technology changes, the economics have vastly improved. DNR
would have to take a serious look at the detailed economics, the
engineering and the reservoir. He indicated the heavy oil
reserves are just being tapped now and are in their initial
stages of production. He pointed out the exploration incentive
is specifically crafted to not include wells within units that
are producing or any units that have a plan of development.
SENATOR DYSON asked if anyone is opposed to CS SSHB 28(FIN).
MR. MYERS said he is not aware of anyone.
REPRESENTATIVE KOHRING said he was not aware of anyone either.
The bill had three committee referrals in the House and he did
not recall any negative testimony.
CHAIR OGAN noted this bill is extensive and he has some angst
about the short timeframe for study. He asked Mr. Myers if he is
aware of any flaws that committee members' may not be aware of.
MR. MYERS said he believes the bill improves the process.
Although compromises are made in every bill, he believes the
compromises are balanced and that the interests of the state are
well protected.
SENATOR WAGONER asked if Swanson River has any royalty
incentives right now.
MR. MYERS said he believes Swanson River is primarily a federal
unit.
SENATOR BEN STEVENS noted that Mr. Myers said that application
is determined on the end of life determination of the field,
which he believes is a trigger to the possibility of a royalty
reduction. He expressed concern that any operator could say a
field is at the end of production life. He asked how DNR would
determine whether a field is at end of life.
MR. MYERS said this bill allows those royalty reductions to
occur at any stage of a field's life but, to determine the true
economics of a field takes a lot of work and is more difficult
the further it is from the end of field because later in the
field life there are more well and seismic data and production
profiles. He said the calculation is very technical, which is
why the fiscal note contains funds for outside experts.
CHAIR OGAN asked why the language on page 2, lines 5-9, is being
deleted. He stated:
I remember we had a lot of discussion with the bill
that originally passed about delineation of the oil
and gas field or pool and, instead of delineating it
to allow the commissioner to conduct an analysis and
make the findings required by the subsection, we're
eliminating - we're just letting them delineate to the
satisfaction of the commissioner and it doesn't say
anything about findings. Why are we doing that?
MR. MYERS said they wanted the delineation to be done on a
technical basis. Representative Rokeberg was concerned about the
level of legislative input and cleaning up the cumbersome nature
of the mechanism. He said the original royalty reduction
required two years of production. There was a push at that time,
primarily by BP, to allow a reduction before production start-
up. BP then asked for the royalty reduction. However, the
reality is that some production is necessary to determine the
economics of the field. The legislature at that time said as
long as the reservoir was delineated, it was willing to grant a
royalty reduction. He said this bill establishes the necessary
level of data and who gets to decide whether a reservoir has
been sufficiently delineated.
CHAIR OGAN said the bill contains no sunset data or requirement
to report to the legislature.
MR. MYERS clarified that the commissioner's preliminary decision
will be presented to the legislature. The House amended the bill
to provide the legislature with access to confidential data.
REPRESENTATIVE VIC KOHRING said regarding the potential
Permanent Fund earnings that this bill will generate, this bill
essentially deals with three fields. Two are not producing
anything at all. One way to look at the economics is that the
state could get 12.5 percent of nothing, or 3 or 7 percent of
something, by virtue of the sliding scale.
CHAIR OGAN asked if there is as much known heavy oil on the
North Slope as has already been discovered.
MR. MYERS said that is correct but the recoverability of that
heavy oil will be much lower, probably 10 to 15 percent.
MR. KEVIN TABLER, Manager of Land and Government Affairs for
Unocal, stated support for CS SSHB 28(FIN). He said it is a
substantial improvement to the 1995 legislation, in that it
provides clarification and predictability for an applicant.
CHAIR OGAN asked Mr. Tabler if Unocal applied for a royalty
reduction but did not complete the process.
MR. TABLER said Unocal pulled out after 18 months and a
significant amount of cost.
CHAIR OGAN commented this bill is extensive, however the policy
decision to allow royalty reduction was already made by the
legislature.
SENATOR WAGONER moved CS SSHB 28(FIN) from committee with
individual recommendations and its attached fiscal note.
CHAIR OGAN announced that without objection, the motion carried.
He then recessed the meeting to the call of the Chair at 12:10
p.m.
On May 20, 2003, at 6:21 p.m., CHAIR OGAN reconvened the meeting
for the purpose of announcing that the committee meeting was
adjourned.
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