HB 330-DNR: DISCLOSURE OF CONFIDENTIAL INFO  2:54:35 PM CO-CHAIR TARR announced that the final order of business would be CS FOR HOUSE BILL NO. 330(JUD), "An Act authorizing the commissioner of natural resources to disclose confidential information during a royalty or net profit share audit or appeal and issue a protective order limiting the persons who have access to the confidential information." 2:55:19 PM TIM BISSON, Audit Section Manager, Central Office, Division of Oil and Gas, Department of Natural Resources, shared a PowerPoint titled "Protective Orders." He stated that he works with a team of nine auditors to audit state royalties, net profit share payments, and federal royalties for the Alaska Department of Revenue. 2:55:38 PM MR. BISSON reviewed slide 3, "Royalty Audit Section," which read as follows [original punctuation provided]: ? The Royalty Audit Section conducts audits of state royalty and net profit payments, as well as Federal royalties received from leases within Alaska. ? Since FY03, the section has conducted 91 audits and collected an additional $270.6 million as a result of audited payments ? The most common audit issues found during a royalty audit include incorrect marine/pipeline deductions, incorrect starting values, and "higher of" calculation MR. BISSON said that the "higher of" calculation was the reason for HB 330. 2:56:11 PM MR. BISSON referred to slide 3, "Computing Royalties," which read as follows [original punctuation provided]: ? Oil and Gas leases determine the royalty rate and the method for calculating royalty payments to the state ? Statutory minimum royalty rate is 12.5% ? All leases define value in relation to the sales of other producers' ? DNR's royalty is the higher of several values under the lease terms, including the lessee's field price, the posted field price and an average value which includes other lessees' field prices. ? Higher of calculations use other producers confidential sales information MR. BISSON stated that in order to arrive at the average of the other producer's field prices, the division uses confidential sales information. 2:57:00 PM MR. BISSON referred to slide 4, "WHY HB 330," which read as follows [original punctuation provided]: ? Royalty Audit Section relies on confidential price information from other producers ? Lease provisions require producers to share price information with the Division ? When an audit is appealed to the Commissioner, access to confidential sales information by the audited producer is necessary to provide the auditee with the higher of audit calculation ? Other producers have refused to voluntarily allow the Division to share confidential price information with the audited producer in connection with audits even when a confidentiality agreement would protect the information and limits its disclosure ? Currently seven royalty audits totaling $39.2 million are pending due to confidentiality concerns 2:57:26 PM MR. BISSON reviewed slide 4, noting that the Royalty Audit Section used confidential price information from producers when it conducted audits. The lease provisions require producers to submit their sales contract invoices and other data to be verified. Once the audit was finished, if it had a "higher up" claim, the audited lessee would naturally ask to examine the supporting audit information, which often contained confidential sales data in the calculation, he said. He indicated he would refer to the audited producer as the "audited lessee" and to the other producers as the "disclosing lessee," since it is the disclosing lessee's information that the division will be disclosing. MR. BISSON described the audit process, such that the division would talk to the disclosing lessee and ask them if the division can disclose the information using a confidentiality agreement to the audited lessee. Often times the [disclosing lessee] would object. He said the division does not have a really great way forward from there. The audit division believes that HB 330 would provide the division with a good solution, he said. MR. BISSON reported that currently, the division has seven royalty audits in the appeal process with "higher up" claims of roughly $39.2 million and as more audits are completed, the figures will increase. 2:58:34 PM MR. BISSON referred to slide 5, "What are Protective Orders," which read as follows [original punctuation provided]: ? Protective orders are common tools used by courts, arbitrators, and certain agencies (Administration, Revenue) ? A typical protective order limits: o Access who can view/access the information o Use what the specific use of the information may be o Distribution narrows distribution of the information o Disposition at the end of use directs return or destruction of information ? Under HB330: o Commissioner determines disclosure is necessary o Notice is given to the owner of the information o Commissioner issues protective order w/ limits MR. BISSON said the solution was a protective order to be issued by the commissioner of the Department of Natural Resources. He read slide 5, which discusses protective orders. He explained that the Department of Revenue (DOR), for oil and gas tax production purposes has a similar right to issue protective orders with similar lessees. MR. BISSON added that the protective order would be limited to providing a solution to the audit with a narrow scope to those working on the resolution. At the end the information would be sent back or destroyed, he said. Under HB 330, the commissioner would determine disclosure was needed, when an audited lessee wanted to see backup used for the "higher up" claim. The audit division would give notice to the disclosing lessee informing the lessee the information the audit division intended to disclose. It would give the disclosing lessee an opportunity to be heard, he said. The disclosing lessee would file any objections and the audit section of the oil and gas division would work through them. The commissioner would ultimately issue the protective order describing any limits, he said. 3:00:01 PM MR. BISSON referred to slide 6, "HJUD Amendments," which read as follows [original punctuation provided]: Two amendments were adopted in the House Judiciary committee 1. Technical changes, to ? limit the applicability of this power to oil and gas issues, ? to clarify that the word "lease" does not modify the words "appeal" or "request for reconsideration," (this change was mooted by amendment 2) and ? to ensure that net profit share audits are captured by this section, as net profit share payments are not considered royalty payments 2. Narrowed the scope of the bill to royalty audits only. ? The bill previously included geologic and geophysical data under protective order MR. BISSON reviewed slide 6, stating that the initial bill was for the whole department and the House Judiciary Committee adopted two amendments. The House Judiciary Committee narrowed the scope in Amendment 1 to oil and gas issues. It clarified the meaning of "lease" to ensure it did not modify "appeal" or "request for reconsideration." It added the term "net profit share payments" to be certain those were also captured. MR. BISSON stated that Amendment 2 narrowed the scope of the bill to royalty audits only. Previously it could have been used for geological or physical data, he said. 3:00:51 PM MR. BISSON referred to slide 7, "HB330," which read as follows [original punctuation provided]: Section 1: New provision adding to the Commissioner of Natural Resources duties and powers to include determining whether a disclosure is required for a royalty or NPSL audit, appeal or reconsideration Mandates that if the commissioner determines disclosure is necessary, notice and opportunity to be heard must be provided to those affected Allows the commissioner to issue a protective order limiting the persons who may have access to the information and the purposes for which it must be used Section 2: Conforming language to allow protective order to be issued as it relates to cost data and financial information submitted in support of applications, bonds, leases and similar items Section 3: Conforming language to statutes dealing with punishment for divulging confidential information allowing for protective orders to view confidential information during royalty or NPSL audits or appeals MR. BISSON paraphrased the section-by-section analysis of the bill as reflected on slide 7. 3:01:44 PM REPRESENTATIVE BIRCH asked how the calculation worked for "royalty in kind." He related his understanding that the state reserves an option to have barrels of oil rather than a check. MR. BISSON explained that this only applied to royalty-in-value barrels. The royalty-in-kind was totally separate and covered by contract. 3:02:19 PM REPRESENTATIVE BIRCH mused that it was a different arrangement depending on the location, contract, and producer. MR. BISSON responded that the royalty-in-kind contract requires the division to do nominations for those barrels; and everything remaining outside the royalty-in-kind contract would be taken in value. The companies sell the barrels and pay the state its royalties, he said. 3:02:46 PM CO-CHAIR JOSEPHSON directed attention to slide 4, bullet 4, which read as follows [original punctuation provided]: ? Other producers have refused to voluntarily allow the Division to share confidential price information with the audited producer in connection with audits even when a confidentiality agreement would protect the information and limits its disclosure CO-CHAIR JOSEPHSON recalled him stating that other producers have not voluntarily allowed the sharing of confidential price information. He asked if they could be compelled or was the bill about assuaging their concerns with proprietary information, so everyone agrees by consent to do so. MR. BISSON responded that the solutions the Royalty Audit Section currently has would require them to obtain a protective order in court and the audit section of the oil and gas division does not want to do so because it takes up the court, the division, and the company's time. The proposed HB 330 provides the preferred method, he said. 3:03:58 PM CO-CHAIR JOSEPHSON asked if everyone was on the same page. He asked whether there was any prearrangement as to the language. MR. BISSON explained that the audit section of the oil and gas division has used some confidentiality agreements in the past and has used language that has been acceptable to companies. 3:04:42 PM REPRESENTATIVE PARISH asked about the $39.2 million in pending audits on slide 4 and if any were concerned about geological or geophysical data. MR. BISSON answered no; that the auditors do not use geological or geophysical data for the "higher up" claims. 3:05:07 PM REPRESENTATIVE DRUMMOND asked if the state would realize more revenue if the bill passed and issue was resolved. MR. BISSON answered that the bill would create an opportunity to resolve the audits. He acknowledged that other issues exist, so he could not answer. He offered his belief that the bill would remove a current hurdle for auditors. REPRESENTATIVE DRUMMOND acknowledged that HB 330 would help resolve audits. MR. BISSON said he hoped so. 3:05:53 PM REPRESENTATIVE PARISH asked if outstanding royalty monies collected interest. MR. BISSON answered yes. 3:06:19 PM KARA MORIARTY, President/CEO, Alaska Oil & Gas Association (AOGA), stated that AOGA, a private trade association, represented the majority of oil and gas producers, explorers, refiners and transporters of oil and gas. She said AOGA recognizes the administration's efforts to address the potential issues surrounding royalty audits and appeals. 3:07:09 PM MS. MORIARTY said unfortunately, the AOGA does not support HB 330 in its current form and has conveyed the two concerns to the Department of Natural Resources. If these concerns were addressed, it would provide further clarity for the stakeholders while preserving the administration's intent as expressed in the transmittal letter and by today's presentation, she said. MS. MORIARTY highlighted two concerns: HB 330 should have language to exempt royalty settlement agreements from being included as part of these efforts. The reason AOGA would like this was because these agreements are contractual agreements between the state and the company and vary based on terms of agreement. Royalty settlement agreements often contain other legal restrictions regarding the disclosure of confidential information to a party not subject to the contractual agreement. She offered her belief that exempting royalty settlement agreements would not interfere with what DNR is trying to achieve. 3:08:31 PM MS. MORIARTY explained the second concern, such that it was in regard to which individuals from the parties involved under the protective order would have access to confidential information during a royalty audit or appeal. The AOGA believes that HB 330 should limit release of confidential information to only those individuals who are directly involved in the royalty audit or appeal and not those individuals who may work outside of such matters. She suggested that the language should be tightened up to limit the release of the confidential information during these types of audits or appeals to those people who are actually working on the protective order. The AOGA has kept an open dialogue with the DNR since the bill was introduced. She reiterated that AOGA cannot support the current version of the bill but would like to continue to work toward resolution of these two issues, she said. 3:09:52 PM CO-CHAIR JOSEPHSON asked if those concerns had been brought to House Judiciary Standing Committee. MS. MORIARTY answered no; because the House Judiciary Standing Committee hearing happened pretty quickly, and the member companies had not fully analyzed the bill at that time public testimony was scheduled. CO-CHAIR JOSEPHSON understood how that could happen. [HB 330 was held over.]