SB 62-GAS LEASES; RENEWABLE ENERGY GRANT FUND  4:02:48 PM CHAIR REVAK announced the consideration of SENATE BILL NO. 62, "An Act relating to surface use restrictions for oil and gas leases; relating to gas leases in Kachemak Bay; relating to the renewable energy grant fund; and providing for an effective date." 4:03:20 PM HALEY PAINE, Deputy Director, Division of Oil and Gas, Department of Natural Resources, Anchorage, Alaska, explained her presentation will provide the committee with an overview of SB 62 including its purpose, any potential challenges if not permitted, and a sectional analysis. 4:03:52 PM MS. PAINE referenced slide 2 and stated the purpose of SB 62 is to allow the Division of Oil and Gas to lease and capture revenue from state-owned resources underlying lands restricted to surface. The bill does not open Kachemak Bay or any other closed area to surface development, the bill simply aims only to capture royalty revenue from geology drained through adjacent development on nearby unrestricted lands. With the use of modern drilling technologies, oil and gas may be safely developed from adjacent lands with no impact to the surface of the restricted areas, to include the offshore. MS. PAINE stated that the primary benefit of SB 62 is increased state revenue. Lands with surface-use restrictions can still provide revenue in the form of lease sale bids, annual rental payments, and royalties if made available for subsurface-only development. The state will be able to protect the land using established regulatory methods while still maximizing the economic recovery of its resources. MS. PAINE turned to slide 3 and said the main concern is the mechanism for collecting royalties if unleased land is drained from wells on adjacent leases where the state does not realize royalty payment and possible diminished revenue. For instance, the wellhead may be located on private land; this may prevent the state from realizing the royalty revenue unless the remedy is sought through [Alaska Oil and Gas Conservation Commission] (AOGCC) for correlative rights. She explained leasing is the standard mechanism for establishing a contractual relationship between the state and the developer. The state exercises its authority through the lease for mitigation measures compliance. The state also requires the sharing of drilling and reservoir data, data integral to the state understanding the extent of its resources. 4:06:21 PM MS. PAINE said bill Section 2 addresses the subject area. The bill seeks to allow gas-only leasing of the subject area while maintaining the surface use restrictions that are currently in place. The offshore state lands in Township 5 South, Range 15 West are shown both within the context of the Greater Cook Inlet with more detail in addition to a closeup of the subject area illustrated in the blue-hashmark region. MS. PAINE detailed the subject area is adjacent to active development on the Kenai Peninsula, including the Seaview Unit which was recently approved by the division in October 2020. The Cosmopolitan Unit to the northdepicted in olive colorare all being developed from the onshore Hansen padlocated on private landabout halfway up the unit along the coastline. The Cosmopolitan Unit provides an example of successful access of offshore resources without impacting the surface-use of the waters. SENATOR STEVENS asked how far the pipelines reach out into Kachemak Bay. MS. PAINE replied they are all accessed from the Hansen pad for the Cosmopolitan Unit but she would follow up with the actual distance to the wellbore. SENATOR STEVENS said he assumed pipelines are able to extend farther and farther from shore. MS. PAINE answered yes, modern drilling technologies continue to improve for safely accessing resources. The distance from shore would depend on the variety of factors including the pool depth within the geologynoting current examples. The blue-hash subject area should be well within current technologies for access via unrestricted surface land. 4:09:30 PM MS. PAINE provided the following sectional analysis for SB 62: Section 1 - Amends AS 38.05 to add a new section, AS 38.05.176 to specify that a statute restricting the surface use of an oil and gas or gas-only lease area does not also restrict drilling of the subsurface of that leased area from an adjacent leased area not subject to restrictions on surface use, unless specifically provided. Section 2 - Amends AS 38.03.184(b) to acknowledge the exemption (created by Section 3 of this bill) to the statute prohibiting the Department of Natural Resources or any other state agency from issuing leases for oil exploration or development on state owned land and waters in and around Kachemak Bay and extending to the three-mile offshore limit of state ownership. Section 3 - Amends AS 38.04.184 by adding a new subsection (h) specifically authorizing the director of the Division of Oil and Gas to offer gas-only leases in an area adjacent to Kachemak Bay specifically, within Township 5 South, Range 15 West, Seward Meridian, Alaska. Such leases would carry no right to use the surface of the land and would allow only natural gas exploration or production drilling from adjacent leased lands. Section 4 - Amends AS 42.45.045(b) to allow the legislature to appropriate to the Renewable Energy Grant Fund the state's rentals, royalties, royalty sale proceeds and net profit shares generated pursuant to oil and gas, or gas-only leases issued pursuant to AS 38.05.180(f) and (g), as well as such revenue generated by gas-only leases issued pursuant to AS 38.05.184(h) (authorized by Section 3 of this bill). Such appropriations would occur after the required deposit of any such revenue to the Alaska Permanent Fund required under art. IX, sec. 15 of the Alaska Constitution. Section 5 - Amends AS 45.45.045(c) requiring investments funds to be managed by the Department of Revenue, which shall be the fiduciary of the fund under AS 37.10.071. Section 6 - Provides an immediate effective date. 4:12:48 PM SENATOR STEVENS noted Senator Micciche passed him a note saying, "We are talking about extending out to 7.5 miles." He asked if drilling from shore eliminates the need for the big platform sites in the ocean. MS. PAINE answered that [drilling from shore] may not be a full replacement for any offshore development. Locations would depend on where the resource is accessed. Locations primarily in the Upper Cook Inlet are not near shore reach. SB 62 is looking to direct specific leasing areas that are close enough for safe and modern drilling technology to access from adjacent unrestricted surface land. SENATOR STEVENS remarked that drilling from shore seems like a great goal. 4:14:26 PM SENATOR KIEHL noted the focus on the Kachemak Bay area and asked if the bill would apply to subsurface leases on all state land with a surface restriction. For example, a critical habitat area like in Gustavus, a state park, or a piece of state land that has a private lease for a lodge. MS. PAINE replied the intention of SB 62 is to provide a general framework that would allow for specific designations in the future should there be a specific lease-by-application (LBA) that closes or restricts that. Consideration will always depend on whether the state has the mineral estate and whether it can be safely accessed from a nearby piece of unrestricted state land. At this time, the bill is only contemplating the access of the subject area. SENATOR KIEHL asked her to confirm that the bill applies everywhere, not just the Kachemak Bay area. MS. PAINE answered yes, the bill is looking at addressing future surface-use restrictions that may be imposed. At this time, the Kachemak Bay oil and gas closure is a very unique location in terms of its authorization through statute and the bill would create the opening in case there are future opportunities. 4:16:27 PM SENATOR VON IMHOF read the following from slide 3: If unleased land is drained from wells on adjacent leases, royalties may not be paid to the state or that revenue could be diminished. She said she looks at this as a revenue enhancement bill. She offered her understanding that horizontal drilling technology is becoming more capable and it could occur without the state knowing. MS. PAINE replied the state currently does not contemplate that drilling from adjacent leases is actively occurring, but the bill sets the stage for the state to not have to go through AOGCC to maximize revenue for those lands. SENATOR VON IMHOF recapped that the bill prepares for what could happen and it ensures the state maximizes the revenue. She read, "To allow the legislature to appropriate revenue from these leases to the Renewable Energy Grant Fund." in Section 4 and asked if some of the money will go to a designated fund. MS. PAINE answered yes, the legislature may choose to appropriate revenues from the leases to the Renewable Energy Grant Fund. 4:18:50 PM SENATOR VON IMHOF asked her to confirm that legislative appropriation to the Renewable Energy Grant Fund is currently not happening, but this would change that. MS. PAINE answered yes. SENATOR MICCICHE asked her to confirm that only funds from projects that are associated with the specified type of lease would be deposited into the Renewable Energy Grant Fund. MS. PAINE answered yes, the bill would only authorize leases from the specified area to have monies allocated to the Renewable Energy Grant Fund. SENATOR MICCICHE pointed out the bill only affects Township 5 South, Range 15 Westan area of interest because of the [Cosmopolitan Unit] and other developments. He asked her if the state has seismic [data] in that particular area that looks interesting. MS. PAINE replied the noted areas are currently under development with their pools and being delineated. The state does not have a specific reason at this time to say that the development is going to occur. However, the bill simply allows for departmental preparation to move forward with land leasing should development occur within the Kenai Peninsula and Anchor Point area. SENATOR MICCICHE asked if separate legislationincluding a "Section 3" that identifies the specific township and range would occur if an additional area in Alaska at some point has some potential or interest by someone. MS. PAINE offered her understanding that with the general provision in place the department would need to find out if there is a specific closure area that is already enshrined for that particular location, and then that particular statute would require modification. 4:21:25 PM SENATOR STEVENS asked her to confirm that appropriations are currently deposited into the Alaska Permanent Fund and the bill would allow for appropriations to the Renewable Energy Grant Fund. He asked what the funds from the Renewable Energy Grant Fund are used for. MS. PAINE replied that from a broad perspective the Renewable Energy Grant Fund has been used to fund projects in different communities throughout Alaska that are in the research and development stage. She offered to follow up with a more detailed explanation. SENATOR KIEHL said his question goes back to the general applicability of directional drilling under lands that are otherwise not open for oil and gas leasing, specifically parks and some state marine parks that include both surface and subsurface waters. He asked if her sense is that should the bill pass, the state will not have to worry about some of the incompatible use restrictions currently in the state management plans for parks or other special areas. For example, things like noise and lights associated with industrial development for oil and gas extraction. 4:23:29 PM MS. PAINE explained that imbedded in the current formal lease contract is all the regulatory authority and protection for mitigation measures and other authorization that dictates how a development may occur in a particular area. The bill does not set aside any plans or agreements that have been set out in any way. MS. PAINE said the department will continue to do successful and safe resource development in areas throughout the state where there are other management plans using the best interest findings process as well as the mitigation measures for a specific lease. The department addresses those and ensures those aspects are only authorized in a manner that is compatible with a plan of operations. 4:24:45 PM CHAIR REVAK opened public testimony on SB 623; finding none, he closed public testimony. 4:25:10 PM CHAIR REVAK held SB 62 in committee.