HOUSE FINANCE COMMITTEE March 10, 1994 8:36 a.m. TAPE HFC 94-55, Side 1, #000 - end. TAPE HFC 94-55, Side 2, #000 - end. CALL TO ORDER Co-Chair Larson called the House Finance Committee to order at 8:36 a.m. PRESENT Co-Chair Larson Co-Chair MacLean Representative Martin Vice-Chair Hanley Representative Navarre Representative Brown Representative Parnell Representative Grussendorf Representative Therriault Representatives Hoffman and Foster were not present for the meeting. ALSO PRESENT Representative Joe Green; Jerry Gallagher, Legislative Liaison, Department of Natural Resources; Jeff Cook, ARCO. SUMMARY INFORMATION HB 199 "An Act providing for oil and gas exploration licenses, and oil and gas leases, in certain areas of the state; and providing for an effective date." CSHB 199 (O&G) was HELD in Committee for further discussion. SB 141 "An Act extending workers' compensation coverage to certain high school students in uncompensated work-study programs." SB 141 was assigned to a subcommittee consisting of Representative Parnell as Chair and Representatives Hanley and Navarre. SENATE BILL NO. 141 "An Act extending workers' compensation coverage to certain high school students in uncompensated work-study programs." 1 Co-Chair Larson assigned SB 141 to a subcommittee consisting of Representative Parnell as Chair and Representatives Navarre and Hanley. HOUSE BILL NO. 199 "An Act providing for oil and gas exploration licenses, and oil and gas leases, in certain areas of the state; and providing for an effective date." REPRESENTATIVE JOE GREEN testified in support of CSHB 199 (O&G). He noted that the state's oil revenues have been dropping. He explained that the legislation would encourage further exploration and development of state resources through the issuance of large block exploration licenses. He pointed out that half of the companies formally doing business in Alaska have left. He emphasized that the current leasing process only provides small blocks of land for exploration. He observed that CSHB 199 (O&G) would allow up to 500,000 acres to be licensed to a company or group of companies. He asserted that the larger block approach would give greater flexibility for companies to invest in exploration. He observed that areas surrounding existing oil fields will be excluded. He noted that areas of Cook Inlet and land north of the Umiat Baseline would be excluded. Representative Green gave examples of how a license could be issued. He noted that a company could propose to the commissioner of Department of Natural Resources that an area between 20 and 500,000 acres be licensed. They would need to provide justification of the exploration of remote sites. If the Commissioner of Department of Natural Resources agrees to allow the area to be licensed a competitive bid will pursue. He noted that the cost of the license will be in the form of a monetary work commitment. The exploration would be limited to oil and gas. Other uses could continue concurrently. The license would be issued for ten years. Representative Green discussed the operation of a work commitment. The licensee must post a work commitment bond on a yearly basis in addition to any environmental bonds required. The bond would be the amount of the work commitment bid, minus what has been expended and approved by the Commissioner, divided by the number of years left on the license. If 25 percent of the work commitment is not met after four years the license is revoked. If more than half of the work commitment has been met than there is no relinquishment of acreage. After the fourth year, 50 percent of the work commitment is not met the licensee would lose 25 percent of the acreage licensed. Until 50 percent of the work commitment is met 10 percent of the license will 2 be lost each year, until an additional 50 percent of the license is lost. The legislation is structured to encourage work to proceed quickly. Representative Green discussed the conversion of a license to a lease. The legislation allows a portion of the license, agreed upon by the Commissioner and the licensee, to be converted to lease. Money spent on the lease does not go to meet the requirement of the license work commitment agreement. Representative Green asserted that the state only receives a small portion of their revenues through lease sales. Representative Grussendorf noted that the legislation gives the Commissioner of Department of Natural Resources a great deal of latitude in directing the use of state assets. Representative Green asserted that the best interest for the state of Alaska is to develop resources. He maintained that Commissioners are environmentally sensitive. Members discussed competitive leasing versus block licensing. Representative Green noted that most leasing sales receiving competitive bids are close to established fields or near transportation corridors. He emphasized that CSHB 199 (O&G) would encourage exploration of remote areas. He asserted that leasing revenues would not be lost, since it is unlikely that a lease would otherwise take place. He stressed that even if a discovery is made the licensee must justify creation of the infrastructure needed for development. Representative Grussendorf asked if bid money will go to the Permanent Fund. Representative Green clarified that the revenue derived from the license will be in the form of a work commitment. Revenues will be the result of the discovery of oil or gas. Representative Therriault asked what restrictions will be placed on the public use of the license JERRY GALLAGHER, LEGISLATIVE LIAISON, DEPARTMENT OF NATURAL RESOURCES explained that the license does not exclude other uses. Public access provided for under AS 38.05.130 would apply. Operators are allowed to prevent public access for reasons of health, safety and certain security reasons. Concurrent uses could occur. In response to a question by Representative Hanley, Representative Green reiterated that areas known to have production value have been excluded. If oil is found the 3 area surrounding the find would be excluded by the Commissioner. He stressed that only unknown and untapped areas are addressed. Representative Grussendorf asked if off shore licenses would be granted. Representative Green replied that offshore licenses would be possible but felt that they would be more difficult to rationalize to the Commissioner of Department of Natural Resources. Representative Brown questioned if the licensee is required to show a geological prosect or reason to expect that the area to be licensed merits exploration. Representative Green suggested that they would need to convinced the Commissioner in order to receive a license. Representatives Green and Brown discussed the granting of licenses by the Commissioner of Department of Natural Resources. Representative Brown asked if provisions which exclude Bristol Bay from exploration would remain. Representative Green assured her that the legislation would not override any statutes in existence. Representative Brown pointed out that there are several sections, such as on page 8, lines 24 and 25, which specify that particular parts of AS 38.05.180. apply. Representative Green explained that the provision would allow companies possessing leases to not be excluded from holding a license. Representative Green admitted that he was not certain that Bristol Bay is excluded. In response to a question by Representative Brown, Representative Green explained the differences between a licensee and a lessee. A licensee may only explore an area. A licensee cannot exclude an area from other excepted uses. A lessee is granted additional rights. Representative Brown asked what responsibilities the lessee is relieved of by holding a license. Representative Green reiterated that the licensee cannot drill or transport the product. Representative Brown noted that the legislation provides a continuing phased package. She observed that upon discovery the licensee shall have the right to convert to a lease. Representative Green acknowledged that the right to convert exists. He emphasized that the license provides a commitment to produce. He added that when the license is converted to a lease the holder must show how development will proceed and how much acreage will be involved in the lease. Representative Brown observed that CSHB 199 (O&G) states that at the time the license is granted the form of the lease to be issued shall be made available. 4 Representative Brown asked what is required to convert to a lease. Representative Green stated that the company would have to show the Commissioner just cause as to why the conversion should take place. He added that the Commissioner would want to know what will be exploited. Representative Brown noted that page 8 states that if the Commissioner determines that the work commitment is met there may be a conversion. Representative Green clarified that some leases may be for five years. Representative Brown observed that leases are normally ten years. (Tape Change, HFC 94-55, Side 2) Representative Brown addressed the issue of competitive opportunities for exploration. She asked if it is possible that no other company would have the opportunity to compete for a lease when the licensee requests to convert the license to a lease. Mr. Gallagher noted that the Commissioner can allow other proposals for a time specific period or a single application for a license could be received. Page 7, line 3 gives the Commissioner authority to reject or to public notice that the proposal is under consideration. He stated that there are no provisions for entertaining additional competitive proposals. Representative Green stated that the intent is that there will be the right for additional proposals. Representative Brown reiterated her concerns that large blocks of land could be controlled by one company. Mr. Gallagher stressed that the intent of CSHB 199 (O&G) is to allow individuals or companies to invest in areas that are not likely to be explored. Representative Brown queried why all existing sales on the five year leasing program are not excluded. Representative Green noted that industry supports areas contained in CSHB 199 (O&G). Mr. Gallagher added that the Commissioner of the Department of Natural Resources is required to go through a written process to designate which lands will be available beyond the excluded areas. Co-Chair MacLean asked if public input is allowed during the conversion to a lease. Mr. Gallagher clarified that the best interest finding would be completed prior to the issuance of the license, under AS 38.05.035. Public input would occur during this time. In response to a question by Co-Chair MacLean, Representative Green clarified that the amount of land conveyed with the granting of the lease would be restricted to land associated with a discovery. Representative Brown clarified that lease acreage limitations under AS 38.05.140 5 (c) would apply. JEFF COOK, DIRECTOR, GOVERNMENTAL PUBLIC RELATIONS, ARCO testified in support of CSHB 199 (O&G). He asserted that the bonding formulation strikes an appropriate balance amongst a variety of interests to provide equal financial footing for bidders and solid protection of the state's interest. He noted that leases are achieved only after the entire work commitment is completed, which minimizes chances for speculation. He added that the bonding and relinquishment provisions provide incentives to conduct the work early and vigorously. He maintained that bonding provisions allow the licensee the maximum flexibility to pursue a work program that makes sense. He emphasized that the winning bid is based upon the objective standards of total dollar amount, using sealed bids. Representative Brown referred to page 8, lines 26 and 27. She asked why a 12.5 percent royalty provision was included rather than a reference to AS 38.05.180 (f), competitive bidding for leases. Witnesses were unable to reply. Representative Brown asked if multiple licenses could be held. Mr. Gallagher did not think that multiple licenses would be prohibited. Representative Brown questioned how the Commissioner would meet requirements of CSHB 199 (O&G) with a zero fiscal note. Mr. Gallagher assured her that the Department can incorporate the program at no additional cost. Representative Brown stressed that the Commissioner is obligated in page 7, section (d) to respond to requests and that regulations must be developed. Representative Brown noted that the state's leasing program lacks resources to meet current demands and legal obligations. Representative Green observed that if the program expands the Commissioner could request a supplemental or increased funding for FY 96. Representative Brown suggested that "shall" be changed to "may" on page 6, line 29. Representative Green felt that the change would weaken the legislation. Representative Therriault suggested that a lack of geological surveys conducted by the state prevents exploration and development of remote areas. He observed that CSHB 199 (O&G) could entice industry to explore areas that the state cannot afford to map. CSHB 199 (O&G) was HELD in Committee for further discussion. ADJOURNMENT 6 The meeting adjourned at 9:55 a.m. 7