HOUSE FINANCE COMMITTEE March 28, 1998 2:15 P.M. TAPE HFC 98 - 81, Side 1. TAPE HFC 98 - 81, Side 2. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 2:15 P.M. PRESENT Co-Chair Therriault Representative Kohring Representative Kelly Representative Martin Representative G. Davis Representative Mulder Representative Grussendorf Representatives Hanley, Foster, Moses and J. Davies were not present for the meeting. ALSO PRESENT Ken Boyd, (Testified via Teleconference), Director, Division of Oil and Gas, Department of Natural Resources; James Eason, Representative for Forcenergy, Anchorage; Representative Mark Hodgins; Pat Carter, Staff, Representative Mark Hodgins; John Shively, (Testified via Teleconference), Commissioner, Department of Natural Resources; Kevin Tabler, (Testified via Teleconference), Land Manager & Governmental Affairs, UNOCAL Oil Company, Anchorage. SUMMARY HB 380 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. CS HB 380 (FIN) was reported out of Committee with individual recommendations and with a fiscal note by the Department of Natural Resources dated 3/13/98. HOUSE BILL NO. 380 "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." Co-Chair Therriault advised that he had spoken with Representative Hodgins regarding the downward modification to the reserves. Amendment #1 would reduce the total number of barrels to 25 million. [Copy on File]. REPRESENTATIVE MARK HODGINS noted that he did not have a problem protecting the State's interest. He reminded Committee members that the fields in the proposed legislation had been shut for thirty years with no revenue generated. Representative Hodgins emphasized the need for an incentive. KEN BOYD, (TESTIFIED VIA TELECONFERENCE), DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, reminded Committee members of past history in which oil companies had threatened the State that they would not develop an oil field without an incentive. Two years later those fields were developed. He stressed that the State has an obligation to do something with the royalties, price and volume. Representative Kohring voiced his disappointment that Director Boyd and Commissioner Shively were not advocating for oil field development. In response to Representative Kohring, Co-Chair Therriault commented that it is the responsibility of the Department and the oil companies to strike a balance. Representative Grussendorf stressed that Director Boyd was fulfilling his job by looking after the revenue resources of the State. Representative Grussendorf pointed out that within the last five years, two major leases have been accepted. The bids had not been made with the understanding that there would be an incentive. The industry deserves to know that the State of Alaska will not change the existing structure. He questioned why the incentives were important at this time. Representative Grussendorf advised that the State has not yet received the 3D's seismic tests from Forcenergy. He suggested that the Committee was making a major decision without the release of important information. Advisors need to be consulted so that the State does not give away its resources. He stressed that there has been no economic evaluation of the project. He noted that he would support incentives to assist the industry if there was a need. Representative Grussendorf added that he resented the State giving away resources. Representative Hodgins replied that such activity was not unusual and referenced the timber industry's negotiation of this type of sale. The type of fields proposed in this legislation are shut-in fields which to date have not produced. The legislation would offer an incentive for these six fields. Representative Grussendorf countered that the State does not know at this time what is in the reserve. He reiterated that oil companies would develop these fields without an incentive. The proposed legislation benefits only the companies, their employees and the federal government from the royalties they would receive. Through statute of the State Constitution, 50% of all royalties go into the Permanent Fund which then benefits all Alaskans. He cautioned that giving the royalty incentives to industry takes the money from State residents. Representative Hodgins agreed that Commissioner Shively and Director Boyd have pertinent information, although, reminded Committee members that the ultimate decision is with the Legislature. He pointed out that the fields had not been proven and were not in production. The proposed incentive would help to bring the sites up to production. He stressed the need for more oil in Cook Inlet. Representative Grussendorf suggested that the price aspect of the legislation should be considered. He recommended that a triggering mechanism be put in place so that the royalties would be contingent on the movement of the price, in which case, the State could also benefit by the investment. JOHN SHIVLEY, (TESTIFIED VIA TELECONFERENCE), COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, clarified that the Department is not opposed to giving appropriate incentives on royalties to anybody who deserves it. However, the Administration has established two important principles: ? If such an incentive is given, there needs to be an economic analysis; ? In addition, the State must get a lump sum if the economic analysis indicates that the prices are substantially higher than those initially captured; ? Because little is known about these fields, and it has been suggested that HB 207 does not work, that bill should be changed. Commissioner Shively stressed that the State was treading on dangerous ground by giving a straight royalty reduction to field areas where little is known. Co-Chair Therriault asked if the Commissioner could modify HB 207 to remove the delineation requirement. Commissioner Shivley replied that could be addressed and adjusted in a pre-proposal. KEVIN TABLER, (TESTIFIED VIA TELECONFERENCE), LAND MANAGER & GOVERNMENTAL AFFAIRS, UNOCAL OIL COMPANY, ANCHORAGE, noted that UNOCAL supports legislation which creates incentives for development. UNOCAL has been an active proponent in supporting legislation specifically as it applies to Cook Inlet. He noted that there is a declining reserve base in that area which has created the need for discovery and development of new reserves. He concluded that the timing is right and that access alone may not make the reserves economically viable. In closing, Mr. Tabler supported the adoption of the legislation, as it would enhance economic liability for development in Cook Inlet. He cautioned that the fields are mature and that they are declining. Co-Chair Therriault warned that residents in Interior Alaska's only tie to the economic benefit of this policy would be the royalty received. He commented that it would be sensible to have an upper limit production cap. Co- Chair Therriault pointed out that the bill's drafter had allowed for caps to be in place. Representative Hodgins noted that the upper limit production cap on the original legislation was 50 million barrels. He added that production must start within five years to qualify for the incentive. Representative G. Davis pointed out that the Department has requested the 3D seismic data and report from Forcenergy. He inquired if efforts had been made to produce those documents. PAT CARTER, STAFF, REPRESENTATIVE MARK HODGINS, noted that information had not been requested from Forcenergy. The legislation is an incentive bill. The unit of measurement of success would be the level of participation. He acknowledged that there is a level of uncertainty which accompanies investments into the oil and gas industry. Representative Grussendorf stressed that the proposed six fields have not been delineated yet. Representative Hodgins replied that delineation was one of the requirements of HB 207, in drilling holes to determine the size of the field. Representative Grussendorf stated because that bill had been passed, it is now in statute. HB 380 creates a situation in which the field has not yet been delineated, although that information is required under statute. Representative Martin concurred with Representative Grussendorf. He recommended that Forcenergy should comply with the proposed requests regarding the fields potential. Representative Martin reiterated that he was not comfortable with how much the State is potentially giving up. Representative Hodgins replied that the potential give-up would be 7% on 25 million barrels. The potential of what the State could gain is 5% on 25 million barrels. He noted, the situation is such that the fields have sat for a long time; if they were viable, they would have already been developed. He remarked that HB 207 has not worked because it is cumbersome and has generated no interest. Representative Grussendorf stated that HB 380 was vague and that it was moving through the Committee too quickly. Mr. Carter commented that at this time, Forcenergy is not committed to any field development. They have purchased and unitized the lease. Representative Grussendorf pointed out that they had purchased the leases before the incentive was available. Mr. Carter disagreed. He commented that the cost measure to unitize would be $7 million dollars per hole. He stated that to assume that Forcenergy was building a platform was misinformation. Representative G. Davis commented that the proposal was a practical offer and solution. He voiced his support of the legislation. He advised that the life and economic viability of the Cook Inlet area are at stake. He encouraged the Committee's support and success of the measure. (Tape Change HFC 98- 81, Side 2). Representative Kohring reiterated that the State should offer more incentive and opportunity to the industry and less tax so that we will develop a stronger economy with more people employed. He pointed out that the industry is willing to take on the risk of field development. Representative Grussendorf pointed out that this decision was being made without adequate economic evaluation and information. Representative Kelly asked what was involved in unitizing a lease. Mr. Boyd explained that the reference was to an exploratory unit. A unit had been developed for efficiency and protection. In the case of Forcenergy, the State took five leases, two of which are to expire 3/31/98; those leases were extended in exchange for a work method over time. Forcenergy was given a series of milestones to be met to keep the unit. The first requirement was to shoot a 3D seismic program. The next step would be due at the turn of the century, at which time they would be required to drill a well or build a platform. If a milestone is missed, the unit goes away. The cost of unitization is $5 thousand dollars. Representative Kelly understood that this would be a series of agreements in which the oil companies would have to comply, in order to receive the benefits of unitization. Representative Kelly asked what was keeping the State from seeing the 3D seismic. JAMES EASON, REPRESENTATIVE FOR FORCENERGY, ANCHORAGE, responded that Forcenergy's 3D seismic information is collected on State lands and is available for the Department of Natural Resources (DNR) to use confidentially if they request it. Representative Grussendorf understood that DNR had requested the information and had yet received it. Mr. Eason stated that he was not aware that the Department had requested that information. Mr. Boyd replied that in most cases, the Department is required to ask for the information, however, in this scenario, Forcenergy is required to provide it as a part of their unit agreement. It is due by 3/31/98 and the Department has to date not received it. Co-Chair Therriault MOVED to adopt Amendment #1. Representative Kohring OBJECTED. A roll call vote was taken on the motion. IN FAVOR: G. Davis, Grussendorf, Kelly, Martin, Therriault OPPOSED: Mulder, Kohring Representatives Moses, J. Davies, Foster and Hanley were not present for the vote. The MOTION PASSED (5-2). Representative Mulder MOVED to report CS HB 380 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Grussendorf OBJECTED. He stated that to date there had not been enough information provided to release the State royalties. A roll call vote was taken on the motion. IN FAVOR: G. Davis, Kelly, Kohring, Martin, Mulder, Therriault OPPOSED: Grussendorf Representatives J. Davies, Foster, Moses and Hanley were not present for the vote. The MOTION PASSED (6-1). CS HB 380 (FIN) was reported out of Committee with individual recommendations and with a fiscal note by the Department of Natural Resources dated 3/13/98. ADJOURNMENT The meeting adjourned at 3:15 P.M. H.F.C. 8 3/28/98