HOUSE SPECIAL COMMITTEE ON OIL & GAS April 7, 1993 5:00 p.m. MEMBERS PRESENT Representative Joe Green, Chairman Representative Pete Kott, Vice-Chairman Representative Jerry Sanders MEMBERS ABSENT Representative Jerry Mackie Representative Joe Sitton Representative Harley Olberg Representative Gary Davis OTHER HOUSE MEMBERS PRESENT Representative David Finkelstein COMMITTEE CALENDAR *HJR 35 Endorsing approval by the United States Congress of S 254 or comparable legislation imposing a fee on imported oil. HEARD AND HELD IN COMMITTEE FOR FURTHER CONSIDERATION *HCR 12 Relating to the use of natural gas as a motor vehicle fuel in Alaska. HEARD AND HELD IN COMMITTEE FOR FURTHER CONSIDERATION 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." HEARD AND HELD IN COMMITTEE FOR FURTHER CONSIDERATION (* first public hearing) WITNESS REGISTER Michael Johnson, Legislative Aide to Representative Joe Sitton State Capitol Court Building, Room 609 Juneau, Alaska 99801-1182 Phone: (907) 465-2327 POSITION STATEMENT: Delivered sponsor statement on HJR 35 Representative David Finkelstein State Capitol Court Building, Room 612 Juneau, Alaska 99801-1182 Phone: (907) 465-2435 POSITION STATEMENT: Prime Sponsor of HCR 12 Bernie Karl K & K P. O. Box 10687 Fairbanks, Alaska 99710 Phone: (907) 457-6880 - home (907) 488-1409 - work POSITION STATEMENT: Supported HCR 12 with amendments Grant Doyle AG Midland P. O. Box 80327 Fairbanks, Alaska 99708 Phone: (907) 458-0385 - home (907) 488-8883 - work POSITION STATEMENT: Supported HCR 12 with amendments Mead Treadwell, Deputy Commissioner Department of Environmental Conservation 410 Willoughby Avenue Juneau, Alaska 99801 Phone: (907) 465-5054 POSITION STATEMENT: Supported HCR 12 with amendments Ron King, Air Pollution Safety Department of Environmental Conservation 410 Willoughby, Suite 301 Juneau, Alaska 99801-1795 Phone: (907) 465-5050 POSITION STATEMENT: Provided information related to HCR 12 Jeff Ottesen, Chief Right-of-Way and Environment Division of Engineering and Operations Department of Transportation 3132 Channel Drive Juneau, Alaska 99801-7898 Phone: (907) 465-2985 POSITION STATEMENT: Answered questions related to HCR 12 Sen K. Tan, Assistant Attorney General General Civil Division Department of Law 1031 W. 4th, Suite 200 Anchorage, Alaska 99501 Phone: (907) 269-5100 POSITION STATEMENT: Answered questions related to HB 199 David Lappi, President Lapp Resources, Inc. 4900 Sportsmen Drive Anchorage, Alaska 99515 Phone: (907) 248-5684 POSITION STATEMENT: Commented on bonding requirements of HB 199 Jim Eason, Director Division of Oil & Gas Department of Natural Resources P. O. Box 107034 Anchorage, Alaska 99510-0734 Phone: (907) 762-2547 POSITION STATEMENT: Commented on HB 199 Bill Webb, General Manager Alaska Sport Industry Alliance 4220 B Street, Suite 200 Anchorage, Alaska 99503 Phone: (907) 563-2226 POSITION STATEMENT: Supported HB 199, but not the bonding Kevin Tabler UNOCAL 909 W. 9th Avenue Anchorage, Alaska 99501 Phone: (907) 276-7600 POSITION STATEMENT: Supported open position on annual bonding Richard Richmond (address not available) POSITION STATEMENT: Commented on bonding with regard to HB 199 Pete Nelson, Land Manager Texaco 2550 Denali Street Anchorage, Alaska 99503 Phone: (907) 278-9611 SPONSOR STATEMENT: Supported annual bond in the amount of the annual work committment PREVIOUS ACTION BILL: HJR 35 SHORT TITLE: URGE FEDERAL FEE ON IMPORTED OIL BILL VERSION: SPONSOR(S): REPRESENTATIVE(S) SITTON,Davidson,Brice, B.Davis,Davies,Ulmer,Carney,Nordlund,Finkelstein,James, Brown,Hudson,MacLean TITLE: Endorsing approval by the United States Congress of S 254 or comparable legislation imposing a fee on imported oil. JRN-DATE JRN-PG ACTION 03/17/93 683 (H) READ THE FIRST TIME/REFERRAL(S) 03/17/93 683 (H) OIL AND GAS, RESOURCES 03/19/93 715 (H) COSPONSOR(S):B.DAVIS,DAVIES, ULMER,CARNEY 03/19/93 715 (H) COSPONSOR(S):NORDLUND, FINKELSTEIN,JAMES 03/19/93 715 (H) COSPONSOR(S): BROWN 03/22/93 738 (H) COSPONSOR(S): HUDSON, MACLEAN 04/06/93 (H) O&G AT 05:00 PM CAPITOL 124 04/07/93 (H) O&G AT 05:00 PM CAPITOL 124 BILL: HCR 12 SHORT TITLE: USE OF NATURAL GAS IN MOTOR VEHICLES BILL VERSION: SPONSOR(S): REPRESENTATIVE(S) FINKELSTEIN TITLE: Relating to the use of natural gas as a motor vehicle fuel in Alaska. JRN-DATE JRN-PG ACTION 03/01/93 485 (H) READ THE FIRST TIME/REFERRAL(S) 03/01/93 485 (H) O&G, RESOURCES, TRA, FINANCE 04/06/93 (H) O&G AT 05:00 PM CAPITOL 124 04/07/93 (H) O&G AT 05:00 PM CAPITOL 124 BILL: HB 199 SHORT TITLE: OIL & GAS EXPLORATION LICENSES/LEASES BILL VERSION: SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR TITLE: "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." JRN-DATE JRN-PG ACTION 03/05/93 549 (H) READ THE FIRST TIME/REFERRAL(S) 03/05/93 549 (H) OIL & GAS, RESOURCES, FINANCE 03/05/93 549 (H) -ZERO FISCAL NOTE (REV) 3/5/93 03/05/93 549 (H) GOVERNOR'S TRANSMITTAL LETTER 03/15/93 (H) O&G AT 05:00 PM CAPITOL 124 03/16/93 (H) O&G AT 08:00 AM CAPITOL 124 03/22/93 (H) O&G AT 05:00 PM CAPITOL 124 03/22/93 (H) MINUTE(O&G) 03/25/93 (H) O&G AT 05:00 PM CAPITOL 124 03/31/93 (H) O&G AT 05:00 PM CAPITOL 124 04/06/93 (H) MINUTE(O&G) 04/07/93 (H) O&G AT 05:00 PM CAPITOL 124 ACTION NARRATIVE TAPE 93-12, SIDE A Number 000 CHAIRMAN JOE GREEN called the meeting to order at 5:10 p.m. and noted only three members of the committee were present: Representatives Green, Sanders, and Kott, which did not constitute a quorum, but testimony would be taken. HJR 35: URGE FEDERAL FEE ON IMPORTED OIL Number 032 MICHAEL JOHNSON, LEGISLATIVE AIDE TO REPRESENTATIVE JOE SITTON, PRIME SPONSOR OF HJR 35, testified on his behalf. He read a sponsor statement. (A copy of the sponsor statement may be found in the House Special Committee on Oil and Gas Committee Room, Capitol Room 114, and after the adjournment of the second session of the 18th Alaska State Legislature, in the Legislative Reference Library.) In summary, the statement said HJR 35 encourages Congress to approve federal senate 254, which imposes a fee on imported oil. Senate 254 would set a price floor of $25 per barrel on crude oil entering the United States. By making imported oil less attractive, this resolution would thereby reduce our dependence on foreign oil, help balance the trade deficit, promote energy conservation, and encourage development of the domestic industry in renewable and alternative fuels. Number 084 REPRESENTATIVE JERRY SANDERS asked if Representative Sitton's office had any communication with the Congressional Delegation. MR. JOHNSON replied in the negative. Number 100 VICE CHAIRMAN PETE KOTT referred the committee to Page 1, Line 13 of HJR 35 and suggested that the number "2000" would read more clearly if it is specified that it means years. Number 116 MR. JOHNSON said he could not speak for Representative Sitton, but felt there would be a problem with changing this term. Number 126 CHAIRMAN GREEN asked Mr. Johnson how he felt HJR 35 would affect the energy tax if it was imposed. Number 138 MR. JOHNSON did not have an answer; however, he stated the price floor was part of the President's ideas concerning the energy tax. Number 149 CHAIRMAN GREEN stated HJR 35 proposed a 35% increase over the current price, and asked if this would create a problem with homeowners in the Lower 48. Number 163 MR. JOHNSON felt there might be some resistance in certain areas. Number 177 CHAIRMAN GREEN stated since the committee did not have a quorum HJR 35 could not be passed out, and asked Mr. Johnson to get a response from the Congressional Delegation. Number 182 MR. JOHNSON agreed to comply. HCR 12: USE OF NATURAL GAS IN MOTOR VEHICLES Number 207 REPRESENTATIVE DAVID FINKELSTEIN, PRIME SPONSOR OF HCR 12, stated the idea of HCR 12 is to promote the use of natural gas to fuel vehicles in Alaska. He felt this would help deal with air pollution problems. Number 241 BERNIE KARL stated he was in favor of HCR 12, but was in hope of an amendment that would add propane. He stated propane comes from California to Fairbanks and he did not feel this was necessary since we have the fuel here in Alaska. He felt using propane would help the air pollution problems. Number 310 VICE CHAIRMAN KOTT asked what it would cost for a pump price for using propane in Alaskan's vehicles. MR. KARL said the total cost would be approximately $1.00 per gallon. Number 322 VICE CHAIRMAN KOTT asked if there were advantages of using propane over natural gas. Number 325 MR. KARL said propane has been used longer in vehicles than natural gas. A disadvantage of propane is a fuel pump has to be put on the vehicle in cold climates, and with natural gas fuel pumps are not necessary. He also stated that propane is more dangerous in accidents than natural gas, although it is safer than gasoline. The advantage that propane has is that it is a liquid and it only has to have 20 pounds of pressure on it so a small tank will hold the same amount as a fuel tank, and if the vehicle is run strictly on propane and not duel-fuel, it will run at the same gas mileage. With natural gas there is about a 10% difference and you do not get the distance you do with propane. Number 414 GRANT DOYLE said he supported HCR 12, but would like to see it amended to include propane. Advantages of propane he mentioned were that it is safer than gasoline, and that vehicles run cleaner with propane so it would help with the air pollution problem. Number 452 MEAD TREADWELL, DEPUTY COMMISSIONER, DEPARTMENT OF ENVIRONMENTAL CONSERVATION (DEC), introduced Ron King, Mobile Sources Programer for the DEC, Jeff Ottesen with Department of Transportation (DOT), and Barbara Sheppard, Alternative Fuels Coordinator and stated they were here to answer any questions that the committee might have. MR. TREADWELL supported HCR 12 and suggested a few changes. He said the DEC and the DOT with support of many private sponsors held a major conference on compressed natural gas vehicles. He said if HCR 12 passed, a task force would be put together to try to figure out a way to make the program work, including municipalities, gas utilities, and gasoline retailers. Number 500 MR. TREADWELL suggested that a lot more people be added to HCR 12 like the mayor of Fairbanks, Commissioner Campbell of the DOT, Mapco, Tesoro, Chevron, Phillips, Ray Lachem, mayor of the North Slope Borough, presidents of Ford, Chrysler, and G.M., along with other independent gasoline retailers. Number 550 RON KING, AIR POLLUTION SAFETY, DEC, showed a map of transmission lines, and where certain stations were located. He said there were stations at this time that could possibly be encouraged to shift to natural gas. Number 588 MR. TREADWELL hoped to have the above-mentioned task force off the ground by spring of 1993. CHAIRMAN GREEN asked if Mr. Treadwell envisioned this being useful in Alaska rather than a metropolitan area. Number 609 MR. TREADWELL felt if this fuel alternative was to prove up over time it could get the DEC out of the oil spill business and help clean things up. It will have to be made to have it work so there is a supply where people are going to drive. Number 632 VICE CHAIRMAN KOTT asked Representative Finkelstein if he would be willing to include propane in HCR 12. REPRESENTATIVE FINKELSTEIN said it was more a drafting question as to whether HCR 12 could include both, because of the way it is written. Possibly a Fairbanks representative would introduce a propane resolution, he added. Number 647 CHAIRMAN GREEN's only concern with HCR 12 is being able to have filling stations in appropriate places. REPRESENTATIVE FINKELSTEIN appreciated all the DEC's suggestions and said he would work to incorporate a new version of HCR 12. Number 653 VICE CHAIRMAN KOTT asked, since the DEC was coming up with a task force, that HCR 12 be pushed through rather quickly. Number 662 REPRESENTATIVE SANDERS asked if the retail price of natural gas would be approximately $.60 per gallon. MR. KING said that the $.60 was the current estimate that he has been given. Number 665 REPRESENTATIVE SANDERS then asked Mr. Karl if the propane would be approximately $1.00 per gallon. MR. KARL said he estimates $1.00, but as the volume increases the price would decrease. Number 669 REPRESENTATIVE SANDERS asked if the price of natural gas would go down also. MR. KING said probably not. Number 671 REPRESENTATIVE SANDERS asked if one alternative is $.60 and one is $1.00, why push the $1.00 alternative. MR. KING said he did not think they could deliver natural gas for $.60 in Fairbanks. Number 676 MR. KARL said one of the major problems with liquified natural gas is to keep it liquified. He said a reason for the higher expense is that the propane trucks go to Prudhoe Bay empty. The price of propane currently in Fairbanks is $1.28, he added. TAPE 93-12, SIDE B Number 000 MR. KARL further stated that he could not think of anywhere in the state one could not go and buy propane. He said 90% of Fairbanks' gas stations have propane. Number 046 REPRESENTATIVE SANDERS asked if the price would get down to $.60. Number 051 MR. KARL said he could not guarantee that the price for propane would get down to $.60. Number 061 REPRESENTATIVE SANDERS asked if he thought it might get down to $.60. Number 062 MR. KARL felt that was a good possibility. He said he knows there is a good possibility if the tax would give up their $.08 per gallon in road tax. Number 070 REPRESENTATIVE SANDERS said if the state was to give up their $.08 that would affect natural gas also. Number 073 MR. KARL wished he could say it would be $.50 or $.52, but in good conscience he felt it would be right at a $1.00 per gallon. Number 076 REPRESENTATIVE SANDERS asked if propane would be viable at $1.00 trying to compete with natural gas at $.60. Number 083 MR. KARL said it would be viable and is cheaper than people are paying for fuel in Fairbanks now. He said natural gas would not be sold in Fairbanks for $.60. Number 100 JEFF OTTESEN, CHIEF, RIGHT-OF-WAY AND ENVIRONMENT, DIVISION OF ENGINEERING AND OPERATIONS, DEPARTMENT OF TRANSPORTATION, said Mr. Karl was correct, natural gas could not be sold in Fairbanks for $.60. He stated the fuel itself is very inexpensive, it is the storing and cleaning of the natural gas that is expensive. Number 135 REPRESENTATIVE SANDERS asked if there was a difference in the price. Number 140 MR. OTTESEN said in the Fairbanks situation you would be looking at equivalent costs to propane, but he felt two alternative products would not be as strong as just one. Number 150 REPRESENTATIVE SANDERS asked if it would be better to push just one over the other. Number 153 MR. OTTESEN thought it would be easier for the public to understand that there is a single choice and it is available statewide. Number 173 REPRESENTATIVE SANDERS said he is not arguing with the concept or picking either alternative, but he felt pushing two things at one time would not be as beneficial as one thing. Number 183 MR. OTTESEN said when the DOT was looking at both propane and natural gas they chose natural gas over propane because there are problems with propane in cold weather. There are also problems with natural gas, like distribution and storage problems, but it is cheaper. HB 199: OIL & GAS EXPLORATION LICENSES/LEASES Number 203 CHAIRMAN GREEN said that testimony on HB 199 would be taken up at this time in reference to the bonding situation. Number 225 SEN TAN, ASSISTANT ATTORNEY GENERAL, GENERAL CIVIL DIVISION, DEPARTMENT OF LAW, said he was available to answer any questions. Number 237 DAVID LAPPI, PRESIDENT OF LAPP RESOURCES, INC., made four points in reference to HB 199, as follows: 1) he thought a dangerous precedent was being set by requiring bonding of limited entry users of the state's resources; 2) it would be difficult for small companies to obtain bonds; 3) the higher up front costs to make the entrepreneurial activity extremely difficult for small companies; and, 4) if the fiscal gap is to be funded with increased production revenues and royalties in the state - explorers around the world need terms on exploration licenses that are at least as attractive as terms that can be obtained in overseas countries. Number 272 CHAIRMAN GREEN asked Mr. Lappi if there was not bonding if he had a suggestion as to how to handle this problem. Number 284 MR. LAPPI felt there were alternatives to be used in place of bonding. He further stated that insurance and regular inspections of operations is very important in countries where they have major problems with prior practice. If environmental regulations were lax or not in force at the time those operations were being carried out, but the situation in Alaska with full regulations and enforcement would preclude a lot of these problems. Number 297 JIM EASON, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, referred to Mr. Lappi's comments and stated the bonding provisions that are included in HB 199 are not intended for environmental purposes. He could not think of any instance in which someone is given the opportunity to explore without some cash, bonding, guarantee, or financial securities of some sort that give the host country some assurance that the proposed work commitment will be undertaken and completed. Number 325 BILL WEBB, GENERAL MANAGER, ALASKA SPORT INDUSTRY ALLIANCE, said the Alliance supported HB 199 for the most part, but felt the bonding was unnecessary as it is written. He said the Alliance would support bonding of the annual program. Number 359 KEVIN TABLER with UNOCAL stated they support the open position on annual bonding. Number 370 CHAIRMAN GREEN put the situation in perspective by saying the committee has heard testimony from one extreme supporting bonding for the entire program to the other end of the spectrum saying no bonding or if so a percentage of the amount of work commitment that would be bid on an annual basis. He stated the committee needed to bring these two extremes together if HB 199 would work and asked for input. Number 391 MR. EASON stated HB 199 is to encourage exploration, but encouraging serious participants. In concept, all companies should have the same resources, intent, and ability to perform, but he said this is not the case. He stated many times in the past there have been problems when you do not have financial security to back the performance that is promised to the state. There are possible legal ramifications that arise if you set a standard so low it becomes inconsequential. Litigation is likely to arise from several different perspectives. First, one would be potential litigation from unsuccessful bidders, who have bid from a responsible position against bidders that turns out are not responsible and do not perform. Secondly, in a situation where you have something as well defined as a work commitment, as opposed to a dollar amount, it makes it that much easier for disputes to arise between the licensee and the state over who has finished a work commitment and what exactly constitutes completion of a work commitment. Number 440 MR. TAN said the basic premise in the line is lifelong licensing. Legislation as it is written right now, not only speaks to the bond, but other financial security. Mr. Tan said if it is an open ended process, we are not protecting the interest of the state and would be in a position of future litigation. Number 469 MR. WEBB stated he does not see a major risk to the state, they undoubtedly are going to use qualified contractors here in Alaska. The worst case scenario is nothing happens. He stated a bond of $1 million certainly discourages small operators. He stated there are other provisions in law, as far as environmental damage, that would take care of any environmental problems. Number 501 CHAIRMAN GREEN said if HB 199 would minimize the amount of commitment that an operator would be held to, either through a bond or some sort of security, and the state could get the land back but it may be several years down the road before the state could reoffer that and the intent is to get that drilled early. Number 522 MR. TAN said the program is to essentially offer opportunity. During this period the State has given up the right to do anything with the land. The concensus would be if there is a requirement to put up a bond for other financial increments then there is an incentive to move and get something done. In the bid process, the commitment for the consideration for the contract is the work commitment. Number 546 MR. WEBB said he would suggest an annual bond, and if you do not perform you loose it at the end of one year. Number 574 MR. EASON said everyone is thinking what does or does not happen after a bid is selected. What we have forgotten is that we have taken away any objective way of evaluating a bid, whether it is sealed or outcry, if it costs nothing, people bid $100 million, no matter how much money they have. With large companies sitting at the tables there would be no way for an administrator who is responsible for selecting the apparent high bidder in a situation to make an informed choice. Number 616 REPRESENTATIVE SANDERS asked Mr. Richmond if there were other financial instruments available to the independent drillers that might protect the state's interest; anything besides bonds. Number 620 RICHARD RICHMOND said the major concern among all the people seems to be the availability of a bond. He feels some security is necessary to guarantee performance of a contract. He said there are other instruments that could be used, like irrevocable letters of credit, which are widely used in the rest of the world. There is no insurance product that would guarantee performance. The only product would be a bank guarantee or an individual type bond. Number 647 PETE NELSON, LAND MANAGER, TEXACO, said Texaco supports the AOGA's (Alaska Oil and Gas Association) position regarding the annual bond in the amount of the annual work commitment for that year with a provision that a bond would be forfeited if the work was not done in that one year. She felt this fell in the middle of what the large oil companies want and the smaller companies and independents. Number 000 MR. EASON said a few things that raised a red flag when he read the AOGA's proposal was looking at things on an annual basis, but it is subject to potential litigation because of the fining problem. It is very difficult to set up an RFP (request for proposal) to entertain and review proposals when you do not have the same schedule of events that are proposed to occur. Another problem is most companies do not want the state in their business. He stated an alternative he has would require less bonding or security up front, but it would also do some things that are very positive. It would encourage earlier more intensive exploration and evaluation of the acreage. It would leave a larger amount of money in the hands of the licensee to do that and at the same time it would incur some penalties if you did not. It would also provide some cash return to the state in the event the licensee walks away during any point of that commitment period, short of the entire body of this commitment. MR. EASON faxed a copy of his formula to the committee at this time. (A copy of this fax may be found in the House Special Committee on Oil and Gas Committee Room, Capitol Room 114, and after the adjournment of the second session of the 18th Alaska State Legislature, in the Legislative Reference Library.) Number 101 MR. EASON said the winning offer is for a five year work commitment of spending $50 million and the way this security provision would work is each year you would calculate the annual obligations that have to be posted by applying a formula. The formula would consist of a numerator, it would have the total value of the work commitment you proposed minus the cumulative expenses that are incurred. There would be a denominator that would consist of the number of years remaining in the program. He further stated costs allowable for the expenses would be very limited and very direct measurable costs labor, benefits, rentals, and contract costs. Overhead would be excluded, eliminate the costs of providing bonds. Number 186 CHAIRMAN GREEN asked Mr. Eason if before the Commissioner put out the bids as to what costs would be allowable, or would they be standard. MR. EASON said there would be a definition and he had a suggested one. He suggested that the definition be put into HB 199. Number 230 CHAIRMAN GREEN asked by using this method if it would limit licensing to major players. MR. EASON said for these size projects, this would be the kind of company that would need to do this. It is an option for the company, either a very small company or a very large company, to have the exclusive right to explore the area and to convert it to leases. Number 270 MR. LAPPI said the way HB 199 is currently written there is no requirement of any company to explore or extend any money before the tenth year. If the state is truly interested in promoting exploration and getting work done early on he said he felt this bill should then address this problem. He said the state should not shy away from trying to produce wealth because a lawsuit may result. The state needs to produce wealth and produce the wealth on the expectation that lawsuits may occur. Number 302 MR. RICHMOND did not realize HB 199 was written with a 10 year obligation. He said that would be impossible to get for any company, except for the very strong as far as a bond is concerned. The maximum bond that any company would want to write in terms of time would not exceed three years at the very maximum. He said speaking on the forfeiture type of bond, which in effect is a financial guarantee and for anyone, and again only the very strong company. Number 327 MR. EASON said other countries that have an easier way of dealing with this are not troubled by having to follow competitive procedures. The simple solution to this would be to amend the statutes to allow the Commissioner to negotiate with any individual he wants to have a work commitment performed on state lands that he at his discretion is in the state's best interest. Number 348 MR. WEBB said the state has land that nothing is happening on. He did not feel there would be too much of a competitive situation. Number 388 MR. TABLER said he would like to have the opportunity to write comments on Mr. Eason's proposal after UNOCAL has the chance to review it. ADJOURNMENT Number 399 CHAIRMAN GREEN adjourned meeting at 7:00 p.m.