HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 17, 1995 5:00 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Bettye Davis Representative David Finkelstein MEMBERS ABSENT Representative Scott Ogan, Co-Chair Representative Gary Davis Representative Bill Williams Representative Tom Brice COMMITTEE CALENDAR HB 207: "An Act relating to adjustments to royalty reserved to the state to encourage otherwise uneconomic production of oil and gas; relating to the depositing of royalties and royalty sale proceeds in the Alaska permanent fund; and providing for an effective date." HEARD AND HELD HO&G - 03/17/95 HB 209: "An Act relating to the authority of the commissioner of natural resources to allow reductions of royalty on oil and gas leases; and providing for an effective date." SCHEDULED BUT NOT HEARD WITNESS REGISTER KEN BOYD, Deputy Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Answered questions on HB 207 PREVIOUS ACTION BILL: HB 207 SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S) 02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE 02/27/95 501 (H) FISCAL NOTE (DNR) 02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV) 02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER 03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) 03/09/95 (H) O&G AT 12:00 PM CAPITOL 17 03/09/95 (H) MINUTE(O&G) 03/14/95 (H) O&G AT 10:00 AM CAPITOL 124 03/14/95 (H) MINUTE(O&G) 03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211 03/15/95 (H) MINUTE(O&G) 03/16/95 (H) O&G AT 10:00 AM CAPITOL 124 03/16/95 (H) MINUTES(O&G) 03/17/95 (H) O&G AT 05:00 PM CAPITOL 124 BILL: HB 209 SHORT TITLE: OIL & GAS ROYALTY REDUCTION SPONSOR(S): REPRESENTATIVE(S) GREEN, Rokeberg JRN-DATE JRN-PG ACTION 02/27/95 503 (H) READ THE FIRST TIME - REFERRAL(S) 02/27/95 503 (H) OIL & GAS, RESOURCES, FINANCE 03/01/95 551 (H) COSPONSOR(S): ROKEBERG 03/09/95 (H) O&G AT 12:00 PM CAPITOL 17 03/09/95 (H) MINUTE(O&G) 03/14/95 (H) O&G AT 10:00 AM CAPITOL 124 03/14/95 (H) MINUTE(O&G) 03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211 03/15/95 (H) MINUTE(O&G) 03/16/95 (H) O&G AT 10:00 AM CAPITOL 124 03/16/95 (H) MINUTE(O&G) 03/17/95 (H) O&G AT 05:00 PM CAPITOL 124 ACTION NARRATIVE TAPE 95-14, SIDE A HO&G - 03/17/95 HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES Number 000 CHAIRMAN ROKEBERG: ...are you there? Hello, Anchorage. Ken? Ken? Anchorage. (Aside: They were there a few minutes ago.) CHAIRMAN ROKEBERG: Is everybody here that want's to testify today? We have a lot of observation. Right. Why don't we just try to get them again. Bill Van Dyke, he's still missing. Is there hearings still going on in the Senate right now? UNKNOWN FEMALE: I think it's over. CHAIRMAN ROKEBERG: Okay. Yeah. We could be real informal. I just want to make the secretary's job as easy as possible. It's unfortunate that Bettye, Representative Bettye Davis and myself are in attendance. We don't have a quorum. There's a number of people traveling. The fish guys are in Kodiak, etcetera. But there's a few, I just was trying today, the Chair's intention today was to take any more further testimony from the public, is to have the Division of Oil and Gas Commissioner's Office present any testimony or any answers to questions they might have. And discuss conceptually with them a few points right now that we're working on in our, our committee substitute draft. We're in the middle, for everybody's information, we're in the middle of drafting our committee substitute -- how's he doing? Have you got through yet? That's all right, we're not on the record. We're on the record, but we're not on the record. UNKNOWN FEMALE: Ken isn't talking yet. He's still in resources. Don't you have anything to use? CHAIRMAN ROKEBERG: Resources. He's still over in .... UNKNOWN FEMALE: Revenue (indisc.). CHAIRMAN ROKEBERG: No, he's in the Senate Resources Committee. That's what's going on. UNKNOWN FEMALE: Okay. So, I guess he's not there yet. CHAIRMAN ROKEBERG: Well, we can just have a public debate here about our CS we don't have and wait for Ken to show up 'cause there's a few, just... UNKNOWN: He's going to come back? If he was there, I mean, it's a mess in Anchorage. CHAIRMAN ROKEBERG: Yeah, he's, he's.... UNKNOWN: Oh, he's coming back here (indisc - both talking). Oh, you mean Ken Boyd. CHAIRMAN ROKEBERG: Yeah. He's not talking over us. He's with Senate Resources. UNKNOWN FEMALE: (Indisc.) in town. Everybody else is gone. CHAIRMAN ROKEBERG: I know. Well, he's the only, he's teleconferencing Senate Resources there. UNKNOWN FEMALE: Oh, okay. I see. CHAIRMAN ROKEBERG: See, as soon as he gets done with that he will come over and.... UNKNOWN FEMALE: I understand now. CHAIRMAN ROKEBERG: So, we're going to take what little testimony we have and talk about some of the problems that we're facing with the CS. There's been a, the first one I want to bring up is the, and I would invite any comments from the audience here in this regard, in terms of the oversight we've been discussing various entities, groups or individuals to be part of the oversight group. There seems to be general consensus that we could it at the Attorney General as part of that, and so we're giving that (indisc.) consideration. My concern is that to expand that we have to have discussions about the Alaska Oil and Gas Conservation Committee, and also the Royalty Board. And I was going to have Mr. Boyd or Mr. Bill Van Dyke, of his office, talk to us about that today. There seems to be some resistance on the part of people to put, to put this entity in the loop, and I, I'm not sure. What I'm hearing from at least some members of the committee is they agree with my idea of having the loop, but we haven't really had a discussion about that. And as I understood it, I've taken some comments from various people regarding an apparent conflict of interest between the conservation commission and the, and decision on a royalty reduction. You know, there's the scope of purpose of the conservation commission is to maximize to the best efficiency the lifting of oil in various pools and units in the state of Alaska. There seems to be the growing consensus that that might be at odds with the charge of reviewing this, so. I have yet to be convinced possibly, but I'm hoping to discussing the royalty board, and the (indisc. - coughing) is comprises of six members three of which are public and three of which are commissioners, including the Commissioner of Natural Resources, Commissioner of Commerce and the Commissioner of Revenue. Is that right? And, that they are appointed at the will of the Governor as far as the conservation commission is appointed (indisc.) room for cause. Do I hear some noise in the background? Ken, you're there. Number 116 KEN BOYD, DEPUTY DIRECTOR OF DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES (Teleconference): Yes. I apologize, Mr. Chairman. It just worked out that two trains that crashed at five o'clock. Number 117 CHAIRMAN ROKEBERG: I can appreciate that. I know that, and I fully understand, and I'm glad you could make it. And we're just, there's a few folks here in the room from the industry and Representative Davis and Representative Finkelstein. We don't have a quorum, but we're taking testimony and we would like to ask you a few questions and let you respond, and then we can discuss a few other things and maybe we can adjourn so we can go back to work on drafting the CS. And first and foremost, we're, I was just discussing the conversations we've had about the, the oversight loop as it related the attorney general, the problems with the conservation commission, which I appreciate your comments on, any conflict of interest there? And then, the department's position on utilizing the royalty oil and gas development board as part of the loop. Could you, could you expand on those and answer some of those questions, sir? Number 141 MR. BOYD: I'll certainly try, Mr. Chairman. I, I provided staff with the attorney general's opinion from 1980 that in pertinent parts was, we (indisc.) that from a legal standpoint even the appearance of a connection between the commission and the department of natural resources would be inadvisable. And it goes on. Number 150 CHAIRMAN ROKEBERG: Excuse me, Mr. Boyd. Number 154 MR. BOYD: It just seems that there is inherent conflict of interest between having AOGCC give oversight to DNR. Number 155 CHAIRMAN ROKEBERG: Mr. Boyd, was that, you gave me about a sheaf of papers, maybe five to eight pages there, the other day with some pink and blue highlight, was that the one you were referring to? Number 156 MR. BOYD: Yes, Mr. Chairman. CHAIRMAN ROKEBERG: Okay, good. Okay. We I.D.'d that one, it's somewhere in the stack. Okay. Now that we know what we're looking for. Thanks, Ken. MR. BOYD: Okay. CHAIRMAN ROKEBERG: (Indisc.) Number 165 MR. BOYD: (Indisc.) it is also, it also an opinion of theirs from a former, well, she is an attorney, and it's also, it sort of flushes out some of the statements that are made in the attorney general's opinion. And again, we do see it as, as a fairly direct conflict of interest. As to the other perhaps message of oversight, to the extent that we believe that, the committee believes that oversight is required, there are two other things perhaps to consider. One being the concurrence of the attorney general and the other is the Alaska Oil and Gas Royalty Board, which, it's not quite their full and correct title, but that's what they are called, the Royalty Board for short, and I just caught the part, Mr. Chairman, where you described the composition of the royalty board. The royalty board is directly, has reviews to take testimony on in-kind oil sales. In other words, and this will be happening fairly shortly. We're trying to negotiate a contract now with Tesoro. And what happens is we negotiate the contract with Tesoro and we take the contract to the royalty board, the six members, and we present the contract and we are asked questions and the royalty board reviews the contract, and as a result, it's a public meeting, and as a result of that, the royalty board makes its recommendations to the legislature prior to the bill being introduced. The royalty board is, is anybody that I have talked to I have obviously not researched this thing to its depth, but it has been my experience that it has never been used for any other purpose, which is not to say it could not be. There are the three commissioners and there are three members selected from the public that are supposed to have at least some knowledge of oil and gas, although it says so without any specificity whatsoever. In my view, it might be difficult, you can add little layers, if you like, of, I don't want to call it bureaucracy, but it is a little layer of, of (indisc.) that's hard, that it will take to review these things. Again, it's Commissioner Shively's view that if oversight is required, he believes the concurrence of the attorney general will, when you consider you have a public notice, I beg your pardon, a finding process and a public hearing process as part of this bill, you have the concurrence of the attorney general. Commissioner Shively believes it's quite enough oversight. Number 215 CHAIRMAN ROKEBERG: But, in terms of all the, exclusive of the attorney general, if you had to make a choice, the royalty board would be better than the conservation commission. Would that be fair to say? Number 219 MR. BOYD: Yes, Mr. Chairman. I mean, there's no, the AOGCC is clearly conflicted, really conflicted. The royalty board is clearly not conflicted. (Indisc. - coughing) or about DNR's activities or perhaps bid over new unit agreements at the same time they're trying to review royalty reduction requests. It would be done, I advise you, Mr. Chairman, in isolation. Number 228 CHAIRMAN ROKEBERG: Okay, and, let's go onto another topic right now. The, you indicated earlier today that there had been a decision on the part of the commissioner in response to the question yesterday as to the full differential between new fields and mature fields where we discussed and, correct me if I'm wrong, that the commissioner would be amendable to a 25 percent of the bid lease rate as a floor on new fields, and we had asked about removing any, or establishing any floor on, on more mature fields, and he was to get back to us. Do you have a response on that issue? Number 245 MR. BOYD: Yes, Mr. Chairman. I talked to Commissioner Shively early this morning. He indicated to me that he wants the floor to remain at 25 percent throughout the bill. Number 252 CHAIRMAN ROKEBERG: And it is, .... REPRESENTATIVE DAVID FINKELSTEIN: Mr. Chairman. CHAIRMAN ROKEBERG: Representative Finkelstein. Number 253 REPRESENTATIVE FINKELSTEIN: For the floor to remain at, I missed the last part of that. The commissioner wanted the floor to remain at? Number 257 CHAIRMAN ROKEBERG: Twenty-five percent if we're going to have a floor at all. Mr. Boyd, that leads to the next question. If the committee would remove any kind of floor at all, would there be an objection? Number 260 MR. BOYD: Mr. Chairman, I can only say that Commissioner Shively has said that he prefers the floor to stay at 25 percent. Number 264 CHAIRMAN ROKEBERG: Could you, could check with him, I know you have nothing else to do, but, do you? If you can get through the snow to your telephone in Anchorage, to find out if we were to remove that provision in its entirety, would there be any heartburn or problems with the commissioner? Number 270 MR. BOYD: Mr. Chairman, when you say, remove the provision in its entirety, could you...? Number 271 CHAIRMAN ROKEBERG: Remove the 25 percent floor. MR. BOYD: (Indisc.) floor it would be zero in all cases. CHAIRMAN ROKEBERG: Well, I just would, (indisc.) to give him the full discretion. Number 273 MR. BOYD: In other words, you could then have a zero royalty on the nonproducing fields? CHAIRMAN ROKEBERG: That would be the intended effect, yeah. MR. BOYD: I, Mr. Chairman, I guess I speak to the commissioner again. I know I hesitate to do so, but I'm sure that will be unacceptable. CHAIRMAN ROKEBERG: Well, the floor is my idea in the first place, Ken. Excuse me. MR. BOYD: Mr. Chair, I'll tell you the floor (indisc.)... CHAIRMAN ROKEBERG: Okay. MR. BOYD: ... but by that number, 25 percent, to put the floor at zero on a field that has not even been producing, which was probably have an ELF of zero, or a tax of zero, leaves you with nothing. Number 283 CHAIRMAN ROKEBERG: Well, if we make a distinction then and put no floor in the CS, what you, his reaction be? To object to it? Number 286 MR. BOYD: That's my belief, Mr. Chairman. Number 288 CHAIRMAN ROKEBERG: Okay, you're, I think it's crystal clear what you're saying, but we had to ask. Thank you very much. Mr. Boyd, when you look at the existing regulations that have related to Section J, there was some questions I believe that I showed you, was it yesterday, the letter regarding the North Trading Bay application from Marathon Oil, and a response to Mr. Kukluff(sp), I think it was March of, well, I don't know what year it was. Then there was a recitation of the statute and the regulations, and then a list of the points that had to be made on an application from the application. Then I think I showed those to you. I'm not sure you had a chance to look at those; however, I'm very curious about that because it seemed to me that the standards that were set forth in the letter by then director, Mr. Eason, were higher than what was required in the regulations. Do you know what I'm talking about? And could you comment on that? Number 306 MR. BOYD: Yes, Mr. Chairman, I believe it was the same. Again, there was references to two (indisc.) and two of them (indisc.) with regulations. I'm sure you'd be (indisc.) out, but I believe that the first part of that, the request one set of regulations that are pretty standard and talk about statement of facts, (indisc.) of facts by description, and then it goes into the other statute, I beg your pardon, in the regulations, just stating that you do not compile the data. It just gives the list of the data that you're supposed to provide. Again, the director is saying, here's the information I need to make my decisions. I can't say that this will go beyond anything, that's what he needs to make a decision, I presume that's what he needs to make his decision. Number 322 CHAIRMAN ROKEBERG: Mr. Boyd, I appreciate if you could take a look at this whole regulatory scheme because I have a concern about it now and how it relates to the directing of our CS on this, because the chair is contemplating adding adopting regulations back in because I'm concerned about leaving any loose ends, so if, if you want to avoid something like that, we need to take a look the regulations that would apply to this circumstances. And I wish you could take a look at those to give us some direction. I think we discussed this before because it seems to me if we leave, the existing regulations survive this, there is a process for a public hearing. There is also the aspect of confidentiality and then there may be some other catchall regulations that may apply here. Could you give me your opinion, kind of describe the whole public process, hearing process and confidentiality as they relate to the regulations, and how you see that unfolding? It's a bad question, but.... Number 340 MR. BOYD: I don't even know where to begin. If you, you know, are you asking me how, how you change regulations? How you adopt regulations? Number 344 CHAIRMAN ROKEBERG: No, how, what would happen if we didn't, like the existing HB 207 deletes the reference to adopting regulations. We have an existing set of regulations there that relate to the sections, and in that it provides a laundry list of, of what has to be done in the application. Does that survive, or how does affect the whole thing? Number 351 MR. BOYD: Mr. Chairman, I, I simply don't know, that whole process of law, or how law is made by regulations (indisc.). I only recall yesterday Commissioner Shively having his pledge that he would not be overly burdensome with any requirements to provide data. And if that needs to be changed somehow, I just don't, I'm just not certain how to do that, but I assume you can do a statute or regulation. In many ways I believe it is a statute that, that the applicant really needs to that clear and convincing showing, and if that's what you have to have, then I presume (indisc.) some things you need to have to (indisc.) a convincing show. CHAIRMAN ROKEBERG: Okay, Representative Finkelstein has a question. Number 363 REPRESENTATIVE FINKELSTEIN: Well, just, the way I see this working and I don't think there's any, could be the confusion around this is that the new law passes, then the, as of that date, any regulation that is in conflict with that is no longer in effect. The, undoubtedly, the, because this is how these things work, the commissioner would at that point revise the regulations of, to, and in the process of the two, you mentioned the confidentially, confidentiality, assuming the bill was as it is written here would clearly have to be written, because it's a new standard. Things like public hearings are less clear because, you know, there may be circumstances the commissioner believes the public hearing is appropriate. It doesn't have to be a public hearing on the administrative procedures act, but it could well be, and I think it will be a variety of other areas. We, we've just never, in complicated areas like this, been ever, been able to pass a law that covers all the details, 'cause we'd be at this table, you know, until the end of the year. And luckily, we turned that stuff over to them and, and the process itself takes care of the nonconforming regulations. They will be gone. The day this passes they will, they will no longer hold effect because the rule always is that a regulation can't stand unless it has a statute to be based on. Number 383 CHAIRMAN ROKEBERG: Thank you, Representative Finkelstein. That helps me a little bit here, but what I, I guess what I'm driving at, Director Boyd, is that in order to avoid any problems, which I think were revealed in the application at North Trading Bay, in my opinion whereas the request for the application exceeded what I thought were in existing regulations, on the one hand. Or secondarily, the regulations as written required almost too much information, that maybe we need to revisit the regulations is my concern. That's my concern. And if we want to expedite the process perhaps we should speak to the statutorily and I'd just like to have your opinion on that. Maybe require you to go look at the regulations, I understand. Number 398 REPRESENTATIVE BETTYE DAVIS: Mr. Chairman. CHAIRMAN FINKELSTEIN: Representative Davis. REPRESENTATIVE B. DAVIS: If you having a problem with the regulations, which you say that you are, then you address it in the statute, then as Representative Finkelstein has said, the old regulations are going to go anyway, so you're going to promulgate new regulations. So, if you think that it needs to be identified more clearly in, in the statute, then you would do that. And, I thought you were going to do that, you had said that you were, you going to say what you require, make it more explicit so we wouldn't have the problem that you have with the North Bay, or whatever the, you cited. I don't think that is a problem. Number 408 CHAIRMAN ROKEBERG: Well actually, Representative Davis, thank you for putting that in such a way because actually the only problem I have is I need some help from the, the commissioner's office to help us with what we should put in the bill here. Number 410 REPRESENTATIVE B. DAVIS: Right, but you see the commissioner's office is not going to necessarily tell us what we should put in there. I think we're going to have to be the ones to do that. They'll tell you how they feel about what you think you want to put in there, but they're not going to say, well, you put it in there because we're not going to do what they say necessarily, because we might not necessarily agree with what the commissioner says. We might decide we want to do it another way. Number 415 CHAIRMAN ROKEBERG: Excellent. Perfect. That's exactly where I want to be right now, if everybody has that understood. Number 418 REPRESENTATIVE FINKELSTEIN: Well, Mr. Chairman, in the end we get the final say... REPRESENTATIVE B. DAVIS: Right. REPRESENTATIVE FINKELSTEIN: ...because in the interim if they adopt regulations or enact policies that, you know, you don't believe address your concerns and your intent then you pass a new law next year to straighten them out. Number 422 CHAIRMAN ROKEBERG: Very good, very good. Let's see, does the, well, I'm trying to figure, figure out another question so we can get out of here. Does anybody... Number 424 REPRESENTATIVE B. DAVIS: Before, before you go any farther, what do you plan to do in your new CS that's going to address the problem where there was language that said the commissioner would have the opportunity to address the royalties across the board, up or down, at his discretion. There was some discussion yesterday, or some other day, that they said that it should be decided at the time that they apply for the reduction. Is that the way you're going to put it in your new CS? Number 430 CHAIRMAN ROKEBERG: Yes, it is. Number 432 REPRESENTATIVE B. DAVIS: Okay, you will have that in committee. 'Cause I spoke with you on that yesterday. You said you were thinking about... CHAIRMAN ROKEBERG: Right. REPRESENTATIVE B. DAVIS: ...doing that. So you... Number 433 CHAIRMAN ROKEBERG: If I'm not mistaken what we were thinking about doing is stipulating our preference, if you will, without using the right words, that we would establish, we would prefer that the commissioner establish a sliding scale royalty based on price and various other factors. Number 437 REPRESENTATIVE B. DAVIS: But when you say sliding scale, are you addressing individual lessees as they apply? CHAIRMAN ROKEBERG: Oh, yes. REPRESENTATIVE B. DAVIS: And not something else. Number 439 CHAIRMAN ROKEBERG: Absolutely. Everything is discrete. Absolutely. Every, every, and we're also going to add a provision that gives the commissioner flexibility too. You know, so we don't tie his hands or, what we want to do is stipulate to our preference, but he does have a sliding scale. And then the only other thing is that we might, is the reopeners issue and how we're going to fine tune that, and whether or not -- that becomes important because if you have a sliding scale situation the oil prices and even the production levels can be taken care of formulaically(ph), but if you don't have a sliding scale you need to stipulate that if there's an oil price increase or production volume reserve increase, then there needs to be a reopener or something like that. So, there's kind of two different things and we just have to, that's the intent. I think everybody agrees with that. It's just how you get it drafted in the language so it has that effect. Is there any other questions? Representative Finkelstein. Number 455 REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Mr. Boyd, the, what is it in existing law that would protect us from a company that goes in, bids on a competitive lease, loses, their competitor gets the lease, a few years down the road comes in to get their, the terms changed under these provisions and then they sue because, you know, they competed under the terms, previous terms and didn't get the lease. Is there anything that protects us from that law suit? Number 462 MR. BOYD: Mr. Chair and Representative Finkelstein. I'm not a lawyer, but from what I've been told this is not a, a right. You know, this is not something we're granting as a right. It's something that is negotiated settlement. The statute that a party may sue as part of the negotiated settlement as opposed to a right, I can't, I don't, I just don't know what the opportunity for a law suit may or may not be. But it seems to me that if it were a right that was granted, if you had to do this that might be a different situation from one where somebody comes (indisc. - coughing) given a state deal, if a reason to negotiate a set of circumstances the decision is made in a public forum. Again, not being a lawyer, I can't say it is not subject to legal action, but it seems to me that it's much less likely to be subject to legal action. Number 476 REPRESENTATIVE FINKELSTEIN: Well, this may be something we want to get some legal opinion on 'cause it, I'm not an attorney either, but on the face of it it seems like there's a problem. If I'm out competitively building, competitively bidding to build some sort of building, I put in my bid for ten million, someone else get it for nine million and it's a, you know, 400,000 square foot building, and the next think I know it's a 300,000 square foot building, and I would have bid less for that because they have revised downward the standards, I'm going to be an aggrieved party and I certainly didn't get an opportunity to bid on that. It, it may be that, I mean, it is a legal question and I don't know the answer to it, but it's certainly something I think we ought to be concerned with. There's probably solutions to it by making clear in the lease arrangement that it's subject to these provisions, and that's not a, anyone who agrees to bid is giving up their right to later challenge based on that revision. Number 492 MR. BOYD: Mr. Chairman and Representative Finkelstein, I did give to the chair a, a five point, the title of this is Nonappealability Clause, and again, this is not an attorney general's opinion. It is the opinion of a single attorney general, assistant attorney general. I, I was just, well, I read one yesterday and perhaps this is the most bombastic. I was reading (indisc. - someone else speaking into the microphone). The Alaskan report has reserved the limited rights to refuse nonappealable agency decisions to the extent necessary to ensure that the agency action was not unconstitutional, that the agency was impartial and that procedure followed was fundamentally fair. And in the third point, again, it's always the moral stuff, if the applicant or a third party can show that DNR's decision flatly (indisc.) your federal constitution, or that DNR acted in a fundamentally unfair manner (indisc. - sneezing) in the nonappealability clause, the court will likely review this decision, or the decision process. Again, Representative Finkelstein, I'm not sure that gives you 100 percent comfort. I'm not sure (indisc.) anything will. But I believe that there is some fundamental (indisc. - coughing) that there is some protection. You can't just frivolously appeal this and if it is a well reasoned decision based on this law I would think it would be very difficult to challenge unless, in fact, the process were fatally flawed. Number 511 REPRESENTATIVE FINKELSTEIN: Mr. Chairman, that issue, that's an interesting one which I think relates to the issue of whether one can appeal to the courts regardless of what's written to law, and I don't, I haven't seen the opinion on that subject, but I'm interested in it. The question I was getting at, which I, I guess we can't answer at this point, is are we exposing ourselves unnecessarily, regardless of the right to appeal, are we exposing ourselves to a challenge because we changed the terms after someone else has bid it competitively. And I, I don't believe it's necessarily a problem in the future because I'm sure you'll put into make it part of the competitive leasing that these, you are, any company that bids on these is bidding on these, you know, reflecting that the standards and law applies, it's self evident that they could be reduced in the future, but to go and apply this to existing leases where someone bid under terms that were different than these I their, it raises a question as to whether it could be successfully challenged. I don't know if it's worth getting an attorney general opinion, or legal affairs opinion on that or not, but I, I certainly think that is the most likely, besides the company themselves, that they don't get the approved royalty reduction, but in the case of an approved royalty reduction, the most likely person to challenge it is going to be the entity that lost the original bidding. Number 535 CHAIRMAN ROKEBERG: Thank you, Representative Finkelstein. I'd like to just state that I share your concerns in that area. That's what I've been calling the integrity of the bidding process issue that's really kind of parallel and collateral to this and we really don't speak to it in the bill, but there's, it's an implicit concern here and.... Director Boyd, we have had this conversation, let me state my proposition and you can respond to it. Would you think that limiting the criteria for the types of bids in the future would be, would have any positive effect? I know under existing statute the commissioner has the ability to design different types of bids, including one with a, the royalty being a variable. If we were to change the statute to limit future bids to say 12.5 percent the customary royalty and allow such, and limit that, and then they, and, of course, you have the other variables. I've even heard a rumor about a sliding scale royalty scheme, at any rate, but do you think that would have any, would that help us in any way in terms of this integrity of bidding process that Representative Finkelstein is talking about? Number 554 MR. BOYD: No, I see no way at all would that solve the problem. I mean, I don't see, why would that, first of all, then, then you've taken away the ability of the state. Let's say there's a discovery made in the Western Beaufort(?), just for the sake of example. It's a new geological (indisc.) and let's say, let's add to it that the price of oil goes up. When we now limited ourselves to 12.5 percent royalty when, in fact, (indisc.) third replacer bid or 25 percent might be much more appropriate. (Indisc.) In any case, if you, if you limit the royalty to 12.5 percent we still have a royalty reduction bill and I presume this, after they're going to want to reduce I don't see how (indisc.) whatsoever. Number 563 CHAIRMAN ROKEBERG: It was, the challenge I guess was, in terms of the bidding process I guess is what I was talking about. And generically, in other words, if you had a variable as a royalty a firm could bid above the 12.5 percent standard minimum royalty and then come and pray for a reduction under Section J somewhere down the road, is what I'm getting at. Like the old 'bait 'n' switch' is what I'm driving at. Number 570 MR. BOYD: Well, Mr. Chairman, they've been coming in now at 12.5 percent and ask for a royalty reduction. I don't, I don't, I would not like that flexibility (indisc. - coughing). Number 571 CHAIRMAN ROKEBERG: Okay, well that, that answers that question, doesn't it? Okay. Thank you. Representative Finkelstein. Number 573 REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Mr. Boyd, I, I'm not sure I understand what it means, page two, line 28, where we refer to a delineated field. It gets used a lot and I think you, you know what it means, you know what it means to you, what would you, how would you describe the degree of delineation necessary to call a field delineated field? Number 579 MR. BOYD: Representative Finkelstein, let me just deal more with (indisc.) rather than the something that you can just stand by something. Each field will, will vary slightly as to how they, what, what degree of liniation that they need. But I think in a simple term, it, it's (indisc.) would it be done, and would involve perhaps seismic dimensional seismic three, dimensional seismic and the drilling of some number of wells. And I think it would be a standard that a prudent operator would actually go forward with development. I think what happens is if, let's say (indisc.) drills, let's say for the sake of argument, three wells and some seismic (indisc. - coughing) on this particular field, and they come in for a royalty reduction. As part of the negotiation for the royalty reduction I believe the commissioner could decide that this part of the field where the wells are and could certainly extend to where the (indisc.) seismic is, is sufficiently delineated that we can grant the royalty reduction on the lease covered. But perhaps, perhaps on the very edges of the field where the seismic is perhaps of poorer quality or is equivocal, you might not grant a royalty reduction, although you might say, if you do X amount of work, then we'll see if the field is to be delineated. So, again, it's a bit of a term of art. I believe it enters into the negotiation as to whether royalty reduction is warranted. Number 596 REPRESENTATIVE FINKELSTEIN: Well, Mr. Boyd, how could you grant a royalty reduction on one side of this field and not on the other? Number 598 MR. BOYD: Mr. Chairman, Representative Finkelstein. You could, you're given the ability of this, of this legislation to grant this oil lease (indisc.). Number 600 CHAIRMAN ROKEBERG: For a pool by pool bed. Number 601 REPRESENTATIVE FINKELSTEIN: If, if, let's say we had, these things are hard for me to visualize, but let's say we had a spot, there's a, you know, sort of, some sort of strike (indisc.), there's delineation kind of wells on three sides of it and the fourth side of it isn't know. Okay, it could be relatively small, or could extend out some great degree, that part that isn't known. Is that a delineated field? Number 607 MR. BOYD: Mr. Chairman, again, that, the statement of (indisc.) two gentlemen, you say that you know that three-quarters of the field, and understand three-quarters of the field, understand them, yes, I would say it is lineated. As to the last quarter or last piece as far as lineated, the answer is no. You would then determine which leases, through this process, are delineated and, you know, and then negotiate the, the royalty reduction contract, if you like, and exclude those portions of the fields that the commissioner's decision says are probably delineated. I mean, yes, it can be on individual leases. Number 615 REPRESENTATIVE FINKELSTEIN: Well, I somehow see that as, in my poor understanding of what, the drama here, is in conflict with what's in this particular sentence because we're talking about only allowing this in a lineated field, not, you know, delineated portion of a field, or delineated subdivision that's the site of the lease. You have to make the decision that feels delineated, and the reason, of course, is it affects the viability of the whole field. I mean, how big it is. MR. BOYD: Mr. Chairman. Number 623 CHAIRMAN ROKEBERG: Mr. Boyd, if I could interject right here I might even cloud the issue a little further, but I think it's appropriate to let everybody know. We have a definition, a working definition of field right now that may impact on Representative Finkelstein's question. In, do, to read the portion of it, it says "...to allow for production from a delineated but not previously produced field, pool or portion of a field or pool that would not otherwise be economically feasible." Well, we've that to take in the horizon concept and allow these different stratums and so forth to be considered, you know, in a proper basis like West Sak above Kuparuk and all that stuff, so. And, but nevertheless, I agree with Representative Finkelstein, and if you will allow me, Representative Finkelstein, just to, I, I really agree with his concern and would ask, you indicate the delineate as a term of art, but would, are there any modifiers like, you use the word sufficiently, or wholly, or completely delineated that would be, would tighten up that language any? Number 639 MR. BOYD: No, Mr. Chairman. I don't believe so. I'd like to say something first. On page three, line three, it specifies individual leases more than anything clear (indisc.). Number 642 CHAIRMAN ROKEBERG: Let's see now. Could you give me the line again there? Oh, on line three, page three? Number 643 MR. BOYD: Yes. "...to allow reduction of royalty on individual leases or leases unitized..." etcetera. Number 644 CHAIRMAN ROKEBERG: Is that a conflict with our redefinition of field then? MR. BOYD: It is not. CHAIRMAN ROKEBERG: It is not. So, that's okay? MR. BOYD: Um-hmm. Number 645 CHAIRMAN ROKEBERG: Okay, so, what's the point there then? So I understand that. Number 646 MR. BOYD: I believe the point is that you can, you can make the decision on a lease by lease basis whether something is delineated or not. Number 648 CHAIRMAN ROKEBERG: Oh, I see. In other words, you could have a huge field, but you'd have one lease inside the field, and then you'd know that area was delineated. Number 649 MR. BOYD: That's correct. CHAIRMAN ROKEBERG: Is that, is that what you're saying. Yeah. Okay. Number 650 REPRESENTATIVE FINKELSTEIN: Mr. Chairman, I find this all to be illuminating, though not reassuring because I, I know when the commissioner has described the steps under this bill approve this, he's, he said, number one, it's got to be a delineated field. Number two, it's, what is the second one? I, forget the second one. Number three is it has to be in the, you know, meet the best interest finding. That those three considerations will have to always be made. Actually, what is that second, second hurdle? What am I forgetting, do you know, Mr. Boyd? Number 657 MR. BOYD: Well, Mr. Finkelstein, I just couldn't quite hear the question. Number 660 REPRESENTATIVE FINKELSTEIN: Well, the, what are the three, the commissioner was describing the terminations he has to make on this and he said, number one, he's got to determine it's a delineated field. Number two escapes me, and number three is he's got to make the best interest finding. What's the, what's the other determination you have to make before allowing the royalty reductions? CHAIRMAN ROKEBERG: They need the relief. Number 663 REPRESENTATIVE B. DAVIS: Economics feasible. CHAIRMAN ROKEBERG: Yeah. REPRESENTATIVE B. DAVIS: That's what it says. CHAIRMAN ROKEBERG: Economic feasibility. Is that right? Does that.... Number 664 REPRESENTATIVE FINKELSTEIN: Well, I, I'd assume that to be part of the best interest, the finding, but maybe that's another.... Okay, if that's, if that's, my point I'm getting at is that the, this delineated, whether or not it's delineated field, but the definition I'm, you know, coming to understand now from you, basically, doesn't make that much of a standard because you could conclude, even enough for one lease, if it's clear enough in that area that there's a, it's delineated in some sense that there's a well there. That is certainly the understanding I have from the English use of the word, not the industry use of the word. The English use of the word is, delineated means, you know the limits of the field. You know, it, you know, which direction (indisc. - coughing) side of it to see that it doesn't head beyond a certain limit and you set, you understand where it is, so that when you're making a decision on what's an appropriate relief you have a very good idea that, and the company has, you know, made a significant investment, that this occurs at a point where it isn't just trying to reduce a, a tax burden. It's, it's gone far enough in the process that they've made their investment and now we're, we're trying to determine how we can encourage further activity. The count off(?). The standard you are using doesn't sound like it would have to be much at all, if there was even just a well or two on one side that you could decide that somehow that field was delineating. Number 684 MR. BOYD: Mr. Chairman, I can only think from my experiences, both the geologists and the geophysicists and exploration for fifteen years, that this is, this is something that is done all the time. We do it here today just as we have for many years. It is, I, I admit difficult perhaps to explain it, what's taking place since there's no bright light sometimes. With delineation to a professional, to technical professionals, it's fairly clear, and I don't think we're in conflict with the definition you gave delineation because as I said, as you reach the edge where you can no longer delineate it, I mean, if you consider the delineation to be the small subset. Anything inside that subset is lineated and anything outside that subset we don't think is lineated is (indisc.). And again, (indisc.) technical valuation of the geological and geophysical engineering data to make that determination by, again, technical professionals, geologists, geophysicists, and we do it I'll say routinely. Number 696 CHAIRMAN ROKEBERG: Mr. Boyd. To follow on that point, is there, in the accounting game they have like general accepted accounting principles, is there anything like that would maybe be applicable here, like generally accepted petroleum engineering principles or something? Number 698 MR. BOYD: No, Mr. Chairman, not to my knowledge. Again, the royalty reduction is in so many, many parts not including just the geology, but also the economics and, and the company's finances and many other things. CHAIRMAN ROKEBERG: No, I mean delineation here. We just (indisc.) delineation here. I mean.... Number 701 MR. BOYD: No, Mr. Chairman. To my knowledge, there is no, there is no bright line where something is really delineated or really is not. I suppose if you drill the well every ten feet, you know, we'd have an absolute certainty of what's going on. But the (indisc.) seismic and a sufficient number of wells, you can determine if something is delineated. Number 706 CHAIRMAN ROKEBERG: Just for the information of the audience, it's come to my attention that, for example, the Badami field on the North Slope is, well, it's going to have three so-called delineation wells, that there is an additional six wells that were, been drilled around nearby with large amounts of geophysical data that went with those wells as well as significant geophysical exploration in that area in terms of trying to "delineate." TAPE 95-14, SIDE B Number 000 CHAIRMAN ROKEBERG: ...line three that three wells wasn't going to be adequate to delineate and they provided this additional information, which I thought was, you know, pretty satisfactory answer 'cause there was empirical evidence, in this whole geographic area there's enough, enough holes punched in the ground and enough work done on it that, to truly delineate it, because I was a little bit skeptical about three wells delineating in a field, so. I would suggest, Mr. Boyd, if you have any further ideas on this regard, and if anybody in the audience or out there TD(?) land, or wherever, has any ideas, please let us know. Is there any other questions of Mr. Boyd at this time? With that, I want to thank everybody for coming on a Friday evening and I would like to thank Mr. Boyd. I know there's a snow storm there, and I promise to make sure that Bill Van Dyke stays out of trouble this weekend, and hope that, hope that we keep, stop having you twist in the wind and get this done by next week so we can more it along, and thanks a lot, Ken. MR. BOYD: Thank you, Mr. Chairman. CHAIRMAN ROKEBERG: And this is, my meeting is adjourned. Thank you, everybody. 5:56 p.m.