HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 26, 1998 10:04 a.m. MEMBERS PRESENT Representative Mark Hodgins, Chairman Representative Scott Ogan Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative Tom Brice Representative J. Allen Kemplen MEMBERS ABSENT All members present OTHER MEMBERS PRESENT Representative Ramona Barnes COMMITTEE CALENDAR * 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." - HEARD AND HELD HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 380 SHORT TITLE: REDUCE ROYALTY ON COOK INLET OIL & GAS SPONSOR(S): REPRESENTATIVES(S) HODGINS Jrn-Date Jrn-Page Action 02/04/98 2218 (H) READ THE FIRST TIME - REFERRAL(S) 02/04/98 2218 (H) OIL & GAS, FINANCE 02/26/98 (H) O&G AT 10:00 AM CAPITOL 124 BILL: HB 393 SHORT TITLE: DEVELOP STRANDED GAS RESOURCES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 02/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S) 02/11/98 2281 (H) OIL & GAS, FINANCE 02/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV) 02/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER 02/19/98 (H) O&G AT 11:00 AM CAPITOL 124 02/19/98 (H) MINUTE(O&G) 02/24/98 (H) O&G AT 10:00 AM CAPITOL 124 02/24/98 (H) MINUTE(O&G) 02/26/98 (H) O&G AT 10:00 AM CAPITOL 124 WITNESS REGISTER PAT CARTER, Legislative Assistant Alaska State Legislature Capitol Building, Room 110 Juneau, Alaska 99801 Telephone: (907) 465-2283 POSITION STATEMENT: Presented sponsor statement on HB 380. JOHN MIESSE, Representative Marathon Oil Company P.O. 196168 Anchorage, Alaska 99519 Telephone: (907) 564-6374 POSITION STATEMENT: Testified in support of HB 380. KATHRYN THOMAS, Owner Construction Service Company P.O. Box 3005 Kenai, Alaska 99611 Telephone: (907) 776-5515 POSITION STATEMENT: Testified in support of HB 380. BILL HUTTO, Operations Manager Gas-Pro Alaska P.O. BOX 3005 Soldotna, Alaska 99669 Telephone: (907) 262-4291 POSITION STATEMENT: Testified in support of HB 380. KEVIN TABLER, Manager of Land Government Affairs Union Oil Company of California P.O. Box 196247 Anchorage, Alaska 99519 Telephone: (907) 263-7600 POSITION STATEMENT: Testified in support of HB 380. GARY CARLSON, Vice President Forcenergy Incorporated 310 K Street, Suite 700 Anchorage Alaska 99501 Telephone: (907) 258-8600 POSITION STATEMENT: Testified in support of HB 380. KEN BOYD, Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503 Telephone: (907) 269-8800 POSITION STATEMENT: Testified on HB 380. REPRESENTATIVE TERRY MARTIN Alaska State Legislature Capitol Building, Room 502 Juneau, Alaska 99801 Telephone: (907) 465-3783 POSITION STATEMENT: Testified on HB 380. PAM LABOLLE, President Alaska State Chamber of Commerce 217 2nd Street, Suite 201 Juneau, Alaska 99801 Telephone: (907) 586-2323 POSITION STATEMENT: Testified in support of HB 380. ACTION NARRATIVE TAPE 98-14, SIDE A Number 0001 CHAIRMAN MARK HODGINS called the House Special Committee on Oil and Gas meeting to order at 10:04 a.m. Members present at the call to order were Representatives Hodgins, Ryan, Bunde, Brice and Kemplen. Representatives Rokeberg, Ogan and Brice arrived at 10:08, 10:12 and 10:23 p.m., respectively. HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS Number 0068 REPRESENTATIVE HODGINS announced the committee would hear 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." He asked Pat Carter to present the bill. Number 0098 PAT CARTER, Legislative Assistant, read the sponsor statement into the record: The intent [of House Bill 380] is to encourage the development of gas reserves within the Cook Inlet region. In addition to stimulating the development of several known undeveloped fields, most of which were developed more than 30 years ago, House Bill 380 has the potential to leverage additional exploration and development in the vicinity of new infrastructure, required to develop those known fields. Any new oil and gas production resulting from the development of these fields will in turn reduce the average cost of producing existing reserves, and extend the economic life of both existing and new Cook Inlet production and transportation infrastructure. "Lease holders with leases overlying previously discovered oil or gas fields which have remained undeveloped from at least January 1, 1988 through December 31, 1997, would have an incentive to develop those fields as rapidly as possible. Oil and Gas from these fields brought into production before January 1, 2004, would pay a reduced royalty of 5 percent, instead of the normal rate of 12.5 percent. This royalty holiday would last for a period of 10 years from the date from which production begins. "In order to qualify for the royalty reduction, lease holders would have to act almost immediately in order to bring these fields to production by the end of the year 2003. By limiting the royalty holiday for the qualifying fields to a 10-year-period, HB 380 provides for reasonable limit to the state's foregone royalties in exchange for oil and gas production that may otherwise not occur. The state's royalties from currently producing Cook Inlet oil and gas fields will not be effected by this legislation. "By encouraging the development of existing uneconomic oil and gas fields, HB 380 will benefit the state and local economies through taxation and royalties, as well as encouraging future development of new oil and gas discoveries by lowering the costs of infrastructure, as well as providing jobs for Alaskans. Some of these reserves were discovered more than 30 years ago and this legislation allows us to provide a reasonable incentive to develop those reserves so that all of us may realize the benefit. As they say 5 percent of something is better than 12.5 percent of nothing." Number 0307 REPRESENTATIVE ROKEBERG asked if he happened to review the minutes of HB 207 from the 19th legislature because it might be illuminating. Number 0448 JOHN MIESSE, Representative, Marathon Oil Company, testified via teleconference from Anchorage and read the following statement into the record; "As most of you know, Marathon has been an operator in the Cook Inlet area for over 30 years and we appreciate your support and interest of the oil and gas industry in the Cook Inlet area. I'd like take a few moments to comment on HB 380, which is intended to provided an incentive for oil and gas development in Cook Inlet from fields that have previously been undeveloped or shut-in. "Marathon supports House Bill 380 and believes that in the long term, this incentive will have a positive economic impact on the state of Alaska and the local communities. I would like to point out, however, that we believe this bill would have a more immediate impact on undeveloped or shut-in fields because of the readily available market for this product. The ultimate incentive for adding additional reserve capacity, whether it be oil or natural gas, is the availability of ready and stable markets. While such a market is certainly available for new oil reserves in the Cook Inlet area, the same cannot be said for natural gas. New markets for uncommitted natural gas reserves are not available for the next several years, making it difficult to economically justify near term drilling expenditures. Although this bill will provide some economic benefit to the industry, we do not believe by itself, will be enough to stimulate significant activity for natural gas development at least in the near future. "I would like now to ask the committee to consider points of clarification that we believe are needed in House Bill 380. It is our understanding that the intent of this legislation is to provide the temporary relief to fields that have been undeveloped or shut- in. We would like clarification on the definition of undeveloped. Specifically, we would like to know if a field that has produced periodically over the last few years, but requires additional drilling to fully develop the field, would be eligible for the temporary royalty relief. Also we would like to clarify that royalty relief would apply to either a re-entry of an existing well or a new well needed to recover undeveloped reserves. Again, we understand the intent of the proposed legislation is to address these scenarios, but we would appreciate the department's review to make sure the language is explicit. "In closing, many of the oil and gas producing states enacted similar incentives for oil and gas development in the early 1990's. These states have found the programs to be beneficial to all stake holders involved and have maintained those programs. We believe incentive programs such as House Bill 380 will also lead to economic gain for our communities and the state, but we recognize that market availability is probably the overriding incentive for our industry to look for new oil or gas reserves. Therefore, we believe you will see a more immediate impact on the undeveloped oil fields in the Cook Inlet area as a result of this proposed incentive. "Thank you for the opportunity to share these comments with you today. I will be glad to answer any questions." Number 0679 REPRESENTATIVE JOE RYAN referred to a presentation that showed a reduction in amount of gas coming out of Cook Inlet and by 2004 it was supposed to be at a level that would support the existing customer base in the Anchorage bowl area. He asked if this was correct. Number 0727 MR. MIESSE replied that in the future additional reserves will be needed to make deliverabilities in the local markets. Economically it would be hard to justify spending millions today for a product that cannot be sold until 2004 or beyond. Number 0783 REPRESENTATIVE NORMAN ROKEBERG asked if Marathon considered any application under HB 207 and if not, was it because of the nature of their asset mix of gas verses oil. Number 0817 MR. MIESSE replied that is correct, Marathon has sold its oil reserves and HB 207 would probably have a more immediate effect on oil production and it is a matter of market. He stated that their gas is committed to long-term markets, currently. Number 0872 CHAIRMAN HODGINS stated that HB 380 is a companion bill to a Senate bill and there are areas in the bill that might need to be changed. Number 0896 KATHRYN THOMAS, Owner, Construction Service Company, testified via teleconference from Kenai that she has served on the boards of the North Peninsula Chamber of Commerce, Alaska Trucking Association, Alaska Industry Support Alliance and was the past chairman of the Alaska State Chamber of Commerce. She stated that in all her time spent on the boards, a considerable amount of time was spent in trying to keep a viable economy and provide jobs. She stated that the gas reserves in the Cook Inlet basin have been in decline, resulting in the loss of many good paying jobs that the gas industry has traditionally provided to the Kenai Peninsula economy. She explained that the local communities have made many efforts to replace these jobs which work in other fields of industry and resource development but at this time jobs in the development of oil and gas are the highest paying. MS. THOMAS stated that on the Kenai Peninsula they have actively sought ways to revitalize what has been perceived as an old oil field. For many years, industry has declined to invest development dollars in many Cook Inlet discoveries, citing the rate of return on investment of capital dollars as a contributing factor. House Bill 380 provides an opportunity for them to attract these dollars, by providing the incentive for companies to make infrastructure investments in Kenai projects. Number 1105 MS. THOMAS stated that the question raised regarding the eligibility of royalty relief for fields that require additional drilling to fully develop the fields and if it would apply to re- entry of an existing well or if a new well would be eligible at this time, she stated that she is not prepared to comment on it. House Bill 380 will provide some incentives for them to attract investment dollars and provide jobs for the community. Number 1155 BILL HUTTO, Operations Manager, Gas-Pro Alaska, testified via teleconference from Kenai, that he has had a few years of experience in Cook Inlet's oil and gas fields. He stated that their project will have the potential of providing the base with the distribution of gas to areas on the Southern-end of the Kenai Peninsula. He stated that this is advantageous to all Kenai Peninsula residents. He stated that HB 380 provides the opportunity for the company to attract the development dollars necessary to see that the gas can reach a market. Number 1253 KEVIN TABLER, Manager of Land, Government Affairs, Union Oil Company of California (Unocal), testified via teleconference from Anchorage that Unocal supports HB 380 and has been an active proponent of incentive legislation, specially as it may apply to the Cook Inlet area. Early exploration in Cook Inlet identified several oil and gas accumulations which were deemed uneconomic by the then current market conditions. Development of these reserves were impacted as much by market conditions as they were by a lack of readily available infrastructure. Development will require expansion and utilization of the existing infrastructure and by taking advantage of economies of scale. He stated that the time is right to access the existing accumulations, but in order to do so the royalty burden needs to be reduced. Number 1342 MR. TABLER stated that Cook Inlet's economy of scale financial incentives to expend capital as well as simple supply and demand economics will be the determining factors in whether or not development of known accumulations will occur. He stated that as the existing Cook Inlet fields are reduced, initiatives such as HB 380 will be critical if the known, but unproduced, areas are to be accessed. He stated that Unocal supports HB 380, as it will enhance and prolong the economic viability of resource development in Cook Inlet. Number 1439 REPRESENTATIVE ROKEBERG stated that Unocal was the only company to apply for a royalty of modification under HB 207 and asked if he could explain any problems faced with that legislation and why HB 380 would be easier to implement. Number 1465 MR. TABLER stated that there are many uncontrollable factors that have to be taken into account under HB 207, whereas HB 380 would have one factor, purely royalty reduction, a controllable factor. In House Bill 207, the recoupment language, for the new field development was very clear but for marginal fields the bill is more subjective and requires the negotiation and the determination that it is in the state's best interest. He explained that the commissioner, prior to HB 207, had the authority to adjust royalties for economic relief on the marginal fields as they applied to Cook Inlet. He stated that the commissioner has the mandate to protect the state's interest which could be in direct conflict with the analysis the company goes through in making investment decisions. He explained that companies must provide a full economical and technical proposal. He said, "As long as there was a positive NPV or Net Precious Value on any of these projects that we proposed, the state was not inclined to grant royalty relief under HB 207." He stated that a clear, clean, easily administered approach would have more utility, at least for the marginally producing fields in Cook Inlet. Number 1561 REPRESENTATIVE ROKEBERG asked if under HB 207, he could have started at a lower rate than 5 percent and if he could justify it. He stated that it did take in account that if the field could be further delineated and had a greater level of profitability, there would be a provision for a sliding scale. He stated that HB 380 does not provide for a sliding scale, in case the amount of recoverable oil proves to greater then first thought. He asked if Mr. Tabler was saying the requirements in HB 207 were too burdensome, economically and he would prefer to see a simpler calculation. Number 1624 MR. TABLER replied that is what he is saying. The sliding scale discussion, as he recalled, was centered around the new field development but in order to make a clear and convincing showing as required under HB 207 that royalty relief required that an owner must show that the present operations or planned investments will clearly destroy value. He explained that as a result royalty relief is likely to be granted only to those companies which extend considerable resources on unattractive projects and are willing to refund all or a portion of the rewards that would be gained. He stated that HB 207 results in the discussion of what is a reasonable rate of return as opposed to a straight forward royalty reduction. With HB 380 there is no question, either you get the reduction or you do not. Number 1692 REPRESENTATIVE ROKEBERG stated that Unocal recently announced that they are going to look at the development of coal bed methane fields and asked his opinion of the gas portion in the bill. Number 1722 MR. TABLER stated that Unocal believes that there is a need for more gas in Cook Inlet and are actively out exploring it. Number 1777 REPRESENTATIVE ALAN KEMPLEN stated that this legislation has a time horizon of ten years from the date that oil or gas production commences from a particular field and the price of oil and gas has fluctuated, sometimes at a fairly significant rate. He asked if during periods of high prices for oil or gas, wouldn't it be appropriate for the state to reap its normal 12.5 percent royalty and shouldn't the proposed legislation have language to make that adjustment during periods of high prices. Number 1831 MR. TABLER stated that he would disagree somewhat with that statement in that investment decisions are based on the market conditions at that time. He stated that the decision to make the investment was made and the drilling was done back when there was a certain price. As incentive legislation, it would require the incentive, in order for companies to spend the money on the undeveloped fields. Number 1884 CHAIRMAN HODGINS stated that it is his intention to have limits placed on the amount of oil and gas that this royalty reduction would affect. For example, if a larger field is found there will be a limit and the royalty reduction will no longer occur. Number 1933 REPRESENTATIVE CON BUNDE referred Mr. Miesse's written statement regarding stimulating significant activity in the near future and asked what changes would have to be made and how he would define significant activity. MR. MIESSE stated that he was referring to the natural gas development, the bill provides a good incentive for oil because of it is readily available for sale. He stated that because the gas is committed for the next several years they do not need to find new gas, therefore, a lot of money would be spent at present, but the return on the investment would not occur for several years. Number 1989 REPRESENTATIVE ROKEBERG stated that the Nikolai Creek field is owned 50 percent by Unocal and 50 percent by Marathon. He asked if HB 380 were in effect would he be more apt to list the gas from that creek then otherwise, and wouldn't that replace the 12.5 percent royalty gas. Number 2016 MR. MIESSE replied that Unocal has different needs then Marathon, but would still have the problem of selling the new gas reserves. He stated that because the royalties would be less, there would be an incentive to try and work with Unocal to do something with the creek. Number 2044 REPRESENTATIVE KEMPLEN stated that Enstar said that they were concerned with the supply of natural gas. He referred to Mr. Miesse's statement of new markets for uncommitted natural gas reserves are not available for the next several years. He asked when would it be appropriate for his industry to begin drilling for natural gas reserves in order to meet the projected demand by Enstar. Number 2075 MR. MIESSE replied that at the end of the time-frame stated in the bill. He stated that they would more apt to spend money on gas in the 2002 to 2003 time-frame. He agreed that Enstar has uncommitted gas needs beyond the time-frame but he believed that new discoveries would fill those needs in the future. Number 2111 REPRESENTATIVE KEMPLEN asked if they just needed a year's lead time in order to do the drilling and meet Enstar's demand. MR. MIESSE replied that it depends on where the drilling is located and how close it is to the infrastructure. If the hook-up is close, then a year to two is sufficient. Number 2138 GARY CARLSON, Vice President Forcenergy Incorporated, stated that Forcenergy is an independent oil and gas company and started investing money in Alaska about 15 months ago. He stated that they have 22 employees, 18 of them Alaskan residents. He pointed out that Forcenergy was very successful in the Gulf of Mexico by taking a strong technical approach to pick up marginal fields that were out of the focus of major oil companies. Cook Inlet is in that category. He stated that in the fifteen months that they have been here they have committed $180 million to the state through acquisitions, seismic projects and drilling. He stated that Forcenergy is in support of HB 380 as it provides the types of incentives that are needed to develop marginal fields. He stated that similar incentives have worked elsewhere as with the coal bed methane. CHAIRMAN HODGINS stated that he is appreciative of their commitment to local hire and to Cook Inlet. Number 2276 REPRESENTATIVE ROKEBERG stated that he is pleased with Forcenergy's commitment to Alaska. He asked how much of their strategic planning in the Gulf of Mexico was influenced by federal royalty relief and other state royalty relief in that area. Number 2311 MR. CARLSON replied that he has only been with Forcenergy for about a year but his observation of their success is by strictly looking for a technical approach to increase recovery of fields that had been developed by others or to take over fields that had lost investments. It had more to do with the geologic opportunities rather that any federal incentives. Number 2333 REPRESENTATIVE ROKEBERG asked how much of a difference would this royalty reduction make to Forcenergy's desire to lift the gas in the West Foreland's field. Number 2376 MR. CARLSON stated that their general philosophy is to look for the opportunities, evaluate them and either invest in them or walk away from them. He stated that the incentives could either encourage them to drill a well, that otherwise they would not have drilled or after a well was drilled, the incentive would affect whether to proceed and put it into production. Number 2417 REPRESENTATIVE ROKEBERG stated that there is the desire to have some sort of cap that relates to the quantity of recoverable reserves in a particular field and asked Mr. Carlson if that is an option. Number 2443 MR. CARLSON referred to the Redoubt Shoal Field. TAPE 98-14, SIDE B Number 0007 MR. CARLSON stated that if the field showed 20 million barrels, the relief would not matter. But a range of 40 to 55 million dollars and a cap in that range would still provide the incentive to proceed and yet there would be some assurance that if it was a large field the state would recover some of the lost opportunities. Number 0031 REPRESENTATIVE ROKEBERG asked it he could provide some examples of fields that might fit into this category. Number 0095 MR. CARLSON stated he would do that. He encouraged the committee to look at a simple cap rather then to try to estimate a cap for each field as every one is different. Number 0146 REPRESENTATIVE RYAN stated that he has heard testimony that the market is uncertain yet the Oil and Gas Journal stated that the liquefied natural gas (LNG) landings have doubled. He stated that the people don't invest money in tankers if they aren't fairly sure that the market is going to be there. He stated that he would like to clear up the uncertainty of a gas market not being there. Number 0196 MR. CARLSON stated that from the LNG standpoint, the reason for substantial investments was a result of the market place driving the investment, Japan, Korea and Taiwan were signing upwards of 30 year contracts at attractive prices. He stated that it is easier to plan on a global scale. Number 0261 REPRESENTATIVE RYAN asked if Marathon only ships just gas or do they ship LNG as well. MR. CARLSON responded that Marathon is selling LNG. Number 0306 REPRESENTATIVE BUNDE stated that earlier testimony stated that HB 380 would not impact gas production but it would impact oil production. He stated that Forcenergy has both oil and gas interests and asked if he visualized using this bill as expanding both their oil and gas production. Number 0334 MR. CARLSON replied that Forcenergy will look at both oil and gas, as they do not have the infrastructure and fixed market that Marathon Oil Company has. He stated that they hope they would be able to negotiate contracts and market gas. He stated that he hoped the incentive would help clarify the gas situation in Cook Inlet. Number 0383 REPRESENTATIVE BUNDE asked if it was correct to assume that gas production is front-end loaded, in that more is recovered in the first ten years than in the second ten years. He asked what life expectancy would he plan for in the Cook Inlet oil fields. Number 0407 MR. CARLSON stated that in regards to an oil field they are at the latter stage of development in Cook Inlet, as it has been ongoing for 30 years. He stated that a new development would not be planned that would take 30 years, investments would be made to try and compact that time-frame. He stated that gas would depend on the contracts and it is possible to end up with a flatter decline for gas if there was a sufficient amount of gas and market place, investments would be made accordingly. Probably more wells at first to get it started and then drill wells for deliverability later on. He stated that oil field investments would come very early. Number 0457 REPRESENTATIVE KEMPLEN stated that there has been talk about the concept of a circuit breaker and asked if that concept could be extended to price. He stated that there is a lot of uncertainty in the energy market and in the Middle East in the ten year time horizon, various acts could occur that would disrupt the flow of energy. He asked if it would be appropriate to have a similar circuit breaker for price as there has been for volume. Number 0499 MR. CARLSON replied that an administration of a price cap would be very difficult. He stated that price strategy would be built in deciding to spend extra millions to bring a field to the market place. It would be difficult to administer a price cap easily and simply. Number 0559 KEN BOYD, Director, Division of Oil and Gas, Department of Natural Resources, referred to a letter that the division sent to the Senate regarding the Senate companion to HB 380. He stated that the division does not have a position on the bill. He stated he would outline the division's questions on HB 380 for the committee: The bill has no provision to account for changing economic conditions. If the price of oil were to increase, the relief would remain the same. How does the bill protect the states upside interest. There is no economic analysis that leads to the terms of the royalty reduction described in the bill. Why is it at 5 percent for 10 years. Are the economic requirements of all companies so similar that the same level of relief is needed for each of them, and the same question would pertain to the fields themselves. He asked why not use HB 207 for royalty relief as it is the law. Which fields would qualify for the royalty reduction. He stated that those are the questions he has on the bill and he would try to answer any of the questions that the committee has. Number 0696 REPRESENTATIVE ROKEBERG asked on the issue of the expansion ability of a particular field that may have been granted a royalty reduction, how could further proven reserves work as practical matter and could that be simplified in the bill. Number 0740 MR. BOYD stated that it is worth discussing and he would work on that as he could not address that on the spot. Number 0761 REPRESENTATIVE ROKEBERG asked if he thought a pricing sliding scale would be difficult. MR. BOYD replied that sliding scales have been used in some of their leases as there as been sliding scale royalties that vary with price over time. REPRESENTATIVE ROKEBERG asked if price was the major element. MR. BOYD replied that is correct. Number 0826 REPRESENTATIVE KEMPLEN asked if there is a simple way to administer a circuit breaker on price. Number 0853 MR. BOYD replied that he would hesitate to recommend a methodology, he stated that there are probably ways to tie price to relief. It would truly be sliding scale that would slide from a low-side to an up-side and capped at each end. Number 0896 REPRESENTATIVE ROKEBERG stated that the bill is limited to the Cook Inlet sedimentary basin and asked if it is geologically difficult to define. Number 0903 MR. BOYD stated that one suggestion would be to use the definition from exploration licensing. He questioned if this bill would apply to a coal bed methane unit in Wasilla. Number 0973 REPRESENTATIVE ROKEBERG asked if the administration would rather see a fix to HB 207 rather than this HB 380. Number 0992 MR. BOYD replied that he believed that the administration would be willing to fix HB 207. Number 1047 CHAIRMAN HODGINS stated that HB 380 would be held over to a future meeting. HB 393 - DEVELOP STRANDED GAS RESOURCES Number 1069 CHAIRMAN HODGINS announced the committee would hear HB 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." He stated that he asked his colleagues to present their concerns and suggestions regarding the bill. Number 1080 REPRESENTATIVE TERRY MARTIN, stated that he has concerns about this issue. He referred to the history of the issue of financing a gas pipeline. He stated that he had voted against the bill that had initiated this because the legislature was giving too much up to the executive branch. He referred to Title 9 of the constitution that stated the power of taxation should never be surrendered. He stated that legislators should not force the economy one way or another. He stated that the free market should be allowed to work and the legislature should not be in the way. Number 1282 REPRESENTATIVE MARTIN stated that as legislators they should look at what is being done with the gas. He stated that recycling of gas is producing more oil resulting in an estimated 2 billion barrels of excess oil received. He stated that if the pipeline is forced the oil will decrease because once gas is taken out the oil reserves will be depleted. He asked how much this will cost the state of Alaska in oil royalties. Number 1401 REPRESENTATIVE MARTIN stated that the incentive programs should make the participants, "run like mad". He referred to Section 2, "The legislature further intends, however, that any fiscal terms agreed to in a contract under this Act in lieu of other taxes will fully and fairly compensate the people of the state of Alaska for the severance, production, and sale of natural resources belonging to the people" and "The value of the infrastructure that may be provided by the state to a project, including all the advantages of civilized society that may be provided by the state to the sponsors of a project." He stated that clause should cause any investor to not participate in the project. He stated that at the most investors would receive 3 percent of what they invested even with the incentive. Number 1581 REPRESENTATIVE MARTIN stated that a market should be established first and the market should invest in the pipeline if China had equity in the pipeline it could be assured that they would uphold their contract. He stated that almost immediately the pipeline would be able to put 15 million metric tons on the market which will result in a drop in prices. He stated that we are willing to give away gas to get more jobs. Number 1618 REPRESENTATIVE MARTIN referred to the Alaska hire issue and feared that there would be a influx of people coming to Alaska to live off our welfare system and fill the residency requirement in order to work on the pipeline. He stated that Alaska does not have 5,000 top quality welders needed for the pipeline. He stated that Alaskan hire is misleading. He asked that the reasons motivating the project be looked at. Number 1946 REPRESENTATIVE RAMONA BARNES stated that she was just here to listen in on the committee process and did not intend to comment. She then stated that a big concern that she has with the bill is that it is called stranded gas legislation instead of the gas pipeline legislation. She stated that gas-to-liquids subject should not be in this bill as it is a different tax regime. She stated that a taxing regime for using the pipeline that exists is different from building a new one. She asserted that the socio- economic aspect of the bill should be deleted and the section dealing with local government needs a lot of work. She stated that there is a section in the bill dealing with the commissioners laying their plans before the Budget and Audit committee, she objected to that and stated that any plan needs to come before the entire legislature. Number 2157 PAM LABOLLE, President, Alaska State Chamber of Commerce, stated that she did not have the expertise to speak to any of the details of the bill. She stated that her testimony is in support of the concept of bringing the stranded natural gas into production and specifically their resolution on the subject urges the legislature and the administration to continue to take those steps to provide a stable appropriate fiscal and regulatory environment which will give the project the best opportunity to become commercially viable thus enabling the earliest possible development of the resource. Number 2266 REPRESENTATIVE RYAN stated that the committee has asked a lot of questions to which the answers were not forthcoming because there has not been any conceptual engineering done, no one knows what the market is and who the investors may be et cetera. He stated that these basic fundamental questions need to be answered. He reiterated his concerns on the bill and stated that he needs to know that we would be operating on a more secure basis. TAPE 98-15, SIDE A Number 0013 CHAIRMAN HODGINS stated that the committee is trying to get answers to those questions. Number 0038 REPRESENTATIVE BARNES stated that the van Meurs' study went into great detail as to what is needed to be done to make the project economically feasible and it is known that there is at least 15 trillion cubic feet of gas at Prudhoe Bay and 6 to 11 estimated trillion feet of gas at Point Thompson. She asserted that it is known that 15 million metric tons a year would be needed to be put into the system to make the gas line economically feasible. It is necessary in order get the gas into the market place, Alaska has to be in the market place by 2005. She stated that some of the purchasers are interested in holding an equity position in the pipeline such as China Petroleum and would purchase 25 percent of the gas that Alaska would put into the market place. She stated that Alaska is competing with the world market and the several gas projects that are scheduled to come on line. If they get into the market before Alaska does, our gas "will sit up there in what they call a stranded gas hold for eternity I suspect." Number 0290 REPRESENTATIVE KEMPLEN stated that this proposed legislation is establishing a framework by which the Administration and the private sector can move forward with this complex project. He pointed out that the legislation lays out the process for how the project is to be done and identifies the key issues that needs to be addressed by the sponsor group. He stated that it gives permission for the Administration to negotiate with a qualified sponsor group. He stated that it will take a few years before there is a contract presented to the legislature. He stated that it is important to move forward with this bill and to make sure the project does happen. Number 0456 REPRESENTATIVE ROKEBERG advised everyone to read the memorandum by the Honorable Kay Brown. He stated that area of interest is if there are going to be any equity issues as it relates to the affected municipalities of the state, a decision on what is to be done on this needs to be made. He stated that the financing mechanisms need to be looked at, as it is key to this project. He suggested that the bill may need to be sent to a subcommittee because there will not be any progress until the committee starts making its changes. Number 0622 CHAIRMAN HODGINS stated that he agreed and would consider a subcommittee. Number 0678 REPRESENTATIVE BARNES referred to Representative Martin's statement raising the issue of gas re-injection to raise oil. She stated that should not be an issue because if Point Thompson was developed first, we would not need any of the gas in Prudhoe Bay but beyond that, there is a tremendous amount of excess gas that is being put back into the holds. She addressed the question of equity interest and if taxes are deferred in the up-front portion of the gas line to recoup at the back-end, that is an equity interest. She stated that would be Alaska's contribution to making the project financially feasible. Number 0783 CHAIRMAN HODGINS stated that he would talk with Representative Martin to inform him on past meetings. He stated that it is a big project for Alaska and a lot of work regarding the enabling legislation will be done in this committee. ADJOURNMENT Number 0821 CHAIRMAN HODGINS adjourned the House Special Committee on Oil and Gas meeting at 11:55 p.m.