SENATE RESOURCES COMMITTEE April 15, 1998 3:30 P.M. MEMBERS PRESENT Senator Rick Halford, Chairman Senator Lyda Green, Vice Chairman Senator Loren Leman Senator Bert Sharp Senator John Torgerson Senator Georgianna Lincoln MEMBERS ABSENT Senator Robin Taylor COMMITTEE CALENDAR CS FOR HOUSE BILL NO. 370(FIN) "An Act making appropriations for relief of the 1997 economic disaster in Bristol Bay and on the Kuskokwim River; and providing for an effective date." - MOVED CSHB 370(FIN) FROM COMMITTEE CS FOR HOUSE BILL NO. 380(FIN)(title am) "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from certain fields described as being located within the Cook Inlet sedimentary basin, as having been discovered before January 1, 1988, and as having been undeveloped or shut in from at least January 1, 1988, through December 31, 1997." - MOVED CSHB 380(FIN)(title am) FROM COMMITTEE CS FOR SENATE BILL NO. 281(CRA) "An Act relating to general grant land entitlements for the City and Borough of Yakutat; and providing for an effective date." - MOVED CSSB 281(RES) FROM COMMITTEE PREVIOUS SENATE COMMITTEE ACTION HB 370 - No previous action to record. HB 380 - No previous action to record. SB 281 - See Community & Regional Affairs minutes dated 2/23/98 and Resources Committee minutes dated 3/20/98 and 3/23/98. WITNESS REGISTER Representative Ivan Ivan State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of HB 370. Mr. LaMar Cotton, Deputy Commissioner Department of Community and Regional Affairs P.O. Box 112100 Juneau, Ak 99811-0200 POSITION STATEMENT: Commented on HB 370. Representative Mark Hodgins State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of HB 380. Mr. Paul Fuhs Alaska Resource Alliance 4220 B Street, Suite 200 Anchorage, AK 99503 POSITION STATEMENT: Supported HB 380. Mr. Gary Carlson, Vice President Forcenergy, Inc. 310 K Street, Suite 700 Anchorage, AK 99501 POSITION STATEMENT: Supported HB 380. Mr. Ken Boyd, Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, AK 99503-5921 POSITION STATEMENT: Opposed HB 380. ACTION NARRATIVE TAPE 98-28, SIDE A Number 001 HB 370 - APPROPRIATION: 1997 FISHERY DISASTER CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 3:30 p.m. and announced HB 370 to be up for consideration. REPRESENTATIVE IVAN IVAN, Sponsor of HB 370, explained that it is an appropriation bill seeking $1.48 million in general funds and over $390,000 from the Commercial Fishing Revolving Loan Fund as a match for the $7 million that's available in Magnuson/Stephens federal funds. These funds will provide for programs designed to assist communities in the Bristol Bay and Kuskokwim regions that were declared an economic disaster area by the administration. This declaration was issued in response to the poor fishing season. The total amount of the state's share is $2.3 million, but with the in- kind contributions from the communities and the Department of Community and Regional Affairs, the amount actually needed for the State's share is $1.875 million. The allocation to regions are based on the input from the coordinated response partnership team from both Lower Kuskokwim and Bristol Bay areas. The plan to provide relief was adopted after approval was given by the US Department of Commerce. The commerce guidelines which the CRPs have to follow in order to receive the federal funds for disaster are under the Magnuson/Stephens Act. The first part is the loan program to Bristol Bay, Chignik, and Kuskokwim permit holders that are in financial crisis. These programs will be administered by the Division of Investments or the Department of Community and Regional Affairs. The program is based on need and should be used to pay for past or future expenses related to commercial fishing. At least 51 percent of earned family income must be derived from commercial fishing and the loan applicant must provide collateral, such as Permanent Fund dividend checks. The Community grant program would provide jobs to the fishers, as well as the communities affected by the disaster. They would be used to enhance the economic planning capability or continue economic planning process and procedures. The fisheries education training and research was part of the package, looking at salmon escapement counts and selected resource management issues. Awards will be based on a competitive basis. The Department of Community and Regional Affairs will seek proposals from the two areas affected and a committee will determine the awards. A portion of the funds will be used by DCRA for administering the program to the communities of Bethel, Napaskiak, Apokak, and Kwithluk, and in the Bristol Bay area: Dillingham, Togiak, and Stuyahok. Number 131 SENATOR LEMAN said he recognized these areas were hit really hard, but he didn't always think that providing someone a loan is necessarily doing them a favor, because it creates an obligation to repay it. Sometimes it creates an attitude of easy money, so a person won't be as careful with investments. He said there is a need, but they need to careful about creating expectations for government to step in and assume the challenges of what appears to be natural disasters. He also asked if it was a two or four year period for repayment without interest. REPRESENTATIVE IVAN said it was a four-year payback. CHAIRMAN HALFORD added that the loans are limited to $1,000 and the federal participation in this requires that the loans follow the permits. He thought it was more effective this way, because as a resident, you can guarantee your loan with your Permanent Fund dividend. If you're a nonresident, you have to put up collateral and he didn't think many people would go through that trouble for a loan of $1,000. The original estimate was for 1,800 applications and the deadline is today with less than 600 applications. So obviously, the loans were not a big part of this package; the community grants are more important. REPRESENTATIVE IVAN said that many folks were not prepared for such a disaster and are learning from this situation and are working so it won't happen again. SENATOR TORGERSON asked for examples of in kind contributions. MR. LAMAR COTTON, Deputy Commissioner, Department of Community and Regional Affairs, said the grants have a wide latitude because of the difference in capabilities of different communities. For example, some communities have the use of a backhoe that the city already owns. So instead of charging for it, they would contribute it to a project. In other places of limited resources, the administrative staff activities related to the grant would be contributed. It could be fuel, but it's generally been equipment or staff time. SENATOR TORGERSON asked if he was going to make sure it all totals $425,000. MR. COTTON said he thought it totaled 6.7 percent. SENATOR TORGERSON asked what happens if they do nothing with this bill. MR. COTTON replied that the DCRA and Magnuson/Stephens money goes away. SENATOR LINCOLN asked if there were only 600 out of 1,800 applicants they thought would apply, would the budget be reduced accordingly. MR. COTTON replied that their efforts would be to put the money back into the community work projects. He said that unlike Gulf fisheries, the Kuskokwim, which is a fresh water fishery, and the Bristol Bay and Chignik fishery, salmon is the only fish they can fish. Some people in Bristol Bay regear their boats and do herring fishing. The Togiak fishery is getting as low as $170 - $200 per ton. There is no alternative winter fishery for the skiff fishermen in the Kuskokwim. Chignik fishermen participate in the eastern Gulf cod fishery, but even there prices are very depressed. This does in fact help them; it is not as if they are not making an effort. He used to be a city and borough manager in the Aleutians and had experience doing four accounting projects similar to these as a way to get a reasonable salary for fishermen during the winter months and they were successful. The city does not pay an exorbitant salary, but it does get money into the communities that stays there as opposed to a project like research or construction. Another thing is that in small communities of under 500 where there is high unemployment and low income, you start to see a buildup of the percentage of people who are in the 90 day collectibles for utilities. This is a good indicator that a community is in trouble, because the city's cash flow is affected. Then the city starts to cut corners, and then you start to have troubles with water and sewer and generators. Those who have the least capacity to issue debt, ultimately come back to the State for help. This won't solve all the problems, but a modest increase in income, particularly in the smaller communities, goes a long ways not only for the people, but for the bare essentials provided by the city. Number 248 SENATOR GREEN said on page two or three of the loan application listed a payback date as the year 2000 and asked if the form was current. MR. COTTON said it is supposed to be four years. CHAIRMAN HALFORD said he got two years from the fact that the Department of Commerce would go along with four years, but the State program was limited to two years. He noted that this is a teleconference and people in Dillingham were in favor of the program. SENATOR LEMAN moved to pass HB 370 from committee with individual recommendations. There were no objections and it was so ordered. HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS CHAIRMAN HALFORD announced HB 380 to be up for consideration. REPRESENTATIVE HODGINS, sponsor, said HB 380 adopts a royalty relief for shut in fields. Cook Inlet has been a very productive field and is now declining. The six fields in this bill are actually on the outside edges and are uneconomical to produce at this stage. For the past 30 years, there have been hydrocarbons found at these locations, but there hasn't been any production because it hasn't been feasible. He said that a small field of gas has been discovered at Anchor Point and if there was enough gas, they could gasify Homer. Anchor Point is 40 - 50 miles from any infrastructure which makes it uneconomical to produce. Legislative Legal has said that a price cap becomes very cumbersome as evidenced by similar legislation which was attempted a couple of years ago. REPRESENTATIVE HODGINS said the reason for a reduction is because the State hasn't received anything from these fields, yet, and he wanted to offer some incentive for industry to start production and bring royalties into the State coffers. On an off-shore platform, approximately 30 million to 40 million barrels of oil is needed to justify it. This has been capped at 25 million because they feel it is sufficient to offer some sort of incentive to cap the State's interest. He pointed out that there is a royalty discovery reduction of five percent currently in statute which has no cap which goes for 10 years. He said there was an argument on the other side that there was no economic assessment; but, on the contrary, there has been one because they have discovered hydrocarbons in these six locations, but they haven't been developed in over 30 years. The price of oil has been up to $25 per barrel and there still has been no incentive, even at that price, for people to go in and develop these fields. In the Kenai, Nikiski, Soldotna area, they have unemployment as high as 17 percent and there are six or seven buildings that are completely vacant that used to have 5 - 15 people working to service the oil fields. That's gone because the oil fields declined. He hoped to create jobs and bring in some royalties to the State. He added if large reserves are discovered, there may be enough economic incentive to build pipelines that would bring other remote fields on line. Number 397 SENATOR GREEN asked what was the likelihood that any of the original owners would go back in and attempt to produce in today's market. REPRESENTATIVE HODGINS answered that he didn't have any idea, but the reason they chose these six fields is because they have been shut in for over 30 years. Legislative Legal Services told him if they delete any of the six fields, it would become too specific and would not be good legislation. He said there are people who are trying to get natural gas into Homer and there has been some activity on Redoubt Shoals. CHAIRMAN HALFORD said a proposed amendment says that the approval for the royalty reduction requires a plan to utilize as much as possible Alaskan manufacturing materials, construction, etc. and provides that the Royalty Oil and Gas Development Advisory Board makes that determination. He asked if that was a problem. REPRESENTATIVE HODGINS said it wasn't, but on page 2, lines 7 - 17 he questioned what the relative cost of the materials in proportion to the benefit to manufacturers in the State meant. CHAIRMAN HALFORD explained that it is intended to provide a reasonable incentive which will be a judgement call by the Alaska Royalty Oil and Gas Advisory Board that all reasonable efforts are made. As far as he's concerned, if it costs substantially more to have it done in Alaska, it's probably not reasonable. If it costs the same or close, do it here. It is not intended to be any numerical scale. REPRESENTATIVE HODGINS said he had visited the Adriatic Ape, a jack-up platform, and it was amazing to understand the gamble they make whenever they set those legs down which leads him to wonder if we have the expertise in the State of Alaska to do this. If it isn't here, are we still going to hold these six fields to that standard? CHAIRMAN HALFORD responded, if the expertise isn't here, then it never reaches the level of consideration. REPRESENTATIVE HODGINS said his whole intent on this legislation was to create Alaskan jobs and he didn't have problems with the amendment as long as it doesn't become too subjective and lend itself to unreasonable caps. He said he would also hate to see someone lose money waiting for a compressor, for example, to come through an Alaskan distributor when he could get one from someplace else. CHAIRMAN HALFORD reiterated that it wasn't the intent to have them buy things through Alaskan wholesalers that are not fabricated in Alaska. The question is fabrication, construction, and the jobs in Alaska versus the materials coming to Alaska from someplace else and the difference in who gets the dealer mark up. SENATOR TORGERSON said he agrees with REPRESENTATIVE HODGINS, but he didn't think the amendment went to the level of detail they are talking about. CHAIRMAN HALFORD said he assumed this was one determination at the point they decide to go forward. It doesn't get reviewed over and over again. REPRESENTATIVE HODGINS asked him how he saw the companies lose their reduction if they didn't follow their plan. CHAIRMAN HALFORD said once there was a plan, there would probably be all kinds of conditions, so they would have to follow their own work plan. He didn't think it would come up. SENATOR LINCOLN asked if they provide relief without there being an economic evaluation performed. REPRESENTATIVE HODGINS replied that the economic evaluations have been the hydrocarbons that have already been discovered in these six fields, although they have never been proved up. The idea behind this bill is that they don't have to delineate the fields. That was a big problem with the existing royalty program (SB 205). He said if you drill through one of the designated fields and find more oil, you're in another field. These fields have already been specifically named and the economic analysis is that they have not had any infrastructure put onto them and have not been producing, even though they have been known for years. Cook Inlet has a lot of pockets of oil. SENATOR LINCOLN said she thought it was helpful to have incentives in any industry to have production, but she didn't see where giving relief in this form to this company would necessarily do anything for the Alaskan coffers. She has heard from Marathon how their plans in Sterling and Beaver Creek fields were a direct result of their 3-D seismic work. Technology is changing so much that we can better pinpoint where it is and not have to go to extremes on giving incentives to the industry for exploration. She said they have a fiduciary responsibility to the citizens of the State. REPRESENTATIVE HODGINS agreed with Senator Lincoln's concerns and explained that the fields in Sterling and Beaver Creek are very close to infrastructure and don't need to put in a pipeline or production facilities. These six fields are a distance from facilities, about 40-50 miles, which is very expensive especially for the size of the field. TAPE 98-28, SIDE B Cook Inlet has a lot of oil, but it's uneconomic to produce. These fields have lain dormant for 30 years. But the bill has a cap, if a big field is found. MR. PAUL FUHS, Alaska Resource Alliance, said they are a marketing consortium of 23 Alaskan oil field supply and service companies and are trying to make it easier for Alaskan oil firms to purchase from Alaskan suppliers. He supported HB 380 saying that the jobs that are created are not just the oil hands on the oil rigs; it's all the companies that supply products from paper clips to valves and pipe and everything in between. A lot of people's jobs depend on the oil field developments. He said he understood that it's their responsibility to try and figure out if the wool is being pulled over their eyes by being asked for a tax break, but he thought it was good proof that these fields have lain dormant for 30 years. If they were economic, they would have been developed. He said there was a cap on six specific fields as a protection in case someone really hit a big field. MR. GARY CARLSON, Vice President, Forcenergy, supported HB 380 and said it is a clear incentive to invest in Alaska in a timely way. He thought it was important for Alaska to act within the time frame that is set out. There is a low administrative burden and it's not complicated and the volume decision was a result of clear thinking. He said that even failed projects will generate jobs for Alaska. His primary concern is uncertainty caused by a requirement to go in front of an unfamiliar board that may or may not have experts on it and being subject to litigation by disgruntled suppliers, although he knew that wasn't the intent behind the amendment. He thought it was a real possibility. They have already made the commitment and worked hard to encourage Alaskan companies to participate in projects they are looking at. Number 524 SENATOR LINCOLN asked him to explain how he thought Alaska was protected on the upside. She also asked how his company would help with Alaska hire. MR. CARLSON said the 25 million barrel volume cap that would allow the State to participate in any upside potential. On Alaskan hire, his company has set up an office in Alaska and has hired 22 employees who are all Alaskan. They took over a bankrupt company and hired the people who were already in place. They have used Alaskan contractors almost exclusively to the point that the expertise is not available. Many of their investments in geophysics and drilling wildcats throughout the State are using drilling equipment that was already here and in one case they are using a piece of drilling equipment that was idle for 10 years. They have an Alaskan hire policy already in place in his company and he offered to supply it to the Committee. His company is acting like they would want him to act and he thought it was good business. His main concern with the amendment is that litigation or lack of understanding would destroy the incentive. SENATOR LINCOLN asked why he purchased the leases knowing the way Alaska does business with its lease structure. She asked why it was economical at that time and not now. MR. CARLSON answered that he wouldn't say that it was attractive to them then and not now. They came to Alaska because they felt it was an area that the major oil companies had lost interest in (Cook Inlet). They felt there was an opportunity for a small company to come in and look hard and be able to figure out ways to invest and get a fair rate of return on fields that were left behind. The incentives they are talking about would come into play at two different times - once you pick up your leases, you decide if you're going to spend the money for 3-D seismic or to drill exploratory wells. You have to look at the whole cost structure and part of that is the burden of pipeline tariffs or royalties or whatever is facing them to making a commercial project. This will make a difference on some fields. If they knew they had a 100 million barrel oil field, they wouldn't be worrying about the royalty, although they would appreciate a reduction. If it's a 40 million barrel oil field, it may make the difference. The concept of putting a time frame on investments is going to encourage companies like his and other small ones in the Anchor Point area, especially, to take action that they wouldn't otherwise. SENATOR LINCOLN asked if their company did a bit of that cost structure before they went in for the leases. CHAIRMAN HALFORD said it isn't his intention to come up with an amendment that get's an ongoing review process; he just wants some way to have a statement about maximizing local hire, fabrication, and construction. Number 408 MR. KEN BOYD, Director, Division of Oil and Gas, first explained that 4-D seismic was time lapse 3-D seismic. It is a production tool, not an exploration tool. He said they don't support the bill because there is no economic evaluation and there is no upside potential for the State. They recognize that the bill has changed somewhat from the beginning. He said it didn't make sense to talk about millions of barrels, if you didn't put a price term on it. At some point, you have to fill in the price term or you don't know if the field is economic. He, personally, had not seen an analysis done on the Cook Inlet fields that said they are uneconomic. He suggested using a sliding scale royalty so the State could capture the upside. An economic analysis saying the fields haven't been developed for 25 or 30 years also doesn't mean a lot to him if you look at what Anadarko is doing at West Moquawkie, another field that has been shut in for 25 or 30 years. He thought that the State needed to have protection in case there was a lot of oil found or if oil prices went up or both. SENATOR SHARP asked how long a State lease could be owned without having production or any explanation whatever. MR. BOYD answered in Cook Inlet, if you don't have it in a unit or producing, the lease goes back to the State and is available for leasing in seven years. SENATOR SHARP noted that most of the leases had been acquired in the last 10 years. MR. BOYD said some of the gas fields are older leases that are in older units that have been held. The oil field leases are recent, with one exception of a Mobil lease in Starichkof. SENATOR LINCOLN asked him to respond to the discoveries that haven't been proved up and said it makes sense to her to have an economic evaluation for the protection of the State and for the companies that are involved. She asked what the objection was to those two areas by supporters of this bill. MR. BOYD explained that the objection is that it adds complexity and uncertainty, although he thought they could do something that was not complex or uncertain. He thought it was important to look at what was the most probable amount of oil there. He said before Forcenergy bought the prospect, there were old wells there and one of them had some oil in it that flowed fairly well, but they could go back with 3-D seismic and reinterpret it and make their best guess. 3-D seismic doesn't show oil, it shows structure or possibilities, but at the end of the day, you still have to drill to prove it up. He hadn't seen anything like an economic analysis that shows what field size would be required to make this project economic. SENATOR LINCOLN asked why someone would be opposed to an economic evaluation. MR. BOYD answered that he has heard it adds complexity and uncertainty. SENATOR LINCOLN asked when companies bid on a lease, do they have some of the historical information available to them to look at to make a decision. MR. BOYD answered, "Sometimes yes and sometimes no." It has been a problem in Alaska to have the data available. Companies can buy data from vendors over fields, sometimes data can't be bought for any price. Sometimes a partnership can be negotiated on data. SENATOR LINCOLN asked him to respond to the amendment. MR. BOYD said he had no objection to the amendment and he presumed that the Board would consist of three commissioners and three members of the public. SENATOR SHARP said he could see difficulty in establishing economic parameters with more than just limiting the size of the field, but if you are handling 100 barrels of water for every one barrel of oil that's coming out of the well, the economics can be bad, too. MR. BOYD said you can run into water usually later in the field, but there certainly were other problems you could run into. CHAIRMAN HALFORD asked why he thought companies always like royalty relief rather than relief in corporate income tax which would automatically be profit sensitive. MR. BOYD replied that maybe the taxing of the sovereign can be changed more easily. It's harder to get a royalty and it's harder to change it once you get it. He didn't know if that was the right answer. CHAIRMAN HALFORD said he would like the amendment just to let people know that there is a goal to have some kind of determination beforehand, but that it be one determination, not a continuous review. SENATOR SHARP moved to adopt amendment #1. There were no objections and it was so ordered. SENATOR TORGERSON moved to pass SCSHB 380(RES) from Committee with individual recommendations and the accompanying fiscal notes. There were no objections and it was so ordered. SB 281 - YAKUTAT GENERAL GRANT LAND ENTITLEMENT CHAIRMAN HALFORD announced SB 281 and said they had a committee substitute that adopts the amount of land Yakutat would have gotten under the original provisions based on VUU, instead of going back in VUU. It comes to 8,552 acres. SENATOR GREEN moved to adopt the CS to SB 281. There were no objections and it was so ordered. SENATOR LINCOLN asked why the acreage was changed from 21,000 to 8,000 acres. MR. BRETT HUBER, staff to Senator Halford, said he requested the DNR to envision Yakutat incorporating today as the original borough boundary, including the annexation, and tell him what the vacant unreserved, unappropriated land base is. That answer came back 87,100 acres. The formula used in the land entitlement is 10 percent of the vuu land, therefore, the 87,100 acres becomes 8,710 minus the original portion that was granted to Yakutat at the time of incorporation. That comes to 8,552 acres. SENATOR TORGERSON asked what happened to the Mental Health Trust. SENATOR MACKIE explained that it had been resolved before they adopted the CS. There was no objection to the 21,000 acres originally requested. CHAIRMAN HALFORD said they may want to look at limiting the selection of land on the Yakutaga end of this thing, if they wanted to create a borough in Cordova. There is a small population base at one end of the area. If they are going to ever have boroughs in some of the other areas, there needs to be some kind of land base left over. SENATOR MACKIE said that land was all included within the Yakutat Borough now and wouldn't be available for Cordova, anyway. He said even Chugach corporation and others didn't have an objection to this legislation the way it's written. SENATOR TORGERSON moved to pass CSSB 281(RES) from Committee with individual recommendations. There were no objections and it was so ordered. CHAIRMAN HALFORD adjourned the meeting at 5:15 p.m