00 CS FOR HOUSE BILL NO. 199(O&G) 01 "An Act relating to the exploration and production of oil and gas and related 02 hydrocarbons, to oil and gas exploration licenses, and to oil and gas leases in 03 certain areas of the state; and providing for an effective date." 04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 05 * Section 1. AS 38.05.020(b) is amended to read: 06 (b) The commissioner may 07 (1) establish reasonable procedures and adopt reasonable regulations 08 necessary to carry out this chapter and, whenever necessary, issue directives or orders 09 to the director to carry out specific functions and duties; regulations adopted by the 10 commissioner shall be adopted under AS 44.62 ([THE] Administrative Procedure Act) 11 [(AS 44.62)]; orders by the commissioner classifying land, issued after January 3, 12 1959, are not required to be adopted under AS 44.62 ([THE] Administrative Procedure 13 Act) [(AS 44.62)]; 14 (2) enter into agreements considered necessary to carry out the purposes 01 of this chapter, including agreements with federal and state agencies; 02 (3) review any order or action of the director; 03 (4) exercise the powers and do the acts necessary to carry out the 04 provisions and objectives of this chapter; 05 (5) notwithstanding the provisions of any other section of this chapter, 06 grant an extension of the time within which payments due on any exploration license, 07 lease, or sale of state land, minerals, or materials may be made, including payment of 08 rental and royalties, on a finding that compliance with the requirements is or was 09 prevented by reason of war, riots, or acts of God; 10 (6) classify tracts for agricultural uses and require the prequalification, 11 including the submission of conservation plans, development plans, or other plans, 12 schedules, or programs, of persons who apply to participate in an agricultural 13 development project under AS 44.33.475; 14 (7) waive, postpone, or otherwise modify the development requirements 15 of a contract for the sale of agricultural land if 16 (A) the land is inaccessible by road; and 17 (B) transportation, marketing, and development costs render the 18 required development uneconomic. 19 * Sec. 2. AS 38 is amended by adding new sections to read: 20 ARTICLE 5A. OIL AND GAS EXPLORATION LICENSES; LEASES. 21 Sec. 38.05.131. APPLICABILITY; DETERMINATION; REGULATIONS. (a) 22 Unless specifically provided otherwise in AS 38.05.132 - 38.05.134, the provisions of 23 AS 38.05.005 - 38.05.040, 38.05.180, 38.05.182 - 38.05.184, and 38.05.920 - 24 38.05.990 apply to the issuance of oil and gas exploration licenses and leases under 25 AS 38.05.132 - 38.05.134. 26 (b) The provisions of AS 38.05.131 - 38.05.134 do not apply to land 27 (1) north of the Umiat baseline; and 28 (2) in the vicinity of Cook Inlet that is within the area bounded by 29 (A) the north boundary of Township 17 North, Seward 30 Meridian; 31 (B) the Seward Meridian; 01 (C) the south boundary of Township 7 South, Seward Meridian; 02 and 03 (D) the west boundary of Range 19 West, Seward Meridian. 04 (c) The commissioner shall make preliminary written determinations of the 05 state land that may be subject to the provisions of AS 38.05.132. The determinations 06 shall be given public notice using the methods described in AS 38.05.945(b). After 07 completion of the comment period and evaluation of the comments received, the 08 commissioner shall issue a written determination of the state land that is subject to the 09 provisions of AS 38.05.132. 10 (d) The commissioner may adopt regulations necessary to implement 11 AS 38.05.131 - 38.05.134. 12 Sec. 38.05.132. OIL AND GAS EXPLORATION LICENSE. (a) To 13 encourage exploration for oil and gas on state land, the commissioner may issue oil 14 and gas exploration licenses. 15 (b) An oil and gas exploration license issued under this section gives the 16 licensee 17 (1) the exclusive right to explore, for a term not to exceed 10 years, for 18 deposits of oil and gas on unleased state land described in the exploration license 19 unless the exploration license is terminated under (d)(1) of this section or the land is 20 earlier relinquished, removed, or deleted under (d)(2) of this section; and 21 (2) unless the exploration license is terminated under (d)(1) of this 22 section, the option to convert the exploration license for all or part of the state land, 23 except the land that is deleted or removed from the land described in the exploration 24 license under (d)(2) of this section, into an oil and gas lease upon fulfillment of the 25 work commitments contained in the exploration license. 26 (c) An exploration license awarded under this section 27 (1) is not subject to the acreage limitations imposed by AS 38.05.140(c) 28 or 38.05.180(m); 29 (2) may cover an area of not less than 20,000 acres and not more than 30 500,000 acres, that must be reasonably compact and contiguous; 31 (3) must be conditioned upon an obligation to perform a specified work 01 commitment, in total for the term of the license, expressed in dollars of direct 02 exploration expenditures; the specified work commitment must include a requirement 03 that the licensee complete at least 25 percent of the licensee's total specified work 04 commitment by the fourth anniversary of the effective date of the issuance of the oil 05 and gas exploration license; 06 (4) must be conditioned upon the posting of a bond or other security 07 acceptable to the commissioner, in favor of the state and subject to the following 08 requirements: 09 (A) the bond or other security must be renewed annually; 10 (B) the initial bond or other security and any annual renewal of 11 it must be in the amount determined by 12 (i) subtracting the licensee's cumulative direct 13 exploration expenditures through the last day of the project year from 14 a number that equals the licensee's total specified work commitment; 15 and 16 (ii) dividing the amount determined in (i) of this 17 subparagraph by the number of years remaining before the exploration 18 license expires; 19 (5) is subject to an annual review and revocation if the commissioner 20 determines that the licensee has failed to provide or maintain in effect the bond or 21 other security required by (4) of this subsection; 22 (6) must be conditioned upon the licensee's payment to the state of a 23 nonrefundable oil and gas exploration license fee in an amount determined by the 24 commissioner, not to exceed $1 for each acre of land or fraction of each acre that is 25 subject to the exploration license; and 26 (7) must be conditioned upon an agreement that exploration 27 expenditures are subject to audit by the commissioner. 28 (d) If, on the fourth anniversary of the effective date of the issuance of the 29 exploration license awarded under this section, 30 (1) the licensee has not completed at least 25 percent of the licensee's 31 total specified work commitment, as measured by the licensee's direct exploration 01 expenditures, the exploration license terminates; 02 (2) the licensee has completed at least 25 percent but has not completed 03 at least 50 percent of the licensee's total specified work commitment, as measured by 04 the licensee's direct exploration expenditure, the commissioner shall remove or delete 05 or shall require the licensee to relinquish a portion of the area within the exploration 06 license; relinquishment, removal, or deletion of an area from the state land described 07 in the exploration license terminates the licensee's rights under AS 38.05.131 - 08 38.05.134 in the area that is relinquished, removed, or deleted; a relinquishment, 09 removal, or deletion of a portion of the area described in the exploration license must 10 be in areas that are reasonably compact and contiguous; the areas relinquished from 11 the state land described in the exploration license must be areas identified by the 12 licensee but, if the licensee fails to identify sufficient area, the commissioner may 13 identify any additional acreage required to be removed or deleted from the area under 14 license to meet the requirements of this subsection; within the area described in the 15 exploration license issued under (a) - (c) of this section, 16 (A) 25 percent must be relinquished, removed, or deleted not 17 later than the fourth anniversary of the effective date of the issuance of the 18 exploration license; 19 (B) an additional 10 percent of the acreage remaining after 20 relinquishment, removal, or deletion of acreage required by (A) of this 21 paragraph and by previous relinquishments, removals, or deletions under this 22 paragraph must be removed or deleted on each of the succeeding anniversaries 23 of the effective date of the issuance of the exploration license; 24 (C) the cumulative total of the acreage relinquished, removed, 25 or deleted under (A) and (B) of this paragraph may not be required to exceed 26 50 percent of the area awarded within the original exploration license area. 27 (e) If, immediately before the beginning of the period for annual renewal of 28 the bond or other security under (c)(4)(A) of this section, the licensee fails to provide 29 or maintain in effect the bond or other security required by (c) of this section for the 30 period covered by the annual renewal and the commissioner revokes the exploration 31 license, the bond or other security then in effect for the licensee's obligations under 01 the exploration license is forfeited to the state. 02 (f) In this section, 03 (1) "direct exploration expenditure" means cash expenses undertaken 04 in performance of a specified work commitment under the provisions of AS 38.05.131 05 - 38.05.134 and necessarily incurred by the licensee in the permitting, mobilization, 06 conducting, demobilization, and evaluation of geophysical and geological surveys, or 07 the drilling, logging, coring, testing, and evaluation of oil and gas wells; the term 08 (A) includes direct labor costs, including the cost of benefits, 09 for employees directly associated with the work commitment programs, the cost 10 of renting or leasing equipment from parties not affiliated with the licensee, the 11 reasonable costs of maintaining and operating equipment, payments to 12 consultants and independent contractors not affiliated with the licensee, and 13 costs of materials and supplies; 14 (B) does not include noncash expenses such as depreciation and 15 reserves, interest or other costs of borrowed funds, return on investment, 16 overhead, insurance or bond premiums, or any other expense that is 17 unreasonable or that the licensee has not incurred to satisfy the licensee's work 18 commitment; 19 (2) "work commitment" includes the drilling of one or more exploration 20 wells or the gathering of data from activities described in (f)(1) of this section, or both. 21 Sec. 38.05.133. LICENSE PROCEDURES. (a) The procedures in this section 22 apply to the issuance of an oil and gas exploration license under AS 38.05.132. 23 (b) The licensing process is initiated by the commissioner preparing, or a 24 prospective licensee submitting to the commissioner, a proposal that identifies a 25 specific area to be subject to the exploration license, proposes specific minimum work 26 commitments, and states the minimum qualifications for a licensee as established by 27 regulations adopted by the commissioner. A prospective licensee may initiate a 28 proposal only in response to a call for proposals by the commissioner or during a 29 period specified in regulations adopted by the commissioner. The regulations must 30 provide for at least one period for that purpose during each calendar year. 31 (c) If the commissioner initiates the licensing process under (b) of this section, 01 the commissioner shall publish notice of the commissioner's proposal in order to solicit 02 comments and competing proposals. 03 (d) Within 30 days after receipt of a proposal from a prospective licensee 04 under (b) of this section, the commissioner shall either reject it in a written decision 05 or give public notice of the intent to evaluate the acceptability of the proposal. The 06 commissioner shall solicit comments on a proposal for which public notice is given 07 under this subsection, and shall request competing proposals. 08 (e) The commissioner may make a written request to a prospective licensee for 09 additional information on the prospective licensee's proposal. The commissioner shall 10 keep confidential information described in AS 38.05.035(a)(9) that is voluntarily 11 provided if the prospective licensee has made a written request that the information 12 remain confidential. 13 (f) After considering proposals not rejected under (d) of this section and public 14 comment on those proposals, the commissioner shall issue a written finding addressing 15 all matters set out in AS 38.05.035(e) and (g), except for AS 38.05.035(g)(1)(K). If 16 the finding concludes that the state's best interests would be served by issuing an oil 17 and gas exploration license, the finding must (1) describe the limitations, stipulations, 18 conditions, or changes from the initiating proposal or competing proposals that are 19 required to make the issuance of the exploration license conform to the best interests 20 of the state, and (2) if only one proposal was submitted, identify the prospective 21 licensee whom the commissioner finds should be issued the exploration license. The 22 commissioner shall attach to the finding a copy of the exploration license to be issued 23 and the form of lease that will be used for any portion of the exploration license area 24 subsequently converted to an oil and gas lease under AS 38.05.134. 25 (g) If only one prospective licensee submits a proposal and the finding under 26 (f) of this section concludes that an exploration license should be issued to that 27 prospective licensee, the prospective licensee has 30 days after issuance of the finding 28 within which to accept or reject the issuance of the exploration license, as limited or 29 conditioned by the terms contained in the finding. The exploration license to be issued 30 and the form of lease that will be used must be attached to that finding. The 31 prospective licensee must accept or reject the issuance of the exploration license in 01 writing. 02 (h) If competing proposals are submitted, and the commissioner's finding 03 under (f) of this section concludes that an oil and gas exploration license should be 04 issued, the commissioner shall issue a request for competitive sealed bids, under 05 procedures adopted by the commissioner by regulation, to determine which prospective 06 licensee should be issued the exploration license. The finding provided to the 07 prospective licensees under (f) of this section must contain notice that (1) the 08 commissioner intends to request competitive sealed bids, (2) a prospective licensee 09 who intends to participate in the bidding must notify the commissioner in writing by 10 the date specified in the notice, and (3) a prospective licensee's notice of intent to 11 participate in the bidding constitutes acceptance of issuance of the exploration license, 12 as limited or conditioned by the terms contained in the finding and by the exploration 13 license to be issued and the form of lease to be used that have been attached to that 14 finding, if the prospective licensee is the successful bidder. The successful bidder is 15 the prospective licensee who submits the highest bid in terms of the minimum work 16 commitment dollar amount. 17 Sec. 38.05.134. CONVERSION TO LEASE. If the licensee requests and the 18 commissioner determines that the work commitment obligation set out in an oil and 19 gas exploration license issued under AS 38.05.132 has been met, the commissioner 20 shall convert to one or more oil and gas leases all or part, as the licensee may indicate, 21 of the area described in the exploration license that remains after the relinquishments, 22 removals, or deletions required by AS 38.05.132(d)(2). A lease issued under this 23 section 24 (1) is subject to the acreage limitations imposed by AS 38.05.140(c); 25 (2) is subject to AS 38.05.180(j) - (m), (o) - (u), and (x) - (z); 26 (3) must be conditioned upon a royalty in amount or value of not less 27 than 12.5 percent of production; 28 (4) must include an annual rent of $3 per acre or fraction of an acre 29 initially paid to the state at inception of the lease and payable annually after that until 30 the income to the state from royalty under that lease exceeds the rental income to the 31 state under that lease for that year; and 01 (5) is subject to other conditions and obligations that are specified in 02 the lease. 03 * Sec. 3. AS 38.05.135(a) is amended to read: 04 (a) Except as otherwise provided, valuable mineral deposits in land belonging 05 to the state shall be open to exploration, development, and the extraction of minerals. 06 All land, together with tide, submerged, or shoreland, to which the state holds title to 07 or to which the state may become entitled, may be obtained by permit or lease for the 08 purpose of exploration, development, and the extraction of minerals. Except as 09 specifically limited by AS 38.05.131 - 38.05.181 [AS 38.05.135 - 38.05.181], land may 10 be withheld from lease application on a first-come, first-served basis, and offered only 11 on a competitive bid basis when determined by the commissioner to be in the best 12 interests of the state. In unproven areas the commissioner may offer additional 13 incentives, including a reduction of royalty to a minimum of five percent in the case 14 of oil and gas, and other terms in and granting a permit or lease for exploration and 15 development whenever it appears to be in the best interests of the state to do so. 16 * Sec. 4. AS 38.05.180(d) is amended to read: 17 (d) The commissioner may issue oil and gas leases in an area that has not been 18 included in a leasing program submitted, in accordance with (b) of this section, to the 19 legislature if the land to be leased 20 (1) [THE LAND TO BE LEASED] was previously subject to a valid 21 state or federal oil and gas lease; [OR] 22 (2) [THE LAND TO BE LEASED] is contiguous to land already under 23 state, federal or private lease and the commissioner makes a written finding, after 24 hearing, that leasing of the land would result in a substantial probability of early 25 evaluation and development of the land to be leased; [OR] 26 (3) [THE LAND TO BE LEASED] is adjacent to land owned or 27 controlled by another party on which a discovery of commercial quantities of oil or 28 gas has been made, and the commissioner finds, after hearing, that there is a 29 reasonable probability that the land to be leased contains oil or gas in communication 30 with the oil or gas discovered on the land of the other party; [OR] 31 (4) [THE LAND TO BE LEASED] is adjacent to land included in the 01 federal five-year Outer Continental Shelf leasing program under 43 U.S.C. 1344, and 02 the commissioner makes a written finding, after hearing, that coordinated or 03 simultaneous leasing with the federal government is in the public interest; or 04 (5) is the subject of an oil and gas exploration license issued under 05 AS 38.05.131 - 38.05.134. 06 * Sec. 5. AS 38.05.180(f) is amended to read: 07 (f) Except as provided by AS 38.05.131 - 38.05.134, the [THE] 08 commissioner may issue oil and gas leases on state land to the highest responsible 09 qualified bidder determined by competitive bidding under regulations adopted by the 10 commissioner. Bidding may be by sealed bid or according to any other bidding 11 procedure the commissioner determines is in the best interests of the state. Whenever, 12 under any of the leasing methods listed in this subsection, a royalty share is reserved 13 to the state, it shall be delivered in pipeline quality and free of all lease or unit 14 expenses, including but not limited to separation, cleaning, dehydration, gathering, salt 15 water disposal, and preparation for transportation off the lease or unit area. Following 16 a pre-sale analysis, the commissioner may choose at least one of the following leasing 17 methods: 18 (1) a cash bonus bid with a fixed royalty share reserved to the state of 19 not less than 12.5 [12 1/2] percent in amount or value of the production removed or 20 sold from the lease; 21 (2) a cash bonus bid with a fixed royalty share reserved to the state of 22 not less than 12.5 [12 1/2] percent in amount or value of the production removed or 23 sold from the lease and a fixed share of the net profit derived from the lease of not 24 less than 30 percent reserved to the state; 25 (3) a fixed cash bonus with a royalty share reserved to the state as the 26 bid variable but no less than 12.5 [12 1/2] percent in amount or value of the 27 production removed or sold from the lease; 28 (4) a fixed cash bonus with the share of the net profit derived from the 29 lease reserved to the state as the bid variable; 30 (5) a fixed cash bonus with a fixed royalty share reserved to the state 31 of not less than 12.5 [12 1/2] percent in amount or value of the production removed 01 or sold from the lease with the share of the net profit derived from the lease reserved 02 to the state as the bid variable; 03 (6) a cash bonus bid with a fixed royalty share reserved to the state 04 based on a sliding scale according to the volume of production or other factor but in 05 no event less than 12.5 [12 1/2] percent in amount or value of the production removed 06 or sold from the lease; 07 (7) a fixed cash bonus with a royalty share reserved to the state based 08 on a sliding scale according to the volume of production or other factor as the bid 09 variable but not less than 12.5 [12 1/2] percent in amount or value of the production 10 removed or sold from the lease. 11 * Sec. 6. AS 38.05.945(a) is amended to read: 12 (a) This section establishes the requirements for notice given by the department 13 for the following actions: 14 (1) classification or reclassification of state land under AS 38.05.300 15 and the closing of land to mineral leasing or entry under AS 38.05.185; 16 (2) zoning of land under applicable law; 17 (3) a decision under AS 38.05.035(e) or 38.05.132 - 38.05.134 18 regarding the sale, lease, or disposal of an interest in state land or resources; 19 (4) a competitive disposal of an interest in state land or resources after 20 final decision under AS 38.05.035(e); 21 (5) a public hearing under AS 38.05.856(b); 22 (6) a preliminary finding under AS 38.05.035(e) and 38.05.855(c) 23 concerning sites for aquatic farms and related hatcheries. 24 * Sec. 7. ADDITIONAL EXCLUDED AREA. In addition to the area designated in 25 AS 38.05.131(b), added by sec. 2 of this Act, the provisions of AS 38.05.131 - 38.05.134, 26 added by sec. 2 of this Act, do not apply to land within proposed Competitive Oil and Gas 27 Lease Sales 80, 87, and 88, as the area to be offered in each of those proposed competitive 28 oil and gas lease sales was delineated in the Five-Year Oil and Gas Leasing Program prepared 29 by the Department of Natural Resources and dated January 1993. However, the exclusion of 30 the land in any one of those lease sales that is required by this section ceases on the date the 31 land described in the lease sale is first offered for competitive oil and gas leasing under 01 AS 38.05.180, and that land is thereafter subject to the provisions of AS 38.05.131 - 02 38.05.134, added by sec. 2 of this Act. 03 * Sec. 8. REGULATIONS. The commissioner of natural resources may proceed to adopt 04 regulations necessary to implement AS 38.05.131 - 38.05.134, added by sec. 2 of this Act. 05 The regulations take effect under AS 44.62 (Administrative Procedure Act), but not before the 06 effective date of secs. 2 - 7 of this Act. 07 * Sec. 9. Section 8 of this Act takes effect immediately under AS 01.10.070(c).