00 SENATE CS FOR CS FOR HOUSE BILL NO. 207(RES) 01 "An Act relating to adjustments to royalty reserved to the state to encourage 02 otherwise uneconomic production of oil and gas; and providing for an effective 03 date." 04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 05 * Section 1. AS 36.30.850(b) is amended by adding a new paragraph to read: 06 (33) contracts between the Department of Natural Resources and 07 contractors qualified to evaluate hydrocarbon development, production, transportation, 08 and economics, to assist the commissioner of natural resources in evaluating applications 09 for oil and gas royalty increases or decreases or other oil and gas royalty adjustments, 10 and evaluating the related financial and technical data, entered into under 11 AS 38.05.180(j). 12 * Sec. 2. AS 38.05.180(j) is amended to read: 13 (j) The [TO PROLONG THE ECONOMIC LIFE OF AN OIL AND GAS 14 FIELD OR TO REESTABLISH COMMERCIAL PRODUCTION OF SHUT-IN OIL OR 01 GAS THAT WOULD NOT OTHERWISE BE ECONOMICALLY FEASIBLE, THE] 02 commissioner 03 (1) may provide for an increase or decrease or otherwise adjust 04 [SHALL ADOPT REGULATIONS TO ALLOW REDUCTION OF] royalty on 05 individual leases, leases unitized as described in (p) of this section, leases subject to 06 an agreement described in (s) or (t) of this section, or interests unitized under 07 AS 31.05; the commissioner may act under this subsection to increase, decrease, or 08 otherwise adjust the royalty 09 (A) after the effective date of this Act and not later than 10 July 1, 2000, to allow for production from an oil or gas field or pool if 11 (i) the oil or gas field or pool has been delineated 12 sufficiently to allow the commissioner to conduct the analyses and 13 make the findings required by this subsection; 14 (ii) the field or pool has not previously produced oil or 15 gas for sale; and 16 (iii) oil or gas production from the field or pool would 17 not otherwise be economically feasible; 18 (B) to prolong the economic life of an oil or gas field or pool 19 as costs per barrel or barrel equivalent increase such that future production 20 would not otherwise be economically feasible; or 21 (C) to reestablish production of shut-in oil or gas that would 22 not otherwise be economically feasible; 23 (2) [. THE COMMISSIONER] may not grant a [REDUCTION OF] 24 royalty increase, decrease, or other adjustment unless the lessee or lessees requesting 25 the increase, decrease, or other adjustment [REDUCTION] makes a clear and 26 convincing showing that an increase, decrease, or other adjustment of royalty meets 27 the requirements of this subsection and is in the best interests of the state; 28 (3) shall 29 (A) [THE REVENUE FROM THE LESSEE'S SHARE OF ALL 30 HYDROCARBONS PRODUCED FROM THE FIELD IS AND IS LIKELY TO 31 CONTINUE TO BE INSUFFICIENT TO PRODUCE A REASONABLE RATE 01 OF RETURN WITH RESPECT TO THE LESSEE'S TOTAL INVESTMENT IN 02 THE FIELD. THE COMMISSIONER MAY] condition any [A] royalty 03 increase, decrease, or other adjustment [REDUCTION] granted under this 04 subsection in any way necessary to protect the state's best interests; 05 (B) describe, in the findings and determinations required by 06 this subsection, the assumptions, including price, projected production rate 07 or volume, predicted ultimate recovery, and development, operating, and 08 transportation costs, upon which the increase, decrease, or other adjustment 09 is based; and 10 (C) set out the terms and conditions, which may include 11 substitution of a sliding scale royalty or other mechanisms, that will govern 12 subsequent increases, decreases, or other adjustments to restore, increase, or 13 decrease the state's royalty share if the assumptions upon which the 14 commissioner relied are subsequently determined to have underestimated or 15 overestimated the economic feasibility of the development of the field or pool 16 without a royalty increase, decrease, or other adjustment; 17 (4) may not grant a royalty increase, decrease, or other adjustment 18 for a field or pool 19 (A) under (1)(A) of this subsection if the royalty increase, 20 decrease, or adjustment for the field or pool would establish a royalty rate 21 of less than five percent in amount or value of the production removed or 22 sold from a lease or leases covering the field or pool; 23 (B) under (1)(B) or (1)(C) of this subsection if the royalty 24 decrease or other adjustment for the field or pool would establish a royalty 25 rate of less than three percent in amount or value of the production removed 26 or sold from a lease or leases covering the field or pool; 27 (5) may not grant a royalty increase, decrease, or other adjustment 28 under this subsection without including an explicit condition that the royalty 29 increase, decrease, or other adjustment is not assignable without the prior written 30 approval of the commissioner; the commissioner's approval of an assignment must 31 be based on a clear and convincing showing by the assignor that the assignment 01 meets the requirements of (1) of this subsection and is in the best interests of the 02 state; 03 (6) shall require the lessee or lessees to submit, with the application 04 for the royalty increase, decrease, or other adjustment, financial and technical data 05 that demonstrate that the requirements of this subsection are met; the commissioner 06 shall 07 (A) require disclosure of the financial and technical data 08 related to development, production, and transportation of oil and gas from 09 the field or pool that are necessary to make a determination as to whether 10 or not to grant the request for royalty increase, decrease, or other 11 adjustment; and 12 (B) keep the data described in (A) of this paragraph 13 confidential under AS 38.05.035(a)(9) at the request of the lessee or lessees 14 making application for the royalty increase or decrease or other royalty 15 adjustment; the confidential data 16 (i) at the direction of the majority of the members of 17 the Legislative Budget and Audit Committee, may be disclosed by 18 the commissioner only to the legislative auditor, the director of the 19 division of legislative finance, and the permanent employees of their 20 respective divisions, and to agents or contractors of the legislative 21 auditor or the legislative finance division director who are engaged 22 under contract to evaluate the royalty increase, decrease, or other 23 royalty adjustment; 24 (ii) may not be disclosed to legislators; 25 (7) may require the lessee or lessees making application for the 26 royalty increase, decrease, or other adjustment to pay for the services of an 27 independent contractor, qualified to evaluate hydrocarbon development, production, 28 transportation, and economics, who is selected by the commissioner to assist the 29 commissioner in evaluating the application and financial and technical data; 30 selection of an independent contractor under this paragraph is not subject to 31 AS 36.30; 01 (8) shall 02 (A) make and publish a preliminary findings and 03 determination on the royalty increase, decrease, or other adjustment 04 application; if the preliminary findings and determination concerns a 05 royalty increase, decrease, or other adjustment under (1)(A) of this 06 subsection, the preliminary findings and determination shall also be 07 presented to the governor for the governor's approval or disapproval; the 08 governor may not delegate a determination to approve or disapprove a 09 preliminary findings and determination under this subparagraph; 10 (B) for a royalty increase, decrease, or other adjustment 11 under (1)(A) of this subsection, if the governor approves the preliminary 12 findings and determination under (A) of this paragraph, 13 (i) give reasonable public notice of the preliminary 14 findings and determination; 15 (ii) concurrently with the issuance of the public 16 notice, if directed by the Legislative Budget and Audit Committee, 17 make available copies of the commissioner's preliminary findings 18 and determination on the royalty increase, decrease, or other 19 adjustment application and the supporting financial and technical 20 data, including the work papers, analyses, and recommendations of 21 any contractors retained under (7) of this subsection, to persons 22 authorized under (6)(B) of this subsection to review the data; and 23 (iii) invite public comment on the preliminary 24 findings and determination during a 30-day period for receipt of 25 public comment; 26 (C) for a royalty increase, decrease, or other adjustment 27 under (1)(B) or (C) of this subsection, if the preliminary findings and 28 determination approves a royalty increase, decrease, or other adjustment, 29 (i) give reasonable public notice of the preliminary 30 findings and determination; and 31 (ii) invite public comment on the preliminary findings 01 and determination during a 30-day period for receipt of public 02 comment; 03 (9) shall address in any findings and determinations required under 04 this subsection 05 (A) the projected effects of the proposed royalty increase, 06 decrease, or other adjustment on the state's revenue; 07 (B) the likelihood that the proposed royalty increase, decrease, 08 or other adjustment will result in incremental capital investment or other 09 beneficial spending within the state, and the steps taken by the commissioner 10 in conditioning the royalty increase, decrease, or other adjustment to assure 11 that anticipated investments or other beneficial spending within the state 12 occur; 13 (C) the projected effects of the proposed royalty increase, 14 decrease, or other adjustment on the employment of Alaskans and the use 15 of in-state contractors and suppliers; and 16 (D) the projected effects of the proposed royalty increase, 17 decrease, or adjustment upon existing and potential new oil and gas 18 exploration and development, and upon competition and patterns of 19 investments related to oil and gas exploration and development; 20 (10) shall offer to appear before the Legislative Budget and Audit 21 Committee on a day that is not earlier than 10 days and not later than 20 days 22 after giving public notice under (8) of this subsection, to provide the committee 23 a review of the commissioner's preliminary findings and determination on the 24 royalty increase, decrease, or other adjustment application and the supporting 25 financial and technical data; if the Legislative Budget and Audit Committee 26 accepts the commissioner's offer, the committee shall give notice of the 27 committee's meeting to all members of the legislature; if, under (6)(B) of this 28 subsection, the financial and technical data must be kept confidential at the 29 request of a lessee or lessees making application for the royalty increase or 30 decrease or other royalty adjustment, the commissioner may appear before the 31 committee in executive session; 01 (11) shall make copies of the preliminary findings and determination 02 available to 03 (A) the presiding officer of each house [INTEREST, 04 INCLUDING RESTORATION OF THE STATE'S ROYALTY SHARE IN THE 05 EVENT OF AN INCREASE IN THE PRICE OF OIL OR GAS. BEFORE 06 APPROVING A ROYALTY REDUCTION, THE COMMISSIONER SHALL 07 MAKE A WRITTEN FINDING THAT THE STATE HAS OBTAINED THE 08 MAXIMUM POSSIBLE ECONOMIC RETURN THAT IS COMPATIBLE 09 WITH ALLOWING A REASONABLE RATE OF ECONOMIC RETURN FOR 10 THE LESSEE, AND SEND COPIES OF THE FINDING TO ALL MEMBERS] 11 of the legislature; 12 (B) the chairs of the legislature's standing committees on 13 resources; and 14 (C) the chairs of the legislature's special committees on oil 15 and gas, if any; 16 (12) shall, within 30 days after the close of the public comment 17 period under (8) of this subsection, 18 (A) prepare a summary of the public response to the 19 commissioner's preliminary findings and determination; 20 (B) except as to a final findings and determination proposed 21 for a royalty increase, decrease, or other adjustment under (1)(A) of this 22 subsection, make a final findings and determination, which is final and not 23 appealable to the court by the lessee or lessees; 24 (C) as to a final findings and determination prepared for 25 a royalty increase, decrease, or other adjustment under (1)(A) of this 26 subsection, make a final findings and determination and present it to the 27 governor for the governor's approval or disapproval; the governor may not 28 delegate a decision to approve or disapprove a final findings and decision 29 presented under this subparagraph; the commissioner's final findings and 30 determination regarding a royalty increase, decrease, or other adjustment 31 prepared under this subparagraph, if approved by the governor, is, as to 01 the lessee or lessees applying for the royalty increase, decrease, or other 02 adjustment, final and not appealable to the court; 03 (D) transmit a copy of the final findings and determination 04 prepared under (B) or (C) of this paragraph to the lessee or lessees making 05 application for the royalty increase, decrease, or other adjustment; 06 (E) with the consent of the lessee or lessees applying for the 07 royalty increase, decrease, or other adjustment, amend the lease or 08 unitization agreement of the lessee or lessees applying for the royalty 09 increase, decrease, or other adjustment consistent with the commissioner's 10 final findings and determination; and 11 (F) make copies of the final findings and determination 12 available to each person who submitted comment under (8) of this subsection 13 and who has filed a request for the copies; 14 (13) is not limited by the provisions of AS 38.05.134(3) or (f) of this 15 section in the commissioner's determination under this subsection. 16 * Sec. 3. AS 38.05.180(p) is amended to read: 17 (p) To conserve the natural resources of all or a part of an oil or gas pool, field, 18 or like area, the lessees and their representatives may unite with each other, or jointly 19 or separately with others, in collectively adopting or operating under a cooperative or a 20 unit plan of development or operation of the pool, field, or like area, or a part of it, when 21 determined and certified by the commissioner to be necessary or advisable in the public 22 interest. The commissioner may, with the consent of the holders of leases involved, 23 establish, change, or revoke drilling, producing, and royalty requirements of the leases 24 and adopt regulations with reference to the leases, with like consent on the part of the 25 lessees, in connection with the institution and operation of a cooperative or unit plan as 26 the commissioner determines necessary or proper to secure the proper protection of the 27 public interest. The commissioner may not decrease royalty on leases in connection 28 with a cooperative or unit plan except as provided in (j) of this section. The 29 commissioner may require oil and gas leases issued under this section to contain a 30 provision requiring the lessee to operate under a reasonable cooperative or unit plan, and 31 may prescribe a plan under which the lessee must operate. The plan must adequately 01 protect all parties in interest, including the state. 02 * Sec. 4. AS 38.05.180(s) is amended to read: 03 (s) When separate tracts cannot be individually developed and operated in 04 conformity with an established well-spacing or development program, a lease, or a 05 portion of a lease, may be pooled with other land, whether or not owned by the state, 06 under a communication or drilling agreement providing for an apportionment of 07 production or royalties among the separate tracts of land comprising the drilling or 08 spacing unit when determined by the commissioner to be in the public interest. 09 Operations or production under the agreement are considered as operations or production 10 as to each lease committed to the agreement. The commissioner may not decrease 11 royalty on leases in connection with a communication or drilling agreement except 12 as provided in (j) of this section. 13 * Sec. 5. AS 38.05.180(t) is amended to read: 14 (t) The commissioner may prescribe conditions and approve, on conditions, 15 drilling, or development contracts made by one or more lessees of oil or gas leases, with 16 one or more persons, when, in the discretion of the commissioner, the conservation of 17 natural resources or the public convenience or necessity requires it or the interests of the 18 state are best served. All leases operated under approved drilling or development 19 contracts and interests under them, are excepted in determining holding or control under 20 AS 38.05.140. The commissioner may not decrease royalty on a lease or leases that 21 are subject to a drilling or development contract except as provided in (j) of this 22 section. 23 * Sec. 6. This Act takes effect immediately under AS 01.10.070(c).