00 CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28(FIN) 01 "An Act relating to adjustments to royalty reserved to the state to encourage otherwise 02 uneconomic production of oil and gas; and providing for an effective date." 03 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 04 * Section 1. AS 38.05.180(j) is amended to read: 05 (j) The commissioner 06 (1) may provide for modification of [AN INCREASE OR 07 DECREASE OR OTHERWISE MODIFY] royalty [, TO ALLOW FOR 08 PRODUCTION THAT WOULD NOT OTHERWISE BE ECONOMICALLY 09 FEASIBLE,] on individual leases, leases unitized as described in (p) of this section, 10 leases subject to an agreement described in (s) or (t) of this section, or interests 11 unitized under AS 31.05 [; THE COMMISSIONER MAY ACT UNDER THIS 12 SUBSECTION TO MODIFY THE ROYALTY] 13 (A) [AFTER JUNE 20, 1995 AND NOT LATER THAN JULY 14 1, 2015, SO LONG AS THE AUTHORITY TO MODIFY ROYALTY 01 UNDER THIS SUBPARAGRAPH HAS BEEN AUTHORIZED OR 02 REAUTHORIZED BY LAW WITHIN THE TEN YEARS PRECEDING THE 03 COMMISSIONER'S ACTION TO MODIFY THE ROYALTY,] to allow for 04 production from an oil or gas field or pool if 05 (i) the oil or gas field or pool has been sufficiently 06 delineated [SUFFICIENTLY] to the satisfaction of [ALLOW] the 07 commissioner [TO CONDUCT THE ANALYSES AND MAKE THE 08 FINDINGS REQUIRED BY THIS SUBSECTION]; [AND] 09 (ii) the field or pool has not previously produced oil or 10 gas for sale; and 11 (iii) oil or gas production from the field or pool 12 would not otherwise be economically feasible; 13 (B) to prolong the economic life of an oil or gas field or pool as 14 per barrel or barrel equivalent costs [PER BARREL OR BARREL 15 EQUIVALENT] increase or as the price of oil or gas decreases, and the 16 increase or decrease is sufficient to make future production no longer 17 economically feasible; or 18 (C) to reestablish production of shut-in oil or gas that would 19 not otherwise be economically feasible; 20 (2) may not grant a royalty modification unless the lessee or lessees 21 requesting the change [MODIFICATION] make a clear and convincing showing that 22 a modification of royalty meets the requirements of this subsection and is in the best 23 interests of the state; 24 (3) shall provide for an increase or decrease or other modification 25 of the state's royalty share by a sliding scale royalty or other mechanism that 26 shall be based on a change in the price of oil or gas and may also be based on 27 other relevant factors such as a change in production rate, projected ultimate 28 recovery, development costs, and operating costs 29 [(A) CONDITION ANY ROYALTY MODIFICATION 30 GRANTED UNDER THIS SUBSECTION IN ANY WAY NECESSARY TO 31 PROTECT THE STATE'S BEST INTERESTS; 01 (B) DESCRIBE, IN THE FINDINGS AND 02 DETERMINATIONS REQUIRED BY THIS SUBSECTION, THE 03 RELEVANT FACTORS, INCLUDING PRICE, PROJECTED 04 PRODUCTION RATE OR VOLUME, PREDICTED ULTIMATE 05 RECOVERY, AND DEVELOPMENT, OPERATING, AND 06 TRANSPORTATION COSTS, UPON WHICH THE MODIFICATION IS 07 BASED; 08 (C) FOR A MODIFICATION UNDER (1)(A) OF THIS 09 SUBSECTION, SET OUT THE TERMS AND CONDITIONS, WHICH 10 (i) MUST INCLUDE A MECHANISM FOR 11 ADJUSTING ROYALTY PERCENTAGE BASED ON PRICE; 12 USING FORECASTS OF THE RANGE OF FUTURE PRICES AND 13 THEIR PROBABILITIES, THE MECHANISM MUST PROVIDE 14 THAT THE VALUE OF THE POTENTIAL REVENUE INCREASES 15 RESULTING FROM ROYALTY PERCENTAGE INCREASES 16 MUST EXCEED THE VALUE OF THE POTENTIAL REVENUE 17 LOSSES RESULTING FROM ROYALTY PERCENTAGE 18 DECREASES; AND 19 (ii) MAY INCLUDE, IN ADDITION TO THE 20 ROYALTY PERCENTAGE ADJUSTMENT BASED ON PRICE, 21 WHICH MUST MEET THE CONDITIONS SPECIFIED IN (i) OF 22 THIS SUBPARAGRAPH, A FURTHER ADJUSTMENT BASED ON 23 PRODUCTION RATE OR VOLUME FROM THE FIELD OR POOL; 24 AND 25 (D) FOR A MODIFICATION UNDER (1)(B) OR (1)(C) OF 26 THIS SUBSECTION, SET OUT THE TERMS AND CONDITIONS, WHICH 27 MAY INCLUDE SUBSTITUTION OF A SLIDING SCALE ROYALTY OR 28 OTHER MECHANISM TO MODIFY THE ROYALTY IF THERE IS A 29 CHANGE IN THE RELEVANT FACTORS, SUCH AS PRICE, PROJECTED 30 PRODUCTION RATE OR VOLUME, PREDICTED ULTIMATE 31 RECOVERY, AND DEVELOPMENT, OPERATING, AND 01 TRANSPORTATION COSTS, UPON WHICH THE MODIFICATION IS 02 BASED]; 03 (4) may not grant a royalty reduction [MODIFICATION] for a field 04 or pool 05 (A) under (1)(A) of this subsection if the royalty modification 06 for the field or pool would establish a royalty rate of less than five percent in 07 amount or value of the production removed or sold from a lease or leases 08 covering the field or pool; 09 (B) under (1)(B) or (1)(C) of this subsection if the royalty 10 modification for the field or pool would establish a royalty rate of less than 11 three percent in amount or value of the production removed or sold from a 12 lease or leases covering the field or pool; 13 (5) may not grant a royalty reduction [MODIFICATION] under this 14 subsection without including an explicit condition that the royalty reduction 15 [MODIFICATION] is not assignable without the prior written approval, which may 16 not be unreasonably withheld, by [OF] the commissioner; the commissioner shall, in 17 the preliminary and final findings and determinations, set out the conditions under 18 which the royalty reduction [MODIFICATION] may be assigned; 19 (6) shall require the lessee or lessees to submit, with the application for 20 the royalty reduction [MODIFICATION], financial and technical data that 21 demonstrate that the requirements of this subsection are met; the commissioner 22 [SHALL] 23 (A) may require disclosure of only the financial and technical 24 data related to development, production, and transportation of oil and gas from 25 the field or pool that are reasonably available to the applicant 26 [NECESSARY TO MAKE A DETERMINATION AS TO WHETHER OR 27 NOT TO GRANT THE REQUEST FOR ROYALTY MODIFICATION]; and 28 (B) shall keep the data [DESCRIBED IN (A) OF THIS 29 PARAGRAPH] confidential under AS 38.05.035(a)(9) at the request of the 30 lessee or lessees making application for the royalty reduction 31 [MODIFICATION]; the confidential data may be disclosed by the 01 commissioner to legislators and to the legislative auditor and as directed by the 02 chair or vice-chair of the Legislative Budget and Audit Committee to the 03 director of the division of legislative finance, the permanent employees of their 04 respective divisions who are responsible for evaluating a royalty reduction 05 [MODIFICATION], and to agents or contractors of the legislative auditor or 06 the legislative finance director who are engaged under contract to evaluate the 07 royalty reduction [MODIFICATION], if they sign an appropriate 08 confidentiality agreement; 09 (7) may 10 (A) require the lessee or lessees making application for the 11 royalty reduction under (1)(A) of this subsection [MODIFICATION] to pay 12 for the services of an independent contractor, selected by the lessee or lessees 13 from a list of qualified consultants compiled by the commissioner, to 14 evaluate hydrocarbon development, production, transportation, and economics 15 and [,WHO IS SELECTED BY THE COMMISSIONER] to assist the 16 commissioner in evaluating the application and financial and technical data; if, 17 under this subparagraph, the commissioner requires payment for the 18 services of an independent contractor, the total cost of the services to be 19 paid for by the lessee or lessees may not exceed $150,000 for each 20 application, and the commissioner shall determine the relevant scope of 21 the work to be performed by the contractor; selection of an independent 22 contractor under this subparagraph [PARAGRAPH] is not subject to 23 AS 36.30; 24 (B) with the mutual consent of the lessee or lessees making 25 application for the royalty reduction under (1)(B) or (1)(C) of this 26 subsection, request payment for the services of an independent 27 contractor, selected from a list of qualified consultants to evaluate 28 hydrocarbon development, production, transportation, and economics by 29 the commissioner to assist the commissioner in evaluating the application 30 and financial and technical data; if, under this subparagraph, the 31 commissioner requires payment for the services of an independent 01 contractor, the total cost of the services that may be paid for by the lessee 02 or lessees may not exceed $150,000 for each application, and the 03 commissioner shall determine the relevant scope of the work to be 04 performed by the contractor; selection of an independent contractor 05 under this subparagraph is not subject to AS 36.30; 06 (8) shall 07 [(A)] make and publish a preliminary findings and 08 determination on the royalty reduction [MODIFICATION] application, [; IF 09 THE PRELIMINARY FINDINGS AND DETERMINATION CONCERNS A 10 ROYALTY MODIFICATION UNDER (1)(A) OF THIS SUBSECTION, THE 11 PRELIMINARY FINDINGS AND DETERMINATION SHALL ALSO BE 12 PRESENTED TO THE GOVERNOR FOR THE GOVERNOR'S APPROVAL 13 OR DISAPPROVAL; THE GOVERNOR MAY NOT DELEGATE A 14 DETERMINATION TO APPROVE OR DISAPPROVE A PRELIMINARY 15 FINDINGS AND DETERMINATION UNDER THIS SUBPARAGRAPH; 16 (B) FOR A ROYALTY MODIFICATION UNDER (1)(A) OF 17 THIS SUBSECTION, IF THE GOVERNOR APPROVES THE 18 PRELIMINARY FINDINGS AND DETERMINATION UNDER (A) OF 19 THIS PARAGRAPH, 20 (i)] give reasonable public notice of the preliminary 21 findings and determination, [; 22 (ii) CONCURRENTLY WITH THE ISSUANCE OF 23 THE PUBLIC NOTICE, UNLESS DIRECTED BY THE 24 LEGISLATIVE BUDGET AND AUDIT COMMITTEE TO DO 25 OTHERWISE, MAKE AVAILABLE COPIES OF THE 26 COMMISSIONER'S PRELIMINARY FINDINGS AND 27 DETERMINATION ON THE ROYALTY MODIFICATION 28 APPLICATION AND THE SUPPORTING FINANCIAL AND 29 TECHNICAL DATA, INCLUDING THE WORK PAPERS, 30 ANALYSES, AND RECOMMENDATIONS OF ANY 31 CONTRACTORS RETAINED UNDER (7) OF THIS SUBSECTION, 01 TO PERSONS AUTHORIZED UNDER (6)(B) OF THIS 02 SUBSECTION TO REVIEW THE DATA;] and 03 [(iii)] invite public comment on the preliminary findings 04 and determination during a 30-day period for receipt of public 05 comment; 06 [(C) FOR A ROYALTY MODIFICATION UNDER (1)(B) OR 07 (C) OF THIS SUBSECTION, IF THE PRELIMINARY FINDINGS AND 08 DETERMINATION APPROVES A ROYALTY MODIFICATION, 09 (i) GIVE REASONABLE PUBLIC NOTICE OF THE 10 PRELIMINARY FINDINGS AND DETERMINATION; AND 11 (ii) INVITE PUBLIC COMMENT ON THE 12 PRELIMINARY FINDINGS AND DETERMINATION DURING A 13 30-DAY PERIOD FOR RECEIPT OF PUBLIC COMMENT; 14 (9) SHALL ADDRESS IN ANY FINDINGS AND 15 DETERMINATIONS REQUIRED UNDER THIS SUBSECTION THE 16 REASONABLY FORESEEABLE EFFECTS OF THE PROPOSED ROYALTY 17 MODIFICATION ON THE STATE'S REVENUE;] 18 (9) [(10)] shall offer to appear before the Legislative Budget and Audit 19 Committee on a day that is not earlier than 10 days and not later than 20 days 20 after giving public notice under (8) of this subsection, to provide the committee a 21 review of the commissioner's preliminary findings and determination on the royalty 22 reduction [MODIFICATION] application and administrative process [THE 23 SUPPORTING FINANCIAL AND TECHNICAL DATA]; if the Legislative Budget 24 and Audit Committee accepts the commissioner's offer, the committee shall give 25 notice of the committee's meeting to all members of the legislature; [IF, UNDER 26 (6)(B) OF THIS SUBSECTION, THE FINANCIAL AND TECHNICAL DATA 27 MUST BE KEPT CONFIDENTIAL AT THE REQUEST OF A LESSEE OR 28 LESSEES MAKING APPLICATION FOR THE ROYALTY MODIFICATION, THE 29 COMMISSIONER MAY APPEAR BEFORE THE COMMITTEE IN EXECUTIVE 30 SESSION;] 31 (10) [(11)] shall make copies of the preliminary findings and 01 determination available to 02 (A) the presiding officer of each house of the legislature; 03 (B) the chairs of the legislature's standing committees on 04 resources; and 05 (C) the chairs of the legislature's special committees on oil and 06 gas, if any; 07 (11) [(12)] shall, within 30 days after the close of the public comment 08 period under (8) of this subsection, 09 (A) prepare a summary of the public response to the 10 commissioner's preliminary findings and determination; 11 (B) make a final findings and determination [AND PRESENT 12 IT TO THE GOVERNOR FOR THE GOVERNOR'S APPROVAL OR 13 DISAPPROVAL; THE GOVERNOR MAY NOT DELEGATE A DECISION 14 TO APPROVE OR DISAPPROVE A FINAL FINDINGS AND 15 DETERMINATION PRESENTED UNDER THIS SUBPARAGRAPH]; the 16 commissioner's final findings and determination prepared under this 17 subparagraph regarding a royalty reduction [MODIFICATION, IF 18 APPROVED BY THE GOVERNOR,] is final and not appealable to the court; 19 (C) transmit a copy of the final findings and determination 20 [PREPARED UNDER (B) OF THIS PARAGRAPH] to the lessee [OR 21 LESSEES MAKING APPLICATION FOR THE ROYALTY 22 MODIFICATION]; 23 (D) with the applicant's consent [OF THE LESSEE OR 24 LESSEES APPLYING FOR THE ROYALTY MODIFICATION], amend the 25 applicant's lease or unitization agreement [OF THE LESSEE OR LESSEES 26 APPLYING FOR THE ROYALTY MODIFICATION] consistent with the 27 commissioner's [APPROVED] final decision [FINDINGS AND 28 DETERMINATION]; and 29 (E) make copies of the final findings and determination 30 available to each person who submitted comment under (8) of this subsection 31 and who has filed a request for the copies; 01 (12) [(13)] is not limited by the provisions of AS 38.05.134(3) or (f) of 02 this section in the commissioner's determination under this subsection. 03 * Sec. 2. AS 38.05.180(p) is amended to read: 04 (p) To conserve the natural resources of all or a part of an oil or gas pool, 05 field, or like area, the lessees and their representatives may unite with each other, or 06 jointly or separately with others, in collectively adopting or operating under a 07 cooperative or a unit plan of development or operation of the pool, field, or like area, 08 or a part of it, when determined and certified by the commissioner to be necessary or 09 advisable in the public interest. The commissioner may, with the consent of the 10 holders of leases involved, establish, change, or revoke drilling, producing, and 11 royalty requirements of the leases and adopt regulations with reference to the leases, 12 with like consent on the part of the lessees, in connection with the institution and 13 operation of a cooperative or unit plan as the commissioner determines necessary or 14 proper to secure the proper protection of the public interest. The commissioner may 15 not reduce [DECREASE] royalty on leases in connection with a cooperative or unit 16 plan except as provided in (j) of this section. The commissioner may require oil and 17 gas leases issued under this section to contain a provision requiring the lessee to 18 operate under a reasonable cooperative or unit plan, and may prescribe a plan under 19 which the lessee must operate. The plan must adequately protect all parties in interest, 20 including the state. 21 * Sec. 3. AS 38.05.180(s) is amended to read: 22 (s) When separate tracts cannot be individually developed and operated in 23 conformity with an established well-spacing or development program, a lease, or a 24 portion of a lease, may be pooled with other land, whether or not owned by the state, 25 under a communitization or drilling agreement providing for an apportionment of 26 production or royalties among the separate tracts of land comprising the drilling or 27 spacing unit when determined by the commissioner to be in the public interest. 28 Operations or production under the agreement are considered as operations or 29 production as to each lease committed to the agreement. The commissioner may not 30 reduce [DECREASE] royalty on leases in connection with a communitization or 31 drilling agreement except as provided in (j) of this section. 01 * Sec. 4. AS 38.05.180(t) is amended to read: 02 (t) The commissioner may prescribe conditions and approve, on conditions, 03 drilling, or development contracts made by one or more lessees of oil or gas leases, 04 with one or more persons, when, in the discretion of the commissioner, the 05 conservation of natural resources or the public convenience or necessity requires it or 06 the interests of the state are best served. All leases operated under approved drilling or 07 development contracts and interests under them, are excepted in determining holding 08 or control under AS 38.05.140. The commissioner may not reduce [DECREASE] 09 royalty on a lease or leases that are subject to a drilling or development contract except 10 as provided in (j) of this section. 11 * Sec. 5. This Act takes effect immediately under AS 01.10.070(c).