00 CS FOR HOUSE BILL NO. 531(RES) 01 "An Act relating to natural gas exploration and development and to nonconventional 02 gas, and amending the section under which shallow natural gas leases may be issued; 03 and providing for an effective date." 04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 05  * Section 1. AS 14.40.365(a) is amended to read: 06 (a) The University of Alaska may select and is entitled to receive the 07 conveyance of not less than 250,000 and not more than 260,000 acres of land 08 conveyed to the state under sec. 6(b) of the Alaska Statehood Act (P.L. 85-508, 72 09 Stat. 339). The Board of Regents of the University of Alaska shall periodically submit 10 a list of selections to the commissioner of natural resources and, if the list of selections 11 contains land within the boundaries of a municipality, the Board of Regents of the 12 University of Alaska shall submit the list to the municipality. The Board of Regents 13 and the commissioner of natural resources shall periodically and jointly submit to the 14 legislature, within 30 days of the beginning of a regular legislative session, a list of the 01 selections of land proposed to be conveyed by the state to the University of Alaska 02 under this section. If the list submitted to the legislature contains land within the 03 boundaries of a municipality, the Board of Regents and the commissioner of natural 04 resources shall provide a copy of the list to the municipality. Each list must contain 05 not more than 25 percent of the total acres of land to which the university is entitled 06 after subtracting previous conveyances under this section, but not less than 25,000 07 acres or the remaining entitlement under this section, whichever is less. A list of 08 selections submitted shall be considered approved for conveyance to the University of 09 Alaska unless the legislature acts to disapprove the list during the legislative session 10 during which the list was submitted. If the amount of land to be conveyed exceeds the 11 balance due the university under this section, the university shall set out the land to be 12 conveyed in priority order. Land may not be selected if, on the date of its selection by 13 the university, it 14 (1) is identified in AS 16.20, AS 41.15.300 - 41.15.330, or AS 41.21 or 15 has been reserved by law from the public domain; 16 (2) is located within a municipality unless the land is vacant, 17 unappropriated, unreserved land; if land included on the list of selections is selected 18 by the municipality with remaining selection rights under AS 29.65 within 120 days of 19 receiving the Board of Regents' list of selections under this subsection, the university 20 may not select the land unless a binding agreement between the university and the 21 municipality is negotiated to allow the selection; if the municipal selection is 22 disapproved, in whole or in part, the university may select the land, or any available 23 portion of the land, and that selection will relate back to the date of the Board of 24 Regents' list of selections under this subsection and shall have priority over all other 25 selections or claims made subsequent to that notice; in this paragraph, "vacant, 26 unappropriated, unreserved land" has the meaning given in AS 29.65.130; 27 (3) is land 28 (A) included in a five-year proposed [OIL AND GAS] leasing 29 program under AS 38.05.180(b); or 30 (B) leased under, or for which a lease application is pending 31 under, AS 38.05.180(d) or 38.05.150; 01 (4) is subject to 02 (A) an oil, gas, or coal lease, or coal prospecting permit; 03 (B) a mining claim, offshore prospecting permit, a prospecting 04 site, an upland mining lease, or a mining leasehold location; 05 (5) is necessary to carry out the purpose of an interagency land 06 management agreement; or 07 (6) is subject to conveyance under a land exchange or land settlement 08 agreement. 09  * Sec. 2. AS 14.40.365(e) is amended to read: 10 (e) The list of selections of land submitted to the legislature may not include a 11 land selection made by the University of Alaska under this section if the commissioner 12 of natural resources determines in writing that the proposed selection 13 (1) includes land that the commissioner, in consultation with the 14 commissioner of fish and game, determines has demonstrated value to the public as a 15 habitat area that is especially critical to the perpetuation of fish or wildlife; 16 (2) includes land for which, at the time of its selection under this 17 section, a municipality has made a selection under AS 29.65 unless the land selection 18 is, at a later date, rejected by the commissioner of natural resources or relinquished by 19 the municipality; 20 (3) includes land that the commissioner reasonably believes may be 21 selected by a newly formed municipality under AS 29.65.030, but the commissioner 22 may not withhold selection under this paragraph for more than three years after the 23 municipality's incorporation; 24 (4) includes land within the boundaries of a municipality, the 25 municipality has a remaining entitlement under AS 29.65, and the municipality selects 26 the land under AS 29.65 within 120 days after receipt by the municipality of the Board 27 of Regents' list of selections under (a) of this section; 28 (5) includes land that, at the time of its selection under this section, 29 (A) is subject to an [OIL AND GAS] exploration license 30 issued under AS 38.05.131 - 38.05.134; or 31 (B) the commissioner reasonably believes will be made part of 01 an [OIL AND GAS] exploration license issued under AS 38.05.131 - 02 38.05.134; the commissioner may not refuse to convey title to land to the 03 University of Alaska under this subparagraph for more than two years after its 04 first selection by the University of Alaska; or 05 (6) includes land the commissioner of natural resources reasonably 06 believes would not be in the best interests of the state to convey outside of state 07 ownership. 08  * Sec. 3. AS 19.40.200(b) is amended to read: 09 (b) The prohibition on disposal of state land under (a) of this section does not 10 apply to a disposal 11 (1) to a licensed public utility or a licensed common carrier under 12 AS 38.05.810(e); 13 (2) for the reauthorization of leases that were in effect on January 1, 14 1994, for nonresidential purposes within the following development nodes: 15 (A) Coldfoot: 16 Township 28 North, Range 12 West, Fairbanks Meridian 17 Sections 3 - 4 18 Sections 9 - 10 19 Sections 15 - 16 20 Sections 20 - 22 21 (B) Yukon River Crossing: 22 Township 12 North, Range 10 West, Fairbanks Meridian 23 Sections 6 - 7 24 Township 12 North, Range 11 West, Fairbanks Meridian 25 Sections 1 - 2 26 Section 12 27 Township 13 North, Range 10 West, Fairbanks Meridian 28 Sections 29 - 32 29 Township 13 North, Range 11 West, Fairbanks Meridian 30 Section 22 31 Sections 25 - 27 01 Sections 34 - 36 02 (3) for nonresidential development within the following development 03 nodes: 04 (A) Deadhorse: 05 Township 10 North, Range 14 East, Umiat Meridian 06 Township 10 North, Range 15 East, Umiat Meridian 07 Section 8 08 Sections 17 - 20 09 Section 30 10 (B) Coldfoot: 11 Township 28 North, Range 12 West, Fairbanks Meridian 12 Sections 3 - 4 13 Sections 9 - 10 14 Sections 15 - 16 15 Sections 20 - 22 16 Township 29 North, Range 12 West, Fairbanks Meridian 17 Sections 23 - 27 18 Sections 34 - 35 19 (C) Franklin Bluffs: 20 Township 4 North, Range 14 East, Umiat Meridian 21 Sections 3 - 4 22 Sections 9 - 10 23 Sections 15 - 16 24 (D) Happy Valley: 25 Township 3 South, Range 14 East, Umiat Meridian 26 Sections 19 - 20 27 Sections 29 - 30 28 (E) Yukon River Crossing: 29 Township 12 North, Range 10 West, Fairbanks Meridian 30 Sections 6 - 7 31 Township 12 North, Range 11 West, Fairbanks Meridian 01 Sections 1 - 2 02 Section 12 03 Township 13 North, Range 10 West, Fairbanks Meridian 04 Sections 29 - 32 05 Township 13 North, Range 11 West, Fairbanks Meridian 06 Section 22 07 Sections 25 - 27 08 Sections 34 - 36; or 09 (4) necessary for 10 (A) an oil and gas lease or gas only lease under AS 38.05.180; 11 (B) exploration, development, production, or transportation of 12 oil and gas north of 68 degrees north latitude; or 13 (C) a state lease or materials sale for 14 (i) exploration, development, production, or 15 transportation of oil or [AND] gas; 16 (ii) reconstruction or maintenance of state highways; or 17 (iii) construction or maintenance of airports. 18  * Sec. 4. AS 31.05.030(j) is amended to read: 19 (j) For exploration and development operations involving nonconventional  20 gas, the commission  21 (1) may not  22 (A) issue a permit to drill under this chapter if the well  23 would be used to produce gas from an aquifer that serves as a source of  24 water for human consumption or agricultural purposes unless the  25 commission finds that the well will not adversely affect the aquifer as a  26 source of water for human consumption or agricultural purposes; or  27 (B) allow injection of produced water except at depths  28 below known sources of water for human consumption or agricultural  29 purposes;  30 (2) shall  31 (A) regulate hydraulic fracturing in nonconventional gas  01 wells to assure protection of drinking water quality;  02 (B) regulate the disposal of wastes produced from the  03 operations unless the disposal is otherwise subject to regulation by the  04 Department of Environmental Conservation or the Environmental  05 Protection Agency; and  06 (C) for the purposes of AS 46.04.030(b), [THE 07 COMMISSION SHALL] determine whether a well drilled for 08 nonconventional [SHALLOW NATURAL] gas may penetrate a formation 09 capable of flowing oil and, if so, whether the volume of oil encountered will be 10 of such quantities that an oil discharge prevention and contingency plan will be 11 required. 12  * Sec. 5. AS 31.05.060(c) is amended to read: 13 (c) Notwithstanding the requirements of (a) and (b) of this section that relate 14 to fixing a date for a hearing and causing notice of the hearing to be given, for an 15 action under this chapter that involves the exploration for or development of 16 nonconventional [SHALLOW NATURAL] gas and that has application to a single 17 well or a single field, upon the request of a lessee or operator, the commission may, 18 where operations might be unduly delayed, approve a variance from the commission's 19 regulations that apply to the well or field without providing notice and opportunity to 20 be heard. In the exercise of its authority to issue the variance, 21 (1) the commission may approve the variance if 22 (A) the approval provides at least an equally effective means of 23 accomplishing the requirement set out in the commission's regulation; or 24 (B) the commission determines that the request is more 25 appropriate to the proposed operation than compliance with the requirement of 26 the regulation; and 27 (2) the terms of the approval of the variance may include exempting 28 the lessee or operator from a requirement of a regulation if the commission determines 29 that the requirement is not necessary or not suited to the well or field taking into 30 consideration 31 (A) the nature of the operation involved; 01 (B) the characteristics of the well or field for which the 02 variance is sought; and 03 (C) the reasonably anticipated risks of the exemption from the 04 requirement to human safety and the environment. 05  * Sec. 6. AS 31.05.170 is amended by adding a new paragraph to read: 06 (16) "nonconventional gas" has the meaning given in AS 38.05.965. 07  * Sec. 7. AS 36.30.850(b)(25) is amended to read: 08 (25) acquisition of confidential seismic survey data necessary for pre- 09 sale oil and gas lease or gas only lease analyses under AS 38.05.180; 10  * Sec. 8. AS 36.30.850(b)(33) is amended to read: 11 (33) contracts between the Department of Natural Resources and 12 contractors qualified to evaluate hydrocarbon development, production, transportation, 13 and economics, to assist the commissioner of natural resources in evaluating 14 applications for [OIL AND GAS] royalty increases or decreases or other [OIL AND 15 GAS] royalty adjustments, and evaluating the related financial and technical data, 16 entered into under AS 38.05.180(j); 17  * Sec. 9. AS 38.04.065(i) is amended to read: 18 (i) An oil and gas lease sale or gas only lease sale is not subject to this 19 section. Oil and gas lease sales and gas only lease sales are subject to the planning 20 process established under AS 38.05.180. 21  * Sec. 10. AS 38.05.035(e) is amended to read: 22 (e) Upon a written finding that the interests of the state will be best served, the 23 director may, with the consent of the commissioner, approve contracts for the sale, 24 lease, or other disposal of available land, resources, property, or interests in them. In 25 approving a contract under this subsection, the director need only prepare a single 26 written finding. In addition to the conditions and limitations imposed by law, the 27 director may impose additional conditions or limitations in the contracts as the director 28 determines, with the consent of the commissioner, will best serve the interests of the 29 state. The preparation and issuance of the written finding by the director are subject to 30 the following: 31 (1) with the consent of the commissioner and subject to the director's 01 discretion, for a specific proposed disposal of available land, resources, or property, or 02 of an interest in them, the director, in the written finding, 03 (A) shall establish the scope of the administrative review on 04 which the director's determination is based, and the scope of the written 05 finding supporting that determination; the scope of the administrative review 06 and finding may address only reasonably foreseeable, significant effects of the 07 uses proposed to be authorized by the disposal; 08 (B) may limit the scope of an administrative review and finding 09 for a proposed disposal to 10 (i) applicable statutes and regulations; 11 (ii) the facts pertaining to the land, resources, or 12 property, or interest in them, that the director finds are material to the 13 determination and that are known to the director or knowledge of which 14 is made available to the director during the administrative review; and 15 (iii) issues that, based on the statutes and regulations 16 referred to in (i) of this subparagraph, on the facts as described in (ii) of 17 this subparagraph, and on the nature of the uses sought to be authorized 18 by the disposal, the director finds are material to the determination of 19 whether the proposed disposal will best serve the interests of the state; 20 and 21 (C) may, if the project for which the proposed disposal is 22 sought is a multiphased development, limit the scope of an administrative 23 review and finding for the proposed disposal to the applicable statutes and 24 regulations, facts, and issues identified in (B)(i) - (iii) of this paragraph that 25 pertain solely to the disposal phase of the project when 26 (i) the only uses to be authorized by the proposed 27 disposal are part of that phase; 28 (ii) the disposal is a [AN OIL AND GAS] disposal of  29 oil and gas, or of gas only, and, before the next phase of the project 30 may proceed, public notice and the opportunity to comment are 31 provided under regulations adopted by the department unless the 01 project is subject to a consistency review under AS 46.40 and public 02 notice and the opportunity to comment are provided under 03 AS 46.40.096(c); 04 (iii) the department's approval is required before the 05 next phase of the project may proceed; and 06 (iv) the department describes its reasons for a decision 07 to phase; 08 (2) the director shall discuss in the written finding prepared and issued 09 under this subsection the reasons that each of the following was not material to the 10 director's determination that the interests of the state will be best served: 11 (A) facts pertaining to the land, resources, or property, or an 12 interest in them other than those that the director finds material under (1)(B)(ii) 13 of this subsection; and 14 (B) issues based on the statutes and regulations referred to in 15 (1)(B)(i) of this subsection and on the facts described in (1)(B)(ii) of this 16 subsection; 17 (3) a written finding for an oil and gas lease sale or gas only lease sale 18 under AS 38.05.180 is subject to (g) of this section; 19 (4) a contract for the sale, lease, or other disposal of available land or 20 an interest in land is not legally binding on the state until the commissioner approves 21 the contract, but if the appraised value is not greater than $50,000 in the case of the 22 sale of land or an interest in land, or $5,000 in the case of the annual rental of land or 23 interest in land, the director may execute the contract without the approval of the 24 commissioner; 25 (5) public notice requirements relating to the sale, lease, or other 26 disposal of available land or an interest in land for oil and gas, or for gas only, 27 proposed to be scheduled in the five-year oil and gas leasing program under 28 AS 38.05.180(b), except for a sale under (6)(F) of this subsection, are as follows: 29 (A) before a public hearing, if held, or in any case not less than 30 180 days before the sale, lease, or other disposal of available land or an interest 31 in land, the director shall make available to the public a preliminary written 01 finding that states the scope of the review established under (1)(A) of this 02 subsection and includes the applicable statutes and regulations, the material 03 facts and issues in accordance with (1)(B) of this subsection, and information 04 required by (g) of this section, upon which the determination that the sale, 05 lease, or other disposal will serve the best interests of the state will be based; 06 the director shall provide opportunity for public comment on the preliminary 07 written finding for a period of not less than 60 days; 08 (B) after the public comment period for the preliminary written 09 finding and not less than 90 days before the sale, lease, or other disposal of 10 available land or an interest in land for oil and gas or for gas only, the director 11 shall make available to the public a final written finding that states the scope of 12 the review established under (1)(A) of this subsection and includes the 13 applicable statutes and regulations, the material facts and issues in accordance 14 with (1) of this subsection, and information required by (g) of this section, 15 upon which the determination that the sale, lease, or other disposal will serve 16 the best interests of the state is based; 17 (6) before a public hearing, if held, or in any case not less than 21 days 18 before the sale, lease, or other disposal of available land, property, resources, or 19 interests in them other than a sale, lease, or other disposal of available land or an 20 interest in land for oil and gas or for gas only under (5) of this subsection, the director 21 shall make available to the public a written finding that, in accordance with (1) of this 22 subsection, sets out the material facts and applicable statutes and regulations and any 23 other information required by statute or regulation to be considered upon which the 24 determination that the sale, lease, or other disposal will best serve the interests of the 25 state was based; however, a written finding is not required before the approval of 26 (A) a contract for a negotiated sale authorized under 27 AS 38.05.115; 28 (B) a lease of land for a shore fishery site under AS 38.05.082; 29 (C) a permit or other authorization revocable by the 30 commissioner; 31 (D) a mineral claim located under AS 38.05.195; 01 (E) a mineral lease issued under AS 38.05.205; 02 (F) an exempt oil and gas lease sale or gas only lease sale 03 under AS 38.05.180(d) of acreage subject to a best interest finding issued 04 within the previous 10 years or a reoffer oil and gas lease sale or gas only  05 lease sale under AS 38.05.180(w) of acreage subject to a best interest finding 06 issued within the previous 10 years, unless the commissioner determines that 07 substantial new information has become available that justifies a supplement to 08 the most recent best interest finding for the exempt oil and gas lease sale or  09 gas only lease sale acreage and for the reoffer oil and gas lease sale or gas  10 only lease sale acreage; however, for each oil and gas lease sale or gas only  11 lease sale described in this subparagraph, the director shall call for comments 12 from the public; the director's call for public comments must provide 13 opportunity for public comment for a period of not less than 30 days; if the 14 director determines that a supplement to the most recent best interest finding 15 for the acreage is required under this subparagraph, 16 (i) the director shall issue the supplement to the best 17 interest finding not later than 90 days before the sale; 18 (ii) not later than 45 days before the sale, the director 19 shall issue a notice describing the interests to be offered, the location 20 and time of the sale, and the terms and conditions of the sale; and 21 (iii) the supplement has the status of a final written best 22 interest finding for purposes of (i) and (l) of this section; 23 (G) [A SHALLOW GAS LEASE AUTHORIZED UNDER 24 AS 38.05.177 IN AN AREA FOR WHICH LEASING IS AUTHORIZED 25 UNDER AS 38.05.177; 26 (H)] a surface use lease under AS 38.05.255; 27 (H) [(I)] a permit, right-of-way, or easement under 28 AS 38.05.850; 29 (7) the director shall include in 30 (A) a preliminary written finding, if required, a summary of 31 agency and public comments, if any, obtained as a result of contacts with other 01 agencies concerning a proposed disposal or as a result of informal efforts 02 undertaken by the department to solicit public response to a proposed disposal, 03 and the department's preliminary responses to those comments; and 04 (B) the final written finding a summary of agency and public 05 comments received and the department's responses to those comments. 06  * Sec. 11. AS 38.05.035(g) is amended to read: 07 (g) Notwithstanding (e)(1)(A) and (B) of this section, when the director 08 prepares a written finding required under (e) of this section for an oil and gas lease 09 sale or a gas only lease sale scheduled under AS 38.05.180, the director shall consider 10 and discuss 11 (1) in a preliminary or final written finding facts that are known to the 12 director at the time of preparation of the finding and that are 13 (A) material to issues that were raised during the period 14 allowed for receipt of public comment, whether or not material to a matter set 15 out in (B) of this paragraph, and within the scope of the administrative review 16 established by the director under (e)(1) of this section; or 17 (B) material to the following matters: 18 (i) property descriptions and locations; 19 (ii) the petroleum potential of the sale area, in general 20 terms; 21 (iii) fish and wildlife species and their habitats in the 22 area; 23 (iv) the current and projected uses in the area, including 24 uses and value of fish and wildlife; 25 (v) the governmental powers to regulate the [OIL AND 26 GAS] exploration, development, production, and transportation of oil  27 and gas or of gas only; 28 (vi) the reasonably foreseeable cumulative effects of 29 [OIL AND GAS] exploration, development, production, and 30 transportation for oil and gas or for gas only on the sale area, 31 including effects on subsistence uses, fish and wildlife habitat and 01 populations and their uses, and historic and cultural resources; 02 (vii) lease stipulations and mitigation measures, 03 including any measures to prevent and mitigate releases of oil and 04 hazardous substances, to be included in the leases, and a discussion of 05 the protections offered by these measures; 06 (viii) the method or methods most likely to be used to 07 transport oil or gas from the lease sale area, and the advantages, 08 disadvantages, and relative risks of each; 09 (ix) the reasonably foreseeable fiscal effects of the lease 10 sale and the subsequent activity on the state and affected municipalities 11 and communities, including the explicit and implicit subsidies 12 associated with the lease sale, if any; 13 (x) the reasonably foreseeable effects of [OIL AND 14 GAS] exploration, development, production, and transportation 15 involving oil and gas or gas only on municipalities and communities 16 within or adjacent to the lease sale area; and 17 (xi) the bidding method or methods adopted by the 18 commissioner under AS 38.05.180; and 19 (2) the basis for the director's preliminary or final finding, as 20 applicable, that, on balance, leasing the area would be in the state's best interest. 21  * Sec. 12. AS 38.05.036(a) is amended to read: 22 (a) The department may conduct audits regarding royalty and net profits under 23 oil and gas contracts, agreements, or leases under this chapter and regarding costs 24 related to [OIL AND GAS] exploration licenses entered into under AS 38.05.131 -  25 38.05.134 and exploration incentive credits under this chapter or under AS 41.09. For 26 purposes of audit under this section, 27 (1) the department may examine the books, papers, records, or 28 memoranda of a person regarding matters related to the audit; and 29 (2) the records and premises where a business is conducted shall be 30 open at all reasonable times for inspection by the department. 31  * Sec. 13. AS 38.05.127(e) is amended to read: 01 (e) The establishment of easements or rights-of-way for oil and gas, gas only, 02 and mineral leases under (a) of this section need not be made until the leases are ready 03 to be developed. 04  * Sec. 14. AS 38.05.131(a) is amended to read: 05 (a) Unless specifically provided otherwise in AS 38.05.132 - 38.05.134, the 06 provisions of AS 38.05.005 - 38.05.037, 38.05.140(f), 38.05.180, 38.05.182 - 07 38.05.184, and 38.05.920 - 38.05.990 apply to the issuance of [OIL AND GAS] 08 exploration licenses and leases for oil and gas, or for gas only, as appropriate, 09 under AS 38.05.132 - 38.05.134. 10  * Sec. 15. AS 38.05.132(a) is amended to read: 11 (a) To encourage exploration for oil and gas on state land, the commissioner 12 may issue [OIL AND GAS] exploration licenses. The commissioner may limit the  13 exploration licenses under AS 38.05.132 - 38.05.134 to exploration for and  14 recovery of gas only. 15  * Sec. 16. AS 38.05.132(b) is amended to read: 16 (b) An [OIL AND GAS] exploration license issued under this section gives 17 the licensee 18 (1) the exclusive right to explore, for a term not to exceed 10 years, 19 [FOR DEPOSITS OF OIL AND GAS] on unleased state land described in the 20 exploration license for deposits of oil and gas, or for deposits of gas only, as  21 appropriate, unless the exploration license is terminated under (d)(1) of this section 22 or the land is earlier relinquished, removed, or deleted under (d)(2) of this section; and 23 (2) unless the exploration license is terminated under (d)(1) of this 24 section, the option to convert the exploration license for all or part of the state land, 25 except the land that is deleted or removed from the land described in the exploration 26 license under (d)(2) of this section, into an oil and gas lease, or a gas lease only, as  27 appropriate, upon fulfillment of the work commitments contained in the exploration 28 license. 29  * Sec. 17. AS 38.05.132(c) is amended to read: 30 (c) An exploration license awarded under this section 31 (1) is not subject to the acreage limitations imposed by 01 AS 38.05.140(c) or 38.05.180(m); 02 (2) may cover, subject to the maximum acreage limitation on 03 exploration licenses by one licensee under AS 38.05.131(e), an area of not less than 04 10,000 acres and not more than 500,000 acres, that must be reasonably compact and 05 contiguous; 06 (3) must be conditioned upon an obligation to perform a specified 07 work commitment, in total for the term of the license, expressed in dollars of direct 08 exploration expenditures; the specified work commitment 09 (A) may include a provision that adjusts the total amount of 10 work commitment, expressed in dollars of direct exploration expenditures, to 11 account for inflation; 12 (B) must include a requirement that the licensee complete at 13 least 25 percent of the licensee's total specified work commitment by the fourth 14 anniversary of the effective date of the issuance of the [OIL AND GAS] 15 exploration license; 16 (4) must be conditioned upon the posting of a bond or other security 17 acceptable to the commissioner, in favor of the state and subject to the following 18 requirements: 19 (A) the bond or other security must be renewed annually; 20 (B) the annual bond or other security shall be calculated as the 21 entire work commitment expressed in dollars, less the cumulative direct 22 exploration expenditures of the licensee as of the last day of the most recent 23 project year, divided by the number of years remaining in the term of the 24 exploration license; 25 (5) is subject to an annual review and revocation if the commissioner 26 determines that the licensee has failed to provide or maintain in effect the bond or 27 other security required by (4) of this subsection; 28 (6) must be conditioned upon the licensee's payment to the state of a 29 nonrefundable [OIL AND GAS] exploration license fee of $1 for each acre of land or 30 fraction of each acre that is subject to the exploration license; and 31 (7) must be conditioned upon an agreement that exploration 01 expenditures are subject to audit by the commissioner. 02  * Sec. 18. AS 38.05.132(f) is amended to read: 03 (f) In this section, 04 (1) "direct exploration expenditure" means cash expenses undertaken 05 in performance of a specified work commitment under the provisions of AS 38.05.131 06 - 38.05.134 and necessarily incurred by the licensee in the permitting, mobilization, 07 conducting, demobilization, and evaluation of geophysical and geological surveys, or 08 the drilling, logging, coring, testing, and evaluation of oil and gas or gas only wells; 09 the term 10 (A) includes direct labor costs, including the cost of benefits, 11 for employees directly associated with the work commitment programs, the 12 cost of renting or leasing equipment from parties not affiliated with the 13 licensee, the reasonable costs of maintaining and operating equipment, 14 payments to consultants and independent contractors not affiliated with the 15 licensee, and costs of materials and supplies; 16 (B) does not include noncash expenses such as depreciation 17 and reserves, interest or other costs of borrowed funds, return on investment, 18 overhead, insurance or bond premiums, or any other expense that is 19 unreasonable or that the licensee has not incurred to satisfy the licensee's work 20 commitment; 21 (2) "work commitment" includes the drilling of one or more 22 exploration wells or the gathering of data from activities described in (1) of this 23 subsection, or both. 24  * Sec. 19. AS 38.05.133(a) is amended to read: 25 (a) The procedures in this section apply to the issuance of an [OIL AND GAS] 26 exploration license under AS 38.05.132. 27  * Sec. 20. AS 38.05.133(f) is amended to read: 28 (f) After considering proposals not rejected under (d) of this section and public 29 comment on those proposals, the commissioner shall issue a written finding 30 addressing all matters set out in AS 38.05.035(e) and (g), except for 31 AS 38.05.035(g)(1)(B)(xi). If the finding concludes that the state's best interests 01 would be served by issuing an [OIL AND GAS] exploration license, the finding must 02 (1) describe the limitations, stipulations, conditions, or changes from the initiating 03 proposal or competing proposals that are required to make the issuance of the 04 exploration license conform to the best interests of the state, and (2) if only one 05 proposal was submitted, identify the prospective licensee whom the commissioner 06 finds should be issued the exploration license. The commissioner shall attach to the 07 finding a copy of the exploration license to be issued and the form of lease that will be 08 used for any portion of the exploration license area subsequently converted to a [AN 09 OIL AND GAS] lease under AS 38.05.134. 10  * Sec. 21. AS 38.05.133(h) is amended to read: 11 (h) If competing proposals are submitted, and the commissioner's finding 12 under (f) of this section concludes that an [OIL AND GAS] exploration license should 13 be issued, the commissioner shall issue a request for competitive sealed bids, under 14 procedures adopted by the commissioner by regulation, to determine which 15 prospective licensee should be issued the exploration license. The finding provided to 16 the prospective licensees and the public under (f) of this section must contain notice 17 that (1) the commissioner intends to request competitive sealed bids, (2) a prospective 18 licensee who intends to participate in the bidding must notify the commissioner in 19 writing by the date specified in the notice, and (3) a prospective licensee's notice of 20 intent to participate in the bidding constitutes acceptance of issuance of the 21 exploration license, as limited or conditioned by the terms contained in the finding and 22 by the exploration license to be issued and the form of lease to be used that have been 23 attached to that finding, if the prospective licensee is the successful bidder. The 24 successful bidder is the prospective licensee who submits the highest bid in terms of 25 the minimum work commitment dollar amount. 26  * Sec. 22. AS 38.05.134 is amended to read: 27 Sec. 38.05.134. Conversion to lease. If the licensee requests and the 28 commissioner determines that the work commitment obligation set out in an [OIL 29 AND GAS] exploration license issued under AS 38.05.132 has been met, the 30 commissioner shall convert to one or more [OIL AND GAS] leases all or part, as the 31 licensee may indicate, of the area described in the exploration license that remains 01 after the relinquishments, removals, or deletions required by AS 38.05.132(d)(2). A 02 lease issued under this section 03 (1) is subject to the acreage limitations imposed by AS 38.05.140(c); 04 (2) is subject to AS 38.05.180(j) - (m), (o) - (u), and (x) - (z); 05 (3) must be conditioned upon a royalty in amount or value of not less 06 than 12.5 percent of production, except that 07 (A) the lessee who, proceeding under AS 38.05.131 - 08 38.05.134, under a lease issued in the Cook Inlet sedimentary basin who is the 09 first to file with the commissioner a nonconfidential sworn statement claiming 10 to be the first to have drilled a well discovering oil or gas in a previously 11 undiscovered oil or gas pool and who is certified by the commissioner within 12 one year of completion of that discovery well to have drilled a well in that pool 13 that is capable of producing in paying quantities shall pay a royalty of five 14 percent on all production of oil or gas from that pool attributable to that lease 15 for a period of 10 years following the date of discovery of that pool, and 16 thereafter the royalty payable on all production of oil or gas from the pool 17 attributable to that lease shall be determined and payable as specified in the 18 lease; the payment of the five percent royalty under this paragraph is 19 authorized only to a holder of a lease who meets the requirements of 20 AS 38.05.180(f)(4); and  21 (B) for nonconventional gas that is not produced in direct  22 competition with gas on which a royalty at a rate of at least 12.5 percent is  23 payable, if the licensee requests, the commissioner may negotiate with the  24 licensee and set a royalty rate for the gas of at least 6.25 percent; for  25 purposes of this subparagraph, "nonconventional gas" has the meaning  26 given in AS 38.05.965;  27 (4) must include an annual rent of $3 per acre or fraction of an acre 28 initially paid to the state at inception of the lease and payable annually after that until 29 the income to the state from royalty under that lease exceeds the rental income to the 30 state under that lease for that year; and 31 (5) is subject to other conditions and obligations that are specified in 01 the lease. 02  * Sec. 23. AS 38.05.140(a) is amended to read: 03 (a) A person may not take or hold coal leases or permits during the life of coal 04 leases on state land exceeding an aggregate of 92,160 acres, except that a person may 05 apply for coal leases or permits for acreage in addition to 92,160 acres, not exceeding 06 a total of 5,120 additional acres of state land. The additional area applied for shall be 07 in multiples of 40 acres, and the application shall contain a statement that the granting 08 of a lease for additional land is necessary for the person to carry on business 09 economically and is in the public interest. On the filing of the application, [EXCEPT 10 AS PROVIDED BY AS 38.05.177(a)(2)(C),] the coal deposits in the land covered by 11 the application shall be temporarily set aside and withdrawn from all other forms of 12 disposal provided under AS 38.05.135 - 38.05.181. 13  * Sec. 24. AS 38.05.140(f) is amended to read: 14 (f) The submerged and shoreland lying north of 57 degrees, 30 minutes, North 15 [NORTH] latitude and east of 159 degrees, 49 minutes, West [WEST] longitude 16 within the Bristol Bay drainage are designated as the Bristol Bay Fisheries Reserve. 17 Within the Bristol Bay Fisheries Reserve, a [NO] surface entry permit to develop an 18 oil or gas lease or an [OIL AND GAS] exploration license under AS 38.05.131 -  19 38.05.134 may not be issued on state owned or controlled land until the legislature by 20 appropriate resolution specifically finds that the entry will not constitute danger to the 21 fishery. 22  * Sec. 25. AS 38.05.150(f) is amended to read: 23 (f) A [NOTWITHSTANDING AS 38.05.177, A] lease entered into under this 24 section gives the lessee the right to vent or remove methane and other gas held in 25 association with the coal in the land covered by the lease to ensure safe coal mining 26 operations. 27  * Sec. 26. AS 38.05.177(a) is amended to read: 28 (a) The provisions of this section 29 [(1)] apply to nonconventional gas [, WHETHER METHANE 30 ASSOCIATED WITH AND DERIVED FROM COAL DEPOSITS OR 31 OTHERWISE, FROM A FIELD IF A PART OF THE FIELD IS WITHIN 3,000 01 FEET OF THE SURFACE; AND 02 (2) DO NOT APPLY TO AUTHORIZE LEASE OF 03 (A) LAND 04 (i) THAT IS SUBJECT TO AN OIL AND GAS 05 EXPLORATION LICENSE OR LEASE ISSUED UNDER 06 AS 38.05.131 - 38.05.134; OR 07 (ii) THAT IS LEASED UNDER AS 38.05.180; 08 (B) THE LAND (i) THAT IS PROPOSED TO BE SUBJECT 09 TO AN OIL AND GAS EXPLORATION LICENSE OR LEASE ISSUED 10 UNDER AS 38.05.131 - 38.05.134; OR (ii) THAT IS DESCRIBED IN AND 11 PART OF A PROPOSED OIL AND GAS LEASING PROGRAM 12 PREPARED UNDER AS 38.05.180(b); HOWEVER, THE COMMISSIONER 13 MAY WAIVE THE LIMITATIONS OF THIS SUBPARAGRAPH; 14 (C) THE LAND THAT IS HELD UNDER A COAL LEASE 15 ENTERED INTO UNDER AS 38.05.150, UNLESS THE APPLICANT FOR 16 A SHALLOW NATURAL GAS LEASE IS ALSO THE LESSEE UNDER 17 AS 38.05.150 OF THAT LAND; OR 18 (D) THE VALID EXISTING SELECTIONS OF THE 19 ALASKA MENTAL HEALTH TRUST AUTHORITY MADE FOR THE 20 PURPOSE OF RECONSTITUTING THE MENTAL HEALTH TRUST 21 ESTABLISHED UNDER THE ALASKA MENTAL HEALTH ENABLING 22 ACT, P.L. 84-830, 70 STAT. 709 (1956), THAT BECOME SUBJECT TO 23 MANAGEMENT UNDER AS 38.05.801, OR OF LAND THAT HAS BEEN 24 DESIGNATED BY LAW FOR OR IS SUBJECT TO DESIGNATION FOR 25 CONVEYANCE TO THE ALASKA MENTAL HEALTH TRUST 26 AUTHORITY; HOWEVER, AFTER CONSULTATION WITH THE 27 ALASKA MENTAL HEALTH TRUST AUTHORITY, THE 28 COMMISSIONER MAY WAIVE THE LIMITATIONS OF THIS 29 SUBPARAGRAPH]. 30  * Sec. 27. AS 38.05.177(d) is amended to read: 31 (d) A lease 01 (1) shall be automatically extended if and for so long thereafter as gas 02 is produced in paying quantities from the lease and the lessee continues to meet all 03 requirements of the lease; a [. A] lease issued under this section covering land on 04 which there is a well capable of producing gas in paying quantities does not expire 05 because the lessee fails to produce gas unless the lessee is allowed reasonable time to 06 place the well on a producing status; if [. IF] drilling has commenced on the 07 expiration date of the primary term of the lease and is continued with reasonable 08 diligence, including such operations as redrilling, sidetracking, or other means 09 necessary to reach the originally proposed bottom hole location, the lease is extended 10 for one year and for so long thereafter as gas is produced in paying quantities; a [. A] 11 gas lease issued under this section that is subject to termination by reason of cessation 12 of production does not terminate if, within 90 days after production ceases or a longer 13 period determined at the discretion of the director, reworking or drilling operations are 14 commenced on the land under lease and are thereafter conducted with reasonable 15 diligence during the period of nonproduction;  16 (2) issued under former (c) of this section before January 1, 2004,  17 may be extended at the discretion of the director; a lease may be extended under  18 this paragraph [. IN ADDITION,] upon application by the lessee; [,] the director 19 may once extend the [A] lease [ISSUED UNDER (c) OF THIS SECTION] for a 20 period of not more than three years; in exercising discretion to extend a lease under  21 this paragraph, the director may not extend the lease unless the director  22 considers  23 (A) the extent of the shallow natural gas exploration  24 activity already conducted on the lease and on adjacent areas;  25 (B) the probability that further shallow natural gas  26 exploration activity will occur on the lease and will lead to shallow natural  27 gas development and production; and  28 (C) whether extension of the lease's primary term will  29 accelerate the eventual production of shallow natural gas from the lease. 30  * Sec. 28. AS 38.05.177(l) is amended to read: 31 (l) A lessee holding [OBTAINING] a lease modified under 01 AS 38.05.180(n)(2) [THIS SECTION] may exercise the rights authorized by this 02 section and the lease. The rights granted by the lease must be exercised in a manner 03 that does not unreasonably interfere with eventual development of other mineral 04 deposits on the land leased. However, in a lease entered into under AS 38.05.150 for 05 land that is already subject to a lease covered [LEASED] under this section, coal may 06 not be mined or extracted by the coal lessee from the coal lease without prior 07 agreement with the lessee holding the lease covered [ISSUED] under this section. 08  * Sec. 29. AS 38.05.180(a) is amended to read: 09 (a) The legislature finds that 10 (1) the people of Alaska have an interest in the development of the 11 state's oil and gas resources to 12 (A) maximize the economic and physical recovery of the 13 resources; 14 (B) maximize competition among parties seeking to explore 15 and develop the resources; 16 (C) maximize use of Alaska's human resources in the 17 development of the resources; 18 (2) it is in the best interests of the state 19 (A) to encourage an assessment of its oil and gas resources and 20 to allow the maximum flexibility in the methods of issuing leases to 21 (i) recognize the many varied geographical regions of 22 the state and the different costs of exploring for oil and gas in these 23 regions; 24 (ii) minimize the adverse impact of exploration, 25 development, production, and transportation activity; and 26 (B) to offer acreage for oil and gas leases or for gas only  27 leases, specifically including 28 (i) state acreage that has been the subject of a best 29 interest finding at annual areawide lease sales; and 30 (ii) land in areas that, under (d) of this section, may be 31 leased without having been included in the leasing program prepared 01 and submitted under (b) of this section. 02  * Sec. 30. AS 38.05.180(b) is amended to read: 03 (b) The commissioner shall biennially prepare and, between the first and the 04 15th day of the first regular session of each legislature, notify the legislature of the 05 availability of, a five-year proposed oil and gas leasing program consisting of a 06 schedule of proposed lease sales and specifying as precisely as practicable the location 07 of tracts proposed to be offered for oil and gas leasing or for leasing of gas only 08 during the calendar year in which the proposed program is made available to the 09 legislature and the following four calendar years. 10  * Sec. 31. AS 38.05.180(c) is amended to read: 11 (c) Except as provided in (d) and (w) of this section, an oil and gas lease sale 12 or gas only lease sale may not be held unless it was included in the proposed leasing 13 programs submitted to the legislature during the two calendar years preceding the year 14 in which the sale is held. A lease sale, whether for oil and gas or for gas only, may 15 not be held before the date it is scheduled in the proposed oil and gas leasing program. 16  * Sec. 32. AS 38.05.180(d) is amended to read: 17 (d) The commissioner 18 (1) may annually offer leases for oil and gas or leases for gas only 19 [LEASES] of the acreage described in AS 38.05.035(e)(6)(F); 20 (2) may issue [OIL AND GAS] leases in an area that has not been 21 included in a leasing program prepared, in accordance with (b) of this section, if the 22 land to be leased 23 (A) was previously subject to a valid state oil and gas lease, a  24 valid state gas lease, or a valid federal oil and gas lease; 25 (B) is contiguous to land already under state, federal, or private 26 lease and the commissioner makes a written finding, after hearing, that leasing 27 of the land would result in a substantial probability of early evaluation and 28 development of the land to be leased; 29 (C) is adjacent to land owned or controlled by another party on 30 which a discovery of commercial quantities of oil or gas has been made, and 31 the commissioner finds, after hearing, that there is a reasonable probability that 01 the land to be leased contains oil or gas in communication with the oil or gas 02 discovered on the land of the other party; 03 (D) is adjacent to land included in the federal five-year Outer 04 Continental Shelf leasing program under 43 U.S.C. 1344, and the 05 commissioner makes a written finding, after hearing, that coordinated or 06 simultaneous leasing with the federal government is in the public interest; or 07 (E) is the subject of an [OIL AND GAS] exploration license 08 issued under AS 38.05.131 - 38.05.134; however, if the license issued was  09 for exploration for and recovery of gas only, then the lease issued under  10 this subsection shall be limited to exploration for and recovery of gas only. 11  * Sec. 33. AS 38.05.180(f) is amended to read: 12 (f) Except as provided by AS 38.05.131 - 38.05.134 [AND 38.05.177], the 13 commissioner may issue oil and gas leases or leases for gas only on state land to the 14 highest responsible qualified bidder as follows: 15 (1) the commissioner shall issue an oil and gas lease or a gas only  16 lease, as appropriate, to the successful bidder determined by competitive bidding 17 under regulations adopted by the commissioner; bidding may be by sealed bid or 18 according to any other bidding procedure the commissioner determines is in the best 19 interests of the state; 20 (2) whenever, under any of the leasing methods listed in this 21 subsection, a royalty share is reserved to the state, it shall be delivered in pipeline 22 quality and free of all lease or unit expenses, including but not limited to separation, 23 cleaning, dehydration, gathering, salt water disposal, and preparation for transportation 24 off the lease or unit area; 25 (3) following a pre-sale analysis, the commissioner may choose at least 26 one of the following leasing methods: 27 (A) a cash bonus bid with a fixed royalty share reserved to the 28 state of not less than 12.5 percent in amount or value of the production 29 removed or sold from the lease; 30 (B) a cash bonus bid with a fixed royalty share reserved to the 31 state of not less than 12.5 percent in amount or value of the production 01 removed or sold from the lease and a fixed share of the net profit derived from 02 the lease of not less than 30 percent reserved to the state; 03 (C) a fixed cash bonus with a royalty share reserved to the state 04 as the bid variable but no less than 12.5 percent in amount or value of the 05 production removed or sold from the lease; 06 (D) a fixed cash bonus with the share of the net profit derived 07 from the lease reserved to the state as the bid variable; 08 (E) a fixed cash bonus with a fixed royalty share reserved to the 09 state of not less than 12.5 percent in amount or value of the production 10 removed or sold from the lease with the share of the net profit derived from the 11 lease reserved to the state as the bid variable; 12 (F) a cash bonus bid with a fixed royalty share reserved to the 13 state based on a sliding scale according to the volume of production or other 14 factor but in no event less than 12.5 percent in amount or value of the 15 production removed or sold from the lease; 16 (G) a fixed cash bonus with a royalty share reserved to the state 17 based on a sliding scale according to the volume of production or other factor 18 as the bid variable but not less than 12.5 percent in amount or value of the 19 production removed or sold from the lease; 20 (H) for nonconventional gas that will not be produced in  21 direct competition with gas on which a royalty at a rate of at least 12.5  22 percent is payable, a royalty share reserved to the state of at least 6.25  23 percent in amount or value of the production removed or sold from the  24 lease;  25 (4) notwithstanding a requirement in the leasing method chosen of a 26 minimum fixed royalty share, on and after March 3, 1997, the lessee under a lease 27 issued in the Cook Inlet sedimentary basin who is the first to file with the 28 commissioner a nonconfidential sworn statement claiming to be the first to have 29 drilled a well discovering oil or gas in a previously undiscovered oil or gas pool and 30 who is certified by the commissioner within one year of completion of that discovery 31 well to have drilled a well in that pool that is capable of producing in paying quantities 01 shall pay a royalty of five percent on all production of oil or gas from that pool 02 attributable to that lease for a period of 10 years following the date of discovery of that 03 pool, and thereafter the royalty payable on all production of oil or gas from the pool 04 attributable to that lease shall be determined and payable as specified in the lease; for 05 purposes of this paragraph, the reduced royalty authorized by this paragraph is subject 06 to the following: 07 (A) only one reduction of royalty authorized by this paragraph 08 may be allowed on each lease that qualifies for reduction of royalty under this 09 paragraph; 10 (B) if, under this paragraph, application is made for a royalty 11 reduction for a lease that was entered into before March 3, 1997, the 12 commissioner may approve the application only if, on that date, the lease was a 13 nonproducing lease that was not committed to a unit approved by the 14 commissioner under (m) of this section, that is not part of a unit under (p) or 15 (q) of this section, and that has not been made part of a unit under AS 31.05; 16 (C) if application for a royalty reduction is made under this 17 paragraph for a lease on which a discovery royalty was claimed or may be 18 claimed under the discovery royalty provisions of former AS 38.05.180(a) in 19 effect before May 6, 1969, the commissioner shall disallow the application 20 under this paragraph unless the applicant waives the right to claim the right to 21 a reduced royalty under the discovery royalty provisions of former 22 AS 38.05.180(a) in effect before May 6, 1969; and 23 (D) the commissioner shall adopt regulations setting out the 24 standards, criteria, and definitions of terms that apply to implement the filing 25 of applications for, and the review and certification of, discovery [OIL AND 26 GAS ROYALTY] certifications under this paragraph; 27 (5) notwithstanding and in lieu of a requirement in the leasing method 28 chosen of a minimum fixed royalty share, or the royalty provision of a lease, for leases 29 unitized as described in (p) of this section, leases subject to an agreement described in 30 (s) or (t) of this section, or interests unitized under AS 31.05, the lessee of all or part of 31 an oil or gas field identified in this section that has been granted approval of a written 01 plan submitted to the Alaska Oil and Gas Conservation Commission under 02 AS 31.05.030(i) shall, subject to (dd) of this section, pay a royalty of five percent on 03 the first 25,000,000 barrels of oil and the first 35,000,000,000 cubic feet of gas 04 produced for sale from that field that occurs in the 10 years following the date on 05 which the production for sale commences; the fields eligible for royalty reduction 06 under this paragraph, all of which are located within the Cook Inlet sedimentary basin, 07 were discovered before January 1, 1988, and have been undeveloped or shut in from at 08 least January 1, 1988, through December 31, 1997, are 09 (A) Falls Creek; 10 (B) Nicolai Creek; 11 (C) North Fork; 12 (D) Point Starichkof; 13 (E) Redoubt Shoal; and 14 (F) West Foreland; 15 (6) notwithstanding and in lieu of a requirement in the leasing method 16 chosen of a minimum fixed royalty share, or the royalty provision of a lease, for leases 17 unitized as described in (p) of this section, leases subject to an agreement described in 18 (s) or (t) of this section, or interests unitized under AS 31.05, the lessee of all or part of 19 an oil field located offshore in Cook Inlet on which an oil production platform 20 specified in (A), (C), or (E) of this paragraph operates, or the lessee of all or part of the 21 field located offshore in Cook Inlet and described in (G) of this paragraph, 22 (A) shall pay a royalty of five percent on oil produced from the 23 platform if oil production that equaled or exceeded a volume of 1,200 barrels a 24 day declines to less than that amount for a period of at least one calendar 25 quarter, as certified by the Alaska Oil and Gas Conservation Commission, for 26 as long as the volume of oil produced from the platform remains less than 27 1,200 barrels a day; the provisions of this subparagraph apply to 28 (i) Dolly; 29 (ii) Grayling; 30 (iii) King Salmon; 31 (iv) Steelhead; and 01 (v) Monopod; 02 (B) shall pay a royalty calculated under this subparagraph if the 03 volume of oil produced from the platform that was certified by the Alaska Oil 04 and Gas Conservation Commission under (A) of this paragraph later increases 05 to 1,200 or more barrels a day and remains at 1,200 or more barrels a day for a 06 period of at least one calendar quarter; until the royalty rate determined under 07 this subparagraph applies, the royalty continues to be calculated under (A) of 08 this paragraph; on and after the first day of the month following the month the 09 increased production exceeds the period specified in this subparagraph, the 10 royalty payable under this subparagraph is 11 (i) for production of at least 1,200 barrels a day but not 12 more than 1,300 barrels a day - seven percent; 13 (ii) for production of more than 1,300 barrels a day but 14 not more than 1,400 barrels a day - 8.5 percent; 15 (iii) for production of more than 1,400 barrels a day but 16 not more than 1,500 barrels a day - 10 percent; and 17 (iv) for production of more than 1,500 barrels a day - 18 12.5 percent; 19 (C) shall pay a royalty of five percent on oil produced from the 20 platform if oil production that equaled or exceeded a volume of 975 barrels a 21 day declines to less than that amount for a period of at least one calendar 22 quarter, as certified by the Alaska Oil and Gas Conservation Commission, for 23 as long as the volume of oil produced from the platform remains less than 975 24 barrels a day; the provisions of this subparagraph apply to 25 (i) Baker; 26 (ii) Dillon; 27 (iii) XTO.A; and 28 (iv) XTO.C; 29 (D) shall pay a royalty calculated under this subparagraph if the 30 volume of oil produced from the platform that was certified by the Alaska Oil 31 and Gas Conservation Commission under (C) of this paragraph later increases 01 to 975 or more barrels a day and remains at 975 or more barrels a day for a 02 period of at least one calendar quarter; until the royalty rate determined under 03 this subparagraph applies, the royalty continues to be calculated under (C) of 04 this paragraph; on and after the first day of the month following the month the 05 increased production exceeds the period specified in this subparagraph, the 06 royalty payable under this subparagraph is 07 (i) for production of at least 975 barrels a day but not 08 more than 1,100 barrels a day - seven percent; 09 (ii) for production of more than 1,100 barrels a day but 10 not more than 1,200 barrels a day - 8.5 percent; 11 (iii) for production of more than 1,200 barrels a day but 12 not more than 1,350 barrels a day - 10 percent; and 13 (iv) for production of more than 1,350 barrels a day - 14 12.5 percent; 15 (E) shall pay a royalty of five percent on oil produced from the 16 platform if oil production that equaled or exceeded a volume of 750 barrels a 17 day declines to less than that amount for a period of at least one calendar 18 quarter, as certified by the Alaska Oil and Gas Conservation Commission, for 19 as long as the volume of oil produced from the platform remains less than 750 20 barrels a day; the provisions of this subparagraph apply to 21 (i) Granite Point; 22 (ii) Anna; and 23 (iii) Bruce; 24 (F) shall pay a royalty calculated under this subparagraph if the 25 volume of oil produced from the platform that was certified by the Alaska Oil 26 and Gas Conservation Commission under (E) of this paragraph later increases 27 to 750 or more barrels a day and remains at 750 or more barrels a day for a 28 period of at least one calendar quarter; until the royalty rate determined under 29 this subparagraph applies, the royalty continues to be calculated under (E) of 30 this paragraph; on and after the first day of the month following the month the 31 increased production exceeds the period specified in this subparagraph, the 01 royalty payable under this subparagraph is 02 (i) for production of at least 750 barrels a day but not 03 more than 850 barrels a day - seven percent; 04 (ii) for production of more than 850 barrels a day but 05 not more than 1,000 barrels a day - 8.5 percent; 06 (iii) for production of more than 1,000 barrels a day but 07 not more than 1,200 barrels a day - 10 percent; and 08 (iv) for production of more than 1,200 barrels a day - 09 12.5 percent; 10 (G) shall pay a royalty of five percent on oil produced from the 11 field if oil production that equaled or exceeded a volume of 750 barrels a day 12 declines to less than that amount for a period of at least one calendar quarter, 13 as certified by the Alaska Oil and Gas Conservation Commission, for as long 14 as the volume of oil produced from the field remains less than 750 barrels a 15 day; the provisions of this subparagraph apply to the West McArthur River 16 field; 17 (H) shall pay a royalty calculated under this subparagraph if the 18 volume of oil produced from the field that was certified by the Alaska Oil and 19 Gas Conservation Commission under (G) of this paragraph later increases to 20 750 or more barrels a day and remains at 750 or more barrels a day for a period 21 of at least one calendar quarter; until the royalty rate determined under this 22 subparagraph applies, the royalty continues to be calculated under (G) of this 23 paragraph; on and after the first day of the month following the month the 24 increased production exceeds the period specified in this subparagraph, the 25 royalty payable under this subparagraph is 26 (i) for production of at least 750 barrels a day but not 27 more than 850 barrels a day - seven percent; 28 (ii) for production of more than 850 barrels a day but 29 not more than 1,000 barrels a day - 8.5 percent; 30 (iii) for production of more than 1,000 barrels a day but 31 not more than 1,200 barrels a day - 10 percent; and 01 (iv) for production of more than 1,200 barrels a day - 02 12.5 percent; and 03 (I) may obtain the benefits of the royalty adjustments set out in 04 (A) - (H) of this paragraph only if the commissioner determines that the 05 reduction in production from the platform or the field is 06 (i) based on the average daily production during the 07 calendar quarter based on reservoir conditions; and 08 (ii) not the result of short-term production declines due 09 to mechanical or other choke-back factors, temporary shutdowns or 10 decreased production due to environmental or facility constraints, or 11 market conditions. 12  * Sec. 34. AS 38.05.180(h) is amended to read: 13 (h) The commissioner may include terms in any [OIL AND GAS] lease 14 imposing a minimum work commitment on the lessee. These terms shall be made 15 public before the sale, and may include appropriate penalty provisions to take effect in 16 the event the lessee does not fulfill the minimum work commitment. If it is 17 demonstrated that a lease has been proven unproductive by actions of adjacent lease 18 holders, the commissioner may set aside a work commitment. The commissioner may 19 waive for a period not to exceed one two-year period any term of a minimum work 20 commitment if the commissioner makes a written finding either that conditions 21 preventing drilling or exploration were beyond the lessee's reasonable ability to 22 foresee or control or that the lessee has demonstrated through good faith efforts an 23 intent and ability to drill or develop the lease during the term of the waiver. 24  * Sec. 35. AS 38.05.180(i) is amended to read: 25 (i) The commissioner may provide for the establishment of an exploration 26 incentive credit system under which a lessee of state land drilling an exploratory well 27 on that land may earn credits based upon the footage drilled and the region in which 28 the well is situated. The commissioner may also provide for credits to be earned by 29 persons performing geophysical work on state land, if that work is performed during 30 the two seasons immediately preceding an announced lease sale and on land included 31 within the sale area and the geophysical information is made public following the sale. 01 Credits may not exceed 50 percent of the cost of the drilling or geophysical work. 02 Credits may be used during a limited period established by the commissioner and may 03 be assigned during that period. Credits may be applied against (1) [OIL AND GAS] 04 royalty and rental payments for oil and gas or for gas only payable to the state or (2) 05 taxes payable under AS 43.55. A credit may not exceed 50 percent of the payment 06 toward which it is being applied. Amounts due the Alaska permanent fund 07 (AS 37.13.010) shall be calculated before the application of credits under this 08 subsection. 09  * Sec. 36. AS 38.05.180(j) is amended to read: 10 (j) The commissioner 11 (1) may provide for modification of royalty on individual leases, leases 12 unitized as described in (p) of this section, leases subject to an agreement described in 13 (s) or (t) of this section, or interests unitized under AS 31.05 14 (A) to allow for production from an oil or gas field or pool if 15 (i) the oil or gas field or pool has been sufficiently 16 delineated to the satisfaction of the commissioner; 17 (ii) the field or pool has not previously produced oil or 18 gas for sale; and 19 (iii) oil or gas production from the field or pool would 20 not otherwise be economically feasible; 21 (B) to prolong the economic life of an oil or gas field or pool as 22 per barrel or barrel equivalent costs increase or as the price of oil or gas 23 decreases, and the increase or decrease is sufficient to make future production 24 no longer economically feasible; or 25 (C) to reestablish production of shut-in oil or gas that would 26 not otherwise be economically feasible; 27 (2) may not grant a royalty modification unless the lessee or lessees 28 requesting the change make a clear and convincing showing that a modification of 29 royalty meets the requirements of this subsection and is in the best interests of the 30 state; 31 (3) shall provide for an increase or decrease or other modification of 01 the state's royalty share by a sliding scale royalty or other mechanism that shall be 02 based on a change in the price of oil or gas and may also be based on other relevant 03 factors such as a change in production rate, projected ultimate recovery, development 04 costs, and operating costs 05 (4) may not grant a royalty reduction for a field or pool 06 (A) under (1)(A) of this subsection if the royalty modification 07 for the field or pool would establish a royalty rate of less than five percent in 08 amount or value of the production removed or sold from a lease or leases 09 covering the field or pool; 10 (B) under (1)(B) or (1)(C) of this subsection if the royalty 11 modification for the field or pool would establish a royalty rate of less than 12 three percent in amount or value of the production removed or sold from a 13 lease or leases covering the field or pool; 14 (5) may not grant a royalty reduction under this subsection without 15 including an explicit condition that the royalty reduction is not assignable without the 16 prior written approval, which may not be unreasonably withheld, by the 17 commissioner; the commissioner shall, in the preliminary and final findings and 18 determinations, set out the conditions under which the royalty reduction may be 19 assigned; 20 (6) shall require the lessee or lessees to submit, with the application for 21 the royalty reduction, financial and technical data that demonstrate that the 22 requirements of this subsection are met; the commissioner 23 (A) may require disclosure of only the financial and technical 24 data related to development, production, and transportation of oil and gas or  25 gas only from the field or pool that are reasonably available to the applicant; 26 and 27 (B) shall keep the data confidential under AS 38.05.035(a)(9) 28 at the request of the lessee or lessees making application for the royalty 29 reduction; the confidential data may be disclosed by the commissioner to 30 legislators and to the legislative auditor and as directed by the chair or vice- 31 chair of the Legislative Budget and Audit Committee to the director of the 01 division of legislative finance, the permanent employees of their respective 02 divisions who are responsible for evaluating a royalty reduction, and to agents 03 or contractors of the legislative auditor or the legislative finance director who 04 are engaged under contract to evaluate the royalty reduction, if they sign an 05 appropriate confidentiality agreement; 06 (7) may 07 (A) require the lessee or lessees making application for the 08 royalty reduction under (1)(A) of this subsection to pay for the services of an 09 independent contractor, selected by the lessee or lessees from a list of qualified 10 consultants compiled by the commissioner, to evaluate hydrocarbon 11 development, production, transportation, and economics and to assist the 12 commissioner in evaluating the application and financial and technical data; if, 13 under this subparagraph, the commissioner requires payment for the services of 14 an independent contractor, the total cost of the services to be paid for by the 15 lessee or lessees may not exceed $150,000 for each application, and the 16 commissioner shall determine the relevant scope of the work to be performed 17 by the contractor; selection of an independent contractor under this 18 subparagraph is not subject to AS 36.30; 19 (B) with the mutual consent of the lessee or lessees making 20 application for the royalty reduction under (1)(B) or (1)(C) of this subsection, 21 request payment for the services of an independent contractor, selected from a 22 list of qualified consultants to evaluate hydrocarbon development, production, 23 transportation, and economics by the commissioner to assist the commissioner 24 in evaluating the application and financial and technical data; if, under this 25 subparagraph, the commissioner requires payment for the services of an 26 independent contractor, the total cost of the services that may be paid for by 27 the lessee or lessees may not exceed $150,000 for each application, and the 28 commissioner shall determine the relevant scope of the work to be performed 29 by the contractor; selection of an independent contractor under this 30 subparagraph is not subject to AS 36.30; 31 (8) shall make and publish a preliminary findings and determination on 01 the royalty reduction application, give reasonable public notice of the preliminary 02 findings and determination, and invite public comment on the preliminary findings 03 and determination during a 30-day period for receipt of public comment; 04 (9) shall offer to appear before the Legislative Budget and Audit 05 Committee, on a day that is not earlier than 10 days and not later than 20 days after 06 giving public notice under (8) of this subsection, to provide the committee a review of 07 the commissioner's preliminary findings and determination on the royalty reduction 08 application and administrative process; if the Legislative Budget and Audit Committee 09 accepts the commissioner's offer, the committee shall give notice of the committee's 10 meeting to all members of the legislature; 11 (10) shall make copies of the preliminary findings and determination 12 available to 13 (A) the presiding officer of each house of the legislature; 14 (B) the chairs of the legislature's standing committees on 15 resources; and 16 (C) the chairs of the legislature's special committees on oil and 17 gas, if any; 18 (11) shall, within 30 days after the close of the public comment period 19 under (8) of this subsection, 20 (A) prepare a summary of the public response to the 21 commissioner's preliminary findings and determination; 22 (B) make a final findings and determination; the 23 commissioner's final findings and determination prepared under this 24 subparagraph regarding a royalty reduction is final and not appealable to the 25 court; 26 (C) transmit a copy of the final findings and determination to 27 the lessee; 28 (D) with the applicant's consent, amend the applicant's lease or 29 unitization agreement consistent with the commissioner's final decision; and 30 (E) make copies of the final findings and determination 31 available to each person who submitted comment under (8) of this subsection 01 and who has filed a request for the copies; 02 (12) is not limited by the provisions of AS 38.05.134(3) or (f) of this 03 section in the commissioner's determination under this subsection. 04  * Sec. 37. AS 38.05.180(l) is amended to read: 05 (l) Subject to the provisions of AS 31.05, the commissioner has discretion to 06 enter into an agreement whereby, with the consent of the lessee, the state's royalty 07 share of [OIL AND GAS] production of oil and gas or gas only may be stored or 08 retained in storage by the lessee, or the commissioner may enter into an agreement 09 with one or more of the affected field lease holders to trade current royalty production 10 from a field for a like amount, kind, and quality of future production, on the condition 11 that the state receives back its stored or traded royalty share during the first half of the 12 estimated field life or no later than 15 years after start of production, whichever is 13 sooner. 14  * Sec. 38. AS 38.05.180(m) is amended to read: 15 (m) An oil and gas lease or a gas only lease must cover a reasonably compact 16 area not exceeding 5,760 acres, and may be for a maximum period of 10 years, except 17 that the commissioner may issue a lease for a period not less than five years upon a 18 finding that it is in the best interests of the state. An oil and gas lease shall be 19 automatically extended if and for so long thereafter as oil or gas is produced in paying 20 quantities from the lease or if the lease is committed to a unit approved by the 21 commissioner, and a gas only lease shall be automatically extended if and for so  22 long thereafter as gas is produced in paying quantities from the lease or if the  23 lease is committed to a unit approved by the commissioner. A lease issued under 24 this section covering land on which there is a well capable of producing oil or gas in 25 paying quantities does not expire because the lessee fails to produce oil or gas unless 26 the lessee is allowed reasonable time to place the well on a producing status. Upon 27 extension, the commissioner may increase lease rentals so long as the increased rental 28 rate does not exceed 150 percent of the rate for the preceding year. If drilling has 29 commenced on the expiration date of the primary term of the lease and is continued 30 with reasonable diligence, including such operations as redrilling, sidetracking, or 31 other means necessary to reach the originally proposed bottom hole location, the lease 01 continues in effect until 90 days after drilling has ceased and for so long thereafter as 02 oil or gas is produced in paying quantities. An oil and gas lease or a gas only lease 03 issued under this section which is subject to termination by reason of cessation of 04 production does not terminate if, within 60 days after production ceases, reworking or 05 drilling operations are commenced on the land under lease and are thereafter 06 conducted with reasonable diligence during the period of nonproduction. 07  * Sec. 39. AS 38.05.180(n) is amended to read: 08 (n) The commissioner may establish by regulation that after a well has been 09 plugged and abandoned, the rental rate which was in effect during the year of 10 abandonment is maintained for the remainder of the term. Rental is payable in 11 advance and continues until income to the state from royalty or net profit share 12 exceeds rental income to the state for that year. Under this subsection,  13 (1) [OIL AND GAS] leases for oil and gas or for gas only shall 14 provide for payment to the state of rental on the following basis: 15 (A) [(1)] for the first year, $1.00 per acre; 16 (B) [(2)] for the second year, $1.50 per acre; 17 (C) [(3)] for the third year, $2.00 per acre; 18 (D) [(4)] for the fourth year, $2.50 per acre; 19 (E) [(5)] for the fifth and following years, $3.00 per acre; 20 (2) if the lessee under a gas only lease demonstrates to the  21 commissioner that the potential resources underlying the lease are reasonably  22 estimated to be only nonconventional gas, the rental payment is $1.00 per acre  23 until the lease expires or paying quantities of conventional oil or gas are  24 discovered underlying the lease. 25  * Sec. 40. AS 38.05.180(p) is amended to read: 26 (p) To conserve the natural resources of all or a part of an oil or gas pool, 27 field, or like area, the lessees and their representatives may unite with each other, or 28 jointly or separately with others, in collectively adopting or operating under a 29 cooperative or a unit plan of development or operation of the pool, field, or like area, 30 or a part of it, when determined and certified by the commissioner to be necessary or 31 advisable in the public interest. The commissioner may, with the consent of the 01 holders of leases involved, establish, change, or revoke drilling, producing, and 02 royalty requirements of the leases and adopt regulations with reference to the leases, 03 with like consent on the part of the lessees, in connection with the institution and 04 operation of a cooperative or unit plan as the commissioner determines necessary or 05 proper to secure the proper protection of the public interest. The commissioner may 06 not reduce royalty on leases in connection with a cooperative or unit plan except as 07 provided in (j) of this section. The commissioner may require a lease [OIL AND 08 GAS LEASES] issued under this section to contain a provision requiring the lessee to 09 operate under a reasonable cooperative or unit plan, and may prescribe a plan under 10 which the lessee must operate. The plan must adequately protect all parties in interest, 11 including the state. 12  * Sec. 41. AS 38.05.180 is amended by adding a new subsection to read: 13 (ff) The provisions of this section that authorize oil and gas leases also apply 14 to authorize the commissioner to issue leases for the production of gas only, subject to 15 the following: 16 (1) in authorizing and managing leases under this subsection, the terms 17 "oil and gas" or "oil or gas" as they are used in this chapter may be read and applied as 18 appropriate as referring to gas only; 19 (2) when a lease is authorized as a gas only lease, the lease does not 20 give the lessee the right to produce oil; if a well drilling for gas under a gas only lease 21 authorized by this subsection penetrates a formation capable of producing oil, the 22 owner or operator 23 (A) shall notify the department and the Alaska Oil and Gas 24 Conservation Commission; and 25 (B) may not conduct further operations in the drilled well until 26 the facility complies with all applicable laws and regulations relating to oil and 27 gas exploration and production; however, this subparagraph does not prevent 28 the owner or operator from conducting activities that may be required by the 29 Alaska Oil and Gas Conservation Commission to plug, plug-back, or abandon 30 a well; 31 (3) for a nonconventional gas lease, if a bond is sought under 01 AS 38.05.130, 02 (A) before the amount of the surety bond to be posted is 03 determined by the director, require, as a condition for issuing the lease, that the 04 director, after notice and an opportunity to be heard, determine that, to exercise 05 rights under the reservation as set out in AS 38.05.125 and the lease, the lessee 06 has no other reasonable means of entry than access and entry upon the land of 07 the owner; the lessee has the burden of demonstrating compliance with the 08 requirement of this subparagraph; and 09 (B) in addition to the coverage for actual damages required by 10 that section, provide for payment of reasonable compensation to the owner for 11 any loss by the owner of the owner's use and enjoyment of the property. 12  * Sec. 42. AS 38.05.860(a) is amended to read: 13 (a) The commissioner may require an applicant seeking the sale, lease, or 14 other disposal of land or an interest in land, other than under an oil and gas lease, gas  15 only lease, or mineral lease, to deposit an amount covering the estimated cost of an 16 appraisal, survey, and other costs necessary to offer the land or interest in land, 17 including advertising. All deposited funds not expended shall be refunded to the 18 applicant. If the land or interest in land is awarded to a person other than the applicant 19 making the deposit, the person awarded the land shall pay the total actual cost incurred 20 by the department in making the disposal, and the deposit shall be returned to the 21 original applicant. In lieu of requiring the deposit under this subsection, the 22 commissioner may enter into an agreement with an applicant seeking land or an 23 interest in land requiring the applicant to reimburse the department for costs incurred 24 in the disposal if the applicant is awarded the land or interest in land. 25  * Sec. 43. AS 38.05.860(c) is amended to read: 26 (c) The commissioner shall require each bidder for the competitive leasing of 27 [OIL AND GAS] land for oil and gas, or for gas only, to submit with each bid a 28 deposit of money equal to 20 percent of the bonus. 29  * Sec. 44. AS 38.05.945(a) is amended to read: 30 (a) This section establishes the requirements for notice given by the 31 department for the following actions: 01 (1) classification or reclassification of state land under AS 38.05.300 02 and the closing of land to mineral leasing or entry under AS 38.05.185; 03 (2) zoning of land under applicable law; 04 (3) issuance of a 05 (A) preliminary written finding under AS 38.05.035(e)(5)(A) 06 regarding the sale, lease, or disposal of an interest in state land or resources for 07 oil and gas, or for gas only, subject to AS 38.05.180(b); 08 (B) [REPEALED 09 (C)] written finding for the sale, lease, or disposal of an interest 10 in state land or resources under AS 38.05.035(e)(6), except a [AN OIL OR 11 GAS] lease sale described in AS 38.05.035(e)(6)(F) for which the director 12 must provide opportunity for public comment under the provisions of that 13 subparagraph; 14 (4) a competitive disposal of an interest in state land or resources after 15 final decision under AS 38.05.035(e); 16 (5) a preliminary finding under AS 38.05.035(e) concerning sites for 17 aquatic farms and related hatcheries; 18 (6) a decision under AS 38.05.132 - 38.05.134 regarding the sale, 19 lease, or disposal of an interest in state land or resources. 20  * Sec. 45. AS 38.05.965 is amended by adding a new paragraph to read: 21 (25) "nonconventional gas" means coal bed methane, shales containing 22 gas, or gas hydrates. 23  * Sec. 46. AS 38.06.080(2) is amended to read: 24 (2) "state lease" means an oil and gas lease or gas only lease on state 25 land. 26  * Sec. 47. AS 38.35.020(a) is amended to read: 27 (a) Rights-of-way on state land including rights-of-way over, under, along, 28 across, or upon the right-of-way of a public road or highway or the right-of-way of a 29 railroad or other public utility, or across, upon, over, or under a river or other body of 30 water or land belonging to or administered by the state may be granted by 31 noncompetitive lease by the commissioner for pipeline purposes for the transportation 01 of oil, products, or natural gas under those conditions prescribed by law or by 02 administrative regulation. Except to the extent authorized by an oil and gas lease, a  03 gas only lease, or an oil and gas or gas only unit agreement approved by the state, no 04 person may engage in any construction or operation of any part of an oil, products, or 05 natural gas pipeline, which in whole or in part is or is proposed to be on state land 06 unless that person has obtained from the commissioner a right-of-way lease of the land 07 under this chapter. 08  * Sec. 48. AS 43.20.072(c) is amended to read: 09 (c) A taxpayer's business income shall be apportioned to this state by 10 multiplying the taxpayer's income determined under (b) of this section by the 11 apportionment factor applicable to the taxpayer among the following factors: 12 (1) the apportionment factor of a taxpayer subject to this section but 13 not engaged in the production of oil and gas, or of gas only, as appropriate, from a 14 lease or property in this state during the tax period is a fraction, the numerator of 15 which is the sum of the property factor under AS 43.19 (Multistate Tax Compact) and 16 the sales factor under (d) of this section for the taxpayer for that tax period, and the 17 denominator of which is two; 18 (2) the apportionment factor of a taxpayer subject to this section but 19 not engaged in the pipeline transportation of oil or gas in this state during the tax 20 period is a fraction, the numerator of which is the sum of the property factor under (e) 21 of this section and the extraction factor under (f) of this section for the taxpayer for the 22 tax period, and the denominator of which is two; 23 (3) the apportionment factor of a taxpayer engaged both in the 24 production of oil or gas from a lease or property in this state and in the pipeline 25 transportation of oil or gas in this state during the tax period is a fraction, the 26 numerator of which is the sum of the sales factor under (d) of this section, the property 27 factor under (e) of this section, and the extraction factor under (f) of this section for 28 the taxpayer for the tax period, and the denominator of which is three. 29  * Sec. 49. AS 43.55.025(a) is amended to read: 30 (a) Subject to the terms and conditions of this section, on oil and gas produced 31 from an oil and gas lease, or on gas produced from a gas only lease, on or after 01 July 1, 2004, a credit against the tax due under this chapter is allowed in an amount 02 equal to 03 (1) 20 percent of the total exploration expenditures that qualify under 04 (b) and (c) of this section, 20 percent of the total exploration expenditures that qualify 05 under (b) and (d) of this section, or both, for a total credit that does not exceed 40 06 percent of the total exploration expenditures; or 07 (2) 40 percent of the total exploration expenditures that qualify under 08 (b) and (e) of this section, for a total production tax credit that does not exceed 40 09 percent of the total qualified exploration expenditures. 10  * Sec. 50. AS 43.55.900(9) is amended to read: 11 (9) "lease or property" means any right, title, or interest in or the right 12 to produce or recover oil or gas including: 13 (A) a mineral interest, 14 (B) a leasehold interest, 15 (C) a working interest, royalty interest, overriding royalty 16 interest, production payment, net profit interest or any other interest in a lease, 17 concession, joint venture, or other agreement for [OIL AND GAS] exploration, 18 development, or production of oil and gas or of gas only, 19 (D) a working interest, royalty interest, overriding royalty 20 interest, production payment, net profit interest or any other interest in an 21 agreement for unitization or pooling under the provisions of 26 U.S.C. 22 614(b)(3) (Internal Revenue Code) as defined on January 1, 1974; 23  * Sec. 51. AS 46.03.100(f) is amended to read: 24 (f) This section does not apply to discharges of solid or liquid waste material 25 or water discharges from the following activities if the discharge is incidental to the 26 activity and the activity does not produce a discharge from a point source, as that term 27 is defined in regulations adopted under this chapter, directly into any surface water of 28 the state: 29 (1) mineral drilling, trenching, ditching, and similar activities; 30 (2) landscaping; 31 (3) water well drilling and [,] geophysical drilling [, OR COAL BED 01 METHANE DRILLING OR OTHER NATURAL GAS DRILLING TO RECOVER 02 GAS FROM A FIELD IF A PART OF THE FIELD IS WITHIN 3,000 FEET OF THE 03 SURFACE]; or 04 (4) drilling, ditching, trenching, and similar activities associated with 05 facility construction and maintenance or with road or other transportation facility 06 construction and maintenance; however, the exemption provided by this paragraph 07 does not relieve a person from obtaining a permit under this section if 08 (A) the drilling, ditching, trenching, or similar activity will 09 involve the removal of the groundwater, stormwater, or wastewater runoff that 10 has accumulated and is present at an excavation site for facility, road, or other 11 transportation construction or maintenance; and 12 (B) a permit is otherwise required by this section. 13  * Sec. 52. AS 46.04.030(b) is amended to read: 14 (b) A person may not cause or permit the operation of a pipeline or an 15 exploration or production facility in the state unless an oil discharge prevention and 16 contingency plan for the pipeline or facility has been approved by the department and 17 the person is in compliance with the plan. This subsection does not apply to an 18 exploration or production facility used solely to explore for or to develop or produce 19 nonconventional [SHALLOW NATURAL] gas resources, except that this exemption 20 does not apply if the Alaska Oil and Gas Conservation Commission determines under 21 AS 31.05.030(j) that 22 (1) a well drilled for nonconventional [SHALLOW NATURAL] gas 23 may penetrate a formation capable of flowing oil; and 24 (2) the volume of oil encountered will be of such quantities that a 25 contingency plan will be required. 26  * Sec. 53. AS 46.04.040(b) is amended to read: 27 (b) A person may not cause or permit the operation of a pipeline or an 28 exploration or production facility in the state unless the person has furnished to the 29 department, and the department has approved, proof of financial ability to respond in 30 damages. Proof of financial responsibility required for 31 (1) a pipeline or an offshore exploration or production facility is 01 $50,000,000 per incident; 02 (2) an onshore production facility is 03 (A) $20,000,000 per incident if the facility produces over 04 10,000 barrels per day of oil; 05 (B) $10,000,000 per incident if the facility produces over 5,000 06 barrels per day but not more than 10,000 barrels per day of oil; 07 (C) $5,000,000 per incident if the facility produces over 2,500 08 barrels per day but not more than 5,000 barrels per day of oil; 09 (D) $1,000,000 per incident if the facility produces 2,500 10 barrels per day or less of oil; 11 (3) an onshore exploration facility is 12 (A) $25,000 per incident for a facility used solely to explore for 13 nonconventional [SHALLOW NATURAL] gas by means of drilling a well to 14 explore for the gas [, WHETHER METHANE ASSOCIATED WITH AND 15 DERIVED FROM COAL DEPOSITS OR OTHERWISE, FROM A FIELD IF 16 A PART OF THE FIELD IS WITHIN 3,000 FEET OF THE SURFACE]; and 17 (B) except as provided by (A) of this paragraph, $1,000,000 per 18 incident. 19  * Sec. 54. AS 46.04.900 is amended by adding a new paragraph to read: 20 (31) "nonconventional gas" has the meaning given in AS 38.05.965. 21  * Sec. 55. AS 46.40.205 is amended to read: 22 Sec. 46.40.205. Consistency determinations for certain activities involving  23 nonconventional [SHALLOW NATURAL] gas. (a) When conducted under 24 oversight and regulation of the Alaska Oil and Gas Conservation Commission and the 25 state's resource agencies, projects for the exploration and development of 26 nonconventional [SHALLOW NATURAL] gas are consistent with the program 27 described in this chapter. Persons responsible for activities subject to this section shall 28 obtain all required permits and approvals from municipal, state, and federal agencies 29 as otherwise required by law. 30 (b) In this section, "nonconventional [SHALLOW NATURAL] gas" has the 31 meaning given in AS 38.05.965 [AS 46.04.900]. 01  * Sec. 56. AS 46.40.210(12) is amended to read: 02 (12) "uses of state concern" means those land and water uses that 03 would significantly affect the long-term public interest; "uses of state concern" include 04 (A) uses of national interest, including the use of resources for 05 the siting of ports and major facilities that contribute to meeting national 06 energy needs, construction and maintenance of navigational facilities and 07 systems, resource development of federal land, and national defense and 08 related security facilities that are dependent upon coastal locations; 09 (B) uses of more than local concern, including those land and 10 water uses that confer significant environmental, social, cultural, or economic 11 benefits or burdens beyond a single coastal resource district; 12 (C) the siting of major energy facilities, activities pursuant to a 13 state oil and gas lease, a state gas only lease, or a federal oil and gas lease, or 14 large-scale industrial or commercial development activities that are dependent 15 on a coastal location and that, because of their magnitude or the magnitude of 16 their effect on the economy of the state or the surrounding area, are reasonably 17 likely to present issues of more than local significance; 18 (D) facilities serving statewide or interregional transportation 19 and communication needs; and 20 (E) uses in areas established as state parks or recreational areas 21 under AS 41.21 or as state game refuges, game sanctuaries, or critical habitat 22 areas under AS 16.20. 23  * Sec. 57. The uncodified law of the State of Alaska added by sec. 1, ch. 45, SLA 2003, is 24 amended to read: 25 LEGISLATIVE FINDINGS. The legislature finds that 26 (1) [THE DEVELOPMENT OF SHALLOW NATURAL GAS 27 RESOURCES IS IN THE BEST INTERESTS OF THE STATE OF ALASKA; 28 (2)] shallow natural gas is abundant and widespread in Alaska and 29 bears the promise of providing Alaskans, particularly Alaskans living in rural areas, 30 with an inexpensive and clean source of energy if those resources can be economically 31 developed; 01 (2) [(3)] the development of shallow natural gas poses significantly 02 fewer risks and creates substantially less impact to the environment than traditional 03 deep oil and gas projects, which have served as the model for oil and gas industry and 04 environmental regulations to date in Alaska; 05 (3) [(4)] the regulatory requirements developed and applied to 06 traditional deep oil and gas projects in Alaska are ill-suited and unduly onerous when 07 applied to shallow natural gas projects, threatening the economic viability of otherwise 08 desirable exploration and development projects; 09 (4) [(5)] there is an immediate state and national need for the 10 development of clean and economical unconventional energy sources, such as shallow 11 natural gas resources; 12 (5) [(6)] reform of existing laws and regulations is needed to remove 13 unnecessary regulatory burdens on the private sector to foster and encourage the 14 development in Alaska of these necessary resources; 15 (6) [(7)] the legislature is acting in the interest of promoting the active 16 development of such resources, while ensuring that suitable measures are taken to 17 protect human health and safety and the natural environment, 18 (A) to remove impediments to the responsible development of 19 shallow natural gas; and  20 (B) to provide the proper state agencies with clear authority and 21 discretion to adopt regulatory practices appropriate to shallow natural gas 22 exploration and development projects, in recognition of the lower risks posed 23 by such projects to human health and safety and the natural environment [; 24 AND 25 (C) TO RESERVE ALL RIGHTS AND POWERS NOT 26 PREEMPTED BY FEDERAL LAW AND REGULATION IN ORDER TO 27 ASSERT STATE PRIMACY OVER THE REGULATION OF SHALLOW 28 NATURAL GAS]. 29  * Sec. 58. AS 31.05.125, 31.05.170(14); AS 38.05.177(b), 38.05.177(c), 38.05.177(e), 30 38.05.177(f), 38.05.177(g), 38.05.177(h), 38.05.177(j), 38.05.177(k), 38.05.177(m), 31 38.05.177(n), 38.05.177(o); and AS 46.04.900(25) are repealed. 01  * Sec. 59. The uncodified law of the State of Alaska is amended by adding a new section to 02 read: 03 CERTAIN SHALLOW NATURAL GAS LEASES AND LEASE APPLICATIONS 04 TO BE ADMINISTERED UNDER FORMER LAW. The provisions of AS 38.05.177(a), 05 (d)(1), and (l), amended by secs. 26 - 28 of this Act, as those provisions read on the day 06 before the effective date of amendment of those subsections, and the provisions of 07 AS 38.05.177(b), (c), (e) - (h), (j), (k), (m), (n), and (o), repealed by sec. 58 of this Act, as 08 those provisions read on the day before the effective date of the repeal of those subsections, 09 apply to shallow natural gas 10 (1) leases issued under AS 38.05.177 and in effect on December 31, 2003; and 11 (2) lease applications under AS 38.05.177 that were received by the 12 Department of Natural Resources before January 1, 2004. 13  * Sec. 60. This Act takes effect immediately under AS 01.10.070(c).