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).