CSHB 394(O&G): "An Act authorizing shallow bed natural gas leasing; relating to regulation of natural gas exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; exempting response and prevention activities associated with shallow bed natural gas leasing as a use for which money in the oil and hazardous substance release prevention and response fund is authorized; and substituting in the exemption from obtaining a waste disposal permit for disposal of waste produced from drilling a reference to shallow bed natural gas for a reference to coal bed methane."
00CS FOR HOUSE BILL NO. 394(O&G) 01 "An Act authorizing shallow bed natural gas leasing; relating to regulation of 02 natural gas exploration facilities for purposes of preparation of discharge 03 prevention and contingency plans and compliance with financial responsibility 04 requirements; exempting response and prevention activities associated with shallow 05 bed natural gas leasing as a use for which money in the oil and hazardous 06 substance release prevention and response fund is authorized; and substituting in 07 the exemption from obtaining a waste disposal permit for disposal of waste 08 produced from drilling a reference to shallow bed natural gas for a reference to 09 coal bed methane." 10 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 11 * Section 1. LEGISLATIVE FINDINGS, PURPOSE, AND EXPRESSION OF INTENT. 12 (a) The legislature finds that 13 (1) there exist throughout the state sizeable reserves of coal and small but 14 commercially significant amounts of natural gas located close to the earth's surface that are
01 usually, though not always, associated with and emitted from coal reserves; 02 (2) the methane derived from these coal reserves and other shallow bed natural 03 gas sources could be tapped to serve as a principal or a chief supplemental energy source of 04 benefit to residents of areas in which they are found; 05 (3) the methane derived from these coal reserves and other shallow bed natural 06 gas sources that are generally close to the surface could be developed without interfering with 07 the development and transportation of the state's vast gas reserves available for interstate and 08 foreign markets; and 09 (4) it is in the best interests of the state and its people that this natural gas should 10 be identified and developed, especially to serve as a source of commercial quality natural gas 11 for use in rural communities and remote locations within the state. 12 (b) In authorizing a program of leasing shallow bed natural gas from state land, it is the 13 legislature's purpose to provide both a means and an incentive by which that gas may be 14 identified and developed at low cost for the direct benefit of residents of remote or sparsely 15 populated areas for which connection to the in-place gas pipeline transmission and distribution 16 system serving population centers in Southcentral Alaska is not economically feasible. 17 (c) In enacting this Act, it is the intent of the legislature 18 (1) that the Department of Natural Resources implement this Act promptly and 19 without adoption of administrative regulations to implement, interpret, or make specific this Act 20 or to establish procedures to govern application of provisions of this Act; and 21 (2) that, to the extent it is necessary for the Department of Natural Resources to 22 adopt constructions that implement, interpret, or make specific this Act or to establish procedures 23 to govern application of provisions of this Act, the commissioner of natural resources may 24 recommend legislation for consideration by the First Session of the Twentieth Alaska State 25 Legislature to amend or add to the provisions of this Act that will adopt those constructions or 26 establish those procedures. 27 * Sec. 2. AS 38.05 is amended by adding a new section to read: 28 Sec. 38.05.177. SHALLOW BED NATURAL GAS. (a) The provisions of this 29 section 30 (1) apply to gas, whether methane associated with and derived from coal 31 reserves or otherwise, developed from a source that is within 3,000 feet of the surface
01 at the drill site; and 02 (2) do not apply to authorize lease of 03 (A) land described in AS 38.05.131(b) in which oil and gas 04 exploration licenses and leases may not be issued; 05 (B) the land 06 (i) that is or becomes subject to an oil and gas exploration 07 license or lease issued under AS 38.05.131 - 38.05.134; 08 (ii) that is leased under AS 38.05.180; or 09 (iii) that is described in and is part of the proposed oil 10 and gas leasing program prepared under AS 38.05.180(b); or 11 (C) the land that, on the effective date of this Act, is held under 12 a coal lease entered into under AS 38.05.150. 13 (b) For the purpose of exploring for and developing shallow bed natural gas, 14 upon application, the director may lease to a person land of the state. A person applying 15 for a lease under this subsection 16 (1) shall specify the area to be leased; the area to be leased may not 17 exceed 23,040 acres and may not be less than 640 acres; 18 (2) may not be required to pay an application fee or any other form of 19 payment as a condition of submitting or processing the lease application or obtaining the 20 lease. 21 (c) Unless the lease application is for land described in (a)(2) of this section or 22 unless otherwise prevented by law from entering into a lease for land described in the 23 lease application, promptly after receipt of a lease application, the director shall enter into 24 an initial shallow bed gas development lease. The initial shallow bed gas development 25 lease entered into under this subsection gives the lessee 26 (1) the exclusive right to explore for, develop, and produce, for a term 27 not to exceed two years, shallow bed natural gas on the state land described in the lease; 28 the right to explore for, develop, and produce is limited to gas derived from shallow bed 29 natural gas within 3,000 feet of the surface at the drill site; and 30 (2) unless the lease is earlier terminated under (f) or (h)(1) of this section, 31 the option to convert the lease for all or part of the state land into a shallow bed gas
01 lease of unlimited duration. 02 (d) Upon application by the lessee, the director 03 (1) may once extend an initial shallow bed gas development lease issued 04 under (c) of this section for a period of not more than two years if the director 05 determines that during the period described in (c)(1) of this section, the lessee 06 (A) has conducted reasonably diligent exploration activities in the 07 area covered by the initial shallow bed gas development lease; 08 (B) has not been able to determine the commercial productivity 09 of the shallow bed natural gas occurring on the lease; and 10 (C) wishes to continue to conduct exploration activities in the 11 area described in the initial shallow bed gas development lease; 12 (2) may adjust the boundaries of a lease entered into under this section 13 as may be necessary to ensure development of shallow bed natural gas within a 14 reasonably compact area or as a single unit; a lease as adjusted under this paragraph 15 remains subject to the acreage limitations set out in (b)(1) of this section. 16 (e) Each lease established by conversion under (c)(2) of this section shall be for 17 an indeterminate period upon condition of diligent development and continued operation 18 for the purpose of producing shallow bed natural gas in commercial quantities. The 19 director shall annually make a determination under this subsection that the lessee has 20 diligently developed and continued to operate under the lease. 21 (f) For the privilege of exploring for and producing gas from a shallow bed gas 22 development lease, the lessee shall pay rent to the state in the amounts determined in this 23 subsection. The rent is due and payable on the dates determined in the lease. If rent is 24 not paid when due, the director shall mail the lessee written notice of nonpayment at the 25 end of each month, while the rent remains unpaid, for a period of two months. The 26 lessee may cure the failure to pay rent when due within 90 days after the rent payment 27 becomes due and payable by paying to the director the amount of rent due together with 28 a penalty of the greater of $50 or five percent of the amount of rent in default. If the 29 lessee fails to remedy the lessee's failure to pay rent, the director shall terminate the 30 lease. The amount of annual rent payable to the state is 31 (1) until the initial commercial production of gas from the area within
01 the shallow bed gas development lease, 25 cents per acre; and 02 (2) after the initial commercial production of gas from the area within 03 the shallow bed gas development lease, 50 cents per acre. 04 (g) The royalty payable on natural gas produced from a shallow bed gas 05 development lease is 6.25 percent of the value of the production removed or sold from 06 the lease. 07 (h) A shallow bed gas development lease issued under this section is subject to 08 the following terms and conditions and may be terminated by the director in the event 09 of a breach of a term or condition: 10 (1) the lessee may surrender or relinquish the lease at any time; 11 (2) the lease may not be transferred or assigned until after the date of 12 initial commercial production of gas from the area within the lease; however, this 13 paragraph does not prohibit the lessee from entering into a farm out agreement or similar 14 arrangement with a third party under which the third party assists in exploration and 15 development of production from the lease if the agreement or arrangement does not 16 require a payment of consideration by the third party to the lessee, except that the lessee 17 may retain an overriding royalty interest in the lease or may retain a net profit or other 18 production payment; 19 (3) gas produced from the lease may not be sold or otherwise made 20 available for insertion into the in-place gas pipeline transmission or distribution system 21 serving population centers in Southcentral Alaska, except that the director may waive this 22 limitation to permit the exchange of the gas produced for other gas that may be 23 distributed in rural communities and remote locations within the state. 24 (i) When a search is required to verify a title to an area described in a shallow 25 bed gas development lease application, the applicant may conduct the title search. 26 (j) The acreage limitations of AS 38.05.140(c) and 38.05.180(m) do not apply 27 to a shallow bed gas development lease. 28 (k) A shallow bed gas development lease does not give the lessee the right to 29 produce oil or to produce gas from sources that are not within 3,000 feet of the surface 30 at the drilling site. If the lessee's operation under the lease results in the production of 31 oil or of gas in violation of this subsection, the director shall immediately suspend the
01 lessee's operation under the lease and may terminate the lease. 02 (l) Notwithstanding AS 38.05.020(b)(1) and AS 44.62.010 - 44.62.300, the 03 commissioner of natural resources may not adopt regulations to adopt constructions 04 that implement, interpret, or make specific the provisions of this section or to establish 05 procedures to govern application of the provisions of this section. 06 (m) In this section, "lease" means a shallow bed gas development lease 07 authorized by this section. 08 * Sec. 3. AS 38.05.035(e)(6) is amended to read: 09 (6) before a public hearing, if held, or in any case not less than 21 days 10 before the sale, lease, or other disposal of available land, property, resources, or 11 interests in them other than a sale, lease, or other disposal of available land or an 12 interest in land for oil and gas under (5) of this subsection, the director shall make 13 available to the public a written finding that, in accordance with (1) of this subsection, 14 sets out the material facts and applicable statutes and regulations and any other 15 information required by statute or regulation to be considered upon which the 16 determination that the sale, lease, or other disposal will best serve the interests of the 17 state was based; however, a written finding is not required before the approval of 18 (A) a contract for a negotiated sale authorized under 19 AS 38.05.115; 20 (B) a lease of land for a shore fishery site under AS 38.05.082; 21 (C) a permit or other authorization revocable by the 22 commissioner; 23 (D) a mineral claim located under AS 38.05.195; 24 (E) a mineral lease issued under AS 38.05.205; 25 (F) a production license issued under AS 38.05.207; 26 (G) an exempt oil and gas sale under AS 38.05.180(d) of 27 acreage offered in a sale that was held within the previous five years if the sale 28 was subject to a written best interest finding, unless the commissioner 29 determines that new information has become available that justifies a revision 30 of the best interest finding; [OR] 31 (H) a lease sale under AS 38.05.180(w) of acreage offered in
01 a sale that was held within the previous five years if the sale was subject to a 02 best interest finding, unless the commissioner determines that new information 03 has become available that justifies a revision of the best interest finding; or 04 (I) a shallow bed gas development lease authorized under 05 AS 38.05.177 in an area for which leasing is authorized under 06 AS 38.05.177; 07 * Sec. 4. AS 38.05.180(f) is amended to read: 08 (f) Except as provided by AS 38.05.131 - 38.05.134 and 38.05.177, the 09 commissioner may issue oil and gas leases on state land to the highest responsible 10 qualified bidder determined by competitive bidding under regulations adopted by the 11 commissioner. Bidding may be by sealed bid or according to any other bidding 12 procedure the commissioner determines is in the best interests of the state. Whenever, 13 under any of the leasing methods listed in this subsection, a royalty share is reserved 14 to the state, it shall be delivered in pipeline quality and free of all lease or unit 15 expenses, including but not limited to separation, cleaning, dehydration, gathering, salt 16 water disposal, and preparation for transportation off the lease or unit area. Following 17 a pre-sale analysis, the commissioner may choose at least one of the following leasing 18 methods: 19 (1) a cash bonus bid with a fixed royalty share reserved to the state of 20 not less than 12.5 percent in amount or value of the production removed or sold from 21 the lease; 22 (2) a cash bonus bid with a fixed royalty share reserved to the state of 23 not less than 12.5 percent in amount or value of the production removed or sold from 24 the lease and a fixed share of the net profit derived from the lease of not less than 30 25 percent reserved to the state; 26 (3) a fixed cash bonus with a royalty share reserved to the state as the 27 bid variable but no less than 12.5 percent in amount or value of the production 28 removed or sold from the lease; 29 (4) a fixed cash bonus with the share of the net profit derived from the 30 lease reserved to the state as the bid variable; 31 (5) a fixed cash bonus with a fixed royalty share reserved to the state
01 of not less than 12.5 percent in amount or value of the production removed or sold 02 from the lease with the share of the net profit derived from the lease reserved to the 03 state as the bid variable; 04 (6) a cash bonus bid with a fixed royalty share reserved to the state 05 based on a sliding scale according to the volume of production or other factor but in 06 no event less than 12.5 percent in amount or value of the production removed or sold 07 from the lease; 08 (7) a fixed cash bonus with a royalty share reserved to the state based 09 on a sliding scale according to the volume of production or other factor as the bid 10 variable but not less than 12.5 percent in amount or value of the production removed 11 or sold from the lease. 12 * Sec. 5. AS 38.05.180(h) is amended to read: 13 (h) The commissioner may include terms in any oil and gas lease, except a 14 shallow bed gas development lease issued under AS 38.05.177, imposing a minimum 15 work commitment on the lessee. These terms shall be made public before the sale, 16 and may include appropriate penalty provisions to take effect in the event the lessee 17 does not fulfill the minimum work commitment. If it is demonstrated that a lease has 18 been proven unproductive by actions of adjacent lease holders, the commissioner may 19 set aside a work commitment. The commissioner may waive for a period not to 20 exceed one two-year period any term of a minimum work commitment if the 21 commissioner makes a written finding either that conditions preventing drilling or 22 exploration were beyond the lessee's reasonable ability to foresee or control or that the 23 lessee has demonstrated through good faith efforts an intent and ability to drill or 24 develop the lease during the term of the waiver. 25 * Sec. 6. AS 46.03.100(f) is amended to read: 26 (f) This section does not apply to discharges of solid or liquid waste material 27 or water discharges from the following activities if the discharge is incidental to the 28 activity and the activity does not produce a discharge from a point source, as that term 29 is defined in regulations adopted under this chapter, directly into any surface water of 30 the state: 31 (1) mineral drilling, trenching, ditching, and similar activities;
01 (2) landscaping; 02 (3) water well drilling or [,] geophysical drilling [, OR COAL BED 03 METHANE DRILLING]; [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 does 07 not relieve a person from obtaining a permit under (a) of 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 (a) of this section; or 13 (5) the discharge or disposal of waste material or water from 14 activities associated with gas exploration drilling under a shallow bed gas 15 development lease authorized by AS 38.05.177. 16 * Sec. 7. AS 46.04.030(b) is amended to read: 17 (b) A person may not cause or permit the operation of a pipeline or [AN 18 EXPLORATION OR] production facility in the state or, except as provided in 19 AS 46.04.050(c) for a well that has not penetrated a formation capable of 20 producing oil, may not cause or permit the operation of an exploration facility in 21 the state unless an oil discharge prevention and contingency plan for the pipeline or 22 facility has been approved by the department and the person is in compliance with the 23 plan. 24 * Sec. 8. AS 46.04.030 is amended by adding a new subsection to read: 25 (s) If an onshore well drilling for gas under a lease authorized by 26 AS 38.05.177 penetrates a formation capable of producing oil, the operator of the 27 facility 28 (1) shall notify the department and the Alaska Oil and Gas 29 Conservation Commission; and 30 (2) may not conduct further operations in the drilled well until the 31 facility complies with all applicable laws and regulations relating to oil and gas
01 production; however, this paragraph does not prevent the operator of the facility from 02 conducting activities that may be required by the Alaska Oil and Gas Conservation 03 Commission to plug and abandon a well. 04 * Sec. 9. AS 46.04.040(b) is amended to read: 05 (b) A person may not cause or permit the operation of a pipeline or an 06 exploration or production facility in the state unless the person has furnished to the 07 department, and the department has approved, proof of financial ability to respond in 08 damages. Proof of financial responsibility required for 09 (1) a pipeline or an offshore exploration or production facility is 10 $50,000,000 per incident; 11 (2) an onshore production facility is 12 (A) $20,000,000 per incident if the facility produces over 13 10,000 barrels per day of oil; 14 (B) $10,000,000 per incident if the facility produces over 5,000 15 barrels per day but not more than 10,000 barrels per day of oil; 16 (C) $5,000,000 per incident if the facility produces over 2,500 17 barrels per day but not more than 5,000 barrels per day of oil; 18 (D) $1,000,000 per incident if the facility produces 2,500 barrels 19 per day or less of oil; 20 (3) an onshore exploration facility is 21 (A) $25,000 per incident for a facility used solely to explore 22 for shallow bed natural gas by means of drilling a well when authorized 23 by AS 38.05.177; and 24 (B) except as provided by (A) of this paragraph, $1,000,000 25 per incident. 26 * Sec. 10. AS 46.04.040 is amended by adding a new subsection to read: 27 (n) If an onshore well authorized under AS 38.05.177 to recover shallow bed 28 natural gas penetrates a formation capable of producing oil, the operator of the facility 29 may not conduct further exploration activity. However, this subsection does not 30 prevent the operator of the facility from conducting activities that may be required by 31 the Alaska Oil and Gas Conservation Commission to plug and abandon a well.
01 * Sec. 11. AS 46.04.050 is amended by adding a new subsection to read: 02 (c) Except as provided in AS 46.04.030(s), the provisions of AS 46.04.030(b) 03 do not apply to an onshore exploration facility used solely to explore for natural gas 04 by means of drilling a well when authorized under AS 38.05.177. 05 * Sec. 12. AS 46.08.040 is amended by adding a new subsection to read: 06 (e) Money from the fund may not be used to take action under (a) of this 07 section as to the release or threatened release of oil or a hazardous substance from a 08 shallow bed natural gas development well authorized under AS 38.05.177. 09 * Sec. 13. RELATION TO RIGHTS GRANTED UNDER EXISTING COAL LEASES. 10 The provisions of AS 38.05.177, added by sec. 2 of this Act, may not apply to impair or 11 infringe upon the rights of a lessee of a coal lease entered into under AS 38.05.150 on or 12 before the effective date of this Act and that is in effect on the effective date of this Act to 13 recover the coal bed methane and other gas held in association with the coal under the lease 14 unless recovery by the lessee of coal bed methane and other gas in association with the coal 15 is prohibited by the coal lease. 16 * Sec. 14. CORRECTIVE LEGISLATION INVITED. If the commissioner of natural 17 resources believes it is necessary to adopt constructions that implement, interpret, or make 18 specific the provisions of AS 38.05.177 or to establish procedures to govern application of 19 provisions of AS 38.05.177, the commissioner of natural resources may recommend legislation 20 for consideration by the First Session of the Twentieth Alaska State Legislature to amend or 21 add to the provisions of AS 38.05.177 that will adopt those constructions or establish those 22 procedures.