CSHB 394(RES): "An Act authorizing shallow natural gas leasing from sources within 3,000 feet of the surface; relating to regulation of natural gas exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; and adding, in the exemption from obtaining a waste disposal permit for disposal of waste produced from drilling, a reference to shallow natural gas."
00CS FOR HOUSE BILL NO. 394(RES) 01 "An Act authorizing shallow natural gas leasing from sources within 3,000 feet 02 of the surface; relating to regulation of natural gas exploration facilities for 03 purposes of preparation of discharge prevention and contingency plans and 04 compliance with financial responsibility requirements; and adding, in the exemption 05 from obtaining a waste disposal permit for disposal of waste produced from 06 drilling, a reference to shallow natural gas." 07 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 08 * Section 1. LEGISLATIVE FINDINGS AND PURPOSE. (a) The legislature finds that 09 (1) there exist throughout the state sizeable reserves of coal and small but 10 commercially significant amounts of natural gas located close to the earth's surface that are 11 usually, though not always, associated with and emitted from coal reserves; 12 (2) the methane derived from this coal and other sources and that is found in 13 reservoirs at depths of less than 3,000 feet could be tapped to serve as a principal or a chief 14 supplemental energy source of benefit to residents of areas in which they are found;
01 (3) the methane derived from this coal and other shallow gas reservoirs could 02 be developed without interfering with the development and transportation of the state's vast gas 03 reserves available for interstate and foreign markets; and 04 (4) it is in the best interests of the state and its people that this natural gas should 05 be identified and developed, especially to serve as a source of natural gas for use in rural 06 communities and remote locations within the state, especially when this natural gas can be 07 delivered to consumers at less cost than alternative energy sources. 08 (b) In authorizing a program of leasing shallow natural gas from state land, it is the 09 legislature's purpose to provide both a means and an incentive by which that gas may be 10 identified and developed at low cost for the direct benefit of residents of remote or sparsely 11 populated areas for which connection to the in-place gas pipeline transmission and distribution 12 system serving population centers in Southcentral Alaska is not economically feasible. 13 * Sec. 2. AS 38.05 is amended by adding a new section to read: 14 Sec. 38.05.177. SHALLOW NATURAL GAS LEASES. (a) The provisions of 15 this section 16 (1) apply to gas, whether methane associated with and derived from coal 17 reserves or otherwise, developed from a source that is within 3,000 feet of the surface; 18 and 19 (2) do not apply to authorize lease of 20 (A) land described in AS 38.05.131(b) in which oil and gas 21 exploration licenses and leases may not be issued; 22 (B) the land 23 (i) that is or becomes subject to an oil and gas exploration 24 license or lease issued under AS 38.05.131 - 38.05.134; 25 (ii) that is leased under AS 38.05.180; or 26 (iii) that is described in and is part of the proposed oil 27 and gas leasing program prepared under AS 38.05.180(b), but the 28 commissioner may waive this limitation; or 29 (C) the land that, on the effective date of this Act, is held under 30 a coal lease entered into under AS 38.05.150. 31 (b) For the purpose of exploring for and developing shallow natural gas
01 reservoirs, upon application, the director may lease to a person land for which the state 02 owns the subsurface rights. A person applying for a lease under this subsection 03 (1) shall specify the area to be leased; the area to be leased may not 04 exceed 5,760 acres; a lessee may not hold more than 23,040 acres of land under leases 05 entered into under this section; 06 (2) may not be required to pay an application fee or any other form of 07 payment as a condition of submitting or processing the lease application or obtaining the 08 lease. 09 (c) Unless the lease application is for land described in (a)(2) of this section that 10 may not be leased or unless otherwise prevented by law from entering into a lease for 11 land described in the lease application, promptly after receipt of a lease application, the 12 director shall give notice of receipt of the lease application and call for comments from 13 the public. The director's call for public comments must provide opportunity for public 14 comment for a period of 60 days. If, on the basis of public comments received, the 15 director determines to enter into a lease for the area described in (b) of this section, the 16 director shall execute the lease within 90 days after the close of the public comment 17 period or, if review is required under AS 46.40, within 30 days after the final consistency 18 determination is made under AS 46.40. A lease entered into under this subsection gives 19 the lessee the exclusive right to explore for, develop, and produce, for a term not to 20 exceed five years, natural gas on the state land described in the lease; the right to explore 21 for, develop, and produce is limited to gas derived from natural gas within 3,000 feet of 22 the surface. 23 (d) A lease shall be automatically extended if and for so long thereafter as gas 24 is produced in paying quantities from the lease. A lease issued under this section 25 covering land on which there is a well capable of producing gas in paying quantities 26 does not expire because the lessee fails to produce gas unless the lessee is allowed 27 reasonable time to place the well on a producing status. If drilling has commenced on 28 the expiration date of the primary term of the lease and is continued with reasonable 29 diligence, including such operations as redrilling, sidetracking, or other means necessary 30 to reach the originally proposed bottom hole location, the lease continues in effect until 31 90 days after drilling has ceased and for so long thereafter as gas is produced in paying
01 quantities. A gas lease issued under this section that is subject to termination by reason 02 of cessation of production does not terminate if, within 60 days after production ceases, 03 reworking or drilling operations are commenced on the land under lease and are 04 thereafter conducted with reasonable diligence during the period of nonproduction. In 05 addition, upon application by the lessee, the director may once extend a lease issued 06 under (c) of this section for a period of not more than five years if the director 07 determines that during the period described in (c) of this section, the lessee 08 (1) has conducted reasonably diligent exploration activities in the area 09 covered by the lease; 10 (2) has not been able to determine the commercial productivity of the 11 natural gas occurring on the lease; and 12 (3) wishes to continue to conduct exploration activities in the area 13 described in the lease. 14 (e) The director 15 (1) shall annually make a determination under this subsection that the 16 lessee has diligently developed and continued to operate under the lease; if the director 17 determines that the lessee has not diligently developed or continued to operate under the 18 lease, the director, after giving notice and opportunity for hearing to the lessee, may 19 terminate the lease; 20 (2) may adjust the boundaries of a lease entered into under this section 21 as may be necessary to ensure development of natural gas within a reasonably compact 22 area; a lease as adjusted under this paragraph remains subject to the acreage limitations 23 set out in (b)(1) of this section. 24 (f) For the privilege of exploring for and producing gas from a lease, the lessee 25 shall pay rent to the state in the amount of 50 cents per acre. The rent is due and 26 payable on the dates determined in the lease. If rent is not paid when due, the director 27 shall mail the lessee written notice of nonpayment at the end of each month, while the 28 rent remains unpaid, for a period of two months. The lessee may cure the failure to pay 29 rent when due within 90 days after the rent payment becomes due and payable by paying 30 to the director the amount of rent due together with a penalty of the greater of $50 or 31 five percent of the amount of rent in default. If the lessee fails to remedy the lessee's
01 failure to pay rent, the director shall terminate the lease. 02 (g) The royalty payable on natural gas produced from a lease is 6.25 percent of 03 the value of the production removed or sold from the lease. 04 (h) A lease issued under this section is subject to the following terms and 05 conditions and may be terminated by the director in the event of a breach of a term or 06 condition: 07 (1) the lessee may surrender or relinquish the lease at any time; 08 (2) the lease may not be transferred or assigned until after the date of 09 initial commercial production of gas from the area within the lease; however, this 10 paragraph does not prohibit the lessee from entering into a farm out agreement or similar 11 arrangement with a third party under which the third party assists in exploration and 12 development of production from the lease if the agreement or arrangement does not 13 require a payment of consideration by the third party to the lessee, except that the lessee 14 may retain an overriding royalty interest in the lease or may retain a net profit or other 15 production payment; 16 (3) gas produced from the lease may not be sold or otherwise made 17 available for insertion into the in-place gas pipeline transmission or distribution system 18 serving population centers in Southcentral Alaska, except that the director may waive this 19 limitation to permit the exchange of the gas produced for other gas that may be 20 distributed in rural communities and remote locations within the state. 21 (i) The applicant for a lease shall conduct a title search for the area described 22 in the lease application. 23 (j) The acreage limitations of AS 38.05.140(c) and 38.05.180(m) do not apply 24 to a lease. 25 (k) A lease does not give the lessee the right to produce oil or to produce gas 26 from sources that are not within 3,000 feet of the surface. If an onshore well drilling for 27 natural gas under a lease authorized by this section penetrates a formation capable of 28 producing gas below 3,000 feet of the surface, the owner or operator 29 (1) shall notify the department and the Alaska Oil and Gas Conservation 30 Commission; and 31 (2) may not conduct further operations in the drilled well until the facility
01 complies with all applicable laws and regulations relating to oil and gas production; 02 however, this paragraph does not prevent the owner or operator from conducting 03 activities that may be required by the Alaska Oil and Gas Conservation Commission to 04 plug, plug-back, or abandon a well. 05 (l) The commissioner of natural resources may adopt only the regulations that 06 are reasonable and that are necessary to implement, interpret, or make specific the 07 provisions of this section or to establish procedures to govern application of the 08 provisions of this section. 09 (m) In this section, "lease" means a shallow gas lease authorized by this section. 10 * Sec. 3. AS 38.05.035(e)(6) is amended to read: 11 (6) before a public hearing, if held, or in any case not less than 21 days 12 before the sale, lease, or other disposal of available land, property, resources, or 13 interests in them other than a sale, lease, or other disposal of available land or an 14 interest in land for oil and gas under (5) of this subsection, the director shall make 15 available to the public a written finding that, in accordance with (1) of this subsection, 16 sets out the material facts and applicable statutes and regulations and any other 17 information required by statute or regulation to be considered upon which the 18 determination that the sale, lease, or other disposal will best serve the interests of the 19 state was based; however, a written finding is not required before the approval of 20 (A) a contract for a negotiated sale authorized under 21 AS 38.05.115; 22 (B) a lease of land for a shore fishery site under AS 38.05.082; 23 (C) a permit or other authorization revocable by the 24 commissioner; 25 (D) a mineral claim located under AS 38.05.195; 26 (E) a mineral lease issued under AS 38.05.205; 27 (F) a production license issued under AS 38.05.207; 28 (G) an exempt oil and gas sale under AS 38.05.180(d) of 29 acreage offered in a sale that was held within the previous five years if the sale 30 was subject to a written best interest finding, unless the commissioner 31 determines that new information has become available that justifies a revision
01 of the best interest finding; [OR] 02 (H) a lease sale under AS 38.05.180(w) of acreage offered in 03 a sale that was held within the previous five years if the sale was subject to a 04 best interest finding, unless the commissioner determines that new information 05 has become available that justifies a revision of the best interest finding; or 06 (I) a shallow gas lease authorized under AS 38.05.177 in an 07 area for which leasing is authorized under AS 38.05.177; 08 * Sec. 4. AS 38.05.180(f) is amended to read: 09 (f) Except as provided by AS 38.05.131 - 38.05.134 and 38.05.177, the 10 commissioner may issue oil and gas leases on state land to the highest responsible 11 qualified bidder determined by competitive bidding under regulations adopted by the 12 commissioner. Bidding may be by sealed bid or according to any other bidding 13 procedure the commissioner determines is in the best interests of the state. Whenever, 14 under any of the leasing methods listed in this subsection, a royalty share is reserved 15 to the state, it shall be delivered in pipeline quality and free of all lease or unit 16 expenses, including but not limited to separation, cleaning, dehydration, gathering, salt 17 water disposal, and preparation for transportation off the lease or unit area. Following 18 a pre-sale analysis, the commissioner may choose at least one of the following leasing 19 methods: 20 (1) a cash bonus bid with a fixed royalty share reserved to the state of 21 not less than 12.5 percent in amount or value of the production removed or sold from 22 the lease; 23 (2) a cash bonus bid with a fixed royalty share reserved to the state of 24 not less than 12.5 percent in amount or value of the production removed or sold from 25 the lease and a fixed share of the net profit derived from the lease of not less than 30 26 percent reserved to the state; 27 (3) a fixed cash bonus with a royalty share reserved to the state as the 28 bid variable but no less than 12.5 percent in amount or value of the production 29 removed or sold from the lease; 30 (4) a fixed cash bonus with the share of the net profit derived from the 31 lease reserved to the state as the bid variable;
01 (5) a fixed cash bonus with a fixed royalty share reserved to the state 02 of not less than 12.5 percent in amount or value of the production removed or sold 03 from the lease with the share of the net profit derived from the lease reserved to the 04 state as the bid variable; 05 (6) a cash bonus bid with a fixed royalty share reserved to the state 06 based on a sliding scale according to the volume of production or other factor but in 07 no event less than 12.5 percent in amount or value of the production removed or sold 08 from the lease; 09 (7) a fixed cash bonus with a royalty share reserved to the state based 10 on a sliding scale according to the volume of production or other factor as the bid 11 variable but not less than 12.5 percent in amount or value of the production removed 12 or sold from the lease. 13 * Sec. 5. AS 46.03.100(f) is amended to read: 14 (f) This section does not apply to discharges of solid or liquid waste material 15 or water discharges from the following activities if the discharge is incidental to the 16 activity and the activity does not produce a discharge from a point source, as that term 17 is defined in regulations adopted under this chapter, directly into any surface water of 18 the state: 19 (1) mineral drilling, trenching, ditching, and similar activities; 20 (2) landscaping; 21 (3) water well drilling, geophysical drilling, or coal bed methane 22 drilling or other natural gas drilling to recover gas from a reservoir at a depth of 23 less than 3,000 feet; or 24 (4) drilling, ditching, trenching, and similar activities associated with 25 facility construction and maintenance or with road or other transportation facility 26 construction and maintenance; however, the exemption provided by this paragraph does 27 not relieve a person from obtaining a permit under (a) of this section if 28 (A) the drilling, ditching, trenching, or similar activity will 29 involve the removal of the groundwater, stormwater, or wastewater runoff that 30 has accumulated and is present at an excavation site for facility, road, or other 31 transportation construction or maintenance; and
01 (B) a permit is otherwise required by (a) of this section. 02 * Sec. 6. AS 46.04.030(b) is amended to read: 03 (b) A person may not cause or permit the operation of a pipeline or [AN 04 EXPLORATION OR] production facility in the state or, except as provided in 05 AS 46.04.050(c) for a well that has not penetrated a formation capable of 06 producing oil, may not cause or permit the operation of an exploration facility in 07 the state unless an oil discharge prevention and contingency plan for the pipeline or 08 facility has been approved by the department and the person is in compliance with the 09 plan. 10 * Sec. 7. AS 46.04.030 is amended by adding a new subsection to read: 11 (s) If an onshore well drilling for gas under a lease authorized by 12 AS 38.05.177 penetrates a formation capable of producing oil, the owner or operator 13 (1) shall notify the department and the Alaska Oil and Gas 14 Conservation Commission; and 15 (2) may not conduct further operations in the drilled well until the 16 facility complies with all applicable laws and regulations relating to oil and gas 17 production; however, this paragraph does not prevent the owner or operator from 18 conducting activities that may be required by the Alaska Oil and Gas Conservation 19 Commission to plug and abandon a well. 20 * Sec. 8. AS 46.04.040(b) is amended to read: 21 (b) A person may not cause or permit the operation of a pipeline or an 22 exploration or production facility in the state unless the person has furnished to the 23 department, and the department has approved, proof of financial ability to respond in 24 damages. Proof of financial responsibility required for 25 (1) a pipeline or an offshore exploration or production facility is 26 $50,000,000 per incident; 27 (2) an onshore production facility is 28 (A) $20,000,000 per incident if the facility produces over 29 10,000 barrels per day of oil; 30 (B) $10,000,000 per incident if the facility produces over 5,000 31 barrels per day but not more than 10,000 barrels per day of oil;
01 (C) $5,000,000 per incident if the facility produces over 2,500 02 barrels per day but not more than 5,000 barrels per day of oil; 03 (D) $1,000,000 per incident if the facility produces 2,500 barrels 04 per day or less of oil; 05 (3) an onshore exploration facility is 06 (A) $25,000 per incident for a facility used solely to explore 07 for shallow natural gas by means of drilling a well when authorized by 08 AS 38.05.177; and 09 (B) except as provided by (A) of this paragraph, $1,000,000 10 per incident. 11 * Sec. 9. AS 46.04.040 is amended by adding a new subsection to read: 12 (n) If an onshore well authorized under AS 38.05.177 to recover shallow 13 natural gas penetrates a formation capable of producing oil, the owner or operator may 14 not conduct further exploration activity. However, this subsection does not prevent the 15 owner or operator from conducting activities that may be required by the Alaska Oil 16 and Gas Conservation Commission to plug and abandon a well. 17 * Sec. 10. AS 46.04.050 is amended by adding a new subsection to read: 18 (c) Except as provided in AS 46.04.030(s), the provisions of AS 46.04.030(b) 19 do not apply to an onshore exploration facility used solely to explore for natural gas 20 by means of drilling a well when authorized under AS 38.05.177. 21 * Sec. 11. RELATION TO RIGHTS GRANTED UNDER EXISTING COAL LEASES. 22 The provisions of AS 38.05.177, added by sec. 2 of this Act, may not apply to impair or 23 infringe upon the rights of a lessee of a coal lease entered into under AS 38.05.150 on or 24 before the effective date of this Act and that is in effect on the effective date of this Act to 25 recover the coal bed methane and other gas held in association with the coal under the lease 26 unless recovery by the lessee of coal bed methane and other gas in association with the coal 27 is prohibited by the coal lease.