Legislature(2021 - 2022)ADAMS 519
04/22/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB28 | |
| HB81 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 81 | TELECONFERENCED | |
| + | HB 28 | TELECONFERENCED | |
| += | HB 69 | TELECONFERENCED | |
| += | HB 71 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 81
"An Act authorizing the commissioner of natural
resources to modify a net profit share lease."
9:55:43 AM
RYAN FITZPATRICK, COMMERCIAL ANALYST, DIVISION OF OIL AND
GAS, DEPARTMENT OF NATURAL RESOURCES (via teleconference),
notified the committee that the department was currently
working on prior questions from the committee and would
provide answers in writing.
Co-Chair Merrick alerted Mr. Fitzpatrick the meeting would
end at 10:15 a.m. due to floor session.
Mr. Fitzpatrick continued with a presentation from a prior
meeting titled "HB 81 - Net Profit Share and Royalty
Modifications on Oil and Gas Leases," dated April 15, 2021
(copy on file). He began on slide 19 and addressed the
primary objectives of the bill. The bill would give the
Department of Natural Resources (DNR) the authority to
modify net profit share lease (NPSL) rates. He relayed that
the bill created an additional qualifying scenario for the
modification of NPSLs.
Mr. Fitzpatrick noted he had described [in the previous
hearing on HB 81] three scenarios in which modification of
royalties were currently allowed. The bill would add a
fourth scenario for end of field life where additional
capital investments were required to increase production in
order to keep the field in production. He elaborated that
it was similar to the second scenario he had described the
previous week, but instead of declining production
resulting in an increased per barrel cost, the fourth
scenario would require additional investment to increase
production that would result in the field maintaining its
status as economically producing oil and gas for an
additional number of years. Currently, the additional
scenario was limited to the modification of net profit
share and did not include royalty.
Mr. Fitzpatrick addressed the last objective of the bill
that would resolve an existing statutory ambiguity related
to production [on slide 19] for the first scenario
(production from a new oil or gas field). He explained that
currently the modification scenario was only allowed if the
field had not produced previously; however, during the
exploration phase there may be test production during
exploration. He clarified that the objective resolved that
the test production would not disqualify the field or pool
from modification; it was only referring to commercial
production after the field had been developed. He added
that it was the department's current interpretation and was
not intended as a change in policy.
9:59:09 AM
Mr. Fitzpatrick advanced to slide 20 titled "What Type of
Modification is Warranted?" The slide included information
about how the current modification process worked for
royalty modification and how it may change under the
legislation related to NPSL modifications. He explained
that currently there was a minimum royalty percentage,
which meant if a royalty modification were granted, DNR
could not reduce royalties below 5 percent for a new field
or pool or 3 percent for fields or pools at the end of
their lifespan. He elaborated that the bill proposed a
minimum net profit share of 10 percent. He detailed that
even if a modification were granted, DNR would not have the
authority to reduce the net profit share below 10 percent.
He noted that the provision mimicked the minimum royalty
rate currently in the modification statute.
Mr. Fitzpatrick drew attention to an error on slide 20,
item C. He remarked that the item should read "the
modification must be based on a sliding scale mechanism"
instead of "may be based." Currently in statute, a royalty
modification was required to be based on the sliding scale
based on the price of oil and may also be based on other
factors such as production or expenses. The bill allowed
for the modification of net profit share royalties and
added a fixed royalty component to one of the options DNR
may consider. However, the package of modifications (such
as fixed royalty, sliding scale royalty, or net profit
share) was required to take the price of oil into account
and apply the sliding scale mechanism built into at least
one of the aspects. Additionally, production or per barrel
cost could also be considered, similar to current statute.
He noted that the modification could not only be to a fixed
royalty and fixed net profit share rate. He explained that
there had to be some element of a sliding scale included
that recaptured foregone revenue if the price of oil
increased, production increased, or costs were reduced.
Mr. Fitzpatrick addressed the last bullet point on slide
20. He relayed that current statute allowed the
modification of royalty to be below or above the current
royalty rate. The bill would allow net profit share rates
to go below or above the current net profit share rate. He
explained that in certain circumstances it may be in the
state's interest to craft recapture mechanisms. He detailed
that if there was foregone revenue because of a royalty
modification earlier in a field's life or at low oil
prices, under certain circumstances (especially if there
was a significant increase in oil price), a modification
could be crafted so the royalty rate or net profit share
rate increased above the original rate to allow the state
to recapture foregone revenue. He expounded that similar to
the way DNR may employ the mechanism with a royalty
modification, the statute would allow DNR to do the same
with the net profit share modification.
10:02:57 AM
Representative Josephson was sensing the proposal was more
nuanced and had more caveats than contingencies. He
observed that the proposal included language that contained
more words. He thought the language described circumstances
where the state instead of being "generous" would be a bit
more self-serving when merited based on price increases or
other similar situations.
Mr. Fitzpatrick did not believe the bill language was
intended to change the thresholds for granting relief or to
change the authority of the department to craft recapture
mechanisms. He explained that the current statutory
language allowed recapture mechanisms for royalties. He
reported that if the department was allowed to modify net
profit share rates, the recapture mechanisms could also be
crafted through a modification of the net profit share rate
(i.e., increasing the net profit share rate above the
current rate); however, it was only intended to mimic the
current system for royalty modifications.
Representative Josephson remarked that there was a give on
the side of the state until such time as the profitability
was apparent and then there was the takeback. He asked if
it was the scenario Mr. Fitzpatrick was suggesting may
happen in the reform of the NPSL.
Mr. Fitzpatrick replied it was the intent of the statutory
language to allow the mechanism under the proper
circumstances. He explained that the language did not
require the recapture mechanism. He thought back to the
different modification scenarios currently in statute and
explained that the recapture mechanism would make a lot of
sense for a new field or pool given the production time
horizon of 20 to 40 years. He elaborated that during the
course of production, the price of oil would vary fairly
dramatically over the time period. He noted the dramatic
change in oil prices over the past several years. He
elaborated that if DNR granted a modification and the price
of oil was in the lower price band, it may justify a
modification. He provided a scenario where the price of oil
increased significantly two or three years following the
modification. He explained that DNR wanted to craft the
modification to phase out if the field was economic without
the royalty modification or net profit share modification.
Additionally, if a field or pool got to a point where the
production was so economic that it could bear the
additional royalty burden, it made sense for the state to
increase the royalty rate or net profit share rate above
the existing level to recapture some of foregone revenue
that may have taken place earlier.
Mr. Fitzpatrick considered another scenario towards the end
of field life. He explained that the recapture mechanism
may not make sense if the anticipation was that a
modification was being granted to keep a field in
production for an additional year or two. He detailed that
there would be a phase out mechanism for higher oil prices
at that point in the life of a field, but perhaps not a
recapture mechanism.
10:07:40 AM
Representative Wool understood why a producer may want to
negotiate a lower royalty rate or net profit share rate
because it was uneconomic without the lower rate and the
state wanted to be able to negotiate to get some
production. He considered a scenario where the rates were
lowered, and production increased. He could not imagine
producers would ask the state to raise rates when they were
making a substantial amount of money. He reasoned the state
would have to step in under the scenario. He asked for
verification the state would only be able to raise rates
that had already been lowered.
Mr. Fitzpatrick answered in the affirmative. He relayed
that the only time the state could raise the rates above
the initial rate, was when the state was granting the
relief in the first instance. He elaborated that the
royalty modification decision would grant a reduction in
the royalty rate or net profit share rate. The decision
would also include a schedule specifying when the
modification would phase out with oil prices, increased
production, reduced costs, and other. He explained that if
the state elected to add a recapture mechanism in
appropriate circumstances, the recapture mechanism would
have to be included in the initial decision. He detailed
that the state and producer would have notice from the
initial publication of the decision specifying when the
recapture mechanism would go into effect.
Representative Wool thought the state would want to specify
at the onset when the recapture mechanism would kick in. He
reasoned that if the mechanism were based on price, the
state would likely know upfront when something was
profitable and when it was not. He asked if the mechanism
would turn on and off as price fluctuated. Alternatively,
he wondered whether a producer would get the reduction, the
state would dial in the recapture if appropriate, and once
the increase kicked back in, the process would conclude. He
asked for verification that the reduction would not go back
and forth depending on the price of oil. He thought the
scenario would not be very efficient.
10:10:08 AM
Mr. Fitzpatrick replied that the situation could vary
depending on the modification. He reported that current
statute allowed for significant flexibility in crafting the
modifications and the sliding scale reversion to the
original rates or recapture mechanisms. He believed one of
the modifications DNR had previously granted was based on
the price of oil, where the modification phased in and out
as oil prices increased or decreased. He reported that the
mechanism had worked well from the administrative side for
the particular field. He remarked that there could be
scenarios where a modification was granted that only
allowed modification for a certain term of years until a
certain level of costs were recouped. He stated that
whether or not a modification phased in and out with the
price of oil or other factors, could be individually
tailored to a particular field or pool.
Representative Wool thought the state would want to include
a recapture in all of the reduction arrangements if certain
parameters were hit. He thought it would be the prudent
thing to do.
Mr. Fitzpatrick answered affirmatively. He explained that
the phase out of the modification was statutorily required.
He detailed that for scenarios where a recapture mechanism
was warranted, DNR currently preferred including the
recapture mechanism whenever it would be justified in one
of the modifications.
Co-Chair Merrick apologized for running out of time. She
noted that the presentation would continue during a future
meeting. She thanked Mr. Fitzpatrick for his testimony.
Mr. Fitzpatrick thanked the committee.
HB 81 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the schedule for the afternoon.