Legislature(2021 - 2022)ADAMS 519
04/23/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB81 | |
| SB19 | |
| HB55 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 69 | TELECONFERENCED | |
| += | HB 71 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 19 | TELECONFERENCED | |
| += | HB 81 | TELECONFERENCED | |
| += | HB 55 | TELECONFERENCED | |
HOUSE BILL NO. 81
"An Act authorizing the commissioner of natural
resources to modify a net profit share lease."
9:06:35 AM
[Secretary Note: A prior meeting on HB 81 was held on April
22, 2021, at 9:00 A.M.]
RYAN FITZPATRICK, COMMERCIAL ANALYST, DIVISION OF OIL AND
GAS, DEPARTMENT OF NATURAL RESOURCES (via teleconference),
continued with the PowerPoint (copy on file): "HB 81 - Net
Profit Share and Royalty Modifications on Oil and Gas
Leases," beginning on slide 21. He discussed Slide 21
titled Eligible Scenarios for Modification:
• Current statute for royalty modification; and
• HB81 would allow net profit share modifications in
these scenarios as well.
A. New Production: If the development of a new
field or pool would not be economic without
modification, so long as the field or pool is
sufficiently delineated. AS 38.05.180(j)(1)(A)
B. Extend Production: To prolong the economic
life of a field or pool when rising per-barrel
costs (due to declining production or otherwise)
would make continuing production no longer
economic without modification. AS
38.05.180(j)(1)(B)
C. Restore Production: To reestablish production
of shut-in oil or gas that would otherwise not be
economically feasible without modification. AS
38.05.180(j)(1)(C)
• New scenario under HB81 proposal
• Applies to net profit share modifications
D. Incremental Production: If incremental
production from producing pools requiring
incremental capital expenditures is uneconomic in
the absence of modification.
Examples: Expansion of existing pools, additional
drilling pads, enhanced oil recovery projects,
etc.
Mr. Fitzpatrick expounded that the fourth scenario was
another end of field life modification. The scenario
applied to fields where additional capital expenditure was
required to increase production and the capital investment
would be uneconomic without the modification. It was very
similar to the second scenario but instead of increasing
operating costs it was an increase in capital expenditures
necessary to increase the life of the field. He delineated
that the modification was only allowed for the net profit
share rates and the provision was added in the House
Resources Committee version committee substitute (CS).
Co-Chair Merrick indicated Representative Rasmussen and
Representative Carpenter had joined the meeting.
9:10:02 AM
Representative Johnson wondered how many fields the
legislation would apply to. Mr. Fitzpatrick referred to
slide 8 that listed the fields that currently had net
profit share leases within the unit. He listed the fields
as follows: Collville River, Oooguruk, Nikaitchug, Kuparuk
River, Duck Island, Point Thompson, and Milne Point. He
noted that from a straight eligibility standpoint anyone of
the fields could potentially apply for a modification. He
expounded that most of the leases were currently in
production already and likely would not see a modification
for new production. He deduced that applications for
modification would likely come from fields at the end of
their production life for some of the smaller fields.
Representative Johnson understood Mr. Fitzpatrick's
response. She inquired whether there were fields the
department was aware of that would likely come online
within 3 years that were not end of life fields. Mr.
Fitzpatrick thought that she was referring to Pikka and
Nikaitchug North fields. He suggested that there might be
an application for a royalty modification but not a net
profit modification. He noted that Nikaitchug North was a
federal field and decisions regarding royalties were made
on a federal level. He speculated that under the fourth
scenario some Milne Point and Duck Island fields might
apply.
9:14:39 AM
Mr. Fitzpatrick moved to slide 22 titled Eligible
Scenarios for Modification. He deferred to his colleague
to describe the modeling work on the following two slides.
9:15:04 AM
JHONNY MEZA, COMMERCIAL MANAGER, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES (via teleconference),
indicated that the slides showed a graphic presentation of
eligibility for the 4 modification scenarios. He
highlighted that the beige colored section of the graphs
represented development costs and the investment and
operating costs were depicted in light gray. In addition,
revenue was portrayed as triangles and operating profits in
circles associated with a hypothetical project. The
royalties to the state were portrayed in dark gray, net
profit share in light orange, and a proxy for production
tax was shown in blue. He noted that proxy was based on
the field level versus the production tax that was accessed
on the taxpayer level. In the case of new production shown
on the left graph on the slide, it was assumed in year
zero, the lease holder had not yet decided whether to
invest and obtain production from the oil and gas pool. If
it was determined to be uneconomic unless modification of
royalty or net profit share was applied the resources would
remain stranded and potential state revenues would not
occur. He turned to the second scenario [extended
production] in year 17, after production for 16 years it
was determined that continued production would translate
into operating losses, modification of reduction of royalty
or net profit shares could prevent the abandonment of the
field by year 18 and ensure production and state revenue
would continue. However, when evaluating the production in
future years past performance of the field did not
influence the lease holder regarding whether to continue
production. He turned to slide 23 with the same title as
slide 22 and continued with the remaining two scenarios.
9:18:14 AM
Mr. Meza continued with the third scenario [restore
production] in year 21 where production from the pool had
ceased. However, with a modification, production could
resume if it was technically feasible. He examined the
graph on the right depicting the fourth scenario from the
original version of the bill. He explained that HB 81
created a fourth scenario. The lease was in year 15 and the
lease holder was considering a capital investment to a
producing field to access incremental production that would
extend the life of the field, stem or reverse the decline
rate through enhanced recovery program or drilling outside
the boundaries of a known reservoir. He qualified that
without modification of the royalty or net profit share the
capital investment might not occur. He reiterated that the
committee substitute only allowed for modification of the
net profit share and excluded royalty modification. He
pointed out that the lease holder would not qualify for the
first three scenarios under the royalty modification
statute. Scenario A was disqualified because the pool was
already producing. He added that scenario B would not
qualify because the lease holder had not yet incurred the
capital expenditures and could not yet claim that per
barrel costs were increasing to the point of abandonment.
He restated that the original version of HB 81 proposed
that both royalty and net profit share could be modified.
9:20:29 AM
Representative Josephson cited the CS and asked if the
original bill would have allowed for royalty adjustment for
Prudhoe Bay itself. Mr. Meza responded that the existing
statute allowed for the modification of royalty for any
lease that had a royalty component, for every state oil and
gas lease. The applicant needed to make a clear and
convincing case that the modification was warranted from
an economic standpoint in order for the department to make
any modifications. Representative Josephson understood that
the amendment reflected on page 2 of the CS, restricted
royalty modification that was allowed under the original
bill. He asked whether he was correct.
Mr. Fitzpatrick responded in the affirmative. The original
bill mimicked the statutory language that applied to all
the first three scenarios. He reiterated that the CS pulled
out the royalty modification in scenario 4 and only allowed
for net profit share modification.
9:23:07 AM
Mr. Fitzpatrick advanced to slide 24 titled Decision-
Making Process.
A. HB 81 does not propose to change the modification
process.
B. A producer applying for a royalty modification must
provide a clear and convincing showing that they
meet the statutory requirements.
? A higher standard of proof than required for most
other DNR applications.
? Applicants required to provide abundant evidence
to justify any request for relief.
C. DNR may require (for .180(j)(1)(A)) or request (for
.180(j)(1)(B)(C)) that producers pay up to
$150,000 per application for consulting work to
support DNR's evaluation of the application.
D. Publication of Best Interest Finding and offer
presentation to Legislature (AS 38.05.180(j)(9)
(10)).
E. If granted, modifications are not transferrable
without the authorization of the Commissioner. (AS
38.05.180(j)(5)).
Mr. Fitzpatrick emphasized that the modification
application process was held to a higher standard and was
unchanged in HB 81. The clear and convincing standard
applied to both types of modifications - royalty
modifications and net profit sharing modification. He
elaborated that the external consulting fee allowed the
Department of Natural Resources (DNR) to obtain consulting
services for scenarios of understaffing due to vacancies or
lacking the necessary expertise to review an application.
The external consultant participated in the review process
for both types of modifications. He furthered that after a
modification review, the department published a best
interest finding that contained the justification and
decision and was subject to a public comment period. During
the comment period, DNR was required to testify before the
legislature to discuss the decision. The requirement
remained unchanged in statute. Finally, if a modification
was granted under current statute, the modification was not
transferable without prior written approval by the
commissioner of DNR, which applied to both modifications.
9:28:53 AM
Mr. Fitzpatrick indicated that the final portion of the
presentation contained tables that were side-by-side
comparisons of the original version of HB 81 versus the
committee substitute beginning on slide 26 titled HB 81
vs. CS for HB 81. He offered that the original bill and CS
both allowed for modification of net profit share under
existing eligibility scenarios for royalty modification and
clarified that the condition of prior production refers to
commercial production. He noted that the language in the CS
that created a new eligibility scenario for modification
when additional capital expenditures were needed was
refined by Legislative Legal Services. He reminded the
committee that the CS restricted applicability of the new
scenario only to net profit share modification.
9:30:13 AM
Mr. Fitzpatrick briefly described slide 27. He commented
that language included in the CS regarding the modification
of the net profit share provided a floor of 10 percent, the
modification could not be less than 10 percent. There were
additional requirements for the new scenario. He explained
that the capital expenditure had to be made by the lease
holder or the modification would lapse and the commissioner
of DNR had to approve the additional capital investments
based on the need to maximize economic production. He noted
that the conditions were typical for a DNR modification. He
referenced the most recent modification from 2014 for the
Oooguruk formation. He delineated that one condition lapsed
the modification if the operator did not make the
investment by a certain time. In the case, the modification
lapsed and voided because the investment was not made. He
believed that the conditions encapsulated best practices.
He added that Legislative Legal also suggested other
conforming language changes.
9:32:43 AM
Co-Chair Merrick asked for the justification for removing
the royalty modification. Mr. Fitzpatrick responded that
there were some concerns about extending royalty
modifications to larger fields. He communicated that the
department viewed the royalty modification useful but
understood it was a matter of legislative policy.
9:33:47 AM
Representative Josephson suggested that because the changes
were historically infrequent, he wondered why the
legislature would not be given the opportunity to approve
modifications. He noted that a modification was granted for
the North Star unit via legislation in 1996. He relayed
that the legislation moved quickly through the legislature
and doubted delay would be a problem. He wondered what the
department's position might be. Mr. Fitzpatrick was unable
to speak to the departments position. He acknowledged that
the legislature had approved modifications in the past. The
current modification statute allowing the commissioner to
approve modifications was in place for the previous 26
years. He would follow up on the representative's question.
Representative Josephson would appreciate the information.
Representative Rasmussen did not believe the legislature
would be able to move quickly on any legislation under the
current political environment.
Mr. Fitzpatrick thanked the committee for hearing the bill.
Co-Chair Merrick set the bill aside.
HB 81 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 55 Status Quo Costs H FIN Miranda 4.23.21.pdf |
HFIN 4/23/2021 9:00:00 AM |
HB 55 |