Legislature(2021 - 2022)BARNES 124
03/17/2021 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Board of Game | |
| HB81 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 81 | TELECONFERENCED | |
HB 81-OIL/GAS LEASE:DNR MODIFY NET PROFIT SHARE
2:15:36 PM
CHAIR PATKOTAK announced that the final order of business would
be HOUSE BILL NO. 81, "An Act authorizing the commissioner of
natural resources to modify a net profit share lease." [Before
the committee was CSHB 81(RES).]
CHAIR PATKOTAK noted that Legislative Legal Services requested
the committee substitute to conform the bill to legislative
drafting style.
2:16:14 PM
REPRESENTATIVE HOPKINS moved to adopt the proposed committee
substitute (CS) for HB 81, Version 32-GH1706\B, Nauman, 3/16/21,
as the working document. There being no objections, Version B
was before the committee.
2:16:33 PM
CHAIR PATKOTAK moved to adopt Amendment 1 to Version B, labeled
32-GH1706\B.2, Nauman, 3/16/21, which read as follows:
Page 2, lines 17 - 18:
Delete "for which additional capital expenditures
would make future production no longer"
Insert "from which, without additional capital
expenditures, future production would no longer be"
2:16:51 PM
REPRESENTATIVE HOPKINS objected for purposes of discussion.
2:17:15 PM
EMILY NAUMAN, Deputy Director, Legislative Legal Services,
Legislative Affairs Agency, explained that in the process of
creating the committee substitute she discovered an error in
drafting the bill, which is corrected by Amendment 1. In
response to Representative Fields, she clarified that in the
original bill, the wording did not conform with the intent of
the bill, so the amendment clarifies [in Version B] that
"without additional capital expenditures, future production
would no longer be" economically feasible.
REPRESENTATIVE FIELDS asked whether, with the new language,
there is a concern that a company might ask for more favorable
lease treatment in lieu of capital expenditures. He noted that
in general it would be preferable to have more investment rather
than changing the lease terms.
MS. NAUMAN replied that the purpose of this amendment was to
clarify what she believed to be the original intent of the bill.
REPRESENTATIVE FIELDS said that perhaps the Department of
Natural Resources (DNR) could address its process for ensuring
additional investment rather than more favorable treatment from
the state for an existing production area.
2:22:36 PM
JHONNY MEZA, Commercial Section Manager, Division of Oil and
Gas, Department of Natural Resources, clarified that it is not
the intent of DNR to provide assistance in the form of a
modified net profit share lease in cases where capital
expenditures would otherwise be required to ensure future
economic feasibility.
2:24:01 PM
REPRESENTATIVE FIELDS asked whether there exist statutes or
regulations that provide the DNR with direction to take that
stance.
MR. MEZA responded, "The statute mandates that the DNR
commissioner maximizes the value of the oil and gas resources to
the people of Alaska, and ... any modification of royalty or net
profit share that could be contemplated would follow that goal."
REPRESENTATIVE FIELDS asked whether it would be better to delete
"additional capital expenditures" [from page 2, line 17, of
Version B], so that the bill doesn't unintentionally
disincentivize capital investment.
2:25:20 PM
REPRESENTATIVE SCHRAGE offered his belief the Amendment 1 would
do the opposite of what the proposed legislation intended by
allowing the modification of a net profit share agreement.
2:26:26 PM
MR. MEZA replied as follows:
Our intent is to encourage that this proposed capital
expenditures be incurred by the lessee such that
future production can come online. When they perform
their economic evaluation, they may find that such an
endeavor is not profitable enough to motivate them to
sanction that investment. If by modifying the royalty
rates or the net profit share, sanctioning that
investment is considered as a profitable endeavor by
the lessee, which includes their capital expenditure,
then that's ... the goal that we're trying to
accomplish. So, in other sense, in a given project
we're not trying to modify the amount of capital
expenditures that a lessee may be contemplating by
modifying the royalty or net profit share, with the
proposed capital expenditures, we're trying to
encourage such future production to become economic.
2:27:35 PM
REPRESENTATIVE SCHRAGE said:
So, what I just heard is that ... if there is analysis
done that shows additional capital expenditure would
make future production economically feasible, they
would be denied the adjustment to the net profit
sharing agreement. And so I do believe the text in
the bill, as currently written in version B, is
correct.
RPRESENTATIVE SCHRAGE then noted that it could be put into
simpler language, but that he believes "it matches the intent of
the bill.
2:28:16 PM
CHAIR PATKOTAK noted that this is DNR's bill, and the intention
of the department was to give the DNR commissioner the authority
to modify net profit share lease agreements.
2:28:55 PM
RYAN FITZPATRICK, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources, said that Legislative Legal
Services brought the matter of the language to the attention of
the department, and that both agencies agree that the language
in the amendment achieves the intent of the bill. He referred
to [subparagraph] (D), on page 2 of Version B, and said that
with the new language inserted it would read: "to prolong the
economic life of an oil or gas field or pool for which
additional capital expenditures would make future production no
longer economically feasible". He said that this language is to
make it clear that in order to be eligible for a royalty or net
profit share modification, the lessee would have to make
additional capital expenditures. He reemphasized that the
royalty or net profit share modification would hinge on the
lessee making the capital expenditure.
2:30:59 PM
REPRESENTATIVE FIELDS directed his remarks to Ms. Nauman and
said that the plain language of [HB 81, Version B] seems to give
DNR the ability to adjust lease terms in the absence of capital
expenditures. He asked whether there's a way to clarify in
stronger terms that capital expenditures and the economic
benefits that accompany them are preferable, and that adjusting
the lease terms is a "last resort" decision.
2:31:45 PM
MS. NAUMAN responded that she agrees that the language wouldn't
necessarily require a lessee to make capital expenditures;
instead, it would require the department to make a finding that
without additional capital expenditures, future production
wouldn't be economically feasible.
2:32:32 PM
REPRESENTATIVE FIELDS said that he understands that the purpose
of the proposed legislation is to prolong production and that he
believes the committee should pursue language making it clear
that changing the lease terms is a last-resort decision.
2:32:58 PM
The committee took an at-ease from 2:33 p.m. to 2:35 p.m.
2:35:30 PM
REPRESENTATIVE SCHRAGE said that there are two scenarios in
which the net profit share lease would be adjusted. One is a
case in which there is no production on the lease, so it would
be preferable for the company to make the investment in capital;
if an investment would not make economic sense for the company,
then the lease agreement could be adjusted to incentivize
production. The second scenario, he said, would be a case in
which there is production occurring on a lease but it's toward
the end of its useful life, and that life could be extended by
adjusting the net profit share agreement to incentivize further
capital investment to extend the life of the lease. In either
case, he said, there would exist a capital investment. He said
that he would like to explore clarifying the language to refine
the amendment.
MR. MEZA said that Representative Schrage's remarks accurately
described the conditions for royalty under the statute. He
summed up the possible scenarios as A) for new production, and
B) existing production which may be near abandonment and need
capital expenditures. He then added two additional scenarios:
C) to restore production that had already been shuttered, and a
newly-proposed scenario D) for incremental production, which
looks similar to scenario B but differs in that the operation
doesn't necessarily require additional capital expenditures for
future production.
2:38:44 PM
REPRESENTATIVE FIELDS said that he would prefer to get Ms.
Nauman's input clarifying that this bill is for application to
cases in which the adjustment of lease terms is necessary for
production to continue, as opposed to allowing lessees to
abdicate their responsibility to make capital investments in
order to keep producing.
2:39:20 PM
REPRESENTATIVE SCHRAGE asked whether it is the intent of the DNR
to be able to adjust a net profit share agreement without any
capital investment taking place, simply to extend the duration
of production on that field.
MR. MEZA said that there is one existing scenario for royalty
modification, scenario B as previously described, which
contemplates prolonging the economic life of an oil or gas field
or pool where continuation of production could, by necessity,
require capital expenditure; in scenario D, however, it is not a
requirement.
2:41:01 PM
REPRESENTATIVE MCKAY said that it costs money just to produce
the field without any additional capital investment; he said
that there is one scenario in which the lessee may shutter the
well unless more profit is possible in the future. He said
that's the condition in scenario B.
2:42:08 PM
REPRESENTATIVE HOPKINS noted that Mr. Meza had described the
condition of being "not profitable enough" and said that Mr.
Meza said that the net profit share lease rate could be lowered
if the field or pool was "not profitable enough." He asked
whether the intent of this bill is to make a pool or field more
profitable, or simply to make it profitable at all.
MR. MEZA answered that the goal for the lease modifications is
to increase the likelihood that a project will be economically
advantageous and to motivate the investment decision by the
lessee. He said DNR cannot guarantee profitability of a
project, and that this bill is to increase the likelihood that
an investment in capital expenditure will take place.
REPRESENTATIVE HOPKINS asked whether a change in the net profit
share rate could be made with no guarantee that capital
investments would be made in the future.
MR. MEZA answered that is correct with respect to all of the
cases with petitions for modification. He noted an earlier
presentation in which he described a 2014 decision made to
modify the royalty agreement; the project did not come to
fruition despite granting the royalty modification.
2:44:26 PM
CHAIR PATKOTAK acknowledged that there is opportunity for DNR
and Legislative Legal Services to work with the offices to
clarify Amendment 1. [Amendment 1 was tabled, with the motion
to adopt left pending.]
2:46:13 PM
The committee took a brief at-ease.
2:47:03 PM
REPRESENTATIVE HANNAN moved to adopt Amendment 2 to Version B,
labeled 32-GH1706\B.1, Nauman, 3/15/21, which read as follows:
Page 2, line 18, following "feasible;":
Insert "a royalty modification may not be made
under this subparagraph;"
Page 2, line 30:
Delete "or (1)(D)"
Page 4, line 5:
Delete "or net profit share"
Following "(1)(A)":
Insert "of this subsection or a net profit share
reduction under (1)(A)"
2:47:07 PM
[REPRESENTATIVE RAUSCHER objected for discussion purposes.]
2:47:13 PM
REPRESENTATIVE HANNAN said that the Amendment 2 focuses on
[subparagraph] (D) and that Version B, as presented, focuses
only on net profit share agreements, of which there are 26;
royalty agreements, of which there are thousands, can already be
modified in accordance with the DNR commissioner. If this bill
passes with subparagraph (D) as currently written, she said,
both net profit share and royalty agreements could be modified
based on capital expenditures. She believes, she said, that
investment to keep up production is standard in the industry,
and that capital investment is necessary as a field ages. She
said that the goal of the bill is to get the 26 existing net
profit share agreements, most of which have not been in
production, into production; therefore, Amendment 2 says that a
producer must incur capital investment in order to modify the
terms of a net profit share lease. She said that she wants to
make subparagraph (D) exclusive to the net profit share
agreements.
2:51:12 PM
CHAIR PATKOTAK noted that based on the presentation in the
committee meetings the focus of the proposed legislation is on
changing the commissioner's authority regarding the net profit
share leases, not the royalty leases.
MR. MEZA confirmed that it is correct that there are 26 net
profit sharing leases on the North Slope, spread out among many
productive oil and gas units. Many of the leases themselves are
still producing, which is the reason for including subparagraph
(D) - allowing modifications for leases on sites in order to
prolong the economic life in the absence of capital
expenditures, which would make future production economically
unfeasible. They are including this scenario, he said,
inclusive of royalty-only leases of net profit share leases.
2:53:05 PM
REPRESENTATIVE HOPKINS noted the title of the bill, "An Act
authorizing the commissioner of natural resources to modify a
net profit share lease." He asked whether the intent of this
bill is to allow a royalty-only lease to change into a net
profit share lease, or to change only the net profit share rate
on a net profit share lease.
2:53:37 PM
MR. MEZA said that the intent is for the DNR commissioner to
have the authority to modify either the royalty rate or net
profit share rate; the current statute, he said, already allows
the commissioner to modify royalty rates for any type of lease,
but this bill is proposing giving the commissioner the authority
to modify the net profit share rate. He said that the newly-
proposed scenario under subparagraph (D) is for a scenario that
would apply to both net profit share modification and royalty
modification, as would the three existing scenarios A, B, and C.
[These scenarios were previously described in a PowerPoint
presentation given by Mr. Meza during the House Resources
Standing Committee meeting on March 5, 2021, and they paraphrase
the provisions under subparagraphs (A), (B), and (C), and the
proposed subparagraph (D).]
REPRESENTATIVE HOPKINS said that Mr. Meza's notes clarified the
intent.
2:55:10 PM
CHAIR PATKOTAK said that as he understands it, in order to
change the net profit sharing lease's royalty agreement, the
lessee would have to meet the requirements in scenarios A, B,
and C, and he asked if that is correct.
MR. MEZA replied that, yes, that is correct; the scenarios A, B,
C, and the newly-proposed scenario D are the scenarios for
eligibility. A lessee applying for modification of royalty or
net profit share would be required to demonstrate that the
project would meet the criteria A through C, as well as the
newly-proposed scenario D, and provide the technical and
financial data that would demonstrate future production in order
to modify either the royalty and/or net profit share rate.
2:56:21 PM
REPRESENTATIVE HOPKINS asked whether it is the intent of DNR to
allow a change to the rate on a royalty-only lease, adhering to
subparagraph (D); he offered his understanding that doing so
would be outside the scope of the proposed legislation based on
its title.
MR. MEZA said that under subparagraph (D), it is possible to
have a modification to a royalty-only lease and that the intent
of DNR is to include leases that only have a royalty component.
The reason for this, he stated, is that the fields or pools
which are currently producing but may be nearing the end of
their economic life may need a modification of net profit share
or royalty rates in order to maximize production, as well as
revenue to the state.
2:58:31 PM
CHAIR PATKOTAK said he understands that if there exists a
royalty-only lease that is ending its life, then perhaps there
should be a modification to the royalty agreement and inclusion
of a net profit share lease, adding to the total number of net
profit share leases overall, depending on the situation.
[The motion to adopt Amendment 2 was left pending.]
CHAIR PATKOTAK announced that HB 81 would be held over.