03/19/2021 01:00 PM House RESOURCES

        HB 81-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE                                                                    
                                                                                                                                
1:38:50 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 the  proposed committee substitute (CS)                                                               
for HB  81, Version 32-GH1706\B, Nauman,  3/16/21, ("Version B"),                                                               
adopted  as  a  working  document   during  the  House  Resources                                                               
Standing Committee  meeting on 3/17/21,  with Amendment  1 tabled                                                               
and Amendment 2 left pending with an objection.]                                                                                
                                                                                                                                
CHAIR  PATKOTAK   briefly  addressed  the  amendments   that  the                                                               
Department  of  Natural Resources  (DNR)  worked  on and  invited                                                               
Representative Hannan to speak about her amendment.                                                                             
                                                                                                                                
1:39:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HANNAN  described  Amendment  2,  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)"                                                                                                
                                                                                                                                
REPRESENTATIVE  HANNAN  reviewed  that   Amendment  2  was  about                                                               
encouraging production  and said that  she believes it  should be                                                               
limited  to  affecting only  the  26  net profit  sharing  leases                                                               
(NPSLs) instead  of opening  it to the  thousands of  leases that                                                               
have  royalties, because  every  lease has  a royalty  component.                                                               
She  said that  the  committee has  learned  that operators  with                                                               
royalty-only leases have other ways  of renegotiating the royalty                                                               
amount, but  this bill was  designed to get  non-productive NPSLs                                                               
into production.   She said that the NPSLs could  use the various                                                               
avenues available in existing  statute to evaluate renegotiation.                                                               
She also noted  that legislative oversight is  required to change                                                               
a lease agreement,  and the Legislative Finance  Division is most                                                               
likely  not  prepared  to  provide  oversight  for  thousands  of                                                               
royalty leases; however, oversight of  26 NPSLs is possible.  She                                                               
ended  by summarizing  that she  supports changes  that encourage                                                               
NPSLs into production, but doesn't  want to create a broad change                                                               
that would allow  thousands of royalty lease  renegotiations in a                                                               
given timeframe.                                                                                                                
                                                                                                                                
1:42:10 PM                                                                                                                    
                                                                                                                                
CHAIR   PATKOTAK  invited   Ryan  Fitzpatrick   to  clarify   any                                                               
actionable changes that would be made by the Amendment 2.                                                                       
                                                                                                                                
1:42:38 PM                                                                                                                    
                                                                                                                                
RYAN  FITZPATRICK,  Commercial  Analyst,  Department  of  Natural                                                               
Resources, referred to the document  "Changes in CS HB 81 Version                                                               
I" [Version  I was not  moved for adoption until  3/22/21], which                                                               
read as follows [original punctuation provided]:                                                                                
                                                                                                                                
     Page 2 Lines 16  19                                                                                                        
          -  Clarifies language  in  subsection D  regarding                                                                    
     circumstances in which  capital expenditures are needed                                                                    
     to extend the  economic life of an oil or  gas field or                                                                    
     pool                                                                                                                       
       - Specifies that subsection D only applies to net                                                                        
     profit share lease modifications                                                                                           
                                                                                                                                
MR.  FITZPATRICK explained  that Amendment  2 would  restrict the                                                               
scenario to  the 26 NPSLs  and modify  only the net  profit share                                                               
component  of   the  26  leases,  not   necessarily  the  royalty                                                               
component.  He  said that he believes that,  from the perspective                                                               
of  DNR, the  issue  with  modifying only  the  net profit  share                                                               
component  is that  it sufficiently  incentivizes  the lessee  to                                                               
make  the  capital  expenditures   necessary  to  get  the  lease                                                               
productive again.   He  said that  if it  was possible  to modify                                                               
royalty in  addition to  net profit  share, then  the leaseholder                                                               
might be sufficiently incentivized  to make capital expenditures,                                                               
thereby extending the life of the field or pool.                                                                                
                                                                                                                                
1:45:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HOPKINS  stated  that  he  supports  Amendment  2                                                               
because of  the title of the  bill, which specifies "to  modify a                                                             
net profit  share lease."   He noted that the  presentations have                                                             
involved  the  26 NPSLs,  but  they've  had no  presentations  or                                                               
opportunities to  learn about  the royalty-only  leases.   If the                                                               
committee  wants   to  address  royalty  modifications   for  the                                                               
previously  described  "scenario D,"  he  said,  there should  be                                                               
another bill  up for discussion.   He opined that Amendment  2 is                                                               
"absolutely  critical"  to  limit  the bill  to  the  information                                                               
already received, the title, and the intent of the bill.                                                                        
                                                                                                                                
1:47:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FIELDS  stated  that  he supports  HB  81  as  it                                                               
pertains to  the NPSLs  but not  with impacts  on royalties.   He                                                               
said  that  he  supports  Amendment  2  and  cannot  support  the                                                               
underlying bill  without it  or his  "subsequent amendment  to an                                                               
amendment  to   make  sure   we  are   appropriately  encouraging                                                               
production  and capital  investment."    He noted  Representative                                                               
Hopkins'  comments   regarding  the   text  of  the   bill  being                                                               
consistent with the title.                                                                                                      
                                                                                                                                
1:48:24 PM                                                                                                                    
                                                                                                                                
CHAIR PATKOTAK  invited Mr.  Fitzpatrick or  Mr. Meza  to provide                                                               
any further comments before the committee votes.                                                                                
                                                                                                                                
MR.  FITZPATRICK said  that  making  a change  in  policy is  the                                                               
prerogative of the legislature, and  noted that in the PowerPoint                                                               
presentation  (given  by  Mr. Meza  during  the  House  Resources                                                               
Standing Committee meeting on March  5, 2021, and included in the                                                               
committee packet), slides 21 and  23 were intended to convey that                                                               
the newly proposed "scenario D" under  HB 81 was to apply to both                                                               
royalty modification and NPSL modification situations.                                                                          
                                                                                                                                
1:49:46 PM                                                                                                                    
                                                                                                                                
CHAIR  PATKOTAK  asked  for clarification  on  Amendment  2  with                                                               
reference to  the PowerPoint  presentation, titled  "HB 81  - DNR                                                               
MODIFYING NET PROFIT SHARES ON OIL  & GAS LEASES," and whether it                                                               
would limit the authority of  the DNR commissioner as outlined in                                                               
item 1A  on slide 21  of the PowerPoint presentation,  which read                                                               
as follows [original punctuation provided]:                                                                                     
                                                                                                                                
     1. Expand the royalty modification process to include                                                                      
     NPSLs:                                                                                                                     
          A.  Commissioner  would   have  the  authority  to                                                                    
     modify net  profit share  rates in  the same  manner as                                                                    
     royalty rates under AS 38.05.180(j).                                                                                       
               ?  Objective is  to  encourage production  of                                                                    
     otherwise stranded resources.                                                                                              
                                                                                                                                
MR. FITZPATRICK answered  that he believes Amendment  2 would not                                                               
impact  that  provision,  but  it  would  impact  other  proposed                                                               
changes,  as shown  in  item 2A  on slide  21  of the  PowerPoint                                                               
presentation,  which   read  as  follows   [original  punctuation                                                               
provided]:                                                                                                                      
                                                                                                                                
     2. Other changes:                                                                                                          
          A. Creates  an additional qualifying  scenario for                                                                    
     modification of either royalty or NPSLs                                                                                    
               ?  For  producing  pools,  where  incremental                                                                    
     production  requires incremental  capital expenditures,                                                                    
     which,  in  the  absence   of  modification,  would  be                                                                    
     uneconomic.                                                                                                                
                                                                                                                                
MR.  FITZPATRICK explained  that the  intent of  DNR was  for the                                                               
modification allowance to apply to both royalty and NPSLs.                                                                      
                                                                                                                                
1:51:46 PM                                                                                                                    
                                                                                                                                
CHAIR  PATKOTAK noted  that Representative  Rauscher had  brought                                                               
forth the  original objection  to Amendment  2 [on  3/17/21], for                                                               
discussion  purposes, but  that Representative  Rauscher's office                                                               
approved of  lifting his objection  in his absence.   There being                                                               
no further objection, Amendment 2 was adopted.                                                                                  
                                                                                                                                
1:52:23 PM                                                                                                                    
                                                                                                                                
CHAIR  PATKOTAK referred  to  the  amendment from  Representative                                                               
Fields, and he and Representative  Fields briefly discussed which                                                               
amendments are about to be put forth.                                                                                           
                                                                                                                                
1:53:12 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
1:53:25 PM                                                                                                                    
                                                                                                                                
CHAIR PATKOTAK  reminded committee  members that on  3/17/21, the                                                               
committee had tabled Amendment 1.   He announced that Amendment 1                                                               
was before the committee.  Amendment 1 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"                                                                    
                                                                                                                                
1:53:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FIELDS moved to adopt Amendment 1 to Amendment 1,                                                                
labeled 32-GH1706\B.3, Nauman, 3/18/21, 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"                                                                    
                                                                                                                                
     Page 3, following line 9:                                                                                                  
          Insert a new paragraph to read:                                                                                       
               "(6)  may not grant a royalty or net profit                                                                  
     share modification for a field or pool under (1)(D) of                                                                 
     this subsection unless                                                                                                 
               (A)  the modification requires the lessee or                                                                 
     lessees to make the capital expenditures necessary for                                                                 
     production to be economically feasible; and                                                                            
               (B)  the commissioner determines that the                                                                    
     capital expenditures made under (A) of this paragraph                                                                  
      are sufficient to maximize production from the field                                                                  
     or pool;"                                                                                                              
                                                                                                                                
     Page 3, line 10:                                                                                                           
          Delete "(6)"                                                                                                      
          Insert "(7)"                                                                                                      
                                                                                                                                
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          Delete "(9)"                                                                                                      
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          Delete "(13)"                                                                                                     
          Insert "(14)"                                                                                                     
                                                                                                                                
1:53:56 PM                                                                                                                    
                                                                                                                                
CHAIR PATKOTAK objected for discussion purposes.                                                                                
                                                                                                                                
1:54:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FIELDS   thanked  the  collaborators   for  their                                                               
assistance and described Amendment 1  to Amendment 1, which would                                                               
ensure  maximum  production  from  the fields  by  ensuring  that                                                               
capital investments are made to  prolong the lives of the fields.                                                               
He  said that  if  either capital  investment  or modified  lease                                                               
terms  could extend  the  life  of the  field,  then the  capital                                                               
investment should  happen either before, or  in conjunction with,                                                               
modified lease terms,  so that modified terms don't  occur at the                                                               
expense of capital investment.                                                                                                  
                                                                                                                                
1:54:56 PM                                                                                                                    
                                                                                                                                
MR. FITZPATRICK explained that this  amendment would specify that                                                               
if capital expenditures  are necessary to extend the  life of the                                                               
field  or pool  and reduced  lease terms  are also  allowed, then                                                               
there  would be  a condition  on  the modification  of the  lease                                                               
terms so that  the capital expenditures must be made  or else the                                                               
modification would  be rescinded.   He described a  specific case                                                               
in  which  capital  expenditures  were not  made,  therefore  the                                                               
royalty modification  lapsed, and  he indicated that  he believes                                                               
DNR would support this amendment.                                                                                               
                                                                                                                                
1:57:40 PM                                                                                                                    
                                                                                                                                
CHAIR PATKOTAK  removed his  objection.   There being  no further                                                               
objection,  Amendment 1  to Amendment  1  was adopted.   He  then                                                               
spoke to  Amendment 1, as  amended, and  addressed Representative                                                               
Hopkins' earlier objection to Amendment 1.                                                                                      
                                                                                                                                
1:58:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HOPKINS withdrew  his objection  to Amendment  1,                                                               
[as amended]. There  being no further objection,  Amendment 1, as                                                               
amended, was adopted.                                                                                                           
                                                                                                                                
1:58:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HOPKINS  indicated his  thanks to DNR  for helping                                                               
bring  this proposed  legislation forward  and expressed  that he                                                               
still has  some concerns about the  bill, but that he  would like                                                               
it to  continue going  forward in  order to  maximize production.                                                               
He said that he wants to  ensure that HB 81, as amended, wouldn't                                                               
"make profitable  production more  profitable," but  rather would                                                               
bring   fields  that   wouldn't  otherwise   be  developed   into                                                               
production.                                                                                                                     
                                                                                                                                
[HB 81 was held over.]