Legislature(2013 - 2014)BARNES 124
04/06/2013 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB163 | |
| HB198 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 198 | TELECONFERENCED | |
| + | HB 163 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 198-OIL AND GAS AND GAS ONLY LEASES
1:27:28 PM
CO-CHAIR FEIGE announced that the next order of business would
be HOUSE BILL NO. 198, "An Act relating to the primary period of
an oil and gas or gas only lease and the extension of a lease;
relating to terms to be included in an oil and gas or gas only
lease; relating to rental for an oil and gas or gas only lease;
and providing for an effective date."
1:27:49 PM
KONRAD JACKSON, Staff, Representative Kurt Olson, Alaska State
Legislature, on behalf of the House Labor and Commerce
Committee, Representative Kurt Olson, Chair, stated that HB 198
relates to the primary period of an oil and gas lease or gas
only lease. Currently under AS 38.05.180 (m), oil and gas
leases may be extended automatically (1) if and for so long as
oil or gas is produced in paying quantities from the leased
area, or (2) if the lease is committed to a unit approved by the
Commissioner of the Department of Natural Resources (DNR).
MR. JACKSON said bill would amend AS 38.05.180 (m) to provide
the Commissioner of the Department of Natural Resources (DNR) or
his/her designee the discretion to grant a onetime lease
extension to the primary period of the oil and gas lease or gas
only lease. The total time of the extension is not to exceed
ten (10) years.
1:29:04 PM
MR. JACKSON stated that Section 2 of HB 198 would allow the DNR
to establish conditions for the lease extension, including that
if a lease extension is granted, the annual rental rate per acre
shall increase up to $250 per acre per year for the final three
years of the term. However, the commissioner has the discretion
to reduce this increased rental rate if it is determined that a
lessee has exercised reasonable diligence in exploring and
developing the lease during the primary term.
MR. JACKSON indicated that Section 4 provides transition
language for leases which will be expiring close to the
effective date of the bill. The intent is to ensure all lessees
have an opportunity to apply for the extension.
MR. JACKSON characterized the bill as a "win-win" for the state,
for explorers and producers, who are close to being able to
begin production or exploration, but need a little more time.
1:30:48 PM
WILLIAM C. BARRON, Director, Division of Oil & Gas, Department
of Natural Resources (DOR), began his presentation by stating
that currently no one has the authority to extend short-term oil
and gas leases beyond the primary lease terms. He characterized
this as a real gap in terms of DNR's policy.
1:31:26 PM
REPRESENTATIVE P. WILSON asked whether there is any reason why
leases cannot be extended or if this represents an accidental
loophole.
MR. BARRON responded that he believed it was an oversight. The
division has the statutory authority to lease up to 10 years but
no less than 5 years. Thus over time the division has
considered 5, 7, or 10-year terms and conditions in an effort to
motivate exploration [slide 2]. The downside to the plan is
that it takes time to mobilize, shoot, interpret, and re-
interpret the seismic information, plus get a drilling rig under
contract can take five years. He suggested that a five-year
lease term on the East side of Cook Inlet, with existing road
infrastructure and longer drilling seasons might tend to work
better.
1:33:06 PM
MR. BARRON said it was recognized that some lessees were
diligently conducting work but running out of time. These
lessees brought to the division unit applications that were not
fully fleshed out. Thus it was necessary for the division to
process units rather than allow companies to perform exploration
drilling to prove the hydrocarbon rather than work off a
potential hydrocarbon. He described this as being a key
difference.
MR. BARRON emphasized that this is not about "warehousing."
Instead, this is about companies who have been diligent about
doing their work. For example, some companies with five-year
leases have been working for four years or longer and working
their leases hard. This bill represents an opportunity for
these companies to pursue one or two more years [slide 2].
However, this bill does not issue an automatic extension and
interested companies would have to petition the department and
provide details on the work done, money spent the discoveries,
and current plans. At that juncture, it would become a bit of a
negotiation since the lease is a contract. Secondly, this
statute would also allow the division to renegotiate contractual
terms, which is essentially an option. Options come at a
premium, so this will the first time the division can actually
hold discussions and dictate the necessity for the drilling
program, with hard and fast work commitments made under the
contract extension.
1:35:22 PM
MR. BARRON referred to the $250 per acre rental rate [in Section
2] that Mr. Jackson previously mentioned, which represents the
lease terms issued within the last several years. He said the
industry has indicated that seven-year leases are good, since
most of the work could be done within seven years; however,
three extra years would be better. Currently, the fees increase
for leases in which work has not yet been done. He said that
the industry has been really good at making business decisions
so the division will give them an opportunity to make additional
business decisions. Additionally, the commissioner has the
ability to reduce the rental rate if work has been done.
MR. BARRON said he was unsure whether the division would ever
use the $250 rental figure. For example, if a producer had a
five-year lease and the division granted the lessee a full five-
year extension, the division would be building yearly
thresholds. In the event the lessee did not meet the first
annual requirement, perhaps the lease would expire. Therefore,
even though the $250 per acre rental rate is an option, he did
not anticipate the division would routinely use it.
MR. BARRON pointed out the real key will be the ability to have
work commitments. Under the bill, this would be the first time
the division could "lean into the companies" and get work
programs established.
1:37:03 PM
MR. BARRON offered to quantify the problem the bill will
address. He referred to slide 3, entitled "Northern Alaska
Lease Distribution" which depicts a collection of data, by
column, for the number of companies and leases in the Foothills
area and North Slope area that will expire in the next 2 years,
2-5 years, and over 5 years. He characterized it as a mix of
companies, which changes over time.
MR. BARRON stated that Repsol [E&P USA, Inc.] (Repsol) is a
"big" player, and AVCG, LLC is right behind them. Repsol was
not at the original lease sale, but acquired the leases through
a business arrangement with Armstrong Oil and Gas, Inc. This is
the type of company that became very aggressive with its
drilling activities and mobilization. He indicated this is the
type of company the division would want to encourage and reward
with this type of extension opportunity.
1:38:28 PM
REPRESENTATIVE HAWKER acknowledged Repsol as a great example.
He recalled previous testimony that the division seeks to have
latitude to extend leases for someone who had been diligent over
the primary term. He wanted to make certain that the intent is
for this bill to cover someone who held a successor interest
since these lessees did not have the ability to be diligent over
the primary term. Thus the successor interest would need to be
willing to adhere to additional requirements as a condition of
the extension.
MR. BARRON responded that is clearly the intent. He explained
that when someone buys into an oil and gas lease, they enter
into a contract with the state and effectively "step into the
shoes" of the other company. If they stepped in with only one
year of the lease remaining, it would be very difficult to make
substantial activities. Granted, that would be a difficult
call, since the company is aware at the outset it only has one
year. Thus, the company must "really get after the program" or
risk "a very blunt no." Naturally, companies will be aware of
the short time remaining so if the companies are not ready to
proceed, it would likely be their preference to let the lease
expire and pick it up in the next lease sale. Again, Repsol
came in with a short window and worked aggressively and
diligently with the state to get its work program moving
forward. He reiterated that someone stepping into the lease
would be treated the same as someone who originally had the
lease.
1:40:44 PM
REPRESENTATIVE P. WILSON asked for clarification on the process.
She asked what happens when a five-year oil and gas lease runs
out. She further asked whether an unsuccessful oil and gas
lease will go back to the state or if the company is successful,
if oil production is the next step.
MR. BARRON first explained what happens if a company fails to
finish working its lease within the lease timeframe. He said
that the company can relinquish the property, which is returned
to the state for the next lease sale. The company has an
opportunity to pick up the lease again or a competitor could
lease it. He said the division recognizes this as a problem
since substantial work may have been done under the initial
lease and the original company has the best knowledge and
understanding of the geology, as well as having the work plan
laid out. Thus it's in the state's best interest to give them
another year or two to complete the work that is already
started.
1:42:00 PM
REPRESENTATIVE P. WILSON asked who owns the geographical
information.
MR. BARRON answered that information is held by the company. He
said that seismic information is typically released to the
state, but it is held in confidence.
CO-CHAIR FEIGE remarked one exception is if the company acquired
the geographical information under exploration credits.
MR. BARRON answered that is correct. In the event the company
acquired the information under the exploration tax credit
regime, the state would receive the information.
1:42:42 PM
MR. BARRON next turned to the success path. In the event a
company was successful and was able to perform due diligence,
and drill wells, and was successful, would apply for a unit
application from the division. The company would unitize the
area it felt was productive and all the leases associated with
the unit will be held so long as the unit is in state. "They
get to keep the land after that," he said.
CO-CHAIR FEIGE understood that is the case so long as the unit
is producing.
MR. BARRON answered that is correct.
1:43:15 PM
CO-CHAIR SADDLER asked whether the extra rental rate per acre,
increasing from $25 to $250, which could be pretty expensive,
might jeopardize the economics such that it might not be
affordable to continue even if the company desired to do so.
MR. BARRON allowed that would be a possibility, but the
division's intent is to have the ability to increase rents as an
option; however, it doesn't necessarily mean the division would
impose the additional rental fees.
CO-CHAIR SADDLER asked whether the division could charge fees up
to the $250 limit.
MR. BARRON answered yes, that process is part of the
negotiations with the lessee. Additionally, one of the pieces
is also performance bonding. For example, the division may
require a $10 million bond if the cost to drill the well is $10
million. If the company doesn't perform, the state would keep
the bond, but in the event the company performs, the state would
release the bond.
MR. BARRON clarified that this represents the division's attempt
to have companies obtain some "skin in the game" and commit to
the state work activities that the lessee intends to perform on
state land in a timely manner.
1:44:27 PM
MR. BARRON, again, said that while the $250 per acre rental rate
may seem extreme, it would likely be the last option the state
would use. In fact, if the company has been performing
substantial work, the $250 increase would not be issued by the
commissioner. He emphasized that the entire point of the
additional fee is if the work isn't being done, that the state
is placing a value on the land.
CO-CHAIR FEIGE remarked that it is a "nudge."
MR. BARRON said that is exactly right. While in theory, the
rental fee increase provision is in the bill, it's highly
unlikely that the state would get to that specific point.
1:45:12 PM
MR. BARRON turned to the slide depicting Cook Inlet Lease
Distribution [slide 5]. He pointed out the slide represents the
major companies operating in the Cook Inlet. Again, this
represents a mix, with clearly Apache Alaska Corporation
(Apache) leading, since that company has picked up considerable
acreage. In fact, the company has been very aggressive. He
cautioned that the lease extension in the bill is not to allow
companies an opportunity to "shoot seismic." While he said he
isn't pointing any fingers, there is a great deal of push to get
as much seismic shot as possible. However, keep in mind,
companies do not have to own leases to shoot seismic. Instead,
companies can obtain a land use permit from the state to "shoot
seismic."
1:46:18 PM
CO-CHAIR SADDLER asked whether the number of leases and the
acreage covered by the leases are based on the same proportion.
MR. BARRON answered relatively so, especially in the Cook Inlet.
But, in general, the division's leases are three miles by three
miles. He offered a "quick rule of thumb" to interpret the
acreage depicted on the slide. He referred to first column with
88 leases in total, that the aforementioned proportion of three
miles by three miles could be multiplied to arrive at the
approximately total acreage.
1:47:04 PM
REPRESENTATIVE SEATON understood that the seismic was held up
for Apache. He asked whether any allowance is made for delays
in permitting.
MR. BARRON answered that the intent is decisions will be made on
a case-by-case basis. The company would need to provide details
on the work planned and any barriers encountered. He
anticipated that companies will likely come in with bundles,
such as packet A, B, and C. Thus the leases may be in a
grouping on the North Slope from west to east. He envisioned
the division would grant extensions for packet A based on
specific work programs. However, the company may not have
performed any work on leases in packet C so the division would
not grant an extension. Again, this would be discretionary and
is part of the dialogue, he said.
1:48:48 PM
MR. BARRON turned to slide 6, entitled, "What are the benefits
of HB 198?" He noted that companies are aware the short-term
leases are somewhat problematic, which the division is trying to
solve with this bill. The goal of this bill will be to afford
lessees holding short-term leases an opportunity to finish up.
In essence, this would benefit the state since it would require
a work program, plus the division believes this bill will
increase the probability of bringing leases to production, which
clearly will benefit the state.
1:49:29 PM
REPRESENTATIVE HAWKER asked whether it will be beneficial to the
state as a law of general application that would apply to both
the northern and southern part of the state.
MR. BARRON answered yes. He said the bill would affect future
leasing programs, regardless of where the areawide leasing is
located. He predicted the overall effect of HB 198 will be to
allow the state to manage its oil and gas leases at a much
higher level.
1:50:13 PM
REPRESENTATIVE HAWKER inquired how Mr. Barron would respond to
critics that this would open up a secondary market in lease
futures where companies can hang on to the lease for the purpose
of "flipping it" to an adjacent holder or someone else once the
work is done.
MR. BARRON remarked that is an interesting question. He
anticipated a company who has been diligent in performing work
will not likely be in a position to "flip it." He surmised that
the secondary market may not be there, but there may be added
value. Besides, if the secondary party has more financial
ability than the first lessee, it would represent an advantage
to the state since the secondary party would bring the strength
of the ability to complete the work and bring the unit under
production. However, operators who originally bought the lease
might be deemed as speculators, probably haven't been performing
any work on the leased land. Therefore it would be difficult
for the speculators to jump the division's first hurdle, which
is to identify any work performed.
1:51:46 PM
MR. BARRON acknowledged that the secondary market exists and it
is a robust market. Clearly, that is evident by the work
already done in Cook Inlet. For example, the aforementioned
Repsol lease is indicative of a secondary lease market. He said
[secondary leases] represent one piece of the industry which
does bring value.
REPRESENTATIVE HAWKER agreed. He was unsure whether it was a
desirable outcome to allow companies to buy up leased land,
perform very little work and then "flip it" to an incredibly
competent qualified new operator. In doing so, it will allow
the new operator the ability to operate for five years without
the lease reverting to the state, which would [effectively
bypass] the competitive bidding process.
MR. BARRON responded that this is the reason the lease extension
is a one-time extension and the timeframe is not locked into
five years. In fact, the extension may only span one or two
years. He emphasized that this process is clearly identified as
a one-time extension with the time and work program to be
determined by the department.
REPRESENTATIVE HAWKER related a scenario in which an operator
bought a lease, but did not perform work and the lease is almost
expired. If the lease can be "flipped" to a company with
expertise to work it, it would essentially be a subsidy for the
value of the lease. Moreover, it would provide an intrinsic
value to a company who has otherwise failed completely in its
obligations to invest and develop on the leased property.
MR. BARRON answered the department would not likely grant an
extension in the aforementioned instance since no work had been
done by the first lessee.
REPRESENTATIVE HAWKER wondered whether the committee ought to
fine-tune the process. He said this is the reason he didn't
pursue a similar bill early in the legislative session.
1:54:45 PM
CO-CHAIR FEIGE surmised the risk of obtaining an extension would
be taken up by the second purchaser. He suggested the risk
would increase significantly as the end term of the first lease
approached. He observed that the better option for the original
lessee would be to "flip it" fairly quickly to allow time for
significant work to be accomplished by the second lessee. He
offered his belief that the leases were mostly competitive bids.
MR. BARRON clarified the original oil and gas leases are all
competitive bid leases.
CO-CHAIR FEIGE pointed out the department really does not have
any control over the high bidder. He suggested this bill could
result in more highly capitalized companies buying leases and
performing more work than the original lessee. In brief, he
said this would let the market decide.
MR. BARRON answered yes.
1:55:55 PM
REPRESENTATIVE P. WILSON asked for the reason the lease would
not automatically revert back to the state. She wondered why
the state would not revoke a lease if a company was not actively
working the lease.
MR. BARRON responded that the primary lease term is a contract
between the state and the company which gives the lessee the
exclusive right to operate on the land for the primary term.
Currently, the state does not impose work obligations during the
primary term, he advised. Thus a company can obtain the land
under the current 10-year lease terms and could hold it.
Incidentally, that's the reason the division added the $250 per
acre rental increase provision for the last three years of the
lease. He predicted this change will encourage companies to
make wise business choices.
1:56:55 PM
REPRESENTATIVE P. WILSON asked for clarification on lease sales
between companies noting the company [selling the lease] would
likely make a profit.
MR. BARRON answered yes. He characterized the transaction as
being a business arrangement between two independent parties.
For example, party "A" owns the lease, party "B" wants to own
the lease or part of the lease. The companies would enter into
a private negotiation, finalize the deal, and present it to the
division as a lease modification to reflect the new owner.
Hence the state would not have any dialogue associated with the
process since it is an independent land transaction.
1:57:54 PM
REPRESENTATIVE SEATON remarked that companies are often
recruited to come to Alaska and drill by the lessee. In fact,
this type of mechanism has brought a number of companies to the
state, such as Repsol and Armstrong. He said he is less
concerned about companies selling their leases since it means
the lessee had to convince another company to buy the lease. He
expressed support for the lease extension provision, which he
characterized as being similar to Norway's requirement for work
commitments. Ultimately this will be beneficial in Alaska in
terms of production, he said.
REPRESENTATIVE SEATON referred to page 2, lines 10-29, to the
language "automatic extensions" which is deleted. He asked for
clarification on the effect since the language on page 2, line
14 allows for automatic extensions, [which seems contradictory].
MR. BARRON responded that automatic extensions will occur, but
will be limited to instances in which the property is committed
to a unit or is under current production.
REPRESENTATIVE SEATON questioned whether the language in the
bill is referenced correctly.
2:01:16 PM
CO-CHAIR FEIGE said it seems as though the "automatic extension"
language was moved from line 10 to line 14.
REPRESENTATIVE SEATON again referred again to page 2, line 10-
29. He argued that removing the language "automatic extensions"
would eliminate automatic extensions. The bill would set up the
condition that if the lease is not automatically extended, the
other provisions will occur; however, the ability to offer
"automatic extensions" has been removed.
MR. BARRON remarked that the division and the sponsor are
comfortable with the language, which read [original punctuation
provided]:
An oil and gas lease or gas only lease shall be
extended beyond its primary term [AUTOMATICALLY
EXTENDED] if, at the end of the primary term, oil or
gas is produced in paying quantities from the lease
and for so long thereafter as oil or gas is produced
in paying quantities from the lease or if the lease is
committed to a unit approved by the commissioner.
MR. BARRON indicated the aforementioned language provides a
clear way to indicate the lease is extended as long as it is
committed to a unit or is producing.
CO-CHAIR FEIGE reinforced that the language does read "shall be
extended."
2:02:51 PM
REPRESENTATIVE TUCK suggested rather than saying "automatically
extended" it could read, "extended beyond its primary term,"
which means the same thing.
[MR. BARRON nodded yes.]
CO-CHAIR FEIGE concurred that "shall be extended" and "if oil or
gas is produced in paying quantities" [seems to cover this].
REPRESENTATIVE SEATON maintained his concern is for the sponsor
to review the language related to automatic extensions to be
certain it functions as intended.
CO-CHAIR FEIGE offered his belief that the essence of the
"automatically extended" is maintained in the proposed language.
2:03:28 PM
CO-CHAIR SADDLER asked whether this bill is likely to change the
division's policy on lease terms or if the department will use
the five or seven year leases to encourage companies or if the
leases would automatically be 10-year leases.
MR. BARRON answered that the division really prefers 10-year
leases, which are called "seven plus three" leases. This allows
the division to grant a 10-year lease, but retain the potential
elevation in rental rates in years 8-10 to encourage work to be
completed in the seventh year, which fits in well with good
business practices. However, the "seven plus three" leases are
not eligible for any extension since the division does not go
beyond ten-year leases.
2:04:30 PM
CO-CHAIR SADDLER asked whether the leases are considered seven-
year leases.
MR. BARRON answered no; that the oil and gas leases are 10-year
leases. The division refers to them as seven-year leases since
the first seven years fall under the low-rental rates.
CO-CHAIR SADDLER remarked that the "seven plus three" leases
would be similar to balloon payments.
2:04:49 PM
MR. BARRON said this bill would clearly give the division the
ability to manage its land over the next five years on lease
sales that were originally five-year and seven-year leases.
Additionally, HB 198 would give the division the ability to
manage the land as short-term leases in the event that the
division decides to let additional five-year or seven-year
leases.
2:05:21 PM
CO-CHAIR SADDLER asked whether it would be a fair assessment to
state that the division does not offer any more five-year
leases.
MR. BARRON answered yes.
CO-CHAIR SADDLER clarified the aforementioned scenario would be
more of an escalator than a balloon payment.
[MR. BARRON nodded yes.]
CO-CHAIR FEIGE commented that the division has built the "nudge"
into the current 10-year leases.
MR. BARRON answered yes.
2:05:37 PM
REPRESENTATIVE OLSON said he had shared Representative Hawker's
concerns at the time the bill was drafted. He emphasized that
he, too, did not want the bill to be used to "warehouse"
significant acreage. He offered his belief that HB 198 will
meet those needs, is a good bill, and he encouraged members to
support it.
2:06:30 PM
REPRESENTATIVE P. WILSON asked why work agreements are not
included in the initial leases.
MR. BARRON replied that the division is not statutorily allowed
to do so.
MR. BARRON explained that Norway expends considerable funds to
build consortiums and gain seismic information, which is made
public to companies interested in leases - prior to any leases
being issued. However, in the U.S. that doesn't happen so at
the time of the lease, U.S. companies really don't know what
resource is "underneath them." For that reason, it isn't
reasonable for the state to impose work programs on exploration
areas. He characterized it as being considered "an unfair
hurdle" and he thought industry would step away from it. In
fact, Alaska would be the sole state to impose that type of
requirement.
2:08:04 PM
REPRESENTATIVE P. WILSON understood that Norway hires companies
to perform the seismic work.
MR. BARRON answered yes. In essence, it is an expense to the
country and to the consortium. He pointed out that Norway's
tracts are sometimes "20-by-20 mile" or "30-by-30 mile" areas
whereas Alaska's leases are "3-by-3 mile" tracts. He described
the comparison as being "two ends of the spectrum."
2:08:44 PM
REPRESENTATIVE SEATON commented that Norway performs 2D seismic,
with the work commitment within three years and Norway performs
3D seismic to further identify the resource. He asked for
clarification on the usefulness of having an open-ended unit
since the company really doesn't have to produce it.
MR. BARRON answered that typically, unit agreements have five-
year or 10-year timeframes, with automatic expirations if
production doesn't happen. He recalled only one major unit in
the Cook Inlet without production; however, drilling has been
aggressively performed. He indicated it is generally not a big
issue since most units have moved forward. In fact, the
division is "dogged" in its efforts to have units formed based
on proven hydrocarbons, not on potential hydrocarbons - even
though that is in regulations. Thus the division can form a
unit based on potential; however, the division drives hard to
have the well drilled and the resource to be proven. Basically,
that would represent the point at which the division would form
units, not before. As a rule, the division insists on a known
hydrocarbon resources. In conclusion, he said that it's not in
anyone's best interest to not produce since the company has
already incurred the expenses and is paying rental fees on
leases. Finally, the company will enjoy the asset base as soon
as the production is on-line.
2:11:48 PM
REPRESENTATIVE SEATON referred to [page 2] lines 12-13, which
read, " ... the lease and for so long thereafter as oil or gas
is produced in paying quantities from the lease or if the lease
is committed to a unit approved by the commissioner." He
recalled a Kenai Peninsula lease that was held for the West
Eagle unit. He asked whether the division has been able to
secure work commitments.
MR. BARRON answered that the time of unitization is the point
when the work agreement is imposed.
2:12:49 PM
CO-CHAIR FEIGE recalled the division offers leases other than
oil and gas leases. He asked whether other lease programs could
also benefit from this method.
MR. BARRON responded that it is possible. However, the only
other lease program the division engages in is for geothermal
leases. He reported this program hasn't grown very much and
represents a small part of the overall lease programs.
Certainly, this bill clearly targets oil and gas leases.
2:13:25 PM
CO-CHAIR FEIGE inferred that while the division has other lease
programs the utility of extensions doesn't apply at this time.
MR. BARRON said that is correct.
2:13:38 PM
CO-CHAIR SADDLER asked whether many companies use land use
permits to perform seismic in an area, but do not buy a lease.
MR. BARRON answered not so much anymore. He recalled that
companies used to go out and "shoot seismic on spec" and in
fact, there are still seismic companies that sell their seismic
information. However, he did not necessarily think oil and gas
companies would do so. Instead, oil and gas companies will buy
the "spec seismic" for future lease sales.
2:14:28 PM
CO-CHAIR SADDLER asked for the biggest delay in the process from
leasing to exploration and production.
MR. BARRON said clearly, the first process is to acquire seismic
information and as diligent as some companies are, they have
encountered hurdles for federal permits to operate on federal
land. Clearly, that effort poses a hurdle, he said. The more
complicated the geographical area, the more time it takes to
process 3D seismic, and to reprocess, stack, and reanalyze the
data. Certainly, it can take several years to process since a
company would not want to drill a well in the wrong spot.
MR. BARRON added that securing a location to drill or to
mobilizing a rig can create hurdles in some areas. Granted, if
the unit is a good prospect, companies can find rigs and bring
them into the state.
MR. BARRON said beyond that would be permitting delays or
ensuring all the permits are in place. He characterized this as
being is a "time value of money" discussion. He pointed out
another limiting factor is the winter season on the North Slope,
which essentially allows three months to drill. To illustrate
this, he asked members to consider that a 10-year lease program
with only three months per year of drilling time actually
translates to about four years.
2:16:52 PM
CO-CHAIR SADDLER recalled some problems one company experienced
to "shoot seismic" along the borders of the Kenai National
Wildlife Refuge. He asked whether this illustrates some of the
permitting delays that can happen.
MR. BARRON answered that the U.S. Fish & Wildlife Service is
allowing seismic activities to take place on Native inholdings
in the Kenai National Wildlife Refuge, but only to the border of
the inholdings and the activity cannot cross the boundaries
outside of the Native inholdings lands. He predicted this could
be a "crippling event," in terms of the ability to acquire "good
seismic" information. In particular, truncating where companies
can put their receivers has been detrimental. He described the
process to accomplish activities on federal land as being
onerous.
MR. BARRON said, then again, issues with respect to endangered
species habitats also must be managed through federal
organizations and rightfully so. However, unreasonably
withholding permission to conduct that type of work presents a
real burden for companies, he said.
MR. BARRON pointed out that Shell has been held up for many
years by lawsuits. In any case, no matter how well the state
handles permitting reform, the ability for parties to stop
activities through legal action remains, which is clearly within
their rights.
2:18:58 PM
CO-CHAIR FEIGE inquired whether there are provisions in the
standard lease agreements that if a delay happens, the lease is
extended. For example, he asked whether the lease that is
delayed due to Beluga whales could be extended.
MR. BARRON answered no.
2:19:25 PM
REPRESENTATIVE P. WILSON asked whether there is any possibility
of allowing for permanent roads on state lands in some areas.
MR. BARRON said he is an unabashed supporter of Roads to
Resources (R2R). He strongly suggested the state should
investigate this further. He offered his belief the west Cook
Inlet is another area that the state should investigate building
permanent roads. He pointed out that each year ice roads are
built on the Alpine, Badami, and Point Thomson units on the
North Slope since the development is roadless development.
However, if a permanent road had been built to the Badami unit
it could have resulted in less expensive exploration by using
short ice roads off of the permanent road. He characterized the
Alpine unit as a great development; however, from Kuparak to
Alpine represents another gap without roads, which is an
impediment to exploration. Similarly, there is a marked
difference between the east and west sides of Cook Inlet. After
all one side has roads and the other does not have roads. In
fact, he identified the lack of infrastructure as being an
impediment. He highlighted the importance of being able to move
people and equipment quickly, which makes all the difference in
the world to operators. He pointed out this has been
demonstrated by the robust development in North Dakota,
Oklahoma, Colorado, Texas, Ohio, and California. He attributed
the difference between the development in the aforementioned
Lower 48 states and Alaska as being due to a lack of general
infrastructure.
2:22:17 PM
CO-CHAIR FEIGE concurred with the difficulties of operating with
ice roads.
MR. BARRON mentioned several areas in the state that also pose
difficulties to access, such as the Umiat oil field due to the
terrain.
2:22:54 PM
REPRESENTATIVE OLSON asked whether it is possible to put the
fiscal note at zero.
MR. BARRON replied that a zero fiscal note would be a good idea.
Initially, the division debated whether it would fall within its
own ability to budget and at the time he was uncertain so he
submitted an indeterminate fiscal note; however, he now believes
the zero fiscal note would be fine.
2:23:34 PM
REPRESENTATIVE SEATON recalled previously discussing permanent
roads. He asked whether any statutory requirement needs to be
changed or if it the decision to build permanent roads is based
on the department's policy.
MR. BARRON said he believed that is correct. He said he did not
think it was a statutory provision, but the areawide best
interest finding (BIF) contains a provision that exploration be
conducted on ice roads and ice paths.
2:24:24 PM
REPRESENTATIVE SEATON recalled the previous discussions on
permanent roads. He expressed the committee's frustration since
it would like to advance main corridor roads that make sense for
other development. He wanted to makes sure the DNR is aware
this this committee believes the policy and finding should be
revisited; however, he understood the decision rests with the
administration. Still, he encouraged the department to move
forward. Again, he said this committee has held hearings and
determined that the committee and legislature is very receptive
to the DNR revising its BIF's policy to allow main corridor
roads to be built. He recalled the legislature funding $70
million for a gravel road to Mount Spurr. In essence, the
department needs to revise its BIF. He offered his belief the
committee has done all it can do to encourage the department to
move in that direction. At some point, it's up to the
department to reanalyze the policy, he said.
2:27:24 PM
REPRESENTATIVE P. WILSON asked whether the department will
consider changes to the policy or if not, to outline reasons not
to change the policy.
MR. BARRON responded that to begin with, one of the division's
roles is as the "protector" of state land. He said by
definition the nature of exploration should be temporary. Since
developing a permanent road will impact the land forever, it
seems premature to build a road until the resource is known.
Therefore, the best way to build roads for exploration is to
build ice roads. He characterized the division's policy as
being based on environmental protections. The division doesn't
want roads to be built to "nowhere." Currently, the state has
co-sponsored ice roads to Badami every year for drilling
activities. Once again, Point Thomson has been under
consideration, which is just further down the ice road from the
Badami unit. He reiterated the department's concern, such that
nature of exploration potentially results in a "scar" on the
land for no value. However, once an area is known to have
ongoing development, such as the Badami unit, the state should
make a hard push for road access; however, it should not do so
during the exploration phase. In short, he said there's good
reason for the [policy].
2:29:28 PM
REPRESENTATIVE P. WILSON asked how many permanent roads exist on
the North Slope.
MR. BARRON directed attention to the map on the committee room
wall that depicts the North Slope, which identifies all the
roads.
REPRESENTATIVE P. WILSON asked whether those are permanent
roads.
MR. BARRON answered yes. In fact, the infrastructure in the
existing fields has been robust, but once away from the area is
not. For example, Great Bear Petroleum has acquired and
performed exploration work using existing gravel pads right off
the highway, rather than to build an ice road via a waiver
granted by the division.
MR. BARRON, with respect to the fiscal note, said that it will
be zero fiscal note, given the balance between leases to be
returned versus activity associated, which also includes the
value of the work programs. Thus the revenue to the state would
be zero, he concluded.
2:31:21 PM
CO-CHAIR FEIGE opened public testimony on HB 198.
2:31:45 PM
LISA PARKER, Manager, Government Relations, Apache Alaska
Corporation (Apache), paraphrased from written testimony, as
follows [original punctuation provided]:
Thank you for the opportunity to comment on [HB] 198,
which would allow the Commissioner of the Department
of Natural Resources to extend the term of oil and gas
leases or gas only leases beyond the original primary
term. This legislation will offer an alternative to
last minute rushes to create units, propose placement
of rigs or other lease saving operations that would
allow an operator to hold its oil and gas lease. The
DNR has seen this done on a repeated basis using
valuable time while the company continues to hold the
unit or oil and gas lease while requesting further
extensions with no actual work being performed.
2:32:36 PM
MS. PARKER continued to read from written testimony [original
punctuation provided]:
Apache Alaska Corporation (Apache) is, in general,
supportive of this legislation. As a new operator in
Alaska we have acquired a significant amount of
acreage which has leases that will expire before we
are able to complete our seismic exploration
activities, which help us delineate what, if any
potential oil or gas resources are under our leases.
Since entering Cook Inlet in 2010, Apache has been
aggressive in exploration and development efforts.
Apache has and continues to find new and innovative
ways to conduct seismic so as to create only the
slightest disturbance while gathering good quality
data. We have employed a cutting-edge technology
that, in 2012, resulted in acquiring over 200,000
acres of seismic data within the Cook Inlet basin.
There is still a lot of work left to do and, in
working with the Department, Apache is hopeful that it
will have the opportunity to continue its 3D seismic
program to better identify the potential of the Cook
Inlet Basin.
2:33:39 PM
MS. PARKER mentioned Apache set its first well in the fall 2012
in Cook Inlet. She recommended two changes to the bill. First,
she suggested deleting the requirement for a performance bond.
Second, she suggested changing the $250 per acre bond to not
exceed 150 percent of the rate for the preceding year of the
lease term.
MS. PARKER said in closing, Apache urges support for HB 198.
She remarked that John Hendrix, General Manager, Apache
Corporation, has stated on numerous occasions that "Apache does
not sit on its assets." She indicated that Apache would like
the opportunity to bring their leases into production and to do
this the company needs to delineate its assets before beginning
exploration efforts. She indicted this is one reason the
company has worked with Representative Olson, the House Labor
and Commerce Standing Committee, and the administration on this
issue.
2:34:47 PM
CO-CHAIR FEIGE, after first determining no one else wished to
testify, closed public testimony on HB 198.
2:35:06 PM
CO-CHAIR SADDLER offered his support for the bill. He said he
thought the bill will provide the division with a flexible tool
to encourage production as well as offer flexible terms for each
circumstance. Given the imperatives to quickly produce new
sources of natural gas for all of Alaska, this bill makes sense
and is a good idea.
CO-CHAIR FEIGE offered his support for the bill. He stated that
this bill will allow the state to standardize its lease periods
and provide adequate time to all entities interested in
producing oil and gas, which generates tax revenues for the
state. He offered his belief that it puts the interest of the
state and companies in greater alignment. Moreover, it takes
leases that could potentially expire and potentially languish
before re-leasing, which will allow work started in good faith
to continue and can result in more production for more of the
state's lands sooner, all of which supports the state's goal
with respect to more production.
2:36:25 PM
REPRESENTATIVE HAWKER made a motion to adopt a zero fiscal note.
There being no objection, the committee adopted a zero fiscal
note.
REPRESENTATIVE TUCK said he supported the bill. He further said
that it's in the state's best interest to obtain production from
its leases and to allow the companies more time to get to
production. He characterized it as a win-win situation for all
parties. He also thought the 10-year lease maximum was a good
thing.
REPRESENTATIVE TARR said she supported the bill. She liked that
the bill enforces the concept of the duty to produce, plus the
"seven plus three leases" of flexibility will give the state
more authority to ensure that work is being done.
2:37:46 PM
REPRESENTATIVE P. WILSON moved to report HB 198 out of committee
with individual recommendations and the accompanying fiscal
notes. There being no objection, HB 198 was reported from the
committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB198 ver C.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HB198 Sponsor Statement.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HB198 Sectional Summary.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HB198-DNR-DOG-4-4-13.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HB 198.Apache letter.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HRES HB198 Hilcorp Letter 4.6.13.PDF |
HRES 4/6/2013 1:00:00 PM |
HB 198 |
| HRES HB198 DNR Presentation 4.6.13.pdf |
HRES 4/6/2013 1:00:00 PM |
HB 198 |