Legislature(1993 - 1994)
04/11/1994 09:15 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 199
An Act providing for oil and gas exploration licenses,
and oil and gas leases, in certain areas of the state;
and providing for an effective date.
Co-chair Pearce directed that CSHB 199 (O&G)am be brought on
for discussion and referenced a work draft SCS CSHB 199
(Fin) (8-GH1012\Q, Chenoweth, 3/22/94), two amendments by
Senator Kerttula, and March 29, 1994, correspondence (copy
appended to these minutes as Attachment A) from the Dept. of
Natural Resources containing a comparison of House and
Senate legislation. She advised that the "Q version"
incorporates provisions from Senator Leman's version of SB
150.
KEN BOYD, Deputy Director, Division of Oil and Gas, Dept. of
Natural Resources, came before committee. He directed
attention to the side-by-side comparison (Attachment A) of
the Senate bill heard last year and the proposed House bill
and explained that both industry and the state were in favor
of the program but differed in individual approaches.
Interim work with 18 companies (both in Alaska and Houston)
achieved consensus between single entrepreneurs, the largest
oil companies, and everyone in between.
End: SFC-94, #58, Side 1
Begin: SFC-94, #58, Side 2
Co-chair Frank voiced need for an understanding of the
purpose of the bill as well as deficiencies and advantages
of licensing and leasing programs. Mr. Boyd acknowledged
that the current state leasing program has worked well for a
number of years. Lease sales of three-mile by three-mile
squares (5,760 acres) have resulted in a checkerboard
pattern of ownership. However, when over a million acres on
the north slope of the Brooks Range were recently offered,
no one came to the sale. Exploration licensing provides a
company a large amount of land to explore, in exchange for a
work commitment. The original bill provided for 2,500,000
acres. Through discussions with companies, the amount now
allowable under license totals 500,000 acres.
Mr. Boyd explained that the purpose of the bill is "to chase
geology." The proposal must be balanced with the dollar
amount of the work commitment and a determination of whether
or not the proposal makes sense. Licenses primarily apply
in areas that have not been explored. They provide
companies with money and a work commitment a chance to
explore, unencumbered by people who might have plans to do
something else with adjacent lands.
Co-chair Frank asked why the department proposes a new
licensing program rather than merely expanding the size of
tracts under the leasing program. Mr. Boyd explained that
licensing relates only to the exploration phase. Following
exploration, part of the land may be converted to lease.
Mr. Boyd attested to need for leases to remain small for
future administrative purposes. A large block of licensed
land converted to lease under that program would be more
difficult to deal with. The major difference between a
license and a lease rests in the fact that licensing
provides for exploration by a company or group of companies
with a commitment to "do 25% of the work within four years."
That provides certainty that an entity does not merely
license the land and then sit on it. The entity must do
some of the work or lose its license.
Co-chair Frank voiced his understanding that the lease
program originally contained work commitments. He then
recalled that that philosophy was abandoned because of
associated problems. Mr. Boyd acknowledged problems
associated with constraints. Requiring a work commitment
during the exploration licensing phase is a better approach.
In response to an additional question from Co-chair Frank,
Mr. Boyd explained that the work commitment does not specify
the type of work to be done. The license is awarded based
on "whoever bids the most money . . ." in the work
commitment. The department will be able to tell from the
amount proposed, what kind of work will need to be done. In
some basins wells will be drilled as part of the commitment
while in other areas geophysical work will be done.
Co-chair Frank asked if a licensee would have the
opportunity to convert the whole 500,000 acres under license
to lease. Mr. Boyd responded, "Only to the extent that they
had fulfilled their entire work commitment obligation." He
cited as an example an instance where a licensee had a $50
million commitment over a ten-year period. If the licensee
spent $25 million to drill a successful well, the licensee
would not have the right to "take anything to lease until
they spend the other $25 million." A licensee may not
convert to lease until the entire work commitment has been
fulfilled. There is no intermediate conversion to lease.
Everything happens at the end of the licensing term.
Further, if the licensee does not do 25% of the work
commitment, it loses its license. If it does 50% of the
commitment in four years, it can keep the land. If between
26% and 49% is done by the fourth year, the licensee must
return 25% of the acreage to the state and 10% of the
acreage each succeeding year for the term of the license.
Senator Kerttula voiced his understanding that a licensee
could secure four adjoining 500,000-acre areas for a total
two-million-acre exploration area. Mr. Boyd concurred,
advising that two million acres is the cap for land under
license. Under lease, the 500,000-acre limit, in state law
for a long time, still applies.
Senator Kelly asked if the existing licensing program would
be repealed and converted to exploration licensing only.
Mr. Boyd advised that no licensing program presently exists.
The existing leasing program would not be repealed. He
further advised that lands on the North Slope and most of
Cook Inlet would be off limits to the licensing program and
handled through the ongoing lease program.
The reason for the licensing program is that lands that fall
within it have been available for leasing for a long period
of time, and no one has shown much interest in them. They
are risky, remote, and potentially expensive to develop.
The proposed bill is intended to give companies with the
time, money, and inclination the ability to explore.
Mr. Boyd next referenced maps showing the geographical
restrictions of the program. He then noted modifying
language restricting surface entry in the Bristol Bay
Fisheries Reserve.
Mr. Boyd next spoke to relinquishments. He explained that
exploration licensing is utilized world wide, and
concessions are features of many programs. Consensus
provisions require that:
1. If at the end of the fourth year of licensing, the
licensee has not done 50% of the work, the
licensee must begin relinquishing land.
2. If 50% of the work commitment has been fulfilled
by the
end of the fourth year, there is no relinquishment
provision.
3. If 25% of the work has not been done by the fourth
year,
the license is cancelled.
4. For work effort that falls within the 26% to 49%
range,
relinquishment begins and 25% must be returned at
the end of the four-year period. Ten percent of
the remaining acreage is relinquished each year
thereafter for the term of the license.
Industry believes that this arrangement gives it a positive
opportunity to "not have relinquishments." The 50% relates
to the total work commitment and is auditable in dollar
amounts. There is no schedule requiring a certain amount of
work to be done each year. The measuring point is the
fourth year when 50% of the work must have been done. The
Commissioner evaluates the number of dollars spent rather
than the scope of the work performed.
Mr. Boyd noted that bonding requirements are linked to
relinquishments. The proposed bill contains a bonding
formula which determines the amount of the bond for the
upcoming year. Mr. Boyd directed attention to Page 4, Line
10, and read formula provisions. Comments followed
regarding application of the formula using a $10 million
work commitment as an example. Failure to post the annual
bond will result in cancellation of the license.
Co-chair Frank inquired concerning need for a bond. Mr.
Boyd described the relationship between the bond and the bid
amount. He spoke to need to be able to determine whether or
not a bid is legitimate. The bond forces companies to be
responsible in both the bidding process and the work
commitment over the term of the license.
Mr. Boyd advised of objection by many companies to bid by
oral outcry. To cover situations where multiple companies
are interested in exploration licensing in a particular
area, the final determination will be made by sealed bid.
That was part of the compromise.
Speaking to conversions, Mr. Boyd pointed to bill provisions
establishing license areas at between 20,000 and 500,000
acres. All or part of license areas may be converted to
lease tracts. The amount of land that can be held by
license is limited to 2 million acres. Current statutory
restrictions limiting lease holdings to 1 million acres
(500,000 acres of upland and 500,000 acres offshore) would
apply to license conversions. The proposed bill does not
change that restriction.
The legislation establishes a floor of 20,000 acres and a
ceiling of 500,000 acres under license. Mr. Boyd described
the situation that led to establishment of the 20,000 acre
floor. The public notice process, best interest findings,
and other process requirements, do not make licensing of
small areas feasible. The acreage cap of 2 million acres
under license at any one time was added in the House bill.
The application fee of not more than $1.00 per acre responds
to concerns raised by small companies. The fee is intended
to eliminate the nuisance of entities "that could never,
ever . . . or even want to really be in the program."
Senator Kerttula voiced his belief that licensees should pay
$1.00 per acre. Mr. Boyd described the discussion with oil
company representatives that led to fee provisions of "not
more than $1.00 an acre."
End: SFC-94, #58, Side 2
Begin: SFC-94, #60, Side 1
In response to a question from Co-chair Frank, Mr. Boyd
acknowledged that the license fee may be different in
different areas. He advised that fees would be worked out
in regulations. In compromise discussions, participants
felt this one-time fee was appropriate.
Mr. Boyd next advised that provisions lowering financial
responsibility for onshore exploration facilities from $5 to
$1 million have been removed from the proposed bill and
incorporated within separate legislation (SB 239).
Mr. Boyd referenced the annual $3.00 lease fee per acre
applicable to license lands converted to lease. An existing
feature of the lease program specifies an annual rental of
$1.00 an acre at the time of the lease sale. That amount
increases in 50-cent increments to a maximum of $3.00 after
five years. Lease terms are generally ten years on the
North Slope and seven years in Cook Inlet.
Speaking to the public notice amendment, Mr. Boyd observed
that the public notice process of Title 38 is one of the
important features of the proposed legislation. While all
the features of Title 38 are present, the amendment at Page
8, Line 7, provides for public notice of the commissioner's
findings.
Senator Sharp asked if regulations would allow for licensing
of 20,000 acre tracts or would they be written to restrict
the size to 100,000 acres of more. Mr. Boyd acknowledged
that regulations could restrict the size. He further noted
that the Commissioner has the right to "reject any
application . . ." Senator Sharp voiced concern that many
do not consider the 20,000-acre threshold a nuisance
limitation. He suggested that a licensing program with a
minimum size that is four or five times larger than tracts
in the existing lease program could be used "against smaller
developers" the state should be encouraging.
Senator Sharp next asked if staking of claims for
exploration and development of minerals other than oil and
gas would be allowed in license areas while licenses are in
effect. Mr. Boyd responded affirmatively. He also pointed
to existing statutory restrictions prohibiting unreasonable
interference with the operator. Most restrictions relate to
safety. All surface rights are reserved, and navigable
waters are never to be blocked.
Senator Kerttula asked if the licensee would incur liability
similar to that of a private property holder. Department
staff responded that "Anything over which the operator had
jurisdiction would be subject to liability." The operator
would not be responsible for things beyond the operator's
control.
Senator Sharp again expressed concern that regulations might
establish minimums and parameters that would be prohibitive
to some operators. Mr. Boyd voiced his belief that
regulations would fairly implement language in the proposed
bill. He reiterated that the program would not apply to the
North Slope and Cook Inlet. The program is thus removed
from areas with existing infrastructure. It is difficult to
imagine conduct of operations on a very small tract of land
in interior basins. The cost of construction of
infrastructure for a small discovery in a small area would
be prohibitive.
Discussion followed between Mr. Boyd and Senator Sharp
regarding the administration's effort to seek alternative
energy sources for small villages through small gas fields,
etc. The Senator remarked that the proposed bill appears to
present an excellent opportunity for that effort. He then
questioned whether the effort would be feasible with a
minimum threshold of 20,000 acres and a multimillion dollar
work commitment for exploration. Mr. Boyd stressed that
"There is no minimum dollar commitment, except what would
make sense." There is no particular relationship between
the number of acres and the dollar amount of the work
commitment. The proposed bill would not preclude attempts
to find a gas source for a remote village. Mr. Boyd noted
that the legislation would only apply to state land.
Federal and Native lands fall outside its jurisdiction.
Further, the state lease-sale program is also available.
Senator Sharp again voiced concern that the program would
favor larger companies over smaller operations. Mr. Boyd
told members that both the proposed bill and the existing
lease program "accommodate anybody that wants to play."
Co-chair Frank referenced language at Page 9, Lines 12 and
13, and noted ability of the Commissioner to reduce
royalties to 5% where it appears to be in the state's best
interest to do so in unproven areas. He then questioned the
wisdom of that provision. Mr. Boyd explained that
questioned language reflects existing law. Co-chair Pearce
added that it has never been used. Mr. Boyd directed
attention to language at Page 8, Lines 16 and 27, and noted
that leases must be conditioned upon a royalty amount or
value of not less than 12.5% of production. Co-chair Pearce
asked that Mr. Boyd review the background of the 12.5%
royalty set forth in the leasing program. She noted that it
appears to be in conflict with a possible incentive for a
lowered royalty in the proposed bill.
Co-chair Frank voiced his understanding that Native
corporations have allowed exploration licensing on Native
lands, but oil companies have not taken advantage of the
arrangement. Mr. Boyd advised that, to his knowledge,
Native corporations do not have a formal program. He said
that "They take an area, and they make a deal." A formal
procedure must be in place for public land.
Co-chair Frank next asked that Mr. Boyd respond to
assertions that the proposed program would end up with much
public land being tied up in license arrangements. Mr. Boyd
stressed that the land has been unexplored or underexplored
for many years. The proposed bill promotes exploration. He
stressed that exploration with a bonded work commitment does
not amount to "locking anything up or giving anything away."
Senator Sharp voiced his understanding that the proposed
bill provides for exploration only. No production would be
allowed. Mr. Boyd acknowledged that production would occur
under lease.
RECESS
Co-chair Pearce advised that the meeting would be recessed
at this time and possibly reconvened later in the afternoon.
The meeting was recessed at 11:10 a.m.
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