Legislature(1995 - 1996)
04/22/1995 01:17 PM Senate RES
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* first hearing in first committee of referral
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HB 207 ADJUSTMENTS TO OIL AND GAS ROYALTIES
JOHN SHIVELY, Commissioner-designee of the Department of Natural
Resources, testified on HB 207. There are a variety of ideas about
how to provide the oil industry with the incentive to develop
marginal oil fields. HB 207 was a compromise effort that can be
implemented this year, as opposed to other ideas that may be
studied by the Governor's Oil and Gas Policy Commission. Royalty
reduction legislation has been on the books since 1959, therefore
the ability to change the amount of royalty is not a new idea. HB
207 specifically adds marginal fields and clarifies language in the
existing law related to fields that might be shut in, or abandoned,
to make the assessment process easier. Essentially, HB 207
requires the oil companies to have a delineated field or pool
before proposing a royalty reduction. DNR would then look at the
economics, based on the capital and operating costs, the price of
oil, and the volume of oil. DNR would either internally review the
proposal or hire experts to review it if the internal capacity was
unavailable. If outside consultants were hired, the industry would
pay for that service. If clear and convincing evidence is found
that a royalty reduction is justified short and long term, the
Commissioner would have to make a best interest finding that the
royalty reduction would be in the best interest of the state. A
public hearing process would then take place. In an amendment
adopted on the House floor, the DNR Commissioner would give a
presentation to the Legislative Budget and Audit Committee.
Number 560
SENATOR LEMAN discussed changes made to the bill in the House. The
original bill had a hold harmless provision for the permanent fund
that was removed; a provision for legislative awareness was added;
and the floor for reduction amounts was changed. He asked Mr.
Shively if those changes were acceptable to the administration.
MR. SHIVELY replied the House changed the language which held the
Permanent Fund harmless to providing floors. The reduction can be
75 percent for new marginal fields, and no more than 90 percent for
fields that are about to be shut in, or fields that have been
abandoned. Current law allows a zero percent royalty for the
latter fields, but the administration believes the floor should be
no more than 75 percent of the existing royalty. That royalty
would be split between the general and permanent funds. Regarding
the oversight provision, added on the House floor, DNR would give
a presentation anyway if Legislative Budget and Audit requested
one. Confidential information would be protected by provisions
under executive sessions.
SENATOR LEMAN cited a newspaper article by Stan Jones and asked
whether DNR would consider royalty reductions seriously if HB 207
passed. MR. SHIVELY answered that he hoped the situation referred
to was a particular agreement between BP and OXY. He anticipated
the industry to make serious proposals since they would be paying
for the economic review.
TAPE 95-47, Side B
SENATOR LEMAN indicated he saw the need to include in the bill
clear language describing the application process to avoid future
litigation.
MR. SHIVELY noted he believes the bill contains language that would
prevent the industry from litigating the decision by the
Commissioner. The administration does not believe the royalty
reduction is a right, but rather a privilege. It can only be
granted if justified, and in the state's best interest. He stated
he would support language to further clarify the process.
PAUL WESSELLS, representing BP Exploration-Alaska, read the
following for the record.
BP supports HB 207 and encourages this Legislature to enact
the bill this year. This bill represents a very positive step
along the road to development of the state's marginal new oil
fields and marginal projects within existing fields. It is
our belief that initiatives such as HB 207 signal a new spirit
of cooperation between the oil industry and state government.
It is this joint effort that will be required for the state to
fully realize the value of its oil and gas resources. In what
manner does HB 207 promote full development of the state's
resources? First, it clarifies the existing statute, by
specifying that new developments, that is properties that have
never produced oil and gas, may qualify for royalty reduction.
Second, the bill provides that relief may be granted for
individual leases, rather than solely as part of a unit
application, and allows for adjustments with respect to
individual pools of oil and gas within lease releases. The
bill takes additional steps to protect the public interest by
assuring that the Commissioner of Natural Resources will
receive the financial and technical information necessary to
allow a reasoned judgment on the merits of an application, and
by requiring that the costs of third party professional
assistance to the Commissioner in analyzing applications be
borne by the applicant. In addition, the public interest is
served by the provision in the bill that the state must
condition a reduction in royalty, on a readjustment at a later
time, if the circumstances which supported the grant of the
reduction change. It is this last aspect of the bill that
makes it clear that it is not just about reducing the
royalty obligations of producers in the absolute sense.
Indeed it is entirely possible that a royalty adjustment
program, negotiated by the state and a lease holder, will lead
to greater royalty payments over the full life of the
property. BP also believes the bill should allow the
Commissioner of Natural Resources to modify state net profit
share interests in the same way that it allows the
Commissioner to adjust state royalties. Net profit payments
and royalty payments are similar forms of economic rent, that
the state receives from leasing its lands for oil and gas
exploration and development. We think that giving the
Commissioner flexibility to address the full economic picture
when reviewing an application for adjustment, is a good idea,
so it does not seem appropriate to us to give the Commissioner
that flexibility with respect to just one form of economic
rent and not the other. Just as the state may gain by
modifications of the royalty obligations under a sliding scale
royalty mechanism, so it should gain in similar circumstances
by allowing appropriate modifications of a net profit
interest. We in BP believe that HB 207 will make it possible
for the state and the oil industry to devise, through open
sharing of information, in good faith negotiations, methods
for sharing the risk of developing marginal properties. It is
imperative that we capture the potential of these properties
to ensure a strong and stable industry and a strong and stable
Alaskan economy. Thank you for the opportunity to testify.
Number 532
SENATOR LEMAN asked Mr. Wessells if he believed the situation
described in the newspaper article he referred to earlier was a
unique circumstance because of the arrangement of the ownership.
MR. WESSELS remarked BP's position is that the application referred
to is a serious application. If one were to take the array of
applications the company might make on existing properties, the
one at Milne Point would be at the bottom of the spectrum, in terms
of the expectation of receiving relief. He did not feel it would
be appropriate to characterize the application as frivolous.
There being no further testimony on HB 207, SENATOR LEMAN announced
the next meeting would be held on Monday, and HB 208, HB 225, HJR
23, and HB 197 would be heard. He adjourned the meeting at 3:25
p.m.
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