04/23/2024 10:00 AM House FINANCE

HOUSE BILL NO. 223                                                                                                            
                                                                                                                                
     "An Act relating to the production tax and royalty                                                                         
     rates on certain gas; and providing for an effective                                                                       
     date."                                                                                                                     
                                                                                                                                
10:23:49 AM                                                                                                                   
                                                                                                                                
Co-Chair  Johnson  MOVED  to ADOPT  the  proposed  committee                                                                    
substitute (CS) for HB 223,  Work Draft 33-LS0886\D (Nauman,                                                                    
4/22/24).                                                                                                                       
                                                                                                                                
Co-Chair Edgmon  OBJECTED for discussion. He  asked Co-Chair                                                                    
Foster's staff to explain the CS.                                                                                               
                                                                                                                                
BRODIE   ANDERSON,   STAFF,  REPRESENTATIVE   NEAL   FOSTER,                                                                    
explained the changes in the CS.                                                                                                
                                                                                                                                
10:28:50 AM                                                                                                                   
                                                                                                                                
Co-Chair Edgmon asked if Mr. Crowther had any comments.                                                                         
                                                                                                                                
JOHN  CROWTHER, DEPUTY  COMMISSIONER, DEPARTMENT  OF NATURAL                                                                    
RESOURCES, shared  that DNR viewed the  changes as technical                                                                    
in nature and appropriate.                                                                                                      
                                                                                                                                
Co-Chair  Edgmon  asked  to  hear  from  Emily  Nauman  with                                                                    
Legislative Legal Services.                                                                                                     
                                                                                                                                
EMILY   NAUMAN,   DIRECTOR,  LEGISLATIVE   LEGAL   SERVICES,                                                                    
addressed a memo in members' packets (copy on file).                                                                            
                                                                                                                                
10:33:11 AM                                                                                                                   
                                                                                                                                
Representative Josephson wondered whether  it was known that                                                                    
there were productive fields in  the upper Cook Inlet at the                                                                    
time of statehood.                                                                                                              
                                                                                                                                
Ms. Nauman agreed that the  court specifically said that the                                                                    
revenue  generation  from  resource  production  would  fund                                                                    
state government.  She stressed that there  would be revenue                                                                    
granted from mineral  land granted to the state  at the time                                                                    
of statehood,  but she  did not  have any  information about                                                                    
whether Cook Inlet was included in that.                                                                                        
                                                                                                                                
Representative Josephson  used the example of  oil developed                                                                    
at Kitchen  Lights, which was immediately  adjacent to other                                                                    
gas  development.  He wondered  if  that  location would  be                                                                    
considered "known at the time of statehood."                                                                                    
                                                                                                                                
Ms. Nauman replied that she  did not know. She stressed that                                                                    
there was  not a  lot of other  information provided  in the                                                                    
case.                                                                                                                           
                                                                                                                                
Co-Chair Edgmon asked Ms. Nauman to continue the review.                                                                        
                                                                                                                                
Ms. Nauman continued her review of the memo.                                                                                    
                                                                                                                                
10:37:23 AM                                                                                                                   
                                                                                                                                
Representative Stapp asked about the best interest finding.                                                                     
                                                                                                                                
Ms. Nauman responded  that the court in the  case would lean                                                                    
heavily on what  the legislature believed to be  in the best                                                                    
interest of the people.                                                                                                         
                                                                                                                                
Representative Josephson asked if  the amendment referred to                                                                    
the CS.                                                                                                                         
                                                                                                                                
Ms.  Nauman corrected  that  the memo  should  refer to  the                                                                    
Resources CS.                                                                                                                   
                                                                                                                                
Co-Chair Johnson asked about the correction she made.                                                                           
                                                                                                                                
Ms. Nauman  replied that  the word  "amendment" in  the memo                                                                    
should  be  the Senate  Resources  CS.  She noted  the  word                                                                    
"amendment" also appeared in the  final line of the memo and                                                                    
should also be  replaced to refer to the  current version of                                                                    
the bill.                                                                                                                       
                                                                                                                                
10:40:17 AM                                                                                                                   
                                                                                                                                
Representative  Hannan asked  about the  maximum benefit  of                                                                    
the people, and  how the benefit would be  measured would be                                                                    
defined  in statute.  She asked  if it  would be  up to  the                                                                    
commissioner to define it.                                                                                                      
                                                                                                                                
Ms. Nauman  answered that the memo  discussed different ways                                                                    
that  the commissioner  could make  a  written statement  to                                                                    
declare the legislation  to be "in the best  interest of the                                                                    
state." She felt that an  equally sufficient way would be to                                                                    
develop  a  legislative  record   to  demonstrate  that  the                                                                    
royalty  regime would  benefit the  people,  even though  it                                                                    
would be outside of the typical royalty structure.                                                                              
                                                                                                                                
MARK   SLAUGHTER,  CHIEF   COMMERCIAL  OFFICER,   HEX/FURIE,                                                                    
ANCHORAGE  (via  teleconference),   shared  details  of  the                                                                    
natural  gas development  produced by  Hex and  Furie within                                                                    
Cook Inlet.  He detailed  that the  Kitchen Lights  unit was                                                                    
the most burdened  unit in Cook Inlet.  The combined royalty                                                                    
was 25 percent, which was almost  twice as much as any other                                                                    
unit in Cook Inlet. He shared  that HB 223 would allow it to                                                                    
become  more  economic,  and become  more  competitive  with                                                                    
other investment opportunities.                                                                                                 
                                                                                                                                
10:45:14 AM                                                                                                                   
                                                                                                                                
Mr.  Slaughter continued  his testimony,  and stressed  that                                                                    
the  legislature would  make the  Kitchen  Lights unit  more                                                                    
attractive for investment.                                                                                                      
                                                                                                                                
Representative Stapp asked what  the limiting factor was for                                                                    
the company.                                                                                                                    
                                                                                                                                
Mr.  Slaughter could  not answer  how many  wells the  other                                                                    
company was not drilling.                                                                                                       
                                                                                                                                
Representative Stapp  asked how the company  would gain more                                                                    
access to the rig if the legislation passed.                                                                                    
                                                                                                                                
Mr. Slaughter  responded that currently Hilcorp  had the rig                                                                    
under contract.  Hilcorp had communicated it  would make the                                                                    
rig available to Furie.                                                                                                         
                                                                                                                                
10:48:26 AM                                                                                                                   
                                                                                                                                
Representative Josephson stated that  the state could forego                                                                    
some of  the royalty,   overriding royalty that was  not the                                                                    
state's.                                                                                                                        
                                                                                                                                
Mr. Slaughter  confirmed that the company  had an additional                                                                    
12.5 percent royalty.                                                                                                           
                                                                                                                                
Representative Josephson  asked if  the company  would still                                                                    
be paying a royalty to another party.                                                                                           
                                                                                                                                
Mr. Slaughter  answered in the  affirmative. It  would still                                                                    
pay  the 12.5  percent royalty  but, testified  in a  Senate                                                                    
committee  asking for  the needle  to  be moved  to get  the                                                                    
company into the competitive range.                                                                                             
                                                                                                                                
Representative  Josephson  asked   what  capacity  could  be                                                                    
produced  that met  South Central's  need. He  asked if  the                                                                    
bill was  part of the answer  to the coming deficits  or the                                                                    
entire answer.  He asked how  the company would  produce and                                                                    
store any excess gas.                                                                                                           
                                                                                                                                
Mr.  Slaughter responded  that they  were just  part of  the                                                                    
solution.  There  was  300  bcf   of  gas  that  could  also                                                                    
alleviate the pressure.                                                                                                         
                                                                                                                                
10:51:37 AM                                                                                                                   
                                                                                                                                
Representative  Hannan wondered  whether  a five-year  state                                                                    
royalty relief would be acceptable.                                                                                             
                                                                                                                                
Mr.  Slaughter  responded  that  the  10-year  timeline  was                                                                    
important for the bill, because  it gave time for investment                                                                    
decisions  and the  company could  not have  alternatives in                                                                    
place within the five year window.                                                                                              
                                                                                                                                
Representative  Hannan did  not know  who the  other royalty                                                                    
was  for  12.5  percent.  She asked  if  they  were  seeking                                                                    
royalty relief from that amount.                                                                                                
                                                                                                                                
Mr. Slaughter answered they  were individuals and investment                                                                    
companies, and  stated that two individuals  said they would                                                                    
match what the  state did. He was not  optimistic they would                                                                    
relinquish the royalty.                                                                                                         
                                                                                                                                
Representative Hannan  stated it concerned her  that outside                                                                    
or  alternate investors  would not  make a  reduction, while                                                                    
the state was being asked to reduce its royalty to zero.                                                                        
                                                                                                                                
10:55:17 AM                                                                                                                   
                                                                                                                                
Representative  Galvin queried  the  process for  estimating                                                                    
the well  production, and  asked for the  size of  the range                                                                    
with or without the bill.                                                                                                       
                                                                                                                                
Mr.  Slaughter replied  that  there was  an  estimate of  an                                                                    
added 5000 cubic  feet of gas per day, so  it would increase                                                                    
to 16,000 cubic  feet. The bill would allow  for more active                                                                    
drilling.                                                                                                                       
                                                                                                                                
Representative Galvin  observed that  the company  had plans                                                                    
to grow. She asked where the investment would come from.                                                                        
                                                                                                                                
Mr.  Slaughter responded  that the  company  was looking  at                                                                    
self-funding the  wells. The company  was looking  to secure                                                                    
additional  financing,   which  would  free  up   funds  and                                                                    
accelerate development. He  did not know the  rate of return                                                                    
the investors would be looking at.                                                                                              
                                                                                                                                
Representative Josephson queried the firm contracts.                                                                            
                                                                                                                                
Mr. Slaughter replied there was  currently a firm commitment                                                                    
through March 31, 2025 with Enstar.                                                                                             
                                                                                                                                
10:59:16 AM                                                                                                                   
                                                                                                                                
BENJAMIN  JOHNSON,  PRESIDENT  AND  CEO,  BLUECREST  ENERGY,                                                                    
INC.,  DALLAS, TEXAS  (via teleconference),  shared that  he                                                                    
grew  up in  Kenai,  Alaska  and worked  for  Arco for  many                                                                    
years. He  had joined  others in creating  BlueCrest Energy,                                                                    
and bought out  Pioneer's interest in 2012.  The company had                                                                    
drilled and  resulted in a  well that was the  most prolific                                                                    
in decades.                                                                                                                     
                                                                                                                                
11:03:00 AM                                                                                                                   
                                                                                                                                
Representative  Stapp asked  if the  company had  received a                                                                    
loan   from  Alaska   Industrial   Development  and   Export                                                                    
Authority (AIDEA).                                                                                                              
                                                                                                                                
Mr. Johnson replied affirmatively.                                                                                              
                                                                                                                                
Representative Stapp asked why the  company did not think to                                                                    
approach AIDEA for another loan of $100 million.                                                                                
                                                                                                                                
Mr. Johnson  replied that  the company  had talked  to AIDEA                                                                    
and at present they did not know how it would work.                                                                             
                                                                                                                                
Representative Stapp asked what "talk to them" meant.                                                                           
                                                                                                                                
Mr.  Johnson answered  that  so far  AIDEA  had stated  they                                                                    
could not make the loan.                                                                                                        
                                                                                                                                
Representative  Stapp stated  his  understanding that  AIDEA                                                                    
had not shown enough interest in the Cook Inlet.                                                                                
                                                                                                                                
Mr.  Johnson answered  not exactly,  but they  had not  been                                                                    
aggressive about wanting to loan money.                                                                                         
                                                                                                                                
Representative  Stapp  stated  his trouble  with  the  whole                                                                    
scheme was that he did not  know why AIDEA would not be more                                                                    
interested  in investing,  if  investors  wanted less  state                                                                    
take they were  arguing for better return. He  asked why the                                                                    
state should take less money.                                                                                                   
                                                                                                                                
11:06:29 AM                                                                                                                   
                                                                                                                                
Mr. Johnson responded that the  gas projects were not highly                                                                    
economic like oil fields.                                                                                                       
                                                                                                                                
Representative  Josephson  asked  for a  comparison  of  the                                                                    
royalty reduction  program and the  reserve/asset-based loan                                                                    
concept.                                                                                                                        
                                                                                                                                
Mr.  Johnson replied  that one  of the  concerns they  heard                                                                    
from out of  state investors was that  the legislature could                                                                    
change  the law.  He remarked  that  if a  company put  $500                                                                    
million into  a project and  the royalty relief  was changed                                                                    
the following year - it was risky.                                                                                              
                                                                                                                                
Representative Josephson  wondered whether the  reserve base                                                                    
loan program from AIDEA would be of interest.                                                                                   
                                                                                                                                
Mr. Johnson would be happy to  work with AIDEA, but he could                                                                    
not speak for its board.                                                                                                        
                                                                                                                                
Representative Josephson asked  for the company's production                                                                    
capacity at the Cosmopolitan well.                                                                                              
                                                                                                                                
Mr. Johnson answered about 50  million cubic feet per day up                                                                    
to 65 if there was pipeline capacity.                                                                                           
                                                                                                                                
Representative  Hannan asked  for the  current royalties  on                                                                    
Cosmopolitan.                                                                                                                   
                                                                                                                                
Mr. Johnson answered  there was a 12.5  state royalty. There                                                                    
was  an  additional  royalty  resulting  in  just  under  20                                                                    
percent royalty.                                                                                                                
                                                                                                                                
Representative Hannan  asked if Mr. Johnson  had talked with                                                                    
the others about reducing their royalty.                                                                                        
                                                                                                                                
Mr. Johnson answered in the  negative and noted they had not                                                                    
heard anyone interested in doing so.                                                                                            
                                                                                                                                
11:11:56 AM                                                                                                                   
                                                                                                                                
Co-Chair Edgmon OPENED public testimony.                                                                                        
                                                                                                                                
Co-Chair Edgmon CLOSED public testimony.                                                                                        
                                                                                                                                
Co-Chair Edgmon  set an amendment deadline  of Friday, April                                                                    
26  at   5:00  p.m.  He  recognized   Representative  George                                                                    
Rauscher in the room.                                                                                                           
                                                                                                                                
HB  223  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.