Legislature(2023 - 2024)BARNES 124
01/31/2024 01:00 PM House RESOURCES
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB276 | |
| HB223 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 276 | TELECONFERENCED | |
| *+ | HB 223 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 276-REDUCE ROYALTY ON COOK INLET OIL & GAS
1:04:42 PM
CHAIR MCKAY announced that the first order of business would be
HOUSE BILL NO. 276, "An Act relating to temporarily reduced
royalty on oil and gas from pools without previous commercial
sales in the Cook Inlet sedimentary basin; and providing for an
effective date."
1:05:25 PM
JOHN BOYLE, Commissioner, Department of Natural Resources (DNR),
presented HB 276 on behalf of the House Rules Committee, sponsor
of the bill by request of the governor. He advised that from
DNR's standpoint the current challenges in Cook Inlet aren't
related to the resource because ample gas is available under
existing platforms as well as platforms that could be permitted
within a short period of time. Rather, he continued, it is
commercial challenges that are inhibiting the development of
Cook Inlet gas resources. Over the 60 years of production in
Cook Inlet, the oil element has driven the economics, with gas a
byproduct from those oil exploration prospects. Over time, oil
has become more and more difficult to find and challenging to
get, which plays a role in the economics because even when lots
of gas accompanies that oil there isn't necessarily a ready
market for any gas supply above and beyond Alaska's domestic
needs. According to existing producers, many development
projects are within the margin of being investable or not given
that other investments with higher rates of return and less risk
are available to investors.
COMMISSIONER BOYLE pointed out that royalty is a lever DNR can
pull to contribute to the economics of these projects, reduce
risk, incentivize, and push over the line of internal rates of
return that can be promised to investors. At the end of last
year, he related, DNR offered net share profit leases, a type of
lease that already existed under DNR's authorities, instead of a
royalty rate. Under net share profit leases, an operator
develops the fields, starts producing oil, and then once costs
are recouped the operators start paying the sovereign a certain
amount. The thought was that they might give companies more
confidence in the economics of bidding for new leases for
prospective projects in areas that haven't been explored before
or where the exploration needs more work to delineate or prove
up the resource, and a slight uptick was seen.
COMMISSIONER BOYLE explained that HB 276 deals with leases that
already exist but don't currently have production; the bill
specifically relates to existing leases where DNR hopes to
incentivize new production. He further explained that HB 276
doesn't deal with existing production, so it doesn't lower the
royalty rate for those producers in the Cook Inlet that are
already producing oil. The bill only applies to producers in
the Cook Inlet that have leases already established at 12.5
percent royalty, and it would lower those royalty rates, which
would be a great first step to help provide better economics for
Alaska's producers.
COMMISSIONER BOYLE said new development will likely not take
place without proactive steps by the state. He related that
banks and investors have expressed concern about the uncertainty
of investing in Alaska, such as the fiscal changes that impacted
tax credits available to Cook Inlet producers and proposals to
change the fiscal take structure in Alaska. Advancement and
passage of HB 276 would signal to investors that the state and
its policymakers strongly support development within the Cook
Inlet and recognize that it is in the state's interest to have a
stable homegrown energy supply that is relatively affordable,
and that the state is looking to enact policies which encourage
rather than discourage that type of production.
1:14:05 PM
CHAIR MCKAY emphasized that HB 276 is not a tax credit program
like the State of Alaska had in the past where fungible funds
from the state treasury were used to help finance oil and gas
projects. Rather, he said, HB 276 is a program which leverages
gas that is still in the ground that may never be produced.
COMMISSIONER BOYLE added that the program proposed by HB 276
wouldn't be the state subsidizing or giving money to producers,
nor anything like the tax credits under the [2010] Cook Inlet
Recovery Act (CIRA). Under HB 276, he continued, instead of a
12.5 percent rate the state would collect a 5 percent royalty
rate to help improve the economics for moving projects forward.
Not making this tweak, he advised, could result in the state
getting 100 percent of nothing rather than 5 percent of
something. While Cook Inlet gas is important for heating and
powering the homes of [most of Alaska's residents], Commissioner
Boyle further pointed out that Cook Inlet oil supplies Alaska's
in-state refineries which produce gasoline and aviation fuels,
and HB 276 would also lower the royalty rate for the oil
produced in these leases.
1:16:52 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas, Department
of Natural Resources (DNR), on behalf of the House Rules
Committee, sponsor of HB 276 by request of the governor,
provided a PowerPoint presentation titled "HB 276 Reduce Royalty
on Cook Inlet Oil & Gas," dated 1/31/2024. He began with slide
2, "WHY IS COOK INLET GAS IMPORTANT?" The left side of the
slide read as follows [original punctuation provided]:
Natural Gas Utilities
• Enstar serves over 440,000 people and operates in
over 25 communities throughout Southcentral Alaska
• Interior Gas Utility (IGU) serves over 2,400 people
Electric Utilities
• Chugach Electric serves over 302,000 people in
Anchorage, Whittier, Girdwood, and Fairbanks
• Matanuska Electric (MEA) serves the Mat-Su Borough
and Chugach and Eagle River, over 180,000 people
• Homer Electric serves nearly 36,000 people
MR. NOTTINGHAM addressed the pie chart on the right side of
slide 2 depicting the 2023 Cook Inlet Utility Gas Under
Contract. He informed the committee that Enstar makes up about
half of the volume of Cook Inlet gas that is under contract,
with Chugach Electric making up [over one-fourth] of the volume,
and with Homer Electric, IGU, and MEA [nearly equally splitting
the remaining volume].
MR. NOTTINGHAM moved to slide 3, "COOK INLET OVERVIEW," which
read as follows [original punctuation provided]:
Cook Inlet is a large mature oil and gas basin
• Has produced over 1.4 billion barrels of oil and
12 trillion cubic feet of gas
• 26 producing fields operated by 8 different
companies
• There are over 200 oil and gas leases in Cook
inlet
Gas production has been declining since 1990
• Peak gas production in 1990 was over 850,000
thousand cubic feet per day
• Current production is just over 200,000 thousand
cubic feet per day
Cook Inlet gas provides heat and electricity to 70
[percent] of Alaskans
MR. NOTTINGHAM drew attention to the Cook Inlet units shown on
the map on the right side of slide 3. He said state units are
depicted in yellow, with Kitchen Lights being the biggest unit,
Trading Bay a historical unit that began in the 1960s, and
Ninilchik an onshore unit on state land. He noted that Swanson
River, [a federal unit] depicted in green, began producing oil
and gas in 1958 or 1959. Mr. Nottingham pointed out that given
the maturity of these existing fields, it is getting tougher and
tougher to find additional oil and gas within these fields.
MR. NOTTINGHAM proceeded to slide 4, "COOK INLET LEASES," which
read as follows [original punctuation provided with some
formatting changes]:
What is a State of Alaska Oil and Gas Lease?
• A lease is a tract of land designated for oil and
gas exploration
• Leases are offered at lease sales or through
exploration licenses
• Primary lease terms are between five and ten
years
• Commercial production extends the lease beyond
the primary term
What is an Oil and Gas Unit?
• Leases are combined to form a unit for the
protection of all parties
• Facilitates joint development, conserve natural
resources, and avoid waste
• Unit agreement is developed between the lessees
and the State
• Requires the development of a plan of
development/exploration (POD/POE) along with
other reporting requirements
• Requires the operator to act as a prudent
operator while developing the unit
1:24:10 PM
MR. NOTTINGHAM spoke to the geological maps depicted on slide 5,
"COOK INLET GEOLOGY." He qualified that he is a petroleum
engineer, not a geologist, but noted that the Alaska Range and
volcanoes comprise the western side of the Cook Inlet and the
east side is comprised of the Kenai Peninsula and Chugach
Mountains. A catch basin formed between these two sides, he
explained, where fluvial systems came in and deposited sand,
creating the stratigraphic column depicted on the right side of
slide 5. The deeper sands in the column tend to be harder rock
and tend to have oil and are considered the source rock for Cook
Inlet oil. Above the deep harder rock is rock that is more
permeable and quite a bit of the oil production comes from these
formations, the Chickaloon, West Foreland, and Hemlock
formations, with oil coming particularly from the Hemlock
Formation. Then, moving above these formations are the Tyonek,
Beluga, and Sterling formations from which gas is produced, and
that gas is formed from biogenic gas related to coals.
Responding to Representative Saddler, Mr. Nottingham offered his
belief that "ma" on the top left of the depiction of the
stratigraphic column stands for millions of years, therefore the
bottom of the column represents 208 million years.
1:26:52 PM
MR. NOTTINGHAM addressed slide 6, "UNDISCOVERED RESOURCES,"
which read as follows [original punctuation provided with some
formatting changes]:
• Undiscovered, Technically Recoverable Oil & Gas
(U.S. Geological Survey 2011):
• mean conventional oil 599 million barrels of oil
• mean conventional gas 13.7 trillion cubic feet
• mean unconventional gas 5.3 trillion cubic feet
• Undiscovered, Technically Recoverable Gas:
• 1.2 trillion cubic feet additional mean resource
assessed in the federal Southern Cook Inlet Outer
Continental Shelf area (Bureau of Ocean Energy
Management 2011)
• Governor's Legislation targets making these
prospects more economic for development
MR. NOTTINGHAM defined unconventional gas as gas that is in
plays like coalbed methane.
1:28:16 PM
MR. NOTTINGHAM discussed the graphic on slide 7, "COOK INLET
PRODUCTION HISTORY." He noted that oil peaked in the 1970s and
has been declining since. Gas peaked in 1990 at 850 million
cubic feet and has been declining from there. Much of the water
production coming in is associated with secondary or enhanced
recovery methods such as water flooding, and the water coming
through the wells and being produced.
1:28:54 PM
MR. NOTTINGHAM continued to slide 8, "GAS PRODUCTION HISTORY,"
and drew attention to the graph on the left depicting production
of Cook Inlet gas by lessee from state-owned oil and gas leases.
He related that from the early 2000s to about 2010, many of the
companies producing from state lands were the bigger companies
with big capability, including ConocoPhillips, Marathon, and
Chevron. However, he continued, in the last 15 years or so
Hilcorp Alaska LLC has been the predominant producer along with
some smaller producers, so the landscape has shifted in the
companies that are producing there and their capabilities. He
turned his attention to the graph on the right depicting the
Cook Inlet fields that have been producing. He pointed out that
all the fields have been declining over the 2000s and that no
major new field has come online in that time.
1:30:30 PM
MR. NOTTINGHAM displayed slide 9, "COOK INLET PRODUCTION BY
FIELD:", and noted that the chart on the left details production
of oil and gas by field and company for the year 2023. He
reiterated that Hilcorp is the dominant producer in the Cook
Inlet with over 80 percent of the production. The Beluga River,
Ninilchik, and North Cook Inlet fields are the big gas
producers. He directed attention to the map on the right and
said oil production is important with oil production today at
around 9,000 barrels a day and on decline.
1:31:34 PM
MR. NOTTINGHAM reviewed slide 10, "GAS STORAGE," which read as
follows [original punctuation provided]:
What is gas storage?
• Gas can be stored by re-injecting it in
subsurface reservoirs and re-producing when it is
needed, although it comes with costs and
operational demands.
• It is used within a year to mitigate the fact
that demand is much higher in the winter than the
summer, but it is best to produce from fields at
a relatively steady rate. Production over the
summer months can be "saved up" for cold winter
days.
• Storage is critical, as peak winter demand
already requires more gas than is deliverable
from producing reservoirs.
• Gas storage can also be used across multiple
years.
There are currently four active gas storage pools
• CINGSA [Cook Inlet Natural Gas Storage Alaska]
Established in 2011, gas storge capacity 18 bcf
[billion cubic feet], operated by CINGSA (an RCA
regulated utility)
• Kenai Gas Pool 6 Established in 2006, gas
storage capacity 50 bcf, operated by Hilcorp
• Pretty Creek Established in 2005, gas storage
capacity 3 bcf, operated by Hilcorp
• Swanson River (Federal) Established in 2001,
gas storage capacity 3.4 bcf, operated by Hilcorp
1:33:37 PM
REPRESENTATIVE MEARS asked whether other potential opportunities
for storage are being explored.
MR. NOTTINGHAM replied that he believes other opportunities are
being explored by various producers/operators in the Cook Inlet
as well as the utilities.
REPRESENTATIVE SADDLER inquired about why CINGSA is regulated by
the RCA but not Kenai Gas Pool 6 or Pretty Creek.
1:34:22 PM
JOHN CROWTHER, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), answered that existing
[DNR] leases grant operators the right to store their own
production on their own leases. Therefore, those operated by
Hilcorp have the right to store Hilcorp production so that it
can be used to meet those deliverability demands. For the Kenai
Gas Pool 6, he explained, [DNR] has authorized third party
storage from a lessor perspective. If that storage is moved
forward and brought into the market, the RCA depending on how it
exercises its authorities, might require regulation for third
parties to access [the stored gas].
1:35:04 PM
MR. NOTTINGHAM spoke to slide 11, "COOK INLET GAS DEMAND," which
read as follows [original punctuation provided with some
formatting changes]:
Kenai LNG Plant
• Nikiski liquified natural gas (LNG) facility is
operated by Trans-Foreland Pipeline Co. LLC which
is a subsidiary of Marathon Petroleum
• Last exported LNG was 2015
• Department of Energy (DOE) authorization for
exporting LNG expired in 2018
• Dec. 2020 Federal Energy Regulatory Commission
(FERC) approved LNG imports to this facility an
annual capacity up to 1.8 billion cubic feet (bcf)
per year
Nutrien Fertilizer Plant
• Second largest ammonia/urea plant in U.S.
• Shut down and mothballed in 2007, however Nutrien
maintains permits and remains interested in
reopening the plant
• Gas prices relative to Lower 48 makes economics
difficult
• Potential source for blue hydrogen/blue ammonia
MR. NOTTINGHAM elaborated that in the early 2000s Cook Inlet gas
was used for electricity and heating in the Anchorage and
Railbelt areas, for producing fertilizer, and for LNG export.
The fertilizer plant was shut down in 2007 and LNG exports ended
in 2015, shrinking the demand for Cook Inlet gas [from a high of
nearly 220 bcf] to roughly 70 bcf per year to supply current
utility needs and some industrial needs such as a refinery and
general oil and gas field operations.
1:36:30 PM
MR. NOTTINGHAM related that [in 2023] Hilcorp informed the
utilities that it couldn't commit beyond meeting its existing
contracts with the utilities. He said DNR responded by putting
together a forecast to understand the gas supply and resource
availability in the Cook Inlet. He paraphrased from slide 12,
"DNR 2022 COOK INLET FORECAST," which read as follows [original
punctuation provided with some formatting changes]:
Purpose of the 2022 Cook Inlet Gas Forecast:
• Independent analysis to provide information on
gas supply issues in the Cook Inlet
• Also provides production information for the
Department of Revenue's revenue forecast
Methodology:
• Utilized public production data to assess Units
producing gas in the Cook Inlet
• Generally accepted petroleum engineering
practices used to develop projections
• Standardized set of economic limits were used for
each Unit
Key Assumptions:
• Assumes 15 development wells per year until 2030,
and no new wells beyond that
• Assumes gas price is flat at 70 BCF, with
escalation for inflation. Does not forecast
market changes responding to supply/demand
• Does not include contribution from non-producing
known prospects and does not forecast likelihood
of their development
• Forecasted volumes do not account for gas
produced from gas storage
1:39:13 PM
MR. NOTTINGHAM spoke to the graphic on slide 13, "FORECAST
PROVED DEVELOPED & PROVED UNDEVELOPED." He explained that [from
2023 to 2026] the forecast is for the gas supply to roughly meet
the estimated demand of 70 BCF per year. Beginning [in 2027],
he continued, the forecast is for supply to start falling off
demand even with continued drilling. That continued drilling,
he advised, is a large chunk of the future supply from the Cook
Inlet, so it's an important piece that needs to continue for the
area to continue to meet the demand.
1:40:48 PM
REPRESENTATIVE MEARS stated it is market development, investor
certainty, and a flat line for demand that are being talked
about. She asked if there are other potential energy demands
that could be a route for proving a larger demand potential if
it is being signaled that Alaska is a good place to invest.
COMMISSIONER BOYLE responded that there is an opportunity to
market more or see a demand increase assuming the economics are
right. Refineries and industrial users continue to need natural
gas, he said. For example, Donlin Gold has explored the
viability of building a pipeline from the Cook Inlet to its mine
site, and several mineral and mining prospects in the Susitna
Valley may be interested in consuming Cook Inlet gas. In
theory, if enough gas were to be discovered, produced, and made
available, there might be an opportunity for the Nutrien
fertilizer plant to resume operation.
1:43:04 PM
CHAIR MCKAY pointed out that only one jack-up rig is currently
operating in the Cook Inlet, and that it has a full schedule of
projects. So, slide 13 is important, he said, because it
forecasts the future if no changes are made. Time is of the
essence for considering this seriously, he continued. "Fifteen
wells per year," give or take, is vitally important or
[production] will stay below the [70 BCF] line. Geologists
think there is lots of gas in the inlet; it is essential to
figure out how to add a second jack-up rig to get more than 15
wells per year. As can be seen on slide 13 and which shows the
slide's importance, a gasline from Cook Inlet to the Donlin Gold
Mine, for example, cannot be advanced in the current situation.
COMMISSIONER BOYLE concurred with Chair McKay's statements that
a shortfall is seen with the status quo assumptions, that it is
known where gas currently is and where opportunities are, and
that a second jack-up rig is an important issue. Another issue
related to the Cook Inlet industry's decline, he added, is the
resulting erosion of the ability of contractors and suppliers to
provide the same level of service and support that they
historically provided in the Cook Inlet. Support services have
been redeployed to the North Slope where investment is now
flowing. It isn't just about the companies producing oil and
gas, the associated service companies that enable the producers
to be successful must also be considered.
1:47:56 PM
REPRESENTATIVE SADDLER related his understanding that Hilcorp
and Homer Electric Association (HEA) have signed an extension of
their gas supply contract, and that he understands this is done
by borrowing from the future. He asked how the chart on slide
13 would change if Hilcorp begins to produce extra gas sooner to
supply HEA.
MR. NOTTINGHAM replied that Hilcorp accelerates gas production
from the future currently. He offered his belief that any
excess above the 70 BCF would go into a storage reservoir and
continue to pressure up that reservoir. When that excess gas is
needed in the future for supplying HEA or any utility, then HEA
could call upon that gas from storage to supply that need.
1:49:25 PM
REPRESENTATIVE SADDLER surmised that that would not change the
decline seen in the graph on slide 13, it is just where it is
stored short term.
MR. CROWTHER responded that the volumes at issue in the HEA
contract are quite small and don't materially change the graph
from a visual perspective. However, he advised, if there were
to be an effort to pull forward large volumes of gas there would
be constraints on rig availability, service capacity, and so
forth. While it was natural for developers and utilities to
manage short term year-to-year supply issues in the near term,
[DNR] believes that longer term there must be a solution like
this legislation which dramatically reframes and brings new
prospects online.
1:50:16 PM
MR. NOTTINGHAM resumed his presentation. He displayed slide 14,
"2022 FORECAST VS ACTUALS," and said the graph shows that actual
[wells drilled] is tracking with DNR's forecast [18 development
wells actually drilled in 2022 versus DNR's forecast of 15
development wells].
MR. NOTTINGHAM elaborated on the accuracy of DNR's forecast of
15 development wells on average per year by proceeding to slide
15, "2023 DEVELOPMENT WELL ACTIVITY," which read as follows
[original punctuation provided with some formatting changes]:
Well Activity
17 gas development wells have been drilled and
completed during calendar year 2023:
• North Cook Inlet Unit x3
• Lewis River Unit x1
• North Trading Bay Unit x1
• Swanson River Unit x3
• Beluga River Unit x5
• Lewis River Unit x1
• Ninilchik Unit x3
• 1 development well is currently being drilled in
Kenai Unit
• 1 development well drilling permit is currently
approved for Beluga River Unit
Production
Major Field Contributors
(through November 2023):
• Ninilchik 21.8 [percent]
• North Cook Inlet 18.8 [percent]
• Beluga River 18.5 [percent]
• All other gas fields represent less than 10
[percent] each
The above percentages are based on gas volumes for
sale, and discounts gas produced from storage as well
as gas reinjected for EOR purposes
1:52:08 PM
MR. NOTTINGHAM spoke to slide 16, "COOK INLET 2023 LEASE SALE
RESULTS," which read as follows [original punctuation provided
with some formatting changes]:
New, competitive lease terms offered:
• Net profit share as the bid variable
• Fixed per-acre cash bonus
• No royaltypercentage of net profits owed to the
State after recovering capital investments and
operating costs to bring production online
Six tracts received bids
• Three from Hilcorp Alaska LLC
• Three from Hex LLC
Net profit share rate bids: 5.6 [percent] 11
[percent]
Cash bonus revenue: About $600,000
Acres receiving bids: About 15,000 acres
MR. NOTTINGHAM reiterated that DNR has the statutory ability to
offer a net profit-based bid variable in its lease sales with no
royalty. It was thought this might attract more exploration in
the Cook Inlet by both new and existing operators/producers.
Under net profit share, the producer doesn't have to pay a
royalty, and net profit share payments to the state don't begin
until the project becomes cash flow positive. He characterized
the lease sale results as encouraging but allowed that DNR would
have liked to see more bids.
1:53:52 PM
CHAIR MCKAY asked whether these new leases can be characterized
as being over existing structures that are believed to have gas.
MR. NOTTINGHAM answered that the division doesn't have specific
knowledge as to what the producers and operators may be looking
at but given they risked some amount of cash to acquire the
leases indicates that they see something there.
CHAIR MCKAY observed from the map on the right side of slide 16
that the new leases are a blend of onshore and offshore that is
close to shore. He surmised these leases could be drilled by a
land rig with extended reach drilling, in which case these
prospects could be drilled without another jack-up [rig].
MR. NOTTINGHAM replied that that would be true for the onshore
prospects. The leases that were picked up, he noted, were near
infrastructure and near existing units, so ease of development
may have been a consideration of the operators that bid on them.
1:55:45 PM
MR. NOTTINGHAM reviewed slide 17, "EXISTING OIL & GAS ROYALTY
STATUTES." He said AS 38.05.180(f)(3) applies to new leases
with no production and prescribes commercial terms for DNR's oil
and gas leases which include a minimum royalty rate of 12.5
percent and the option for sliding-scale royalty rates or net
profit sharing. He said AS 38.05.180(f)(4)-(5) apply to both
new and existing leases with no production in Cook Inlet and
provide a 5 percent royalty rate on initial production under
limited circumstances. Put in place [by Senate Bill 112] in
1996, .180(f)(4), Cook Inlet Discovery Royalty, has been used
only once. Put in place [by House Bill 380] in 1998, .180(f)(5)
grants 5 percent royalty for 10 years; at the time of the
legislation it applied to six known fields, four of which
qualified and were successful developments. Mr. Nottingham then
addressed statutes relating to mature production on existing
leases. He said AS 38.05.180(f)(6) reduces royalty rates on oil
production for some offshore fields under limited conditions.
[Put in place by Senate Bill 185 in 2003], he said this has been
an effective methodology for prolonging oil production from
those fields. However, he noted, it doesn't apply to some
offshore fields that are producing now, and which could benefit
from this. Regarding AS 38.05.180(j), royalty modification by
the DNR commissioner, he noted that it applies to more than just
the Cook Inlet. [Expanded in 1995 by House Bill 207], he said
this statute allows the DNR commissioner to modify royalty for
unproduced pools, mature pools, or shut-in pools that are
uneconomic. This is a very high bar and lengthy process, he
added. Mr. Nottingham advised that many of the existing
statutes have restrictions which make for a cumbersome process
that may be a detraction.
1:59:56 PM
CHAIR MCKAY pointed out that [the Cook Inlet] is a very mature
basin. Alaska is almost like an independent country, he opined,
because it is far away from the Lower 48 and other sources of
gas, so charting Alaska's future is "in our hands." He noted
that Alaska collects money from these fields in four ways: 12.5
percent royalty per the state constitution, production/severance
tax, corporate income tax, and property tax. Royalty is what is
being talked about today, he continued, property taxes are
collected by the local governments, and corporate income tax is
another subject. He asked whether no production tax is paid on
many of these fields.
MR. CROWTHER replied that production tax revenue from Cook Inlet
production is quite limited today due to policy rationale
enacted by the legislature to promote development of those
resources. Property tax is an important component of state
revenue, he said, but also a part of the dynamic that drives
investment decisions about activity in Cook Inlet. Currently
there is very active debate and dispute with different operators
about the appropriate property tax implications and how they
affect investments. Royalty is directly within DNR to manage,
and the department thinks royalty is a key economic driver of
decisions in these fields. Slide 17 shows the legislature's
historical enactment of significant royalty modification in
different contexts to promote development to get energy supplies
on the market. The intent of HB 276, Mr. Crowther continued, is
to make royalty reductions broadly applicable and clearly
applicable to new production instead of having volume driven
limits, or location driven limits, or a complicated process with
long timelines and uncertainty.
2:03:41 PM
REPRESENTATIVE SADDLER asked whether current statutes are
ineffective or were effective for their time, but circumstances
have now changed.
COMMISSIONER BOYLE answered that he wouldn't say the royalty
modification statutes are ineffective, but he would say they set
a high hurdle that requires lots of analysis by the division and
lots of back and forth with the applicant, which isn't a good
tool for certainty or being able to do something quickly. He
offered his belief that historically there haven't been many
instances of the department granting royalty relief.
REPRESENTATIVE SADDLER offered his opinion that the State of
Alaska can use royalty and tax provisions to encourage desirable
outcomes like providing a supply of gas that keeps people warm
and dry, so he doesn't consider the provisions as gas giveaways.
2:06:14 PM
COMMISSIONER BOYLE responded to both Representative Saddler's
and Chair McKay's comments. He advised that the four kinds of
state and/or local tax can be drivers on the economics of a
project, particularly during the early years when there isn't
yet any revenue from the project. Property tax begins as soon
as any kind of infrastructure is put in the ground and must be
paid by the company regardless of whether a profit is being
made. The royalty obligation begins as soon as the project
starts production, yet costs haven't been recovered at that
point. So, property tax and royalty are key drivers in the
economics of a project. After operation starts it takes time to
recover the drilling, equipment, and pipeline costs and to earn
enough return to repay lenders and shareholders. Commissioner
Boyle said he thinks the committee rightfully should look at all
the elements to understand where in the cycle they have an
impact on project economics. Policies that provide benefit in
the early years will have more meaningful impact in helping
companies decide whether a project is a go or a no-go versus
policies that are oriented towards fields that are already in
production or are more mature.
2:09:09 PM
REPRESENTATIVE MEARS drew attention to the second column on
slide 17 and asked what the difference is between HB 276 and [AS
38.05.180(f)(4)-(5)], which has not been heavily utilized.
MR. CROWTHER answered that AS 38.05.180(f)(4) is where a new
field is discovered and certifications are required of the well,
the production, and the status of the reservoir pre-well, and
only the royalty is reduced for that one lease that the well is
located on. The department thinks the reason that authority has
only been applied for and utilized one time is in part due to
how narrow and focused it is. A given unit may involve five or
more leases, so that royalty reduction on the production from
only the discovery lease is a limitation there. He stated that
AS 38.05.180(f)(5) targeted reduced royalty for six different
fields to get them online and was successful in that four of
those six fields did go into production, providing oil and gas
that the state has benefitted from. He said HB 276 essentially
would be expanding that (f)(5) provision for all pools that are
not currently in commercial production, so new resources getting
into the market at that highly competitive 5 percent rate. The
hope is to see the same success as with those prior fields which
came online in the 1990s and early 2000s.
2:11:15 PM
MR. NOTTINGHAM paraphrased from slide 18, "HB 276: WHY IT IS
NECESSARY," which read as follows [original punctuation
provided]:
Why this legislation is necessary
• Alaskans need access to reliable, affordable energy
• Nearly 70 [percent] of Alaskans use Cook Inlet
natural gas for heating, energy, and electricity
generation
• Cook Inlet gas supplies are forecasted to drop below
demand in coming years unless new sources are brough
online
• There are several significant known natural gas
fields in Cook Inlet that are not seeing development
under the status quo
• Policies and actions to support future development
need to be taken today
• More competitive development terms will increase
total recovery and utilization of Alaska's natural
resources, which otherwise may not be developed or
generate revenue for the State
• Alaska should use all the local natural gas
resources available as we work on long-term energy
solutions for the Railbelt
2:12:57 PM
REPRESENTATIVE MCCABE inquired about the performance clauses in
the Kitchen Lights and Cosmopolitan leases.
MR. NOTTINGHAM replied that the Kitchen Lights and Cosmopolitan
units both have a plan of development requiring the operators to
state their plans for the current and future years. He said the
division works with the operators to help them identify what
they should be doing in the next and following years. The
division has recently strongly indicated to both operators its
expectation that these units be developed expediently.
REPRESENTATIVE MCCABE asked whether the Kitchen Lights and
Cosmopolitan units are nearing the end of the period stated in
their leases, usually five to ten years, where they must
perform, or the lease will be sent to someone else to perform.
MR. CROWTHER responded that both units are currently in
production and that production holds the unit. He said DNR has
authorities to review the status and level of development
activities for a unit, as well as the scope and size of that
unit, but hasn't utilized those authorities to pare back or
modify either unit. The department expects to see performance
under the recently approved annual plans of development which
have significant development obligations for both operators. If
HB 276 or something like it were to be enacted, the department
would be able to specifically tell those operators that it is a
highly competitive environment and development activities must
be undertaken in the near term, or the state will move forward
with potential action under the unit.
REPRESENTATIVE MCCABE requested a definition of "in production."
MR. CROWTHER offered his belief that last year the Kitchen
Lights Unit produced near 4 BCF of gas, so contributed to the
total demand. But, he added, DNR believes that additional wells
and development would push that number up to see the full
development of that resource, which is an obligation of the unit
agreement. The Cosmopolitan Unit currently is producing oil and
a small amount of gas that is being used in the market, but DNR
similarly feels that the full development of that resource with
additional wells needs to be done to meet those obligations.
2:16:24 PM
MR. NOTTINGHAM returned to his presentation. He spoke from
slide 19, "HB 276: EFFECTS," which read as follows [original
punctuation provided]:
What the bill does
• Grants a reduced royalty of five percent for the
first then years of production from pools in Cook
Inlet that have not previously been produced for
commercial sale
• Includes know resources that are not yet in
production and resources that could be discovered
through further exploration
• Applies to any state land in Cook Inlet, whether or
not in existing fields, units, or leases
• Does not reduce royalties for pools presently in
commercial production
2:17:06 PM
MR. NOTTINGHAM spoke to slide 20, "HB 276: QUALIFYING
PRODUCTION," which read as follows [original punctuation
provided, with some formatting change]:
AS 38.05.180(f)(f) is amended to read:
"[The] lessee of all or part of an oil or gas pool in
the Cook Inlet sedimentary basin that, subject to
determination by the commissioner, has not previously
produced for commercial sale oil or gas shall pay a
royalty of five percent on oil or gas produced for
sale from that pool for 10 years following the date on
which the production for commercial sale commences;"
What "has not previously produced for commercial sale
oil or gas" means:
• Production from wells or sidetracks drilled after
the effective date of this legislation that would
not have otherwise been produced from existing wells
• "[S]ubject to determination by the commissioner"
means DNR considers if the source of oil and gas has
produced in the past, proximity to existing wells,
drainage area of existing wells, and timeframe for
recovery from existing wells
• Examples of qualifying production:
• A newly-drilled well or sidetrack from the edge
of an existing or previously-producing
development
• A new well or sidetrack from an unproduced
accumulation of oil and gas
• The lessee or lessees shall jointly or separately
apply for reduction in royalty for one or more wells
with each application
• Data and interpretations will be supplied with the
application, and DNR may request further data and
interpretations
• A well or accumulation may be determined to receive
reduced royalties before a well is drilled when
supported by data and interpretations
2:20:06 PM
MR. NOTTINGHAM addressed slide 21, HB 276: SECTIONAL SUMMARY,"
which read as follows [original punctuation provided with some
formatting changes]:
• Section 1: Amends AS 38.05.180(f)(5). The original
statute granted a five-percent royalty rate for oil
or gas for the first ten years but was limited to
six Cook Inlet fields discovered before 1988 and
provided a deadline of January 1, 2004, for start of
production (in AS 38.05.180(dd)).
This amendment modifies the program to include new
production in Cook Inlet, regardless of discovery
date, and removes limits or eligible volumes of oil
or gas during the ten-year period of reduced
royalty. Eligibility is subject to determination by
the Department of Natural Resources (DNR)
commissioner, rather than being automatic.
• Section 2: Repeals the following statutes:
AS 31.05.030(i):
This section relates to the powers and duties of the
Alaska Oil and Gas Conservation Commission (AOGCC)
and the paragraph outlines the procedure for
approving plans of development by the AOGCC. This
statute is no longer necessary because the
Department of Natural Resources, not the AOGCC, is
the agency that administers and approves plans of
development.
AS 38.05.180(dd):
This section relates to the State of Alaska's oil
and gas and gas only leasing policies. Paragraph
(dd) established a deadline for start of production
under the unamended AS 38.05.080(f)(5) and is no
longer appropriate.
• Section 3: The legislation takes effect immediately
under AS 01.10.070(c).
2:22:01 PM
CHAIR MCKAY drew attention to slide 10 regarding gas storage.
He requested verification on whether Kenai Gas Pool 6 could have
500 BCF or more of gas storage capability.
MR. CROWTHER replied that he will get back to the committee with
DNR's understanding of the general size of that asset as there
are some limits to what size storage asset can be utilized. He
said two things drive the size of a storage asset 1) the raw
geologic capacity, with the prior volume produced from the field
being a guide there; and 2) the Alaska Oil and Gas Conservation
Commission (AOGCC) sets a pressure limit based on the reservoir
and regulations.
2:23:11 PM
REPRESENTATIVE SADDLER asked whether there is a reason why HB
276 limits the royalty relief to 10 years. He further asked
whether offering that incentive for a longer period would be
more effective.
MR. CROWTHER responded that [DNR] set a 10-year period in the
proposed legislation because historically these provisions have
had a 10-year period for the legislature and the public to
assess the effectiveness of the program. A longer period, he
continued, would be a strong signal that DNR would be happy to
discuss with the committee.
REPRESENTATIVE SADDLER asked whether a longer period would cause
confusion.
MR. CROWTHER answered that clear statutory language for whatever
period is set can be assessed by accountants and professionals
and won't create confusion.
2:24:23 PM
REPRESENTATIVE BAKER observed the zero fiscal note for HB 276.
He asked whether there are any projections on how the state
would benefit revenue-wise moving forward.
MR. CROWTHER answered that the department will share its
hypothetical models with the committee. He pointed out that
these resources aren't being developed under the status quo of
12.5 percent royalty, so the state is receiving nothing.
Receiving 5 percent of new production that otherwise wouldn't be
on the market could therefore be a significant revenue benefit.
2:25:31 PM
REPRESENTATIVE MEARS noted that this proposal is for the entire
Cook Inlet Basin. She asked whether it would be in perpetuity
or would have a limit of the time for when this can initiate.
COMMISSIONER BOYLE replied that currently the intent is for the
incentives to continue indefinitely given the reliance on Cook
Inlet energy for providing heat and electricity to homes. As
well, he noted, oil and gas development enable the State of
Alaska to monetize its resources which in turn grows the
permanent fund and provides revenues for state services.
CHAIR MCKAY pointed out that more activity in Cook Inlet creates
local jobs and local revenue, which is liked by constituents.
2:27:44 PM
The committee took an at-ease from 2:27 p.m. to 2:29 p.m.
2:29:13 PM
CHAIR MCKAY announced that HB 276 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 276 Transmittal Letter 01.16.2024.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 276 |
| HB 276 Sectional Analysis version A 01.22.2024.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 276 |
| HB 276 Fiscal Note DNR.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 276 |
| HB 223 Sponsor Statement.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 223 |
| HB 223 Sectional Analysis.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 223 |
| HB 276 - DNR Briefing Paper.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 276 |
| HB 276 - DNR Presentation 1.30.24.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 276 |
| HB 223 Fiscal Note DNR.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 223 |
| HB 223 Fiscal Note DOR.pdf |
HRES 1/31/2024 1:00:00 PM |
HB 223 |