Legislature(1997 - 1998)
03/20/1998 01:48 PM House FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
HOUSE BILL NO. 380
"An Act relating to a temporary reduction of royalty on
oil and gas produced for sale from fields within the
Cook Inlet sedimentary basin where production is
commenced in fields that have been discovered and
undeveloped or that have been shut in."
REPRESENTATIVE MARK HODGINS, SPONSOR, spoke in support of HB
380. He explained that HB 380 would offer royalty
reductions on six oil and gas fields, in Cook Inlet region,
that have been shut in for more than twenty years. The
fields have been worked on and proven to be uneconomic. He
observed that the House Special Committee on Oil and Gas put
limits of 35 million barrels of oil or 35 billion cubic feet
of gas produced. Tyonek Deep would not be included. He
observed that the oil industry in Cook Inlet is declining.
There are several oil field service companies that are no
longer in operation. Royalty would be reduced from 12.5
percent to 5 percent. He observed that there is no royalty
if the oil is not removed.
In response to a question by Co-Chair Therriault,
Representative Hodgins clarified that the legislation
pertains to delineated fields. Pools underlying the fields
would not be included.
Representative Hodgins noted that Falls Creek, Nicolai
Creek, North Fork, Point Starichkof, Redoubt Shoal, and West
Foreland fields were specifically identified. Royalty
reductions would be included on any "sweet spots" found on
the above named fields. He observed that seismic studies do
not indicate the existence of sweet spots.
KEN BOYD, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF
NATURAL RESOURCES spoke against the legislation. He
disagreed that the fields are delineated. He maintained
that the Point Starichkof field is not delineated. He
observed that the fields are recently leased. He maintained
that old fields are being developed using new technology.
He noted that discovery royalty legislation was confined to
the pool of discovery. House Bill 380 would apply to the
whole field. He stressed that oil and gas activity will
increase due to 3D seismic, other new technologies and
recent legislation. He observed that there is more oil and
gas activity in Cook Inlet now then during the previous five
years. He asserted that the relief is not based on any
economic evaluation of need and does not protect the State's
upside interest if economic conditions change. Both of
these conditions were included in HB 207. He stressed the
need for more information. Fields have proven, probable and
high side potential. He observed that the potential of the
fields is unknown.
Representative Kohring spoke in support of the legislation.
He maintained that every advantage should be taken to reduce
taxes on the industry.
Co-Chair Therriault observed that revenues to the state of
Alaska from resources and the amount that industry must pay
must be balanced.
Representative Hodgins clarified that no royalties have been
received from the six fields. Mr. Boyd agreed that the
fields have not been developed, but emphasized that they
have recently been leased. He noted new technology might
bring them on line.
Representative Davies questioned how the state of Alaska's
upside could be protected. Mr. Boyd observed that the
actual shape of the field is unknown. He suggested that
volume and price structure overtime should be determined.
He maintained that once the company recoups its cost to
develop the field the State should be able to recapture the
money provided at the front end. A combination of value and
price is needed.
JAMES EASON, FORCENERGY testified in support of the
legislation. He referred to a letter to Senator Halford,
dated 3/11/98. The letter contained an estimate of
reserves. He observed that the fields are not delineated.
House Bill 207 requires a set of standards that an applicant
must make. The commissioner makes a definitive set of
findings based on a standard of delineation, which the
fields in HB 380 do not have. Royalty relief is not
available to these fields under HB 207, since they are not
delineated.
Mr. Eason observed that royalty relief would be exchanged
for guaranteed development before January 1, 2004. Royalty
would only be reduced if development occurs prior to January
1, 2004. He emphasized that the fields have not been
developed in 30 years. The state of Alaska would receive 5%
instead of 12.5% under the lease. Infrastructure would
occur as a result of development. There is no
infrastructure in the fields to encourage development.
Pipelines and platforms would have to be built. The bill is
narrowly crafted to affect defined fields that meet the
criteria and are brought under production by 2004. He noted
that the primary focus of previous hearings has been the
value of the legislation to the leasee and the cost and
value to the State.
Mr. Eason observed that the accompanying fiscal note assumes
that there will be large impacts from the legislation. He
pointed out that the fiscal note is based on estimations.
He stressed that revenue would be generated on fields that
would not otherwise be developed. He questioned why the
fiscal note on HB 380 is so different from HB 207.
Representative Grussendorf observed that marginal fields are
being shut in due to low oil prices.
Representative Davies noted that reserves at Redoubt Shoals
were estimated at 8.9 million barrels. Mr. Eason clarified
that the estimate should be adjusted to 11.0 million barrels
of oil. He did not think that there was an oil price based
upon the known proven reserves that would make development
economic. He did not think that there was an oil price that
would justify the development of the field, given the
expected cost, based on the reserves that are known to
exist, under the current royalty structure, at Redoubt
Shoals. Representative Hodgins pointed out that Redoubt
Shoals is an offshore field and would need additional
infrastructure.
Representative Martin stated that the royalty structure
should be left alone and the severance tax should be
adjusted. Mr. Boyd responded that he supports changing
royalty to encourage production when it is supported by
analysis.
Representative Davies observed that Article VIII, Section 2,
Alaska State Constitution requires that the State provide
for the utilization and development of all natural resources
for the maximum benefit of its people. He asked if the bill
provides for the maximum benefit of the people. Mr. Boyd
did not think that the bill provides for the maximum benefit
of the people.
Representative Grussendorf observed that 50% of all
royalties on new fields go into the Permanent Fund.
Representative Hodgins observed that current royalties on
the fields are zero.
Representative Kelly questioned if there are other ways of
finding out the extent of the reserves, short of
development.
Representative Hodgins emphasized that the fields are
isolated and require infrastructure to be developed.
Redoubt Shoals would require an offshore platform and
pipeline. A pipeline would also be needed for development
of North Fork. It would be uneconomical for a pipeline to
go north. The best utilization of North Fork gas would be
for use in Homer.
In response to a question by Representative Kelly,
Representative Hodgins noted that the federal government
goes to five percent when they give royalty reductions.
Mr. Eason observed that Redoubt Shoals has had 6 wells
drilled. He reviewed the drilling history of Redoubt Shoals
as contained in his letter to Senator Halford, dated
3/11/98. He pointed out that it is the only field in the
State's history where the State told the owners that they
had to go into production or lose their leases. The lease
was returned to the State and the unit was disbanded. When
Forcenergy assumed the interest in those leases it committed
to the State, as part of the unit agreement, to conduct a 3D
seismic survey and to evaluate all the options available to
drill further delineation wells to determine if there are
enough reserves to develop the field. Forcenergy agreed to
release the lease if they did not proceed. Forcenergy has
done the 3D seismic survey and commissioned an independent
assessment of options for building a platform. It is
impossible to develop a field offshore in conditions at
Redoubt Shoals for the amount of reserves. More reserves
will have to be identified or the field will not be
developed regardless of the passage of HB 380.
Representative Hodgins pointed out that the state of Alaska
would receive 9 mils in tax platforms or a pipeline built at
Redoubt Shoal. He emphasized that jobs would be created in
the area. He observed that the legislation would open up
possibilities to smaller operators. A two-person operation
is interested in developing the North Fork field. He
emphasized that the essence of the legislation is to try to
put people to work.
Representative Davies questioned what is the sensitivity of
the development of these fields to price and volume
estimates. He asked if the generic form of Mr. Boyd's
calculations is the correct exercise for the state of Alaska
to go through.
Mr. Eason acknowledged that it would be the correct exercise
to go through in circumstances where there is a reasonable
amount of information to make a legitimate calculation. He
stated that he has no objections to the process of HB 207,
but emphasized that it is a high standard. He stressed
that there are obvious indicators for royalty relief for
fields that have been discovered but remain undeveloped
after 30 years. He pointed out that there are prospects
that are not profitable regardless of price. He observed
that Cook Inlet production is declining. He estimated that
Cook Inlet is 90 percent depleted of oil. He maintained
that the ability to deliver the resource would be absent
major new discoveries or development. He noted that it has
been almost 30 years since there has been a major oil or gas
discovery in Cook Inlet. A point will be reached when the
infrastructure cannot be maintained, due to rising cost, to
complete the existing reserves efficiently.
(Tape Change, HFC 98 -73, Side 1)
Mr. Eason stated that the time is right for legislation to
see if these fields can be produced for the benefits
described. He asserted that a time would come when the
opportunity will be lost.
Representative Davies stated that there has to be a change
in dollar value of the resource that goes beyond the value.
Why would the State not want to structure the legislation in
the event that the price goes above the threshold value that
makes development sensible or the volume estimates go beyond
the threshold estimates. The state would then participate
in the upside potential.
Mr. Eason observed that companies look at expectations. Oil
prices, development costs, costs for wells that are not
drilled due to mechanical problems, frequency and magnitude
of work over wells that are required to replace defective
and deteriorating equipment and a host of other factors
including needed permits for platforms are included in
estimates before making investments. Oil prices, royalties
and taxes are all important factors. He cautioned against
over engineering one factor as the cut off point. He noted
that a decision to produce based on the assumption that the
legislation is in place and royalties are 5 percent could
influence the assumption or risks about other things in
order to proceed. He observed that price spikes could
affect more of the business then the price itself.
Representative Davies stressed that uncertainties will exist
in any calculation. He maintained that sensitivity to
royalty reduction is usually small compared to oil price and
production volume. He suggested that the royalty reduction
could be different for each field. He asserted that more
information could be obtained in a confidential manner.
Representative Mulder observed that the Division has implied
that the legislation is premature and not necessary. He
asked if Forcenergy worked with the Division to justify the
need for the legislation. Mr. Eason observed that
Forcenergy has not approached the Department to talk about
royalty relief under HB 207 because the fields are not
delineated. He discussed the terms of the legislation with
the Department. He explained that the commissioner makes a
determination, on undeveloped fields that have not produced,
based on upon a showing of delineation that have not. The
only recourse is to ask the legislature for relief.
HB 380 was HELD in Committee for further consideration.
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