Legislature(1997 - 1998)
04/16/1998 04:37 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 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."
SENATE CS FOR CS FOR HOUSE BILL NO. 380(RES)
"An Act relating to a temporary reduction of royalty on
oil and gas produced for sale from certain fields
described as being located within the Cook Inlet
sedimentary basin, as having been discovered before
January 1, 1988, and as in from at least January 1,
1988, through December 31, 1997."
Co-chair Sharp noted there was a work draft in the file and
asked that it be moved before calling on the sponsor.
Senator Pearce moved SCS CSHB 380() the version "P" draft by
Mr. Glover, dated 4/16/98. Senator Adams objected. He
asked the difference between the Resources Committee
substitute and the work draft.
Senator Pearce asked the committee look at the Resources
version, page three, lines nine through nineteen and said
the RES CS added a section under the Alaska Royalty Oil and
Gas Development Advisory Board which gives them an approval
within forty-five days after receipt of the changes based on
and in order to require local Alaska contractors, Alaska
residents, but also Alaska purchase, Alaska fabrication.
The chairman of the Resources Committee in offering this as
an amendment said there had been discussion back and forth
as he tried to get something drafted, because there was
concern about setting up another opportunity for any entity
to file suit against this sort of approval of a temporary
reduction of a royalty based on a decision made by an
advisory board. The version now before us as a work draft
changes the language, and we have gone through it. Looking
on page three, lines ten and eleven, while the advisory
board is still certifying receipt of a plan, the entity that
comes and asks for the reduction is voluntarily forced to
give a written plan that would require local hire, local
fabrication, as best they can. The advisory board would
hold a public hearing on the plan within forty-five days of
receipt. The entity would still be required to make their
best effort, as we all support using Alaska fabrication and
Alaskans on the job. However, there still would not be a
situation where the advisory board decision could become
reason for a suit by whatever entity. That was the intent
of going in this direction. She advised Senator Adams that
was the only change.
Senator Adams withdrew his objection and therefore, without
objection it was adopted as the working draft.
REPRESENTATIVE MARK HODGINS, sponsor of the bill, was
invited to join the committee. He said the bill would be an
incentive bill for six specific oil fields in Cook Inlet
that have been shut in for approximately thirty years. No
royalty has ever been received. Hopefully, the bill would
allow some royalties to flow and open up new areas. In the
case of the three southern fields, Anchor Point field,
specifically, any amount of gas that has hit there could
have the added benefit of gasifying Homer.
Senator Adams asked about the reference to the bill being an
incentive bill. What did it do to Alaskans with regards to
their permanent fund dividends if the correct royalty was
not received?
Representative Hodgins said nothing had been received to the
permanent fund program from any of these fields. There had
been no production and no royalties paid in. This was
because these were small fields, they were far from
infrastructure and they've been uneconomical. The best
economic analysis was the oil and gas had been known to be
there and has not been developed since they've been
discovered approximately thirty years ago.
Senator Adams asked what this year's State deficit in the
operating and capital budget?
Representative Hodgins said he did not know.
Senator Adams asked if it was in the area of five to six
hundred million dollars?
Representative Hodgins said he would think that was correct.
Senator Adams asked if there was such a large deficit in the
State's return to their coffer should the resources be just
given away?
Representative Hodgins said the point was they had not
received any money at all from the fields and he contended
that five percent was better than nothing. He also noted
that as the State revenues were being diminished municipal
assistance was also being diminished. He said if any one of
the six fields were developed, the infrastructure that would
be put in would help the municipalities. As an example he
cited the Kenai Peninsula Borough, that had approximately
twelve mills, would leave an extra eight mills for the
State. The incentive for Alaskans was that it would create
some jobs and hopefully create some revenue in a place that
no revenue had been received up to this point.
Senator Adams further noted that he had mentioned revenue
assistance and that it was going down. Representative
Hodgins concurred. Senator Adams said this was the fault of
the Legislature that this had occurred. It was a loss of
about twenty-four million dollars.
Representative Hodgins explained that no monies had been
received from these fields other than the lease amounts. He
further said these fields would not be developed unless
there was some sort of incentive. Oil prices had been up to
twenty-five dollars a barrel and these fields still had not
been developed. He felt it was prudent for them to go
forward as shepherd to the State's assets and resources in
order to get some revenue out of them. But for the past
thirty years they had not received any revenue.
Senator Adams asked about justification and wasn't this
necessary to explain a royalty reduction as was in HB 207?
Representative Hodgins said that HB 207 had never been used
because it was too cumbersome and provided no incentive. He
said with the present bill they were trying to help the six
fields so they could become operative. The discovery bill
offered a five- percent royalty and an unlimited amount of
production for ten years with a twenty-five million barrel
oil cap and thirty-five billion cubic feet of natural gas
that does protect the State's interest.
Senator Phillips asked if there was going to be any
testimony from the oil companies.
Co-chair Sharp advised Gary Carlson, Paul Fuhs, and Ken Boyd
were signed up to testify.
Senator Phillips said his constituents were concerned about
giving the oil companies a royalty break. Therefore he
wanted to hear from the oil industry on why they needed this
incentive.
(miscellaneous conversation at the table)
Senator Pearce said she was not approached by any oil
company to introduce this bill. She said it came after an
Anchorage caucus meeting, which was where gas shortages and
Cook Inlet were talked about and how to get ahead of the
market rather than have the gas prices go way up.
GARY CARLSON, Vice President for Force Energy, an
independent oil company, was invited to join the committee.
He said the company started investing in Alaska in the
latter part of 1996. He said the company supported the bill
since the beginning and felt it was a clear incentive to
invest. He said the advantages to the State would set a
time frame to cause the investment to take place because the
fields have been fallow for over thirty years after
discovery. He felt there would be some response from the
industry with this incentive. It is simple and clear and
the industry can plan around it. There were no problems
trying to anticipate cost of development and the oil and gas
prices were not in issue. The cap that was adopted was fair
and protected the State but still provided incentive to
develop these marginal fields. He also supported the
committee substitute as introduced today. He said his
company felt the substitute included good business. He felt
the company was basically an Alaska company because they had
originally hired nineteen Alaska residents, local
consultants and contractors had been used, and they planned
to utilize local manufacturers and contractors as they go
ahead.
Senator Phillips said his district was questioning whether
they should do royalty breaks or not. He said the people in
his district were hardworking. He asked what the industry
was doing to convince the people of Alaska they needed this
royalty break. He felt this dissatisfaction could be a
forewarning of what could happen in the next few years.
Mr. Carlson responded that he could not answer the question
on how to influence the thinking of his constituents. It
was beyond the realm of his role in Alaska. Senator
Phillips was concerned about being asked to vote for
something that Mr. Carlson now considered to be out of his
realm. Senator Phillips again voiced his concern and said
there was no support back home for this bill. He felt the
industry should spend more time with the shareholders of
Alaska and educate them on what they were trying to do.
Co-chair Sharp said perhaps they may be differentiating
between the "big three" and giving them a break and small
marginal fields. Senator Phillips reminded the Co-chair
that Cook Inlet was mentioned specifically.
Senator Torgerson said contrary to Senator Phillip's
district, his district was in support of this bill. He
noted empty buildings and loss of jobs in his area. He said
the Administration was making no effort to promote any deals
using HB 207 or any other bills passed for incentives. He
asked if this bill would speed up production?
Mr. Carlson, speaking for his own company, said there were
landholders and individuals who had leases in the Kenai
area; also ARCO and UNICAL had interest in these fields. He
said the clock was already running as far as they were
concerned and wanted to look at these fields as quickly as
possible. They felt the bill offered great incentive. He
noted the caps spoken about earlier were valid. However,
there was still some distance between the resource and the
market. He was not sure what the other companies were
looking at.
Senator Torgerson said part of the criticism in Senate
Resources was there was not a cap on the price per barrel.
He wanted to know if there should be a sliding scale on the
cap put in the bill.
Mr. Carlson said he had seen similar incentives utilized in
other states and countries. However, what happens was that
it becomes difficult to plan investments because it has to
be built into the risk in capital. He said the nice thing
about this bill was that it was clear the industry took the
risk on the oil price and on the cost, and it was understood
what the royalty was. This was a good tool for industry to
evaluate the prospects.
Senator Adams asked when they purchased Marathon Oil in 1996
and then bid and won in 1997 approximately seventeen tracks,
did they anticipate starting or getting into an incentive
program like this?
Mr. Carlson said he personally came to work for Force Energy
three months after they came to Alaska and started investing
in Alaska. Therefore, he could not answer on these
specifics. He generally related the company strategy now
under his leadership in Alaska. He said they felt Alaska
had a progressive business attitude with the discovery
royalty, HB 207, area-wide leasing concept and this was very
consistent. The fields were left behind for thirty years
and they anticipated a good business environment.
Senator Adams asked about ANS crude prices and what price
would his company need in order to be able to develop a
particular field.
Mr. Carlson said that at the latest ANS crude price there
was no incentive for them. He said they were still trying
to get some cost estimates.
Senator Adams asked if they had looked at the royalty relief
versus without the royalty relief. Mr. Carlson indicated
they had. Senator Adams further inquired as to what they
had come up with. Mr. Carlson said the economic model they
looked at included the difference in the size of the field,
if capital could be attracted to Alaska and the possibility
of a thirty-five million barrel field not being developed.
He did note that a fifty-five million barrel field could
probably be developed at twelve and a half percent royalty.
He said this could all change depending on the oil price,
the capital costs and the timing. The attempt to put a cap
in the range of forty plus or minus million barrels would
give the incentive for industry to go out and look for
marginal fields. They further felt they could do something
with Cook Inlet as left behind by the majors.
Senator Adams asked if they would continue to develop the
oil fields if this bill did not pass or if they would
consider working under HB 207 as passed a couple of years
ago?
Mr. Carlson said there was no incentive through HB 207. It
would not apply to these six fields because they are not
delineated.
Senator Torgerson asked about Lease/Sale 85 and if anything
purchased under this would be covered under this bill?
Mr. Carlson said he was not a geologist and did not really
understand the extent of that prospect in the field. He did
not know if there were any 85-A leases that would be
affected.
Senator Torgerson asked if they were talking about shut-in
wells and that particular field? Mr. Carlson said the field
was probably originally discovered and then abandoned.
Senator Phillips said he felt there was a serious problem
creeping up and it had to be dealt with here. He felt the
public needed to be in the loop also.
PAUL FUHS, representing Alaska Resource Alliance was invited
to join the committee. He said they were a newly formed
business in Alaska of twenty-three oil fields, supply and
service companies, single-point ordering system and a
comprehensive consolidated shipping and logistics tracking.
He said they supported the bill because of the potential
offered Alaska oilfields service and supply companies. In
response to Senator Phillips earlier concerns he said it was
simply a matter of how the bill was presented to
constituents. He knew it was difficult for them to
understand all the complexities of particular economic
arrangements. He noted the House Oil and Gas Committee did
reduce the caps substantially to twenty-five million
barrels, which makes for a skinny incentive. However, it
was still worth considering. He asked the committee to
support the bill.
KENNETH A. BOYD, Director, Division of Oil and Gas,
Department of Natural Resources was invited to join the
committee. He said the division did not support the bill.
There were wells drilled in the 1980's that no one
understood and now with the help of technology, 3-D seismic
and figured it out. He referred to an article from John
Barnes, Manager for Marathon who said some of the changes in
drilling technology being seen on the North Slope will help
drive costs down in Cook Inlet. Just because a field has
been shut in for twenty-five years is reason enough to grant
a sixty percent royalty reduction for ten years. The State
was not protected under this bill and would not get their
fair share. He wanted to make clear to the committee that
he was not against royalty reduction as he worked on HB 207
and worked directly with UNICAL. Companies should have time
to work under the new technology. Several million dollars
of new leases were sold last year. He urged the committee
to consider some sort of price mechanism to go along with
the barrel cap.
Senator Adams asked Mr. Boyd if he agreed with the sponsor
statement that more jobs were being provided and that was
helpful to local taxes? Mr. Boyd said there was always the
argument of "what would they do anyway"? If it were true
that the oil fields would not be developed without this
relief, then some number of jobs would be created.
Senator Adams asked who gets the profit from royalty relief?
He felt the State was the loser. Mr. Boyd said that if the
field needed royalty relief an economic analysis should be
done to decide what the relief was and fine tune it to
create a balance between the State and the company. He said
the company deserved a return on its investment for taking a
risk. However, it is the State's resource, the people's
resource, and they too must be protected.
Senator Torgerson asked Mr. Boyd if the 3-D technology drove
costs down because there wouldn't be so many dry holes
drilled? Mr. Boyd concurred. He gave a brief explanation
of 3-D. It was used both as an exploration and production
tool. Senator Torgerson asked if 3-D were employed would
location of small fields keep them shut in? Mr. Boyd
indicated that was correct. Shooting 3-D over a field did
not make it better. It made it easier to understand. 3-D
is a tool that will help to drive costs down.
Senator Torgerson asked how incentive would be offered to
companies who keep 3-D seismic in complete confidentiality?
Mr. Boyd said the division did have the right to that
information. They could use this data to make the analysis.
He said a price needs to be set. One is looking for value,
which is volume times price.
Senator Torgerson said he understood the testimony to be
that since the fields have been shut in for such a long time
period of time they are not economical, but that Mr. Boyd is
saying because they have 3-D technology now the past thirty
years can be ignored. Mr. Boyd explained that if the fields
in fact were not economical he could not explain why the oil
companies were spending money shooting millions of dollars
of 3-D seismic over them.
(Tape #124, Side A switched to Side B.)
Senator Pearce referred to HB 207 and explained why it was
not useful. The bill presently before the committee gave
specific reduction for specific amount of time with a cap in
the number of barrels. She did not feel the State was
taking that large of a risk on specific deals for a specific
period of time. However, they have to be in production by
2004, which is a short period of time in the industry when
there is no infrastructure or a certain immediate
availability of getting to production in any of these
places. She also finds herself as puzzled as Senator
Torgerson to the continuing pitched opposition and to the
tone of the pitch they've been hearing. Particularly when
the Administration is in favor of huge concessions for a gas
line. But somehow it is different in this matter of six oil
fields that will keep people working.
Senator Sharp said that Senator Adam's pitch on why it
shouldn't be done was exactly his pitch against HB 207 that
passed big time. The farm should not have been given away.
He said his concern was to get some kind of small
independent producers successful in the State. However, it
was never going to happen with existing law and the present
way things were being handled. He felt the Legislature
needed to force the issue in getting some kind of activity
going.
Senator Phillips commented briefly to Mr. Boyd.
Senator Adams MOVED amendment #1. Senator Torgerson
OBJECTED. He spoke briefly to his amendment which had to do
with the deficit and that it was not a good public policy to
give away some of the State's resources. By a roll call
vote of 1 yea (Adams) and 5 nays (Sharp, Pearce, Donley,
Torgerson, Parnell, Phillips) the amendment FAILED.
Senator Donley MOVED SCS CSHB 380(FIN). Senator Adams
OJBECTED. By a roll call vote of 5 yeas (Sharp, Pearce,
Donley, Torgerson, Parnell) the bill was REPORTED OUT with
individual recommendations and accompanying zero fiscal note
from the Department of Natural Resources, Division of Oil
and Gas.
ADJOURNMENT
Co-chair Sharp reviewed the schedule for tomorrow's meeting
noting the committee would meet at 9:00 a.m. He recessed
the committee at 5:30 p.m.
SFC-98 -1- 4/16/98
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