Legislature(2003 - 2004)
05/05/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE CS FOR CS FOR HOUSE BILL NO. 531(RES)
"An Act relating to natural gas exploration and development
and to nonconventional gas, and amending the section under
which shallow natural gas leases may be issued; and providing
for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, offered by the House Resources
Committee, "[is] having to do with conventional and nonconventional
gas leases."
MARK MEYERS, Director, Division of Oil and Gas, Department of
Natural Resources, testified that this bill focuses on the issues
of shallow gas leasing and the regulatory framework for the
production of coal bed methane.
ELEANOR WOLF, staff to Representative Beverly Masek, referred to
the sponsor statement titled "S CS CS HB 531 (RES) -
Conventional/Non-Conventional Gas Leases" [copy on file.] She
informed that she was available for questions.
Mr. Meyers explained that this bill repeals the existing over-the-
counter shallow gas-leasing program, and replaces it with the
current exploration licensing and conventional competitive leasing
programs. The competitive leasing program would require a best
interest finding, essentially an environmental impact statement,
and would necessitate extensive public notices and consideration of
public input and the public interest. These requirements would be
met prior to handling the lease sale and issuing the license. He
continued to testify the following.
In addition, this bill also includes some additional ground
water protection regulation involving the activity of
producing nonconventional gas, particularly coal bed methane.
It requires the AOGCC (Alaska Oil and Gas Conservation
Commission) to regulate hydraulic fracturing, disposal wastes,
the reinjection of produced waters, and prohibits the
protection of gas from aquifers that serve as a source of
water for human consumption or agricultural purposes unless it
can be demonstrated that it won't adversely affect the
aquifer. These groundwater protections are very significant
and they are one of the areas of contention in the lower 48
[states] with coal bed methane production. There are some
major protections here in this section.
The bill also limits the discretion of the DNR (Department of
Natural Resources) Commissioner to existing shallow gas
leases. It specifies the terms under which that discretion can
be used. It gives the Commissioner the discretion to issue
either oil and gas or a gas only lease. And the gas only
lease, if it can be demonstrated by the lessee that it is
nonconventional gas only, can get more favorable lease terms:
the rentals is one dollar per acre, and if that gas does not
compete with other gas on the market it can be 6.25-percent.
So it contains those favorable terms that were in the shallow
gas leasing for oil energy fundamentally.
It [this bill] repeals the provisions of HB 69, which allowed
the Commissioner to override local zoning authority. It gives
a one-time opportunity for pending lease applications. Under
the programs we have about 200,000 acres or so of pending
lease applications. It takes those applications and gives the
applicant a one-time chance to convert those to a non-
competitive exploration license with a best interest finding
in front of it. And I think that is important again; there is
a lot of concern over those pending applications. We believe
that we can do that expediently, and to that is the DNR fiscal
note is so that we can simultaneously run at least three best
interest findings in addition to the ones we are doing in the
Bristol Bay area to be able to get those licenses out as
quickly as possible.
The bill also requires the Department of Natural Resources
Commissioner to establish set backs and noise mitigation
measures for compressor stations. It also requires the
operator to acquire base line water test data prior to
production or production testing. Again, one of the issues is
that once you have that baseline data then you will be able to
know whether there is any affect. We think with these oil
protectionists it is highly unlikely the water system will be
affected, but AOGCC will have the authority to require that
base line testing. In fact, [AOGCC] will be required to have
that testing before they [the lessees] drill the production
wells [a requirement which is] again dealing with one of the
major concerns we have seen with coal bed methane.
Finally [this bill] specifies the bonding requirements for the
gas only leases.
So, Mr. Chairman, this bill covers both the future leasing for
coal bed methane and nonconventional gas. I think it provides
a good framework for leasing in rural Alaska as well. And it
puts the best interest finding process back in front of the
leasing, and then it provides this overall regulatory
framework, which again has been a desire of the folks, the
concern of the folks out in the Mat-Su valley, and the Homer
area and other areas. And I think it does it in a way that
balances the interests of the industry and interests of the
State in seeing a production occur. And [this bill] provides
that additional level of environmental protection that the
public wants. So I think it is a well-balanced bill that does
a lot of different things.
Co-Chair Wilken asked if this bill would effectively lift the
moratorium currently in place.
Mr. Meyers replied that the Department of Natural Resources is
awaiting the final stages of the public process in the Mat-Su
valley. Five public meetings have been held, and the
recommendations have been gathered. The Department is accepting
public comments on the draft finding guidelines and proposed
regulations until May 21, 2004. The moratorium would lift after the
public process is completed. The moratorium affects production
drilling in the Mat-Su valley; however, the drilling of core holes
and other evaluation work is not affected and has been able to
continue. This bill would effectively lift the moratorium on the
pending leases because those leases would not be issued. Instead,
the pending leases could be converted to a license.
Co-Chair Green referenced an earlier discussion with Mr. Meyers,
and certain concerns he expressed regarding State-owned land. She
referenced information prepared by the Department asking if the
statement "own any State leases" refers to Mr. Meyer's earlier
concerns.
Mr. Meyers responded that the two subjects are related. The program
is confusing in that the regulatory environment is regulated by the
type of lease rather than by activity. In the Mat-Su valley there
are areas with conventional state leases, shallow gas leases,
Mental Health Trust leases, private leases, and potentially federal
leases. Regulating only certain leases and not others does not
promote the creation of a cohesive regulatory environment. The
various leases are under the authority of different agencies such
as the Alaska Oil and Gas Conservation Commission and the
Department of Environmental Conservation, which do have the wide
authority to affect all of the leases. The attempt is being made to
use a scientifically based pattern rather than a leasing based
pattern in establishing a cohesive regulatory framework.
Senator Bunde noted this bill repeals the provision that allowed
the Commissioner of the Department of Natural Resources to overrule
the authority of local zoning ordinances. He assumed that the
original provision was adopted in HB 69 "for good reason". He asked
if local zoning ordinances would be able to overrule the State's
access to subsurface rights.
Mr. Meyers responded that the repeal is very relevant to the Mat-Su
Borough, and potentially to the Kenai Peninsula Borough. The
Department supports the State's standards. Technical guidance would
be provided to the boroughs as they established standards. The
Department is optimistic that a set of standards would be produced
that would be acceptable to both the State and to municipal
governments. The State maintains the constitutional right to
produce resources, and, as a result, if the local zoning ordinances
are unreasonable, the State's authority ultimately supersedes the
authority of the municipalities and boroughs. HB 69 would not
change the balance between the State and the municipalities, but
would shift the constitutional authority of the State to the
Commissioner of the Department of Natural Resources. The State has
proven successful in working alongside municipalities such as the
North Slope and Kenai Boroughs. In certain situations, local zoning
ordinances are appropriate to regulate activities such as the
placement of facilities.
Senator Bunde informed that it is unlawful to hinder a property
owner from accessing their property.
SFC 04 # 108, Side B 05:23 PM
Senator Bunde asked if a borough were to exclude its territory from
commercial gas development, whether the State would be able to gain
access to the land through a court ruling.
Mr. Meyers affirmed.
AT EASE 5:24 PM / 5:25 PM
Amendment #1: This amendment deletes the language of AS
38.05.180(ff)(3) in Section 41 on page 40, lines 6 - 12 of the
committee substitute. The deleted language reads as follows.
(3) for a nonconventional gas lease, if a bond is
sought under AS 38.05.130, before the amount of the surety
bond to be posted is determined by the director, require, as a
condition for issuing the lease, that the director, after
notice and an opportunity to be heard, determine that, to
exercise rights under the reservation as set out in AS
38.05.125 and the lease, the lessee has no other reasonable
means of entry than access and entry upon the land of the
owner; the lessee has the burden of demonstrating compliance
with the requirement of this paragraph;
This amendment also amends the language in subsection (gg)
following line 17 and inserts new language to read as follows. No
language in this subsection is deleted.
(gg) For an activity or operation related to the
extraction of coal bed methane,
(1) for which the department by regulation requires
submission and approval of a plan of operations before
activities or operations may be undertaken, the director
shall, as a condition for determining a bond requested under
AS 38.05.130, after notice and an opportunity to be heard,
review the plan of operations to determine if use of the
owner's land is reasonable necessary to extract the coal bed
methane; a bond determined under AS 38.05.130 and this
paragraph may, at the discretion of the director, be imposed
against a statewide bond that has been posted by the person
initiating the request for determination of the bond if the
statewide bond remains in effect, and an additional bond is
not required;
(2)
Co-Chair Green moved for adoption.
Co-Chair Wilken objected for an explanation.
Co-Chair Green deferred to Mr. Meyers.
Mr. Meyers explained that this technical amendment relates to
bonding authority and is necessary because the original language
was included in the wrong section of the original version of the
bill. The intent is that the bonding language generally applies to
leases, whereas the original language only applied the bonding
provisions specifically to a nonconventional lease.
Co-Chair Wilken removed his objection and the amendment was
ADOPTED.
Senator Bunde asked the cost of the implementation of this
legislation to the State in future revenues.
Mr. Meyers responded that this legislation would improve future
revenues in the long term. The over-the-counter shallow gas leases
were not significantly valuable nor desirable in the terms of
actual production, considering the limited depth of drilling, the
three-year lifespan of the lease, and the lack of a best interest
finding and balancing test, all of which resulted in speculation.
Leases were purchased in areas not ideal for oil and gas
development. More money was spent administering the leases than was
earned in value for them. Legitimate applicants faced public
opposition because public input was hindered through the over-the-
counter lease process. In areas where competitive leasing sales
would occur under this legislation, competitive bidding would bring
in more revenue than the current over-the-counter fee. Both the
State and the lessees would receive more net profit under this
legislation. The implementation would require increased
expenditures in the short term to accelerate the required findings,
but the benefits of an up-front public process would prove valuable
in the long term.
Senator Olson asked the type of protection the State would receive
in the event that a lease buy back was required.
Mr. Meyers answered that if the buy back is based on the amount
spent for exploration, the buy back cost is correspondingly large.
However, if the eminent domain status is used to purchase the
lease, the cost is based on just compensation, which consists of a
projected value of the potential resource. Buy back would be very
expensive, in certain cases tens of millions of dollars or more.
Senator Olson restated his earlier question.
Mr. Meyers answered that this bill does not contain buyback
provisions. The competitive lease program would ensure that the
public has greater acceptance of the development projects, and if
the public were content, the State would not need to buy back
leases.
Senator Olson commented that he is in support of tax credits and
other incentives to encourage shallow gas development in rural
areas where energy is expensive. He would pursue such a proposal
during the next legislative session.
Co-Chair Green offered a motion to report SCS CS HB 531 (RES) as
amended from Committee with individual recommendations and
accompanying fiscal notes.
There was no objection and SCS CS HB 531 (FIN) MOVED from Committee
with fiscal note #1 for $252,600 from the Department of Natural
Resources and fiscal note #3 for $20,000 from the Department of
Administration.
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