Legislature(2021 - 2022)BUTROVICH 205
03/10/2021 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB61 | |
| SB62 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 61 | TELECONFERENCED | |
| *+ | SB 62 | TELECONFERENCED | |
SB 61-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE
3:36:51 PM
CHAIR REVAK announced the consideration of SENATE BILL NO. 61
"An Act authorizing the commissioner of natural resources to
modify a net profit share lease."
He asked Mr. Meza and Mr. Fitzpatrick to provide a recap of SB
61 and an overview of their response to questions the committee
asked during the first hearing.
3:37:47 PM
JHONNY MEZA, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources, Anchorage, Alaska, stated the
information the department provided related to the three cases
for which the department granted royalty modification.
He explained there were eight applications for royalty
modification: two where denied, three were withdrawn by the
applicants, and the department approved the remaining three
applications. For the approved applications, the department
issued recent findings, received public comments, and gave a
presentation to the Legislative Budget and Audit Committee
(LB&A).
MR. MEZA noted the department included additional information in
their email response letter to the committee regarding the
production that came from the royalty modification as well as
revenues to the state as resource owner, specifically royalty
and net profit share where applicable.
CHAIR REVAK asked Mr. Fitzpatrick if he had anything to add.
3:40:02 PM
RYAN FITZPATRICK, Commercial Analyst, Department of Natural
Resources, Anchorage, Alaska, stated Mr. Meza covered the
information that DNR provided to the committee.
CHAIR REVAK asked why it would benefit the State of Alaska to
modify royalty or net profit share leases.
MR. FITZPATRICK replied the intent of the bill is to encourage
development of resources would otherwise be stranded. He noted
Chair Revak mentioned royalties and explained that current
Alaska statute allows the DNR commissioner to modify royalty
rates under three different scenarios: 1) to encourage new
production from a field or pool that has not previously been
produced, 2) to extend the life of existing production in the
event that per barrel costs are increasing, or 3) to restore
ceased production in a pool or field that is shut-in.
MR. FITZPATRICK explained that SB 61 primarily would do two
things. First it would allow for a fourth condition for royalty
modification, or for potential modification of net profit shares
in the event that a field is producing but additional capital
investments is required to increase marginal production. The
scenarios would include additional drilling, drilling pads, and
enhanced oil recovery. If those projects were not economic on a
standalone basis but could be made economic through royalty or
net profit share modification, it would encourage additional
investment and production.
He said the second objective of SB 61 is to allow the
modification of net profit shares under the same regime as
royalty modification as currently allowed in statutes. That
would be one of the three bases that the department already
discussed, or potentially the fourth additional basis that the
bill would add.
3:43:30 PM
CHAIR REVAK noted he mentioned enhanced recovery efforts and
asked him to confirm that as an oilfield produces over time, oil
recovery becomes harder and more expensive.
MR. FITZPATRICK answered yes, an oilfield over its life
generally sees a decline in production. It is a common feature
seen in North Slope oil fields and oilfields throughout the
world. Initial production is high, but reservoirs drop over
time. There are methods that producers can use to either slow
oil production decline or temporarily increase production by
injecting water or gas, polymer flooding, and a whole host of
arrays that can be used.
CHAIR REVAK asked him to confirm that DNR's position is that
current oilfield development will become uneconomical and that
is the reason for the legislation.
MR. FITZPATRICK answered yes. He explained over time, any
oilfield can potentially become uneconomic as seen throughout
the world where oilfields producing over long periods of time
eventually decline and no longer provide adequate revenues to
meet operating expenditures and other financial commitments.
Hypothetically, as oilfield production declines the modification
of royalty rates and net profit share rates could extend the
life of the oilfield a couple of years with increased revenues
rather than the oilfield shutting down.
MR. FITZPATRICK summarized that the department believes the bill
could help to increase production over time from certain fields
that might otherwise be economically disadvantaged.
3:47:03 PM
SENATOR STEVENS expressed interest in knowing how often the
department approves or denies modified lease requests. He noted
the statement that there were eight royalty modification
requests. He asked how often requests occur and does the
department approve or deny a lot more requests.
MR. FITZPATRICK explained the figures that Mr. Meza shared
pertain to when the statute was first enacted in 1995. DNR has
had eight applications for royalty modifications from 1995 to
present. These requests do not occur annually and involve a lot
of review work.
CHAIR REVAK noted that the three modified applications were
substantially lucrative to the state. He asked him to walk
through the internal processes when somebody applies for a lease
modification.
MR. FITZPATRICK explained that royalty modification is generally
reviewed by the Commercial Section within the Division of Oil
and Gas. The review process varies depending on whether the
application is for larger or smaller oilfields, or larger or
smaller operators, but it is always in depth. The last oilfield
the department reviewed took approximately 10-11 months.
MR. FITZPATRICK detailed when the department reviews the
application, there is generally a back and forth with the
applicant to get all the information. If it is not forthcoming,
the department can deny modification due to lack of information.
MR. FITZPATRICK said the department has statutory authority to
require or request an applicant pay for consultant fees to aid
the department in its application review. Those consultants
would provide expertise that the department may not have in-
house such as reservoir engineering, accountants, or financial
industry members that might have expertise in financial review.
3:52:04 PM
MR. FITZPATRICK explained that once the applicant information is
received, the department does its own evaluation and economic
modeling. The primary evaluation objective is to determine
whether the application meets the statutory requirements for
royalty modification that were mentioned earlier. Each of the
three scenarios potentially has subparts that each application
would have to meet.
MR FITZPATRICK said one of the primary considerations is that
when the legislature passed the statute in 1995 to allow for
royalty modification, one of its features is a heightened burden
of proof that an application must meet for royalty modification
eligibility. That is clear and substantial evidence.
MR. FITZPATRICK detailed once the applicant review is finished,
the Commercial Section briefs the Division of Oil and Gas and
the DNR commissioner to determine whether there is additional
review work for the division to conclude the application
process; at that point, DNR would prepare and publish a best
interest finding that includes a public comment period, an offer
to LB&A for a hearing on the royalty modification, the best
interest finding draft, and comments from the DNR commissioner.
After the public comment period closes, the department must
consider all public and legislative comments to incorporate and
publish in its final best interest finding.
3:54:40 PM
CHAIR REVAK noted the application process includes oversight by
the public and LB&A, and only three out of eight applications
have been approved. He asked Messrs. Meza and Fitzpatrick why
the department is now asking for a modification, noting oilfield
throughput has drastically decreased over the past few decades.
MR. MEZA replied he is correct in referencing that the declining
production from the state's producing fields may create a
possibility that some of those pools may become uneconomic. One
of the main goals with the proposed bill is that modifying the
royalty rates, or the net profit share rate for the net profit
share leases, can prevent declining oilfield production from
abandonment and perhaps ensure continuing production and revenue
to the state. SB 61 provides the DNR commissioner with another
lever to modify parameters to encourage continuous or additional
incremental production versus shutting down wells due to
economic disadvantages.
CHAIR REVAK noted the committee has strictly heard from the
department on SB 61. He asked the Alaska Oil and Gas Association
(AOGA) to provide their input.
3:57:54 PM
KARA MORIARTY, President and CEO, Alaska Oil and Gas
Association, Anchorage, Alaska, testified in support of SB 61.
She explained AOGA is the professional trade association that
represents the majority of explorers, producers, refineries, and
pipeline company in Alaska.
She said 2020 was an unprecedented year for the oil and gas
industry. Even with COVID-19, the industry also experienced a
pre-pandemic price war, and then the whole world turned upside
down about a year ago from COVID-19. For the first time since
Prudhoe Bay production started, drilling on the North Slope
virtually stopped. There were no drilling rigs in Prudhoe Bay
for the first time in history and the sector lost thousands of
jobs.
She noted while oil prices are rising and production in Alaska
has largely rebounded to where production was before COVID-19,
there are still effects from 2020. While the proposed
legislation is not a new concept to allow for potential [net
profit share lease] (NPSL) modifications, the timing for the
legislation might be right because the state needs to do
whatever it can to make sure the state's oilfields are economic
and its fiscal regime remains competitive. SB 61 provides an
additional regulatory tool in the state's toolbox to incentivize
and grow production.
MS. MORIARTY said she thinks Mr. Fitzpatrick did a nice job
discussing how modifying current royalty rates for oil and gas
leases is not easy. Modification does not happen overnight.
There is very much a rigorous standard of proof, the economics
absolutely have to warrant a change, and modification has to be
in the best interest of the state. Allowing NPSL to go through
the same type of process could be a very necessary and effective
tool for providing flexibility in managing different cost
structures, market dynamics, and project economics.
MS. MORIARTY stated AOGA sees SB 61 as an additional tool to use
on a case-by-case basis. It provides the option for DNR to work
with the industry on any particular development.
She summarized AOGA wants to see as much production as possible
because it is good for the state, economy, jobs, and all
Alaskans.
4:02:18 PM
CHAIR REVAK opened public testimony on SB 61; finding none, he
closed public testimony.
4:02:43 PM
CHAIR REVAK held SB 61 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 61 CS (RES) Work Draft 32-GS1706.B.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 61 DNR Response to Committee Questions 2.17.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 61 LAA Legal Opinion 2.19.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 62 Sectional Analysis Version A 2.2.2021.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 62 |
| SB 62 Sponsor Statement 1.28.2021.pdf |
SFIN 2/1/2022 1:00:00 PM SFIN 3/18/2022 9:00:00 AM SRES 3/10/2021 3:30:00 PM |
SB 62 |
| SB 61 AOGA Letter of Support- 3.9.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 62 DNR Presentation- Gas Leases; Renwable Energy Grant.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 62 |