Legislature(2013 - 2014)BUTROVICH 205
04/05/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB99 | |
| Confirmation Hearing(s) | |
| SB96 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 99 | TELECONFERENCED | |
| *+ | SB 96 | TELECONFERENCED | |
| += | HB 4 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 96-OIL AND GAS AND GAS ONLY LEASES
4:24:09 PM
CHAIR GIESSEL announced SB 96 to be up for consideration.
4:24:34 PM
LARRY SEMMENS, staff for Senator Micciche, sponsor of SB 96,
Alaska State Legislature, Juneau, Alaska, said the bill proposed
to allow the commissioner of the Alaska Department of Natural
Resources (DNR) to extend oil and gas, and gas only leases on a
one-time basis to allow a lease holder additional time to
develop and get a lease productive. He stated that the DNR and
industry supported SB 96. He explained that SB 96 had a zero
fiscal note. He detailed that SB 96 would fix shorter-term, five
and seven year issued leases that entailed situations where the
leases should be extended. He noted that there was no statutory
authority to extend the leases. He said oil and gas, or gas only
leases did not expire as long the leases were producing, or if
the lease land was part of a unit that was producing; otherwise
the lease term was limited to the initial term. He explained
that SB 96 would provide the statutory authorization to extend a
lease if it was in the best interest of the state to do so.
4:26:56 PM
CHAIR GIESSEL announced that the committee would stand at ease.
4:28:36 PM
BILL BARRON, Director, Division of Oil & Gas (DOG), Alaska
Department of Natural Resources (DNR), Anchorage, Alaska, said
SB 96 would address areas in the statutes that were a bit remiss
in the DNR's ability to manage state land. He asserted that
there was no way to extend a lease out of its primary term other
than through active drilling, being part of a unit, or was part
of production. He said there were opportunities where short term
leases issued by DOG had companies diligently trying to work
their leases while coming up to the brink of their term without
drilling a well or proving hydrocarbons. Rather than having oil
and gas companies release their acreage just to go back into a
lease-sale and take the risk of not being a party to pick it up,
oil companies tend to bring forward unit applications which were
not necessarily fully mature. He explained that DOG gets into a
dialogue of what was and was not a "unit." He informed the
committee that a simple one, two, or three year extension would
have given the oil and gas companies the ability to drill wells
and prove-up their acreage in a timelier manner. The DNR
commissioner's decision would not be based upon work that was
planned to be done. The first step in the decision process would
address what work had been done on a lease. The lease extension
decision was not about warehousing and the interaction with the
lessees allowed the commissioner to look over a lease's history.
Companies that had done little or no work on their lease would
have a tough battle to get past the first step. The second step
in the process was that the oil and gas companies would be
buying a premium or an option in order for the DNR to manage the
state's land. A performance bond or work commitment that
identified the types of funding or work may be required. The
process at the second stage was a contractual negotiation of a
term. The process was an opportunity for the state to talk to
companies about the lease work's scope, funding, and timing that
they had in a primary term. Leases would expire if a company did
not establish performance terms and conditions.
He addressed a slide to the committee that displayed short term
leases for the North Slope, Foothills, and Beaufort Sea regions.
Short term leases were divided into three expiration groups: two
years or less, two to five years, and outside of five years.
There were 104 leases in the first group with multiple companies
having leases that were to expire in two years or less. He noted
that Repsol and Alaska Venture Capital Group (AVCG) were
actively trying to work their short term leases and explained
that they were running into a time clock. He said the DNR was
trying to not have leases come back to lease-sale for companies
that were working hard to develop their acreage.
SENATOR FRENCH noted that Repsol stood head-and-shoulders above
other oil companies for short term leases that were to expire in
two years or less. He asked if Mr. Barrons could comment on the
amount of leases Repsol had that were expiring.
MR. BARRONS replied that Repsol stepped in a couple of years ago
to acquire some of the acreage in joint cooperation with
Armstrong Oil and Gas. Repsol recognized very clearly that they
were under-the-gun and aggressively approached the opportunity
immediately. Repsol had a rig up within the first drilling
season and started processing drilling activities. Repsol was
the kind of company that was actually trying to drive while
recognizing the time frame. He asserted that DOG should not be
put into a position to hurt the companies later. He noted that
Repsol and AVCG were clearly the first two candidates. He said
the big player for the out-years, the seven year leases was
Great Bear Petroleum Ventures (GBPV). GBPV's focus was on shale
based oil and their out-years would be addressed as well. He
agreed that Repsol was a very interesting case and reiterated
that they did not come into the primary lease activity. Repsol
had shown their ability to get going and prove-up acreage as
quickly as possible. Additional time would allow Repsol to
continue their operations and Repsol had the knowledge with rigs
under contract. Working with Repsol was the kind of game that
the DNR was trying to make sure was played out correctly.
4:34:33 PM
MR. BARRONS addressed the Cook Inlet and noted that Apache
Alaska Corporation's (AAC) operations stood out. He explained
that AAC did very similar activities that Repsol did with other
companies in the Cook Inlet and bought a large area of acreage
that was scattered across Cook Inlet's western and eastern
sides. He said some of AAC's acreage was clearly coming up short
in terms of time. AAC was the kind of player that DOG also
wanted to encourage. He noted that AAC's diverse acreage was a
challenge for DOG. Companies had to understand what work had to
be done on specific acreage and not on the totality of their
leases. Extended time would not apply to requests for seismic
testing or getting wells drilled. He said the DNR commissioner
and DOG wanted the committee to appreciate that the intent was
getting a work program established for: drilling wells,
advancing technology, and bringing resources to market as
quickly as possible. The process would provide the state with a
better understanding of its resources.
SENATOR MICCICHE explained that his interest in the bill
addressed the three top prospects for getting gas to market in
Cook Inlet: AAC, Buccaneer, and Hilcorp. The three companies had
a large number of leases that were coming up against the less
than two year deadline. He said we certainly want to encourage
the three companies to hopefully get some gas to market as soon
as possible without starting over.
4:36:50 PM
MR. BARRONS answered that he agreed. He said the intent was to
assist people who have diligently tried to progress a lease
without having to release it and try to get it back. There was
also a balance that had to be recognized in the general business
practice of lease-sales. Some companies were concerned that not
managing extensions properly could be seen as a way to hold
acreage in a competitive market. Some companies knew the geology
as well as others and were waiting for leases to expire for the
next bid-round. DOG understood the concerns for holding acreage
and noted that the intent was for the state to benefit from
lessees that were doing the work on their five or seven year
lease. He remarked that if there were issues on timing, weather,
rigs, equipment, or whatever the problems were, DOG would have
an opportunity to listen and then firm up a strong contractual
deal. He said a contractual deal would make companies drill
wells with bonding, committed work programs, and elevated rental
agreements. The clear intent was for the DOG to form a new
contractual business relationship with companies for the next
year or two if extensions were granted.
He reiterated that extensions were not guaranteed, a five year
lease would not get a five year extension. Extensions would be
handled on a case basis with decisions based upon a company's
committed work program. He said an example was a five year
extension might be provided if annual performance-gates were set
and not meeting the goals could lead to lease expiration. He
explained that the extension process was an opportunity for the
state to really engage with the industry in a very positive way
by encouraging development. DOG was excited about the extension
process and believed it to be an important issue for the
division. He explained that both the industry and the state
would benefit from the lease extensions. The industry would be
accommodated for shorter drilling windows and additional time
for working diligently. The state benefited from requiring a
work program for the first time that encouraged ongoing work to
be completed. He emphasized the importance of a work program for
increasing the probability of leases being brought on to
production more quickly.
SENATOR FRENCH stated that he appreciated being brought up to
speed by Mr. Barrons. He noted having a meeting with Mr. Barrons
prior to the committee meeting and said there were some folks,
including himself, that believed a work program should be setup
in the first five years. He said he realized what the state's
current philosophy was, but it struck him that having a firm set
of work commitments earlier rather than later would benefit
everybody. He noted that work commitments in an initial lease
was not the bill in front of the committee and would set the
point aside.
4:40:11 PM
SENATOR FRENCH noted that Repsol's approximate 60 leases were
coming up for expiration. He asked if Repsol's leases would be a
lease-by-lease decision, or would the DOG just say that it
really liked Repsol, the company had a lot of money, and they
would be given a break.
MR. BARRONS replied that DOG's clear intent was to require the
companies to come in and explain what they had been doing on the
leases. Some of the leases would be bundled with contiguous
lease blocks identified and area work activity noted. Some of
the leases could be packaged as A-B-C with extensions managed in
a negotiated settlement where packaged leases were addressed
separately. He addressed GBPV'S 500,000 un-unitized acreage of
shale and noted that it was going to very interesting to see.
SENATOR FRENCH asked how many individual leases there were
within GPBV's huge swath of property.
MR. BARRONS answered several hundred.
SENATOR FRENCH asked to confirm that there could not be more
than 5,000 acres per lease.
MR. BARRONS answered correct. He explained that GBPV's leases
were quarter-sectioned for reasons associated with shale
development. GBPV did their work along the highway which was a
smart and well-reasoned activity. He said DOG would ask GBPV
what they were going to do at other parts of the acreage and the
division would have difficulty with a reply where GBPV would get
to other areas of their lease in five years. He specified that
his comment was not an official stand, but if GBPV were to meet
with DOG today, it would be a hard road for them to hoe.
SENATOR FRENCH asked what would happen if a bigger company
wanted to buy GBPV's leases. He said his view would be that the
second company should start and stand in GBPV's shoes. The new
company, despite their best intensions and deep pockets, decided
to buy leases that were expiring. The scenario he presented
would be a tough case for DOG to decide because suddenly there
was a new player with a lot of money on leases that were
expiring.
MR. BARRONS replied that oil and gas was a very intelligent and
sophisticated industry. When a company comes in and buys acreage
from someone who already owns the lease; they would know what
the rules and contractual obligations were. The new owner would
have to abide by the original lease and it was not DOG's problem
if the new company did not "action" activities associated within
the given time frame. The DOG's problem was to make sure that
the lease was either worked or returned so that the division
could lease it to somebody else.
SENATOR FRENCH replied that he appreciated Mr. Barrons' reply,
especially given the shifting sort of ownership structures where
a lessee created a new oil company to buy the leases in order to
obtain five additional years.
MR. BARRONS answered that Repsol was a good example of somebody
who did buy-in, recognized what the rules were, and progressed
as quickly as they possibly could.
SENATOR FRENCH replied that Repsol hurried a rig up to their
lease, had a blow out and some bad luck. He said the example of
Repsol struck him as an easy case where a company ran into force
majeure problems that they could not overcome. He asked Mr.
Baron to address a letter for AAC where they raised two concerns
regarding the performance bond and $250 an acre. He inquired how
many leases in general would a $250 per acre charge be sort of
out of bounds and above what was paid in the first place.
MR. BARRONS replied that the $250 uplift applied to years eight,
nine, and ten. The current lease terms were introduced two years
ago on entry level leases at $25 an acre, previously it was $3
per acre and the lease terms were a very low entry price. He
reiterated that oil and gas companies were sophisticated and
knew how to make business decisions. Companies had a business
choice if they had not been diligently progressing land for
seven years. A company would have to decide if the increased
cost of holding land as an exclusive right at $250 acre for the
last three years was viable. The alternative was relinquishing
the acreage, putting it back to the lease-sale, and allowing DOG
to manage it through the lease-sale process. He noted that one
company had leaned in and said the increased cost should only be
150 percent. He opined that 150 percent of $3 an acre really did
not give him a warm comfort required from a business negotiating
standpoint and allow a company to not be serious about moving
the land. He said for the reasons previously noted, it was
clearly the discretion of the commissioner to decide if a
company had been doing work in order to authorize waving the
$250 per acre charge and allow the original lease to be
maintained. He addressed comments and concerns about a required
work program. He reiterated that if a company wanted an
extension, they would be asking for an option to hold land
exclusively and there should be something that goes back to the
state. If a company wanted the luxury to have land for an
extended period of time, something had to be in it for the
state. He asserted that the state required wells to be drilled
in order to hold acreage longer and the requirement he set forth
was a very simple business philosophy that the DOG followed to
get wells drilled.
SENATOR MICCICHE stated that the maximum lease extension to the
primary terms was up to five years with a total primary lease
and extension not to exceed ten years.
4:47:56 PM
MR. BARRONS replied that Senator Micciche's statement was a
critical piece and DOG was working with the Senator's staff to
make sure that at no time would any of the primary terms exceed
ten years. He emphasized that there could only be one and only
one extension.
SENATOR MICCICHE added that it was imperative for Alaskans to
understand that the intent was getting leases to work and
producing hydrocarbons. He emphasized that the extensions were
not about a landholding program.
MR. BARRONS concurred with Senator Micciche.
4:48:42 PM
LISA PARKER, Manager, Government Relations & External Affairs,
Apache Alaska Corporation (AAC), Soldotna, Alaska, thanked
Senator Micciche for working with ACC and the administration in
moving SB 96 forward. She said SB 96 would allow the DNR
commissioner to extend the term of oil and gas leases or gas
only leases beyond the original primary term. The legislation
offered an alternative to last minute rushes to create units,
proposed placement of rigs, or other lease saving operations
that would allow an operator to hold its oil and gas leases. She
noted that the DNR dealt with repeated requests for extensions
that wasted time while a company continued to hold its units
with no actual work being performed. She explained that AAC was
a new operator in Alaska and the company acquired a significant
amount of acreage with leases that were expiring prior to
seismic exploration completion. AAC's seismic studies helped to
delineate the potential for oil and gas resources. AAC had been
aggressive in exploration and development efforts since the fall
of 2010. ACC possessed and continued to find new and innovative
ways to conduct seismic studies that created only the slightest
disturbance while gathering good quality data. AAC employed a
cutting-edge technology that in 2012 resulted in seismic
acquisition on over 200,000 acres within the Cook Inlet basin.
She informed the committee that AAC "spudded" their first well
on the Cook Inlet's west side in late 2011. She stated that
there was still a lot of work left to do and AAC was hopeful
that in working with the DNR there would be an opportunity to
continue its 3D seismic program to better identify the Cook
Inlet's potential. She noted that AAC had submitted a letter to
the committee on suggestion changes to SB 96. She summarized
that AAC's general manager, John Hendrix, had stated on numerous
occasions that, "Apache does not sit on its assets." AAC wanted
an opportunity to delineate its assets before commencing with
exploration efforts and that was the reason why the company was
working with Senator Micciche and the administration.
CHAIR GIESSEL announced that finding no further comments, public
testimony was closed.
4:52:22 PM
SENATOR FRENCH inquired if the only way to extend a lease term
was through unitization.
MR. BARRONS answered yes. He explained that lease extensions
could occur through unitization or active drilling.
SENATOR FRENCH clarified that what he meant was doing something
short of doing something productive.
MR. BARRONS responded that companies could process the
application for unitization.
SENATOR FRENCH noted that unitization would be tough to do if
there had not been drilling, but it was an avenue that the
companies pursued. He inquired if the ability to extend leases
would be considered one more negotiation option between the
industry and the department.
MR. BARRONS answered that the DNR had thought about what Senator
French had said. He explained a statute that stated companies
would have to come to the commissioner 180 days prior to lease
termination. Companies would have to plan and have an idea of
where they were 180 days prior to lease expiration. Companies
should provide the DNR with the latitude of time and come to
them with a plan and a program.
SENATOR FRENCH asked how many leases were turned straight back
to the DNR where and owner-operator gives back their lease.
MR. BARRONS asked Saree Timmons to answer Senator French's
question.
4:54:19 PM
SAREE TIMMONS, Petroleum Land Manager, Division of Oil & Gas
(DOG), Alaska Department of Natural Resources (DNR), Anchorage,
Alaska, stated that she did not have the information.
SENATOR FRENCH asked for a "ballpark" answer.
MR. BARRONS replied that the number was small number, less than
ten percent.
SENATOR FRENCH asked how often lease extensions would be used.
MR. BARRONS replied that the Senator's question was speculative
and he would reply with a speculative answer. He advised that
companies would come in 50 percent of the time and ask for
extensions without having done anything with their leases. He
said requests for extensions without lease activity would be a
very short conversation.
SENATOR FRENCH asked how often the DNR would say "yes" to an
extension request.
MR. BARRONS replied that the decisions would clearly depend on
the quality of the applications.
CHAIR GIESSEL asked if Mr. Semmens had any closing remarks as
carrier of the bill.
MR. SEMMENS thanked the committee for hearing the bill. He
acknowledged the DNR for their excellent work and appreciated
hearing from the industry as well.
4:56:00 PM
SENATOR DYSON moved to report SB 96 from committee with attached
fiscal note and individual recommendations.
CHAIR GIESSEL announced that, without objection, SB 96 moved
from committee with attached zero fiscal note.