03/17/1995 03:55 PM Senate RES

 SRES 3/16/95                                                                  
                SB 112 DISCOVERY ROYALTY CREDIT                                
                                                                               
 SENATOR LEMAN announced SB 112 to be up for consideration.                    
                                                                               
 SENATOR LEMAN announced an at ease from 4:55 - 5:07 p.m.                      
                                                                               
 Number 428                                                                    
                                                                               
 KEN BOYD, Acting Director, Division of Oil and Gas, said that there           
 has been a discovery royalty in statute since statehood.  The term            
 "geologic structure" has been used by the United States Geologic              
 Survey since 1920 for oil and gas purposes.  From 1937 - 1958 this            
 term was used to establish reduced royalties on non-competitive               
 leases under regulations implementing the Alaska Oil Proviso of the           
 Federal Mineral Leasing Act of 1920.                                          
                                                                               
 The Oil Proviso authorizes the Secretary of the Department of the             
 Interior to establish special royalty rates on leases issued in the           
 State of Alaska to encourage oil and gas development.                         
                                                                               
 MR. BOYD said that in 1959 Alaska became a state and the oil and              
 gas resource was thought to be the best avenue for getting                    
 revenues.  And it worked well.                                                
                                                                               
 In 1969 the discovery royalty statute was abolished, because all              
 the major oil fields were in production and it wasn't needed any              
 more.  Cook Inlet had been discovered and Prudhoe Bay was just                
 being sold for over $900,000,000 in bonuses.                                  
                                                                               
 Now production is declining, MR. BOYD said, and perhaps a discovery           
 royalty is needed to bring back new explorers.                                
                                                                               
 SENATOR LEMAN said maybe they could clarify the application of                
 discovery oil credit by specifying time or distance rather than               
 using the term  "geologic structure. "                                        
                                                                               
 BILL VAN DYKE, Division of Oil and Gas, said that would be                    
 possible.  The old royalty provisions show that they were effective           
 in getting people out there early to try to be the first to                   
 discover, but there were some nasty arguments over what constitutes           
 a known geologic structure and who discovered what reservoir first.           
                                                                               
 SENATOR FRANK asked if the idea was to reduce the royalty from                
 12.5% to 5% for a period of 10 years for the first well discovered            
 in a newly discovered geologic structure.  MR. VAN DYKE answered              
 that was his understanding.  SENATOR FRANK asked if Lisburne,                 
 Kuparuk, Prudhoe, etc. were separate geologic structures.  MR. VAN            
 DYKE said that Prudhoe and Lisburne would be considered the same              
 geologic structure.                                                           
                                                                               
 SENATOR FRANK said there was some criticism of the bill, because              
 the commissioner has more discretion he could possibly abuse .  MR.           
 VAN DYKE explained that history shows that where you have a number            
 of separate geologic structures very close to each other, people              
 can disagree as to whether it's one big geologic structure or                 
 whether it's different geologic structures.                                   
                                                                               
 Number 291                                                                    
                                                                               
 SENATOR LEMAN noted that he thought the drafter, Mr. Chenoweth, in            
 drafting this legislation merely restored language from 1969 and he           
 thought that a lot had been learned since then that needed to be              
 applied to current legislation to keep the state out of continued             
 litigation.                                                                   
 SENATOR LEMAN asked if the reduced royalty applies to the discovery           
 well or to the entire lease on which the first well is located.  He           
 thought the language meant the entire lease.  MR. VAN DYKE said the           
 old law applied to all production from the lease.  He added that a            
 field covers more than one lease usually.                                     
                                                                               
 SENATOR LEMAN asked if it were limited to just the one well, it               
 probably wouldn't be a substantial enough incentive.  MR. VAN DYKE            
 answered that was right.  SENATOR FRANK asked if some units had               
 many leases.  MR. VAN DYKE said that Prudhoe has over 100.  SENATOR           
 FRANK asked if the reduction was applied to just one lease, would             
 that be a significant incentive.  MR. VAN DYKE replied that it has            
 been in the past.                                                             
                                                                               
 Number 142                                                                    
                                                                               
 SENATOR FRANK asked if you could have enough production out of one            
 lease to make an oil field economically viable.  MR. VAN DYKE said            
 that was almost impossible on the North Slope.                                
                                                                               
 SENATOR FRANK asked how many uneconomical pools of oil have been              
 found on the North Slope.  He wanted to know if the tax structure             
 made it unviable.  MR. VAN DYKE said there was currently only about           
 a half dozen decent sized pools that are still "shut in" as                   
 uneconomic.                                                                   
                                                                               
 SENATOR FRANK asked if the state was trying to spur activity on               
 leases that have already been issued or is a long term policy being           
 established to increase the chances of the state leasing more.  MR.           
 VAN DYKE answered that it would be nice to get some activity on               
 some leases that have been issued in the last couple of years which           
 haven't been drilled, yet, in addition to getting more activity on            
 leases that will be issued in the next few years.  He explained               
 that North Slope leases are mostly issued for 10 years.                       
                                                                               
 SENATOR LEMAN asked how we have some leases from the old discovery            
 days that are still not developed, but could still possibly apply             
 if the leases are for 10 years.  MR. VAN DYKE said some of them               
 have not been developed, because the state has yet to receive title           
 to the land under those leases; they're called conditional leases.            
 Others are in unit areas which get extended.