04/15/2010 08:30 AM House FINANCE

CS FOR SENATE BILL NO. 243(FIN)                                                                                               
                                                                                                                                
     "An Act  relating to geothermal resources;  relating to                                                                    
     the  royalty   obligation  for   geothermal  resources;                                                                    
     transferring from  the Department of  Natural Resources                                                                    
     to  the  Alaska  Oil and  Gas  Conservation  Commission                                                                    
     authority over permitting  and inspection of geothermal                                                                    
     wells;  providing  for  a regulatory  cost  charge  for                                                                    
     geothermal  wells;  and   providing  for  an  effective                                                                    
     date."                                                                                                                     
                                                                                                                                
2:11:10 PM                                                                                                                    
                                                                                                                                
SENATOR  LESIL   MCGUIRE,  SPONSOR,  discussed   the  policy                                                                    
changes made  regarding geothermal resources.  She explained                                                                    
that  geothermal  harnesses  energy  from the  heat  in  the                                                                    
earth's    core.    Alaska    provides    good    geothermal                                                                    
opportunities.  The  bill reflects  on  a  royalty rate  for                                                                    
geothermal energy  allowing investors  to take  advantage of                                                                    
the  rate. She  explained the  10 percent  royalty rate  was                                                                    
established  for geothermal  energy 26  years ago.  The rate                                                                    
was  deduced  to  be a  placeholder  alongside  hydrocarbons                                                                    
before   a  true   understanding  of   geothermal  potential                                                                    
existed.                                                                                                                        
                                                                                                                                
2:15:17 PM                                                                                                                    
                                                                                                                                
Senator McGuire stressed  that the value of  the land leased                                                                    
from the  Department of Natural Resources  (DNR) does convey                                                                    
a use and  a royalty is therefore deserved. The  bill sets a                                                                    
rate commiserate  of 1.57 percent of  gross revenues derived                                                                    
from production,  sale, or use  of geothermal  resources for                                                                    
the first  ten years,  which is the  federal rate.  The next                                                                    
ten years will  require 3.5 percent of the  gross income. In                                                                    
crafting the bill, a competitive  rate was desired. The goal                                                                    
was a rate  that was not higher than  the federal government                                                                    
which might disincentivize investment on state land.                                                                            
                                                                                                                                
Senator  McGuire remarked  on the  importance of  the second                                                                    
part  of the  bill. She  explored the  history of  a company                                                                    
called  Naknek Electric  who began  drilling in  Pikes Ridge                                                                    
leading to  research of the  topic by a commissioner  of the                                                                    
Alaska   Oil  and   Gas  Conservation   Commission  (AOGCC).                                                                    
Findings were that  the seismic and the  geological data had                                                                    
not  been  analyzed  in  a  method  consistent  to  that  of                                                                    
hydrocarbon  drilling leading  to  new  methods that  better                                                                    
protect  workers   and  the  resource.  The   statutory  fix                                                                    
proposed in  SB 243 is a  result of this work  between AOGCC                                                                    
and   DNR.  The   bill  states   that   AOGCC  will   assume                                                                    
responsibility   for  regulating   the  conservation   of  a                                                                    
geothermal  resource to  prevent waste.  She added  that DNR                                                                    
will   oversee  leasing,   unitization,  and   general  land                                                                    
management.                                                                                                                     
                                                                                                                                
2:19:19 PM                                                                                                                    
                                                                                                                                
Senator  McGuire expressed  enthusiasm  for state  resources                                                                    
including geothermal.                                                                                                           
                                                                                                                                
Co-Chair Hawker acknowledged  that the state did  not have a                                                                    
regulatory  structure  related   to  geothermal  energy.  He                                                                    
commended the work done on the legislation.                                                                                     
                                                                                                                                
MICHAEL PAWLOWSKI, STAFF, SENATOR  LESIL MCGUIRE, provided a                                                                    
sectional for the bill.                                                                                                         
                                                                                                                                
     Section 1 amends AS 31.05.030 clarifying that the                                                                        
               Alaska  Oil and  Gas Conservation  Commission                                                                    
               (AOGCC) has jurisdiction over the exploration                                                                    
               and  development   of  geothermal  resources;                                                                    
               except  for  the  management  of  leases  and                                                                    
               units.                                                                                                           
                                                                                                                                
     Section 2 amends the royalty rate for geothermal                                                                         
               resources  in  AS   38.05.181(g)  to  reflect                                                                    
               federal royalty rates;  1.75% of gross income                                                                    
               during the  first 10 years and  3.5% of gross                                                                    
               income thereafter.                                                                                               
                                                                                                                                
     Section 3 adds a new section to AS 41.06 delineating                                                                     
               jurisdiction   over    geothermal   resources                                                                    
               between the  AOGCC and Department  of Natural                                                                    
               Resources (DNR).                                                                                                 
                                                                                                                                
     Section 4 amends AS 41.06.010 to allow the AOGCC to                                                                      
               investigate    the   waste    of   geothermal                                                                    
               resources.                                                                                                       
                                                                                                                                
     Section 5 repeals and reenacts AS 41.06.020 to set out                                                                   
               the jurisdiction  of the AOGCC over  all land                                                                    
               in the state and  to allow for the suspension                                                                    
               of the  application of chapter 06  on federal                                                                    
               land  if   similarly  regulated   by  Federal                                                                    
               government and  clarifies the  application of                                                                    
               the chapter.                                                                                                     
                                                                                                                                
     Section 6 amends AS 41.06.030(a) to clarify that a plan                                                                  
               of development and operation for a geothermal                                                                    
               resource must be filed with the AOGCC.                                                                           
                                                                                                                                
     Section 7 amends  AS   41.06.030(b)  to   clarify  that                                                                  
               unitization by  DNR of a  geothermal resource                                                                    
               system under AS 41.06.030 when the geothermal                                                                    
               resource system includes state land.                                                                             
                                                                                                                                
     Section 8 amends  AS  41.06.030(c)  to conform  to  the                                                                  
               changes made in section 7.                                                                                       
                                                                                                                                
     Section 9 amends  AS  41.06.030   by  inserting  a  new                                                                  
               subsection (e)  that allows  the commissioner                                                                    
               of  DNR  to  adopt regulations  necessary  to                                                                    
               implement the purposes  and intent of chapter                                                                    
               6.                                                                                                               
                                                                                                                                
     Section  10 amends  AS 41.06  by adding  a new  section                                                                  
               41.06.035 allowing the  AOGCC to issue orders                                                                    
               and impose requirements  to prevent waste and                                                                    
               protect correlative rights  on any geothermal                                                                    
               operation.    This  section also  allows  the                                                                    
               AOGCC to adopt regulations.                                                                                      
                                                                                                                                
     Section  11   repeals  and  reenacts   AS  41.06.040(a)                                                                  
               governing the authority of the AOGCC to adopt                                                                    
               regulations governing the safe development of                                                                    
               a geothermal resource.                                                                                           
                                                                                                                                
     Section 12 amends  AS 41.06.040 (b) to  allow the AOGCC                                                                  
               to require  a geothermal  operator to  file a                                                                    
               surety bond.                                                                                                     
                                                                                                                                
     Section   13   amends   AS  41.06.040(c)   to   require                                                                  
               notification of the AOGCC rather than the DNR                                                                    
               is    geothermal    exploration    encounters                                                                    
               hydrocarbons and other fissionable materials.                                                                    
                                                                                                                                
     Section  14  amends  AS  41.06.040(d)  to  replace  the                                                                  
               commissioner of  DNR with  the AOGCC  for the                                                                    
               purposes  of  authorizing   inspection  of  a                                                                    
               geothermal operation.                                                                                            
                                                                                                                                
     Section 15 repeals and  reenacts AS 41.06.050 governing                                                                  
               the AOGCC  permitting process  for geothermal                                                                    
               exploration and development drilling.                                                                            
                                                                                                                                
     Section  16 amends  AS 41.06  by adding  a new  section                                                                  
               41.06.055   authorizing  a   regulatory  cost                                                                    
               charge for geothermal wells.                                                                                     
                                                                                                                                
     Section 17 repeals and  reenacts AS 41.06.060 providing                                                                  
               definitions for AS 41.06                                                                                         
                                                                                                                                
     Section  18  repeals  AS 41.06.030(d)  governing  lease                                                                  
               operations   under   an  approved   plan   of                                                                    
               development and AS 41.06.040(e) the exemption                                                                    
               from AOGCC authority of geothermal resources.                                                                    
                                                                                                                                
     Section 19 adds a new section to the uncodified law of                                                                   
               the State of Alaska  that applies the royalty                                                                    
               rates  established  by  section 2  to  leases                                                                    
               entered into  or renewed after  the effective                                                                    
               date of the act  and directs the commissioner                                                                    
               of DNR to offer the royalty rates established                                                                    
               by section 2 to an existing lessee.                                                                              
                                                                                                                                
     Section 20 adds a new section to the uncodified law of                                                                   
               the   State  of   Alaska  that   governs  the                                                                    
               transition  of  authorities  over  geothermal                                                                    
               resources established in this act.                                                                               
                                                                                                                                
                                                                                                                                
     Section 21 adds a new section to the uncodified law of                                                                   
               the State  of Alaska that gives  direction to                                                                    
               the revisor of statutes.                                                                                         
                                                                                                                                
    Section 22 immediate effective date for section 20                                                                        
                                                                                                                                
     Section 23 effective date of July 1, 2010                                                                                
                                                                                                                                
2:26:46 PM                                                                                                                    
                                                                                                                                
Vice-Chair Thomas asked  about Section 13. He  wondered if a                                                                    
company struck  hydrocarbons, would  they stop  drilling for                                                                    
water.  Mr.   Pawlowski  responded  that  the   quantity  of                                                                    
hydrocarbons is  often the deciding factor.  If hydrocarbons                                                                    
are found,  it is  important that  AOGCC knows,  because the                                                                    
weight  of  the  mud  used in  the  drilling  operations  is                                                                    
important.                                                                                                                      
                                                                                                                                
Vice-Chair  Thomas  imagined  that the  royalty  rate  would                                                                    
change.                                                                                                                         
                                                                                                                                
Representative   Foster   remarked  on   discussions   about                                                                    
development of the  Pilgrim Hot Springs north  of Nome. With                                                                    
the  springs  existing  on private  versus  state  land,  he                                                                    
wondered if the royalties will apply.                                                                                           
                                                                                                                                
Mr. Pawlowski  pointed out  Page 2  Line 25,  which explains                                                                    
that the authority of the  commission to regulate geothermal                                                                    
extends  to  all  land  in  the  state,  including  private,                                                                    
municipal, and  state land. The regulation  of the operation                                                                    
would  remain the  same,  but the  royalty  rates would  not                                                                    
apply.                                                                                                                          
                                                                                                                                
2:30:47 PM                                                                                                                    
                                                                                                                                
KEVIN BANKS, DIRECTOR, DIVISION OF  OIL & GAS, DEPARTMENT OF                                                                    
NATURAL  RESOURCES   (via  teleconference),   addressed  the                                                                    
question about  geothermal found on private  land. He agreed                                                                    
that all  of the statutory  authorities drafted in  the bill                                                                    
are already  in place. The  bill removes authority  given to                                                                    
DNR  and transferred  them to  AOGCC who  has the  staff for                                                                    
management and safety.                                                                                                          
                                                                                                                                
Mr.  Banks responded  to the  question  regarding oil  found                                                                    
during an  attempt to drill  for geothermal. He  stated that                                                                    
if the  oil is on state  land, a discussion about  the lease                                                                    
must  occur.  The leases  provided  are  either for  oil  or                                                                    
geothermal, but not both. If oil  was found, it would not be                                                                    
complicated to issue an oil  or gas lease allowing the state                                                                    
to receive  the appropriate royalties. On  private land, the                                                                    
owner would communicate the changes.                                                                                            
                                                                                                                                
Mr. Banks replied to the  question concerning changes in the                                                                    
royalty, he stated that "something  is better than nothing."                                                                    
He stated that a royalty rate  of 1.75 percent for the first                                                                    
ten years,  rising to  3.5 for the  second ten  years, makes                                                                    
private land competitive with federal land.                                                                                     
                                                                                                                                
2:34:05 PM                                                                                                                    
                                                                                                                                
Representative   Gara   pointed   out  the   definition   of                                                                    
geothermal,  which is  divided into  "geothermal fluid"  and                                                                    
geothermal  resources."   He  wished  to  ensure   that  the                                                                    
definition in  the bill did not  inadvertently include other                                                                    
valuable resources.  He requested  a list of  other possible                                                                    
exemptions.  He asked  if the  definition of  geothermal was                                                                    
clear enough to avoid the loss of royalties.                                                                                    
                                                                                                                                
Mr. Banks  replied that the  bill expands the  definition of                                                                    
geothermal.  The  current  statutes  have  a  limit  of  120                                                                    
degrees Celsius  increasing the likelihood  that electricity                                                                    
could be  created with a  geothermal resource less  than 120                                                                    
degrees.  The  addition  of the  commercial  use  provision,                                                                    
defined as  sales of power,  heat to  a third party  lead to                                                                    
access to those types of resources.                                                                                             
                                                                                                                                
Representative Gara reiterated  concerns about inadvertently                                                                    
lowering the royalty on oil, gas, minerals, or gold.                                                                            
                                                                                                                                
Mr. Banks assured that the  language applies only to heat or                                                                    
hot liquids                                                                                                                     
                                                                                                                                
Vice-Chair Thomas  queried the lease rate  when hydrocarbons                                                                    
were  discovered when  drilling  for  geothermal. Mr.  Banks                                                                    
explained hypothetically that if a  driller does not have an                                                                    
oil  and  gas  lease;  when  drilling  on  public  land  for                                                                    
geothermal,  the  driller  is  governed  by  the  geothermal                                                                    
lease. The  company would  not be  permitted to  produce the                                                                    
oil and  gas. The  department would be  summoned to  form an                                                                    
oil and  gas lease  with either a  competitive process  or a                                                                    
decision made  by the commissioner.  He pointed out  that if                                                                    
oil  and  gas  is  found,  the company  is  tapping  into  a                                                                    
resource that requires a separate lease.                                                                                        
                                                                                                                                
2:38:40 PM                                                                                                                    
                                                                                                                                
CATHY  FOERSTER, ENGINEERING  COMMISSIONER,  ALASKA OIL  AND                                                                    
GAS  CONSERVATION COMMISSION,  DEPARTMENT OF  ADMINISTRATION                                                                    
(via teleconference),  explained that the  royalties portion                                                                    
of  the  bill  does  not affect  the  AOGCC.  The  important                                                                    
sections  are   those  that  transfer   some  but   not  all                                                                    
authorities  from  the DNR  to  the  AOGCC. The  authorities                                                                    
transferred are those that  regulate drilling and production                                                                    
operations,  protect correlative,  prevent  fiscal waste  of                                                                    
the resource,  and protect the  fresh ground water.  The DNR                                                                    
will retain pertaining authorities.                                                                                             
                                                                                                                                
Ms. Foerster  stressed the importance of  AOGCC's expertise,                                                                    
which  allows them  to take  on the  additional authorities.                                                                    
She  announced   the  experienced  drilling   engineers  who                                                                    
approve  the permits  ensuring safety  and good  operational                                                                    
practices.   She  also   mentioned  the   experienced  field                                                                    
inspectors who competently test  equipment to ensure that it                                                                    
works  properly.  The  transfer  of  authority  requires  no                                                                    
fiscal impact.  If the bill does  not pass, a cost  to allow                                                                    
the  DNR to  contract the  necessary expertise  will require                                                                    
state funding.                                                                                                                  
                                                                                                                                
Co-Chair Hawker  asked if  adequate regulatory  authority is                                                                    
drafted  into  the  legislation. Ms.  Foerster  replied  the                                                                    
legislation provides everything needed by AOGCC.                                                                                
                                                                                                                                
Co-Chair Hawker closed public testimony.                                                                                        
                                                                                                                                
Mr. Pawlowski described  three fiscal notes. The  first is a                                                                    
zero fiscal  note from DNR.  The second fiscal note  is from                                                                    
AOGCC under the Department  of Administration (DOA) and also                                                                    
has zero fiscal  impact. The third zero fiscal  note is from                                                                    
the Department  of Revenue  (DOR). All  three of  the fiscal                                                                    
notes have positive revenue potential for the state.                                                                            
                                                                                                                                
2:44:23 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  explained that the  action of  creating the                                                                    
regulatory   structure  does   not  lead   to  a   financial                                                                    
consequence  for  the  state,  with  the  state  hoping  for                                                                    
positive numbers. Mr. Pawlowski agreed.                                                                                         
                                                                                                                                
Vice-Chair  Thomas  MOVED to  report  CSSB  243(FIN) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes. There  being NO OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
HCS CSSB 243(RES)  was REPORTED out of Committee  with a "do                                                                    
pass" recommendation and  with attached previously published                                                                    
fiscal notes: FN2 (REV), FN3 (DNR, FN4 (ADM).                                                                                   
                                                                                                                                
2:49:23 PM          AT EASE