Legislature(1993 - 1994)
03/10/1994 08:36 AM House 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
HOUSE BILL NO. 199
"An Act providing for oil and gas exploration licenses,
and oil and gas leases, in certain areas of the state;
and providing for an effective date."
REPRESENTATIVE JOE GREEN testified in support of CSHB 199
(O&G). He noted that the state's oil revenues have been
dropping. He explained that the legislation would encourage
further exploration and development of state resources
through the issuance of large block exploration licenses.
He pointed out that half of the companies formally doing
business in Alaska have left. He emphasized that the
current leasing process only provides small blocks of land
for exploration. He observed that CSHB 199 (O&G) would
allow up to 500,000 acres to be licensed to a company or
group of companies. He asserted that the larger block
approach would give greater flexibility for companies to
invest in exploration. He observed that areas surrounding
existing oil fields will be excluded. He noted that areas
of Cook Inlet and land north of the Umiat Baseline would be
excluded.
Representative Green gave examples of how a license could be
issued. He noted that a company could propose to the
commissioner of Department of Natural Resources that an area
between 20 and 500,000 acres be licensed. They would need
to provide justification of the exploration of remote sites.
If the Commissioner of Department of Natural Resources
agrees to allow the area to be licensed a competitive bid
will pursue. He noted that the cost of the license will be
in the form of a monetary work commitment. The exploration
would be limited to oil and gas. Other uses could continue
concurrently. The license would be issued for ten years.
Representative Green discussed the operation of a work
commitment. The licensee must post a work commitment bond
on a yearly basis in addition to any environmental bonds
required. The bond would be the amount of the work
commitment bid, minus what has been expended and approved by
the Commissioner, divided by the number of years left on the
license. If 25 percent of the work commitment is not met
after four years the license is revoked. If more than half
of the work commitment has been met than there is no
relinquishment of acreage. After the fourth year, 50
percent of the work commitment is not met the licensee would
lose 25 percent of the acreage licensed. Until 50 percent
of the work commitment is met 10 percent of the license will
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be lost each year, until an additional 50 percent of the
license is lost. The legislation is structured to encourage
work to proceed quickly.
Representative Green discussed the conversion of a license
to a lease. The legislation allows a portion of the
license, agreed upon by the Commissioner and the licensee,
to be converted to lease. Money spent on the lease does not
go to meet the requirement of the license work commitment
agreement.
Representative Green asserted that the state only receives a
small portion of their revenues through lease sales.
Representative Grussendorf noted that the legislation gives
the Commissioner of Department of Natural Resources a great
deal of latitude in directing the use of state assets.
Representative Green asserted that the best interest for the
state of Alaska is to develop resources. He maintained that
Commissioners are environmentally sensitive.
Members discussed competitive leasing versus block
licensing. Representative Green noted that most leasing
sales receiving competitive bids are close to established
fields or near transportation corridors. He emphasized that
CSHB 199 (O&G) would encourage exploration of remote areas.
He asserted that leasing revenues would not be lost, since
it is unlikely that a lease would otherwise take place. He
stressed that even if a discovery is made the licensee must
justify creation of the infrastructure needed for
development.
Representative Grussendorf asked if bid money will go to the
Permanent Fund. Representative Green clarified that the
revenue derived from the license will be in the form of a
work commitment. Revenues will be the result of the
discovery of oil or gas.
Representative Therriault asked what restrictions will be
placed on the public use of the license
JERRY GALLAGHER, LEGISLATIVE LIAISON, DEPARTMENT OF NATURAL
RESOURCES explained that the license does not exclude other
uses. Public access provided for under AS 38.05.130 would
apply. Operators are allowed to prevent public access for
reasons of health, safety and certain security reasons.
Concurrent uses could occur.
In response to a question by Representative Hanley,
Representative Green reiterated that areas known to have
production value have been excluded. If oil is found the
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area surrounding the find would be excluded by the
Commissioner. He stressed that only unknown and untapped
areas are addressed.
Representative Grussendorf asked if off shore licenses would
be granted. Representative Green replied that offshore
licenses would be possible but felt that they would be more
difficult to rationalize to the Commissioner of Department
of Natural Resources.
Representative Brown questioned if the licensee is required
to show a geological prosect or reason to expect that the
area to be licensed merits exploration. Representative
Green suggested that they would need to convinced the
Commissioner in order to receive a license. Representatives
Green and Brown discussed the granting of licenses by the
Commissioner of Department of Natural Resources.
Representative Brown asked if provisions which exclude
Bristol Bay from exploration would remain. Representative
Green assured her that the legislation would not override
any statutes in existence. Representative Brown pointed out
that there are several sections, such as on page 8, lines 24
and 25, which specify that particular parts of AS 38.05.180.
apply. Representative Green explained that the provision
would allow companies possessing leases to not be excluded
from holding a license. Representative Green admitted that
he was not certain that Bristol Bay is excluded.
In response to a question by Representative Brown,
Representative Green explained the differences between a
licensee and a lessee. A licensee may only explore an area.
A licensee cannot exclude an area from other excepted uses.
A lessee is granted additional rights.
Representative Brown asked what responsibilities the lessee
is relieved of by holding a license. Representative Green
reiterated that the licensee cannot drill or transport the
product. Representative Brown noted that the legislation
provides a continuing phased package. She observed that
upon discovery the licensee shall have the right to convert
to a lease.
Representative Green acknowledged that the right to convert
exists. He emphasized that the license provides a
commitment to produce. He added that when the license is
converted to a lease the holder must show how development
will proceed and how much acreage will be involved in the
lease. Representative Brown observed that CSHB 199 (O&G)
states that at the time the license is granted the form of
the lease to be issued shall be made available.
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Representative Brown asked what is required to convert to a
lease. Representative Green stated that the company would
have to show the Commissioner just cause as to why the
conversion should take place. He added that the
Commissioner would want to know what will be exploited.
Representative Brown noted that page 8 states that if the
Commissioner determines that the work commitment is met
there may be a conversion. Representative Green clarified
that some leases may be for five years. Representative
Brown observed that leases are normally ten years.
(Tape Change, HFC 94-55, Side 2)
Representative Brown addressed the issue of competitive
opportunities for exploration. She asked if it is possible
that no other company would have the opportunity to compete
for a lease when the licensee requests to convert the
license to a lease. Mr. Gallagher noted that the
Commissioner can allow other proposals for a time specific
period or a single application for a license could be
received. Page 7, line 3 gives the Commissioner authority
to reject or to public notice that the proposal is under
consideration. He stated that there are no provisions for
entertaining additional competitive proposals.
Representative Green stated that the intent is that there
will be the right for additional proposals. Representative
Brown reiterated her concerns that large blocks of land
could be controlled by one company.
Mr. Gallagher stressed that the intent of CSHB 199 (O&G) is
to allow individuals or companies to invest in areas that
are not likely to be explored.
Representative Brown queried why all existing sales on the
five year leasing program are not excluded. Representative
Green noted that industry supports areas contained in CSHB
199 (O&G). Mr. Gallagher added that the Commissioner of the
Department of Natural Resources is required to go through a
written process to designate which lands will be available
beyond the excluded areas.
Co-Chair MacLean asked if public input is allowed during the
conversion to a lease. Mr. Gallagher clarified that the
best interest finding would be completed prior to the
issuance of the license, under AS 38.05.035. Public input
would occur during this time.
In response to a question by Co-Chair MacLean,
Representative Green clarified that the amount of land
conveyed with the granting of the lease would be restricted
to land associated with a discovery. Representative Brown
clarified that lease acreage limitations under AS 38.05.140
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(c) would apply.
JEFF COOK, DIRECTOR, GOVERNMENTAL PUBLIC RELATIONS, ARCO
testified in support of CSHB 199 (O&G). He asserted that
the bonding formulation strikes an appropriate balance
amongst a variety of interests to provide equal financial
footing for bidders and solid protection of the state's
interest. He noted that leases are achieved only after the
entire work commitment is completed, which minimizes chances
for speculation. He added that the bonding and
relinquishment provisions provide incentives to conduct the
work early and vigorously. He maintained that bonding
provisions allow the licensee the maximum flexibility to
pursue a work program that makes sense. He emphasized that
the winning bid is based upon the objective standards of
total dollar amount, using sealed bids.
Representative Brown referred to page 8, lines 26 and 27.
She asked why a 12.5 percent royalty provision was included
rather than a reference to AS 38.05.180 (f), competitive
bidding for leases. Witnesses were unable to reply.
Representative Brown asked if multiple licenses could be
held. Mr. Gallagher did not think that multiple licenses
would be prohibited.
Representative Brown questioned how the Commissioner would
meet requirements of CSHB 199 (O&G) with a zero fiscal note.
Mr. Gallagher assured her that the Department can
incorporate the program at no additional cost.
Representative Brown stressed that the Commissioner is
obligated in page 7, section (d) to respond to requests and
that regulations must be developed. Representative Brown
noted that the state's leasing program lacks resources to
meet current demands and legal obligations. Representative
Green observed that if the program expands the Commissioner
could request a supplemental or increased funding for FY 96.
Representative Brown suggested that "shall" be changed to
"may" on page 6, line 29. Representative Green felt that
the change would weaken the legislation.
Representative Therriault suggested that a lack of
geological surveys conducted by the state prevents
exploration and development of remote areas. He observed
that CSHB 199 (O&G) could entice industry to explore areas
that the state cannot afford to map.
CSHB 199 (O&G) was HELD in Committee for further discussion.
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