Legislature(1995 - 1996)
04/03/1996 02:30 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 394 An Act authorizing a program of natural gas and coal bed methane development licensing and leasing; relating to regulation of certain natural gas exploration facilities and coal bed methane exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; amending the duties of the Alaska Oil and Gas Conservation Commission as they relate to natural gas exploration activities and coal bed methane exploration activities; and amending the exemption from obtaining a waste disposal permit for disposal of waste produced from coal bed methane drilling. REPRESENTATIVE SCOTT OGAN, sponsor of HB 394, spoke in support of the legislation. He noted that the legislation creates a lease program that will enable independent energy companies to develop natural gas reserves within 3,000 feet of the surface. He emphasized that the legislation will benefit rural Alaska. Co-Chair Foster MOVED to adopt Committee Substitute, 9- LS1463\R, dated 4/2/96 (copy on file). There being NO OBJECTION, it was so ordered. In response to a question by Representative Brown, Representative Ogan noted that members were provided with an analysis showing changes from the previous version (Attachment 1). There being NO OBJECTION, Committee Substitute, 9-LS1463\R, dated 4/2/96 was adopted. DAVID LAPPI, LAP RESOURCES INC., ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He emphasized the benefit to rural Alaska. 7 STEVE BORREL, EXECUTIVE DIRECTOR, ALASKA MINERS' ASSOCIATION, ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He stated that the safe removal of methane gases is one of the primary safety concerns of underground mining. Productivity in underground mining is dependent on getting rid of methane gas. If coal production is too high it is difficult to get enough air through the entries to flush the gas. He noted that the technology that was developed to accommodate the use of methane gas was developed with safety issues in mind. He emphasized that the legislation provides an incentive for mining companies to utilize the gas resource. EARL AUSMAN, ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He stated that the legislation provides small communities with the opportunity to become self reliant. MEERA KOHLER, GENERAL MANAGER, NAKNEK ELECTRIC ASSOCIATION testified via the teleconference network. She spoke in support of CSHB 394 (FIN). Ms. Kohler's provided the Committee with written testimony (Attachment 2). She noted that the Naknek Electric Association uses 1.4 million gallons of diesel fuel annually. She observed that Naknek Electric Association has been interested in developing a natural gas supply. She stated that the possibility of natural gas in their area is high. She emphasized that development costs have been high and discouraging. New technology makes development more feasible. She stressed the need for state support. In response to a question by Representative Brown, Ms. Kohler noted that the gas reserve would be economically viable as far as 25 to 30 miles away. Representative Brown noted that the legislation would lease the gas at half of the normal royalty rate. She asked if the difference in the royalty cost is enough to make a project economic. Ms. Kohler stated that the Company's preference would be to not pay more than the bare minimal in royalties. She stated that the project would be economically viable at a slightly higher rate depending on the distance of delivery. Representative Brown asked if the State would be asked to subsidize construction of the transmission line. Ms. Kohler stated that it is not the intent of the Company to request additional subsides. She clarified that no specific reserve has been identified. Representative Brown noted that there are prohibitions on gas and oil development on Bristol Bay tidelands. Ms. 8 Kohler stated that they were not contemplating development of tidelands. Representative Ogan stated that the Director of the Division of Oil and Gas would have enough discretion to follow existing oil and gas laws. Representative Brown requested an analysis of the potential cost demonstrating that the royalty reduction would allow the project to be viable. Ms. Kohler stressed that it is difficult to develop costs without a specific gas source. In response to a question by Representative Brown, Ms. Kohler explained that the goal of Naknek Electric Association is to own the resource. Naknek Electric Association would either form a partnership with or retain a firm to drill and develop the project. The project would be managed by the Naknek Electric Association. Representative Ogan asked how much was paid to the Naknek Electric Association for power cost equalization. Ms. Kohler replied that they receive approximately $330.0 thousand dollars annually. TUCKERMAN BABCOCK, ALASKA OIL AND GAS CONSERVATION COUNCIL (AOGCC) testified via the teleconference network. In response to a question by Representative Brown, Mr. Babcock clarified that permits would be classified along the lines as an exploratory, development, or service well. He stated that the legislation would not reduce the standards for safety that are currently applied to permits to drill. Representative Ogan stated that with the exception of the North Slope there are no known reserves of oil above 3,000 feet. The pressures associated with methane gas are low. He emphasized that it is extremely unlikely that oil would come to the surface. He maintained that gas can be vented or flared Mr. Babcock stated that there is a danger of drilling into a gas pocket in any well. JIM HANSEN, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES testified via the teleconference network. He observed that drilling could be done with slim hole rigs. It would be a smaller operation and easier to contain. He stated that CSHB 394 (FIN) incorporates changes suggested by the Department. The Department's main concern is to assure that leasing under the legislation does not interfere with other oil and gas leasing. Representative Therriault asked if one well would provide enough gas or if a number of wells would radiate out from a central area. He asked how coal mining could occur if pipes 9 were generating out into the coal seam. Mr. Lappi explained that a small village could be serviced by one well drilled in the appropriate coal seam. Gas would be removed before mining operations would begin. He noted that underground coal mining is unlikely due to the cost. Vertical wells would be drilled to intersect the coal seam. Representative Therriault noted that there is no provision for the Department to charge for lease processing. Mr. Lappi emphasized that the legislation was developed to reduce the regulatory cost. He noted that the application fee for a large exploration license is $500.0 thousand dollars. (Tape Change, HFC 96-104, Side 1) KEN RIGALSKY, DEPARTMENT OF ENVIRONMENTAL CONSERVATION testified via the teleconference network. He stated that the Department is neutral regarding CSHB 394 (FIN). He stated that there is minimal risk involved. He did not think contingency plans would be warranted. Representative Brown asked the likelihood of finding gas deposits not associated with coal bed methane in areas above 3,000 feet. DAVE JOHNSTON, ALASKA OIL AND GAS CONSERVATION COUNCIL testified via the teleconference network. He stressed that the presence of gas hydrates on the North Slope must be considered. Gas hydrates are found within 3,000 feet of the surface. Representative Brown asked if the legislation applies to the North Slope. Mr. Hansen noted that the legislation excludes any land included in an oil and gas leasing program. Representative Brown pointed out that this exclusion could be waived by the commissioner of the Department of Natural Resources. Mr. Hansen stressed that it is not the intent to offer shallow gas leases in areas of existing leases. He stated that the exclusion would allow flexibility if something changes in the future. Representative Brown asked for an explanation of gas hydrates. Mr. Johnston explained that gas hydrates are pockets of gas associated with permafrost areas. The gas is locked in an ice matrix. He observed that there is interest in developing gas hydrates on the North Slope. Mr. Hansen observed that little is known about the subsurface geology of areas of the State. He noted that 10 there are areas of high tectonic activity. It is possible that shallow gas not associated with coal could be found in any area. He stressed that drilling is the best way to determine if the resource exists. In response to a question by Representative Brown, Mr. Lappi stated that wells could be drilled for under $100.0 thousand dollars each with the aid of special equipment. The exploratory well would become the production well. Representative Brown noted that page 6, lines 15 and 16, states that the applicant "may" conduct a title search. "Shall" was changed to "may". She expressed concern that individuals could stake over other interests. She acknowledged that there will be public notice. Mr. Hansen observed that the State normally does a title search, but does not guarantee title in the lease. On the North Slope, a title search will be done after the lease is issued. He emphasized that the legislation would clarify that the title search would not have to be done prior to the lease. He maintained that existing statutes require that a title search must be completed prior to drilling. Representative Brown stressed the importance of assuring that existing rights are maintained. Mr. Hansen stated that the subsurface state is dominate. The federal transfer of land to the State requires that the State retain the subsurface rights and that they be made leasable according to the wishes of the legislature. AS 38.05.125 addresses this issue. Representative Ogan noted that most of the methane leases will be associated with rural areas and will be close to the village that will be served. He emphasized that there will be a public process. Representative Brown reiterated concerns that the rights of surface owners be protected. She noted the lack of staff support in the Department of Natural Resources. Mr. Hansen noted that there are bond provisions under AS 38.05.130. The Director of Oil and Gas can require a bond to cover potential damages. In response to a question by Representative Brown, Mr. Hansen stated that the general stipulation that no person may engage in mineral exploration activity without a good faith effort to resolve differences with the surface owner would apply. Representative Brown asked if the bill would apply to offshore leases. Mr. Hansen stated that the legislation is not designed for offshore leases. He acknowledged that the 11 legislation does not prohibit offshore drilling. Representative Brown asked how the Bristol Bay exclusion under AS 38.05.140(f) would be interpreted. Mr. Hansen reiterated that leases would not be issued in any area that has been set aside, such as Bristol Bay or Kachemak Bay. Representative Ogan stated that he did not anticipate any offshore activity under the legislation. Representative Brown noted that the major oil companies have expressed interest in offshore leasing in the Bristol Bay area. Representative Brown asked what would happen if a reserve crossed the 3,000 feet mark. Mr. Hansen stated that the Department of Natural Resources shares this concern. Mr. Babcock observed that page 6, subsection (j) references an onshore well. Co-Chair Hanley pointed out that if an onshore well drilling for natural gas penetrates a formation capable of producing gas below 3,000 feet then the owner must notify the Department and the Alaska Oil and Gas Conservation Council and may not conduct further operations until the facility complies with all applicable laws and regulations relating to oil and gas production. Representative Brown maintained that production cannot occur above 3,000 feet without affecting the area below 3,000 feet. Co-Chair Hanley interpreted the legislation to state that operations cannot occur until they have complied with all the laws and regulations governing oil and gas. Representative Ogan pointed out that subsection (j) states that: "A lease does not give the lessee the right to produce gas from sources that are not within 3,000 feet of the surface." He emphasized that the legislation is primarily pointed toward production of methane gas. He added that the intent is not to exclude other shallow sources of gas. The legislation is not intended as an exploration tool to allow larger oil companies to find gas. Mr. Babcock noted that the AOGCC will be appointed to protect the rights of the owner of the resource which is below 3,000 feet. Representative Brown stressed that it will be difficult to protect the State's ownership below 3,000 feet. Mr. Babcock reiterated that AOGCC will protect the State's ownership of the resource below 3,000 feet. Representative Brown questioned the effect on Native lands. She noted that the low state royalty would under cut development on Native lands. There was no answer to Representative Brown's question.