Legislature(1995 - 1996)

04/03/1996 02:30 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                 
  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.                           
  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.                                          
  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.                 
  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.                                                   
  (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.                                                      
  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                 
  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                 
  (Tape Change, HFC 96-104, Side 1)                                            
  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.                                                                  
  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                 
  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                 
  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                 
  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.                                             

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