Legislature(1997 - 1998)
03/20/1998 01:48 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 380 "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from fields within the Cook Inlet sedimentary basin where production is commenced in fields that have been discovered and undeveloped or that have been shut in." REPRESENTATIVE MARK HODGINS, SPONSOR, spoke in support of HB 380. He explained that HB 380 would offer royalty reductions on six oil and gas fields, in Cook Inlet region, that have been shut in for more than twenty years. The fields have been worked on and proven to be uneconomic. He observed that the House Special Committee on Oil and Gas put limits of 35 million barrels of oil or 35 billion cubic feet of gas produced. Tyonek Deep would not be included. He observed that the oil industry in Cook Inlet is declining. There are several oil field service companies that are no longer in operation. Royalty would be reduced from 12.5 percent to 5 percent. He observed that there is no royalty if the oil is not removed. In response to a question by Co-Chair Therriault, Representative Hodgins clarified that the legislation pertains to delineated fields. Pools underlying the fields would not be included. Representative Hodgins noted that Falls Creek, Nicolai Creek, North Fork, Point Starichkof, Redoubt Shoal, and West Foreland fields were specifically identified. Royalty reductions would be included on any "sweet spots" found on the above named fields. He observed that seismic studies do not indicate the existence of sweet spots. KEN BOYD, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES spoke against the legislation. He disagreed that the fields are delineated. He maintained that the Point Starichkof field is not delineated. He observed that the fields are recently leased. He maintained that old fields are being developed using new technology. He noted that discovery royalty legislation was confined to the pool of discovery. House Bill 380 would apply to the whole field. He stressed that oil and gas activity will increase due to 3D seismic, other new technologies and recent legislation. He observed that there is more oil and gas activity in Cook Inlet now then during the previous five years. He asserted that the relief is not based on any economic evaluation of need and does not protect the State's upside interest if economic conditions change. Both of these conditions were included in HB 207. He stressed the need for more information. Fields have proven, probable and high side potential. He observed that the potential of the fields is unknown. Representative Kohring spoke in support of the legislation. He maintained that every advantage should be taken to reduce taxes on the industry. Co-Chair Therriault observed that revenues to the state of Alaska from resources and the amount that industry must pay must be balanced. Representative Hodgins clarified that no royalties have been received from the six fields. Mr. Boyd agreed that the fields have not been developed, but emphasized that they have recently been leased. He noted new technology might bring them on line. Representative Davies questioned how the state of Alaska's upside could be protected. Mr. Boyd observed that the actual shape of the field is unknown. He suggested that volume and price structure overtime should be determined. He maintained that once the company recoups its cost to develop the field the State should be able to recapture the money provided at the front end. A combination of value and price is needed. JAMES EASON, FORCENERGY testified in support of the legislation. He referred to a letter to Senator Halford, dated 3/11/98. The letter contained an estimate of reserves. He observed that the fields are not delineated. House Bill 207 requires a set of standards that an applicant must make. The commissioner makes a definitive set of findings based on a standard of delineation, which the fields in HB 380 do not have. Royalty relief is not available to these fields under HB 207, since they are not delineated. Mr. Eason observed that royalty relief would be exchanged for guaranteed development before January 1, 2004. Royalty would only be reduced if development occurs prior to January 1, 2004. He emphasized that the fields have not been developed in 30 years. The state of Alaska would receive 5% instead of 12.5% under the lease. Infrastructure would occur as a result of development. There is no infrastructure in the fields to encourage development. Pipelines and platforms would have to be built. The bill is narrowly crafted to affect defined fields that meet the criteria and are brought under production by 2004. He noted that the primary focus of previous hearings has been the value of the legislation to the leasee and the cost and value to the State. Mr. Eason observed that the accompanying fiscal note assumes that there will be large impacts from the legislation. He pointed out that the fiscal note is based on estimations. He stressed that revenue would be generated on fields that would not otherwise be developed. He questioned why the fiscal note on HB 380 is so different from HB 207. Representative Grussendorf observed that marginal fields are being shut in due to low oil prices. Representative Davies noted that reserves at Redoubt Shoals were estimated at 8.9 million barrels. Mr. Eason clarified that the estimate should be adjusted to 11.0 million barrels of oil. He did not think that there was an oil price based upon the known proven reserves that would make development economic. He did not think that there was an oil price that would justify the development of the field, given the expected cost, based on the reserves that are known to exist, under the current royalty structure, at Redoubt Shoals. Representative Hodgins pointed out that Redoubt Shoals is an offshore field and would need additional infrastructure. Representative Martin stated that the royalty structure should be left alone and the severance tax should be adjusted. Mr. Boyd responded that he supports changing royalty to encourage production when it is supported by analysis. Representative Davies observed that Article VIII, Section 2, Alaska State Constitution requires that the State provide for the utilization and development of all natural resources for the maximum benefit of its people. He asked if the bill provides for the maximum benefit of the people. Mr. Boyd did not think that the bill provides for the maximum benefit of the people. Representative Grussendorf observed that 50% of all royalties on new fields go into the Permanent Fund. Representative Hodgins observed that current royalties on the fields are zero. Representative Kelly questioned if there are other ways of finding out the extent of the reserves, short of development. Representative Hodgins emphasized that the fields are isolated and require infrastructure to be developed. Redoubt Shoals would require an offshore platform and pipeline. A pipeline would also be needed for development of North Fork. It would be uneconomical for a pipeline to go north. The best utilization of North Fork gas would be for use in Homer. In response to a question by Representative Kelly, Representative Hodgins noted that the federal government goes to five percent when they give royalty reductions. Mr. Eason observed that Redoubt Shoals has had 6 wells drilled. He reviewed the drilling history of Redoubt Shoals as contained in his letter to Senator Halford, dated 3/11/98. He pointed out that it is the only field in the State's history where the State told the owners that they had to go into production or lose their leases. The lease was returned to the State and the unit was disbanded. When Forcenergy assumed the interest in those leases it committed to the State, as part of the unit agreement, to conduct a 3D seismic survey and to evaluate all the options available to drill further delineation wells to determine if there are enough reserves to develop the field. Forcenergy agreed to release the lease if they did not proceed. Forcenergy has done the 3D seismic survey and commissioned an independent assessment of options for building a platform. It is impossible to develop a field offshore in conditions at Redoubt Shoals for the amount of reserves. More reserves will have to be identified or the field will not be developed regardless of the passage of HB 380. Representative Hodgins pointed out that the state of Alaska would receive 9 mils in tax platforms or a pipeline built at Redoubt Shoal. He emphasized that jobs would be created in the area. He observed that the legislation would open up possibilities to smaller operators. A two-person operation is interested in developing the North Fork field. He emphasized that the essence of the legislation is to try to put people to work. Representative Davies questioned what is the sensitivity of the development of these fields to price and volume estimates. He asked if the generic form of Mr. Boyd's calculations is the correct exercise for the state of Alaska to go through. Mr. Eason acknowledged that it would be the correct exercise to go through in circumstances where there is a reasonable amount of information to make a legitimate calculation. He stated that he has no objections to the process of HB 207, but emphasized that it is a high standard. He stressed that there are obvious indicators for royalty relief for fields that have been discovered but remain undeveloped after 30 years. He pointed out that there are prospects that are not profitable regardless of price. He observed that Cook Inlet production is declining. He estimated that Cook Inlet is 90 percent depleted of oil. He maintained that the ability to deliver the resource would be absent major new discoveries or development. He noted that it has been almost 30 years since there has been a major oil or gas discovery in Cook Inlet. A point will be reached when the infrastructure cannot be maintained, due to rising cost, to complete the existing reserves efficiently. (Tape Change, HFC 98 -73, Side 1) Mr. Eason stated that the time is right for legislation to see if these fields can be produced for the benefits described. He asserted that a time would come when the opportunity will be lost. Representative Davies stated that there has to be a change in dollar value of the resource that goes beyond the value. Why would the State not want to structure the legislation in the event that the price goes above the threshold value that makes development sensible or the volume estimates go beyond the threshold estimates. The state would then participate in the upside potential. Mr. Eason observed that companies look at expectations. Oil prices, development costs, costs for wells that are not drilled due to mechanical problems, frequency and magnitude of work over wells that are required to replace defective and deteriorating equipment and a host of other factors including needed permits for platforms are included in estimates before making investments. Oil prices, royalties and taxes are all important factors. He cautioned against over engineering one factor as the cut off point. He noted that a decision to produce based on the assumption that the legislation is in place and royalties are 5 percent could influence the assumption or risks about other things in order to proceed. He observed that price spikes could affect more of the business then the price itself. Representative Davies stressed that uncertainties will exist in any calculation. He maintained that sensitivity to royalty reduction is usually small compared to oil price and production volume. He suggested that the royalty reduction could be different for each field. He asserted that more information could be obtained in a confidential manner. Representative Mulder observed that the Division has implied that the legislation is premature and not necessary. He asked if Forcenergy worked with the Division to justify the need for the legislation. Mr. Eason observed that Forcenergy has not approached the Department to talk about royalty relief under HB 207 because the fields are not delineated. He discussed the terms of the legislation with the Department. He explained that the commissioner makes a determination, on undeveloped fields that have not produced, based on upon a showing of delineation that have not. The only recourse is to ask the legislature for relief. HB 380 was HELD in Committee for further consideration.