Legislature(1997 - 1998)

03/20/1998 01:48 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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."                                        
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.                                     
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                     
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                          
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                        
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                               
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.                        

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