Legislature(1993 - 1994)
04/06/1993 08:00 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 199: OIL & GAS EXPLORATION LICENSES/LEASES "We are familiar with House Bill 199 which provides for oil and gas exploration licensing. There is nothing wrong with the concept of exploration licensing and it has been used successfully in various places around the world. There are variations on them and such licenses are sometimes referred to as 'concessions' or 'work concessions.' I am familiar with the program as it exists in Canada on federal or 'Queen's' lands and, to a lesser degree, I am familiar with the programs in Australia and in the North Sea. "With respect to Alaska, any licensing program should not include the mature areas which are the North Slope and Cook Inlet Basin. Such a program is appropriate for, and should be utilized in, frontier areas. Alaska has in the order of 20 sedimentary basins. Only half a dozen have been explored and only two have been extensively explored. "While the concept of exploration licensing has merit for the State of Alaska, certain provisions of House Bill 199 will preclude participation in the arrangement by independent producers and probably by the smaller of the major oil companies, as follows: "1. The bill (HB 199) as drafted allows for licenses covering as much as 500,000 acres. With the contemplated license fee in the amount of $1.00 per acre, many independents will not pursue the arrangement further. The entire Prudhoe Bay field, the largest oil field on the North American continent, covers less than half of the 500,000 acre maximum, and the likelihood of discovering another Prudhoe Bay is highly unlikely. A license limit of 100,000 acres is more appropriate and will allow competition by smaller companies. Also, reduction of the license area over time as the exploration process defines specific prospects is in order. In addition, total land under license to any single licensee should be limited to, say, 500,000 acres to prevent 'warehousing' of acreage. "2. The bill (HB 199) as drafted, provides for an obligation to perform a specified minimum work commitment, expressed in dollars. We submit that the work commitment should be expressed in terms of activity (i.e., 35 miles of seismic work plus one exploratory well to be drilled to a depth of 10,000 feet). Independents can operate cheaper than major companies. The bill as drafted punishes efficiency. If we were to bid in terms of dollars for the work program just cited, we might bid $1.5 million for the seismic and $10 million for drilling, for a total of $11.5 million. If we were able, through efficiency, innovation, or luck to perform the entire program for $9.5 million, the $2 million 'savings' would be forfeited to the state of Alaska under terms of the bill. "3. The required 'performance bond or other security in favor of the state in an amount not less than the amount of work to be performed' will, of course, preclude participation by smaller companies. Bonds of that nature are simply not available in today's market. We are a small but successful company with a good financial statement, but we were unable to obtain, at least initially, a $100,000 drilling bond, which is currently required as a condition of the drilling permit. We satisfied the obligation by pledging a certificate of deposit to the state of Alaska. We could not possibly pledge the $11.5 million utilized in our example, and allow those funds to be tied up for long periods of time, plus do the actual work. That arrangement amounts to paying double for the activity. We suggest a performance bond posted annually in the amount of 10% of estimated expenditures for the ensuing year. "Setting aside our 'example' for the moment and looking at reality, our company has expended, or caused to be expended, close to $20 million in connection with the West McArthur River project. If we had been required to post a bond in that amount, the project would never have happened. During periods of drilling, approximately 40 full- time on-site jobs are created together with approximately 20 support jobs in Anchorage or Kenai. Pipeline construction involves approximately 25 full-time on-site jobs and 15 support jobs. After full development of the field, about 15 permanent on-site and support jobs will be involved in producing operations. Upon full development of this field, we estimate taxes and royalties to the state of Alaska will exceed $1 million per month. Total revenues to the state are estimated at $250 million over field life. "4. Finally, the oral outcry arrangement provided in HB 199 will, again, preclude real competition by the independent sector. We submit that the sealed bid arrangement presently utilized in the state's competitive oil and gas leasing program is more appropriate. Number 200 "As an independent producer, we are in touch with many other independent producers. There are roughly 10,000 members in IPAA, the Independent Petroleum Association of America. Most of the IPAA members will never venture to Alaska, but in the wake of our success, we are beginning to hear expressions of interest from quite a few who have the financial capability of operating or investing here. Exploration licensing with the modifications we have suggested will attract those independents. Exploration licensing as currently set forth in House Bill 199 will discourage them. "Thank you for hearing us. We look forward to continued work with the committee in this matter and are prepared to assist with specific language to accomplish these suggested changes." Number 250 REPRESENTATIVE JOE SITTON asked Mr. Stewart to elaborate on the mature areas that he previously mentioned. Number 264 MR. STEWART said the Division of Oil & Gas has recently worked with industry and determined upon the Umiak baseline - anything North of the Umiak baseline, would be excluded. There is also an exclusion for the entire Cook Inlet Basin. Mr. Stewart said these arrangements were fine with his company, and the rest of the industry with the exception of one large company. Number 274 REPRESENTATIVE SITTON felt there was potential with the different parties for compromise on things like the oil outcry and the performance bond. Number 280 CHAIRMAN GREEN agreed with Representative Sitton and stated there was a rewrite of HB 199 that takes these things into consideration. Number 282 REPRESENTATIVE SITTON asked why Cook Inlet would be excluded and not the other. Number 284 MR. STEWART stated the portion of the North Slope north of the Umiak baseline is in about the same status in terms of level of exploration and in these instances about specific prospects not broad regional studies, whereby one company can lock up 500,000 acres and hold it for 10 years and exclude it from everyone else. He further stated that these two areas are much further along than the other 18 basins he previously mentioned. Number 293 REPRESENTATIVE SITTON asked how he would feel if the size maximum was changed to 100,000 acres. Number 295 MR. STEWART said he would still not recommend it in those two specific areas. He felt this would be fine in the frontier areas, and that the frontier areas are a very different operation. Number 303 REPRESENTATIVE SITTON said one large oil company has said that the other companies are objecting to this because this one large oil company has the money and commitment to do the exploration and nobody else does, and they want them to "hold their cards until the other companies can belly up to the table." Number 311 MR. STEWART said his testimony last week in the Senate Oil & Gas Committee was absolutely parallel to all the other oil companies. These other oil companies do not want to see Cook Inlet or North Slope involved nor do they want to see large warehousing of acreage happening. Number 324 CHAIRMAN GREEN stated his question does not necessarily reflect his position, but more what he has heard; that if you rely totally on the undrilled basins that the state have, there may be a reluctance to go in there because there is no way to get a discovery to a market. Number 331 MR. STEWART said this was another issue altogether and something that industry and specific companies will have to make. Number 337 CHAIRMAN GREEN stated the way HB 199 is currently written it requires bonding for the total 10 year work commitment, which is extremely costly, and asked Mr. Stewart what he thought about an annual bond. Then comes that year or years, in this program that might be laid out where you have a lot of seismic and you also have a well; is there any possibility that an oil company, that is not well known, comes to Alaska and bid a 10% bond, but they cannot make it, so they pull out. Number 351 MR. STEWART said that then the state would have a couple million bucks and still have their land. He said that the mere speculators will not play around with $1 or $2 million. He further stated he did not feel that new, unknown, oil companies would even come to Alaska. Number 370 CHAIRMAN GREEN asked, "If you went from a dollar to a work commitment could you determine the amount of bond?" Number 372 MR. STEWART stated, "You would have to accompany your proposal with an estimate." He also stated there were people in the state that can look it over to see if it was reasonable. Number 379 CHAIRMAN GREEN asked if there were two or three companies trying for the same area, would Mr. Stewart suggest the awarding be done on a work commitment or a dollar amount. Number 380 MR. STEWART said it would be done on the scope of work. Number 383 CHAIRMAN GREEN asked how to equate someone who says they will do a lot of seismic and one well and someone who says they will do two wells with a little seismic. MR. STEWART said it was subjective and would be done by a board. Mr. Stewart said, "At this point you could synthesize the two or three proposals and say this is what we want done and see who shows up at the table." Number 395 CHAIRMAN GREEN felt the latter part might preclude the state from possible legal action down the road. Number 399 MR. STEWART thought it would be rare to have two or more on the same parcel of land. Number 402 REPRESENTATIVE SITTON asked how the State can encourage the recipient of these licenses to do the work the first year and not the ninth year or whatever. Number 409 MR. STEWART stated the bidding process could easily include a work time-line. Number 416 REPRESENTATIVE SITTON asked what would motivate Arco, for example, to get one of these licenses and not do anything up front. Number 418 MR. STEWART said, "Excluding all the rest of the oil companies." Number 422 CHAIRMAN GREEN said he has talked about trying to encourage earlier work and maybe even present working the amount so the person who bids a big job in 10 years may get outbid by someone who does a smaller job in three years. Number 429 MR. STEWART asked Chairman Green if he meant on the same parcel. Number 431 CHAIRMAN GREEN said yes and asked Mr. Stewart whether from an independent standpoint some sort of an incentive like that would make a difference. Number 432 MR. STEWART said that yes, he thought this would cause competition to happen. Number 434 REPRESENTATIVE SITTON asked Chairman Green what the 10 year period was for. CHAIRMAN GREEN stated the first year you look things over, the second year you send geologists out, so by the time the oil company is ready to do much, you're in the third or fourth year, and this is under the best of circumstances. Chairman Green further stated there were many hurdles to go through, like permitting. Number 443 REPRESENTATIVE SITTON felt the horizontal permitting process needs some changing. Number 445 CHAIRMAN GREEN said, "Yes, and it is not fair to someone bidding on a wide area leasing, or concession leasing, to say the government is now going to take care of this permitting process." Number 449 MR. STEWART stated he started their project in 1985, "now eight years later we are coming into production." Number 452 CHAIRMAN GREEN asked Mr. Stewart if they put their big money in the well two and a half years ago. Number 454 MR. STEWART said, "Yes, but the geological work started in 1985." Number 455 CHAIRMAN GREEN asked Mr. Stewart if dollars were going out for eight years and just now starting to get some return. Number 457 MR. STEWART said this was not unusual in Alaska. Number 458 REPRESENTATIVE SITTON asked how it would be somewhere else, for example, Texas. Number 459 MR. STEWART said the geological work is non-specific, but once you make a discovery you are on stream in two weeks. Number 464 REPRESENTATIVE SITTON stated this crosses party lines when these regulations come up and that everyone is interested in getting out of all these regulations. Number 467 MR. STEWART said he has 22 permits involved in this particular project so far, and if it was for 22 chores to do it would not be too bad, but there are conflict situations where you get caught in between agencies all the time. REPRESENTATIVE SITTON asked Mr. Stewart if he had to deal with the defense as opposed to a situation like say in Texas. Number 478 MR. STEWART said in Texas you're not dealing with Federal lands. He favored the lead agency concept. One agency where you go to that agency and tell them what you want to do. At that time that agency contacts all the others for their comments and concerns. He further stated that one agency should be the Alaska Oil and Gas Conservation Committee (AOGCC), that they are the only people who understand what the oil companies do. MR STEWART further stated that the biggest problem the oil companies have is in the Department of Environmental Conservation (DEC). That ever since the oil spill it has mushroomed beyond belief with the DEC. He said he dates it back to the first Hammond administration. It has been a very slow growth in the regulatory "rain forest" then when the oil spill happened it went crazy. Number 499 REPRESENTATIVE SITTON appreciated Mr. Stewart's point. He said everyone loved and admired Jay Hammond, but people forget that he was anti-development. Number 501 CHAIRMAN GREEN asked Mr. Stewart if Alaska had a lead agency, like some years ago there was a Coastal Zone Overview ADGC (Alaska Division of Governmental Coordination) that was supposed to be a permit collector, but they really have no authority - they are more like an escrow. Number 507 MR. STEWART felt the AOGCC should be in this role. Number 508 CHAIRMAN GREEN asked if he felt this agency would have enough teeth; that when say, Stewart Petroleum comes to the AOGCC, that the AOGCC, or whoever is set up as a lead agency then becomes a proponent; will they have the authority to move things. Number 512 MR. STEWART stated this was something that would have to be done through legislation, "but it is what we want." Number 514 REPRESENTATIVE SITTON asked, "But we do not necessarily want to create an energy czar, or do we?" Number 515 MR. STEWART said he would not call it a czar, "I would call it an agency that understands what the oil companies do, and wants to see activity and move it along." Number 524 REPRESENTATIVE SITTON asked Mr. Stewart if they prefer committee work rather than dealing with a single person. Number 525 MR. STEWART said he runs into situations where one personalty could stop them. "If you run into one person who has the mentality of stop or go, I feel they elevate themselves from regulator to policy maker at that point." He further stated, "They do not have to answer to anyone and this makes them very powerful people." Number 533 REPRESENTATIVE SITTON asked, "With a pro-development governor and a pro-development the Department of Natural Resources (DNR) Commissioner, how come things have not loosened up along the process?" Number 536 MR. STEWART said it does not filter down to the rank and file. He stated he has been personally disappointed in this. "The DNR Commissioner may be pro-development, but he does not understand what the oil companies do," he added. Number 542 CHAIRMAN GREEN asked Mr. Stewart, "If there was a lead agency concept and a problem came up between getting something done in an environmentally satisfactory manner but they were confronted by some of these underlings of maybe DEC, or some other organization, do you foresee that moving ahead would jeopardize the applicants position with the Federal Government?" Number 551 MR. STEWART felt he could not answer this question. "Obviously, we are talking brand new legislation and many of the statutes as they exist are pretty good, it is the regulations that they are under and the way they are implemented that causes the grief," he said. Number 558 REPRESENTATIVE SITTON said hopefully there will be something on the ballot in the next general election that would ask the people to give the authority to overturn regulations. Number 561 MR. STEWART said that Independents have been around for a long time in the state of Alaska, and that he is "doing a list of Independents." So far he has come up with 38 that have drilled wells here in Alaska, going all the way back to 1898. Number 588 REPRESENTATIVE SITTON said the only other independent he knew of just speculates, and asked if this was prevalent or not. Number 591 MR. STEWART stated there used to be non-competitive leasing in Alaska, years ago. He stated he thought he knew who Representative Sitton was referring to in Fairbanks. Some of this still happens down south. There are still non- competitive leasing programs, grab-bag deals, he added. Number 602 REPRESENTATIVE SITTON stated, "Even with the reduction to the acreage to 100,000 is that still too much?" Number 603 MR. STEWART said the normal speculator would not get involved with that to lose it forever; to have to do a bond and forfeit the bond. Number 606 REPRESENTATIVE SITTON told Mr. Stewart he is very grateful for the work that he has done and, "for your independence, discovery and production." Number 613 CHAIRMAN GREEN talked about some of the "ridiculous regulations," of the government entity that takes care of spills on water. He said, "If you have a sheen, this is an offensive and you will be fined, but if someone accidentally dumps 20 or 30 times this amount and it can't be seen because it is dark, there is no problem." Number 621 REPRESENTATIVE SITTON asked if this was a Federal Agency that Chairman Green was referring to. And asked if it was the Coast Guard or the Environmental Protection Agency. Number 623 CHAIRMAN GREEN stated it was one of those. Number 625 MR. STEWART stated the Exxon Valdez should have been set on fire. Number 626 CHAIRMAN GREEN stated this was a very interesting point because that is exactly the thing to do with a major spill like that and that is why there is so much burn boom around. Number 635 CHAIRMAN GREEN thanked Mr. Stewart for coming and introduced Mr. Bob Gardner. Number 647 BOB GARDNER: "Mr. Chairman, Members of the House Oil & Gas Committee; my name is Robert Gardner. I am the REGIONAL PROGRAM MANAGER FOR OIL AND GAS SERVICES FOR ENSR CONSULTING AND ENGINEERING. Thank you for the opportunity to present our comments on House Bill 199, the exploration licensing bill which is before you. My comments will be from the perspective of the service and support sides for the petroleum industry. "We believe that exploration licensing is a concept that can stimulate exploratory activities and accelerate development in the frontier basins of our state. These basins are mainly in Interior Alaska and are currently unexplored or only marginally explored. Properly implemented, exploration licensing would attract new operators to Alaska, in addition to being attractive to oil and gas operators already here. From the service and support perspective we encourage the state to adopt programs, such as exploration licensing, which will broaden the base of clients and customers we serve. Unfortunately, with the single exception of reducing the time required to explore for and develop oil and gas deposits, House Bill 199, in its present form, does little to achieve this goal. Specifically, our objections are as follows: "1. The dollar for dollar bond required to ensure that the work commitment is discharged, is a disincentive to all independent operators, and I imagine to many major companies as well. Since the only variable in the exploration license bidding proces is the work commitment, and this work commitment is to be considered mainly in light of dollars obligated, it follows that the deepest pocket wins. The required dollar for dollar bond simply ups the ante. Incidentally, bonds, in the size we are anticipating, are nearly impossible to obtain except by the largest of companies. "In addition, as the bill (HB 199) now stands, if an operator secures a license and performs the work commitment in its entirety, but doesn't spend all of the obligated dollars in doing so (in other words he does an excellent job of managing his operations), the difference is subject to forfeit. In our opinion the scope of work and not dollars obligated should be the variable here. We agree that some form of bond should be required to ensure that the work gets done. In our opinion that bond should be limited to 10% of the amount of work scheduled to be performed each year or one million dollars, whichever is more. "Proponents of the legislation (HB 199) in its present form say the dollar for dollar bond is necessary to keep "speculators" out of the exploration licensing program. I submit that there may be some confusion here between independent operators and speculators. We believe a one million dollar bond will easily flush out the speculators and not prove a major disincentive to independent operator participation in the program. "2. As it is presently drafted, House Bill 199 would allow for the "warehousing" or "banking" of large tracts of land up to 500,000 acres under a 10 year exploration license, provided the work commitment was discharged as planned and the dollar for dollar bond maintained. We believe some shrinking of the license area, triggered by work commitment milestones, would be appropriate. In other words, as the exploration license moves through the exploratory process and toward the possible eventual conversion of parts of the license area to a lease, there is some specific percentage of the acreage in the original license area relinquished annually. This would encourage further industry interest in the surrendered areas and prevent the amassing of huge tracts of land by the licensee with the greatest financial resources. "3. House Bill 199 in the present form gives extraordinary discretionary powers to the Commissioner of the Department of Natural Resources. As you know, this is an appointed position, and the possibility therefore exists that the way in which the exploration licensing program is administered can be subject to political pressures. We encourage your committee to consider the establishment of an independent board made up of knowledgeable Department of Natural Resources and private sector participants to administer the program. "4. As I remember, the exploration licensing concept developed from a desire to stimulate activity in the unexplored basins of Alaska. The Department of Natural Resources currently has an active and effective five year oil and gas leasing program. Obviously the exploration licensing program and the five year leasing program have to interface in some manner. As presently drafted, House Bill 199 essentially opens all areas of the state to exploration license applications. While a strong case can be made that both Cook Inlet and the North Slope are inadequately explored, we believe these areas should not be subject to exploration licensing. "The possible exception might be those areas of the North Slope lying south of the presently producing areas and encompassing the Arctic foothills belt. Activities in Cook Inlet Basin and on the North Slope north of the 8N Township are best left to the existing state leasing program. Since the existing bill does not specifically define the term 'insufficient or undocumented geologic and geophysical information,' the potential is there for the deepest pocket to tie up most of the unleased land in areas that already have some proven production. We believe this is not an appropriate role for exploration licensing and it will lead to fewer, rather than more, operators being involved in the state. Number 635 "In summary, we support exploration licensing as a vehicle to encourage and stimulate exploratory activity in frontier areas of Alaska. We believe exploration licensing will improve the health of oil field service and support companies by providing expanded work opportunities. We encourage your committee to consider a committee substitute for House Bill 199 which would address the inequities in the current bill which I have described, and basically level the playing field. I would be honored to work with your staff to develop the language of these changes, if you feel these concerns have merit." TAPE 93-11, SIDE B Number 047 REPRESENTATIVE SITTON asked Mr. Gardner if he and Mr. Stewart work together. Number 050 MR. GARDNER stated he works for ENSR Consulting & Engineering and Stewart Petroleum is one of their clients. Number 055 REPRESENTATIVE SITTON asked if a czar is being created, a single individual that would be able to be corrupt. Number 063 MR. GARDNER said going back to Mr. Stewart's comments earlier, the program needs to be administered in as non- political a manner as possible. He did not feel it would be beneficial to have someone handle the program that is subject to political pressures or is appointed by a governor. Number 077 REPRESENTATIVE SITTON asked Mr. Gardner when he mentioned the independent board, "Were you actually thinking AOGCC?" Number 080 MR. GARDNER stated AOGCC would work. Number 081 REPRESENTATIVE SITTON asked what type of representatives AOGCC has. Number 083 CHAIRMAN GREEN said the three commissioner positions are made up of a registered petroleum engineer, a registered geologist, and the other can be either or neither of those. Number 089 MR. GARDNER stated it is not a panel involving industry people. Number 095 CHAIRMAN GREEN stated from time to time there have been some allegations that the conservation commission is too pro- industry. He then asked, "Do you think by doing this it would cause all kind of problems? Would it be better to have that board meet independently with someone else so it could defuse the thought that it is all an industry ploy?" Number 107 MR. GARDNER replied, "A board like the Permanent Fund which operates pretty independently and something along those lines." ADJOURNMENT Number 126 CHAIRMAN GREEN thank Mr. Gardner and Mr. Stewart for speaking and adjourned the meeting at 9:00 a.m.
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