Legislature(1993 - 1994)
11/12/1993 10:00 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
Number 158
HB 199 - OIL & GAS EXPLORATION LICENSES/LEASES
KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT
OF NATURAL RESOURCES (DNR), said Chairman Green gave a good
overview of the bill, and that he would highlight the
features of the document under consideration. He explained
this bill originated during the 17th session when, then
Commissioner Heinze was challenged to stem the tide of
companies leaving Alaska. There was a lot of controversy
about the bill, and a new bill was crafted during the 18th
session when it was introduced to the Oil & Gas Committee
and to the counterpart committee on the senate side. This
committee heard the bill as did the Finance Committee, and
in the senate there was fireworks during the last session.
The bill was pulled in different directions and no one
seemed pleased with its configuration. He said industry has
worked with DNR during the interim to reach this consensus
document. He said it would be important that all parties
involved remain on board with whatever changes are made
because the alliance behind this document is strong.
MR. BOYD explained that in the original bill the concept of
exploration licensing applied to virtually any land that had
never been leased before. Through a series of meetings and
hearings it was determined to limit the bill to certain
geographic areas. Mr. Boyd referred to maps in the room and
illustrated that everything above the dashed line would be
off-limits, thereby delineating lands north of the Umiat
baseline from everything south of that line and from certain
areas outside of the Cook Inlet box.
MR. BOYD stated because many of the items in the draft were
interdependent, it would be difficult to address one topic
at a time. Having said that, he continued by addressing the
concept of commitment. He said a company would have a
commitment, subscribed to for a period of time, that would
involve certain conditions. One condition would be a bond,
which is the state's assurance that the work commitment
would be fulfilled. In the original bill, bonding was on a
dollar-for-dollar basis and any work left undone was
forfeited to the state. In the October 25 draft, there is
an attempt to reach middle ground. He explained the formula
in the following way: " You take your work commitment and
you subtract the amount of work you have done up to the
point in time you are at and you divide it by the number of
years left." He further illustrated this formula with the
following example: "Let's say you have a 50 million dollar
work commitment and you have not done any work yet, and it
is a 10 year license; so it is 50 million minus zero,
divided by 10. Your bond for the first year would be five
million dollars. You do five million dollars worth of work
your first year. What is your bond for the second year? It
would be 50 minus five, divided by nine; it would be five
million again, and so on." He stated that with this formula
the state would not be protected on a dollar-for-dollar
basis, yet there would still be a fairly high standard. He
explained that if a company did not perform, their bond
would be forfeited and they would lose their license.
MR. BOYD said in the original house bill there was no
relinquishment provision at all. He explained
relinquishment as meaning that at some point during the
licensing period a company would give back some of the land
they were originally given. In the senate, the provision
was that at the end of the fourth year, 25 percent of the
original licensed area was to be relinquished, and then on
each succeeding anniversary 10 percent of the original
acreage would be relinquished. Once again, industry felt
this was too harsh a standard, and from a long series of
meetings, a compromise was established. It was determined
that at least 25 percent of the work commitment should be
done during the first four years, otherwise a company would
risk losing its license. However, if 50 percent of the work
was done in the first four years, there would be no
relinquishment. He said this works to the advantage of the
state because it increases the workload in the beginning.
If the company does something in-between, then 25 percent of
the original acreage is relinquished and then each
succeeding year 10 percent of the remaining acreage, up to a
maximum of 50 percent, is lost. This is characterized as a
balance because companies are given the opportunity to not
relinquish any land, yet they are still required to do 25
percent of the work, thereby pushing the work forward. He
concluded that bonding and relinquishment are key points in
protecting the state.
MR. BOYD mentioned competitive bidding as another aspect of
this bill. He said there was objection to this because it
was difficult for some companies to have the authorization,
with minimal notice, to bid higher. Both the senate version
and the October 25 draft have incorporated competitive
sealed bids. He said that in efforts to define what monies
would be counted towards the work commitment, overhead costs
were excluded, whereas direct exploration expenditures were
included. He noted that sometimes a smaller company may
have a real or perceived benefit over a larger company and
be able to do a certain job cheaper.
MR. BOYD said with regards to acreage chargeability, the
licensed area would not be charged against the 500,000 acre
maximum. He further stated the application fee would be
lower than in the original bill and would not exceed one
dollar per acre. He said in the original bill, all a
company had to do was pay the work commitment. In the
senate bill a company had annual reviews, which is a lot of
work. With the bonding formula, middle ground is approached
because a company would have to complete 25 percent of the
work by the end of the fourth year. He added the bond would
need to be in place at the beginning of each year.
MR. BOYD stated Title 46, financial responsibility, is not
present in the October 25 draft. In the senate there was a
lot of discussion pertaining to the reduction of the
financial responsibility from five million to one million
dollars. Mr. Boyd said this issue is not DNR's
responsibility, but is in fact a subset of Title 46 and is
part of a financial responsibility package that was passed
several years ago in response to the Exxon Valdez accident.
He stated HB 567 introduced a lot of new financial
responsibilities. He said that, as a convenience, every
provision not pertaining to exploration licensing was taken
out of the October 25 document. For the same reason, the
so-called 90-day provision was also removed but will appear
in some other legislation. Mr. Boyd also mentioned that the
rental fee would actually begin at three dollars an acre,
and move incrementally from there. He said another change
refers to extending the phrase, "Acts of God" to the
(undiscernible).
MR. BOYD joined Chairman Green in commending the industry on
the hard work done and the compromises made to arrive at
this document.
Number 501
CHAIRMAN GREEN thanked Mr. Boyd and asked if there were any
questions from committee members before taking testimonies
from the audience.
Number 506
REPRESENTATIVE JERRY SANDERS asked if the regulations and
rules generated from this would support the original intent
of this legislature.
Number 511
MR. BOYD responded that a lot of the regulations were
already in Title 38. He said an annual meeting would need
to be determined, and the regulations would need to be
updated.
Number 545
CHAIRMAN GREEN mentioned that Kotzebue was now on-line.
Number 558
REPRESENTATIVE SANDERS asked if there was any commitment
from the industry that companies would take advantage of
this bill.
Number 565
MR. BOYD replied he did not have anything in writing but
believed that the companies would not spend so much time on
this if they did not intend to take advantage of it. He
said he could not make any promises, but saw this as an
opportunity for Alaska.
Number 598
REPRESENTATIVE PETE KOTT asked for clarification regarding
the administrative effect this bill would have on DNR.
Number 602
MR. BOYD replied the program could initially be administered
without additional personnel and the status quo would be
sufficient. He said if the program grew and became popular,
changes in staff would probably ensue.
Number 624
CHAIRMAN GREEN asked if more than 25 percent, but less than
50 percent of the work commitment were done, resulting in a
situation where the licensed area would, during the fourth
year still be in tact, who would determine which areas were
to be relinquished?
Number 626
MR. BOYD replied there was a provision in the bill
pertaining to the commissioner's identification of the
acreage to be relinquished if the company did not identify a
compact and contiguous 25 percent of the acreage.
Number 632
CHAIRMAN GREEN asked if this also applied to the subsequent
10 percents. Chairman Green also asked if this would, in
effect, be administered in a fashion similar to that of
unitization, thereby indicating that more personnel may be
needed.
Number 638
MR. BOYD answered in the affirmative to both questions.
Number 639
CHAIRMAN GREEN reiterated that Mr. Boyd had finished
highlighting the changes introduced to the bill, and asked
if there were any questions from the remote areas.
CHAIRMAN GREEN said testimony would be taken in the order in
which people signed in.
TAPE 93-15, SIDE B
Number 001
BILL O'BRIEN, RESIDENT, south Anchorage, thanked the
committee and testified in support of the October 25 draft.
He said oil revenues have afforded Alaska tremendous
prosperity and sustaining this prosperity requires replacing
the declining production with new fields as well as
legislation that will make Alaska attractive to the
industry. He asked legislators to review the following two
questions: 1) How many of the companies that currently
operate oil and gas fields today are aggressively exploring
within Alaska? and 2) How many of the companies who have
left in recent years plan to return to explore? He said
although Alaska is virtually unexplored, U.S. oil companies
are investing more than half of their exploration and
production capital overseas. He stated this bill, if passed
in the next session, would signal to the industry that
Alaska wants to improve its business climate. He further
stated that exploration and development require time,
especially in Alaska, and that Alaskans must plan for the
future, a future that includes aggressive exploration
because Alaska cannot afford to do otherwise.
Number 038
CHAIRMAN GREEN thanked Mr. O'Brien. He said he would
presume in this and other testimonies that this would be
considered as the potential committee substitute.
Number 040
MR. BOYD answered this was correct. He said in response to
Representative Sander's earlier question that he was
certainly in support of the current draft and hoped it would
help to generate activity in the industry.
Number 049
CHAIRMAN GREEN asked if any of the satellites had questions.
There being none, he called upon the next witness.
Number 059
JUDITH BRADY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), said it was the association's opinion
that large block licensing would accelerate exploration and
the potential development of Alaska's frontier areas. She
stated the association supports the geographical
delineations regarding the Umiat baseline, et cetera. She
said AOGA supports the posting of an annual bond or other
security in favor of the state and in which the security is
calculated as the entire work commitment, expressed in
dollars. Ms. Brady stated that AOGA supports a competitive
program in which all licenses are awarded on the basis of a
written sales bid. She further stated AOGA supports a
program in which conversion is from license to lease. She
said AOGA supports a program in which any relinquishment of
a licensed area would not occur before the fourth
anniversary of a license. (Note, much of the above was
indiscernible.) Ms. Brady concluded by saying AOGA supports
the October 25 draft.
Number 100
MS. PETE NELSON, LAND MANAGER, TEXACO, said Texaco strongly
supports DNR's October 25 draft, and also supports AOGA's
position as presented today. She said Texaco believes this
will encourage accelerated exploration and development of
areas that have not been sufficiently evaluated, and it will
present a great opportunity for Alaska and for industry.
She said this draft does not cater to one specific party,
but is a consensus document. Ms. Nelson stated her hope for
the bill's passage with essentially the same contents as is
currently existent.
Number 122
CHAIRMAN GREEN noted that Representative Bill Williams of
Ketchikan was now present.
Number 128
BRAD PENN, AREA LAND MANAGER, MARATHON OIL COMPANY, stated
the company supports the October 25 draft. He said the
document provides a complement to the state's five-year
leasing program and it represents a unanimous consensus of
diverse companies on areas such as bonding, relinquishment,
and work commitment. Mr. Penn commended Mr. Ken Boyd and
the Division of Oil & Gas on their efforts to work with
industry to develop this legislation.
Number 141
GEORGE FINLEY, MANAGER OF GOVERNMENT AND PUBLIC RELATIONS,
ARCO ALASKA INCORPORATED, testified in support of the
October 25 draft. He stated the bill provisions were an
integrated and fairly elegant combination of mechanisms for
the following four reasons: 1) It is a frontier bill which
excludes inappropriate areas; 2) it provides a fair and
level playing field for the competition in awarding
licenses; 3) it provides strong incentives to do the work
quickly; and 4) it supplements the existing system very
nicely.
Number 165
REPRESENTATIVE SANDERS asked to what extent ARCO's
participation could be assumed, given their support of the
bill.
Number 169
MR. FINLEY responded that this committee substitute has
allowed ARCO to begin thinking about frontier prospects
proposed for exploration licensing that would otherwise not
be considered. Mr. Finley said he could not make any
promises and obviously did not want to talk about any
particular areas until the bill passed.
Number 175
LIZ SHEPHERD, UNOCAL, testified in support of the October 25
draft proposal.
Number 181
CHAIRMAN GREEN said he was pleased to hear UNOCAL's support.
Number 190
TOM WILLIAMS, DIRECTOR OF GOVERNMENT AND PUBLIC AFFAIRS,
BRITISH PETROLEUM EXPLORATION(BP), stated that British
Petroleum completely supports the October 25 draft,
recommended as a committee substitute. He said large block
licensing is a useful addition to the state's conventional
leasing program. He stated it would not be a substitute for
the current leasing program, but the commissioner of DNR
would have to use discretion to decide which system to use
in appropriate circumstances. He stated experience
elsewhere in the world indicates that these programs can in
fact lead to discoveries as well as increased exploration
activity. He said BP supports the bill and pledges to not
seek to change it from this version as it moves forward.
Regarding the necessary rewording of the draft, at the risk
of sounding arrogant, he cautioned the legislators to not
yield to distraction regarding particular style preferences.
Finally, he commended the patience and flexibility of other
companies who worked on this legislation. He also thanked
Commissioner Noah for his leadership and Mr. Ken Boyd for
his skillfulness.
Number 228
CHAIRMAN GREEN expressed his appreciation for Mr. William's
well-founded words of caution.
Number 232
REPRESENTATIVE GARY DAVIS asked about the history and
effectiveness of large tract leasing.
Number 240
MR. WILLIAMS said he does not think any other state has a
large block program, and that perhaps conventional leasing
has been used because other states have a different land
ownership pattern than that of Alaska. He said large block
programs have been used in other countries with varying
degrees of success and are usually referred to as "large
tract concessions." He said BP's experience with this began
in the early 1900s in Iran.
Number 268
CHAIRMAN GREEN commented that Mr. Williams made an excellent
point in mentioning that a lot of Alaskan land is owned by
the state.
Number 276
WALT FURNACE, ALASKA SUPPORT INDUSTRY ALLIANCE, stated the
Alliance supports the October 25, 1993, draft. He said the
provisions are pertinent and necessary in order to establish
a large block leasing program in Alaska. For the record, he
acknowledged the industry members who worked on this draft.
Mr. Furnace expressed concern that the bill would change
during the legislative process, and he encouraged Chairman
Green to exercise his ability to safeguard the bill from
substantial changes. He mentioned that Alliance's 320
members would be available to offer any support necessary
regarding this issue.
Number 318
JERRY BOOTH, VICE PRESIDENT, ENERGY AND MINERALS, COOK INLET
REGION INCORPORATED (CIRI), stated CIRI is owned by
approximately 6,700 Athabascan, Eskimo, and Aleut
shareholders. He said CIRI owns and manages approximately
924,000 acres of surface estate and 1.6 million acres of
subsurface estate in Alaska. CIRI has been active in
Alaska's oil and gas industry for over 15 years. He added
that it owns a subsidiary, Cook Inlet Region Production
Company, and has other oil and gas involvements on the North
Slope. He said CIRI supports the concept of large block
leasing and licensing in Alaska. He concluded by saying
that CIRI supports the drafting of this legislation in a way
that respects the fragile compromises that have already been
agreed upon.
Number 360
CHAIRMAN GREEN said it was encouraging to have the support
of a Native corporation on this issue.
Number 368
MARY SHIELDS, GENERAL MANAGER, NORTHWEST TECHNICAL SERVICES
and STATE LEGISLATIVE CHAIR, ALASKAN FEDERATION OF BUSINESS
AND PROFESSIONAL BUSINESS WOMEN, testified in support of the
October 25 document and stated on behalf of both
organizations, she wanted to congratulate the extensive
efforts of those involved with crafting this document.
Number 392
CHAIRMAN GREEN asked if there were any comments or questions
from the remote sites of Kotzebue, Fairbanks, Juneau,
Soldotna, or from the audience.
Number 407
DAVID LAPPE, PRESIDENT, LAPP RESOURCES, testified in support
of the October 25 document. He said a majority of the oil
industry in Anchorage met during the summer and worked hard
to produce this compromise. He said Alaska needs to do what
it can to remain competitive in this international market.
Number 432
REPRESENTATIVE DAVIS asked Mr. Lappe if there was
opportunity for independents in this bill.
Number 434
MR. LAPPE replied in the affirmative. He said opportunities
would depend, in part, on the state's implementation of the
regulations.
Number 459
CHAIRMAN GREEN referred to the 20,000 acre minimum in the
current version, and asked if this amount of acreage would
be attractive to an independent; the concern being that a
smaller organization would find bonding to be quite
difficult.
Number 487
MR. LAPPE agreed that bonding would be extremely difficult
for a smaller company because of a lack of cash resources.
Regarding the size of the acreage, he said that 20,000 acres
was not an unreasonable minimum to have. He stated this
amount is roughly the size of four current state leases and
this is certainly within the explorative capability of
independents.
Number 518
CHAIRMAN GREEN asked if JACK RODERICK would care to make a
statement.
Number 525
JACK RODERICK, LOCAL CITIZEN, WRITING A BOOK ON THE HISTORY
OF THE OIL INDUSTRY, expounded on the concept of exploration
during the 1950s and 1960s. He summarized historical
information and mentioned the federal government's use of
development contracts. He added that exploration would be
useful and beneficial to the state.
Number 600
CHAIRMAN GREEN asked if there were other comments. There
being none, he thanked Mr. Ken Boyd and the industry for
their hard work. He stated his appreciation of their
efforts and emphasized the fact that Alaska is operating in
a competitive international marketplace.
ADJOURNMENT
CHAIRMAN GREEN adjourned the meeting at 11:30 a.m.
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