Legislature(2001 - 2002)
04/08/2002 09:04 AM House O&G
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SB 319-SHALLOW NATURAL GAS: LEASING & DISCHARGES Number 1059 VICE CHAIR FATE announced the final order of business, CS FOR SENATE BILL NO. 319(FIN), "An Act relating to shallow natural gas; and providing for an effective date." Number 1101 SENATOR JOHN TORGERSON, Alaska State Legislature, sponsor of SB 319, explained that the shallow gas leasing program originally was proposed to enable exploration and production of shallow gas deposits in rural areas, in order to supply energy to villages, mines, and other rural users. However, now that the program is fully operational - with more than 100 leases processed and nearly 200 pending - it is apparent the program has become a vehicle for commercial gas development in Fairbanks, Big Delta, the Matanuska-Susitna area, and the lower Kenai Peninsula. SENATOR TORGERSON reported that the bill changes the program in five distinct ways. First, it increases revenues to the State of Alaska. [Section 2] raises application [fees] for shallow gas leases from $500 to $5,000, which more closely reflects the state's processing costs. [Section 4] increases annual fees from 50 cents an acre to $1 an acre. Second, the bill lowers administrative costs [in Section 4] by eliminating a requirement that the Department of Natural Resources (DNR) notify lessees by certified mail when rental fees are due. It also removes the deadlines for issuing leases; the deadlines have proven unworkable and don't recognize the work required by DNR in processing leases in populated areas that [may have] complex land-ownership patterns. SENATOR TORGERSON explained that third, the bill provides better reservoir management and increased value to lessees. The depth limitation of 3,000 feet has been replaced with a requirement that some portion of the field must be within 3,000 feet of the surface. The total acreage that may be held by a lessee has been increased [in Section 2] from 46,080 acres to an aggregate of 100,000 acres; he said DNR believes the acreage increase reflects the greater amount that may be necessary to have a viable shallow gas leasing program. Number 1230 SENATOR TORGERSON noted that fourth, the bill removes the requirement that the applicant conduct a title search. He said DNR routinely conducts a title search for land before leases are issued; furthermore, no title company will conduct a thorough title search of the subsurface estate and warranty title. In addition, there is improved protection for surface estate owners through bonding. However, the lessee must secure a bond as a precondition of obtaining the lease. If damages occur and the lessee and landowner cannot reach an agreement on the amount of damages, either party may seek relief in the courts, he said, and DNR would release the bond as directed by the court. These proposed new bonding provisions would help protect surface owners by ensuring that substantial bonds are in place prior to the exploration and development of the leases. SENATOR TORGERSON specified that the fifth change is actually a timeline for converting the existing leases to the new program, giving them through September 30 [2002] to do that. Number 1309 REPRESENTATIVE DYSON noted that this is an area about which Chairman Ogan has expressed a lot of interest. He asked whether it would be possible to talk with him by telephone. VICE CHAIR FATE, after consulting with the committee aide, said Chairman Ogan [who was absent for medical reasons] wasn't available. REPRESENTATIVE DYSON asked whether delaying passage of the bill until the next hearing, in order to receive comment from Chairman Ogan, would cause a problem with the timeline. Number 1361 SENATOR TORGERSON reported that Chairman Ogan is aware of the bill, which he said they'd discussed earlier. "I don't believe he has any problems with it," Senator Torgerson offered; he acknowledged, however, that he wasn't sure whether changes had been made since Chairman Ogan last reviewed it. He told Representative Dyson that the key is passage this year, and he said it wouldn't hurt to hold it for a period of time. He indicated his understanding, however, that Chairman Ogan has been most interested in Evergreen [Resources], which is in favor of the bill. Number 1408 VICE CHAIR FATE called an at-ease at 9:27 a.m. He called the meeting back to order at 9:28 a.m. Number 1417 REPRESENTATIVE KOHRING expressed appreciation to Senator Torgerson for what he is trying to do with the legislation. He remarked on the mention of Evergreen Resources' support for the legislation and surmised that the fee increases aren't objectionable to that company or others in the industry. He added that he couldn't help notice the tenfold increase in the annual rental fees, as well as the increase in the per-acreage rental fees. He requested that Senator Torgerson address that, as well as the [portion of the sponsor statement that says the fees aren't to] discourage parties of genuine interest and ability from developing [shallow natural gas] resources, given that companies will be paying more money. SENATOR TORGERSON noted that before being asked to consider this bill, he was "going down a parallel path on how to convert the shallow gas leasing into a more conventional leasing program." At $500 a lease, he said, he'd been concerned that some of the 300 lessees were just betting on possible success and tying up the land for $500 because nothing was required to happen. SENATOR TORGERSON indicated DNR personnel had said going from [$500] to $5,000 more closely reflects costs, which he understood to be perhaps $3,500 a lease. He referred to discussion about "pure rural users," for which this was originally intended. He remarked, "I committed to revisiting this program so that we could have, basically, a rural development kind of a community-by-village lease program where it would still be available." He added, "Other than that, none of the companies oppose the current increases, or at least not that I'm aware of." Number 1594 VICE CHAIR FATE noted that Mark Myers of DNR's Division of Oil & Gas was online to answer questions. He referred to the acreage [in Section 2], pointing out that 46,080 acres is two townships, whereas 100,000, the new amount in the bill, is between four and five townships. Although he had no objection to the new amount, he suggested perhaps it could be a multiple of a whole township. He asked Senator Torgerson whether he'd considered that. SENATOR TORGERSON replied no. He said the increase was worked out between DNR and the producers, "in recognition that it takes a lot of acreage and a lot of wells to produce the shallow gas." He added that the reservoirs don't necessarily follow boundaries or straight lines; he suggested perhaps the particular increase recognizes that also. He suggested it would be a great question for Mr. Myers. Number 1685 MARK MYERS, Director, Division of Oil & Gas, Department of Natural Resources (DNR), testified via teleconference in response. He said: Typically, we don't end up with totally even numbers when we do the work because, again, in these large blocks there's typically other subsurface owners as well, particularly in the areas where the leases have been. So the numbers end up being not directly related. MR. MYERS further explained that with the 100,000 acres, "the thought process was that that's a very large-size, coal-bed- methane-type unit, where they would depressurize ... a large unit." Regarding the existing [46,080 limit], he said there have been clear examples of units larger than that, which needed to be that large for "economy-of-scale production." He concluded: We were trying to get a number significantly large enough, that was as large or larger than any of the largest coal-bed-methane units we knew. That's not to say an individual company might not need to have two or three units, again, for ... their total production scenarios. So, the 100,000 acres wasn't a magical number. It's simply a number to recognize the commercial size of development. And we recognize that in the filing program; ... people will file for a full township, but not get that full amount of acreage. So the even- versus-odd number didn't make much difference to us because, again, that's something that's sorted out in the title search, ultimately, at the time of lease issuance. But, again, we would have no problem in rounding those numbers ... if the committees and Senator Torgerson were comfortable with that. Number 1740 VICE CHAIR FATE clarified that he wasn't anticipating rounding it, but had wondered whether there was a desire to keep the acreage at a multiple of a [township]. He said the question had been answered adequately. He thanked Senator Torgerson and Mr. Myers for their testimony. Number 1795 CHARLOTTE MacCAY, Senior Administrator of Environmental and Regulatory Affairs, Teck Cominco Alaska Inc., testified via teleconference, noting that Teck Cominco Alaska operates the Red Dog Mine north of Kotzebue. Ms. MacCay offered the following testimony: I'm here today to talk about a potential energy source we're looking at to replace our extensive use of diesel fuel. Briefly, the Red Dog Mine employs some 400 Alaskans, of which 60 percent are NANA [Regional Corporation] shareholders. The mine produces over a million tons of zinc and lead concentrates each year, and ships it out through our port for a three-month period. To crush the ore and make the concentrate requires some 28 megawatts of power using approximately 18 million gallons of diesel each year. In the area where we have found indications of shallow gas, the terrain is rolling hills to rugged mountains, much different than either the Matanuska Valley or Prudhoe Bay. The rugged nature of the region presents a need to have a more flexible definition for the depth limitation for a shallow gas lease. The depth language suggested in this legislation will assist the state and the leaseholder in knowing which areas are part of the lease and in allowing us to fully utilize a reservoir once it's been tapped. Number 1870 MS. MacCAY continued: Currently, Teck Cominco holds four state shallow gas leases, for a total of 23,000 acres, and NANA has the adjoining land to the east, for nearly 100,000 acres, which also has shallow gas. To adequately cover a target or a concept takes considerable acreage. The current lease has an acreage limitation of 46,000 acres to any one company; this is not sufficient acreage for a project. The suggested 100,000-acre limit offered in this legislation is supported by Teck Cominco. Surface ownership in this portion of Alaska is fairly straightforward, with three major owners: the National Park Service, whose land we know is off limits; the State of Alaska land; and the private lands of NANA. So the issues of addressing surface owners separately is not an issue for Teck Cominco. The fee change requested by the administration is considerably more than the initial legislation - in fact, double for rentals and ten times for application fees. We understand the administration's desire to generate more revenue to administer the program, and Teck Cominco can support the fee increases if the monies are directed to the shallow gas program. Otherwise, the increase is a significant [added] cost to an already cost-sensitive business, particularly for rural Alaskan development. Number 1941 MS. MacCAY continued: Development of a shallow gas field in Northwest Alaska has many impediments [that] some areas share and some don't. Location is a major impediment due to access and the ability to bring large equipment in and out during the summer months only. The lack of roads in the area and the desire to maintain the pristine nature of the region is a high cost and time impediment. It is very difficult, if not impossible, to test a shallow gas lease within the three years provided in the current lease when work is so seasonal. Logic would say a lease should be at least five years for a primary term, with renewal options as provided. Although not provided in this legislation, we would support a five-year term with renewal options. Development of a shallow gas field is much different than a conventional field in Cook Inlet or on the Slope. Instead of 2 to 5 holes to develop a gas field, it will take 50 to 100 holes to develop a shallow gas field. A longer lease is needed to accommodate this work, and the cost per hole needs to be kept at a minimum, or a field becomes uneconomic very quickly. Number 1989 MS. MacCAY continued: To date, Teck Cominco has followed the mineral exploration effort in the Red Dog area as a tool to help defray costs and delineate areas of potential gas resource. The methane gas we have found is low- pressure, and is located lateral to and underlying our ore zones. Extensive work has been completed to date, but the next phase is to conduct a flow test. The flow test cannot be supported until the depth below surface of a field is better defined, as this bill proposes to do. Arctic operations will always present numerous challenges not present elsewhere. Teck Cominco Alaska addresses many of these each and every day at Red Dog. By passing this legislation, you will have addressed a major challenge and impediment that we otherwise could not address. VICE CHAIR FATE thanked Ms. MacCay and requested that she fax her written testimony. Number 2054 REPRESENTATIVE JOULE asked whether any benefits would be realized by the people who live in the area. MS. MacCAY replied: At this point, our exploration has been limited to just following our own mineral exploration. But it appears that there's probably a greater gas field potential than what we've already defined. ... Currently, we've defined enough to replace Cominco's 18 million gallons. But if we continue exploration and find further gas, then it's possible that we could transmit power to the villages of Kivalina and Noatak. MS. MacCAY noted that for Noatak, in particular, the barges cannot get there to deliver fuel "at this time," and fuel costs for both villages are quite high. The power would have to be transmitted, not the gas, because neither village is large enough to support the power generation itself. Number 2112 REPRESENTATIVE JOULE asked, "And should this all come to pass, the other thing that you would free up is the 18-million-gallon storage capacity?" MS. MacCAY responded, "If we were able to convert from diesel fuel to shallow gas, not only would we eliminate a lot of the risk of shipping in the 18 [million gallons] of gas each summer, [but] it would also cut the air emissions and many pollutants to about half." Number 2158 KEVIN A. TABLER, Manager of Land and Government Affairs, Union Oil Company of California (Unocal), testified via teleconference in support of SB 319, noting that Unocal is currently conducting an aggressive gas exploration program in the Cook Inlet area and is very interested in any legislation dealing with gas and gas exploration. He said: The shallow gas leasing program augments the existing areawide leasing program and enhances the access to, and development of, the state's natural gas resources. We are very supportive of this program and other leasing programs providing access to the state's mineral wealth. I have participated in hearings on the Senate side and have listened today to the remarks of Senator Torgerson and the few remarks of director [Mark] Myers of the Division of Oil & Gas and others in support of this bill, and wish to lend Unocal's support in passage of this legislation, for the varied reasons already articulated. The amendments identified in SB 319 provide for better administration and clarification of the shallow gas leasing program and are certainly in the best interest of the State of Alaska. VICE CHAIR FATE thanked Mr. Tabler and requested that he fax any written comments. Number 2232 JOHN TANIGAWA, Special Projects Manager, Evergreen Resources Alaska Corporation, testified via teleconference in support of SB 319, noting that his company is a wholly owned subsidiary of Evergreen Resources, Inc. He told members: Last December, I moved to Wasilla to oversee our operations, and I am the person who is accountable and responsible for our activities up here. Currently, we have [46,080] acres of shallow gas lease applications near Willow. These applications are pending with the Division of Oil & Gas. Today, I testify in support of Senate Bill 319. SB 319 removes obstacles [to] our ability to explore for and to develop shallow natural gas. Evergreen Resources Alaska's specialties extend to Alaska the main focus of Evergreen Resources, which is coal bed methane, unconventional gas, and shallow natural gas development. These activities require at least 100,000 acres, or roughly four townships, to establish the necessary economies of scale for initial development. Due to the challenges of operating in an arctic environment, however, increasing that acreage limitation to 138,240 acres, or six townships, increases the ... economic viability of shallow natural gas. We strongly support increasing the depth limitation to one that relies on science and geology for the specific play. And we are certain that we can drill, complete, and produce natural gas [wells] below 3,000 feet in a safe, environmentally responsible manner, using already existing technologies that we currently employ. Finally, ... the shallow natural gas program is the primary reason why Evergreen is in Alaska. We are grateful that the legislature is making this program possible and for improving it. Changes proposed in this bill provide us the necessary latitude to operate in an economically sound and environmentally safe manner. We acknowledge the Division of Oil & Gas for collaborating with us and other [stakeholders], and this is an excellent example of how state agencies and industry can work together to benefit not just government and industry, but particularly the public. Number 2359 REPRESENTATIVE KOHRING remarked, "I want to thank you guys for all the exploration and prospective development in the Mat-Su. It's certainly going to translate to some economic activity out there." He then asked whether Mr. Tanigawa sees the [increase in] fees as a problem for his company. MR. TANIGAWA said no. He explained: We believe that in this time of fiscal challenges for both the state and the industry, it is important that this program be ... self-funding. And I believe that the oil and gas industry has a long history of funding its own regulations at the borough and state and federal levels. And we believe that this program should be no different [and] not seek any taxpayer support to comply with this proposed regulation. VICE CHAIR FATE thanked Mr. Tanigawa and called on Dana Olson. Number 2423 DANA OLSON testified via teleconference on her own behalf. A property owner in a potentially affected area, Ms. Olson said she was testifying with regard to the socioeconomic impacts of the program upon communities. She expressed concern that the definition of "rural" is too broad because there are well- defined communities in the Matanuska-Susitna Borough. She said this activity could potentially displace people and have impacts on communities. MS. OLSON further said DNR's land-use plans are out of date, and Title 38 requires revision when necessary. She pointed out that land-use plans go through a public process [beyond] just testifying to the legislature. She cited AS 46.03.040, saying it is "a requirement for environmental plans that DEC [Department of Environmental Conservation] has not done, nor has it been approved by the governor." She suggested the committee may want to repeal it, if it is no longer relevant. MS. OLSON further suggested the fees are too low when it comes to impacting communities. Remarking that the amount in the bill seems rather arbitrary, Ms. Olson said she'd like to see some "factual basis for what the effects will be on communities before a generalized fee is required." MS. OLSON turned attention to a proposed Knik Arm power plant in Cook Inlet; she indicated one provision is utilization of both oil and natural gas. She suggested power plants generally should be required to use cleaner fuel sources. "It doesn't make much sense to go in and do all this development and not require industry to use it," she concluded. Number 2569 VICE CHAIR FATE thanked Ms. Olson and asked whether anyone else wished to testify; there was no response. He closed public testimony. Number 2585 REPRESENTATIVE DYSON expressed appreciation for the sponsor's bringing this bill forward. He said it sounds as though there is no downside. He suggested there is a great advantage to having the administrative costs covered by the fees paid by the industry. If the fees are more than enough, Representative Dyson remarked, it is a public resource being used and can support public services, which is good public policy and helps to get public support for the industry. He added that his former concerns about showing deference to Chair Ogan had been assuaged. Number 2628 REPRESENTATIVE DYSON moved to report CSSB 319(FIN) from committee with individual recommendations and the attached fiscal note. There being no objection, CSSB 319(FIN) was moved out of the House Special Committee on Oil and Gas.
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