Legislature(1995 - 1996)
05/05/1995 08:44 AM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 334 - EXEMPT NAT. GAS FACILITY FROM BOND AND PLANS REPRESENTATIVE BILL WILLIAMS made a MOTION to ADOPT CSHB 334(O&G). CHAIRMAN ROKEBERG asked if there were any objections. Hearing none, the MOTION PASSED. CHAIRMAN ROKEBERG noted for the record that Representative DAVIES had joined the committee. PAUL CRAIG, PRESIDENT, Z-ENERGY INCORPORATED, testified via teleconference and expressed support for HB 334. He said oil spill contingency planning and financial responsibility for oil spills is good public policy and should be upheld, specifically for oil production facilities, but not natural gas facilities. He stated the importance of exempting gas facilities from oil spill contingencies, bonding, and planning has already been recognized. Unfortunately, the exemption goes downstream from the wellhead but does not go upstream to the natural gas reservoir. The result is having a $1 million oil spill contingency bonding and planning requirement in place for natural gas wells and exploratory wells in the state. MR. CRAIG stated the Alaska Oil and Gas Conservation Commission (AOGCC) has both the technical expertise and data to give knowledgeable opinions about the probability of encountering oil in a well being drilled. The state's stratigraphic wells, which can be drilled very easily, are already exempted from oil spill planning and oil spill contingency if they are not thought to be drilled into a hydrocarbon bearing structure. Number 155 MR. CRAIG said the current bonding requirement precludes development of important resources, such as coalbed methane, for rural communities and villages. He stated the requirement to put up $1 million in assets to back up a bond basically makes drilling these type of projects uneconomic. That requirement also puts up a barrier which stops independents from doing business in Alaska. He pointed out there is an estimated 8,000 independents doing business in the Lower 48 and only a couple doing business in Alaska. He explained providing an environment that is attractive to Alaska owned, small independent oil and gas companies is good for Alaska and good for the oil and gas industry. He strongly encouraged the legislature to pass HB 334 and recommended any provisions included in HB 334 would exclude the continuation of oil spill contingency bonding. CHAIRMAN ROKEBERG asked Mr. Craig if he had a copy of the committee substitute, version F and a copy of the memo from Mr. Johnston of the AOGCC. MR. CRAIG said he had a copy of the committee substitute but not the memo from Mr. Johnston. CHAIRMAN ROKEBERG recalled that Mr. Craig had said bond costs make drilling uneconomic. He asked Mr. Craig to give the committees a brief idea of how he justifies that statement. Number 220 MR. CRAIG responded bonding, unlike insurance, has different requirements. If he has to get a $1 million bond, he must prove that he can repay that $1 million. Therefore, he would have to tie up $1 million in liquid assets. He stated if he goes to the Sacramento Valley, where environmental concerns are paramount, he can drill a well and the bonding requirements would be approximately $25,000 to $50,000 total for the entire well. He said to tie up $1 million in assets or find investors willing to tie up $1 million in assets to drill a coalbed methane well to serve a rural village of 200 residents does not make economic sense. MR. CRAIG noted it is a time when very little money is going to exploratory drilling of hydrocarbon wells, and natural gas wells in particular. In talking with numerous independents from the Lower 48 regarding (indiscernible) gas project in Alaska and when they hear the bonding requirements, they either hang up or laugh. He stated there is already a $100,000 bonding requirement, through the AOGCC, for the purpose of making sure the site is plugged, abandoned, and cleaned up appropriately. He said if a $1 million oil spill contingency bond is added on top of the AOGCC bond, it is simply not attractive and creates an environment where it economically does not make sense to develop reserves in Alaska when it is much more inexpensive to develop reserves in the Lower 48 or internationally. (Representative NICHOLIA joined the committee.) CHAIRMAN ROKEBERG wondered if Mr. Craig has a project or plan on the near-term horizon that HB 334 would assist. MR. CRAIG stated Z-Energy would like to drill a natural gas well on the north end of the Beluga Gas Field. He said investors are interested in the project and are willing to participate in drilling costs. He stressed one of the major barriers he is facing, in terms of getting firm commitments for participation, is there are no investors who will consider tying up $1 million in assets to participate in an exploratory natural gas well of this nature. He pointed out passage of HB 334 would allow Z-Energy to proceed with that particular project during the current drilling season. Number 286 ERIK OPSTAD, PRESIDENT, E.A. OPSTAD & ASSOCIATES, testified via teleconference and expressed support for passage of HB 334 to eliminate the bonding requirements for natural gas wells. He stated from personal experience, the bonding requirements in the state of Alaska impose an enormous hurdle for small operators such as himself. He stated small operators simply do not have the capital to put up, or will investors put up the dollars required to allow drilling gas properties in the state. As a consequence, the small operators do all their work outside. MR. OPSTAD said in 1994, his company and his partners spent approximately $3.5 million drilling wells in the state of California and they were successful. He stated his company did not spend that money in Alaska because they cannot justify it. As a consequence, the royalties being generated as a result of that activity are benefiting the state of California and the jobs which are part and parcel to that activity are also going to Californians rather than Alaskans, even though much of the funding for that activity came from Alaska. MR. OPSTAD stated he sees no benefit to the environment by having the bonding requirement. He said it has been his experience that natural gas wells are benign in terms of their environmental impact. He felt the AOGCC is fully capable of determining whether or not a proposed drilling location and depth is likely to have any significant probability of encountering oil. He expressed support for the continuation of the bonding requirements for oil wells but sees no necessity for having bonding requirements for natural gas wells. Number 338 DAVID JOHNSTON, CHAIRMAN, AOGCC, testified via teleconference and stated HB 334 would authorize the commission to classify certain exploration activities as being likely to encounter oil and gas for the purposes of oil discharge prevention and contingency plans required by AS 46. He said HB 334, as written, would also require AOGCC to establish a bond amount for natural gas exploration facilities to ensure surface clean up in the event oil is encountered and spilled. He pointed out the commission does not object to classifying these types of exploration activities in this manner and added the commission has worked with the Department of Environmental Conservation (DEC) informally in the past on similar activities. MR. JOHNSTON said the AOGCC does recommend a few changes to HB 334 and had faxed a copy of the proposed changes the day before. However, in a meeting the previous night, additional changes were recommended. He stated he would review those changes, even though the committee did not have them before them. MR. JOHNSTON stated the first proposed change is in Section 1. AS 31.05.030 is proposed to be amended by adding a new subsection to read: "(i) When requested by a person proposing to explore for gas by means of drilling a well, the commission may evaluate the likelihood that the well will penetrate a formation containing oil. If the commission concludes with reasonable certainty that the well will not penetrate a formation containing oil, the commission shall so certify." CHAIRMAN ROKEBERG asked if the changes could be faxed to the committee. MR. JOHNSTON said as soon as he gets back to the office he could fax them. He stated the changes are not in writing at this time. REPRESENTATIVE ALAN AUSTERMAN asked if the changes were being proposed to CSHB 334(O&G) or the original bill. MR. JOHNSTON said the changes are proposed for the committee substitute, version C. CHAIRMAN ROKEBERG requested that before Mr. Johnston faxes the changes to the committee to make sure they conform with version F. MR. JOHNSTON stated in Section 3, AOGCC proposes AS 46.04.030 be amended by adding a new subsection to read: "(s) If a well certified by the Alaska Oil and Gas Conservation Commission under AS 31.05.030(i) penetrates a formation containing oil, the operator of the exploration facility (1) shall notify the department, the Alaska Oil and Gas Conservation Commission, and all other appropriate state agencies; and". He said the reason for the proposed change is the original bill said something about notifying the oil spill response cooperative designated in the permit. He pointed out AOGCC does not issue permits which have the oil spill response cooperative designated. (Representative G. DAVIS joined the committee.) REPRESENTATIVE SCOTT OGAN stated he is having a hard time following the changes Mr. Johnston is proposing verbally. He requested Mr. Johnston to fax something to the committee. Number 456 MR. JOHNSTON stated AOGCC proposes changing Section 5 by adding a new subsection to read: "(n) If a well certified by the Alaska Oil and Gas Conservation Commission under AS 31.05.030(i) penetrates a formation containing oil, the operator of the exploration facility shall cease all activity until the bonding requirements of (b) of this section are met." MR. JOHNSTON said the problem AOGCC was having with the current version is that Section 5 would have the commission establishing a bond amount. Currently, the commission does not have the expertise in-house to evaluate the type of surface damage which might result from oil being spilled. Traditionally, that has been a function of DEC. He stated if the commission began judging what that damage was, another program would need to be built and staff would need to be added. He thought it would be simpler if when oil is encountered during exploration activities for natural gas, the operator cease operations and then comply with bonding requirements previously established by AS 46. REPRESENTATIVE AUSTERMAN asked how often operators encounter oil when exploring for natural gas. MR. JOHNSTON stated one in ten wells in the state find oil. Therefore, with only a 10 percent chance, the question can be asked why is bonding required for any well. He said what is desired is some reasonable certainty that the well will not encounter oil. In those cases where there is sufficient well control in a nearby facility, the commissioner can make that call. If a very shallow program is being considered, such as coalbed methane, again that call could be made by the commissioner as it would not be likely to encounter oil. In another situation, in the Interior of the state where a deep program is being proposed, that comfort level is not there to say oil will not be encountered. Number 504 REPRESENTATIVE DAVIES stated it sounds like AOGCC is comfortable in having the expertise to make the fundamental geophysical and geological determination called for. He wondered in those cases where AOGCC is not comfortable, would AOGCC feel comfortable in not certifying. MR. JOHNSTON replied that is correct. He said if AOGCC did not have the data, they would not certify. REPRESENTATIVE DAVIES asked Mr. Johnston if he was referring to all drilling exploration when he mentioned one in ten wells encounter oil or was he referring to those exploring for natural gas. MR. JOHNSTON stated he was talking about all exploration activities in the state. REPRESENTATIVE DAVIES asked if AOGCC certifies the operator is drilling for gas and only expects to find gas, what is the history of circumstances where they encounter oil. MR. JOHNSTON said there is no history as those situations have never been looked at. He stated that data is not available. CHAIRMAN ROKEBERG recalled Mr. Craig had said his company is contemplating drilling near the Beluga Gas Field. He asked how much geophysical or other information does AOGCC need to have to determine that a company will be going after gas as opposed to other hydrocarbon formations. MR. JOHNSTON stated first the company would have to submit their actual drilling proposal to AOGCC, so the commission would understand exactly where they were proposing the well and at what depths they were planning to go to. Then the commission would look at surrounding wells in the vicinity. He said for example in the Beluga River area, there are a number of wells which have established very good well control. In that particular case, the commission could say with reasonable certainty that if a company is going to dig at that particular depth, they would not likely encounter oil. Whereas, if a company proposed a deeper well which exceeded the depth of the surrounding wells in that region, the commission may not have that comfort level and probably would withhold the certification. MR. JOHNSTON stated there is one additional proposed change to amend Section 6 by adding a new subsection to read: (c) Except as provided in AS 46.04.030(s) and 46.04.030(n), the provisions of AS 46.04.030(b) and AS 46.04.040(b) do not apply to the operation of an exploration facility to the extent that it is used to explore for gas by means of drilling a well certified by the Alaska Oil and Gas Conservation Commission under AS 31.05.030(i). Number 572 DAVID LAPPI, PRESIDENT, LAPP RESOURCES INC., testified via teleconference and expressed support for HB 334. He urged the legislature, when they are looking at the business climate in the state of Alaska, to continuously evaluate the cost of doing business for private industries. He said the bonding and insurance, as it relates to oil and gas exploration and development, is a key factor in the cost of doing business. He noted he had submitted testimony in writing and hoped it had been distributed. MR. LAPPI stated he would like to see the three agencies requiring bonding and/or insurance get together and roll the financial responsibility, bonding, and insurance requirement into one package. Therefore, an operator coming to the state or an operator in the state would not have to deal with three separate agencies to get the bond. He said that would be of great assistance in reducing administrative work and helping the operators along in the business climate. MR. LAPPI commented on AOGCC's proposed change to require an operator to stop operations if he encounters oil and purchase the appropriate bond. He pointed out if the primary purpose is still to produce gas and oil is not going to be produced, the well is continuously cased with field casings cemented in place, the operator proceeds to produce gas and that oil is safely contained by a casing program, he felt the state should go back after the production of gas begins and review the requirement for any oil spill contingency bond if the operator is not actually going to produce the oil. He urged the legislature to pass HB 334. Number 620 BRECK TOSTEVIN, ASSISTANT ATTORNEY GENERAL, ENVIRONMENTAL SECTION, DEPARTMENT OF LAW, testified via teleconference and said he had some legal drafting concerns regarding the coordination of AOGCC and DEC's programs. He stated Sections 2 and 4 create exemptions in the oil spill contingency plan responsibility requirements. He felt those two sections were unnecessary because the way the legislation has been drafted in the past, there has been a unified exemption contained in AS 46.04.050 which is contained in Section 6 of the bill. He said as long as the exemptions in Section 6 are dealt with, Sections 2 and 4 are not needed, and would avoid making it complicated. MR. TOSTEVIN said in regard to Section 5, it is a policy call as to whether or not financial responsibility is going to be required, but language should be used that refers to financial responsibility and not tie it to surety bonds, because that is only one method of financial responsibility allowed under AS 46.04.040. AS 46.04.040 allows self-insurance, insurance, surety, guarantee, letters of credit or other forms approved by the department. Number 649 ROBERT MINTZ, ASSISTANT ATTORNEY GENERAL, OIL, GAS, AND MINING SECTION, DEPARTMENT OF LAW, testified via teleconference and said the changes suggested are legal. He stated there are some differences in language between AOGCC's statute AS 31 and DEC's statute AS 46. For example, the conservation act uses the term gas but not natural gas and AS 46.04 uses the term natural gas. He added that AS 46 provides that financial responsibility and contingency fund requirements are triggered by operation of a facility but facility is not a concept used by the commission. MR. MINTZ noted that many of the changes Mr. Johnston suggested are an attempt to avoid confusion because of the different languages and different concepts used in the two acts. He stated the work draft uses the term natural gas exploration facility and the term natural gas is not necessary. He said the term exploration facility is sufficient. TAPE 95-65, SIDE B Number 000 REPRESENTATIVE OGAN clarified the gas versus natural gas language is inclusive to include coalbed methane. MR. MINTZ responded there is no problem with that. BETTY COX, BRADY AND COMPANY, testified via teleconference and stated she will offer her experiences in working in the oil industry from a bonding and insurance standpoint. She noted everyone keeps referring to a $1 million bond (indiscernible). She said she has worked with the AOGCC in regard to bonding and meeting the financial responsibility requirements of AS 46.04.040. She agreed with Mr. Tostevin that a bond is not the only method of meeting those requirements. MS. COX said for a smaller operator, a bond is not the ideal way to approach the financial requirements because bonding companies look at that type of obligation as a financial guarantee. She explained just because someone has $1 million in cash does not necessarily mean the bonding company will approve and support that person with a $1 million bond. The bonding company looks at the long term and whether a company will be around ten years in the future to pay if there is a loss. Number 073 MS. COX stated insurance is readily available both with financial responsibility and without financial responsibility. She said she is not sure whether or not a natural gas exploration facility comes under financial responsibility requirements. The costs on the insurance varies from operation to operation and can be quite expensive. However, she felt insurance would be cheaper than a bond because on an independent operation, unless the company is worth $50 million, not only will there be a bond premium, the company will have to post $1 million cash. MS. COX said from an insurance basis, for a $1 million exploration well, her company would go to its carriers and establish a commercial general liability policy that would provide third party coverage for property damage and bodily injury and would also include pollution. At the same time, they would purchase a side- by-side pollution liability policy that could provide (indiscernible) both pollution coverage for the company's own spills and own property and that of the public. She stated the minimum premium would be approximately $50,000. The premium would be based on the entire operation. Number 112 MS. COX stated she had been successful in writing a bond for an independent. She said in trying to write the bond, she contacted AOGCC for information to determine how many people had posted bonds and contacted every one of them in trying to sell her clients to them. She told committee members every single one turned her down. She thought the only companies having bonds with the state currently are probably very large companies, such as the major oil companies. She noted when she placed the calls, she was told two people had posted cash. MS. COX said writing the bond was a very long process. She finally found a bonding company willing to work with her on the bond. She stated the first year the bond was collateralized 50 percent. It was a $200,000 bond, so the bonding company kept $100,000. She noted they were successful at the anniversary premium date in getting the collateral released. MS. COX told committee members the difference between bonding and insurance is that with bonding, if there is a loss, it has to be paid back and with insurance, the company does not have to pay it back. CHAIRMAN ROKEBERG recessed the House Special Committee on Oil and Gas and passed the gavel to Co-Chairman Green to conduct business with the House Resources Committee. Number 440 CHAIRMAN ROKEBERG called the joint meeting of the House Special Committee on Oil and Gas and the House Resources Committee back to order. GRANT DOYLE, CHIEF EXECUTIVE OFFICER, A.G. MIDLAND CO, INC., testified via teleconference and expressed support for HB 334. He asked committee members to imagine a home-grown energy industry that is (indiscernible) to protecting (indiscernible), not because there are laws and regulations requiring the protection but rather because of the workers, the owners, the investors, the mangers, their children and their grandchildren. He said they are all concerned that Alaska remain a beautiful, clean, and healthy place to live. MR. DOYLE asked committee members to imagine a home-grown energy industry which not only pays royalties to the state and pays salaries to Alaskans but also spends and invests the profits in Alaska, investing for the future. He said imagine the state's rural villages being heated and generating electrical power with clean, economical, and abundant natural gas. He stated imagine no more leaking tanks and lines to contaminate water supplies and endanger fish and game stocks; no more paying two to three dollars for 180,000 BTUs of energy. MR. DOYLE stressed it is past time to allow Alaskans to directly participate in Alaska's energy interest. He stated gas does not spill. He asked why the state requires writing contingency plans and purchasing spill bonds for natural gas. He said it is time to bring energy decisions home but first the state must prepare itself. The Alaska energy industry, owned, operated, and managed by Alaskans is long past due. He urged the legislature to pass HB 334 and eliminate the requirement to write a spill contingency plan in order to drill for natural gas which cannot spill. He urged the legislature to eliminate the requirement to post a $1 million oil spill bond for natural gas. Number 490 ED COLLAZZI, ENVIRONMENTAL SPECIALIST, INDUSTRY OIL SPILL CONTINGENCY PLANNING, DEPARTMENT OF ENVIRONMENTAL CONSERVATION (DEC), stated the department has no objection to modifying its requirements for natural gas exploration facilities based on an informed judgement and a certification from the AOGCC. He said the department has several concerns with HB 334 as written. He noted Section 1 refers to a reasonable probability and the department believes the certification should reflect a reasonable certainty since there is an argument there is reasonable probability that any exploratory well will not hit a producing formation. He added the department would support Mr. Johnston's suggested language. MR. COLLAZZI agrees with Mr. Tostevin in regard to Sections 2 and 4. Both of those sections are inconsistent with the department's existing law because the department puts all of the specific exemptions to its requirements in AS 46.04.050 and there is no need to add the change in either Section 2 or 4. The definition of exploration facility and the exemptions would specifically exempt those facilities certified by AOGCC. MR. COLLAZZI said Section 3 seems to describe limitations on the exemption which is granted in Section 6. He thought that might be more appropriately placed in AS 46.04.050 because it describes limitations and modifications to the exemption itself. He stated Section 5, as written, proposes to amend the DEC law and the department believes it needs some clarification. He noted Section 5 refers to a surety bond and in looking at the law, the department was wondering if that bond was intended to be an additional oil spill clean up bond that would be attached to or in addition to the bond AOGCC presently requires for plugging and abandonment. If so, he suggested it be put into AS 31, AOGCC's laws rather than attempting to modify AS 46, DEC's laws. MR. COLLAZZI stated if the intent is to make this part of DEC's law and amend Title 46, what is essentially being done is exempting natural gas exploration facilities from DEC's present financial responsibility requirements and then requiring financial responsibility again in an amount not specified. He thought it was a round-about way of doing that if that is the intent. He said the DEC does not have bonding specialists on staff but administers the program (a one-person program) based on specific financial responsibility amounts the legislature sets. Therefore, if the intent of Section 5 is to require the DEC to require a lesser amount based on a determination from AOGCC, the department would ask either that lesser amount be specified in the law or that AOGCC be tasked with determining what that amount is. He stressed if this section is intended to amend Title 46 and not Title 31, he suggests the language be replaced with surety bond by financial responsibility because there are several different ways to demonstrate financial responsibility under the DEC's laws. MR. COLLAZZI commented in Section 6, there is a typo. He stated the reference should be to AS 46.04.030(b) not AS 46.04.030(a) as (a) refers to oil terminal facilities and (b) refers to exploratory facilities. He added the comments he heard from Mr. Johnston sounded reasonable regarding Section 6 also. Number 558 REPRESENTATIVE AUSTERMAN told Mr. Collazzi the committee would appreciate receiving his comments in writing. CHAIRMAN ROKEBERG stated because of the technical nature of HB 334 and the fact there is a significant amount of work needing to be done on the bill, HB 334 will be held at this time. He noted other reasons for holding HB 334 include there is no fiscal note attached to the bill, there needs to be several amendments made to incorporate the language Mr. Johnston suggested, and additional input from the state and industry is needed. He agreed there is a need for immediate legislation in this area. He assured everyone who is interested in seeing HB 334 passed, that the House Special Committee on Oil and Gas will give the bill serious consideration. CHAIRMAN ROKEBERG said in talking with Speaker Phillips, it is the opinion of the Speaker, Representative Green and himself that there is not adequate time to consider HB 334 during this session. He stated if timing warrants and a window of opportunity does arise, the committee may revisit the bill because the committee does recognize the importance of HB 334.