Legislature(1997 - 1998)
02/26/1998 10:04 AM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS Number 0068 REPRESENTATIVE HODGINS announced the committee would hear HB 380, "An Act relating to a temporary reduction of royalty on oil and gas produced for sale from fields within the Cook Inlet sedimentary basin where production is commenced in fields that have been discovered and undeveloped or that have been shut in." He asked Pat Carter to present the bill. Number 0098 PAT CARTER, Legislative Assistant, read the sponsor statement into the record: The intent [of House Bill 380] is to encourage the development of gas reserves within the Cook Inlet region. In addition to stimulating the development of several known undeveloped fields, most of which were developed more than 30 years ago, House Bill 380 has the potential to leverage additional exploration and development in the vicinity of new infrastructure, required to develop those known fields. Any new oil and gas production resulting from the development of these fields will in turn reduce the average cost of producing existing reserves, and extend the economic life of both existing and new Cook Inlet production and transportation infrastructure. "Lease holders with leases overlying previously discovered oil or gas fields which have remained undeveloped from at least January 1, 1988 through December 31, 1997, would have an incentive to develop those fields as rapidly as possible. Oil and Gas from these fields brought into production before January 1, 2004, would pay a reduced royalty of 5 percent, instead of the normal rate of 12.5 percent. This royalty holiday would last for a period of 10 years from the date from which production begins. "In order to qualify for the royalty reduction, lease holders would have to act almost immediately in order to bring these fields to production by the end of the year 2003. By limiting the royalty holiday for the qualifying fields to a 10-year-period, HB 380 provides for reasonable limit to the state's foregone royalties in exchange for oil and gas production that may otherwise not occur. The state's royalties from currently producing Cook Inlet oil and gas fields will not be effected by this legislation. "By encouraging the development of existing uneconomic oil and gas fields, HB 380 will benefit the state and local economies through taxation and royalties, as well as encouraging future development of new oil and gas discoveries by lowering the costs of infrastructure, as well as providing jobs for Alaskans. Some of these reserves were discovered more than 30 years ago and this legislation allows us to provide a reasonable incentive to develop those reserves so that all of us may realize the benefit. As they say 5 percent of something is better than 12.5 percent of nothing." Number 0307 REPRESENTATIVE ROKEBERG asked if he happened to review the minutes of HB 207 from the 19th legislature because it might be illuminating. Number 0448 JOHN MIESSE, Representative, Marathon Oil Company, testified via teleconference from Anchorage and read the following statement into the record; "As most of you know, Marathon has been an operator in the Cook Inlet area for over 30 years and we appreciate your support and interest of the oil and gas industry in the Cook Inlet area. I'd like take a few moments to comment on HB 380, which is intended to provided an incentive for oil and gas development in Cook Inlet from fields that have previously been undeveloped or shut-in. "Marathon supports House Bill 380 and believes that in the long term, this incentive will have a positive economic impact on the state of Alaska and the local communities. I would like to point out, however, that we believe this bill would have a more immediate impact on undeveloped or shut-in fields because of the readily available market for this product. The ultimate incentive for adding additional reserve capacity, whether it be oil or natural gas, is the availability of ready and stable markets. While such a market is certainly available for new oil reserves in the Cook Inlet area, the same cannot be said for natural gas. New markets for uncommitted natural gas reserves are not available for the next several years, making it difficult to economically justify near term drilling expenditures. Although this bill will provide some economic benefit to the industry, we do not believe by itself, will be enough to stimulate significant activity for natural gas development at least in the near future. "I would like now to ask the committee to consider points of clarification that we believe are needed in House Bill 380. It is our understanding that the intent of this legislation is to provide the temporary relief to fields that have been undeveloped or shut- in. We would like clarification on the definition of undeveloped. Specifically, we would like to know if a field that has produced periodically over the last few years, but requires additional drilling to fully develop the field, would be eligible for the temporary royalty relief. Also we would like to clarify that royalty relief would apply to either a re-entry of an existing well or a new well needed to recover undeveloped reserves. Again, we understand the intent of the proposed legislation is to address these scenarios, but we would appreciate the department's review to make sure the language is explicit. "In closing, many of the oil and gas producing states enacted similar incentives for oil and gas development in the early 1990's. These states have found the programs to be beneficial to all stake holders involved and have maintained those programs. We believe incentive programs such as House Bill 380 will also lead to economic gain for our communities and the state, but we recognize that market availability is probably the overriding incentive for our industry to look for new oil or gas reserves. Therefore, we believe you will see a more immediate impact on the undeveloped oil fields in the Cook Inlet area as a result of this proposed incentive. "Thank you for the opportunity to share these comments with you today. I will be glad to answer any questions." Number 0679 REPRESENTATIVE JOE RYAN referred to a presentation that showed a reduction in amount of gas coming out of Cook Inlet and by 2004 it was supposed to be at a level that would support the existing customer base in the Anchorage bowl area. He asked if this was correct. Number 0727 MR. MIESSE replied that in the future additional reserves will be needed to make deliverabilities in the local markets. Economically it would be hard to justify spending millions today for a product that cannot be sold until 2004 or beyond. Number 0783 REPRESENTATIVE NORMAN ROKEBERG asked if Marathon considered any application under HB 207 and if not, was it because of the nature of their asset mix of gas verses oil. Number 0817 MR. MIESSE replied that is correct, Marathon has sold its oil reserves and HB 207 would probably have a more immediate effect on oil production and it is a matter of market. He stated that their gas is committed to long-term markets, currently. Number 0872 CHAIRMAN HODGINS stated that HB 380 is a companion bill to a Senate bill and there are areas in the bill that might need to be changed. Number 0896 KATHRYN THOMAS, Owner, Construction Service Company, testified via teleconference from Kenai that she has served on the boards of the North Peninsula Chamber of Commerce, Alaska Trucking Association, Alaska Industry Support Alliance and was the past chairman of the Alaska State Chamber of Commerce. She stated that in all her time spent on the boards, a considerable amount of time was spent in trying to keep a viable economy and provide jobs. She stated that the gas reserves in the Cook Inlet basin have been in decline, resulting in the loss of many good paying jobs that the gas industry has traditionally provided to the Kenai Peninsula economy. She explained that the local communities have made many efforts to replace these jobs which work in other fields of industry and resource development but at this time jobs in the development of oil and gas are the highest paying. MS. THOMAS stated that on the Kenai Peninsula they have actively sought ways to revitalize what has been perceived as an old oil field. For many years, industry has declined to invest development dollars in many Cook Inlet discoveries, citing the rate of return on investment of capital dollars as a contributing factor. House Bill 380 provides an opportunity for them to attract these dollars, by providing the incentive for companies to make infrastructure investments in Kenai projects. Number 1105 MS. THOMAS stated that the question raised regarding the eligibility of royalty relief for fields that require additional drilling to fully develop the fields and if it would apply to re- entry of an existing well or if a new well would be eligible at this time, she stated that she is not prepared to comment on it. House Bill 380 will provide some incentives for them to attract investment dollars and provide jobs for the community. Number 1155 BILL HUTTO, Operations Manager, Gas-Pro Alaska, testified via teleconference from Kenai, that he has had a few years of experience in Cook Inlet's oil and gas fields. He stated that their project will have the potential of providing the base with the distribution of gas to areas on the Southern-end of the Kenai Peninsula. He stated that this is advantageous to all Kenai Peninsula residents. He stated that HB 380 provides the opportunity for the company to attract the development dollars necessary to see that the gas can reach a market. Number 1253 KEVIN TABLER, Manager of Land, Government Affairs, Union Oil Company of California (Unocal), testified via teleconference from Anchorage that Unocal supports HB 380 and has been an active proponent of incentive legislation, specially as it may apply to the Cook Inlet area. Early exploration in Cook Inlet identified several oil and gas accumulations which were deemed uneconomic by the then current market conditions. Development of these reserves were impacted as much by market conditions as they were by a lack of readily available infrastructure. Development will require expansion and utilization of the existing infrastructure and by taking advantage of economies of scale. He stated that the time is right to access the existing accumulations, but in order to do so the royalty burden needs to be reduced. Number 1342 MR. TABLER stated that Cook Inlet's economy of scale financial incentives to expend capital as well as simple supply and demand economics will be the determining factors in whether or not development of known accumulations will occur. He stated that as the existing Cook Inlet fields are reduced, initiatives such as HB 380 will be critical if the known, but unproduced, areas are to be accessed. He stated that Unocal supports HB 380, as it will enhance and prolong the economic viability of resource development in Cook Inlet. Number 1439 REPRESENTATIVE ROKEBERG stated that Unocal was the only company to apply for a royalty of modification under HB 207 and asked if he could explain any problems faced with that legislation and why HB 380 would be easier to implement. Number 1465 MR. TABLER stated that there are many uncontrollable factors that have to be taken into account under HB 207, whereas HB 380 would have one factor, purely royalty reduction, a controllable factor. In House Bill 207, the recoupment language, for the new field development was very clear but for marginal fields the bill is more subjective and requires the negotiation and the determination that it is in the state's best interest. He explained that the commissioner, prior to HB 207, had the authority to adjust royalties for economic relief on the marginal fields as they applied to Cook Inlet. He stated that the commissioner has the mandate to protect the state's interest which could be in direct conflict with the analysis the company goes through in making investment decisions. He explained that companies must provide a full economical and technical proposal. He said, "As long as there was a positive NPV or Net Precious Value on any of these projects that we proposed, the state was not inclined to grant royalty relief under HB 207." He stated that a clear, clean, easily administered approach would have more utility, at least for the marginally producing fields in Cook Inlet. Number 1561 REPRESENTATIVE ROKEBERG asked if under HB 207, he could have started at a lower rate than 5 percent and if he could justify it. He stated that it did take in account that if the field could be further delineated and had a greater level of profitability, there would be a provision for a sliding scale. He stated that HB 380 does not provide for a sliding scale, in case the amount of recoverable oil proves to greater then first thought. He asked if Mr. Tabler was saying the requirements in HB 207 were too burdensome, economically and he would prefer to see a simpler calculation. Number 1624 MR. TABLER replied that is what he is saying. The sliding scale discussion, as he recalled, was centered around the new field development but in order to make a clear and convincing showing as required under HB 207 that royalty relief required that an owner must show that the present operations or planned investments will clearly destroy value. He explained that as a result royalty relief is likely to be granted only to those companies which extend considerable resources on unattractive projects and are willing to refund all or a portion of the rewards that would be gained. He stated that HB 207 results in the discussion of what is a reasonable rate of return as opposed to a straight forward royalty reduction. With HB 380 there is no question, either you get the reduction or you do not. Number 1692 REPRESENTATIVE ROKEBERG stated that Unocal recently announced that they are going to look at the development of coal bed methane fields and asked his opinion of the gas portion in the bill. Number 1722 MR. TABLER stated that Unocal believes that there is a need for more gas in Cook Inlet and are actively out exploring it. Number 1777 REPRESENTATIVE ALAN KEMPLEN stated that this legislation has a time horizon of ten years from the date that oil or gas production commences from a particular field and the price of oil and gas has fluctuated, sometimes at a fairly significant rate. He asked if during periods of high prices for oil or gas, wouldn't it be appropriate for the state to reap its normal 12.5 percent royalty and shouldn't the proposed legislation have language to make that adjustment during periods of high prices. Number 1831 MR. TABLER stated that he would disagree somewhat with that statement in that investment decisions are based on the market conditions at that time. He stated that the decision to make the investment was made and the drilling was done back when there was a certain price. As incentive legislation, it would require the incentive, in order for companies to spend the money on the undeveloped fields. Number 1884 CHAIRMAN HODGINS stated that it is his intention to have limits placed on the amount of oil and gas that this royalty reduction would affect. For example, if a larger field is found there will be a limit and the royalty reduction will no longer occur. Number 1933 REPRESENTATIVE CON BUNDE referred Mr. Miesse's written statement regarding stimulating significant activity in the near future and asked what changes would have to be made and how he would define significant activity. MR. MIESSE stated that he was referring to the natural gas development, the bill provides a good incentive for oil because of it is readily available for sale. He stated that because the gas is committed for the next several years they do not need to find new gas, therefore, a lot of money would be spent at present, but the return on the investment would not occur for several years. Number 1989 REPRESENTATIVE ROKEBERG stated that the Nikolai Creek field is owned 50 percent by Unocal and 50 percent by Marathon. He asked if HB 380 were in effect would he be more apt to list the gas from that creek then otherwise, and wouldn't that replace the 12.5 percent royalty gas. Number 2016 MR. MIESSE replied that Unocal has different needs then Marathon, but would still have the problem of selling the new gas reserves. He stated that because the royalties would be less, there would be an incentive to try and work with Unocal to do something with the creek. Number 2044 REPRESENTATIVE KEMPLEN stated that Enstar said that they were concerned with the supply of natural gas. He referred to Mr. Miesse's statement of new markets for uncommitted natural gas reserves are not available for the next several years. He asked when would it be appropriate for his industry to begin drilling for natural gas reserves in order to meet the projected demand by Enstar. Number 2075 MR. MIESSE replied that at the end of the time-frame stated in the bill. He stated that they would more apt to spend money on gas in the 2002 to 2003 time-frame. He agreed that Enstar has uncommitted gas needs beyond the time-frame but he believed that new discoveries would fill those needs in the future. Number 2111 REPRESENTATIVE KEMPLEN asked if they just needed a year's lead time in order to do the drilling and meet Enstar's demand. MR. MIESSE replied that it depends on where the drilling is located and how close it is to the infrastructure. If the hook-up is close, then a year to two is sufficient. Number 2138 GARY CARLSON, Vice President Forcenergy Incorporated, stated that Forcenergy is an independent oil and gas company and started investing money in Alaska about 15 months ago. He stated that they have 22 employees, 18 of them Alaskan residents. He pointed out that Forcenergy was very successful in the Gulf of Mexico by taking a strong technical approach to pick up marginal fields that were out of the focus of major oil companies. Cook Inlet is in that category. He stated that in the fifteen months that they have been here they have committed $180 million to the state through acquisitions, seismic projects and drilling. He stated that Forcenergy is in support of HB 380 as it provides the types of incentives that are needed to develop marginal fields. He stated that similar incentives have worked elsewhere as with the coal bed methane. CHAIRMAN HODGINS stated that he is appreciative of their commitment to local hire and to Cook Inlet. Number 2276 REPRESENTATIVE ROKEBERG stated that he is pleased with Forcenergy's commitment to Alaska. He asked how much of their strategic planning in the Gulf of Mexico was influenced by federal royalty relief and other state royalty relief in that area. Number 2311 MR. CARLSON replied that he has only been with Forcenergy for about a year but his observation of their success is by strictly looking for a technical approach to increase recovery of fields that had been developed by others or to take over fields that had lost investments. It had more to do with the geologic opportunities rather that any federal incentives. Number 2333 REPRESENTATIVE ROKEBERG asked how much of a difference would this royalty reduction make to Forcenergy's desire to lift the gas in the West Foreland's field. Number 2376 MR. CARLSON stated that their general philosophy is to look for the opportunities, evaluate them and either invest in them or walk away from them. He stated that the incentives could either encourage them to drill a well, that otherwise they would not have drilled or after a well was drilled, the incentive would affect whether to proceed and put it into production. Number 2417 REPRESENTATIVE ROKEBERG stated that there is the desire to have some sort of cap that relates to the quantity of recoverable reserves in a particular field and asked Mr. Carlson if that is an option. Number 2443 MR. CARLSON referred to the Redoubt Shoal Field. TAPE 98-14, SIDE B Number 0007 MR. CARLSON stated that if the field showed 20 million barrels, the relief would not matter. But a range of 40 to 55 million dollars and a cap in that range would still provide the incentive to proceed and yet there would be some assurance that if it was a large field the state would recover some of the lost opportunities. Number 0031 REPRESENTATIVE ROKEBERG asked it he could provide some examples of fields that might fit into this category. Number 0095 MR. CARLSON stated he would do that. He encouraged the committee to look at a simple cap rather then to try to estimate a cap for each field as every one is different. Number 0146 REPRESENTATIVE RYAN stated that he has heard testimony that the market is uncertain yet the Oil and Gas Journal stated that the liquefied natural gas (LNG) landings have doubled. He stated that the people don't invest money in tankers if they aren't fairly sure that the market is going to be there. He stated that he would like to clear up the uncertainty of a gas market not being there. Number 0196 MR. CARLSON stated that from the LNG standpoint, the reason for substantial investments was a result of the market place driving the investment, Japan, Korea and Taiwan were signing upwards of 30 year contracts at attractive prices. He stated that it is easier to plan on a global scale. Number 0261 REPRESENTATIVE RYAN asked if Marathon only ships just gas or do they ship LNG as well. MR. CARLSON responded that Marathon is selling LNG. Number 0306 REPRESENTATIVE BUNDE stated that earlier testimony stated that HB 380 would not impact gas production but it would impact oil production. He stated that Forcenergy has both oil and gas interests and asked if he visualized using this bill as expanding both their oil and gas production. Number 0334 MR. CARLSON replied that Forcenergy will look at both oil and gas, as they do not have the infrastructure and fixed market that Marathon Oil Company has. He stated that they hope they would be able to negotiate contracts and market gas. He stated that he hoped the incentive would help clarify the gas situation in Cook Inlet. Number 0383 REPRESENTATIVE BUNDE asked if it was correct to assume that gas production is front-end loaded, in that more is recovered in the first ten years than in the second ten years. He asked what life expectancy would he plan for in the Cook Inlet oil fields. Number 0407 MR. CARLSON stated that in regards to an oil field they are at the latter stage of development in Cook Inlet, as it has been ongoing for 30 years. He stated that a new development would not be planned that would take 30 years, investments would be made to try and compact that time-frame. He stated that gas would depend on the contracts and it is possible to end up with a flatter decline for gas if there was a sufficient amount of gas and market place, investments would be made accordingly. Probably more wells at first to get it started and then drill wells for deliverability later on. He stated that oil field investments would come very early. Number 0457 REPRESENTATIVE KEMPLEN stated that there has been talk about the concept of a circuit breaker and asked if that concept could be extended to price. He stated that there is a lot of uncertainty in the energy market and in the Middle East in the ten year time horizon, various acts could occur that would disrupt the flow of energy. He asked if it would be appropriate to have a similar circuit breaker for price as there has been for volume. Number 0499 MR. CARLSON replied that an administration of a price cap would be very difficult. He stated that price strategy would be built in deciding to spend extra millions to bring a field to the market place. It would be difficult to administer a price cap easily and simply. Number 0559 KEN BOYD, Director, Division of Oil and Gas, Department of Natural Resources, referred to a letter that the division sent to the Senate regarding the Senate companion to HB 380. He stated that the division does not have a position on the bill. He stated he would outline the division's questions on HB 380 for the committee: The bill has no provision to account for changing economic conditions. If the price of oil were to increase, the relief would remain the same. How does the bill protect the states upside interest. There is no economic analysis that leads to the terms of the royalty reduction described in the bill. Why is it at 5 percent for 10 years. Are the economic requirements of all companies so similar that the same level of relief is needed for each of them, and the same question would pertain to the fields themselves. He asked why not use HB 207 for royalty relief as it is the law. Which fields would qualify for the royalty reduction. He stated that those are the questions he has on the bill and he would try to answer any of the questions that the committee has. Number 0696 REPRESENTATIVE ROKEBERG asked on the issue of the expansion ability of a particular field that may have been granted a royalty reduction, how could further proven reserves work as practical matter and could that be simplified in the bill. Number 0740 MR. BOYD stated that it is worth discussing and he would work on that as he could not address that on the spot. Number 0761 REPRESENTATIVE ROKEBERG asked if he thought a pricing sliding scale would be difficult. MR. BOYD replied that sliding scales have been used in some of their leases as there as been sliding scale royalties that vary with price over time. REPRESENTATIVE ROKEBERG asked if price was the major element. MR. BOYD replied that is correct. Number 0826 REPRESENTATIVE KEMPLEN asked if there is a simple way to administer a circuit breaker on price. Number 0853 MR. BOYD replied that he would hesitate to recommend a methodology, he stated that there are probably ways to tie price to relief. It would truly be sliding scale that would slide from a low-side to an up-side and capped at each end. Number 0896 REPRESENTATIVE ROKEBERG stated that the bill is limited to the Cook Inlet sedimentary basin and asked if it is geologically difficult to define. Number 0903 MR. BOYD stated that one suggestion would be to use the definition from exploration licensing. He questioned if this bill would apply to a coal bed methane unit in Wasilla. Number 0973 REPRESENTATIVE ROKEBERG asked if the administration would rather see a fix to HB 207 rather than this HB 380. Number 0992 MR. BOYD replied that he believed that the administration would be willing to fix HB 207. Number 1047 CHAIRMAN HODGINS stated that HB 380 would be held over to a future meeting.