Legislature(1997 - 1998)

03/05/1998 10:03 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS                                
Number 0059                                                                    
CHAIRMAN 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."                         
Number 0010                                                                    
REPRESENTATIVE CON BUNDE made a motion to move the proposed CSHB
380( ) before the committee.                                                   
Number 0156                                                                    
CHAIRMAN HODGINS asked if there was an objection.  Hearing none,               
CSHB 380( ) was adopted before the committee for discussion                    
Number 0175                                                                    
PATRICK CARTER, Legislative Assistant to Representative Hodgins                
presented the changes in the committee substitute.  He stated that             
the entire bill was rewritten and the concerns of the Division of              
Oil and Gas were addressed.  He stated that a 40 million barrel cap            
was adopted on what would be subject to the 5 percent royalty                  
reduction.  It was also adopted that nothing above 35 billion cubic            
feet of gas production would be subject to the 12.5 percent.                   
MR. CARTER stated that the  committee substitute lists the fields              
that are covered to be: Falls Creek, Nicolai Creek, North Fork,                
Point Starichkof, Redoubt Shoal and West Foreland.                             
Number 0454                                                                    
KEN BOYD, Director, Division of Oil and Gas, Department of Natural             
Resources, testified via teleconference from Anchorage that CSHB
380( ) "addresses the fields that I thought would apply but I would            
still asked the question, why would these fields be excluded."  He             
stated that he is still waiting to hear the analysis that lead to              
the numbers.  He stated that the relief for oil seems to be the                
same for both oil fields.  He stated that he would like to hear how            
the numbers were developed.                                                    
CHAIRMAN HODGINS announced that the committee would hear from Mr.              
Number 0577                                                                    
JAMES EASON, Independent Consultant, stated that he is speaking on             
the behalf of Forcenergy and is prepared to explain the issues that            
Mr. Boyd has listed as his concerns.  He referred to his letter                
written to Senator Halford relating to the Division of Oil and Gas'            
comments on SB 256, HB 380's companion bill.  In the letter he                 
pointed out the four principle concerns that the division has                  
raised.  The first being the lack of a provision that would account            
for changing conditions.  Another concern being why the royalty                
rates of 5 percent and the term of ten years, were selected.  The              
question of which fields would apply.  The question of the economic            
needs of all the lessees in the legislation being the same.                    
Number 0800                                                                    
MR. EASON stated that the 5 percent was chosen as a floor to                   
provide consistency with the state's existing law in royalty                   
reductions.  It also provides the same floor established by the                
legislature two years ago in 1996, with the adoption of the                    
discovery royalty legislation in the Cook Inlet basin.  It assures             
that there is a reasonable royalty to the state regardless if these            
things are developed.  The term of ten years are in regards to the             
production profiles and that any meaningful royalty relief has to              
occur over a set number of years because of the way the oil and gas            
fields are produced.                                                           
Number 0910                                                                    
MR. EASON stated that in response to Mr. Boyd's concerns on the                
production of the upside potential, CSHB 380( ) reflects what he               
believes is the proper approach for trying to anticipate and                   
protect the states interest if these fields appear or turn out to              
be larger than expected.  He explained that he understood the                  
concern that lessees might attempt to use the legislation in a                 
manner which the legislature did not intend the legislation to                 
apply, he understood this concern.  The only way to avoid this                 
concern is to list the fields that the legislation applies to,                 
those that have been discovered before 1988 and have been shut-in              
from that time.                                                                
Number 1018                                                                    
MR. EASON referred to previous testimony that in situations of                 
royalty reduction there is no fiscal impact to the state because               
the presumption is the production of oil or gas would not occur.               
He stated that it has some merit.  He stated that when he looked at            
the economic analysis of the fiscal impacts that the division                  
believes this bill will have, is that in his opinion they did not              
rigorously follow the rules for estimating production declines nor             
did they consider the benefits that come to the state balanced with            
what they characterize as a "loss" of royalty revenue.  He                     
suggested to refer to the fiscal analysis and his letter.   He                 
stated that he assumed the most optimistic numbers from Mr. Boyd's             
fiscal analysis; that two oil fields have 10 wells each, and 1,000             
barrels a day of production.  At the starting point they would                 
yield over 3 million barrels.  The division's analysis projects                
that same volume for 10 years and multiplies it by an assumed $10              
per barrel takes the 12.5 percent royalty and compares that to the             
5 percent royalty the state would have, and shows the difference as            
a loss.  He stated that the Cook Inlet oil field does not produce              
at constant rates.  He stated that unless there are programs to                
increase and maintain the initial rates the fields begin to decline            
immediately.  He stated that it is difficult to define the decline             
rate.  He referred to an exhibit that the minimum decline rate                 
would be a about 16 percent a year.  He explained that he kept                 
everything the division suggested but adjusted for the decline rate            
and the results is then a "loss" of royalty of 14.1 million per                
field rather than the Division's estimate of 27 million per field.             
Number 1231                                                                    
MR. EASON stated that there is a critical piece of analysis missing            
from the Division's fiscal impact.  He said "That is, they did not             
acknowledge the value of the 5 percent accumulated under the                   
decline curve, that might not otherwise occur, at least based upon             
the fact that after 30 years it has not occurred yet.  And when you            
do that you find, as you look at the table under the column of 5               
percent, you find a 'loss' of 14.1 million under the 7.5 percent               
sharing for the company, and a gain of 9.4 million in royalties                
that the state would not otherwise receive, based upon the history             
of these fields."  He stated that there are also other factors,                
including the development and extension of new infrastructure, and             
the prolonging of all production in Cook Inlet by the increased                
deliverability of oil and gas.  He stated that they are important              
factors although difficult to quantify especially since we can't               
guarantee that any field on the list will be developed.  However,              
if they are developed these benefits will happen.                              
Number 1329                                                                    
CHAIRMAN HODGINS stated that years ago on the Kenai, there were                
thriving industries for the oil field and in the last five years               
there has been a decline.  The intent of the bill is to stimulate              
some of economic development by going into field where no income               
has been received.  He stated that by lowering the royalty rates               
some of those field can get going again.  He reiterated that there             
is of course no guarantee.                                                     
Number 1394                                                                    
REPRESENTATIVE BUNDE stated that he would have a concern that if               
this was extended to other fields that there might be the incentive            
for some oil companies to cease production in an attempt to fall               
under this bill to receive decreased royalties.  He stated that it             
is important to limit it to certain shut-in fields.                            
Number 1469                                                                    
KATHERINE THOMAS, Owner, Construction Service Company, testified               
via teleconference from Kenai that this bill is of a great interest            
to the Kenai Peninsula.                                                        
Number 1502                                                                    
JIM SYKES, Representative Oilwatch Alaska, testified via                       
teleconference from Anchorage, that Oilwatch is an non-partisan                
organization, that works for open government and fairness on                   
matters of commonly owned oil and gas resources.  He stated that               
the changes in CSHB 380( ), he feels are good.  He agreed that this            
would have to be limited in scope so oil companies do not delay                
production in order to get the royalty relief.  He asked what                  
independently verifiable information is there that proves the                  
producers really need the lower royalty rates.  He stated that in              
the case of Cook Inlet gas, the majority of Alaskans depend on it              
for electricity and heat, creating the market.  However, currently,            
two-thirds of Cook Inlet gas is exported, mostly to Japan.  It is              
projected that Cook Inlet gas will run out in the year 2007 from               
the wells that are currently in production.  He referred to                    
Representative Kott's letter questioning the renewal of the export             
license as the "energy security of Southcentral Alaska should not              
be risked."  He stated that this concern is in line with the                   
federal law, Section 3A of the Natural Gas Act, prohibiting exports            
that cause regional shortages.  He stated that the current supplies            
would last an additional decade if exports of Cook Inlet gas                   
ceased.  He stated that the bill does not put any restriction on               
the use or export of the natural gas.                                          
Number 1669                                                                    
MR. SYKES stated that the number 35 million cubic feet should be               
reduced by a third.  He suggested that there be a royalty break for            
five years instead of ten years and "the 7.5 percent benefit at the            
front end be added back in following that five year sunset, so that            
industry can profit from the lower rate for the five years that it             
takes to get the production on line."  He asserted that the state              
should recover what is reasonably due, therefore, after five years             
the royalty rate should be raised to 15 percent for a period of ten            
years before it returns 12.5 percent.  He stated that the state                
should not provide additional corporate welfare where there is no              
need.  He stated that the legislature should recognize its                     
obligation to the citizens of Alaska without commonly owned natural            
gas resources.                                                                 
Number 1784                                                                    
KEN TURNAGE, General Manager, Oil Field Service Company, testified             
via teleconference from Kenai that CSHB 380( ) provided the                    
incentive for industry to develop fields that are proven but not               
processing and will provide royalties to the state and jobs for the            
Kenai residents.  He asserted that the resources are just laying               
there, and they should be developed.                                           
Number 1854                                                                    
MR. BOYD stated that he would like to comment on Mr. Eason's                   
testimony.  He stated that the 5 percent is the floor for new                  
fields in the current law but in this legislation the 5 percent is             
not the floor it is the only number that there is.  He stated that             
under HB 207 there is a great flexibility and the number can vary              
with time.  He stated he did not feel just because the fields have             
yet to be developed, a huge royalty relief must be provided.  The              
technology changes have been dramatic in the past ten years as                 
field within fields are being found.  The economics of the fields              
have changed and the time factor is not a good criteria for a                  
royalty reduction.  He stated that the discovery royalty bill                  
passed last year, only allows the discovery royalty in the                     
discovered horizon and does not give a royalty relief to the entire            
Number 1926                                                                    
MR. BOYD stated that in regards to the fiscal note it states that              
"If one adopts the division's (Indisc.) well production rate ..."              
but that is not what he did."  He stated that he provided two                  
numbers and the lower number 500 barrels a day number was just                 
meant to provide a range.  He stated that on page 2 of the                     
analysis, the example shows a decline but if the numbers are                   
averaged the production would not change at all.  He questioned                
what the difference is, the number he is providing is exactly the              
same as Mr. Eason's number.  He stated that he understood the issue            
of declining fields and does not have any idea that the Redoubt                
Shoal field will decline at the same rate as the Hemlock fields.               
He stated that the value of oil is kept constant at $10 because the            
future price is unknown and it could change, therefore a range of              
values need to be considered. He asserted that there is no                     
requirement for anybody to build anything in this bill.                        
Number 2009                                                                    
CHAIRMAN HODGINS asked how he would suggest the legislature                    
stimulate increased interest in Cook Inlet.                                    
MR. BOYD replied: in Cook Inlet there has been two state sales                 
resulting in $4 million in bids, the Redoubt Shoal field and the               
North Middle Ground field has established their units, Forcenergy              
has bought all of Stewart's Petroleum's assets, Unocal proposed the            
formation of the pioneer unit, there are 3 coal-bed-methane wells              
being drilled in the Mat-su valley, there have been at least three             
seismic programs in Swanson River Field, Forcenergy is building a              
gas well at Coffee Creek and intends to build others, and Phillips             
has plans to drill.  He stated that they have provided for a good              
lease-sale program, a discovery royalty program and have fair and              
equitable leasing terms.  He stated that the new technology has                
provided companies the ability drill better wells.                             
Number 2078                                                                    
CHAIRMAN HODGINS asked if he would suggest that all the resources              
in the fields listed in CSHB 380( ), be left in the ground and that            
no revenue is gotten out of those wells.                                       
Number 2088                                                                    
MR. BOYD stated that he has not suggested anything of the kind, he             
suggested that no one has shown that royalty relief is needed to               
develop these fields.  He referred to Point Starichkof and stated              
that he had no reason to believe that it would not be drilled next             
year.  He asked if there is no market for the gas, what is the                 
point of displacing 12.5 percent gas with 5 percent gas.                       
Number 2121                                                                    
REPRESENTATIVE ROKEBERG stated that he had a few questions to re-educate himsel
benefits to the state would accrue if the royalties were reduced.              
He asked if the severance tax would come into play.                            
Number 2154                                                                    
MR. BOYD stated that the Division of Oil and Gas does not do taxes.            
He stated that there would be a small severance tax but someone                
from the Department of Revenue could better answer that question.              
Number 2165                                                                    
REPRESENTATIVE ROKEBERG stated that he assumed there would be some             
property and corporate taxes and the state would be getting some               
other benefits.                                                                
MR. BOYD replied that he believed that to be true.                             
Number 2180                                                                    
REPRESENTATIVE ROKEBERG asked if in the history of the state of                
Alaska if the division has ever entered into an agreement to reduce            
the royalty for any oil and gas field.                                         
Number 2191                                                                    
MR. BOYD stated yes.  Oxidental Petroleum did and Unocal is                    
currently looking at what can be done under HB 207.  He stated that            
there were others, and he could provide that to the committee.                 
Number 2226                                                                    
REPRESENTATIVE ROKEBERG stated that when Oxidental Petroleum did               
get the royalty relief they shut the field in because of prices.               
Number 2236                                                                    
MR. BOYD stated that they did not shut the field in, they sold it              
to British Petroleum, who has now tripled the production at Melody             
REPRESENTATIVE ROKEBERG stated that there was a shut-in of the                 
field and then it reopened.  He asked if the state has granted any             
royalty reductions.                                                            
MR. BOYD replied that the state has had one application from Unocal            
which would grant a partial royalty reduction on some of the fields            
that were applied for.                                                         
Number 2270                                                                    
REPRESENTATIVE ROKEBERG stated that Mr. Boyd's answer is no.                   
MR. BOYD stated that is correct.                                               
REPRESENTATIVE ROKEBERG stated that is the point he wanted to make,            
because it is the perception that the legislature has granted                  
significant royalty reductions.  He asserted that they are creating            
statutes to provide for that, but point in fact there have not been            
any royalty reductions.                                                        
Number 2286                                                                    
REPRESENTATIVE ROKEBERG stated that he is concerned with the issue             
that relates to pools, horizons and fields. He asked if he could               
explain the differential between the three and the impact of this              
bill if another zone was found through a known zone.                           
Number 2325                                                                    
MR. BOYD stated that a pool can be described as having a number of             
different colored sponges stuck on a stick, the sponges would                  
represent a pool, all the sponges together would be the field.  He             
stated that zones and horizons are terms.  He referred to having               
two colored sponges, the oil pool would be the deep sponge and the             
gas pool would be the shallow sponge, his question is if there were            
two wells drilled into that oil pool in the 1960s, would it mean               
that it was discovered in 1960's and would have then applied to the            
bill prior to the committee substitute.  He stated he was asking               
that if  a shallow gas well was opened up does that mean that both             
pools would get the relief.                                                    
Number 2427                                                                    
REPRESENTATIVE ROKEBERG stated that in the bill and in the proposed            
committee substitute it used the term "leases and unitized",                   
therefore the entire field within the unit would qualify.  He asked            
if that would be his interpretation.                                           
Number 2461                                                                    
MR. BOYD responded that it would be his as well.                               
REPRESENTATIVE ROKEBERG asked if Forcenergy wanted to go back into             
Redoubt Shoal field and drill through the known reserves into a new            
pool, would it still be eligible for the royalty reduction.                    
MR. BOYD responded that would be his interpretation.                           
TAPE 98-18, SIDE B                                                             
Number 0049                                                                    
REPRESENTATIVE ROKEBERG asked what are the proven reserves at the              
Redoubt Shoal field.                                                           
Number 0054                                                                    
MR. BOYD stated that there is older seismic data there but                     
Forcenergy had done a 3-D survey which is better than his data.                
Number 0082                                                                    
REPRESENTATIVE ROKEBERG asked how the use of the 40 million barrels            
of oil and the 35 billion cubic feet gas stacks up in terms of                 
North American and in Cook Inlet.                                              
Number 0088                                                                    
MR. BOYD replied that he could not answer for North America and he             
does not know the size of the oil field but the division has added             
up all the gas reserves and the entire amount is approximately 47              
billion  cubic feet.  Individually, he believed the highest one to             
be 20 billion cubic feet.                                                      
Number 0116                                                                    
MR. EASON stated that he had a few comments to make.  He referred              
to the division's fiscal note analysis.  It is 3.65 million barrels            
per year as an initial production rate.  He compared that relative             
to the producing oil fields in Cook Inlet.  He stated that the                 
fifth largest oil field in Trading Bay Field has reserves of about             
100 million barrels.  It is estimated that it only has 2 or 3                  
percent of its reserves left.  He stated that numbers that he spoke            
of previously would result in a rate of 37 percent the size of                 
Trading Bay field.                                                             
Number 0167                                                                    
MR. EASON referred to Mr. Boyd's comment that the bill would not               
require the development of any infrastructure.  He stated that he              
could not conceive how Redoubt Shoal or Point Starichkof fields                
without the well, production facilities and the platform, could                
operate.  He stated that by definition the infrastructure is                   
guaranteed if in fact the bill has the ability to provide the                  
incentive to develop.  He stated that the legislature has done a               
lot to provide incentives in adopting the area wide leasing                    
standards.  He agreed that technology is changing and that there is            
exploration activity in Cook Inlet but there is the continued                  
decline of oil and gas production as Cook Inlet is about 90 percent            
depleted of oil based on the division's estimates.  He stated that             
somewhere between 2005 and 2007 year range, there will be a demand             
for gas.                                                                       
Number 0293                                                                    
MR. EASON stated that he believed that the six fields are unique               
and he believes that if they can be developed the benefits will                
benefit both parties and attract investment into the inlet.                    
Number 0364                                                                    
REPRESENTATIVE KEMPLEN referred to the 40 million barrels of oil               
and the first 25 billion cubic feet of gas produced in an oil or               
gas field.  He stated that those are relatively small fields and               
asked if that was correct.                                                     
MR. EASON stated that small and large are relative terms in oil and            
gas.  In West Texas they would be considered as huge fields but in             
respect to Cook Inlet they are not huge fields.  They are not                  
insignificant numbers, they are not fully delineated as to the                 
potential of the fields.                                                       
Number 0460                                                                    
REPRESENTATIVE SCOTT OGAN asked if HB 207 was only applicable to               
pools of oil.                                                                  
Number 0471                                                                    
MR. BOYD replied that it wasn't for either oil or gas but was for              
the discovered pool.                                                           
REPRESENTATIVE OGAN asked that if there was a shut-in well in a                
field, would the entire field get the royalty reduction.                       
Number 0521                                                                    
MR. BOYD stated that was his interpretation.                                   
Number 0540                                                                    
REPRESENTATIVE OGAN asked if there could be a list of the shut-in              
pools and wells in each field.  He stated that maybe royalty                   
reduction on just the pools should be looked at.                               
Number 0570                                                                    
CHAIRMAN HODGINS stated that the idea behind the bill is to                    
stimulate someone opening the field and discovering oil and getting            
revenue into the state.  The idea is to find more oil and bigger               
Number 0596                                                                    
MR. EASON stated that the bill is self-limiting because the field              
would have to be brought on to production before 2004 in order to              
qualify.  Once the field is brought on the reduced royalty is only             
on what is produced for the next ten years.  He stated that the                
incentive would be to develop the field fully and quickly.  He                 
referred to the Redoubt Shoal field and its previous attempts at               
drilling.  Additional reserves or pools being discovered can not be            
ruled out but past evidence suggests that it is unlikely, in                   
regards to the Redoubt Shoal field.                                            
Number 0737                                                                    
REPRESENTATIVE RYAN stated that he would like to know who the                  
players are, and what their economic situations are before he is               
comfortable with handing out this royalty.                                     
Number 0798                                                                    
CHAIRMAN HODGINS stated that the information is in his committee               
Number 0857                                                                    
REPRESENTATIVE ROKEBERG stated that he wanted to offer out some                
questions.  He stated that he was concerned with the ten-year                  
period.  Overproduction or fast production could ruin the structure            
and be at odds with the conservation commission.  He suggested that            
a "right to extend provision" be looked at.  He referred to AS                 
38.05.180(e)(4)(A) that states a second royalty reduction can not              
be obtained, therefore, it needs to be applied to the bill.  He                
stated that a provision of assignability needs to be addressed.                
There needs to be a review of the ethicacy of a price parameter on             
the bill.  He stated that if the committee is listing the fields in            
the bill then the committee needs to look at the geologic history              
on the fields.  He stated that HB 380 is taking a provision of HB
207 and simplifying it, and the committee needs to  be cautious.               
Number 1019                                                                    
CHAIRMAN HODGINS stated that he would hold CSHB 380( ) over.                   

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