Legislature(1997 - 1998)

03/12/1998 10:15 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 0064                                                                    
CHAIRMAN HODGINS announced the committee would hear CSHB 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 0101                                                                    
REPRESENTATIVE NORMAN ROKEBERG made a motion to adopt the proposed             
CSHB 380( ), 0-LS1503\B, 3\11\98, for discussion purposes.                     
Number 0130                                                                    
CHAIRMAN HODGINS asked if there was an objection.  Hearing none,               
the proposed CSHB 380( ) was before the committee.                             
Number 0157                                                                    
PATRICK CARTER, Legislative Assistant to Representative Mark                   
Hodgins, stated that last week the committee adopted a proposed                
committee subsitute which named the field eligible for a royalty               
reduction and placed a royalty cap on 40 million barrels of oil and            
a 35 billion cubic feet of gas.  He stated that the only change in             
this committee substitute is the royalty cap on oil is reduced to              
35 million barrels of oil.  He stated that there were some                     
discussions on putting a price cap on the royalties at $24 a barrel            
but after discussing that with legal it was decided that it would              
not be proposed as an amendment because of significant hardships it            
would cause to the industry.                                                   
Number 0357                                                                    
REPRESENTATIVE JOE RYAN stated that he thought that the time-frame             
was originally set for the year 2000, not 2004.                                
MR. CARTER replied that it has always been at 2004.                            
REPRESENTATIVE RYAN asked what is wrong with using a Platt's [ph]              
price, that reflects the type of oil on the market for which it is             
being sold.                                                                    
Number 0433                                                                    
MR. CARTER replied stated that he is not qualified to speak to                 
pricing indexes utilized throughout industry on oil, but there is              
the complication of how often it would be changed.  Would the                  
royalty rate be changed daily and if so that would become very                 
complicated.  For those reasons, it was not considered as an                   
Number 0491                                                                    
REPRESENTATIVE ROKEBERG referred to the issue of specificity of the            
six discreet fields and asked if he checked with legal as to the               
constitutionality on specifying fields.                                        
Number 0578                                                                    
MR. CARTER replied that he had and the restriction is shut-in                  
fields or undeveloped fields that were discovered before January 1,            
1988 and have remained that way through December 31, 1997.  He                 
stated that in regards to oil and gas legislation, the different               
stratifications, that occur throughout the state, are region                   
specific and that is why they allow quite a bit of leniency with               
regard to special legislation on oil and gas issues.                           
Number 0601                                                                    
REPRESENTATIVE ROKEBERG asked if it was possible to list the six               
fields but add the wording "not limited to" so that it would not               
have any challenges based on special legislation.                              
MR. CARTER replied that language was not discussed, although the               
intention was that the six fields listed are the fields that                   
qualify to date.                                                               
Number 0670                                                                    
REPRESENTATIVE SCOTT OGAN asked if any of the fields had recently              
changed hands.                                                                 
MR. CARTER replied that he would not be qualified to speak to the              
history of the fields.                                                         
Number 0741                                                                    
JAMES EASON, Oil and Gas Operations, Management and Policy,                    
Forcenergy Incorporated, replied that in the case of Redoubt Shoal             
Field, the leases where all owned by a combination of different                
entities all of which were under the control of Daniel Dunkel [ph]             
until about two years ago when the leases were signed to                       
Forcenergy, which unified the leases.  A 3-D seismic survey was                
conducted this fall and currently is in the process of discussing              
with the companies in the Far East, the construction cost for a                
platform that might be used to explore those leases.  In regards to            
the Starichkof field, it was discovered 30 years ago and the lease             
has been held by the same company.  In addition Forcenergy, ARCO               
and (Indisc.) have bought leases from the federal government or the            
state that are near that field.  The ownership of Nicolai Creek has            
been owned by Unocal and Marathon.  He stated that North Fork field            
had originally been drilled by Chevron and there were a number                 
parties involved over the years.  The current ownership is by a Gas            
Pro Alaska, ARCO and Marathon.  He stated that Forcenergy owns                 
leases adjacent to the discovery of the West Foreland field.                   
Falls Creek is owned by ARCO, Cliff Bergland [ph], and private                 
Number 0959                                                                    
KEN BOYD, Director, Division of Oil and Gas, Department of Natural             
Resources, testified via teleconference from Anchorage that he                 
wanted to point out that a lot of the discussion is that these                 
fields have not been developed for many years, but in fact there is            
a lot new leasing that has gone on some of the oil fields.  He                 
stated that the new leasing surrounding the fields shows that there            
is a lot of interest in Cook Inlet.  He stated that a lot of new               
fields are coming on line.                                                     
Number 1042                                                                    
CHAIRMAN HODGINS asked which of the fields on the list that he knew            
of, would not have any activity.                                               
Number 1050                                                                    
MR. BOYD replied that he expected there to be activity at Redoubt              
Shoal but he did not know which ones would not be developed.  He               
stated that if they become economic they will be developed.  He                
stated that he believed that industry was buying leases with some              
intention of doing something with them.                                        
Number 1183                                                                    
CHAIRMAN HODGINS asked if he would rather this bill did not exist.             
MR. BOYD stated that he was willing to work on the bill and asked              
why the committee has now lowered the number to 35 million barrels             
of oil.  He stated that he was looking for a reason to do this.                
Number 1212                                                                    
CHAIRMAN HODGINS asked if he thought without the bill there would              
be a lot of opportunities on the six fields.                                   
MR. BOYD responded that he saw a lot of opportunities on the oil               
fields and stated that he could not speak to the gas fields as                 
there is no shortage of gas.  He said " If you want to displace                
12.5 percent gas with 5 percent gas that's the benefit you get in              
the short term.  If there is a gas shortage and price rises I think            
simple economics tell you these fields become more economic."                  
Number 1240                                                                    
CHAIRMAN HODGINS stated that Enstar has stated that there is a gas             
MR. BOYD stated he would not speak for Enstar or anybody else.  He             
stated that there are other companies that would testify there is              
not a gas shortage.  He stated that he is not sure if it is a gas              
shortage or a deliverability problem.                                          
Number 1278                                                                    
CHAIRMAN HODGINS asked him why he thought the fields have not be               
Number 1300                                                                    
MR. BOYD stated the he believed the companies are out there working            
as Forcenergy, ARCO and Frontier Petroleum are drilling on the west            
side.  He stated that certain fields because of their advantages               
are going to be developed first.  He stated that if a shortage                 
develops and exploration does not pan out the fields would become              
more economical.  He stated that he could not say the terms of the             
bill is the right answer.                                                      
CHAIRMAN HODGINS asked what is the right answer.                               
Number 1350                                                                    
MR. BOYD replied that HB 207.                                                  
CHAIRMAN HODGINS stated that he is interested in HB 207 for the                
fact that it has never been used.                                              
MR. BOYD replied that there has been an application from Unocal and            
that is the only time that it has been applied.                                
Number 1387                                                                    
CHAIRMAN HODGINS stated that the reason could be that HB 207 is too            
cumbersome to be used and this bill would allow industry to get                
into various fields.                                                           
MR. BOYD responded that the other possibility is that the fields               
are economic and do not need relief.                                           
CHAIRMAN HODGINS responded than he would think there would be                  
drilling rigs all over Cook Inlet.                                             
Number 1412                                                                    
REPRESENTATIVE RYAN referred to page 3 of Mr. Eason's letter in                
answer to Representative Ogan's question.  He stated that a spread             
sheet could adjust the royalty rate to the price of oil on a daily             
Number 1460                                                                    
REPRESENTATIVE ROKEBERG asked if the way the bill is drafted, it               
does not distinguish between a field, pool or horizon.                         
Number 1491                                                                    
MR. BOYD stated that the bill as he understands it, it applies to              
the entire field.                                                              
Number 1503                                                                    
CHAIRMAN HODGINS asked that in regards to the fiscal note, what                
would it cost the state if the bill went through.                              
MR. BOYD stated that there was a range of numbers on oil regarding             
two scenarios.  He stated that it was between $14 million and $27              
Number 1543                                                                    
CHAIRMAN HODGINS asked what it would cost to administer this bill.             
MR. BOYD responded that it would cost very little.                             
Number 1553                                                                    
REPRESENTATIVE OGAN referred to the discovery oil bill and asked if            
there was an increase in exploration work as a result.                         
Number 1570                                                                    
MR. BOYD responded that the bill was passed a year ago and the                 
regulations have just been adopted.  He stated that he expected to             
see applications in the future.  One of the problems was that there            
were a few lawsuits in Cook Inlet which have been won.                         
Number 1636                                                                    
REPRESENTATIVE OGAN asked if there was a potential for the shut-in             
wells that they could find some new pools and fields then the                  
royalty could be applied to them.                                              
Number 1653                                                                    
MR. BOYD responded that is the purpose of the bill so the answer is            
Number 1671                                                                    
CHAIRMAN HODGINS asked if he could give a synopsis of his letter as            
his office has just now received it.                                           
Number 1677                                                                    
MR. BOYD stated that it was a letter to Senator Halford in response            
to a letter that Forcenergy wrote in March.                                    
Number 1690                                                                    
CHAIRMAN HODGINS called for a brief at ease at 10:45 a.m.                      
Number 1690                                                                    
CHAIRMAN HODGINS called that meeting back to order at 10:48 p.m.               
Number 1716                                                                    
REPRESENTATIVE RYAN asked what would be the initial capital cost               
for these people to go out and set up the various platforms and                
infrastructures they would need to do the drilling.  He stated that            
he is comfortable with the incentive that is offered as if it is               
not offered there is no reason for the people to take the time and             
invest the capital.                                                            
Number 1794                                                                    
REPRESENTATIVE CON BUNDE made a motion to move the proposed CSHB
380( ) out of committee.                                                       
Number 1805                                                                    
REPRESENTATIVE OGAN objected for discussion purposes.                          
Number 1808                                                                    
REPRESENTATIVE ROKEBERG referred to Mr. Eason's letter dated March             
11, 1998 and stated that it answers a lot of the committee's                   
questions.  He stated that there is a section that refers to the               
potential of double dipping and stated that the statutory cite                 
should read AS 83.05.180 subsection (F) not (D) both on page 1 and             
3 of the letter.  He stated that the wanted to note that the letter            
refers to proprietary information on field sites.  He stated that              
because of this disclosure of proven reserves, he has a greater                
comfort level.  He stated that he would rather not complicate the              
bill with sliding scales but it is a policy scale to let the bill              
go forward with the policy reduction as to the entire lease.  He               
stated that he would be voting to support the bill.                            
Number 1955                                                                    
BOB SHAVELSON, Executive Director, Cook Inlet Keeper, testified via            
teleconference from Homer, that Cook Inlet Keeper is a non-profit              
organization that is dedicated to protecting Cook Inlet.  He stated            
that there is no need for this legislation as the oil and gas                  
activity has increased under the existing royalty structure and new            
technology is resulting making wells more efficient.  He stated                
that the more appropriate thing to do, is to take back non-                    
performing leases and wells and put them out for competitive bid               
and see if other companies are interested in trying to make a                  
profit.  He stated that there still are the questions of which                 
fields this bill could be applied to and the fiscal impact to the              
state.  He stated that these nonrenewable resources are public                 
resources, held in trust by the state, which is to ensure that all             
these dispensations be in the best interest of the public.  He                 
stated that testimony has shown that there is no reason to decrease            
revenues that are available to the state.                                      
Number 2057                                                                    
REPRESENTATIVE OGAN asked Mr. Boyd with the royalty reduction given            
on the estimated amount of producible reserves, how much money                 
would the state not be getting.                                                
MR. BOYD estimated the range to be between $14 and $27 million                 
assuming certain things about production rate over 10 years.                   
Number 2111                                                                    
REPRESENTATIVE OGAN removed his objection.                                     
CHAIRMAN HODGINS asked if there were any further objections.                   
Hearing none, CSHB 380(O&G),0-LS1503\B, with individual                        
recommendations and the attached fiscal notes moved out of the                 
House Special Oil and Gas Committee.                                           

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