Legislature(1997 - 1998)
03/12/1998 10:15 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 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 amendment. 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 individuals. 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 shortage. 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 utilized. 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 basis. 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 million. 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 yes. 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.