Legislature(2001 - 2002)

01/31/2002 10:07 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 307 - OIL/GAS EXPLORATION INCENTIVE CREDIT                                                                                 
[Contains discussion of HB 308]                                                                                                 
Number 0191                                                                                                                     
CHAIR OGAN announced the first  order of business, HOUSE BILL NO.                                                               
307, "An  Act delaying to June  30, 2007, the last  date by which                                                               
hydrocarbon  exploration geophysical  work must  be performed  or                                                               
drilling of  a stratigraphic test  well or exploratory  well must                                                               
be completed in order for a  person to qualify for an exploration                                                               
incentive credit."                                                                                                              
REPRESENTATIVE  FATE, sponsor  of  HB 307  and  HB 308,  informed                                                               
members that although the two  are separate bills, both relate to                                                               
exploration and development in the same basin.                                                                                  
Number 0254                                                                                                                     
JAY HARDENBROOK, Staff to Representative  Hugh Fate, Alaska State                                                               
Legislature, read the sponsor statement for HB 307 as follows:                                                                  
     House Bill  307 will  extend the  exploration incentive                                                                    
     credit  [EIC] for  petroleum  for  an additional  three                                                                    
     years.   This will  allow for further  exploration into                                                                    
     the possibility  of natural gas  and oil in  the Tanana                                                                    
     River  drainage  basin.   There  is  presently  renewed                                                                    
       interest in exploring for natural gas in the above-                                                                      
     described basin near Nenana.  This simply extends its                                                                      
     sunset provision from 2004 to 2007.                                                                                        
MR. HARDENBROOK  noted that Mark Myers  of the Division of  Oil &                                                               
Gas was online to explain the EIC.                                                                                              
Number 0312                                                                                                                     
CHAIR OGAN asked why HB 307 is a good idea.                                                                                     
MR. HARDENBROOK  indicated the  subject [of  both bills]  came to                                                               
the  attention   of  Representative   Fate's  office   via  Andex                                                               
Resources,  a company  out of  [Houston, Texas,  with offices  in                                                               
Denver  and Oklahoma  City].   He  noted  that committee  packets                                                               
contain an article from Petroleum  News [Alaska] that talks about                                                             
a  renewed interest  [by Andex  Resources] in  the Nenana  basin,                                                               
which is close  to both Nenana and the Parks  Highway; it reports                                                               
an  interest  in  providing  natural gas  to  Fairbanks  and  the                                                               
surrounding area.   Mr.  Hardenbrook said this  is a  "great boon                                                               
for  Fairbanks, since  the majority  of us  are still  on heating                                                               
oil,  which  makes our  heating  costs  considerably larger  than                                                               
those of other areas in the state."                                                                                             
Number 0398                                                                                                                     
REPRESENTATIVE FATE  offered some history.   He recalled  that 15                                                               
or 20  years ago  ARCO and Texaco  drilled exploratory  wells and                                                               
found "good  structure"; one of those  wells was capped.   To his                                                               
understanding, they hit  the "basement or igneous  rock" at about                                                               
6,000  feet,  which isn't  the  optimum  level  for a  large  gas                                                               
deposit.     Since   then,  with   new  technology   and  seismic                                                               
exploration, the  Nenana basin has  been found  to go as  deep as                                                               
about 20,000  feet, with much  at 14[,000]  feet.  He  stated his                                                               
understanding that [Andex Resources]  will extend its exploratory                                                               
drilling down to  about 14,000 feet.  He pointed  out that gas is                                                               
found both  above and below this  level, but is optimum  at about                                                               
12,000 feet; he indicated Andex  Resources believes the potential                                                               
is quite high.                                                                                                                  
REPRESENTATIVE  FATE   told  members  the  entire   Tanana  River                                                               
drainage [basin]  takes in  far more than  the Nenana  basin, but                                                               
includes coal-bearing  strata in the northern  and eastern parts.                                                               
Currently,  another company  there  is looking  for shallow  gas;                                                               
that  doesn't  even  touch  on   the  Jarvis  Creek  area,  where                                                               
exploration has  been done  on coal.   That  whole basin  has the                                                               
potential for both deep and shallow gas.                                                                                        
REPRESENTATIVE  FATE   noted  that   [HB  307]  just   extends  a                                                               
[deadline],  whereas [HB  308] duplicates  what has  already been                                                               
done in  Cook Inlet.   Therefore, they extend  these [incentives]                                                               
and  provide the  same  new advantages  for  new exploration  and                                                               
development -  in an area of  high potential - that  have existed                                                               
already in Cook Inlet.                                                                                                          
Number 0576                                                                                                                     
REPRESENTATIVE DYSON asked why this  only applies for that basin,                                                               
and  whether a  similar  incentive is  being  made available  for                                                               
other areas.                                                                                                                    
REPRESENTATIVE FATE answered:                                                                                                   
     Because  basically  this  was  the  area  in  question.                                                                    
     There are other  basins, and I would  have no objection                                                                    
     ... if  those basins  were identified.   This  basin is                                                                    
     specifically identified in this  particular bill, and I                                                                    
     can't speak  to other  basins as to  their stratigraphy                                                                    
     and anything else.                                                                                                         
Number 0628                                                                                                                     
CHAIR OGAN  pointed out that  the foregoing  discussion pertained                                                               
to both bills.                                                                                                                  
REPRESENTATIVE  DYSON  stated  his   understanding  that  HB  307                                                               
extends the date for everyone.                                                                                                  
CHAIR OGAN affirmed that.  He  asked Mr. Myers to explain the EIC                                                               
and whether it has ever been applied for or used.                                                                               
Number 0723                                                                                                                     
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources,  testified  via  teleconference.    He  first                                                               
offered some geology, saying:                                                                                                   
     We concur with Representative  Fate's assessment of the                                                                    
     Nenana basin.   It's  a very  attractive-looking basin,                                                                    
     ... particularly for  gas.  One of  the exciting things                                                                    
     about it  is, it does  have two well  penetrations, the                                                                    
     last  one by  ARCO.   On  the peripheral  edges of  the                                                                    
     basin, ... neither  well hit into the ...  "gut" or the                                                                    
     deeper parts of the basin.                                                                                                 
     There's  a regional  seismic grid  that  exists in  the                                                                    
     basin, and  it's gravity  and magnetic  data.   So, the                                                                    
     basin is very well defined  on regional data. ... Also,                                                                    
     with  the well  data  and with  the  outcrops that  are                                                                    
     exposed around  the peripheral parts  of the  basin, we                                                                    
     know a fair amount about it.   We know that it's a very                                                                    
     young  -  geologically  young -  basin.    It  contains                                                                    
     numerous coals,  and obviously some of  those coals are                                                                    
     the edge of the Usibelli mine;  ... you can see some of                                                                    
     the same geology that would reflect into the basin.                                                                        
     It has  very prospective-looking,  positive indications                                                                    
     of reservoir  rock.  We  know gas was generated  in the                                                                    
     basin;  there's enough  ... direct  indications of  gas                                                                    
     being generated in the basin.   So, we have many of the                                                                    
     key components  for ... significant discoveries  of gas                                                                    
     in the basin.                                                                                                              
     I would concur, again,  with the depth assessments that                                                                    
     are being  relayed.  There's  significant parts  of the                                                                    
     basin that are  at 10,000 feet or  deeper depths, which                                                                    
     ... generates  the large "kitchen"  to create  the gas.                                                                    
     ... Additionally, no one's ruled  out the potential for                                                                    
     oil or for ... heavier  liquids, although there's not a                                                                    
     good  indication  that the  type  of  source rocks  you                                                                    
     would need to generate oil are in the basin.                                                                               
     The  basin was  earlier explored,  as we  said:   twice                                                                    
     from  the  [19]60s  on.   The  state  actually  held  a                                                                    
     competitive  sale there  in 1982  and got  ... 14  bids                                                                    
     from ARCO,  Shell, and ...  private parties.   And that                                                                    
     resulted, then, in the drilling of the ... ARCO well.                                                                      
Number 0878                                                                                                                     
MR. MYERS highlighted another attractive  feature:  the proximity                                                               
to Fairbanks  and to infrastructure  on the highway.   Currently,                                                               
he  told the  committee,  liquefied natural  gas  (LNG) is  being                                                               
shipped  to Fairbanks,  where it  is converted  back to  methane.                                                               
Mr. Myers  said it is  "receiving about  $8 a ...  thousand cubic                                                               
feet."   He  called  this  "very high,  positive  price" a  great                                                               
incentive for exploration in the basin.                                                                                         
Number 0917                                                                                                                     
MR. MYERS addressed the exploration  licensing program.  He noted                                                               
that currently [DNR] has an  application from Andex Resources for                                                               
a 500,000-acre license; it covers, basically, the entire basin                                                                  
itself.  Mr. Myers told members:                                                                                                
     We're  encouraged by  this license.   I  think ...  the                                                                    
     exploration license is a  dynamic tool for exploration.                                                                    
     It does  a bunch of  things to the  basin.  One  is, it                                                                    
     gives exclusive  rights of exploration for  a one-time,                                                                    
     $1   fee  per   acre;  then   the  license   period  is                                                                    
     negotiated, based on the dollar  or work commitment and                                                                    
     time.  So ... the only  money the state receives out of                                                                    
     the initial  license period - and,  typically, anywhere                                                                    
     between five  and ten years  for a license period  - is                                                                    
     $1 per acre; in the  case of a $500,000 application, it                                                                    
     gets $500,000.  There are no rentals to pay.                                                                               
     At  the end  of  the exploration  license period,  that                                                                    
     company  -  which  ...  now  has  exclusive  rights  to                                                                    
     explore,  basically, in  this case,  an entire  basin -                                                                    
     those  can be  converted into  leases noncompetitively.                                                                    
     So they  can choose the  heart -  the best part  of the                                                                    
     basin - and then convert  to a 12.5-percent lease, with                                                                    
     no bonus upfront.                                                                                                          
Number 0990                                                                                                                     
     That gives  a company a huge  competitive advantage and                                                                    
     a  huge  incentive.   To  realize  what  that's  worth,                                                                    
     approximately, is if  we went for a minimum  $5 bid for                                                                    
     the same amount  of acreage and ... it was  bid at that                                                                    
     level,  and we  then follow  it  up ...  with just  the                                                                    
     normal rentals, it'd be worth about $10.5 million.                                                                         
     So  I  think  one  real, positive  [incentive]  is  the                                                                    
     exploration   licensing   program  that   then   allows                                                                    
     conversion, gives exclusive  rights of [exploration] at                                                                    
     extremely  minimal   costs,  and  then   a  significant                                                                    
     subsidy  over what  we'd do  with  a competitive  sale.                                                                    
     And I think it's a very  good program, and I think it's                                                                    
     a  very encouraging  program for  production of  gas in                                                                    
     ...  this basin.    Again, we  have  good geology;  the                                                                    
     basin looks  very positive; we have  an exclusive right                                                                    
     ...  to explore,  by a  company that  seems willing  to                                                                    
     explore.   ...   So,    again,   some   very   positive                                                                    
     The other thing is, we're  not far from market, and the                                                                    
     market  has   high  value.     The  market   will  have                                                                    
     additional  value, of  course, if  a gas  pipeline goes                                                                    
     through Fairbanks.  So, ...  again, great potential for                                                                    
     a local  market - we've kind  of assessed that -  and a                                                                    
     long-term potential with a pipeline. ...                                                                                   
     It's a basin we were  excited about years ago, with the                                                                    
     state;  under land  selection, we  selected as  much of                                                                    
     the  prospective   part  as   we  could.  ...   So  the                                                                    
     potential's been  recognized for  years, and  it's nice                                                                    
     to see  someone actively going into  exploration - and,                                                                    
     again, we're excited about that.                                                                                           
Number 1092                                                                                                                     
MR. MYERS,  in response to a  question by Chair Ogan,  noted that                                                               
the license  [Andex Resources] has  applied for is in  the review                                                               
process now.  In further response, he said:                                                                                     
     They would  not be  allowed, within that  license area,                                                                    
     to  explore   for  shallow-gas  leases.  ...   It's  an                                                                    
     exclusive  right for  explorations from  grassroots all                                                                    
     the  way down  to  the  center of  the  earth.   So  it                                                                    
     precludes anyone  within that  license area  from doing                                                                    
     coal beds.                                                                                                                 
MR.  MYERS,  when  asked  by  Chair Ogan  to  confirm  that  this                                                               
legislation doesn't affect the  shallow-gas leasing program, said                                                               
it doesn't directly.  He added:                                                                                                 
     Now,  there's some  nuances  with  ... the  exploration                                                                    
     licensing  part  of that,  in  the  sense that  ...  an                                                                    
     exploration  license cannot  be given  on leased  state                                                                    
     land.    So  EICs  only  work  on  the  regulations  on                                                                    
     unleased state land  or private land.   So with respect                                                                    
     to [HB]  307, if someone  has a shallow-gas  lease, the                                                                    
     state  cannot  give  them an  EIC,  or  a  conventional                                                                    
     lease, they could not give them an EIC.                                                                                    
MR.   MYERS  concluded   by  saying   [shallow-gas  leasing   and                                                               
exploration licensing] are totally separate, distinct programs.                                                                 
Number 1232                                                                                                                     
MR.  MYERS  offered some  history  of  the exploration  incentive                                                               
program.   It was  designed so the  state could  acquire geologic                                                               
information, generally prior to competitive  sales.  In the past,                                                               
a consortium of perhaps a  dozen companies would drill wells into                                                               
a frontier  basin to  acquire data  prior to  a lease  sale; they                                                               
would  deliberately drill  "off-structure"  in  a location  where                                                               
they  believed they  wouldn't  encounter  hydrocarbons, to  avoid                                                               
giving a competitive  advantage to anyone.  This was  in order to                                                               
understand  the basic  geology of  the  basin.   Mr. Myers  cited                                                               
examples,  including Norton  Sound, indicating  these are  called                                                               
"cost wells" or "combined offshore stratigraphic test wells."                                                                   
MR. MYERS said  the concept was that if everyone  chipped in some                                                               
money, "we  could go out  and get the scientific  information and                                                               
be  better  prepared  for  the  leasing  program."    Under  this                                                               
concept, it  could be  extended to  Interior basins,  although he                                                               
said  there  wouldn't  be  a  dozen  companies  interested.    He                                                               
suggested   that  if   a  company   were  interested,   then  the                                                               
commissioner of  [DNR] would have  discretion to pay for  part of                                                               
that exploration well or geologic  test well; that could occur if                                                               
the  value of  the  information to  [DNR's]  leasing program  and                                                               
resource management  issues -  and to  promote exploration  - was                                                               
[deemed] significant enough.  Mr. Myers told members:                                                                           
     It also  had another element:   it was  recognized that                                                                    
     the state doesn't ... get  seismic data over lands that                                                                    
     are Native-owned or privately owned.   We get it now by                                                                    
     right of permit on state lands.   But it would apply to                                                                    
     wells  or seismic  data drilled  on  private lands  the                                                                    
     state wants to  get.  In general, if a  well is drilled                                                                    
     on private land, the state  is not entitled to see that                                                                    
     data   until   the    primary,   two-year   period   of                                                                    
     confidentiality is over for that well.                                                                                     
     On state  lands, ... the  program also gave  some other                                                                    
     rights to  the state.   It would  be able to  show that                                                                    
     data  -  not  give,  but  show that  data  -  to  third                                                                    
     parties,  to promote  exploration.   So, again,  from a                                                                    
     well and  seismic information  [standpoint], it  was to                                                                    
     encourage the  gathering of baseline geologic  data, to                                                                    
     then  be  better  prepared  to  go  forth  and  promote                                                                    
     exploration ... into the basins.                                                                                           
Number 1373                                                                                                                     
     So, that  was clearly  the intent;  that's the  way the                                                                    
     program has  been proposed for administration.   It put                                                                    
     a cap  on $30 million  for the entire program  over its                                                                    
     life, to 2004, for the ten-year program.                                                                                   
     It also  said that  no single project  - and  it didn't                                                                    
     really  define  "project"  -  could  be  more  than  $5                                                                    
     million.  The money would be  given based on a cost per                                                                    
     line-mile for  seismic, or by  foot for  well drilling.                                                                    
     So, it  was designed that  the state would pay  so many                                                                    
     dollars for each  foot drilled, and then  ... would get                                                                    
     that information.                                                                                                          
Number 1395                                                                                                                     
MR. MYERS  pointed out that  under some circumstances,  wells can                                                               
be granted "extended confidentiality"  beyond their primary term,                                                               
beyond the  24 months.   He indicated  [HB 307] says  [a company]                                                               
that  gets  information under  this  program  couldn't apply  for                                                               
extended confidentiality.  He noted  that there are approximately                                                               
a dozen wells on the North Slope under confidentiality now.                                                                     
MR. MYERS  told members [HB 307]  is well-intentioned legislation                                                               
that DNR  certainly doesn't oppose.   However, the  question that                                                               
comes to  mind is  whether it  is appropriate to  give EICs  in a                                                               
license area -  which is a precursor to leasing  - where there is                                                               
no  competition at  that point  in  time and  where the  geologic                                                               
data,  because of  that, doesn't  have significant  value to  the                                                               
state.  He expanded on his answer:                                                                                              
     The  state's going  to get  that data  anyway on  state                                                                    
     lands,  so ...  is it  appropriate to  do in  a license                                                                    
     area?   Laws researching whether  or not the  state can                                                                    
     do  it  -  is  a  license  a  lease?  -  because  we're                                                                    
     restricted  from  doing  leases.     And  I  think  our                                                                    
     tentative  belief  is  that  it's  probably  not,  that                                                                    
     there's probably discretion to be able to give it.                                                                         
     But, again, the  value of the information:   if someone                                                                    
     has  locked  up  the  basin   to  exclusive  rights  of                                                                    
     exploration for  the first seven  years, followed  by a                                                                    
     lease for  another seven  years, say,  there's fourteen                                                                    
     years where that data isn't  of value in ... promotion,                                                                    
     to  the state.    It may  be of  value  in the  state's                                                                    
     ability  to  manage  the  land.   It  may  promote  the                                                                    
     exploration.    But ...  was  that  the intent  of  the                                                                    
Number 1493                                                                                                                     
MR. MYERS proposed that one  of clearest values of discussing the                                                               
bill's  extension  is  to  get clear  legislative  intent  as  to                                                               
whether the legislative  intent of the program is  changing to be                                                               
more of  an incentive to people  in license areas, for  the state                                                               
to subsidize  or pay  part of  the cost of  drilling.   He added,                                                               
"Again, the  original intent was  clear, for the state  to gather                                                               
information;   so   it's   very    discretionary   on   the   DNR                                                               
commissioner's part.   So that's  the fundamental question."   He                                                               
     I think there are other  areas of the state that aren't                                                                    
     under license  where the original intent  would clearly                                                                    
     be met.  And there  are Native lands or privately owned                                                                    
     lands within  this basin that  the state might  want to                                                                    
     apply  it  to, if  it  considers  the information  very                                                                    
     valuable,  to  get  within  the  two-year  period.  ...                                                                    
     Again, the original intent  was to acquire information,                                                                    
     not to subsidize drilling on state land.                                                                                   
Number 1552                                                                                                                     
CHAIR OGAN  noted the  $30-million cap on  the program  in total,                                                               
with a  $5-million incentive-credit  cap per  project.   He asked                                                               
whether that $5 million would  come from royalties or bonus bids,                                                               
for example.                                                                                                                    
MR.  MYERS  answered that  it  comes  directly from  the  revenue                                                               
stream  coming out  of  oil  and gas.    It  could be  royalties,                                                               
rentals, taxes,  and/or bonus bids.   It also is  transferable to                                                               
other companies that may have production.                                                                                       
MR. MYERS  reported that in the  past, the state had  another EIC                                                               
program  under which,  when people  competitively bid,  they knew                                                               
the state  might pay up to  30 percent or  so of the cost  of the                                                               
well.    To date,  those  EICs  have  cost  the state  about  $55                                                               
million.     Furthermore,  under  that  program   the  state  had                                                               
transferable  EICs; companies  without  production  on the  North                                                               
Slope sold their incentive credits  and transferred them to third                                                               
parties such as ARCO or BP.                                                                                                     
Number 1648                                                                                                                     
MR. MYERS, returning attention to  the current program, remarked,                                                               
"We have not had anyone apply  for this program, so at this point                                                               
in  time,  literally,  we  have  not expended  any  money."    In                                                               
response to a question from Chair  Ogan, he clarified that no one                                                               
has wanted to  drill a stratigraphic test on  unleased acreage to                                                               
this point.  He added:                                                                                                          
     The other  wrinkle in this  is ... that when  this bill                                                                    
     was  passed,  it was  the  same  year that  exploration                                                                    
     licensing was  passed.   So my  opinion is  that didn't                                                                    
     really  address the  licensing issue.    So that's  one                                                                    
     thing,   again,  that   probably  would   need  to   be                                                                    
     clarified,  as  to  the  legislative  intent:    Is  it                                                                    
     different now?   How does  the license fit in  with ...                                                                    
     the issue of "it's for unleased acreage?"                                                                                  
Number 1691                                                                                                                     
CHAIR OGAN  offered his reading of  the statute:  an  oil company                                                               
can apply,  but the commissioner  [of DNR] has  discretion, based                                                               
on eligible costs - approved  by the commissioner - of performing                                                               
[geophysical]  work, drilling  a stratigraphic  [test well],  and                                                               
drilling an exploratory well.                                                                                                   
MR.  MYERS affirmed  that the  commissioner has  discretion.   He                                                               
again emphasized  that legislative intent is  of great importance                                                               
in the commissioner's granting, or not  granting, of an EIC.  The                                                               
amount also  is discretionary.   He reiterated, "Right  now, it's                                                               
pretty  clear  that  the intent  was  [that]  the  commissioner's                                                               
discretion was  based on  how much  he valued  that information."                                                               
He  added that  the determination  would be  based upon  how that                                                               
information could  be used, to whom  it could be shown,  and what                                                               
value it  had in  promoting exploration  and more  competition in                                                               
lease sales.                                                                                                                    
Number 1760                                                                                                                     
REPRESENTATIVE FATE asked whether [a  company] has to actually be                                                               
producing before the credit is given.                                                                                           
MR. MYERS  said that  is basically  correct, but  it can  also be                                                               
used on rentals, royalties, and bonus bids.                                                                                     
REPRESENTATIVE FATE  suggested it  wouldn't be against  the bonus                                                               
bids because there is no production there.                                                                                      
MR. MYERS replied:                                                                                                              
     In  this  particular case,  more  than  likely the  EIC                                                                    
     would  be sold.  ...  A hypothetical  ... company  that                                                                    
     didn't  have  production  or   ...  wasn't  bidding  on                                                                    
     exploration acreage  elsewhere in  the state  ... would                                                                    
     sell  that  credit  to a  third  party;  that's  what's                                                                    
     happened normally.   So  it's real  dollars.   And they                                                                    
     may get 90 cents on  the dollar. ... It's whatever they                                                                    
     negotiate  with that  party.   But ...  it's just  like                                                                    
     cash, in essence. ... They  always can sell that credit                                                                    
     ... to  another producer  or another explorer  that has                                                                    
     those costs.                                                                                                               
Number 1830                                                                                                                     
MR. MYERS, in response to Chair Ogan, specified that he was                                                                     
talking about the EIC and its worth.  He added:                                                                                 
     A  licensee, of  course,  doesn't have  any rentals  or                                                                    
     didn't pay any  bonuses, nor do they have  any taxes or                                                                    
     royalties; so  they have nothing  to take that  EIC off                                                                    
     against.  ...  That party  would  have  to sell  it  to                                                                    
     someone, ...  as a transfer  to someone that  does have                                                                    
     those elements.  And, of course,  we have a lot of that                                                                    
     on the North Slope [and] on Cook Inlet.                                                                                    
CHAIR OGAN requested clarification about Mr. Myers' statements                                                                  
that the [current] program has never had anyone apply under it                                                                  
and that traditionally these are sold like cash.                                                                                
MR. MYERS replied that there are two EIC programs.  The first is                                                                
a term [during which] the commissioner has the option of putting                                                                
on a competitive sale.  He explained:                                                                                           
     The thought was  that an EIC upfront would  be worth an                                                                    
     increase in  the bonus bid [at]  the time of sale.   So                                                                    
     it  was   a  competitive  term  that   would  not  only                                                                    
     encourage  people to  drill wells,  but also  the costs                                                                    
     would  be  recovered  by people  bidding  more  on  the                                                                    
     sales.   And I  don't believe  there was  a symmetrical                                                                    
     relationship there, but that was the theory.                                                                               
     The state has  not used that program for  years, but we                                                                    
     have  used it  in  the  past, and  have  given out  $54                                                                    
     million.  So there's a  significant track record of how                                                                    
     those EICs  were transferred.   The methodology  in how                                                                    
     it mechanically  works, other than discretion  [on the]                                                                    
     part of the  commissioner, ... is identical  to the ...                                                                    
     other EIC program that I referred to.                                                                                      
Number 1925                                                                                                                     
REPRESENTATIVE GUESS asked:                                                                                                     
     If  we were  discussing a  basin where  you didn't  see                                                                    
     that  there  was  the  value that  there  might  be  in                                                                    
     another  situation, where  would you  sit on  this? ...                                                                    
     This bill  in front of  us is just extending  the date;                                                                    
     it doesn't really particularly  talk about any specific                                                                    
     basins.  Do you think we  should just let 2004 come and                                                                    
     go, and that  this part of the  statute isn't necessary                                                                    
     anymore?   Or where do  you sit on extending  the date,                                                                    
     versus Nenana basin?                                                                                                       
MR. MYERS replied:                                                                                                              
     I know DNR's position is  that we're neutral.  We think                                                                    
     it's really  a policy call  of ... the legislature.   I                                                                    
     think  it's a  very  good point.    Outside of  license                                                                    
     areas, the intent  is still there.  And it  may even be                                                                    
     there  within  license areas  [if]  the  intent ...  is                                                                    
     clarified by the committee.                                                                                                
     There  are certainly  other areas  of the  state, other                                                                    
     ...  potential  basins, where  we  have  not had  lease                                                                    
     sales - there  are no licenses -  where the information                                                                    
     might have  great value.   And ...  if the  state would                                                                    
     subsidize  it or  pay for  a part  of the  cost of  the                                                                    
     well, it may be money well  spent.  So, again, that was                                                                    
     the original intent ... of  the program; ... again, I'd                                                                    
     certainly think that that intent's fine. ...                                                                               
     But I  think whether or  not you want to  continue that                                                                    
     program  is  ...  really  a  call  you  have  to  make,                                                                    
     depending on intent, and then  I think language - since                                                                    
     license  areas didn't  exist before  - clarifying  what                                                                    
     the  intent would  be in  license areas,  where someone                                                                    
     has  an  exclusive  right to  explore  and  you're  not                                                                    
     really  going to  promote competition  by granting  the                                                                    
Number 2050                                                                                                                     
JAMES  B.  DODSON,  Executive  Vice-President,  Andex  Resources,                                                               
L.L.C., testified  via teleconference.  He  informed members that                                                               
Andex Resources  was formed in  late 1998  by a foundation  and a                                                               
family that has been in the oil  and gas business in the Lower 48                                                               
for about 50 years.   Its original capitalization was $80 million                                                               
in cash and  $20 million in oil and  gas leaseholds, particularly                                                               
in the Rocky  Mountain States.  Headquartered in  Houston, it has                                                               
a Denver office where he himself works.                                                                                         
MR.  DODSON  said  the  Nenana  basin is  of  interest  to  Andex                                                               
Resources because  the project  is the right  size for  a company                                                               
its size.   He surmised  that one  reason ARCO "walked  away from                                                               
this  basin in  1983-84" was  that  it didn't  see a  significant                                                               
enough gas market.   However, Andex Resources  sees the Fairbanks                                                               
market - which it estimates to  be 40 million to 60 million cubic                                                               
feet a  day - as being  of interest, even though  a "major" might                                                               
not see it the same way.                                                                                                        
MR.  DODSON indicated  Andex Resources  did approximately  a one-                                                               
year study  of the Nenana basin;  he concurred that the  basin is                                                               
probably 20,000  to 21,000  feet deep  at its  deepest.   From an                                                               
exploration standpoint,  he said, the biggest  problem stems from                                                               
the fact that  the deepest penetration was on  the basin's flanks                                                               
and  that ARCO's  well only  got down  to about  4,000 feet.   He                                                               
     So we  don't know what  the basin looks like  deep. ...                                                                    
     No one ever has drilled a  well down to, say, 12,000 or                                                                    
     14,000 feet, which  we think needs to happen.   So what                                                                    
     we  don't know  about the  basin is,  ... particularly,                                                                    
     what kind  of "seal  rocks" we may  have in  the basin.                                                                    
     ... That's one  of our critical components  to the play                                                                    
     that we,  frankly, have to  say is an open  question at                                                                    
     this point,  because the shallow penetrations  have not                                                                    
     found a  shale or a sealing  rock that would give  us a                                                                    
     lot more confidence in the basin.                                                                                          
     But we  do agree that  it is very rich  in hydrocarbon-                                                                    
     generating  source rock,  particularly  coals and  some                                                                    
     (indisc.)  shales.   We don't  know if  gas is  trapped                                                                    
     and, if so, where.  Our  interest in being able to draw                                                                    
     upon  exploration  incentive  credits is  basically  to                                                                    
     help us  in carrying out our  exploratory effort while,                                                                    
     frankly, reducing our capital risk  in doing so. ... By                                                                    
     granting the  exploration incentive credits,  the state                                                                    
     would be promoting  the work that we want to  do and be                                                                    
     promoting an effort to get gas into Fairbanks. ...                                                                         
Number 2224                                                                                                                     
     The first  thing that needs  to happen in the  basin is                                                                    
     probably  about  a  275-mile   to  maybe  300-mile  2-D                                                                    
     seismic grid  tying in the  old grid and  shooting over                                                                    
     the deepest  part of the  basin, which ...  hasn't been                                                                    
     done  yet.   And we  think  that that's  going to  cost                                                                    
     somewhere  in the  neighborhood  of  $6 million,  after                                                                    
     which, hopefully,  we have some  prospects fall  out of                                                                    
     that seismic  work.   And a well  to about  12,000 feet                                                                    
     out here,  unfortunately, would  cost about,  again, $6                                                                    
     And part  of the  problem with  working in  an Interior                                                                    
     basin  is  that  there  isn't  a lot  of  oil  and  gas                                                                    
     infrastructure to leverage off of.   In the Cook Inlet,                                                                    
     there is  an oil and  gas industry.  There  are service                                                                    
     industries, et  cetera, that could  support you  in the                                                                    
     Cook  Inlet.   For us  to work  up here  in the  Nenana                                                                    
     basin, we've  basically got to position  everything out                                                                    
     of the Cook Inlet, move it  300 miles to the north, and                                                                    
     ...   build  ...   ice  roads   out  into   the  basin.                                                                    
     Everything is  done on a  retail basis; it's  just part                                                                    
     of the problem.                                                                                                            
MR. DODSON emphasized the importance  to Andex Resources, when it                                                               
comes  time to  make  an  economic decision,  in  having help  in                                                               
defraying those costs.   For example, once the  seismic [data] is                                                               
shot,  the  company  would  need to  make  an  economic  decision                                                               
regarding  whether  to risk  drilling  the  well.   Assuming  its                                                               
license  issues this  year -  which the  company is  hopeful will                                                               
happen -  its desire  is to shoot  seismic information  in winter                                                               
2002-2003 and drill a well the following winter.                                                                                
Number 2334                                                                                                                     
MR. DODSON pointed  out, however, that this EIC is  set to expire                                                               
July 1, 2004.  He said  the statute itself defines an exploratory                                                               
well as  being three  or more  miles from  another well.   [Andex                                                               
Resources]  envisions  having  perhaps two  to  four  "prospects"                                                               
"fall out  of this seismic program."   There wouldn't be  time to                                                               
drill the  exploratory wells in the  basin by 2004.   Rather, the                                                               
company would  drill in the  winters of 2003-2004  and 2004-2005;                                                               
if  successful, it  would be  with the  idea of  maybe trying  to                                                               
"hook up Fairbanks" with some gas sometime in 2005.                                                                             
MR. DODSON  suggested to  the committee  that anything  the state                                                               
can do  to make [Andex  Resources'] economic decision  on whether                                                               
to drill  a well easier and  less risky is advantageous  not only                                                               
to the company, but  also to the state.  The  state would get the                                                               
seismic  data over  the deepest  part of  the basin,  as well  as                                                               
stratigraphic,  structural information  from a  well drilled  to,                                                               
say,  12,000 to  14,000 feet.   Furthermore,  Fairbanks would  be                                                               
more likely to get natural gas.                                                                                                 
MR.  DODSON referred  to  Mr.  Myers' testimony  that  this is  a                                                               
policy issue regarding what these  credits are to be granted for.                                                               
Mr.  Dodson reiterated  that Andex  Resources sees  a significant                                                               
gas market  in Fairbanks for  a company  its size.   In addition,                                                               
people in Fairbanks are paying a  lot for energy, and the company                                                               
believes  it could  "attack  that cost  structure."   Mr.  Dodson                                                               
concluded  by saying  Andex Resources  would  certainly favor  an                                                               
extension of  this EIC through 2007  in order to ease  the burden                                                               
of getting this exploratory work done.                                                                                          
Number 2449                                                                                                                     
REPRESENTATIVE FATE  asked Mr. Dodson  whether he  perceives this                                                               
as  a possible  model for  drilling  in other  rural areas  where                                                               
there is at least the potential for a small market.                                                                             
MR. DODSON answered  in the affirmative.  He  reiterated that the                                                               
problem  with  exploration in  the  Interior  is lack  of  nearby                                                               
infrastructure  support.   To the  extent the  state can  step in                                                               
under the  EIC program and  change the economics for  an operator                                                               
to figure  out whether to  drill a  well, it certainly  creates a                                                               
model that  might be  applicable, for example,  near the  Red Dog                                                               
zinc  mine, which  to his  understanding is  looking for  a local                                                               
source of gas - a risky  and expensive undertaking.  If the state                                                               
could  use the  EIC program  to help  decrease risk  to companies                                                               
doing exploration, Mr. Dodson said he  does see it as a model for                                                               
the balance of Interior Alaska.                                                                                                 
Number 2530                                                                                                                     
REPRESENTATIVE   GUESS  referred   to  the   exploration  license                                                               
discussed by Mr. Myers.  She  asked how those incentives fit into                                                               
Andex Resources'  business plan  and how  they interact  with the                                                               
MR. DODSON answered  that he believes there is a  good reason why                                                               
no stratigraphic test well has been  drilled in this basin in the                                                               
absence of a  lease or license.   This project is of  a size that                                                               
won't interest a major [producer],  which would be more likely to                                                               
drill a  stratigraphic well just to  get geologic data.   He said                                                               
the license is important to  Andex Resources; the company doesn't                                                               
want to  spend money on a  block of land unless  it believes data                                                               
generated from the well will be  to its economic benefit.  As for                                                               
the  EIC program,  it just  makes the  decision whether  to drill                                                               
that much more  favorable toward drilling because  of the reduced                                                               
risk of capital.  Mr. Dodson further said:                                                                                      
     At the end of  the day, if the state were  to give us a                                                                    
     credit for  half of what we  spent on state lands  or a                                                                    
     quarter of what  we spent on Doyon land,  that helps us                                                                    
     make the  decision to go  forward.  But in  the absence                                                                    
     of a license and the  exclusive right ... it grants, we                                                                    
     wouldn't spend  our 50  percent or  75 percent  of that                                                                    
     well  cost.  ...  So  we  do see  the  two  being  very                                                                    
     integral to one another.                                                                                                   
Number 2624                                                                                                                     
CHAIR OGAN asked about the company's timetable for drilling.                                                                    
MR. DODSON replied that the critical  item right now is getting a                                                               
license from  the state, which will  determine quite a bit.   The                                                               
company believes it is dealing  with a winter-only area, for both                                                               
environmental and access reasons.  The  key is how far advance of                                                               
a winter - and  which winter - it would be in  position to have a                                                               
license and  could therefore  shoot seismic  data.   He expressed                                                               
hope  that a  license  would issue  this year  in  time to  shoot                                                               
seismic data in December, January,  and February, and that summer                                                               
2003 would be  used to complete the seismic model  for the basin,                                                               
generate  prospects off  of that,  and then  drill a  prospect to                                                               
12,000 feet or deeper.  Because of  the need to get a good set of                                                               
sonic logs to  tie into the seismic database, Mr.  Dodson said he                                                               
doesn't  envision more  than one  well in  winter 2003-2004.   He                                                               
also mentioned the  need for direct readings on  the porosity and                                                               
density  "of the  stratigraphy we  do drill  through," which  can                                                               
significantly  improve the  accuracy of  the seismic  model; that                                                               
would  happen in  summer 2004.   In  winter 2004-05,  the company                                                               
could drill one,  two, or possibly three wells, and  then be in a                                                               
position to  make a decision  [whether] to build a  pipeline into                                                               
Number 2730                                                                                                                     
CHAIR  OGAN  asked  whether  the  company  plans  to  shoot  two-                                                               
dimensional (2-D) or three-dimensional (3-D) seismic data.                                                                      
MR.  DODSON  offered  Andex Resources'  current  belief  that  it                                                               
likely would  be a  patchwork of both:   predominantly  2-D, with                                                               
perhaps a nine-square-mile area of 3-D.                                                                                         
Number 2752                                                                                                                     
CHAIR OGAN asked what the  company estimates the aggregated costs                                                               
of  the bonus  bid  and so  forth would  be,  should the  company                                                               
decide to go forward; he indicated  those are the costs for which                                                               
a credit by the state could be  given.  He also asked whether the                                                               
company plans to spend more than $5 million.                                                                                    
MR. DODSON answered:                                                                                                            
      Absolutely. ... Initially, there'd be a half-million-                                                                     
     dollar  payment  due  the state  for  issuance  of  the                                                                    
     license.   Then we're  looking at a  $6-million seismic                                                                    
     program.  And each  exploratory well we're anticipating                                                                    
     would  cost  about  $6  million also.    And  so  we're                                                                    
     thinking it's  going to take  at least three  wells out                                                                    
     in  this  basin  to  get  to  an  aggregate  amount  of                                                                    
     production  that   would  allow   you  to   build  into                                                                    
     Fairbanks.    So  we're  talking  $24  million-plus  to                                                                    
     develop this basin.                                                                                                        
Number 2808                                                                                                                     
CHAIR OGAN  clarified that  he wanted to  know whether  the state                                                               
would have to absorb 100 percent  of the company's costs for this                                                               
project; he  also asked whether  that would continue for  five or                                                               
ten years  or for the life  of the project.   He further inquired                                                               
whether  the  state  ever  would  [receive]  revenues  if  [Andex                                                               
Resources] applied for this and got the full $5-million credit.                                                                 
MR. DODSON answered:                                                                                                            
     We'd certainly  work our way  through the  credits. ...                                                                    
     If  you assume  that  we were  able to  get  to a  $50-                                                                    
     million-cubic-foot-per-day  gas  market,  and  ...  the                                                                    
     state royalty  share - even  if we were given  the same                                                                    
     treatment  as  in  the Cook  Inlet,  with  a  5-percent                                                                    
     royalty -  ... the state's  royalty ... on  2.5 million                                                                    
     cubic feet of gas per day  at, say, a $2 netback, would                                                                    
     be  $5,000 a  day,  $150,000 a  month,  $1.8 million  a                                                                    
MR. DODSON concluded that the  project definitely "goes positive"                                                               
for  the state  in  terms  of revenue,  if  successful.   In  the                                                               
alternative, if the company drills a  series of dry holes, "we go                                                               
Number 2896                                                                                                                     
CHAIR  OGAN  asked  whether,  in   applying  for  an  exploration                                                               
license, the  company had to  submit the same geological  data to                                                               
the state that is required for an EIC.                                                                                          
MR. DODSON deferred to Mr. Myers.                                                                                               
MR.  MYERS  answered  that   the  information  [regarding]  wells                                                               
drilled on  state land  has to  be given to  the state  within 30                                                               
days of  completion of the  well, under any circumstances;  it is                                                               
part of the permitting requirement  and is a lease requirement as                                                               
well.   But even if the  drilling is on nonleased  land, the same                                                               
requirements apply,  as part of  the permit.   Similarly, seismic                                                               
data shot  over state lands  must be submitted  to the state.   A                                                               
significant  difference regarding  the  program  on state  lands,                                                               
however,  is that  it allows  [DNR] to  show that  data to  other                                                               
parties; that  was designed in  anticipation that the  data would                                                               
have value in promoting exploration in a competitive sale.                                                                      
Number 2957                                                                                                                     
MR. MYERS returned to the  basin's history, noting that he'd been                                                               
part of  ARCO's exploration team when  it drilled that well.   He                                                               
explained  that [ARCO]  was  actually looking  for  oil, but  the                                                               
basin isn't  oil-prone; he suggested  the same was  probably true                                                               
for  Unocal.   He then  said he  likes the  "characterization" of                                                               
the  basin, and  believes there  is a  positive market  there, as                                                               
well  as  a  very  large  long-term market  if  there  is  a  gas                                                               
pipeline.   Mr. Myers said  he is encouraged by  Andex Resource's                                                               
exploration plans.   He added, "It's one of the  basins we've had                                                               
our  eye on  a long  time in  the state;  it's trying  to promote                                                               
activity.  ...  So  we're  moving   ahead  with  the  exploration                                                               
license."   [Comments  about  timing  were cut  off  by the  tape                                                               
TAPE 02-4, SIDE B                                                                                                               
Number 2924                                                                                                                     
REPRESENTATIVE  JOULE asked  Mr.  Dodson whether  his company  is                                                               
looking at any part of the state other than the Nenana basin.                                                                   
MR. DODSON  answered in the affirmative.   He said the  two areas                                                               
of  greatest interest  after this  would be  Yukon Flats  and the                                                               
Susitna  basin, in  a  possible joint  venture  with Forest  [Oil                                                               
REPRESENTATIVE  JOULE inquired  whether  this  would allow  other                                                               
small independents to perhaps look  at other areas.  For example,                                                               
has  a  company  done  anything  in the  Bethel  area,  a  highly                                                               
populated rural area where energy costs are extremely high?                                                                     
MR.  DODSON replied  that he  understood  the [federal]  Minerals                                                               
Management  Service  (MMS)  was  looking  at  trying  to  license                                                               
federal lands  in the Norton  basin, to his  recollection; beyond                                                               
that, however,  he didn't know  of any company efforts  to "work"                                                               
that part of Alaska.                                                                                                            
Number 2865                                                                                                                     
CHAIR OGAN informed  Mr. Dodson that the committee  plans to hear                                                               
from  the independent  companies that  are moving  to Alaska  and                                                               
operating  in the  state.   It would  include discussion  of what                                                               
those companies' plans  are, as well as what the  state can do to                                                               
provide a  modicum of  ease for  them.  To  that end,  he invited                                                               
Andex Resources to participate in  an overview and to think about                                                               
incentives for such companies to do business in Alaska.                                                                         
Number 2813                                                                                                                     
REPRESENTATIVE  JOULE  asked  about  communities  that  would  be                                                               
impacted by this.                                                                                                               
MR. DODSON answered that Nenana  and Minto would be most affected                                                               
by the license  area Andex Resources has asked for.   He reported                                                               
that he'd  gone to a  meeting at  the offices of  Doyon, Limited,                                                               
that  included  people from  village  corporations  and from  the                                                               
communities  of  Nenana and  Minto.    The general  viewpoint  in                                                               
Nenana is  "very, very positive,"  with a  desire to see  this go                                                               
forward  and  to  have  this   gas  supply  available,  he  said.                                                               
However,  people  in  Minto  are   "not  opposed,  but  they  are                                                               
nervous,"  primarily  about  disturbance  of  traditional  lands,                                                               
whether Native  lands or  state lands, on  which the  people have                                                               
depended for food for a very long time.                                                                                         
MR. DODSON reported that in  response to those concerns, Jim Mery                                                               
of  Doyon, Limited,  had asked  him to  coordinate with  Marathon                                                               
[Oil Corporation] for  a tour of its "Deep Lake  gas find" on the                                                               
Kenai Peninsula;  Mr. Mery went on  that tour and will  follow up                                                               
in late March  with a tour of that same  gas facility with people                                                               
from Nenana  and Minto.   Mr. Dodson  suggested that  once people                                                               
have a  chance to see the  rather minimal impact of  the wellhead                                                               
and  buried pipeline  coming out  of it  - with  not an  enormous                                                               
amount of  surface disturbance  - they  will be  favorable toward                                                               
the project.                                                                                                                    
REPRESENTATIVE  JOULE  agreed  and  remarked  that  education  is                                                               
always a good thing.                                                                                                            
Number 2670                                                                                                                     
MR. DODSON returned  attention to the EIC program.   He specified                                                               
that Andex Resources  believes the logic for the  creation of the                                                               
exploration incentive  credits in  the first place  still exists;                                                               
the company  is just  asking that the  program be  extended three                                                               
years.   He  indicated there  should  be an  opportunity to  take                                                               
advantage of  it, since no  one has even  applied for one  of the                                                               
credits under  the program.  In  response to a question  by Chair                                                               
Ogan, Mr. Dodson affirmed that  his company absolutely would want                                                               
to  apply  for  an EIC.    "We  do  plan  on going  forward  with                                                               
exploratory work out there," he added.                                                                                          
Number 2633                                                                                                                     
CHAIR OGAN  mentioned the policy  call that the  committee needed                                                               
to   make,  and   he  referred   to  the   director's  testimony.                                                               
Acknowledging that  the discussion had  pertained to both  HB 307                                                               
and HB  308, he  reminded members  that HB  307 just  extends the                                                               
date of the program.                                                                                                            
CHAIR OGAN  asked whether there  was further testimony;  none was                                                               
Number 2573                                                                                                                     
REPRESENTATIVE DYSON  surmised that because the  committee hadn't                                                               
heard  from  others  in  the  industry,  it  meant  they  had  no                                                               
reservations about the bill; he expressed hope that it was so.                                                                  
CHAIR  OGAN pointed  out  that the  oil  industry generally  pays                                                               
attention and that there was proper notification.                                                                               
Number 2514                                                                                                                     
REPRESENTATIVE  GUESS moved  to report  HB 307  out of  committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.   There being no  objection, HB 307  was moved out  of the                                                               
House Special Committee on Oil and Gas.                                                                                         
HB 308-OIL/GAS LEASES; DISCOVERY ROYALTY CREDIT                                                                               
[Contains discussion of HB 307]                                                                                                 
CHAIR OGAN announced the final  order of business, HOUSE BILL NO.                                                               
308,  "An Act  extending  to discoveries  of oil  or  gas in  the                                                               
Tanana River  drainage basin the  discovery royalty  credits that                                                               
are  authorized for  lessees of  state land  drilling exploratory                                                               
wells and making the  first discovery of oil or gas  in an oil or                                                               
gas  pool  and  for  licensees  under  oil  and  gas  exploration                                                               
licenses making  the first discovery of  oil or gas in  an oil or                                                               
gas pool that convert those licenses to oil and gas leases."                                                                    
REPRESENTATIVE FATE,  sponsor of  both HB 308  and HB  307, asked                                                               
Jay Hardenbrook to present HB 308 to the committee.                                                                             
Number 2449                                                                                                                     
JAY HARDENBROOK, Staff to Representative  Hugh Fate, Alaska State                                                               
Legislature,  read  from  the  sponsor   statement,  with  a  few                                                               
changes, as follows:                                                                                                            
     House Bill  308 will  provide that a  royalty discovery                                                                    
     credit such as allowed for  Cook Inlet oil and gas will                                                                    
     be made available for the  Tanana River drainage basin.                                                                    
     This allows companies  drilling for oil and  gas in the                                                                    
     area  near Nenana,  as well  as  throughout the  Tanana                                                                    
     River  drainage  basin,  to  be  on  the  same  royalty                                                                    
     footing with those companies producing in Cook Inlet.                                                                      
     Once  again, interest  in this  basin  is being  dusted                                                                    
     off,  and new  information  and  technology raises  the                                                                    
     potential  for  oil and  gas  discovery  in the  Tanana                                                                    
     River drainage basin.   This will also be  a huge boost                                                                    
     to  rural Alaskan  economies, and  the  economy of  the                                                                    
     state as a whole, if oil  and gas are actually found in                                                                    
     commercial quantities.                                                                                                     
Number 2380                                                                                                                     
REPRESENTATIVE FATE reminded members  that much of the discussion                                                               
of HB  307 earlier in  the meeting pertained  to HB 308  as well.                                                               
Noting the [state] budget crisis,  he mentioned "development in a                                                               
very proper  and environmentally  sound way" for  resources found                                                               
in Alaska;  he said this  is simply  another method of  trying to                                                               
create incentives "to do just exactly that."                                                                                    
Number 2330                                                                                                                     
MR.  HARDENBROOK,  in response  to  Chair  Ogan's request  for  a                                                               
"walk-through" of the bill sections  and the justification, noted                                                               
that he  hadn't brought  his sectional  analysis.   He explained,                                                               
however,  that the  whole bill  basically just  adds "the  Tanana                                                               
River drainage  basin" wherever [the  statute] says  "Cook Inlet"                                                               
for the  royalty credit.   Mentioning  that the  Twentieth Alaska                                                               
State Legislature  had placed  a royalty amount  of 5  percent on                                                               
oil and  gas, he added, "For  this, all we have  done is extended                                                               
that to  the Tanana River  drainage basin  so that they  can also                                                               
have that  same credit, given  that petroleum is found  in paying                                                               
Number 2286                                                                                                                     
CHAIR OGAN offered his understanding:   "They want an exploration                                                               
incentive credit  [EIC], which they  could get up to  $5 million;                                                               
and now,  on top  of that,  if they find  something, they  get 5-                                                               
percent royalty."                                                                                                               
MR. HARDENBROOK replied in the affirmative.                                                                                     
CHAIR  OGAN surmised  that  it is  for  a pool  or  unit of  gas,                                                               
MR.  HARDENBROOK said  that  also extends  to  the entire  Tanana                                                               
River drainage basin  and the Nenana basin, which  is where Andex                                                               
[Resources] has  applied for an  exploration license.   He added,                                                               
"While it  is a very  large area, it's a  very small part  of the                                                               
entire basin that we're talking about in this bill."                                                                            
CHAIR OGAN said  he wanted to do what he  could to help Fairbanks                                                               
"get  energy and  keep energy,"  but  was a  little worried  this                                                               
whole project  could result in  negative cash flow to  the state.                                                               
There  is already  a $5-million  credit,  assuming [the  company]                                                               
applies and  is approved;  he questioned  the wisdom  of knocking                                                               
the royalty down  to 5 percent in addition.   He pointed out that                                                               
it costs  money to manage  these leases,  for example.   He asked                                                               
Mr. Myers whether the Division of  Oil and Gas expects to get any                                                               
revenues out  of this project,  under the best-case  scenario, if                                                               
both these [incentives] are applied for.                                                                                        
Number 2175                                                                                                                     
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural Resources,  responded via teleconference.   He noted that                                                               
the  license  is  an  exclusive right  to  explore  that  doesn't                                                               
involve  bonus bids  and that  foregoes the  rentals; it's  worth                                                               
about $10.5  million "under conservative consideration."   An EIC                                                               
is defined  at $5 million  per project; however, a  project isn't                                                               
defined yet.  When the  two are combined, "conceivably, you could                                                               
see one basin,  multiple projects, that might  consume the entire                                                               
$30 million."  He continued:                                                                                                    
     But let's  say that it's  half of  that -   $15 million                                                                    
     there - combined with a  discovery royalty; that means,                                                                    
     as Mr.  Dodson said  [during that  day's hearing  on HB
     307], that  the cash flow to  the state might be  ... a                                                                    
     few  million dollars  ... per  year.   So it  takes the                                                                    
     state  a  long  time  to  get  to  [a]  revenue-neutral                                                                    
     Additionally,  we  would   not  anticipate  that  these                                                                    
     leases - I'm  talking with the Department  of Revenue -                                                                    
     would  pay any  severance taxes,  based on  current ELF                                                                    
     [economic  limit factor].    So if  they  paid any,  it                                                                    
     would be only a few percent.   ... If it's gas, if it's                                                                    
     oil, ... the  rate would vary.  But  primarily the only                                                                    
     direct  revenue stream  from the  state would  be local                                                                    
     taxes,  income taxes,  and then  the 5-percent  royalty                                                                    
     share.   So ... the  chicken doesn't have much  meat on                                                                    
     it left, if you combine all the programs together....                                                                      
     I think  that's a  fundamental issue  the state  has to                                                                    
     grapple with:  ... I  don't believe a discovery royalty                                                                    
     credit can be  more justified in this  basin than, say,                                                                    
     Copper River, Susitna, or,  potentially, even the North                                                                    
     Slope  foothills,   where  the  same   arguments  about                                                                    
     economic incentives,  need to  explore, could  be used.                                                                    
     ... And  you're looking  at it,  potentially, involving                                                                    
     multiple discoveries.   It's per pool.  So  if each one                                                                    
     of  those, the  different  wells, [is]  in a  different                                                                    
     pool, the  discovery royalty would  be given  on those.                                                                    
     So when  you add it up  cumulatively, discovery royalty                                                                    
     can  be very  expensive -  in the  tens to  hundreds of                                                                    
     millions of dollars over time.                                                                                             
Number 2067                                                                                                                     
MR.  MYERS  emphasized  that  this  is a  big-ticket  item.    He                                                               
suggested  the question  is whether  it is  what the  legislature                                                               
wants to do, given the  current fiscal situation.  Conversely, is                                                               
it a good incentive?   Noting that discovery royalty has existed,                                                               
in  one form  or  another, since  pre-statehood  days, Mr.  Myers                                                               
said, "It  was initially repealed.   Again, the new  program came                                                               
in, in  Cook Inlet.   So  there's a  lot of  history on  what the                                                               
program has and  hasn't done that I'd be happy  to share with the                                                               
committee, if and when you're ready."                                                                                           
CHAIR OGAN  asked whether  anyone in Cook  Inlet has  applied for                                                               
MR. MYERS answered that Redoubt  Shoals had qualified.  He added,                                                               
"There was  a reduction royalty  for six  identified nonproducing                                                               
pools.   We estimate  the Redoubt  Shoals discovery  royalty will                                                               
cost the state about $29 million in lost royalty."                                                                              
Number 2019                                                                                                                     
CHAIR OGAN  said he'd carried,  on the House floor,  the previous                                                               
legislation that passed;  the idea was that  because of declining                                                               
productivity in Cook Inlet, the time  was right for giving such a                                                               
break to encourage new development  there.  He asked whether this                                                               
has ever  been done for a  basin where there is  only speculative                                                               
development and no history of production.                                                                                       
MR. MYERS answered that the program  existed in Cook Inlet and on                                                               
the  North  Slope  before  they had  production.    The  original                                                               
program for discovery royalty [incentives],  very similar to this                                                               
program, was repealed in 1969.   However, many existing leases on                                                               
the North Slope within units  are pre-1969 and have retained that                                                               
right.    For  example,  the   state  gave  a  discovery  royalty                                                               
[incentive] at Alpine and now  is in litigation with Phillips and                                                               
BP over  a discovery  royalty on a  37-year-old lease  within the                                                               
Prudhoe Bay  structure.   He cautioned  about creating  a program                                                               
like this, because it has a  huge legacy.  He emphasized that the                                                               
[legal] case in  Prudhoe Bay, if the state  doesn't prevail, will                                                               
cost about  $20 million  in lost royalty,  although it  is within                                                               
the confines  of the  largest oil  field in  North America,  on a                                                               
lease that  is "where the discovery  was not made until  it was -                                                               
quote, unquote - 30 years old."                                                                                                 
Number 1912                                                                                                                     
MR.  MYERS told  members  he  doesn't believe  this  has been  an                                                               
effective  incentive.   History  illustrates  how  the state  has                                                               
given  away millions  of dollars.   Nor  does he  believe it  has                                                               
accelerated exploration or production, he  said.  The program has                                                               
involved intense  litigation over the years.   It also is  a very                                                               
hard program to define in  terms of whether something is entitled                                                               
to  a discovery  royalty.   Furthermore, it  simply isn't  a high                                                               
enough incentive  to really  change behavior,  which he  said has                                                               
been learned from long experience.  Mr. Myers elaborated:                                                                       
     The  problem  is,  if  you   look  at  commodity  price                                                                    
     variation,   you  look   [at]  exploration,   ...  that                                                                    
     explorer  has  to  risk  lots   of  factors  ...  on  a                                                                    
     "nonsuccess" leg,  and then  put that  calculation into                                                                    
     its model. ... And then,  if they're successful, one of                                                                    
     the big issues is, what's going  to be the price of oil                                                                    
     or gas?   You're [skimming]  about 7.5 percent  off the                                                                    
     total royalty  stream of  the total  production; that's                                                                    
     equivalent to  about a change  in about one  dollar per                                                                    
     barrel  for  oil, for  example.    So  if you  look  at                                                                    
     commodity price  variation, that  explorer has  to take                                                                    
     in  account that  that  price of  oil's  going to  vary                                                                    
     multiple dollars  in a  year; that  uncertainty greatly                                                                    
     overcomes  any  value  they   would  get  in  discovery                                                                    
     That said, it's still millions  of dollars.  But if you                                                                    
     look  at a  development  project, development  projects                                                                    
     cost tens  or hundreds  of millions  of dollars  to do.                                                                    
     So, again, that few million  dollars a year has not, at                                                                    
     least  historically,   driven  exploration.   ...  And,                                                                    
     again,  the   evidence  is  there   in  terms   of  the                                                                    
     activities; the  evidence is there that  we're granting                                                                    
     these on ... almost 40-year-old leases, in cases.                                                                          
     So,  again,  I guess  I  have  to  stress that  we  are                                                                    
     opposed to  this program not  because we don't  like to                                                                    
     see enhanced  oil-and-gas exploration  and development,                                                                    
     but we  just think this  is not an effective  tool, and                                                                    
     it's historically  been proven  not to be  an effective                                                                    
Number 1790                                                                                                                     
MR. MYERS  pointed out  that the state  has other  incentives and                                                               
programs, primarily  in the  royalty-reduction statutes,  that he                                                               
believes  are  much  more  effective in  dealing  with  the  risk                                                               
element.  He  emphasized that discovery royalty  is given whether                                                               
the discovery  needs it or  not, based  on evidence of  the first                                                               
discovery.   On the  other hand,  royalty reduction  is tailored:                                                               
if the  project is uneconomic,  the state can lower  its royalty.                                                               
He  concluded, "So  we have  the ability,  I think,  to stimulate                                                               
that  development  and to  deal  with  issues  of ...  a  project                                                               
becoming  uneconomic.   And  ...  we can  do  it  with much  more                                                               
precision,  with much  more proof,  and with  much more  positive                                                               
impact to the state treasury."                                                                                                  
Number 1753                                                                                                                     
CHAIR OGAN asked, "What part of the bill do you like?"                                                                          
MR. MYERS  answered that because  of the long,  troubled history,                                                               
the "dollars  given," and the  inability, to his belief,  to show                                                               
that it has actually accelerated  exploration and development, he                                                               
personally doesn't like discovery royalty at all.                                                                               
CHAIR OGAN again  indicated that his own  previous involvement in                                                               
legislation affecting  Cook Inlet  was to  try to  help primarily                                                               
with  oil development,  since [production]  was declining  there;                                                               
the policy  call was that  those fields required  some incentive.                                                               
He said  there is a  fair amount  of competition in  [Cook Inlet]                                                               
now,  and suggested  some people  might disagree  with Mr.  Myers                                                               
about  whether  the incentives  had  anything  to do  with  that.                                                               
Regarding  the  Tanana River  drainage  basin,  he asked  whether                                                               
there is  competition or  if [Andex  Resources] has  "applied for                                                               
all the good stuff."                                                                                                            
MR.  MYERS  replied that  the  application  basically covers  the                                                               
entire  sedimentary  basin,  but   not  the  shallow-gas  leasing                                                               
potential for  coal in the  "shallow horizon."  Referring  to the                                                               
intent, he said:                                                                                                                
     I  think  exploration  licensing  is  a  powerful  tool                                                                    
     because  it   lets  one  company   tie  up   an  entire                                                                    
     sedimentary  basin, and  that's  ... a  huge thing,  if                                                                    
     they can  leverage it.   The uniqueness of  this basin,                                                                    
     the  positive   thing,  is  it's  not   very  far  from                                                                    
     Fairbanks; there's  already a  local market.   Should a                                                                    
     gas line be created from  the [North] Slope, there is a                                                                    
     very,  very  large  ability   -  there's  a  potential,                                                                    
     assuming we have the right  access language - that that                                                                    
     gas  could  be  put  into  that  longer  transportation                                                                    
     system.  So  it has both the elements of  being able to                                                                    
     serve  a small,  very lucrative  market and  the upside                                                                    
     potential to serve a much larger ... market.                                                                               
Number 1630                                                                                                                     
MR. MYERS mentioned  the "really positive, good  geology" as well                                                               
as  exploration  risk.   He  pointed  out,  however, that  if  an                                                               
exclusive right  is given,  companies historically  minimize risk                                                               
by farming out  [to other companies] or  bringing other companies                                                               
in at a higher rate.  He remarked:                                                                                              
     In an exploration license,  it's the perfect situation,                                                                    
     where a company  can say, "Look at  the good [prospect]                                                                    
     here; why don't you come in  and share my costs or take                                                                    
     a  higher percentage  of the  cost, and  I'll give  you                                                                    
     some of the capital in  return."  Licenses are designed                                                                    
     so that  it would be  very easy to  do that.   Also, it                                                                    
     allows ... that person  exclusive rights to explore, so                                                                    
     when  they  convert  to  leases,  they  can  bull's-eye                                                                    
     exactly what they want, ... with a full data set.                                                                          
MR.  MYERS warned  that the  state  would get  very little  money                                                               
upfront, only  the dollar-per-acre  initial application fee.   He                                                               
told members, "The competitive nature  of the license is strictly                                                               
the work  commitment, which the  [company] needs to do  anyway to                                                               
assess the basin.   So the money goes into  the ground under this                                                               
program, not in  the state coffers.  The anticipation  is, in the                                                               
future, the  state's going to recover  that ... in royalty."   He                                                               
     Now, if  you take that  away by ... spending  the money                                                                    
     on incentives upfront, whether that  [would] be EICs or                                                                    
     discovery royalty,  ... you're  taking away  almost all                                                                    
     the value  of those discoveries to  the state treasury,                                                                    
     or very ...  near.  So you end up  ... creating an oil-                                                                    
     and-gas  situation where  your prime  value is  getting                                                                    
     that  commodity to  the market,  and  it's serving  ...                                                                    
     that market, not serving the state treasury.                                                                               
MR. MYERS  cautioned members that  this is a very  serious policy                                                               
call that the legislature has to make.                                                                                          
Number 1527                                                                                                                     
CHAIR  OGAN  asked about  "other  modalities"  if someone  had  a                                                               
marginally  economic  field,  for  example;  he  referred  to  an                                                               
unspecified bill several years  ago that Representatives Rokeberg                                                               
and Green had "pushed through."  He said:                                                                                       
     So  they  could  apply  to  the  state  for  a  royalty                                                                    
     reduction if  ... they laid  out the numbers  and said,                                                                    
     "Look, we've  got a project;  here's what we  think our                                                                    
     find  is; here's  what our  economic  models are;  this                                                                    
     doesn't  pencil  out  for  us  if  we  don't  get  this                                                                    
     reduction."   They  have the  ability to  apply to  the                                                                    
     state for that; is that correct?                                                                                           
MR. MYERS answered:                                                                                                             
     Absolutely, Mr.  Chairman.   Under AS  38.105.180(j) we                                                                    
     have what's  called royalty reduction, where  the state                                                                    
     looks  at   ...  the  economics  of   the  project  and                                                                    
     determines whether  it needs  to reduce  the royalties.                                                                    
     Now, it puts  a fairly high burden of proof  ... on the                                                                    
     lessee to demonstrate that.   But, again, we think that                                                                    
     it's  ...   very  appropriate;   we  think   it's  good                                                                    
     legislation; it's very appropriate  that the state have                                                                    
     that flexibility.   But  it also  targets it  ... where                                                                    
     it's really needed.                                                                                                        
     The problem  with other incentives that  are upfront is                                                                    
     you don't really know if  that incentive is needed. ...                                                                    
     But, again, the companies would  be very foolish not to                                                                    
     take  advantage of  incentives  that  exist out  there;                                                                    
     they're in the business to make money.                                                                                     
     So ... ideally you structure  a reduction so you have a                                                                    
     win-win  situation:    the  state  gets  production  it                                                                    
     wouldn't  otherwise get,  even though  it's willing  to                                                                    
     forego  some  of  its  royalty  share,  but  ...  under                                                                    
     royalty  reduction,  you  can effectively  manage  that                                                                    
     process,  look  at  the economic  data,  and  make  the                                                                    
     conclusion very accurately and  with precision, to that                                                                    
     particular  development, rather  than on  a very  broad                                                                    
     basis, as the other incentives are.                                                                                        
Number 1413                                                                                                                     
REPRESENTATIVE FATE asked:                                                                                                      
     How  do  you compare  the  new  discovery incentive  in                                                                    
     other areas  of the state, including  Cook Inlet, where                                                                    
     ...   they're  aggressively   looking   for  new   gas,                                                                    
     including the North Slope  and everywhere else, really,                                                                    
     because of the popularity of  gas?  Does that discovery                                                                    
     incentive  cost the  state "x"  number of  dollars, and                                                                    
     then can you  compare that loss to the  state to what's                                                                    
     perceived  as a  small potential  in the  Nenana basin?                                                                    
     ... How  are those losses  comparable if, in  fact, ...                                                                    
     at  this time  in exploration  that incentive  is still                                                                    
     utilized on the North Slope and in the Cook Inlet?                                                                         
MR.  MYERS replied  that each  discovery  royalty [incentive]  is                                                               
customized in the  sense that it refers to an  individual pool or                                                               
"additional accumulation."   It depends on the  economics of that                                                               
additional accumulation,  if it is  found.  Basically,  it lowers                                                               
the state's royalty  share from 12.5 percent to 5  percent; it is                                                               
a  reduction of  7.5 percent  of the  oil and  gas produced  that                                                               
would normally go to the state.   The effect is a direct decrease                                                               
in  the royalty  cash  flow  to the  general  fund  of the  state                                                               
treasury.    The  amount  [of  decrease] depends  on  how  it  is                                                               
calculated.  He offered an example:                                                                                             
     If you  look at  the Fairbanks  market, and  similar to                                                                    
     Mr. Dodson's  statement [during  that day's  hearing on                                                                    
     HB  307], he  said  the state  would  receive about  $2                                                                    
     million  a year;  it would  then not  receive about  $3                                                                    
     million a year out of that.   So that would be ... sort                                                                    
     of the  relative effect  of that, ...  and it  would be                                                                    
     for a ten-year  period from the date of  discovery.  If                                                                    
     it took you  three years to bring it  online, say, that                                                                    
     discovery royalty  would only  run for seven  years; so                                                                    
     in that example,  it'd be about $21 million.   It's not                                                                    
     quite ... 3-to-2,  but it's 7.5 percent,  and the state                                                                    
     gets 5  percent.  So  basically, under the  analysis by                                                                    
     Mr. Dodson, it would be about $2 million.                                                                                  
MR. MYERS told  members it depends on the wellhead  value and the                                                               
final  delivered-commodity price.   He  also indicated  agreement                                                               
regarding the size of market  Mr. Dodson had mentioned initially.                                                               
He offered  that the upside is  that it wouldn't be  just a local                                                               
market,  but  would  be  a  long-term market  with  a  gas  line,                                                               
assuming  proper access  language  is written  into the  pipeline                                                               
[agreements].   He said the  number could go up  significantly if                                                               
there were multiple discoveries in  the basin and a higher demand                                                               
for gas than just the local market.                                                                                             
Number 1192                                                                                                                     
REPRESENTATIVE FATE  indicated part of his  previous question had                                                               
related to  comparing what  Mr. Myers had  just explained  to the                                                               
loss that could  be incurred both in Cook Inlet  and on the North                                                               
Slope, provided  that new discoveries  take place  there, because                                                               
of the  current intense  exploration.   He said  it isn't  just a                                                               
loss in one small  basin, but is a potential loss  in the rest of                                                               
the state.  He asked whether that is correct.                                                                                   
MR. MYERS answered affirmatively, adding:                                                                                       
     We  can quantify,  sort  of, what  we  know right  now.                                                                    
     Redoubt  [Shoals], we  estimate  about  $29 million  of                                                                    
     loss in revenue. ... If  Phillips is successful, one of                                                                    
     the other main  fields is Zariski (ph)  Point, which is                                                                    
     where  they're drilling  now;  so if  they  were to  be                                                                    
     successful, that  would be ...  similar dollars.   Some                                                                    
     of these are  gas fields, and they would  have a lesser                                                                    
     impact,  probably  around   ...  the  $5-million-effect                                                                    
     range.  So, cumulatively, add that up.                                                                                     
Number 1121                                                                                                                     
MR. MYERS  specified that on  the North Slope, new  leases aren't                                                               
issued  with the  discovery  royalty provision.    It would  only                                                               
apply to  leases within existing  units that are  pre-1969; those                                                               
are still  "popping up,"  like the one  he'd mentioned  at Alpine                                                               
that  is in  litigation.    He  mentioned other  examples, noting                                                               
that  the  cumulative [monetary]  effect  on  these large  fields                                                               
isn't much different, because it  just applies to production from                                                               
that one  lease.  However, what  might vary is the  netback value                                                               
of  oil.   For  example, if  oil were  discovered  in the  Nenana                                                               
basin, there would be a netback  of perhaps $12 to $17, depending                                                               
on the  price of oil.   He emphasized that there  would be larger                                                               
numbers for  oil than for  gas.  He added,  "In a new  basin, you                                                               
just can't  predict how  many discoveries, and  you hope  for the                                                               
MR. MYERS answered Representative  Fate's question by reiterating                                                               
that  discovery  royalty is  a  very  expensive program  for  the                                                               
state,  and that  "we just  don't  think it's  delivered ...  its                                                               
promise of accelerating exploration  and development."  Regarding                                                               
the argument that  it has spurred exploration,  he countered that                                                               
the level of  the incentive [relative to] the  cost of developing                                                               
a field  is almost miniscule  compared to the variation  [of the]                                                               
commodity price, and  that the $2 or $3 million  dollars a year a                                                               
company gets from a discovery  royalty isn't enough to change its                                                               
development  behavior  "on most  fields  that  we've seen."    He                                                               
added, "We can  go back historically, from '59 on,  and make that                                                               
case very strongly."                                                                                                            
Number 0981                                                                                                                     
REPRESENTATIVE FATE asked whether  Mr. Myers nonetheless believes                                                               
the  discovery incentive  would  encourage going  into basins  in                                                               
Interior  Alaska that  are  even more  isolated  than the  Nenana                                                               
MR.  MYERS answered  that he  believes the  exploration licensing                                                               
program is the tool doing that.   For example, currently there is                                                               
a  license in  Copper River;  there are  two applications  in the                                                               
Susitna basin  and one  in the  Nenana area;  and Mr.  Dodson and                                                               
others have expressed  interest in the Yukon  Flats area, another                                                               
basin  that is  both oil-  and  gas-prospective.   All those  are                                                               
along the route of a proposed gas line, he noted.                                                                               
MR. MYERS  told members that  economic opportunity overall  - and                                                               
not incentives - is what  drives exploration for large commercial                                                               
developments; that  includes the  ability to  commercialize those                                                               
exploration opportunities, whether to a  local market the size of                                                               
Fairbanks or to put into a  larger pipeline for distribution.  By                                                               
contrast, he  noted that the  problems with dealing with  a small                                                               
village and  its energy needs,  and drilling dedicated  wells, is                                                               
much more  problematic because  the economics  simply are  not as                                                               
good;  he suggested  perhaps targeting  some  of the  shallow-gas                                                               
legislation or incentives there.  He continued:                                                                                 
     With that said, I think  [the] exploration license is a                                                                    
     very,  very powerful  incentive,  because  ... I  don't                                                                    
     know very many  places in the world where  you can lock                                                                    
     up a very prospective basin  near a market for $500,000                                                                    
     and then have  the ability to selectively  convert to a                                                                    
     lease at  12.5 percent  and pay virtually  no severance                                                                    
     tax.  ... Those are  all very, very positive things for                                                                    
     development.    Again, I'm  not  saying  ... that  they                                                                    
     aren't  appropriate in  this  case;  I believe  they're                                                                    
     appropriate  and,   again,  I  think   the  exploration                                                                    
     license program is doing what it wants to.                                                                                 
Number 0815                                                                                                                     
MR.  MYERS   said  these  are   some  of  the   "better  looking"                                                               
sedimentary  basins.     Mentioning   two  licenses   in  Susitna                                                               
"covering  most of  that basin,"  a 500,000-acre  license already                                                               
issued in the  Copper River basin, and "a license  expected to be                                                               
issued here in October,"  he  said, "If Yukon Flats is covered, a                                                               
lot of the  prospective sedimentary basins will  be already under                                                               
license."   He reiterated that  the program  is doing what  it is                                                               
supposed to  do.   He mentioned rising  gas commodity  prices and                                                               
renewed interest.                                                                                                               
MR. MYERS  offered his belief  that it  is his division's  job to                                                               
heavily promote exploration and  competition, where possible.  He                                                               
said,  "I  believe  we  can  sell  these  licenses,  we  can  see                                                               
actuation activity  and development.   Part of it's  just getting                                                               
the word out, and part of it  is just the change in economics and                                                               
the  potential for  long-term ...  gas sales  from Alaska  to the                                                               
Lower   48."     Mentioning  earlier,   unsuccessful  rounds   of                                                               
exploration in these  basins, he said that [lack  of success] was                                                               
largely due  to looking for oil.   With gas, however,  there is a                                                               
whole  new  emphasis  for  exploration.   He  added  that  it  is                                                               
positive and  that he  certainly doesn't want  to take  away from                                                               
the  efforts of  Andex Resources  to explore  in the  basin.   He                                                               
concluded, "But  we have  to recognize that,  I believe,  we have                                                               
better economics  than we  did in the  past and  that exploration                                                               
licensing  already   provides  that   tool  to   accelerate  that                                                               
exploration in the basin."                                                                                                      
Number 0697                                                                                                                     
MR. MYERS,  in response to  a question from Chair  Ogan regarding                                                               
acreage  for  gas  versus  oil,  reported  that  currently  under                                                               
license or proposed  for licensing is over 2  million [acres] for                                                               
exploration  licenses.    There is  approximately  an  additional                                                               
million acres  for shallow-gas leasing.   He agreed it is  a huge                                                               
quantity,  and suggested  Jim  Hansen, who  was  there with  him,                                                               
could  look up  the number  of acres  under conventional  leasing                                                               
[for gas].   He added, "It's more than that,  but they're getting                                                               
to be pretty similar."                                                                                                          
CHAIR OGAN  referred to  a recent  overview and  recalled hearing                                                               
that there  was almost as  much shallow-gas activity as  there is                                                               
total licensing for oil.                                                                                                        
MR. MYERS answered:                                                                                                             
     Mr. Chairman, we leased last  year 1.6 million acres on                                                                    
     the conventional  program, so  we have about  a million                                                                    
     ... with the coal bed.   ... So in the same timeframe -                                                                    
     and  you would  (indisc.) shallow-gas  leases, assuming                                                                    
     we grant  the licenses next  year - we will  issue more                                                                    
     acreage, undoubtedly, in these  programs than we ... do                                                                    
     in our conventional programs.                                                                                              
Number 0584                                                                                                                     
REPRESENTATIVE GUESS requested  confirmation of her understanding                                                               
that  Mr.  Myers  was  testifying  that,  in  general,  discovery                                                               
royalty is not  the best policy, that it doesn't  matter where it                                                               
is, and that other existing tools do a better job.                                                                              
MR. MYERS said Representative Guess  had heard exactly right.  He                                                               
commended her for her summary.                                                                                                  
Number 0508                                                                                                                     
JAMES  B.  DODSON,  Executive  Vice-President,  Andex  Resources,                                                               
L.L.C., came  forward to testify on  HB 308.  He  told members he                                                               
thinks  discovery  royalties  absolutely   are  an  incentive  to                                                               
exploration.    He mentioned  discovery royalties applied  in the                                                               
early days of Cook Inlet and the North Slope.  He continued:                                                                    
     I  agree with  director Myers  that one  of the  things                                                                    
     that you can't wring out  of your risk profile when you                                                                    
     run  your  economic  model  for   drilling  a  well  is                                                                    
     commodity  pricing, which  means  that everything  else                                                                    
     that you  can nail down  the risk on -  everything else                                                                    
     that you can reduce your risk  by - you should do.  And                                                                    
     reducing the  royalty certainly  would be  an incentive                                                                    
     for us to  go from shooting seismic  [data] to drilling                                                                    
     a well.  And I think  it's axiomatic that ... if adding                                                                    
     7.5  percent to  the royalty  -  say, taking  it to  20                                                                    
     percent - would be a  disincentive to drilling, I think                                                                    
     it's  similarly axiomatic  that reducing  the royalties                                                                    
     by  7.5  percent  is  an  incentive  to  drilling.    I                                                                    
     absolutely think that's true.                                                                                              
MR. DODSON highlighted  another important issue.   Cook Inlet was                                                               
granted a  5-percent royalty in  order to try to  increase supply                                                               
to  the Anchorage  area, whose  people pay  much less  for energy                                                               
than  the  people of  Fairbanks  do.    He asked,  "Why  wouldn't                                                               
Fairbanks  be  given  equal  dignity   with  Anchorage,  and  why                                                               
wouldn't the  Nenana basin be  given equal dignity with  the Cook                                                               
Inlet?"  He  suggested that policy decision  for Anchorage should                                                               
apply equally here with regard to Fairbanks.                                                                                    
Number 0328                                                                                                                     
MR.  DODSON,  regarding  the  cumulative  effect  of  exploration                                                               
incentive credits  (EICs) and a  royalty reduction,  told members                                                               
the  EICs remain  discretionary with  the commissioner  [of DNR],                                                               
depending upon  how much the commissioner  thinks the information                                                               
gained is  of value  to the  state.   There could  be no  EIC, he                                                               
indicated.   He added, "What  we asked  for under House  Bill 307                                                               
was simply a longer period in  which to ask for those exploration                                                               
incentive  credits.    They  do   not  become  legally  mandated.                                                               
They're simply an  extension of the time ... during  which we can                                                               
ask for them."                                                                                                                  
MR. DODSON noted that people in  Fairbanks pay more than twice as                                                               
much for  home heating  and energy than  people in  the Anchorage                                                               
area.   He emphasized that although  there is a need  to increase                                                               
the energy supply  and decrease the cost  in Fairbanks, Anchorage                                                               
is the one with this advantage.                                                                                                 
Number 0197                                                                                                                     
MR. DODSON offered a typical rule  of thumb that 50 to 67 percent                                                               
of  the  price  at  the  "burner tip"  doesn't  show  up  at  the                                                               
wellhead; if  gas sells to a  homeowner for $3.60, then  $1.20 to                                                               
$1.80 shows  up at the  wellhead.   Therefore, even if  gas sells                                                               
for $6  at the  burner tip,  he believes  it still  translates to                                                               
about $2  for natural gas  at the wellhead.   He said  he doesn't                                                               
know that there  is an enormous amount of  additional value "that                                                               
we might  realize for gas  sold into  the Fairbanks market."   At                                                               
the end  of the day, it  must compete with heating  oil, and must                                                               
be cheaper.  He told members:                                                                                                   
     The  royalty   reduction  we're  asking  for   is  just                                                                    
     equivalent to  that granted under the  1996 statutes in                                                                    
     Cook Inlet.   We're not  trying to create  something in                                                                    
     the lease  that ... created these  problems from leases                                                                    
     30 or 40 years ago.   This is just the same application                                                                    
     as  there  would  be  in  the  Cook  Inlet,  trying  to                                                                    
     increase local  supply, in this case,  for the Interior                                                                    
     as opposed to Anchorage.                                                                                                   
     Additionally,  Director  Myers  indicated  we  probably                                                                    
     would not  be paying severance  tax on wells  out here.                                                                    
     And as I  read the severance tax  [regulations] and the                                                                    
     economic limit  factor under those, that  would be true                                                                    
     if our  wells were each  producing ... under  3 million                                                                    
     cubic feet  of natural  gas per day;  ... if  that were                                                                    
     the case and  we were trying to serve 60  million a day                                                                    
     to  Fairbanks, we  would need  to drill  some 20  wells                                                                    
     plus  probably 8  or  so  in reserve.  ...  Even if  we                                                                    
     drilled  that  many,  we  might get  them  down  to  $5                                                                    
     million apiece because  of the volume.   That's a $140-                                                                    
     million investment to try to serve Fairbanks.                                                                              
     The  flip  side of  that  is,  if  the wells  are  more                                                                    
     productive - if they're moving,  say, 8 million a day -                                                                    
     they would be  paying severance tax ... to  the tune of                                                                    
     about 5 percent ... of the gas produced.                                                                                   
TAPE 02-5, SIDE A                                                                                                               
Number 0001                                                                                                                     
MR. DODSON  said there a  lot of wells  out there with  3 million                                                               
cubic feet  a day or  less of deliverability  per well.   He told                                                               
members,  "We  think  that  the  incentive  is  justified."    He                                                               
reiterated  that  it  grants "equal  dignity"  to  Fairbanks  and                                                               
Anchorage  to try  to  increase energy  supply  and decrease  the                                                               
cost, and  to the two  basins that  would supply the  two biggest                                                               
cities in Alaska.                                                                                                               
Number 0065                                                                                                                     
CHAIR  OGAN again  recalled that  the policy  call when  the Cook                                                               
Inlet legislation passed  was that there was  a "maturing field";                                                               
he acknowledged the major royalty  differences for oil versus gas                                                               
because of the value.                                                                                                           
Number 0139                                                                                                                     
REPRESENTATIVE  GUESS  asked  Mr.  Dobson  what  [his  company's]                                                               
reason is for taking this  approach of "adding yourselves to this                                                               
statute, which  seems - at  least from the state's  perspective -                                                               
fundamentally flawed,  ... rather than working  under the section                                                               
that [Mr.  Myers] had discussed,  where ... the  commissioner may                                                               
provide  for an  increase  or decrease  or  otherwise modify  the                                                               
royalty  to   allow  production  that  would   not  otherwise  be                                                               
economically feasible."   She added,  "It seems, even  under that                                                               
case,  you might  get less  than 5  percent, and  maybe that's  a                                                               
better path  than something  in statute which  is a  set amount."                                                               
She again asked why this approach is being asked for.                                                                           
MR. DODSON replied:                                                                                                             
     I  think ...  it's  certainty and  avoiding  an ad  hoc                                                                    
     decision on  every well that  we want to go  and drill.                                                                    
     If  ...  we knew  with  certainty  that  if we  find  a                                                                    
     discovery and -  under the '96 statute  that applies in                                                                    
     the Cook Inlet  - could certify to the  Division of Oil                                                                    
     &  Gas  and the  commissioner  of  [the Department  of]                                                                    
     Natural Resources  that this is a  new discovery, we're                                                                    
     certain  as to  what our  royalties are.   And  ... 7.5                                                                    
     percent of  the production  for the  first ten  years -                                                                    
     ... that's  another important point:   ... this  is not                                                                    
     forever; this is for the  first ten years of production                                                                    
     - makes  a difference  in terms of  whether or  not you                                                                    
     make the decision to drill a well.                                                                                         
     And if  ..., for example,  I'm ready to propose  a well                                                                    
     to my management, and I  put together an economic model                                                                    
     and  I agree  with the  director that  commodity prices                                                                    
     move around  and your drilling  costs can  escalate and                                                                    
     you may  be delayed in  getting your pipeline on  and a                                                                    
     lot of  variables are  in there  that can  move around,                                                                    
     the more that  I can make certain, the better  off I am                                                                    
     in getting a decision to go forward with a well.                                                                           
     And  if I  can say  with certainty  that if  we make  a                                                                    
     discovery, the royalties  will be 5 percent  - they are                                                                    
     not subject to an ad  hoc decision post-drilling - then                                                                    
     I'm in  a much  better position  to get  an affirmative                                                                    
     answer  on   going  ahead   and  risking   the  dollars                                                                    
     necessary to drill a well. ...                                                                                             
     Even with  the seismic  shot, this  is probably  a "20-                                                                    
     percent chance,  25-percent chance of success"  kind of                                                                    
     a  venture.   Most things  that you  try that  are this                                                                    
     risky, that are  this exploratory, don't work.   So the                                                                    
     more  you  can  do  to  improve  your  risk-to-economic                                                                    
     [ratio], the  better off you  are making a  decision to                                                                    
     go on a well.                                                                                                              
Number 0385                                                                                                                     
CHAIR  OGAN  thanked Mr.  Dodson  and  asked whether  there  were                                                               
further questions;  none were offered.   He asked  whether anyone                                                               
else  wished  to  testify;  there  was  no  response.    He  then                                                               
announced his intention to hold HB 308 over.                                                                                    
REPRESENTATIVE FATE  thanked Mr. Myers  and Mr. Dodson  for their                                                               
testimony,  which  he  said  had  been  most  educational  [even]                                                               
outside the parameters of HB 307 and HB 308.                                                                                    
CHAIR OGAN concurred  and again invited Mr. Dodson  to present an                                                               
overview  to  the  committee.     He  thanked  all  participants.                                                               
[HB 308 was held over.]                                                                                                         

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