Legislature(1993 - 1994)
02/28/1994 08:15 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 199 - Oil and Gas Exploration Licenses/Leases REPRESENTATIVE BUNDE made a motion to ADOPT CSHB 199(O&G). VICE CHAIRMAN HUDSON asked if there were any objections. Hearing none, the MOTION PASSED. Number 175 REPRESENTATIVE GREEN said since the Department of Natural Resources (DNR) representative had not dialed in yet, he would review HB 199. He told committee members that in their folder was a chart showing the revenues to the state from the petroleum industry. It shows, contrary to a belief which many people have, the lease bonus does not supply a very large portion of oil revenue. He pointed out that the state's wealth from the oil industry comes primarily from royalties received and the severance tax applied to all barrels. REPRESENTATIVE GREEN stated, referring to two maps contained in members' folders, that HB 199 does not apply to any land north of the Umiat Base Line or the developed portion of Cook Inlet. HB 199 does not impact conventional, competitive leasing which is conducted every year by DNR. He stressed HB 199 encourages companies remaining in the state and perhaps encourages other worldwide companies to return to the state or come to the state for the first time. He said these worldwide companies are familiar with concession type leasing which occurs in foreign countries and noted this country has nothing like that, but rather develops the oil industry in the U.S. based on private ownership. He stated in the U.S., an oil company goes to a private landowner and requests that a certain royalty be arranged if the landowner allows drilling. REPRESENTATIVE GREEN stated HB 199 allows competitive lease bidding which is currently ongoing and is similar to the conventional oil company operations within the U.S. He explained that HB 199 supplements competitive lease bidding with what is known as worldwide tract leasing or large concession leasing with a licensing from the state on large tracts of land. He noted the minimum amount of acreage to exercise HB 199 is 20,000 acres and the maximum is 500,000 acres. REPRESENTATIVE GREEN reminded committee members there are large amounts of acreage in the state which have not been developed, tapped, or even drilled upon. HB 199 will make that acreage available by allowing a company or a combination of companies to suggest to the commissioner of DNR that they would like to exercise their license agreement with the state for a particular area. He explained if the commissioner finds it would be in the best interest of the state to have activity looking for hydrocarbons to replace the state's dwindling reserves, he would then publicly announce that a competitive bid will take place for the license privilege within the area which has been designated. Representative Green said hopefully at that time, several individual companies or combinations of companies will submit sealed bids similar to the competitive lease sales which occur in Cook Inlet and the North Slope. REPRESENTATIVE GREEN added that when the commissioner agrees the activity should happen, he will assign some blanket conditions. Once those conditions are determined, they will be listed in the licensing bidding. Therefore, when companies bid, they are completely aware there are certain restrictions. He explained the licensing agreements then go on the block. The successful bidder will be chosen by a sealed bid arrangement, similar to the competitive lease selling. If the commissioner finds at that time the bids are not satisfactory, the sale is cancelled. If it is determined that there has been a satisfactory license bid, that bid is accepted. REPRESENTATIVE GREEN gave an example: Company A comes to the commissioner and expresses an interest in a tract; the lease sale is held and companies bid; company A bids $100 million and the bid is accepted. Company A is then committed to the state to spend $100 million over a ten year period to try and find hydrocarbons, with the restrictions imposed in the area which company A has received a designation on. Company A then has an exclusive ability to look for oil anywhere in this concession. He pointed out there are some restrictions. If company A has not committed and spent at least 25 percent of their bid by the fourth year, the commissioner relinquishes that license agreement. Number 298 VICE CHAIRMAN HUDSON asked if their bond would be forfeited. REPRESENTATIVE GREEN responded, yes the company would and added that is a yearly commitment. He stated HB 199 says company A has an up front requirement from a regulation saying they have to commit or lose their bond. Current leasing does not have that restriction. He continued that if a company gets a ten year lease on a competitive basis, it can wait nearly until the tenth year before it does anything. He said HB 199 forces a company to do something earlier which is to the state's benefit. He added that if a company completes 50 percent and has actually spent $50 million in ground truth before the fourth year, there will be no restriction of the land back to the state and the company is allowed to continue to develop. If a company commits more than 25, but less than 50 percent; for example, a company commits 40 percent on a very expensive well within the fourth year but then sits on their laurels and thinks about it, the company begins to lose part of its acreage by that time. The company loses 25 percent and ten percent every year thereafter, up to 75 percent total. He stressed the company has committed what is needed to hold but has lost 75 percent of the land designated since it has not committed to doing the work agreed to. REPRESENTATIVE GREEN explained further that even though there is a bond requirement or an environmental safeguard for any petroleum activity within the state, a company either has to show that it is capable or buy an actual performance bond saying that if its drilling messes up the countryside, that company can be taken to task or their bond will be taken. That is a completely separate bond than the bond which is issued in relation to HB 199. The bond for HB 199 is a commitment to the state that a company will do some work and if it does not, it will sacrifice dollars to the state. REPRESENTATIVE GREEN gave an example: Company A has committed $100 million. HB 199 says that you take that amount of commitment and subtract the amount of work which the commissioner has approved as adequate, and then divide by the number of years remaining on the license agreement. He pointed out the first year it would be $100 million minus zero, divided by ten. A company would need to post a $10 million bond that if the company does not do anything in that year, the state gets $10 million. The second year, the company does 55 percent or $55 million - $100 million minus $55 million, leaving $45 million yet to be divided by nine, meaning the company needs to commit to a $5 million bond. It works that way progressively down until the company has spent $100 million. He stated at that point there is no more bonding to the state, but there would still be environmental bonding needed through the Department of Environmental Conservation (DEC). REPRESENTATIVE GREEN continued with the example. Company A finds an oil field in its 500,000 acres. The company then goes to the commissioner and states that the remaining land seems to be a goat pasture and desires to convert the area around the indicated oil field to a lease. He stressed there is a provision in HB 199 to accomplish that. At that time, the company goes on the same leasing program which it would have done if it had gone through competitive leasing. The lease area which the company commits to, will draw $3 an acre rental until it can actually develop an economic stream of oil from there. He added that it is up to the company to develop a way to get that oil to market. REPRESENTATIVE GREEN stated HB 199 is designed to get activity in other parts of the state, probably remote parts of the state, meaning there is no existing method of getting there. The company will possibly incur pipelines, barges, etc. The company needs to consider in their bid that once oil is found, the company has to get the oil to market. HB 199 does not circumvent any biological, environmental or economic problems which will incur after a company finds oil. Number 378 KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DNR, testified via teleconference, and explained that HB 199 dates back to the second session of the seventeenth legislature. The commissioner of DNR at that time was challenged by the legislature to determine a way to allow Alaska to remain competitive with the international oil market. The commissioner came up with two ideas; one is before the committee today, and the second is exploration incentive credits which the committee will hear later in the week. He stated the exploration licensing bill was generated late in that session and (indiscernible) the concession provisions of about 100 countries, putting together a package suitable for Alaska. MR. BOYD said the exploration licensing bill was introduced late in the session, had very few hearings, and languished during the interim. He noted much work was done to the bill between sessions resulting in a bill that was heard last session in both the House and the Senate. He stated on the Senate side, the bill was heard several times and was heavily amended. It ended in the Senate as a result of different groups having various ideas as to what the bill should look like. He explained on the House side, the bill was heard several times in the Oil and Gas Committee, was not amended and sat until this session. MR. BOYD pointed out that DNR and the industry knew there was not a consensus on the bill. The one thing that gave them hope, however, was that everyone wanted the concept of exploration licensing. It was important and needed as an incentive for companies to get out into the remote areas of Alaska to explore. He pointed out that too many companies were leaving the state. He said over the interim, DNR met with approximately 20 companies of all sizes and took the bill apart, reviewed each piece and reached a consensus. Mr. Boyd stressed it is important that the committee consider that HB 199 as it is written, is the bill that had a consensus. Number 447 REPRESENTATIVE BUNDE asked Representative Green if the four years he used in his example is a firm four years or does that vary with the length of the lease. REPRESENTATIVE GREEN responded four years is included in the bill. REPRESENTATIVE JAMES said she is very supportive of any activity to be done in the state which enhances economic activity and encourages industry to take a part in the development of the state's resources. She asked when 550,000 acres has been licensed to an oil company to drill for oil and the company does the projected activity they committed to do, what is the possibility of them using that 550,000 acres for any other resource development, such as timber, mining, coal, etc. She also questioned if the exploration license is given and the oil company subsequently enters into a lease, how does that compete with development of other natural resources. Number 479 MR. BOYD replied all of the current provisions in regulation and statute apply to licensing. He said just as it is with the leasing program currently, the same is true for licensed lands; every other activity is allowed, and added that this includes the public access provision. REPRESENTATIVE DAVIES stated there seems to be three distinct land use decisions which get made if HB 199 was to pass. The first decision would be the commissioner making a preliminary written determination on state land, which is subject to the provisions of HB 199. There would be a blanket designation of a lot of land which may be entered into licenses. He said the second land use decision which might get made would be where a company applies for a license on a subset of the land which was designated. The third action would be to convert a portion of that licensed land to a lease. He asked if the provisions for licensing are exactly those which are in present law. REPRESENTATIVE GREEN replied the law says there will be restrictions put on a lease once it is converted, and added that those restrictions could be in a blanket form or could be site specific. MR. BOYD added that the lease is actually tied to the licensing. The lease received is already in place. He stressed all the provisions in place currently apply and gave an example. He said companies will have no surprises when they convert to a lease. They will know there are certain constrained areas within the licensed area which will need to be addressed. Number 558 REPRESENTATIVE DAVIES said taking a best interest finding as an example, does that process occur at the time the commissioner considers the issuance of the license or at the time he considers the issuance of the lease. MR. BOYD responded at the time of the license and stressed everything has to be completed prior to issuing the license. VICE CHAIRMAN HUDSON noted for the record that REPRESENTATIVE WILLIAMS joined the committee at 9:40 a.m. GEORGE FINDLING, MANAGER, GOVERNMENT AND PUBLIC RELATIONS, ARCO ALASKA, testified via teleconference, and expressed support of HB 199. He pointed out the strengths of HB 199, including the provision of a level playing field for potential competitors for licenses. First, the bonding formulation strikes an appropriate balance among the variety of interests, provides equal financial footing for bidders and solid protection for the state's interest. Second, leases are achieved only after the entire work commitment is completed which minimizes the chances for speculation. Third, the bonding and relinquishment provisions provide incentives to conduct work early and vigorously. Fourth, the bonding provision allows the licensee maximum flexibility to pursue a work program which makes sense. Fifth, the licensing supplements and also dovetails into the proven state licensing system, providing licensees with maximum certainty of the long-term rule. And finally, the winning bid in any competition is selected based upon objective standards of total dollar amounts by using sealed bids. He stressed that ARCO strongly supports HB 199. Number 646 ARDIE GRAY, PUBLIC SERVICE MANAGER, ALASKA OIL AND GAS ASSOCIATION (AOGA), testified via teleconference, and said AOGA believes that large oil and gas exploration licensing is an attractive addition to the state's leasing program, to accelerate exploration and financial development of Alaska's frontier areas. She stated AOGA supports a large block licensing program which does not apply to lands north of the Umiat Base Line; lands south of the Umiat Base Line which are within proposed competitive oil and gas lease sales 80, 87, and 88 prior to the initial sale; and in the vicinity of Cook Inlet that are within the area bounded by the north boundary of township 17 north Seward meridian, the Seward Meridian, the south boundary of township 7 south Seward meridian, and the west boundary range 19 west Seward meridian. MS. GRAY stated that AOGA supports a program in which a license is conditioned upon posting of an annual bond or other security in favor of the state and in which the annual bond or other security is calculated as the entire work commitment expressed in dollars less the cumulative expenditures as of the last day of the most recent project year, divided by the remaining years of the exploration license. She said AOGA supports a competitive program in which all licenses are awarded on the basis of written, sealed bids for total dollar work commitment. The commissioner should adopt regulations to evaluate competing proposals. MS. GRAY stressed that AOGA supports a program in which conversion from license to lease is under existing state leasing statutes AS 38.05.180 (j)-(m), (o)-(u), and (x)-(z), and upon conversion, such a lease is subject to the acreage chargeability of AS 38.05.140(c). She stated AOGA supports a program in which any relinquishment of the license area does not occur before the fourth anniversary of the license and each year thereafter is a percentage relinquishment of the remaining license area, not to exceed 50 percent of the original license area. As an incentive for early evaluation of a license area, AOGA believes no relinquishment should be required if the licensee has expended 50 percent of the approved work commitment by the fourth anniversary of the license. MS. GRAY stated the House Oil and Gas Committee Substitute for HB 199 is consistent with the AOGA position on exploration licensing legislation. AOGA supports HB 199. TAPE 94-22, SIDE A Number 000 BECKY GAY, EXECUTIVE DIRECTOR, RESOURCE DEVELOPMENT COUNCIL (RDC), testified via teleconference, and said RDC strongly supports HB 199 and believes it will augment the present oil and gas leasing program. She stressed that many hours of work have gone into building the exploration licensing from a concept into a workable program, which should help encourage exploration of Alaska's vast resource potential. Most people think of resources already in production or under development, but she felt exploration is the key to the future of resource development. Just as the state cannot afford to wait for megatons like Prudhoe Bay, to fill its coffers, neither can exploration companies afford to rest on their laurels of past successes in looking for new oil and gas lease areas. MS. GAY stressed exploration is the lifeblood of the industry and anything which will help encourage more exploratory work in Alaska, particularly on state lands, should be supported. This legislation will not supplant the ongoing lease program, but it should enhance it. Many compromises allowing small companies to pursue exploration licensing have been made, but noted in any event, exploration in Alaska is costly, very risky in regard to success, and even more difficult because of the huge areas off-limits, and the lack of infrastructure to support exploration activities. RDC urged the committee to move HB 199 on to the next committee. Number 036 WALT FURNACE, GENERAL MANAGER, ALASKA SUPPORT INDUSTRY ALLIANCE, testified via teleconference, and said the board of directors of the Alliance reviewed HB 199 and supports the intent of the legislation. The Alliance's position is that as Alaska's known oil and gas fields are depleted, there is a need to take aggressive steps to encourage companies to explore areas of the state which may not be of prime capacity. In reviewing the legislation, the Alliance noted that it does provide (indiscernible) vehicle. The Alliance also endorses the bonding mechanism contained in the bill and supports the concept that when companies explore, the financial responsibility must be in place. MR. FURNACE stressed the Alliance supports HB 199 because the oil and gas industry is the lifeblood of Alaska and urges the rapid passage of HB 199. Without its passage, Alaska will no longer be able to provide this source of revenue which is so crucial to the development of its resources. He reminded committee members that under the state's Constitution, legislators are charged with developing Alaska's resources to the maximum benefit of the state's citizens. Number 063 GREG GARRELS, FAIRBANKS, testified via teleconference, and stated he had not heard anyone mention the fact that what this bill amounts to is an option on a lease. He felt HB 199 gives the large, powerful corporations the ability to lock up an area equivalent to 50 percent of all private lands in Alaska with very little oversight. He wondered if anyone had considered the possibility that with large discoveries being made all over the world, and with oil companies, in general, moving many of their operations overseas, what the oil companies may be looking for is a cheap and efficient way to lock the door behind them on their way out. MR. GARRELS noted that he had heard the words level playing field mentioned and he felt there is only a level playing field if you are a multi-billion dollar corporation, not a small company located in Alaska. He stated the whole thing is going to be overseen by one ex-oil company employee. He asked if the provisions are going to be enforced through the same diligence which has resulted in $6 billion in back taxes. He felt HB 199 was written by a major oil company and that it is in the interest of the major oil companies, not in the interest of the state. Number 098 CLIFF BURGLIN, FAIRBANKS, testified via teleconference, and said British Petroleum (BP) is Alaska's major producing corporation. He stated in the last year, BP has had discoveries in Columbia and in the last two weeks, BP has announced findings of 500 million to one billion barrels of oil in the North Sea. He mentioned that BP produces about 600,000 barrels of Alaska oil a day and it appears they are headed elsewhere. He stated companies are already sitting on finds which will produce two billion barrels a day, close to infrastructures and he named the fields. He stressed the fields have been discovered, but not yet developed in addition to about two million acres that companies are also sitting on in leases, which have not been developed or are only partially developed. Mr. Burglin asked what makes the legislators think these companies are going to do anymore than they have already done if they get exploration licensing. He expressed opposition to passage of HB 199. REPRESENTATIVE GREEN said when the House Oil and Gas Committee reviewed HB 199, Mr. Burglin stated he had several questions to ask the committee and was requested to send the written questions to the committee. Representative Green noted he had not received them to date. MR. BURGLIN responded he had sent the questions and he would like to have his concerns addressed in writing. He added there is trouble brewing in the Mid-East and when it comes to fruition, Arabs do not care about oil fields and 15 billion barrels a day could come off the market just like it did in 1973 and 1974. Alaska will be the only place where the U.S. can pick up additional production easily like they did during the Gulf War. If the land in Alaska is allowed to be locked up by big oil companies, he hoped that people are prepared to freeze and wait in long gas lines. Number 183 REPRESENTATIVE MULDER made a motion to MOVE CSHB 199(O&G) with a zero fiscal note out of committee with INDIVIDUAL RECOMMENDATIONS. VICE CHAIRMAN HUDSON asked if there were any objections to the motion. Hearing none, the MOTION PASSED. ANNOUNCEMENTS VICE CHAIRMAN HUDSON announced the committee will meet on Wednesday, March 2 at 8:15 a.m. to hear HB 238. ADJOURNMENT There being no further business to come before the House Resources Committee, Vice Chairman Hudson adjourned the meeting at 10:17 a.m.
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