Legislature(1995 - 1996)
04/29/1996 08:18 AM House RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
CSSB 112(RES) - DISCOVERY ROYALTY CREDIT CO-CHAIRMAN GREEN said the committee would address HCSCSSB 112(RES), Version O, "An Act establishing a discovery royalty credit for the lessees of state land drilling exploratory wells and making the first discovery of oil or gas in an oil or gas pool in the Cook Inlet sedimentary basin." Co-Chairman Green said, "As you recall at our last meeting we had a request by at least one of the members, Representative Barnes, and I believe you also felt that we should actually have the wording that we had been talking about, and so you have before you Version O which has incorporated that wording and I would entertain a motion to accept Version O as our work draft. It has been moved that 9-LS0808\O, 4/27/96, be adopted as the work draft. Without objection, that is the bill before us." CO-CHAIRMAN GREEN said, "It has also been brought to my attention that we have a proposed amendment, Representative Davies." Number 114 REPRESENTATIVE JOHN DAVIES made a motion to adopt the amendment before the committee members. CO-CHAIRMAN GREEN objected for the purpose of discussion. REPRESENTATIVE DAVIES explained it removes the explicit definition of "paying quantities" on page 5, lines 7 through 13. He said there was a long discussion in subcommittee on whether or not this should be explicitly be defined. Representative Davies said his sense is this language is going to be pretty critical as to how much litigation there will be over this bill. He said it is his view that it would better for the division to spend a fair amount of time working with people of the industry and various legal people to make sure that this language is going to be the cleanest possible language. He said he believes the bill will work fine without including this specific definition. He said he thinks this is an instance where we will be further ahead if we allow the division to establish this definition in regulations. CO-CHAIRMAN GREEN said, "My objection would be that, as we found out in subcommittee that there are at least three definitions banding about out there for what `paying quantities' means. And that rather than leave that to chance or uncertainty by putting it in statute, there is no question what was meant when this bill was passed as opposed to relying on regulations which, from time to time as we have known in the past - regulations have a tendency to maybe move a little away from the full intent of the legislation. And for that reason, I would like to see -- and let the people who may be involved in this know precisely what is meant rather than to the possibility of a regulation that can be changed fairly easily, and for that reason I would oppose the amendment." Number 351 REPRESENTATIVE SCOTT OGAN said there is an expert in this field in attendance, Commissioner Condon. He said he knows this is highly irregular, but he would ask Representative Davies to withdraw his motion to take testimony on this issue. CO-CHAIRMAN GREEN asked Mr. Condon if he would like to testify on the amendment. WILSON CONDON, Commissioner, Department of Revenue, indicated he wasn't in attendance to testify in favor of this bill, but Representative Ogan asked him to be available to answer any questions about his past experience with respect to the discovery royalty disputes that have arisen. He said he would be happy to answer questions if the chair wishes. CO-CHAIRMAN GREEN asked Representative Davies to rescind his motion while testimony is taken or would he rather vote on it. REPRESENTATIVE DAVIES said he would be happy to withdraw his motion as long as he can reintroduce it. He then withdrew his motion. COMMISSIONER CONDON then came before the committee to answer questions. Number 462 REPRESENTATIVE OGAN said the reason he asked him to be in attendance is so that he could describe, for the record, at what capacity he has dealt with this issue with the state in the past as far as discovery royalty. COMMISSIONER CONDON explained, "I dealt with the issues relating to discovery royalty while I served as an assistant attorney general and the deputy attorney general for the state back in the late `70s and up until 1980. In that capacity, there was a dispute between Union Oil Company and Marathon Oil Company with respect to whether or not they were entitled to a discovery royalty for their discovery of the McCarther River Trading Bay filed. In my work with respect to that particular dispute, I undertook to compile a comprehensive history of how the discovery royalty provision came to be what it was, and both in terms of the statutory origins of it - the regulations that were adopted to implement it and then all the disputes that had arisen up to that point with respect to the discovery royalty and there were a number. The disputes that arose centered on what did you have to discover and the statute, lease and regs referenced a geologic structure that had not been previously certified as a producing geologic structure as well, you know, what did you actually have to find to constitute a discovery. Did you have to have, you know, how much did you have to find? And then finally when did you make the discovery so that the clock started running. And all three of those issues were subjects of dispute up to that time and subsequently with respect to a couple of discoveries that were made on the North Slope." Number 639 REPRESENTATIVE OGAN asked Commissioner Condon if he feels the language in the bill is adequate to cover those three issues. COMMISSIONER CONDON said, "I believe that the bill, as you have drafted it, deals with what do you have to find by switching to pool from geologic structure. The timing I believe is explicit enough so that you don't have the kind of dispute that might have arisen and did arise before, and similarly by referring it to poolize, you have -- it also takes care of the timing and what, you know, what kind of a discovery you have to make. I don't -- looking at it last night and again this morning, it seems to me and I may not have thought about this as carefully as I should, but I tried, that the definition of `paying quantities' if you leave it in I don't think it's gonna create a problem. If you take it out I still think you're gonna land on the same square because I think by having tied it to pool the way you have that you're not gonna be sponding(Sp.?) litigation one way or the other as the previous legislation did." Number 772 REPRESENTATIVE DAVIES said he would renew his motion to adopt Amendment 1. CO-CHAIRMAN GREEN said he would object. Number 785 REPRESENTATIVE ALAN AUSTERMAN asked Representative Davies why he would like to take this out. REPRESENTATIVE DAVIES stated that there was a long discussion in the subcommittee about whether these kinds of terms should be defined in the bill or if they should be left to regulation. He read from the paragraph above the one he is proposing to delete, "the commissioner shall adopt regulations setting out the standards, criteria and definitions of terms that apply to implement the filing of applications for the review and certification of, discovery oil and gas royalty certifications under this paragraph;". He said clearly with respect to most of the definitions, certainly the intent of the bill is that the commissioner, through the normal process, would set out the regulations. As the chairman has pointed out, there are at least four definitions of `paying quantities' in the existing regulations right now. They are all very similar, but the reason why they're slightly different is because they defend the definition of "paying quantities" depends on the precise context in which the term is to be used. Representative Davies said he doesn't believe that during the two hours of conversation in the subcommittee on this topic nor in the 15 minutes that we'll spend thinking about right now that the committee will spend the time requisite to understand those nuances as to what the best definition, the one that will be subject to the least amount of litigation, will be. He said he thinks that is a topic for experts, within his division, to go out and discuss it with members of the industry and other members that have had experience with these kinds of pretentious issues and to come back with a definition that will hopefully meet the goal of the minimum litigation. The chairman said, "Well, we'd it to chance," Representative Davies said he doesn't he is hoping that the opposite occurs. He said he doesn't want to leave this to chance. He stated he is concerned that if we just look down that list of definition and pick one having spent about a half an hour thinking about it, that they probably wouldn't pick the optimum one under those circumstances. Number 946 CO-CHAIRMAN GREEN stated his objection is that he thinks just the opposite. This doesn't leave it to chance. He said the committee heard the commissioner say that this answers the question. Anybody who is thinking about drilling knows what they have to have for paying quantities. If we have three or four paying quantity definitions out there and we leave it regulations, we may end up with a fifth definition. He said he doesn't think there is anything in the bill that doesn't address itself specifically to discovery royalty, and because of that, he would think that is as good as they could possibly get. He said by including this, it is cut and dry. Number 997 REPRESENTATIVE AUSTERMAN said if he understands the bill correctly, paying quantities is the whole crux of the bill when you get right down to it. CO-CHAIRMAN GREEN said, "Well, not exactly. There has to be a separate pool discovered, and so that's the main crux. You have to find it, as the commissioner said, you have find it, then you have to develop it and then does that well that you use for the discovery royalty - it has a time certain completion date of that well and that's, in essence, that used to be a squabble and we heard between two companies who had the first date. It is new, it's a separate pool not associated directly in communication with an existing pool and that what is required. It can't just be a grease stain. It has to actually produce more profit than it cost to operate it - not that you necessarily would be able to drill another well and make your money back. It just says, `If you're producing it at greater rate, then you would have expenditures so that a prudent operator would continue to produce the best paying quantities.' And to me, that's pretty cut and dried, straight forward, no questions, no litigation, no anything and that's what we want." Number 1063 REPRESENTATIVE OGAN said he supports Co-Chairman Green's position and would speak against the amendment. He said there was quite a bit of debate about the paying quantities. Representative Ogan pointed out that he has known Commissioner Condon for about ten years and he is probably one of the leading experts on legal issues regarding oil litigation in the state. He stated he is comfortable with the commissioner's analogy of it. He said, "I think that the idea of paying quantities is -- if we have discovery royalty and the first one in the pool can -- and without paying quantities description can say `watch out at first,' and then sit on it, and we want the oil in production. So I think it also motivates people to bring the oil in production to get the discovery royalty. So for that reason, I think it's good to keep it in." Number 1118 REPRESENTATIVE AUSTERMAN said, "As Representative Davies said, doesn't that mean leave it open for (indisc.) lease to get into a big squabble with the department as what really paying quantities is if it's not in there." CO-CHAIRMAN GREEN said he isn't second guessing the department that they would ultimately have something in regulation. The question is we don't know what that might be. Number 1153 REPRESENTATIVE AUSTERMAN referred to descriptions that currently are in regulation and asked if any of them are strictly pointed toward discovery. CO-CHAIRMAN GREEN said, "No, this one is the closest and this is actually is not my wording. This is right out of one of the regulations, it's for unitization, but it certainly applies here. There is another one that says that the paying quantities must be sufficient to drill and pay out another well to the same formation, and the problem is if you had a $5 million well and you have a 500 barrel producing well you wouldn't ever get your investment back. But if you had the well drilled anyway, and that's sunk cost, 500 barrels a day certainly exceeds operating costs in most areas. Now if it was somewhere in a remote area it wouldn't, but in an oil field it would be enough to pay for its operation." Number 1208 REPRESENTATIVE AUSTERMAN said if Representative Davies' amendment is adopted, is there anywhere in the bill where it specifies that the department will promulgate those regulations or identify the regulations immediately after this becomes effective. CO-CHAIRMAN GREEN said nothing says that they will define "paying quantities." Number 1226 REPRESENTATIVE DAVIES said he can't believe that. It says in the paragraph immediately proceeding this, which he read earlier, that the commissioner "shall." It doesn't say "may," it says he shall adopt regulations defining the terms. CO-CHAIRMAN GREEN pointed out that nowhere in the bill does it say that they will define "paying quantities." REPRESENTATIVE DAVIES said "paying quantities" is clearly a term that applies to the implement of filing for applications. In other words, it's a term and for the review and certification clearly that term must be defined. He said the debate isn't whether it should be defined or not. The question is, "Who should define it and when?" Representative Davies said he would also point out that there is another term that's not defined in the bill and that is "pool." That is an extremely complicated issue. He said he thinks the Senate committee chose not to define that. We chose in our subcommittee not to define it for very good reasons. We don't have the expertise to sit around and figure out exactly how to define it. He said the definition of "pool" will need to be in the regulations too before this whole thing moves forward. Representative Davies said he would submit that is a far more complicated issue than the question of paying terms. He explained it seems to him the underlying assumption is that somehow this is not going to be included in the bill or that it will be left to chance. He said he is suggesting that he hopes the process is precisely the opposite of that. People who have really spent a lot of time thinking about this will spend some more time thinking about it in the specific context of this bill. He said this doesn't exactly apply to discovery royalty, it applies to unitization. He said of the four definitions he has read, this is probably the best one. Number 1362 CO-CHAIRMAN GREEN said "pool" doesn't have four other definitions handing around in statute, it is described in statute. He stated there is a motion before the committee and there is an objection. He asked for a roll call vote. Representative Davies voted in favor of the motion. Representatives Austerman, Kott, Ogan, Williams and Green voted against the motion. So Amendment 1 was not adopted. Number 1409 REPRESENTATIVE OGAN moved that the committee move HCSCSSB 112(RES), Version O, with fiscal notes and individual recommendations, out of the House Resources Committee. CO-CHAIRMAN GREEN asked if there was an objection. Hearing none, HCSCSSB 112(RES) was moved from the House Resources Committee.
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