Legislature(2001 - 2002)
04/15/2002 01:26 PM 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
SB 319-SHALLOW NATURAL GAS: LEASING & DISCHARGES CO-CHAIR MASEK announced the next order of business, CS FOR SENATE BILL NO. 319(FIN), "An Act relating to shallow natural gas; and providing for an effective date." Number 1523 SENATOR JOHN TORGERSON, Alaska State Legislature, sponsor, came forward to present SB 319. He explained that the [Department of Natural Resources (DNR)] Oil and Gas Leasing Program was started more for the rural areas of the state and has now become a commercial program rather than a program targeted to supply gas to rural areas. Senator Torgerson said [DNR] had issued more than one hundred leases and had two hundred more leases pending. He explained the points of the bill: increase state revenue by increasing the [application fees for shallow gas] leases from $500 to $5,000, which would more closely reflect the costs of DNR to process the leases; increase the annual rental fee from 50 cents to $1 per acre; and delete the requirement that DNR annually notify a [lessee] by certified mail of rental due. Senator Torgerson indicated rent would be automatically due on the date determined by the lease. He explained that the deadlines have proven to be unworkable and do not recognize the work required by DNR [to prepare leases in areas that are populated and may have complex land ownership patterns.] Senator Torgerson explained that for [the purpose] of better reservoir management, the limitation of the depth of 3,000 feet [would be amended] to require that some portion of the field has to be at the 3,000-foot level. He said the total amount of acreage would be [amended] and increased from 46,080 acres to 100,000 acres, and would it [repeal] the requirement for the applicant to conduct the title search. SENATOR TORGERSON explained that DNR routinely conducts a title search for land before the leases are issued. Additionally, he said, there are no title companies in the state that will give a "subsurface estate warranty title." Senator Torgerson said the lessee must secure a bond as a precondition of the lease; if damages occur and the lessee and the landowner cannot reach an agreement on the amount of damages, then either party can seek relief in the courts. He explained that the proposed new bonding would help protect surface owners by ensuring that the substantial bonds are in place prior to exploration development. Senator Torgerson addressed an additional point that he said "is actually just a conversion, a timeline for people, ... a transition period for them to get the leases under this current leasing program." Number 1365 REPRESENTATIVE FATE questioned increasing the total acreage to 100,000 acres. He recalled that at an earlier meeting he had previously suggested "squaring that up into six townships," and asked whether that would be problematic. Number 1285 SENATOR TORGERSON indicated the area could not be squared and said he'd spoken with Mark Myers [Director, Division of Oil and Gas, Department of Natural Resources] about the possibility of an amendment "to increase this." He said, "I'm basically going to go on their recommendation; ... they think it might be all right; nobody has 100,000 acres now, so I think we're jumping the gun a little bit." He reiterated that he would go with [DNR's] recommendation and said that [DNR was considering] adding another township. Senator Torgerson said [Mark Myers] believed that might particularly help Evergreen [Resources] "out for some of the stuff in the valley." SENATOR TORGERSON remarked: One of the concerns I had ... is that people are tying up our acreage in the state, waiting for stuff to happen, and the old thing of $500 and 50 cents an acre costs you nothing to tie up thousands of acres of oil and gas land and call it a shallow gas leasing. SENATOR TORGERSON indicated he would not object to an amendment. He said he was acting on recommendations of people in the business who had indicated [an amendment] would be workable. Number 1218 REPRESENTATIVE GREEN stated: I have a bit of the same concern. I can understand why an exploratory outfit might want to go in, somewhat like a concession. I know in other countries, in order to try and prove up an area, they'll grant concessions and they might fiddle around and find something here that, if they had tried to find littler blocks like we generally lease in, it might not really be of an interest to them because they have to focus so much of their corporate work to go in there. But I share the Senator's concern that right now if we ... have $500 for so many acres, we go up to $5,000 but we're increasing the acreage significantly. And if we were to say something more like 10 cents an acre or something so that as the acreage increases, so, too, does the rent -- because I share your concern that pretty soon you're going to have enough of these things that any reasonable area that you might want to poke a hole in has already been leased up for almost nothing, and I am really concerned about that. I don't think increase in rent would be a deterrent. I think what it would do is make people [say], ... "If two's good, four outta be better, maybe we only need three and we're willing to pay a little extra to get that three." But to increase this by almost 50 percent at the same rattle seems to be a little bit of a jump. So, I don't have an objection to the amount of acreage, but I think the rent ought to go up [proportionately]. So, if we make that increase in acreage, I'd like to maybe bring up a second amendment. SENATOR TORGERSON pointed out that [the cost] would increase to $1 per acre and asked Representative Green if he wanted [the cost to be increased] above $1 per acre. REPRESENTATIVE GREEN replied, "No, that's fine; I was just looking at the number on Section 2 there." SENATOR TORGERSON reiterated that the cost was being increased from 50 cents to $1. REPRESENTATIVE GREEN said, "That's fine, I think that's great, if that doesn't impact this because 138,000 acres at $5,000 seems like that's not quite a dollar an acre." SENATOR TORGERSON suggested the current program had become commercialized compared to the past program. He said a more user-friendly program would be [beneficial] for communities in rural areas of the state that use [the program] for the consumption of power, gas, and electricity. He remarked, "Again, this program didn't necessarily work well for that, but then it got too commercialized in the NANA [region], and the Kenai Peninsula, and Mat-Su areas ...." He suggested that most of the [oil and gas] industry was in support of the bill. Number 1006 REPRESENTATIVE McGUIRE called attention to Section 3, page 2, line 31, which read: The director shall execute the lease [WITHIN 90 DAYS] after completion of a title search, the close of the public comment period, and [OR], if review is required under AS 46.40, [WITHIN 30 DAYS] after the final consistency determination is made under AS 46.40 [, WHICHEVER IS LATER]. REPRESENTATIVE McGUIRE expressed concern that the removal of the specific time requirement might stall the process and asked why it had been deleted. SENATOR TORGERSON remarked: Basically, 'cause we never met the 90 days, we couldn't get the work done, mainly because of the heavy volume of work that they have; so, we just took out the requirement completely because we really weren't making the 90 days. SENATOR TORGERSON indicated the director would be the appropriate person to refer to if the committee wanted to replace the time requirement. He reiterated his concern that 90 days wasn't enough time to meet the requirement and suggested that a six-month time requirement might possibly be more sufficient. REPRESENTATIVE McGUIRE remarked, "And I appreciate that, Senator Torgerson; I just want to make sure that there might be some incentive to try to get that through as quickly as possible." SENATOR TORGERSON offered his belief that the incentive would be more money for DNR's budget. Number 0839 JERRY BOOTH, Representative, Teck Cominco Alaska Inc., testified via teleconference. Mr. Booth noted that Teck Cominco was the operator of the Red Dog Mine, north of Kotzebue, and was interested in locating a potential energy source to replace the extensive use of diesel fuel. He said the Red Dog Mine has produced over a million tons of zinc and lead concentrate each year and shipped that product to the "DMTS" facility, south of Kivalina, for three months of each year. Mr. Booth told the committee that to crush the ore and make the concentrate requires [approximately] 28 megawatts of power and uses over 18 million gallons of diesel fuel each year. Number 0751 MR. BOOTH spoke about Teck Cominco Alaska's search for low- pressure methane gas and black shale that occur near the mine. He said the area surrounding the mine where there are indications of gas is rolling hills and rugged mountains, and much different from the Matanuska Valley or Prudhoe Bay. He mentioned the rugged nature of the region and the need to have a more flexible definition of the depth limitations for a shallow gas lease. Mr. Booth referred to AS 38.05.177, subsection (a), paragraph (1), which he suggested would assist the state and the leaseholder in knowing what area would be part of the lease. He explained that Teck Cominco Alaska currently holds four state shallow gas leases for a total of 23,000 acres, and NANA Regional Corporation, owner of the Red Dog Mine, controls nearly 100,000 acres of adjoining land to the east. Mr. Booth indicated that the total acreage of the two companies was about 123,000 acres. Number 0670 MR. BOOTH explained that to adequately cover a resource target or concept takes considerable acreage; he offered support for the increase in the acreage. He said surface ownership in this portion of Alaska is fairly straightforward and has three major landowners: the National Park Service (NPS), the State of Alaska, and private lands of NANA. Mr. Booth said addressing the surface owners separately was not an issue for [Teck Cominco]. He said the development of shallow gas in Northwest Alaska has many impediments, and other areas of Alaska share some that they don't. Mr. Booth suggested that location was the major impediment due to access and the ability to bring large equipment in and out only in the summer months. He maintained that the lack of roads in the area and the desire and need to maintain the pristine nature of the region were a high cost-and- time impediment. Mr. Booth offered his belief that it would be very difficult, if not impossible, to cast a shallow gas lease in that part of Alaska within the three years provided in the current lease when work is seasonal. MR. BOOTH remarked: Logic would say that a lease should be at least five years for a primary term, with renewal options as provided in the current lease, and someone may want to consider an amendment to cover that. ... [As] provided in this legislation, we support the five-year term with renewal options. Number 0558 MR. BOOTH said arctic Alaska would always present numerous challenges not present elsewhere, and Teck Cominco Alaska addresses many of those challenges each day at the Red Dog Mine. He told the committee that passing this legislation would address a major challenge and impediment that [Teck Cominco] cannot address. He stated that Teck Cominco Alaska was in support of SB 319. Number 0521 MARK MYERS, Director, Division of Oil & Gas, Department of Natural Resources (DNR), testified. Mr. Myers told the committee that [SB 319] was a big step forward toward the commercialization of shallow gas, strictly coal bed and fractured shale. He explained that [DNR] worked with Senator [Torgerson] and the parties to try to craft something that works as a package. Mr. Myers commented, "I think the elements you've heard do that rather nicely together." He explained that the increase in acreage to 100,000 acres was a recognition that the production of a coal bed would have to be produced on a large scale for commercial operations where they depressurize a large area over time. MR. MYERS remarked: With that recognition, it's different than a conventional oil and gas play, and may in fact require more acreage to do on a commercial scale. We have no objections to the six townships or ... approximately 138,000 acres versus 100,000 acres. What we've seen in the program, being over-the-counter filing, is that it's pretty easy to file and meet the basic qualifications anyway, and we've seen family members stack on each other to create aggregates, such are in fact at that same scale. Number 0433 MR. MYERS suggested that there were no protections [in place] to prevent an individual or consortium from acquiring a large group of acreage. He noted that he had seen this happen in the conventional program. He commented: So again, the ... 46,000 acres hasn't been an impediment or affiliated organizations or affiliated people to bid in aggregate together. So, in fact, I'd personally rather see the primary party, who's interested in exploring, be able to acquire the significant amount of acreage needed to unitize, and the 138,000 give you enough for two substantial units for solid, unitized production. One of the other concerns, again, was the worry about lock-up. I think a three-year term has the converse effect, that ... what Mr. Booth had testified, that it does require the leases turn over. Number 0357 MR. MYERS explained that the commissioner can, with discretion, renew [the lease] for three additional years. He remarked: So, in fact, if you're making progress toward exploration development, you, in fact, probably have a six-year lease, at which point you would assume that you go into some kind of unitized production, ... to maintain the acreage over an area. Number 0283 MR. MYERS said, "We think it works; we think the three-year term's an aspect of this not holding the acreage forever." He suggested the higher fees are necessary for the program to pay for itself and to discourage rampant speculation. Mr. Myers offered his belief that a flat fee over a graduated fee would be better because it would not penalize someone who wanted to produce a large aggregate of acreage efficiently together in a unitized form. He commented: On the comments about the 90 days, we found that impractical; we simply can't do it for a number of reasons: one is, again, we had to go through the title work; ... we found because the lack of title insurance we couldn't guarantee the title work had been [done] adequately, so we ended up doing it ourselves. We figured, "Why burden the applicant if we are, in fact, doing it ourselves?" Also, I think it helps justify the higher fee. The other thing is that we have to go through stipulations and mitigation measures for environmental protection, and those are unique area by area. I don't know if any of you have been involved with that process, but we're not the only agency involved with that, so the inner-agency effect is elevations, commonly, with other agencies like [Alaska Department of] Fish and Game that may disagree with the environmental protections. We also, generally, in many of the areas, have to go through the ACMP [Alaska Coastal Management Program] process. So again, to do all of that in 90 days is totally unrealistic, no matter our best intent. MR. MYERS said the [department] has to balance the use of staff on title work for conventional lease sales, exploration licenses, and shallow gas leasing. He indicated [the use of staff] is balanced on a need-to-need basis, but the programs bringing in the most revenue for the state [are viewed] as the most important and work is often [prioritized on that basis]. Mr. Myers said not having a deadline gives the [department] flexibility. He remarked, "We work hard to get these leases out, and every chance we get, we do work on them, including, in fact, hiring contractors to do some of the title work." Mr. Myers said the [department] is motivated and wants to see the program work. Number 0133 MR. MYERS remarked, "We think it's an important resource, strictly in the Mat-Valley, the Big Delta, and the lower Kenai, where we think it could work commercially, as well as a very appropriate use there ... in the Red Dog Mine area." He said the fees are justifiable and supportable by the industry; the program will have net positive benefits, and [SB 319] works as a whole to stimulate commercial [coal bed] development. Number 0085 REPRESENTATIVE McGUIRE expressed concern about [removal] of the time requirement. She asked Mr. Myers if there was a time requirement that he thought would be appropriate to provide an incentive in processing the applications. TAPE 02-31, SIDE A Number 0001 MR. MYERS answered that it depends on the staffing level of the division, the level of activity, and the state's internal priorities. He said in conventional leasing, it has taken up to 14 months to issue a lease. He remarked, "So, my concern is, again, putting artificial boundaries; I think in reality we should be able to turn this around in 180 days, and that is our hope." Mr. Myers noted that there had been issues of litigation regarding the filing program that had tied up certain areas. He said [a time requirement] was hard to predict and indicated it was due to the combination of process - permitting the coastal zone and the volume of applications at any one time. He remarked, "I would like to believe you could trust ... the professional judgment of whoever's in the department at the time, and hold our feet to the fire if we don't perform." Number 0136 KEVIN TABLER, Manager of Lands and Government Affairs, Union Oil Company of California (Unocal), testified via teleconference. Mr. Tabler told the committee that he thought Senator [Torgerson] and Mr. Myers had adequately represented the benefits of the bill. He suggested that the Shallow Gas Leasing Program was an augmentation to the existing areawide leasing program and an enhancement for development of the state's natural resources. Mr. Tabler told the committee that [Unocal] was supportive of [SB 319] and urged members to pass the bill out of committee. He suggested that the amendments identified provide for better administration, flexibility, and clarification of the Shallow Gas Leasing Program. Mr. Tabler asked [John Tanigawa] from Evergreen [Resources Alaska Corporation] to address the how the acreage limitation issue is applicable to shallow gas, coal bed, and methane development. Number 0299 JOHN TANIGAWA, Special Projects Manager, Evergreen Resources Alaska Corporation, testified via teleconference in support of SB 319, noting that his company is a wholly owned subsidiary of Evergreen Resources, Inc. He told members: Last December, I moved to Wasilla to oversee our operations. Currently, we have 46,080 acres of shallow gas lease applications located near Willow, and today I testify in support of Senate Bill 319. SB 319 removes obstacles to our ability to explore for and to develop shallow natural gas. Evergreen Resources Alaska's specialties extend to Alaska the main focus of Evergreen Resources, which is coal bed methane development, unconventional gas, and shallow natural gas. These activities require at least 100,000 acres, or roughly four townships, to establish the necessary economies of scale for initial development. Due to the challenges of operating in an arctic environment, however, increasing that acreage limitation to 138,240 acres, or six townships, increases the economic viability of shallow natural gas in Alaska. We strongly support increasing the depth limitation to one that relies on science and geology for the specific play. And we are certain that we can drill, complete, and produce natural gas [wells] below 3,000 feet in an environmentally safe and responsible manner, using already existing technologies that we employ. Finally, Madam Chairman, the shallow gas program is the reason why Evergreen is in Alaska. We are grateful that the legislature is making this program possible and for improving it. Changes proposed in this bill provide us the necessary latitude to operate in an economically sound and environmentally safe manner. We acknowledge the Division of Oil & Gas for collaborating with us, with other [stakeholders], and this is an excellent example of how the state agencies and industry can work together to ... benefit not only industry and government, but particularly the public. Thank you for allowing me to testify. I will be pleased to answer any questions that you might have. Number 0509 DANA OLSON testified via teleconference on her own behalf, noting that [she'd faxed her comments to the committee that morning]; she asked that they be included in the legislative history. She suggested that the social and economic impacts [to] the acreage were rather significant, and [the bill] could potentially impact community developments. Ms. Olson said she felt that DNR had a responsibility to the people who live in Alaska to adequately consider the risk assessments and the economic [impacts], and to apply the policies and law equally (indisc.) a person similarly situated. She said she didn't feel that the risk assessment was adequate [or] that $5,000 would [be enough money] to adequately consider the effects. Ms. Olson remarked, "And I ask you specifically to keep this in committee until that a complete and thorough review, whether the risk assessment would be adequate." Number 0650 CO-CHAIR MASEK closed public testimony. Number 0720 REPRESENTATIVE FATE offered the following amendment [Amendment 1]: Page 2, line 19, following, "an aggregate of 100,000" Delete "100,000" Insert "138,240" Number 0722 CO-CHAIR MASEK indicated she would like an explanation of the proposed amendment [Amendment 1]. Number 0723 REPRESENTATIVE FATE explained: It's already been established, both in the committee and the Oil and Gas Committee, and this committee testifying, specifically, to the amount of acreage, that it's beneficial to the ... people who are ... doing the exploration, ... that it's beneficial to them in unitizing, basically, the cost effectiveness, and ... it's also been testified to by ... Mark Myers, the Director of the Division of Oil and Gas, that ... it's not going to be deleterious to any efforts to ... explore those lands, and in fact will increase the income of the state, too, given that there is an increase from $500 to $5,000 per acre. So, it looks to me like the testimony that we've had, relevant to the increase of acreage, has all been positive. Number 0792 DARWIN PETERSON, Staff to Senator John Torgerson, Alaska State Legislature commented, "As Senator Torgerson testified earlier, he will agree with the department and defer to their opinion, and I understand they're okay with this amendment." Number 0810 REPRESENTATIVE CHENAULT asked, "Just for clarity, it's not $5,000 an acre, correct?" REPRESENTATIVE FATE responded, "Correct." Number 0834 CO-CHAIR MASEK returning to the proposed amendment, asked if there was objection to Amendment [1]. There being none, [Amendment 1] was adopted. Number 0864 REPRESENTATIVE GREEN moved to report [CSSB 319(FIN), as amended] out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HCS CSSB 319(RES) was moved out of the House Resources Standing Committee.
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