Legislature(1995 - 1996)
03/11/1996 08:09 AM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 394 - GAS & COAL METHANE LICENSES & LEASES CO-CHAIRMAN GREEN stated the first order of business to come before the House Resources Committee would be HB 394, "An Act authorizing a program of natural gas and coal bed methane development licensing and leasing; relating to regulation of certain natural gas exploration facilities and coal bed methane exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; amending the duties of the Alaska Oil and Gas Conservation Commission as they relate to natural gas exploration activities and coal bed methane exploration activities; and amending the exemption from obtaining a waste disposal permit for disposal of waste produced from coal bed methane drilling." He called on Representative Ogan, sponsor of HB 394, to come forward. Number 080 REPRESENTATIVE SCOTT OGAN explained that he introduced HB 394 because of the tremendous problem which exists in rural Alaska of leaking storage tanks holding diesel fuel, as well as the power cost equalization issue. Fuel storage facilities in rural Alaska are failing, causing economic and environmental problems. Clean-up and restoration alone is estimated to cost upwards of $500 million. Each year, approximately $20 million is spent on power cost equalization for rural residents. Transporting diesel fuel is environmentally hazardous. Barges currently haul a one-year supply of fuel, usually up rivers, which are difficult to navigate. REPRESENTATIVE OGAN further explained that HB 394 would authorize a shallow gas leasing program, above 3,000 feet. The origin of the shallow gas could be coal bed methane, as in the majority of cases, or other sources. Natural gas occurs in many parts of rural Alaska. It is very clean. Rural homes could be heated by natural gas, and electricity could be generated. The existing diesel fired generators could be converted to burn natural gas. Number 394 REPRESENTATIVE OGAN stated that the purpose of HB 394 is to encourage shallow gas development for use within the state of Alaska, not for export. The proposed legislation relieves the bonding and regulatory burdens placed upon those who would develop this resource for rural communities. The committee substitute represents a concerted effort between the sponsor, private enterprise, and the administration, to arrive at a plan that will be good for everyone involved. Representative Ogan commented that this dialogue should have been initiated years ago. REPRESENTATIVE OGAN then referred to a packet, "Alaska Rural Energy Initiative," prepared by the Division of Energy. He also indicated a map (not included in the packet) showing shaded areas of known coal reserves. Many of these deposits are located along the Yukon and other river systems, where many villages are located. These include areas in the Interior, Southcentral, and Kenai Peninsula. He indicated that an energy problem in the Glennallen area could possibly be mitigated by coal bed methane. Representative Ogan reiterated that the primary purpose of the bill is to provide affordable energy for rural Alaskans. Number 567 REPRESENTATIVE OGAN explained that the bill currently before the committee is CSHB 394, Version M. Section 1 sets out the legislative findings and statement of purpose. Section 2 states the program is applicable to recovery of natural gas from any source located within 3,000 feet of the surface. It is not applicable to areas that cannot be leased under oil and gas exploration and licensing and leasing programs, also known as the North Slope and Cook Inlet, banned under an exploration license or lease, or already leased under AS 38.05.180, and land under existing coal leases. There is no minimum size requirement. One change in the proposed CS makes the maximum lease size smaller, to coincide with the existing lease program. This was done at the suggestion of the Department of Natural Resources (DNR), in order to minimize the need for new regulations. The bill also establishes a public comment period. The lease will automatically be extended if production of gas at paying quantities continues. Rent and royalty rates are set out in 38.05.177(f) and (g). There are several conditions and restrictions on shallow gas leases, including limitations on lease assignment and on insertion of gas into an in-place transmission system. Representative Ogan reiterated that the proposed bill minimizes regulatory hurdles, and is primarily targeted at rural Alaska. The bill gives the Commissioner of the DNR the ability to adopt only those regulations necessary to implement the operations. Number 639 REPRESENTATIVE OGAN went on to explain that Section 3 exempts the requirement of the best interest finding. Considering the tremendous problem which already exists with leaking diesel fuel storage tanks, minimal risks in developing alternatives are acceptable. Section 4 exempts shallow gas from competitive bidding requirements. This will make it easier for developers to begin operations. Section 5 includes natural gas drilling to depths of 3,000 feet as an activity. Section 6 lists a general requirement in state law that pipelines and exploration production facilities may not be operated unless an oil discharge prevention contingency plan has been developed. The amendment made by the section establishes an exemption from requirements for on-shore well drilling for shallow natural gas, so long as the facility does not encounter a formation capable of producing oil. Section 7 sets out steps that an owner or operator of a shallow gas well must take if the operator encounters a formation capable of producing oil. Section 8 sets the financial responsibility requirement at $25,000. Representative Ogan emphasized that the likelihood of encountering oil at less than 3,000 feet is remote at best. The only oil that has been discovered in the state above 3,000 feet is heavy oil, at Prudhoe Bay, which will not come to the surface. Section 9 requires the operator or owner to stop operating, with exceptions, when a formation capable of producing oil is encountered. Section 10 sets out exemptions from the laws establishing oil discharge prevention and contingency plans and financial responsibility requirements. Section 11 prohibits the use of the oil and hazardous substance release prevention response fund, the 470 fund, as a source of money to clean up any release attributable to a shallow natural gas well. Section 12 affirms that persons holding coal leases in effect on the effective date of this act have the right to develop the coal bed methane and gas held in association with coal. Representative Ogan then invited questions from the committee. Number 935 CO-CHAIRMAN GREEN noted that Representatives Austerman, Williams, Nicholai and Kott had joined the meeting. REPRESENTATIVE ALAN AUSTERMAN asked, with reference to Section 11 and the 470 clean-up fund, how we know that there is no oil between 3,000 feet and the surface. He asked if there is any possibility of striking oil at less than 3,000 feet, and what sources of funding could be used for clean-up if a problem did develop. Number 974 REPRESENTATIVE OGAN reiterated that there are no known reserves of oil in the Cook Inlet Basin above 3,000 feet, and that the only known reserves at less than 3,000 feet are on the North Slope, and that is heavy oil. There is no guarantee that a developer won't run into oil, but it is unlikely. Studies show that, world-wide, since 1986 the number of oil spills in excess of 10,000 gallons from on-shore drilling has been zero. He referred to a graph contained in committee members' packets, which shows world-wide numbers of oil spills. During the same time period, spills over 10,000 gallons from vessels other than tankers totaled approximately 300. Representative Ogan reiterated that the likelihood of encountering oil at less than 3,000 feet is extremely remote, and the likelihood of a spill from drilling is even more remote. The likelihood of a spill occurring from diesel fuel being shipped up rivers in Alaska is much higher. With small companies going into small villages, in marginally profitable situations, and the vast majority of drilling occurring in coal beds, the benefits of providing low-cost energy far outweigh any potential risks. Number 1180 REPRESENTATIVE AUSTERMAN stated that the answer was not responsive to his question. He asked if the 470 fund were not exempted from the bill, and a spill occurred, would the 470 fund then help with clean up? If there is no potential problem, why is the exemption included? Number 1218 CO-CHAIRMAN GREEN asked if the exemption was possibly included to avoid operators having to contribute to the 470 fund. Number 1266 REPRESENTATIVE OGAN requested that the question be raised at a later time. REPRESENTATIVE DON LONG asked if the 470 fund was based on the production of oil. REPRESENTATIVE OGAN responded that lease operators producing coal bed methane or other natural gas would not contribute to the 470 fund. He reiterated that the likelihood of oil being encountered was low, and added that the exemption was included to avoid excessive regulations. Number 1302 REPRESENTATIVE AUSTERMAN stated that he had no problem with exempting the 470 fund, so long as the fund only applies to oil, but he would like to know that. REPRESENTATIVE LONG asked about exempting the North Slope and Cook Inlet from the proposed legislation. He stated that communities in those areas could also benefit from the program. REPRESENTATIVE OGAN responded that the areas were exempted because of problems with existing lease schedules. If an oil company has rights to the oil and gas below 3,000 feet, and someone is allowed to get a lease for above 3,000 feet on top of their lease, then there is a problem with legal ownership of the gas produced. Number 1424 REPRESENTATIVE JOHN DAVIES stated that he understood why the provisions relating to existing leases were included. But the stipulations basically exclude everything north of the Umiat parallel, which covers a lot of territory not covered by existing leases. He asked why villages were excluded. REPRESENTATIVE OGAN replied that this was based on input from the administration, and suggested that the question should be directed to the DNR. Number 1481 CO-CHAIRMAN GREEN asked about areas that would be associated with the large block leasing area. If an operator was working in an area, and someone wanted to include it in a large block lease, what would happen? Also, does the legislation address Native as well as state lands? REPRESENTATIVE OGAN responded that, with regard to the first question, he was not sure. He stated that the DNR would be better qualified to answer the question. CO-CHAIRMAN JAMES stated that a representative of the DNR was available via teleconference, in Anchorage. Number 1540 JAMES HANSEN, Division of Oil and Gas, Department of Natural Resources, stated that he could respond to the question. How a shallow lease would be affected by large block exploration and licensing is also a concern of the DNR. As far as the North Slope, leasing efforts in that area are located above the Umiak meridian. Anything south of the meridian would be included in the same category as the rest of the state. Shallow bed leasing below the Umiak meridian would not necessarily interfere with oil and gas leasing. Number 1590 REPRESENTATIVE DAVIES asked, with respect to the North Slope leases, what percentage of land north of the Umiak meridian is under lease or proposed lease sale. MR. HANSEN stated that as far as proposed lease sales, (indisc., coughing). So far as land that is currently under lease, possibly one-fourth. Number 1625 REPRESENTATIVE DAVIES then asked what are the possibilities of doing this under the National Parks and Refuge Act. Would it be possible to do this under federal regulations? MR. HANSEN responded that he was not sure, but that he thought it would be an appropriate place. For example, Native Corporations are testing for coal bed methane in Northwest Alaska. CO-CHAIRMAN GREEN asked if Mr. Hansen knew of any shallow gas located in the National Petroleum Reserve in Alaska (NPRA). MR. HANSEN replied that he was not aware of any. Number 1690 REPRESENTATIVE LONG asked if HB 394 included any provisions that would allow the smaller communities to tap into existing gas fields. The village of Nuiqsut, for instance, is located in the middle of a large field, where gas is being re-injected. Yet, residents are paying exorbitant prices for heating fuel. Does HB 394 allow any possibility of tapping into some of that re-injected gas? REPRESENTATIVE OGAN replied that nothing in HB 394 would help with that problem. He stated that he could understand Representative Long's frustration, but the gas is owned by the companies that are producing it. There is nothing that the state can do about the situation. Number 1766 REPRESENTATIVE LONG asked what percentage of the re-injected oil and gas belonged to the state. CO-CHAIRMAN GREEN noted that the cost of transporting the gas would probably be prohibitive, even if the state were to take its royalty gas in-kind. REPRESENTATIVE LONG then asked if there would be any way to include a provision in HB 394 relating to the extraction of re-injected gas by local communities. CO-CHAIRMAN GREEN reiterated that he felt Representative Long had a valid point. The state does have the ability to take oil and gas in-kind. Number 1820 REPRESENTATIVE AUSTERMAN asked if the original leases would have to be renegotiated in order to do this. CO-CHAIRMAN GREEN concurred. He then asked about the various exemptions referred to by Representative Ogan. Would any of these exemptions cause a conflict with existing regulations? REPRESENTATIVE OGAN responded that all legal issues have been addressed. He stated that HB 394 represents a policy call for the legislature. A major problem already exists in the rural areas, which more than mitigates the extremely small risk posed by the proposed operations. If the program is successful, it could result in a reduction of the yearly appropriation for power cost equalization. Adding regulatory requirements to the bill would result in fewer villages being served. In Fort Yukon, for example, it is well-established that coal sites exist underneath the village. Chances are that the drill sites will be located very close to the villages. This is the only way the program can be economically feasible. A public comment requirement is included, so that local people can decide if they want the wells drilled near their communities. Number 1974 CO-CHAIRMAN GREEN stated that he agreed philosophically with the idea, but that his question was aimed at potential legal conflicts. He asked Mr. Hansen if there would be any conflict with existing laws or regulations. MR. HANSEN replied that this was a concern of the DNR. The current version of the bill is a vast improvement over the original, but the DNR feels that some portions still require a closer look. The department has not had time to thoroughly examine all aspects of the bill for potential conflicts. Therefore, there is no way to know if problems exist. Number 2037 CO-CHAIRMAN GREEN responded that the committee should determine if it was on a collision course. REPRESENTATIVE OGAN commented that the DNR had made extensive comments on the previous version of the bill, which the CS attempts to address. The new CS reflects many of the DNR's concerns. The basic policy calls, however, were not changed. Number 2094 REPRESENTATIVE AUSTERMAN asked if someone could discuss the leasing royalties set out on page 3 and 4 of the CS. The rates are 50 cents per acre and 6.25 percent royalties. How do these compare to other gas lease royalties? CO-CHAIRMAN GREEN asked if this was a question for now, or for the future. REPRESENTATIVE AUSTERMAN responded that it was for now. Number 2122 REPRESENTATIVE OGAN stated that the figure of 50 cents per acre was for a non-competitive, across-the-counter lease. The drafters wanted to make sure that the leases would not be tied up for speculative reasons. Without production, the leases would be voided after a five-year period. The operations would be marginally profitable, which is why the cost is kept low. A higher cost would result in greater expense, greater regulation, and fewer villages served. REPRESENTATIVE AUSTERMAN stated that he would simply like to compare the cost of other leases with those in the bill. REPRESENTATIVE OGAN responded that those figures could be obtained from the DNR. Number 2200 REPRESENTATIVE PETE KOTT asked about page 5, line 30, which states that "The Commissioner of DNR may adopt only the regulations that are reasonably necessary to implement provisions ..." Since the bill does not have a Judiciary Committee referral, is the language reasonable and consistent with other areas of the law? He commented that the language might offer an opportunity for litigation. REPRESENTATIVE OGAN responded that it is a high standard of regulation, in that it delegates authority to the DNR. He stated that he had asked the drafting attorney to come up with appropriate language, and this was the result. REPRESENTATIVE KOTT then asked if the language was consistent with other lease sales. REPRESENTATIVE OGAN responded that he didn't know, but that the language was an attempt to give the DNR some regulatory authority. Number 2321 CO-CHAIRMAN GREEN stated that it was his hope that only reasonable and necessary regulations are ever adopted. However, ten people would have ten different views. Who would determine if the regulations were reasonable? REPRESENTATIVE OGAN responded that the authority was given to the commissioner to implement reasonable and necessary regulations. He reiterated that all regulations should be reasonable and necessary. CO-CHAIRMAN GREEN then called on the next witness, Tuckerman Babcock, via teleconference from Anchorage. Number 2352 TUCKERMAN BABCOCK, of the Alaska Oil and Gas Conservation Commission (AOGC), stated he would try to answer some of the committee's questions. There is a shallow gas involvement in the West Colville area. On the North Slope, there are deposits of shallow gas in conventional reservoirs, but not in coal bed methane reservoirs. He noted that it would not be impossible for an operator to sell or assign a portion of their lease, to a certain depth, to another operator. In that light, he did not anticipate problems with companies attempting to search for oil and methane gas, even on a conventional lease. This could be done by arrangement with a larger operator. The difficulty would largely be confined to surface facility arrangements. Mr. Babcock directed the committee's attention to Section A, line 2, page 2, which limits the ability to obtain a lease to areas that are not otherwise committed. CO-CHAIRMAN GREEN noted that the reference was "to coal reserves or otherwise." He asked if this referred to any kind of shallow gas accumulation, or was it limited strictly to coal beds. REPRESENTATIVE OGAN replied that the legislation was specifically designed to include all types of shallow gas. Number 2464 CO-CHAIRMAN GREEN announced that the next witness, DAVE LAPPI, would testify via teleconference, from London. DAVID LAPPI, President of Lapp Resources, Incorporated, stated that he was in Great Britain primarily to investigate how shallow gas extraction was done there. TAPE 96-30, SIDE B Number 035 MR. LAPPI explained that the possibility does exist for producing gas on the North Slope within the shallow limit being discussed, without conflicting with existing lease programs. He stated that he would like to see the areas available for shallow gas leasing be limited to those areas not specifically mentioned in a five-year oil and gas leasing program. As far as the area-wide leasing programs on the North Slope are concerned, certainly all areas that are being considered for a lease sale should be excluded from the shallow gas leasing program. For an area considered an exploration licensing area, a shallow gas leasing program would pose significant conflicts. The tracts that would be considered for shallow gas leasing are extremely small compared to exploration licensing areas. Thus, allowing shallow gas leases in these areas could restrict development. Mr. Lappi explained that as far as the oil companies are concerned, shallow gas leasing would not be financially feasible for most companies in most areas. He believes it would be in the state's best interest to encourage local production and local involvement. If royalties can be reduced to encourage this type of development, the state will be financially better off in the long run. Number 195 MR. LAPPI further commented that on page 3, line 13, there needs to be a limit on the amount of acreage a party can hold under shallow lease agreements. This would help prevent speculators from taking advantage of the program. Page 5, line 18 refers to existing gas pipeline or distribution systems to the population centers in Southcentral Alaska. It may be useful to add "in Northern Alaska" to this section. Line 21 states that the applicant for a lease "shall conduct a title search." Existing state policy on oil and gas leases is that there is no guaranteed title to any type of oil and gas lease. The same policy should apply to the shallow gas program. Number 333 REPRESENTATIVE RAMONA BARNES joined the meeting. MR. LAPPI continued his discussion of HB 394. He noted that one of the proposed amendments may affect the section on page 5, lines 29 - 30. On page 8, the section dealing with discharge should be modified, beginning on line 7, by adding the word "undisposable" after the word "discharges." He further added that Section 5(f) could be amended, to clarify the legislature's intent in 1985. Number 496 CO-CHAIRMAN GREEN asked if the language being suggested by Mr. Lappi was included in any of the proposed amendments before the committee. MR. LAPPI responded that it was not. He continued discussing the bill. Page 9 mentions activities that may be required by the AOGC. At line 13, he suggested changing the line to "permission to ... " (indisc.). In closing, Mr. Lappi urged the committee to continue working on the bill. He stated that it was good legislation for the state of Alaska. Number 713 CO-CHAIRMAN GREEN asked if there was any likelihood of mining a coal seam which contained enough methane to be exploitable. He stated this would seem to be an extremely hazardous situation. MR. LAPPI responded that he believes there are coal seams in Alaska which have demonstrated, in past mining operations, that they have significant quantities of gas. In other areas of the world, coal bed gas from underground mining operations is used as a fuel for running coal mines, and is also exported through pipeline operations and used as normal natural gas. He stated that he believes opportunities do exist in Alaska for safely using this type of gas. Number 794 CO-CHAIRMAN GREEN asked if there would be some way to separate gas rights from oil rights, should oil accumulations be found above 3,000 feet. MR. LAPPI stated that the question was handled in a variety of ways by other states, but would probably not be a big problem, at least initially, because of the unlikelihood of oil being found above 3,000 feet. CO-CHAIRMAN GREEN responded that he had asked the question because a section of HB 394 exempts shallow gas leasing from bonding and other requirements, since oil would not be associated with the production. If there was a gas cap associated with oil, this could create a problem. He asked if this section of the bill might need to be reviewed. MR. LAPPI replied that the AOGC would have the regulatory authority to make decisions necessary to protect subsurface reservoirs from contamination. They would also be able to accommodate the intent of the bill with the actual conditions underground. As long as the AOGC continues to do the job that they've been doing, he doesn't foresee any problem. Number 955 CO-CHAIRMAN GREEN asked if the language regarding discharges or disposal on page 8, line 7, could possibly create problems with aquifer pollution. MR. LAPPI responded that the AOGC has the responsibility to protect against such problems, and maintains strict restrictions. The exemptions contained in HB 394 would not apply to discharges into surface water bodies. The exemption referred to on page 8 refers to discharges associated with the act of drilling. Water produced as part of the production process would not come under that exemption. Instead, it would be treated as a point source discharge and would require a National Pollutant Discharge Elimination System (NPDES) waste water permit. CO-CHAIRMAN GREEN stated that he understood. But what about the fluids used to drill the well? It is not an uncommon practice to inject those wastes into the Cretaceous zone. Under HB 394, drilling would be limited to the upper 3,000 feet. Would operators be allowed to discharge the drill cuttings into a stream? Number 1135 MR. LAPPI replied that the exemption would not allow any discharge into a surface water body. The cuttings and possibly drilling fluid would be ground into the road, or work pad. This would not represent a threat to the environment, because drilling fluids used in modern practice are not hazardous. All operators are very keenly aware of what drilling fluids are environmentally correct, and they are not using hazardous fluids when drilling shallow holes. Bearing that in mind, the exemption is appropriate. Number 1295 MR. BABCOCK stated that the AOGC had no additional testimony, other than to note that Mr. Lappi correctly identified the AOGC's responsibilities. He suggested that the AOGC might at some point request a subsurface setback, to protect other owners' rights to produce their oil and gas. In the same fashion, there is already a surface setback. The practicality might be that the geologic formation itself would limit drilling to 2,500 or 2,000 feet. If that were the case, a setback might be required. CO-CHAIRMAN GREEN asked if Mr. Babcock would envision the AOGC provisions applying to drain hole drilling techniques. MR. BABCOCK responded that, yes, they would apply to any well drilled in search of oil or gas. Number 1423 REPRESENTATIVE DAVIES asked what would be the typical depth at which the AOGC would require well cuttings to be re-injected. MR. BABCOCK replied that it was a function of the geology. On the North Slope, for instance, the injection levels are much deeper than the wells envisioned by this legislation. REPRESENTATIVE DAVIES then asked if such shallow wells would preclude re-injection of cuttings. MR. BABCOCK responded that they might. It would depend upon the AOGC's assessment of the geology, and whether or not there was any potential threat to water. REPRESENTATIVE DAVIES asked what would be a typical re-injection depth along the annulus. MR. BABCOCK replied that it would depend upon the surface casing, which can range from 400 to 600 feet, down to 6,000 feet. He explained that the injection into a Class II well is limited to a volume of 35,000 barrels, to avoid over-pressuring a shallow drill and affecting fresh water. Number 1585 REPRESENTATIVE DAVIES stated that the previous discussion related to materials used for drilling, and not to water produced by the drilling process. He noted that with methane production, there is often a large amount of produced water. How would that be handled? Number 1650 KURT FREDRICKSON, Acting Deputy Commissioner for the Department of Environmental Conservation (DEC), and Director, Division of Spill Prevention and Response, DEC, responded to the question. He stated that, as noted by Mr. Lappi, the produced waters would be treated as a point source discharge, and would be regulated by the DEC under an NPDES waste water permit. He stated that the specific technology applied would be on a case-by-case basis. One way of handling the waste water is through the use of evaporation ponds. MR. FREDRICKSON further testified that providing rural communities with natural gas as an energy source could actually be an environmentally preferable alternative to the current dependence on diesel fuel. His division deals with many diesel spills, which pose a significant risk to public health and to the environment. There is a possibility of spilled diesel fuel entering the freshwater streams that people use as a water source. The DEC does have one problem with the bill. In section 11 of the current draft, the DEC's access to the spill response fund would be restricted. However, the DEC is currently directed by law to respond to spills in those cases where the responsible party is either incapable or unwilling to mount an adequate spill response. The DEC would then have to respond, but its resources are dependent upon accessing the response fund. By restricting access to the fund, HB 394 would conflict with AS 46.08.030, which is a stated policy of the legislature to make the fund available for those spill situations where the responsible party is not coming forward. Number 1845 CO-CHAIRMAN GREEN noted that if the DEC did respond, they would then attempt to recoup from the spilling party. MR. FREDRICKSON responded that the DEC is obligated by statute to recover the costs, and they take that responsibility very seriously. Number 1874 REPRESENTATIVE OGAN inquired, if the natural gas wells were to be included in the 470 fund, what would be the drilling operators' contribution to the fund? MR. FREDRICKSON replied that the response fund currently is supported through the 5 cents per barrel surcharge. That money is directed into two accounts, prevention and response. Two cents per barrel goes into the response account. When the account balance exceeds $50 million, then no surcharge is collected. The balance is currently at $58 million, so no funds are currently being deposited. CO-CHAIRMAN GREEN asked if Mr. Fredrickson was aware of any case where there has been an oil spill related to shallow drilling activities, above 3,000 feet. MR. FREDRICKSON replied that he was not aware of any spill from the drilling itself, but that other types of spills could occur. Operational spills, for instance, from storage of fuel, occur frequently. Both drilling and related operational activities are covered by the response fund. Number 1974 REPRESENTATIVE OGAN asked if the required $25,000 bond would be adequate to cover operational spills. MR. FREDRICKSON replied that the financial responsibility requirement was intended to provide a demonstrated capability of the responsible party to respond to a spill. The cost of responding to a spill is extremely problematic. For incidental spills, $25,000 may be adequate. Current financial responsibility for an exploration well, being drilled for the purpose of locating oil, is one million dollars. The DEC has never experienced a spill from a shallow well, but the risk appears very low. However, if crude oil was accidentally released through a gas well drilling operation, the cost would be significantly higher than $25,000. REPRESENTATIVE OGAN reiterated that the probability of such a spill occurring through shallow drilling, such as contemplated by HB 394, was extremely unlikely. That being the case, he did not understand the DEC's concern with HB 394's exemption of shallow gas operators from contributing to the spill fund. MR. FREDRICKSON responded that the DEC was concerned that this represents a major policy change with respect to the fund. The fund was created to respond to spills, of whatever source. The DEC receives spill reports in excess of three thousand per year, and thus is quite concerned that there might be any prohibition on its use of the fund. It is correct that, to date, no spills have occurred through natural gas drilling, but such a spill could occur at any time. Number 2348 REPRESENTATIVE DAVIES asked about the possibility of a holding pond containing slightly saline water being breached, possibly due to an earthquake or flood. Would the DEC access the fund to respond to such an event? TAPE 96-31, SIDE A Number 000 MR. FREDRICKSON stated that it was difficult to imagine such an event occurring. However, if saline water was released into a fresh water environment, it would be cause for concern. If the spill was related to a major disaster, the DEC would probably turn to the Department of Military and Veterans' Affairs. REPRESENTATIVE AUSTERMAN asked if the DEC used the 470 fund to clean up oil spills related to transfer of fuel from one tank to another, in the event of a ruptured fuel tank, regardless of where the spill occurred. MR. FREDRICKSON replied that this was correct. The DEC responds on an emergency basis when necessary, such as in the event of a pipeline rupture. They also respond to non-emergency situations, such as contamination resulting from a long-standing leak. Number 158 REPRESENTATIVE AUSTERMAN asked if the DEC would then try to collect costs from the responsible party. MR. FREDRICKSON responded that this was correct. Number 229 DAVE HUTCHINS, of the Alaska Rural Electric Cooperative Association (ARECA), stated through a spokesperson (Hugh Chumley) that ARECA supports HB 394. SARA HANNAN, Lobbyist, Alaska Environmental Lobby (AEL), testified that the AEL supports the idea of energy independence for Alaskans. She stated that it is a shame to live in a state that is a major energy producer, and still have some of the highest energy costs for local users of anywhere in the country. Bringing energy independence to rural Alaska is a laudatory goal. However, HB 394 contains major policy shifts that need to be explored more fully. Most oil and gas regulation within the state is based on high volume production. In talking about coal methane production, we are looking a very small fields. However, this does not mean there is no economic risk. Exempting such developments from all current regulation, and reducing economic bonding to $25,000, requires caution. The AEL believes that exempting the 470 fund from use, and lowering the bond to $25,000, puts local communities at extreme risk. This amount is probably not enough to cover the cost of cleaning up even one spill. The risk is not from potential gas spills, but from the operational spills that inevitably result when dealing with large equipment. MS. HANNAN further testified that the 470 fund is only paid into by crude oil production, but it was designed by law to clean up spills of oil and other hazardous substances. If there is a chlorine spill, for instance, related to a water treatment facility, the DEC has the authority to tap the 470 fund. The 470 fund is the fire drill fund, and gives DEC the ability to respond immediately. Without access to the 470 fund, and only $25,000 bond required, the AEL believes that a small community could be devastated. All the gas producers who are interested in going forward today, such as Mr. Lappi, are experienced and reputable. However, operators may come in who are not experienced. They could suddenly decide in the middle of a project that they cannot afford to go forward. Half finished projects and rusty equipment could then create a very expensive problem for a small community. This could be remedied by providing access to the 470 fund, or by requiring a higher bond. Ms. Hannan urged the committee to remedy this problem with the bill, to assure that the state's general fund would not have to be tapped. What it comes down to is who pays when the liable party has gone bankrupt or gone out of business. Number 600 REPRESENTATIVE OGAN thanked Ms. Hannan for her testimony, but noted that the villages are already getting shafted, due to problems with leaking fuel tanks. In one case, a tank exploded due to poor operational procedures. The more regulatory prohibitions that are applied to shallow gas operations, the longer the current problems in rural Alaska will continue. MS. HANNAN urged the committee to remember that swinging the pendulum from over regulation to no regulation would probably result in disreputable people going into business, who are not aware of the complexities of gas development in rural Alaska. The bottom line would be that it would be a local community, with production facilities very close to its residence base, that would experience a problem. The AEL would like to see gas development in rural Alaska, but does not believe that $25,000 bond is an adequate financial protection. If 300 rural Alaskan communities are to have local production of natural gas, there must be some controls. Without best interest findings, without contingency plans, and without access to the 470 fund, there must be a greater financial guarantee. Number 792 REPRESENTATIVE RAMONA BARNES asked if Ms. Hannan was familiar with the Native corporations. MS. HANNAN responded in the affirmative. REPRESENTATIVE BARNES stated that many Native corporations are already involved in oil and gas drilling, and would probably be going into the local communities to do shallow gas drilling. The corporations would not be likely to demolish their own villages. MS. HANNAN responded that no one would purposely put in a shoddy system. However, accidents happen because we cannot always foresee human error or natural disasters. All potential situations cannot be anticipated. The proposed legislation prohibits access to the deep pocket of the 470 fund, and only requires a $25,000 bond. Perhaps a mechanism where a collective bond could be shared, similar to the 470 fund, would address the problem. She stated that she would not want to see a Native corporation's assets put at risk for the subsidiary operation of gas production in one village. Like most bonds, this is to ensure that if there is a problem, the mechanism exists to remedy it. Number 910 REPRESENTATIVE BARNES noted that there is coming a time in the very near future when power cost equalization will be a thing of the past. The villages must become energy independent, and HB 394 is one mechanism to encourage such independence. REPRESENTATIVE AUSTERMAN stated that the AEL appeared to be in the same position as some of the committee members, in that they favor HB 394, but share the same concerns regarding the 470 fund. He suggested an amendment to allow access to the 470 fund. Number 1030 CO-CHAIRMAN GREEN announced that, there being no further witnesses, public testimony on HB 394 was closed. He asked the sponsor if it was his wish to adopt version M. REPRESENTATIVE OGAN responded that version M had already been adopted. He stated that the amendments proposed today were appropriate to version M. CO-CHAIRMAN GREEN noted that the scheduled meeting time was almost up. REPRESENTATIVE OGAN stated that, due to time constraints, some of the proposed amendments could be grouped together. CO-CHAIRMAN GREEN stated that the amendments would be taken up at the next House Resources Committee meeting.