Legislature(1995 - 1996)

03/11/1996 08:09 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 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.                                   

Document Name Date/Time Subjects