Legislature(1995 - 1996)
03/13/1996 08:10 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 Number 0089 REPRESENTATIVE SCOTT OGAN, sponsor of HB 394, offered to answer any questions before addressing amendments. The committee was working from version M, dated 3/7/96. Representative Ogan moved Amendment1 to CSHB 394, which read: Page 2, line 24: Delete "at the drill site" Page 3, line 27: Delete "at the drill site" Page 5, line 26: Delete "at the drill site" REPRESENTATIVE OGAN explained this was a technical amendment recommended by the Department of Natural Resources, Division of Oil and Gas. He said, "They felt that `at the drill site' was not appropriate language because right before that, it talks about ... within 3,000 feet of the surface at the drill site. The problem is sometimes that the casing doesn't go straight down. If they deviate the casing somewhat, it could be interpreted that 3,000 feet from the drill site might not be 3,000 feet down." CO-CHAIRMAN GREEN asked if there were any comments about the proposed amendment. There being none, Amendment 1 passed. Number 0231 REPRESENTATIVE OGAN moved Amendment 2 to CSHB 394, which read: Page 9, line 5 & 6: Delete "of the facility" line 5: Insert "owner or" following "the" Page 9, line 11: Delete "of the facility" line 11: Insert "owner or" following "the" Page 10, line 7: Delete "of the facility" line 7: Insert "owner or" following "the" REPRESENTATIVE OGAN believed this was a recommendation of the Oil and Gas Conservation Commission. "Of the facility", which was not clear language, was being changed to "owner or operator". Basically a technical amendment, it would cover anybody associated with the drilling operation, Representative Ogan said. CO-CHAIRMAN GREEN asked if there were questions or objections. There being none, Amendment 2 passed. Number 0320 REPRESENTATIVE OGAN offered Amendment 3 to CSHB 394, which read: Page 3, line 19: Substitute "more" for "less" He explained, "What we'd like to do is put a very linear process in the public comment period, here. This was a drafting mistake, a request of the drafter to change this. ... We'd like the public comment period not to exceed 60 days, so when an operator will know, for example, that if he applies for a lease in the fall of one year, that in so many days, by the spring of next year, he'll be able to go into the area and set up and operate." CO-CHAIRMAN GREEN asked if there were questions or objections to Amendment 3. REPRESENTATIVE JOHN DAVIES objected. He asked: "Would you object to just making it 60 days, period?" REPRESENTATIVE OGAN replied 60 days would be fine. Number 0443 REPRESENTATIVE DAVIES moved to amend Amendment 3 to read, "a comment period of 60 days". CO-CHAIRMAN GREEN said, "Just deleting `not less than'." REPRESENTATIVE DAVIES concurred. CO-CHAIRMAN GREEN noted that was a friendly amendment to Amendment3. REPRESENTATIVE OGAN agreed he perceived it as a friendly amendment. Number 0479 REPRESENTATIVE GREEN stated, "We're making it a 60-day specific, rather than `more' or `less'." He asked if there was an objection. There being none, Amendment 3 passed. Co-Chairman Green noted that it would read, "comment for a period of 60 days." REPRESENTATIVE OGAN moved Amendment 4 to CSHB 394, which read: Page 5, Lines 26-29: Delete: "If the lessee's operation under the lease results in the production of oil or of gas in violation of this subsection, the director shall immediately suspend the lessee's operation under the lease and may terminate the lease." Insert: following "surface" ". If an onshore well drilling for natural gas under a lease authorized by AS 38.05.177 penetrates a formation capable of producing gas below 3,000 feet of the surface, the owner or operator (1) shall notify the department and the Alaska Oil and Gas Conservation Commission; and (2) may not conduct further operations in the drilled well until the facility complies with all applicable laws and regulations relating to oil and gas production; however, this paragraph does not prevent the owner or operator from conducting activities that may be required by the Alaska Oil and Gas Conservation Commission to plug or abandon a well." Number 0489 REPRESENTATIVE OGAN explained there was a similar provision in the bill that when an operator entered a formation capable of producing oil, that operator had to cease operation and notify the department. Further operations could not be conducted until the facility complied with applicable laws and regulations. Representative Ogan said, "What we're attempting to do with this is to put some further parameters. The legal experts and DNR [have] shared some concern about ... who owns the gas below 3,000 feet. And if the operator enters into a gas formation [where] gas is possibly produced below 3,000 feet, ... we would like them to cease operations and enter into the normal oil and gas lease process." REPRESENTATIVE OGAN mentioned there had been subsequent discussion, not reflected in Amendment 4, where someone would possibly be able to plug the well at 3,000 feet and produce the gas above that. He said he would not put that on the table currently. REPRESENTATIVE OGAN stated, "What I've been told by the experts is if a person enters a formation, ... for example, if its a gas cap on an oil formation, the pressures will be much greater and they'll be able to tell that they're into this formation that possibly produces gas from below 3,000 feet. Because we're making a lot of accommodations to put this program in place, we'd like to make this as bullet-proof as possible, so we don't end up in litigation and problems further on down the line." Number 0642 CO-CHAIRMAN GREEN referred to page 2, line 20, and said "SHALLOW NATURAL GAS LEASES" applied to a lease within 3,000 feet of the surface. He asked: "How, then, would a well produce gas below 3,000 feet in this amendment?" REPRESENTATIVE OGAN replied, "Only if ... the gas that they hit above 3,000 feet ... possibly comes from below 3,000 feet. In other words, if they hit the top of a gas cap that extends below 3,000 feet, we'd like them to enter into a conventional oil and gas lease." Number 0777 REPRESENTATIVE ALAN AUSTERMAN indicated there was no competitive leasing at that point in time, as would normally occur. He asked what prohibited people from drilling 3,000-foot wells without having to get permits until they found a gas pocket. Representative Austerman understood that an operator could complete the paperwork afterwards, without going through a competitive bid. He asked if that was how it was set up, with the amendment. Number 0828 REPRESENTATIVE OGAN suggested someone on teleconference might be better qualified to answer that. CO-CHAIRMAN GREEN asked: "Is your question that they can go anywhere and punch holes? They're only going to be drilling holes on their lease. Their lease is just limited to 3,000 feet. Or are you thinking maybe there'll be some 3,000-foot leases and not anything leased below that?" REPRESENTATIVE AUSTERMAN replied, "Well, obviously, this bill is for everything above 3,000 feet. And everything above your demarcation line ... is a competitive-type leasing, whereas this new bill is not a competitive-type leasing program." He suggested a person could pick a place to drill; if everybody said it was all right, that person could go ahead and drill there above 3,000 feet. Representative Austerman asked if that was correct. CO-CHAIRMAN GREEN responded, "If a lease is granted." REPRESENTATIVE OGAN agreed. CO-CHAIRMAN GREEN said, "So, it's what's happened below that, in this area that has not been leased, below 3,000 feet." REPRESENTATIVE AUSTERMAN concurred. CO-CHAIRMAN GREEN stated, "It's my understanding there would be nothing to preclude the driller of the 3,000-foot well, who had special compensation because he doesn't have to have as big a bond and all these other ramifications for the likelihood it's not there. If he then says, `hey, I think there's a mother lode below here, I'm going to go get a lease of a different kind', then he would be subject to all the other ramifications of a lease, the big bond, the whole nine yards, just as he would be now." Number 0937 REPRESENTATIVE AUSTERMAN asked if that would have eliminated the competition that would normally occur. CO-CHAIRMAN GREEN replied, "Well, no, he has to get the lease. And the owner of the land, if it's Native land or if it's state land, may say, `I'm sorry, Charlie, that's not going to be on the lease schedule for five more years.' So, you ... can't drill in the lower until you get a lease, and that's not going to be up for awhile. The only exception that I can think of is if there was [an] exploration licensing area, that the shallow gas entity wanted to come in and say, `look, there's a Native village on this large, sub-surface lease and we think we can find some shallow gas', that might be an exception. But, then, that would already be leased to someone else who has the rights to drill deeper. So, I don't think that would be a problem." REPRESENTATIVE AUSTERMAN asked: "But what if at 2,995 [feet] he finds oil? Then he has to cap it?" CO-CHAIRMAN GREEN said yes. REPRESENTATIVE AUSTERMAN continued: "He can't go any further with it?" Number 1002 REPRESENTATIVE OGAN said that was covered in another portion of the bill. An operator who encountered a formation capable of producing oil had to cease operations and notify the department and the Alaska Oil and Gas Conservation Commission (AOGCC), as well as comply with all applicable laws. Representative Ogan noted that operations would cease except for whatever was instructed by the AOGCC. CO-CHAIRMAN GREEN stated, "Then you get into a correlative rights situation. And that's where the Conservation Commission comes in, because then, in effect, you have a 3,000-foot lease but you're trying to drain ... oil from a 3,001-foot lease, which is a different entity." He added, "You can't drain oil from someone else's lease, unless it's unitized." Number 1072 REPRESENTATIVE OGAN pointed out that Section 7, page 9, relating to onshore well drilling for gas that penetrated a formation capable of producing oil, had the same stipulations. REPRESENTATIVE DAVIES said he understood the concern and noted they were talking about the "hinterlands," where little geophysical exploration had occurred. He wondered how a person would know, at 2,900 feet, where gas was coming from. Number 1138 REPRESENTATIVE OGAN replied he had been told by Tuckerman Babcock of the AOGCC that if they hit a natural gas formation not associated with the characteristics of methane, which was low- pressure and low-volume, chances were it could be associated with another type of gas. Representative Ogan suggested if committee members had reservations about the Amendment 4, he would withdraw it for later discussion. Number 1192 REPRESENTATIVE DAVIES stated the amendment was better than the existing language. However, he was seeking clarification. He asked if an adjacent leaseholder or the AOGCC would trigger it. CO-CHAIRMAN GREEN replied, "In order to drill the well, to get the permit, you have to have an Oil and Gas Conservation Commission permit. And in that permit, the requirements are that you will provide the geological information you find - if you're going to log it, all copies of the logs, any cuttings, any cores that are taken - so that the Conservation Commission engineering and geological staff would be privy to the information that the operator gets on the well. ... Let's assume ... at 2,990 you encounter a gas sand that might be a part of a dome that extends below 3,000 feet, which would come under this operation. At that time, you would have to follow this amendment, as I understand your suggestion." Chairman Green added that the AOGCC would then have authority. "You then get into a situation of either draining unleased or other leased interests below 3,000 feet," he said, indicating that addressed Representative Austerman's question. Number 1384 CO-CHAIRMAN GREEN continued, "So, then, you either have to ... go to a unitization or get permission of the owner of the lower gas- hold," he said. "That gets sticky, and so, I would imagine what would happen is you'd be tangled up in a unitization effort, which would actually work against the concept here, because those things probably take a year, at minimum. But, on the other hand, it might not take that much, because whoever has the sub-surface lease, then, is assured of at least finding some gas." He noted this was all speculative. He suggested it would be handled not in this bill but by the AOGCC and the Department of Natural Resources (DNR), as far as leasing was concerned. Number 1411 CO-CHAIRMAN GREEN noted there were several methods for determining that the condition existed. For an unleased area, the situation would be stickiest, he suggested, because the operator or someone else might want to take out a conventional lease. And the lease for the lower interval would not be on the lease schedule. REPRESENTATIVE AUSTERMAN said that was his question. CO-CHAIRMAN GREEN said, "Then, you get a situation where, at this person's detriment, they have discovered a gas reservoir at the very, very edge of their lease area and that's an unfortunate situation, because they would be in a correlative rights problem." Number 1444 JAMES HANSEN, Leasing/Evaluations, Division of Oil and Gas, Department of Natural Resources (DNR), testified via teleconference from Anchorage. CO-CHAIRMAN GREEN asked: "Would you be willing to take this situation on? Did you understand the concern that was registered?" MR. HANSEN replied he had written down the same concern that morning. "You pretty much have pointed out all the problems," he said. He referred to the question of what would happen if gas were struck that extended below 3,000 feet. He suggested the operator would have to hold back and DNR would have to go through the competitive process in order to lease below 3,000 feet. "That would be a stumbling block to producing any of that gas, even above the 3,000 feet," he said. Number 1484 REPRESENTATIVE DAVIES asked Mr. Hansen, "In a relatively unexplored area, ... how would we know that you'd penetrated a formation capable of producing gas below the 3,000 feet? What kinds of information would be available out of single hole to know that kind of information?" MR. HANSEN replied there were several ways to tell. If a bed was dipping down-slope, away from the well, it was fairly certain that gas existed further down. "If you drill down to 3,000 feet, stop at that point, and you hit gas, and you still have gas at 3,000, chances are pretty good you've got gas below 3,000," he said. "But you're right, without a geophysical survey to be able to `see' what's down there or ... how thick the formation is ..., it would be hard to tell." He said if there were other signs, it could be assumed gas extended further down, however. Number 1546 CO-CHAIRMAN GREEN explained that surface geology would create the desire to drill there in the first place. He asked why a person would want to drill a 3,000-foot well just on speculation. "They're going to try to find that area that gives the most likelihood of finding gas," he said, indicating magnetometers, seismic indications, or surface geology could be used to make that determination. REPRESENTATIVE DAVIES referred to a concern raised by Dave Lappi at an earlier hearing and asked: "Suppose that you encountered gas at 2,000 feet and the well went on down, and then you got into a situation where this paragraph would be triggered and you had to plug it. Within this language, is it possible for AOGCC to allow them to plug the bottom of the hole and back up to the 2,000-foot horizon and just produce the low-pressure methane from that level?" CO-CHAIRMAN GREEN replied, "I would certainly think so." Number 1640 MR. HANSEN agreed it was a definite possibility that the gas could be plugged and left there. REPRESENTATIVE DAVIES asked: "So, when it says `plug the well', that doesn't imply plug the whole thing, but just plug that portion of it. Is that right?" MR. HANSEN replied that the wording may need to be more specific. REPRESENTATIVE DAVIES asked: "So, could we put some language in like `plug a portion or all of', or something like that?" MR. HANSEN agreed that should work. CO-CHAIRMAN GREEN thought it was covered. He said the paragraph did not prevent the owner or operator from activities that may be required by the AOGCC, which had jurisdiction over the well. Number 1659 REPRESENTATIVE DAVIES said, "My concern is that the language says `to plug or abandon the well'. CO-CHAIRMAN GREEN explained, "They will allow plug-backs, partial plug-offs of zones above. You can actually plug off a[n] ... intermediate zone and produce lower, or you can plug the lower zone and produce above it, as required by AOGCC." REPRESENTATIVE DAVIES stated, "I'm just concerned that this line doesn't get read that the only option AOGCC has is to plug or abandon the entire well." CO-CHAIRMAN GREEN thought the language could not be construed to say "you must plug and abandon the well." Number 1689 REPRESENTATIVE OGAN clarified, "The legislative intent, my intent, and maybe the committee's intent we could put on the record, is that it is not for them to plug and abandon, but just simply to give AOGCC the authority to deal appropriately with a situation. I think we all maybe agree that we still would like to see the gas produced from that well to go to that particular village, ... but let AOGCC make the call as [to] what the appropriate steps are to do that." Number 1714 CO-CHAIRMAN GREEN said, "If I could offer a friendly amendment [to Amendment 4] to avoid that possibility: `to plug, plug back or abandon the well'." REPRESENTATIVE DAVIES replied, "I'd be more comfortable with that." REPRESENTATIVE OGAN said, "That would be more than considered a friendly amendment." CO-CHAIRMAN GREEN stated, "And that plug-back is a common vernacular in the oil industry." He asked if there was any objection to the amendment to Amendment 4. There being none, it was so ordered. Co-Chairman Green asked if there were questions, comments, or any objection to Amendment 4, as amended. There being none, Amendment 4, as amended, was adopted. Number 1748 REPRESENTATIVE OGAN moved Amendment 5 to CSHB 394, which read: Page 4, line 20, after "lease;": Insert "if the commissioner determines that the lessee has not diligently developed or continued to operate under the lease, the commissioner, after giving notice and opportunity for hearing to the lessee, may terminate the lease;" REPRESENTATIVE OGAN explained that because of the many accommodations being made to independent companies to facilitate drilling the gas, he was attempting to make this as "bullet-proof" as possible, to prevent speculators from coming in and tying up leases for five years without developing them. "What we want people to do is to lease these leases and be ready, within a year, to do some drilling and some action," he said, adding this was a safe-guard measure to enhance the intent of the bill. Number 1803 CO-CHAIRMAN GREEN asked Mr. Hansen if legal problems might occur with the amendment. He asked if it would be an agreement entered into beforehand, eliminating potential litigation. MR. HANSEN replied he thought the amendment was needed. He suggested changing "commissioner" to "director"; when the annual review was done, the director would have the discretion of terminating the lease if the party was not doing anything. CO-CHAIRMAN GREEN asked: "And you don't feel there's any problem, then, with somebody suggesting that that director might be deleterious or ... arbitrary and capricious?" REPRESENTATIVE AUSTERMAN indicated page 4, line 18, already dealt with that. MR. HANSEN replied that one could always request a reconsideration by the commissioner on the director's decision. Number 1875 REPRESENTATIVE OGAN moved an amendment to Amendment 5 to change "commissioner" to "director". CO-CHAIRMAN GREEN asked if there was any objection to using the word "director". There was none. He asked if there was further concern that, as indicated by Mr. Hansen, there might be other words to help prevent arbitrary capriciousness or whether that was understood. REPRESENTATIVE DAVIES commented, "I would think that this kind of language would be part of the lease. It should be able to be known, going into this situation, that this is part of the deal, ... that if the director isn't happy with your operation, then he has this power to make the decision." CO-CHAIRMAN GREEN asked Mr. Hansen if he had indicated that. Number 1917 MR. HANSEN replied yes and said, "We do have appeal regs in effect in which anybody, for any decision by the director, ought to appeal. They have that right to appeal to the commissioner. So, if someone thinks they're being unfairly treated by the director, they do have legal standing." CO-CHAIRMAN GREEN asked if there was further discussion or any objection to adopting Amendment 5. There being none, Amendment5, as amended, was adopted. Number 1965 REPRESENTATIVE DAVIES offered Amendment 6 to CSHB 394, which read: Page 10, line 15-18: Delete all material He explained that Amendment 6 deleted Section 11, the prohibition against using the 470 Fund. Number 1906 REPRESENTATIVE OGAN said he did not object. He indicated his concerns about deleting the language had been alleviated. CO-CHAIRMAN GREEN asked if there was indication that suppliers of the 470 Fund would object. REPRESENTATIVE OGAN replied that he had spoken with three major suppliers. While they had some reservations that the 470 Fund was being expanded, Representative Ogan thought they understood that the possibility of the 470 Fund being used would probably be mitigated by this bill. If the bill was effective, there would be less handling and shipping of diesel fuels in the bush. " And we've also addressed some of the concerns by providing some financial responsibility for incidental operational spills," Representative Ogan said. "So, because of that, they don't have an objection to it." CO-CHAIRMAN GREEN asked if there were further comments about Amendment 6. REPRESENTATIVE OGAN asked anyone in the audience who objected to please speak up. Number 2065 CO-CHAIRMAN GREEN noted there were no objections and stated that Amendment6 was adopted. He asked if there was further discussion on HB 394. REPRESENTATIVE DON LONG recalled a concern at a past meeting about page 2, lines 25-32, and page 3, on existing leases. He asked if anything was being done about that. REPRESENTATIVE OGAN explained there had been a meeting between himself and Representatives Long, Davis and Austerman to discuss those issues. He said, "I know what your concerns are about the North Slope. I remain committed to work with you between now and the next committee of referral to see if we can get some language that would help your situation. It's got to be a concerted effort between the [Department of] Natural Resources and myself, and I'd be happy to work with you on that." He explained that the short notice had precluded the ability to draft language for the present committee. REPRESENTATIVE LONG said he had no problem with that. Number 2135 REPRESENTATIVE DAVIES expressed concern about that issue, as well. His office had contacted Mr. Hansen the previous day to try to work out language. "The department's concerns are sufficiently complicated that it's not easy to draft some language in the short period of time," he said. Number 2161 MR. HANSEN responded that his concern was over how complicated it would be. Legal problems needed to be addressed and he wanted to run it by the Attorney General's office to see what could happen if leases were allowed to overlap. He was unsure what problems there might be, but he foresaw there would be some. CO-CHAIRMAN GREEN said, "Wouldn't it be, since that is a lease-hold entity to whoever has the deeper lease - they go from the surface down - that the only way you could accomplish, I think, what Representative Long wants would be a sublease, if the lease itself does not preclude that. I think if you try and file lease-on-top- of-lease, you'll hang both leases up." MR. HANSEN thought that was correct. CO-CHAIRMAN GREEN continued, "But I think it's not without reason to think that you might be able to get a sublease, from a deep lease owner, for the shallow rights." Number 2211 MR. HANSEN said, "I believe that's right, Mr. Chairman. I think Mr. Lappi said that it's actually done in the Lower 48. So, that's why I'm saying it's not impossible. I'm just saying we need to look at it closely to see what legal ramifications there might be." REPRESENTATIVE LONG suggested that in the interest of time, the bill would be the instrument to start with. Another amendment could be made later. CO-CHAIRMAN GREEN submitted that it would not be part of the current bill in any regard. "It would have to be an agreement with the other leaseholder," he said. "The state could not retroactively take back a portion of that lease by itself." Number 2239 REPRESENTATIVE DAVIES referred to page 2, line 26 and said he had a corollary concern because that wording excluded everything in the North Slope and Cook Inlet, whether or not it was currently leased. "And the reason for that is to avoid the possibility of an overlapping lease," he said. He thought the bill should be modified to allow for that possibility, although it would be complicated. He believed it was possible to amend the language at line 26, for example, to allow for the possibility where no lease currently existed. "In other words, the lease sale could be offered subject to whatever existing shallow leases may be in place and whatever language would have to be around it would have to be developed," he said. "That would take care of Representative Long's concern in a number of instances," he concluded. REPRESENTATIVE AUSTERMAN moved that CSHB 394(RES), version M, as amended, move from the House Resources Committee with accompanying fiscal notes and individual recommendations. There being no objection, it was so ordered.