Legislature(2003 - 2004)
02/04/2004 01:34 PM Senate CRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 250-NATURAL GAS LEASES ON THE KENAI PENINSULA
CHAIR BERT STEDMAN announced SB 250 to be up for consideration.
The bill establishes a moratorium on shallow natural gas leasing
in the vicinity of Kachemak Bay and asks the state to reacquire
leases within the moratorium area. The bill has revenue
implications and is of concern to residents in the affected
communities.
He advised he did not intend to move the bill that day. The
sponsor would familiarize members with the issues and Director
Mark Myers would speak to the fiscal impacts. He would not take
public comment that day, but comments submitted by email or FAX
were welcome and the affected communities and others were
invited to listen via teleconference.
SENATOR GARY STEVENS, sponsor of SB 250, thanked the Chair and
said he looks forward to hearing from the public as well. He
restated the purpose of the legislation and further explained:
SB 250 reaffirms previous findings of the state that
Kachemak Bay and Homer area are not really appropriate
areas for oil development and gas development and
there are two instances I present you. The first, in
1976, the state found it in the best interest of the
state to reacquire the oil and gas leasehold interests
in Kachemak Bay and the surrounding upland areas. The
Legislature approved SB 720 that year for several
reasons, but mainly because it found that the natural
environment and intrinsic beauty of Kachemak Bay area
supported a community of economic development path
based on renewable resources like tourism and fishing.
The state reacquired these leases later in 1976 so
that the local communities would not be encumbered
with the conflict associated with oil and gas
development in this unique environment. In 1999, the
state again found it in the best interest of the state
to exclude Homer and [Kachemak Bay] area from area-
wide oil and gas lease programs. Today, Homer enjoys
the benefits realized by [excluding] Kachemak Bay, Fox
River Flats critical habitat area, the Kachemak Bay
State Park, the Alaska Maritime Wildlife Refuge and
our only national estuarine research reserve and has
built a thriving economy based on tourism and fishing
and small business.
One of the unintended consequences of this 1999
decision was to make the area available for this
streamlined, less regulated shallow natural gas
leasing program under HB 394 that was passed in 1996.
Following the letter of the law in HB 394 but not
really the precedent set in the past three years, DNR
leased the subsurface rights of 22,000 acres in the
Homer area last June. These leases included
predominantly residential areas, schoolyards,
municipal reservoir, natural environment that was
excluded from leases in the past sales. This is a very
serious concern. The benefits of exploiting this
really very small gas reserve - 22,000 acres to a
depth of 3,000 feet - would be much smaller than the
economic and environmental cost to the community would
be.
I've heard from dozens, if not hundreds, of residents
of the Kachemak Bay area who are very concerned about
this and are concerned about the fairness of this
streamlined process that led to these leases being
let. Many of these citizens feel they are being denied
an opportunity to speak to the lease sales because of
the fact that no notices or limited notices, and no
notices in the Homer area newspapers, which have a
very wide circulation and should have been included.
These residents have also raised concern about the
unintended statutory preemption of the department's
ability to consider public comments, the potential for
administrative override of local ordinances and also
the lack of clear environmental regulations. A lot of
questions remain about whether the amount of money
paid for these leases might be less than what it cost
the state to administer.
There are also concerns about the patchwork quality of
these leases, which include several surface-rights
owners as well as areas that are in residential areas,
schoolyards, a municipal reservoir and then the
natural environment that was excluded from past
leases.
In its resolution supporting this buyback, the City of
Homer is concerned about the potential affects of
shallow gas drilling on their water supply. They have
a water supply that serves 450 homes and businesses
inside and also outside the city as well as
groundwater that is vitally important for private
water wells. The City of Homer is also concerned - in
its resolution - about the general health and general
ecology of the local area economics. [Residents] are
so dependent on the activities of commercial fishing
as well as sport fishing, charter guided, [and]
subsistence fishing. The city is also concerned about
tourism and land values and roads. The City of
Kachemak and also the Kenai Peninsula Borough
supported buybacks through resolutions and this bill
is supported overwhelmingly by a majority of Homer
residents. I've had a chance to attend a couple of
public hearings in Homer and 250 people or so were at
those hearings and virtually to a person, they are
overwhelmingly in support of this buyback.
You may remember that Governor Murkowski indicated at
one time that he would at least consider lease
buybacks as an alternative. Mr. Chair, I urge your
support for this extremely important legislation to
the people I represent, to continue the state's 30
year consensus of supporting renewable resources and
the economic development path on the southern Kenai
Peninsula and hope the committee will hold a further
hearing on this bill to allow for public comment. I
will end by saying we have not received a clear - well
actually the fiscal note we received is indeterminate
and I'm anxious to hear of any further developments in
that area.
CHAIR STEDMAN stated he would request additional information
regarding the fiscal note. He then advised that when dealing
with this type of complex issue he would appreciate having maps
provided to help relay information to the public.
SENATOR GARY STEVENS agreed to provide maps.
CHAIR STEDMAN asked Mr. Myers to come forward and speak to the
issue.
MARK MYERS, Director of the Division of Oil and Gas, DNR,
reported he had geology, natural resource law and leasing
program experts available online to answer questions.
He assured members that DNR appreciates the concerns expressed
regarding the environment and the uniqueness of Kachemak Bay.
That being said, he advised that the 1979 moratorium from
offshore leasing was justified under AS 38.05.184 where
"Kachemak Bay was declared one of the state's most important
commercial fisheries; and that even minute quantities of oil may
be harmful to larval forms of crabs and other marine life..."
but there was no moratorium established for onshore leasing.
At the time that DNR switched to area-wide leasing a best
interest finding (BIF) was called for and the commissioner made
the decision to draw the line for the finding at Anchor Point.
Because the document did not speak to the area to the south of
the point, no determination was made on the value or lack of
value of the state's best interest for that area. He emphasized
that DNR has no documentation regarding the commissioner's
reason for drawing the line at Anchor Point; it was just a
decision he made.
As a point of clarification he explained that under conventional
oil and gas leasing, the state leases all mineral rights, not
just gas, which is why the Legislature was concerned about oil
spills into the marine environment and why they made the
determination that Kachemak Bay should be protected.
MR. MYERS acknowledged the leases could be viewed as an
unintended consequence of the 1999 decision because over-the-
counter, shallow gas lease sales are specifically allowed in
areas excluded from area-wide leasing. Based on the nature of
the shallow gas leasing program law that asks whether the gas
would benefit the residents of the local area, the commissioner
made the appropriate decision.
With regard to adequate noticing, he insisted the sale was
properly noticed in the newspaper. The fact that it wasn't in
the Homer newspaper was an oversight and he apologized, but
pointed out that notice was placed in the Peninsula Clarion in
an effort to reach the area involved. He noted DNR was noticing
for leases in the Mat-Su Valley at the same time so they did a
single blanket announcement and unintentionally omitted
publication from the Homer paper. He explained the shallow gas
program doesn't allow a BIF or the typical public process that
people are accustomed to in the area-wide leasing program or
exploration licensing. DNR's position is that the leases were
appropriately let, but they realize that there is strong local
opposition to the shallow gas program.
MR. MYERS explained the procedure for evaluating the leases if
the state were to conduct a buy-back. First, the cost value at
$500 per lease multiplied by eight leases for a total of $4,000
is established. Next, DNR negotiates compensation for work done
to the point of buy-back. Finally, if an agreement cannot be
reached with the lessee, the use of eminent domain is
authorized. If that mechanism is used, the state constitution
requires just compensation to be rendered, which would include
the cost of the lease, the cost of work performed, and the
potential value of the undiscovered resource.
Valuing the undiscovered resource base depends on the quality of
data available and the interpretation of that data. In this
case, DNR would look at analogs onshore in Cook Inlet. The Homer
area is on structural trend for conventional gas with some known
gas fields and reservoirs. Using that model and hypothesizing
that one-fifth of the state's 22,000 acres is productive and
there is a 50 foot pay sand, DNR estimates that there is a
conservative 20 bcf of recoverable gas and an optimistic 100
bcf. Assuming a conservative $1 net per thousand cubic feet, the
ground value would amount to roughly $20 million. The applicants
could claim significant resource value, he said. It follows that
the fiscal note is indeterminate because it is dependent upon
what is negotiated.
MR. MYERS speculated that many of the leases won't be explored
and will probably be turned back to the state. They're 3 year
leases and about 2 years are remaining. When reviewing the
conventional 7 year leases, most see no exploration activity for
one reason or another and for 3 year leases the process is even
more difficult.
SENATOR KIM ELTON mused he was puzzled as to why the leases were
let for $500. The price for the lease isn't predicated on the
value of the resource yet the repurchase figure is predicated on
the projected value of the resource. This, he asserted, is
particularly perplexing when the fiscal gap is considered.
MR. MYERS acknowledged his point was good then noted that the
intent of the non-competitive shallow gas leasing program was to
provide rural energy in remote areas. In a competitive program,
multiple companies may bid and when that occurs, the state
receives the most optimistic view of the value of the lease,
which is typically better than market value. The shallow gas
program is different so the cost of acquiring the lease is not
in proportion to the value of the lease in a competitive market.
Keep in mind, he said, the state would also receive royalties
and severance taxes from the production. Using the estimated $1
per 1000 cubic feet net for an optimistic 100 bcf reserve, a
12.5 percent royalty would result in receipts of $12.5 million.
However, if the gas was used for local sources and wasn't
competing against other gas, just half that amount could be
expected.
SENATOR ELTON asked if there had been any effort to work with
the community and buy back just those leases that were of
special concern.
MR. MYERS replied the points were good and the issue and
concerns were similar to those expressed in the Mat-Su Valley
where drilling activity has begun. He advised that Pat Galvin
has been named state coordinator for coal bed methane and he is
leading a series of workshops to get public input and
involvement in the process of looking at the public notice
procedures as well as the stipulations and mitigation measures.
The initial stages of exploration and drilling spurred
involvement in the Mat-Su Valley and residents weren't sure DNR
had covered the full spectrum of regulatory issues with coal bed
methane.
He informed the committee that the commissioner of DNR scheduled
four major workshops and several additional public meetings in
the Homer area to go through the process to assess how the
stipulations and mitigation measures work. He warned that it's
difficult to foresee what measures might be required until there
is a proposed activity, but the details are attached to the
lease and give the state great power and latitude.
For example, if coal bed methane is developed and water
produced, they would expect to be required to reinject water.
Surface entry might be limited in certain areas as well. In the
Homer area, where conventional gas is the primary target,
directional drilling is the appropriate use of technology. So
they're able to offset sensitive habitats and drill
directionally under as they do further north on the Kenai
Peninsula.
He repeated that no one has proposed a well yet and since the
leases are short term it is likely that no drilling will occur.
If it does, there will be full community involvement and
stipulations and mitigation measures will be used. Finally, the
governor did state that he would consider buy back as a last
resort if it's shown that you can't drill with minimal risk to
the environment.
SENATOR GARY STEVENS agreed with Senator Elton that the process
for buy back doesn't immediately jump to the highest value
because there is room for negotiation between the state and the
leaseholders along the way.
He told Mr. Myers that the community was advised that this
development would be shallow gas yet the testimony indicated
that the leaseholders were looking at conventional gas. He asked
how a shallow gas permit that is limited to 3,000 feet could
become a much deeper, conventional gas development.
MR. MYERS conceded there is considerable confusion due to the
nomenclature used on shallow gas, coal bed methane and
conventional gas programs. He explained:
The shallow gas leases contemplated all gas at shallow
depths so when I use the term conventional gas I mean
gas that's present in a reservoir that's typically a
sandstone at more conventional play. The gas is not
found in the coal seam itself as it is in coal bed
methane or in a fractured shale as it is in some other
non-conventional gas sources. So conventional gas
simply refers to the more traditional reservoirs where
it's more like a tank. You have sand grains and in
between those sand grains are spaces and there is gas
in those sand grains. The gas was created in a
different source and it migrated out of that source
into a trapping mechanism of some sort. Those type gas
fields typically recover the gas with very little
produced water and they are generally produced at much
higher production rates than do non-conventional gas
methods such as coal bed methane. In coal bed methane,
the gas is trapped in the coal seam. It's physically
within the coal and not within the cracks in the coal.
When you pull water out of the cracks, it lowers the
pressure in the coal and gas actually comes out of the
matrix of the coal into these cracks and then gets
produced along with the water. So, it's sort of like a
bottle of soda; with an unlimited supply of CO you
2
shake it up and produce the gas and out comes the gas
with the water and you separate those two.
With conventional gas, the gas is typically by itself
in the reservoir, sometimes with a little bit of water
underneath it, but normally just a pocket of gas in
the sand grain. So you produce that, you just produce
the gas. The advantage of conventional gas is the
rates are much higher; it takes much fewer wells to
drill it and generally it's more economic if it's
present.
The conventional gas in this program has to be at
shallow depths in order to qualify - at least part of
the reservoir. One of the problems with the shallow
gas program is it made sense from a point of trying to
mitigate oil spill risk by limiting depth so you have
less chance of encountering oil, but it doesn't make
any sense from a production, conservation of resource,
maximization of producing the gas [standpoint]. It
also creates huge quarrelative rights problems between
owners at different depths. The difficulty is it uses
3,000 feet above the surface, true vertical depth. If
your surface is like Homer and you have bluffs and
sand, where difference in depth might be 400 to 500
feet. [Indicated a rolling wave variation] Underneath,
geologically you could have a flat line reservoir and
you could be in and out of the coal seam based on the
undulation of the hills [with areas] legal to produce
[and] not legal to produce. The well doesn't care; you
don't produce just around the well bore but in a
radius of investigation of significant distance from
the well bore. Coal bed methane typically [has] five
wells per square mile [and] it would be less than that
for conventional wells. So you have a well that is
draining an area of say one-quarter to one-half mile
radius around that area. Some of the gas they would
legally have in a 3,000-foot limit; some of which
would be 100 percent unleased state gas rights. On
some of that gas sale it's 12.5 percent or 6.25
percent and some yield it's 100 percent. Huge
quarrelative rights huge disincentive for maximizing
production of the reservoir and all these other issues
that we have to deal with as an agency to protect the
maximum recovery of resource and maximum by the state.
It creates a huge problem.
So, two years ago the statutes was amended to say that
if part of the field was above 3,000 feet, you could
produce the deeper gas and that was aimed from a
practical standpoint. The only logical way to see
further development, so when that was passed, it does
allow - if part of that field is above 3,000 feet -
for you to follow that same field down to deeper
depths. I would advocate that is the only responsible
way to develop the gas resources; otherwise you're
going to leave a lot of value in the ground. You won't
maximize recovery. I think that is one of the
unintended consequences of the shallow gas leasing
program. It really didn't contemplate beyond leasing -
to the next stage of what do you do. In coal bed
methane, when you get below about 4000 to 6000 feet,
the pressures of the earth on top collapse the
fractures in the coal that are necessary to get the
gas out of the coal. Realistically there is a limit of
depth between 4000 and 6000 feet depending on geology
in which coal bed methane simply will not work no
matter what you do. Conventional gas, that can go as
deep as 20,000 feet - so a big difference in how you
would produce it - but still all that gas above 3000
or 4000 feet depending on definitions of what part of
the field is still definitely shallow gas and
allowable to be produced from the lease.
SENATOR GARY STEVENS remarked that the understanding that the
leases are shallow gas and are limited to 3000 feet is
incorrect. In fact the depths could be considerably deeper and
there could be conventional gas development.
MR MYERS replied there is no more environmental impact from a
deeper well and a lot of advantages because production is
maximized with fewer well bores. "From a technical and
environmental standpoint, I think the 3000 foot depth didn't
make a whole lot of sense and I think that is why it was amended
two years age."
SENATOR GARY STEVENS noted that the Homer area was
unintentionally excluded from the public notice process for the
lease sales while Talkeetna was properly noticed. Talkeetna
expressed concern and they were removed from the lease sale and
he questioned whether that might have happened in Homer as well
had they responded similarly.
MR. MYERS pointed out there is little geologic potential in the
Talkeetna area and DNR made the determination that leases
wouldn't benefit the area residents. In contrast, there is a
geologic trend in the Homer area and the area has a population
of 15,000 and no source of natural gas. Although community input
is taken into consideration, the standard isn't a best interest
finding standard. It is a standard that is much more focused to
the benefit of gas and, he maintained, the commissioner had
little discretion but to grant those leases.
PIRTLE BATES, leasing program expert, DNR, testified via
teleconference and explained the notices for Talkeetna, Mat-Su,
and Homer were identical. "For the Talkeetna area, it was done
in the statewide paper, which was the Daily News as well as the
Frontiersman for the Mat-Su Talkeetna area. Whereas on the
peninsula we did notice in the Peninsula Clarion." In addition,
local community councils, municipalities, local boroughs as well
as regional and village Native corporations were notified. He
reported they received no response from the core Mat-Su area or
the Kenai Peninsula other than from the borough and several
state agencies whereas Talkeetna residents registered a
significant number of comments after the original public notice.
As a result of the concerns expressed, DNR attended local public
meetings and responded to a number of comments from Talkeetna.
It is a misconception that the bill prohibits DNR from
considering public comment, but the legislation creating the
program does require the use of decision criteria that weights
geologic evaluations. As a result of the work done by DNR
resource evaluators, the director decided not to issue leases in
the immediate Talkeetna area.
SENATOR WAGONER asked for a specific list of which publications
were notified of the proposed lease sales.
MR. BATES agreed to provide a complete list to the committee.
CHAIR STEDMAN asked Mr. Myers if he had additional comments.
MR. MEYER stated DNR is sensitive to the need for balance
between the environmental and resource needs, but they are
concerned about the gas reserve base in Cook Inlet and they do
see geologic potential in the Kachemak Bay area. He concluded,
"As we're learning in the Mat Valley, the public process is very
important and we don't intend to short it to the extent we're
allowed under the law."
CHAIR STEDMAN noted supporting resolutions from the City of
Homer, Kenai and Kachemak were in member's packets.
SENATOR GARY STEVENS asked whether there were other leases south
of Anchor Point and outside the scope of SB 250.
MR. MYERS replied DNR isn't aware of any other applications in
the Homer area. Since it's an over-the-counter program
applicants are free to apply any time, but there is currently a
moratorium on leases until the coal bed methane process in the
Mat-Su Valley is complete. He continued to report there aren't
any conventional leases offshore, but there is a federal OCS
[outer continental shelf] sale scheduled in lower Cook Inlet in
May 2004.
CHAIR STEDMAN recapped several points:
· There is considerable public concern regarding this issue
· DNR is looking for ways to mitigate potential impacts
· The leases have approximately two years left
· Drilling has not begun
He held SB 250 in committee.
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