Legislature(1995 - 1996)
05/06/1996 03:13 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 548(WTR)
An Act authorizing the amendment of Northstar Unit oil
and gas leases between the State of Alaska and BP
Exploration (Alaska) Inc.; and providing for an
effective date.
Co-chairman Halford noted teleconference links to Anchorage
and Barrow and directed that CSHB 548 (WTR) be brought on
for discussion of proposed amendments for inclusion within a
draft SCS CSHB 548 (FIN).
Senator Rieger referenced an earlier distributed amendment
by Senator Leman, relating to Limitation of Authority. He
then pointed to a handwritten addition that he explained
would clarify that the "cooling off period" on additional
negotiations of lease modifications not apply to long
standing, traditional modifications (allowed in statute) for
declining fields, at the end of their lives. The original
amendment would not have provided that exclusion. Senator
Rieger then MOVED for adoption of Amendment No. 1 (the
original amendment from Senator Leman plus Senator Rieger's
handwritten addition).
Co-chairman Halford asked if Amendment No. 1 relates to net
profit share and royalty. He voiced his understanding that
it would not apply to uneconomic late-field, production-
continuation-type modifications such as Cook Inlet. Senator
Rieger responded that his addition relates to modifications
of competitively bid oil and gas leases, after the fact, on
all except declining fields. He spoke to need for a cooling
off period while the legislature and Governor sort out
policy questions surrounding modifications. He expressed
his hope that legislation during the next session would
clarify the general framework. Co-chairman Halford voiced
his understanding that the addition would have no impact on
the Northstar agreement, since the amendment is prospective
in nature.
JOHN SHIVELY, Commissioner, Dept. of Natural Resources, said
the department would not be authorized to negotiate marginal
new oil field agreements under the proposed amendment.
Senator Rieger acknowledged that if the field was let
through competitive oil and gas lease, no negotiations could
occur. If the field has not yet been subject to a
competitive lease, it would be appropriate to "try to make
terms that are workable for the players in the industry who
want to have a chance to bid on it." The Commissioner spoke
in opposition to the amendment. He indicated that the
position of the administration is that such agreements
should be submitted to the legislature for a vote on the
merits. He acknowledged frustration on the part of
legislative members due to the timing of this particular
agreement and the difficulty of the issue.
Senator Rieger referenced earlier testimony indicating that
due to the prospect of subsequent modifications, bids might
be higher. He noted that that does not mean the competitive
process is well served. It also does not mean that actual
total return to the state is as high as it would have been
under an unmodified lease. Senator Rieger reiterated that
his concern relates to the process. He voiced his belief
that the oil and gas lease process has become politicized
within Alaska. It is not proper to conduct oil and gas
leasing via a process where bidders do not know all the bid
terms. The state must set clear ground rules. The
cumulative effect of modifications has the potential to
destroy the competitive oil and gas leasing process.
Legislation in the next legislature should clearly state
policies and trade-offs. It should also define the role of
both the Governor and legislature.
Senator Rieger noted that he argued against politicization
of the process when SB 207 was passed last year. The state
is now involved in the type of dynamic he envisioned. He
stressed that the process is not healthy and reiterated need
for a cooling off period.
Commissioner Shively said that, since statehood, all leases
have contained provisions that allow lease terms to be
changed. Modification is not a new concept. The law itself
has changed over time. Companies signing state leases have
known changes were possible.
The Commissioner questioned Senator Rieger's concern
regarding the process. He spoke to passage of generic
legislation (SB 207), last year, and submission of a
specific agreement, for approval, during the present
session. The Commissioner expressed his belief that review
of a "more generic approach on net profits might be worth
doing on net profit shares." Additional discussion of
circumstances surrounding passage of SB 207 followed.
Senator Zharoff suggested that the proposed amendment
appears to tie the hands of the administration when
attempting to work out negotiations to bring something to
the legislature for consideration. Senator Rieger
reiterated need for a cooling off period to address areas of
significant concern. Senator Zharoff voiced lack of support
for the amendment.
Commissioner Shively asked if the amendment would
essentially repeal department authority to use AS 38.05.180
(j)(1)(A). Thereafter, if the lessee of a marginal field
came in for negotiations, the department could not
negotiate. Commissioner Shively asked if that was the
intent of Amendment No. 1. Senator Rieger stressed that the
amendment provides a cooling off period, not repeal. Co-
chairman Halford voiced his understanding it would apply a
moratorium. Commissioner Shively said that since there is
no time frame associated with the amendment, the cooling off
period would apply until subsequent legislation is enacted.
Co-chairman Halford voiced accord with concern over
intricate issues placed before the legislature in the waning
hours of the session. He then asked if the amendment could
be stated in the affirmative to require that the
commissioner undertake a comprehensive review of the policy
of modifying bid variable terms and present the legislature
with legislation dealing with net profit leases. Language
could include a provision that no modifications would occur
until comprehensive legislation is presented next session.
He cautioned against legislative action that might be
perceived as anti-development toward a potential field.
Senator Rieger expressed apprehension regarding the
foregoing approach, advising that he was unaware of the
extent to which a competitively bid lease could be modified.
Co-chairman Halford voiced his understanding that particular
concern relates to modification of the bid variable. That
focuses on net profit leases which, at inception, were
strongly opposed by the industry and have not been used
since.
In response to a question from Co-chairman Frank, Mr.
Shively referenced an Exxon lease in which the company
agreed to increase the based royalty to get rid of a set net
profit.
Discussion of net profit leases set at 30 or 40 percent
versus 89 percent followed. Commissioner Shively added that
the lower percentage leases were also bid at 12.5 percent
base royalty as opposed to the 20 percent base royalty on
the BP leases. Co-chairman Frank said he did not feel it
would be inappropriate to have the administration "come back
with a proposal . . . to treat the other lessees fairly and
in a manner that will encourage continued development and
production." He suggested that it would not be onerous to
include language within Amendment No. 1 and then ask the
administration to "come back with a general policy."
Senator Rieger questioned whether the public perception of
the state's oil and gas leasing policy was improved or
degraded when lease modifications are decided in a
legislative setting, with an "entire room full of people
involved in the industry in the audience, with two days to
go in the session." Commissioner Shively acknowledged that
the circumstances do not improve the perception. He
stressed, however, that the economics of the agreements must
stand on their own. He remarked that every piece of
legislation of major significance involves interested
parties.
Senator Sharp registered concern that the majority of
Alaska's residents are not aware of the proceedings. He
voiced his belief that when changes are made to a lease that
was bid competitively, the lease should go to bid again
under the new rules. Changing a bid after the competitive
bid process disenfranchises other bidders. It does not make
sense to negotiate down competitive bids when so many
variables are involved. The perception is that many things
can be wrong with that process. Senator Sharp advised that
he would support the proposed bill, but he voiced reluctance
to establish modification after competitive bid as a policy.
Co-chairman Halford suggested that the committee proceed to
review of additional amendments to CSHB 548 (WTR). Co-
chairman Halford referenced a packet of amendment and
designated them Amendments 2 through 6. Senator Randy
Phillips MOVED for adoption of Amendment No. 2, Auditing and
Reporting, provided by Senate Resources Committee. Senator
Sharp voiced his understanding that Legislative Budget and
Audit Committee could order an audit at will. He then
questioned need for the amendment. Co-chairman Halford
concurred that the contents of Amendment No. 2 could be
placed within a letter from any legislator to the LBA
committee, requesting an audit.
The committee next proceeded to review of Amendment No. 3,
relating to "Findings and intent." JIM EASON, Contractual
Staff to Senate Resources Committee, explained that the
amendment would, in effect, rescind findings within CSHB 548
(WTR) and replace them with findings from CSSB 318 (RES).
Co-chairman Halford expressed a preference for adding
language from the Senate Resources version rather than
removing language from the House bill.
The Co-chairman noted that Amendment No. 4 would change the
effective date of the agreement to "some type of internal BP
approval." Questions were raised regarding the term
"project sanction." Co-chairman Frank voiced recollection
of concern by Senator Leman that the leases could be placed
in limbo should a lawsuit be brought. Mr. Eason concurred.
He explained that by passage of the proposed bill, the
legislature would be conferring contract benefits to the
lessee without a commensurate agreement by the lessee that
the terms the company is offering will be finalized. The
amendment puts in place the state's agreement with "the
specific terms of what you would like the commissioner to do
as far as amending the lease but not making that effective
until the lessee . . . acts to approve the project
financing." Co-chairman Frank asked if the amendment would
pose a problem for BP. ERIC LUTTRELL, Vice-President,
Exploration and New Developments, BP Exploration (Alaska),
Inc., responded, "Absolutely!" He advised that the company
so stipulated in hearings before Senate Resources. The
amendment would transfer "all the risk to BP." The company
would have to approve the project and "start spending money
before there's any opportunity for litigation to begin." It
would have the effect of "not seeing Northstar developed."
Further discussion of the impact of litigation followed.
Mr. Luttrell explained that, per current bill language,
litigation, in most cases, will not "have a big impact on
going forward." BP would move forward and assume some of
the risk because of the severability issue.
Senator Sharp MOVED for adoption of Amendment No. 4 and
asked that the following be added to the amendment:
Page 4, line 4:
Delete: 'to make'
Insert: 'has'
He explained that the amendment relates to qualifications
for an Alaska resident, residents of Alaska, and resident
personnel. It attempts to tighten provisions so that an
individual who arrives in state, secures a driver's license,
and voices intent to remain indefinitely does not
immediately qualify as a resident. It also changes language
saying that one intends "to make" a home in Alaska to
require that one "have" a home in state. The first portion
of the amendment requiring that the individual possess a
resident fishing, trapping, or hunting license or receive a
permanent fund dividend is intended to eliminate areas that
qualify an individual as a resident in thirty days or less.
In response to a question from Co-chairman Frank,
Commissioner Shively advised of two issues. The first
relates to Alaska hire and the second to how one counts
"what is an Alaskan." Amendment No. 5 appears to relate to
the count. He concurred in legislative desire to focus on
"somebody who's really been here." The Commissioner
acknowledged that a positive aspect of debate on the bill
has been discussion of Alaska hire with a focus on "how to
count people." He concurred in the residency standard of
"at least a year." Senator Sharp agreed that was the intent
of the amendment. It establishes a "measuring stick"
without becoming onerous or restricting interstate travel
for work. He stressed that the company could hire anyone it
chooses. That hire will, however, be measured against
standards within the bill.
Further discussion of residency standards followed.
Commissioner Shively acknowledged it is important for the
legislature to "tell us how long they think a person should
be here before we count them as a resident . . . ."
END: SFC-96, #115, Side 1
BEGIN: SFC-96, #115, Side 2
Additional discussion followed between Co-chairman Frank and
Commissioner Shively regarding state action that could
legally be negotiated into the agreement. Further
discussion of standards for Alaska hire followed.
Commissioner Shively referenced Dept. of Labor comparison of
employment security data against the permanent fund dividend
list as the basis for determining local hire. Mr. Luttrell
added that BP is comfortable with language in CSHB 548
(WTR). Wording within Amendment No. 5 makes the language
more restrictive. The company is less comfortable because
the implications are unknown.
Senator Sharp called for a vote on adoption of Amendment No.
5. Senator Phillips referenced employment at Endicott and
noted 125 employees, 50 of which are not residents. Mr.
Luttrell said language within the proposed bill would
completely exclude those 50 people. They would be counted
as non-residents. Proposed language puts BP at greater risk
of public outcry "about some people who come here to work
for a long time but for a while are actually not residents
by this very restrictive clause." Senator Sharp advised
that the purpose of the amendment is to provide a greater
level of comfort to legislators. Senator Phillips expressed
concern that past performance is a good measure of what the
company might do in the future. He stressed need to protect
the best interest of the state and its residents. Mr.
Luttrell advised that it is in the best interest of the
company to hire Alaska residents. BP reluctantly brings in
specialists from outside.
Senator Zharoff said he was comfortable with provisions for
local hire, in the proposed bill. He remarked on the irony
of discussion of local hire while the state, in its
promotion of development of ANWR, cites the potential for
out-of-state jobs created as a result of industry activity
in Alaska and stresses the benefit of these jobs to various
states. Senator Zharoff further noted that many long-term
Alaskans do not have a home, per se, in Alaska. He cited
fishermen as an example.
Commissioner Shively voiced concern regarding restricting
the measure of residency to fishing, trapping, and hunting
licenses as well as permanent fund dividends. Simply
stating that an individual must have lived in the state a
year or eighteen months might provide clearer direction.
Co-chairman Frank asked why there would be resistance to the
proposed language when no numerical goal is involved.
Commissioner Shively registered support for the concept but
expressed concern that application of only two measures when
counting employees might not cover all residents.
Co-chairman Halford called for objections to adoption of
Amendment No. 5. No objection having been raised, Amendment
No. 5 was ADOPTED.
Senator Randy Phillips asked for an explanation of
Amendments 6, 7, and 8. Mr. Eason advised of his
understanding that Amendment No. 6 (by Senator Phillips)
would apply residency standards to vendors, suppliers, and
contractors in an attempt to ensure that Alaska vendors,
suppliers, contractors, and consultants are used in
Northstar development. It would supplement language within
the House bill. Mr. Luttrell initially expressed discomfort
with the language. He said a brief review indicates that
much of the content is already within CSHB 548 (WTR) (Page
4, line 29) and inquired concerning need for additional
provisions. After further review, Mr. Luttrell stated he
saw nothing unconstitutional about the proposed amendment.
He said it was in keeping with intent in terms of
contracting relating to Northstar.
Mr. Eason explained that two items are embodied within
Amendment No. 7. The first portion of the amendment is
directed at the following concern:
If the modeling that forms the basis of the agreement
between the state and BP turns out not to be accurate
in a substantial way, in other words, if there happens
to be a tremendously large recovery of oil or a large
daily production rate (beyond a significant amount)
that would result in a major difference in BP or the
state's earnings under this agreement, there should be
some sideboards to make sure that the benefits are
redistributed.
The first paragraph of the amendment provides that in the
event the daily production rate is in excess of 50,000, or
the cumulative production from the field exceeds 130,000
barrels, the agreement would be amended to provide a
mechanism for readjusting the financial benefits.
The second part of the amendment provides that if the lessee
agrees to use on-site production and processing facilities,
that would occur at lessee's expense. BP would be
responsible for reimbursing the state for state expenses
associated with fabrication, construction, or transportation
of modules.
Mr. Luttrell characterized the first portion of the
amendment as requiring BP to assume all the downside risk
but obtain none of the upside benefits. If that is included
within the agreement, the field will not be developed. He
voiced similar sentiments for the latter portion of the
amendment.
Co-chairman Halford voiced his understanding that adoption
of both portions of Amendment No. 7 would necessitate a new
agreement. Mr. Eason concurred.
Discussion followed between Co-chairman Frank and
Commissioner Shively concerning the variables within the
first portion of the amendment.
Senator Donley asked if state financing of module
construction was part of the negotiations. Commissioner
Shively responded negatively. He explained that discussion
with contractors and BP focused on how much of the risk of
development of the facilities contractors would bear as
opposed to BP. The Commissioner acknowledged that review of
module business in Alaska identified areas where the state
could participate. There is no commitment by the state to
spend "any money on development of any facilities."
Mr. Eason explained that Amendment No. 8 is similar to the
latter portion of Amendment No. 7. It would amend lease
agreement provisions to require that BP use and install on-
site production and processing modules. It would also
replace findings of fact language relating to local hire,
contained within CSHB 548 (WTR), with language from CSSB 318
(RES). Mr. Luttrell said that the amendment "revises the
agreement in totality." He added that he could not
negotiate the agreement in the current manner.
Senator Sharp MOVED for adoption of Amendment No. 9.
Referencing Page 5, line 29, he explained that the amendment
would replace "not discriminate against" with "give
preference to." Co-chairman Halford voiced concurrence with
the language change but again cautioned that it appears to
modify one of the provisions of the contract. He suggested
that the language instead be inserted in the findings
section. Commissioner Shively concurred. He explained that
language within that portion of the bill was derived from
the signed agreement. Senator Sharp then withdrew his
motion for adoption of Amendment No. 9.
Senator Randy Phillips referenced the following language at
Page 5, lines 27 through 31:
Lessee shall comply with all valid federal, state, and
local laws in hiring Alaska residents and contractors
and shall not discriminate against Alaska residents or
contractors.
He then inquired concerning use of the word "valid."
Commissioner Shively advised that the foregoing consists of
standard legal language.
RECESS
Co-chairman Halford directed that the meeting be recessed,
subject to a call of the chair. The meeting was recessed at
approximately 4:45 p.m.
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