Legislature(1995 - 1996)
03/13/1996 03:50 PM Senate RES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 112 DISCOVERY ROYALTY CREDIT
SENATOR PEARCE announced SB 112 to be up for consideration.
SENATOR HALFORD moved to adopt CSSB 112(RES), version G, as the
working draft. There were no objections and it was so ordered.
ANNETTE KREITZER, Staff, Senate Resources Committee, explained that
she worked with Ken Boyd, Director, Division of Oil and Gas, to
come to some agreement about the applicability section. She said
this version deleted the "commercial quantities" language in all
sections because administration felt it was more to the point
without it. It also adds applicability language.
KEN BOYD, Director, Division of Oil and Gas, commented that they
had come a long way in getting the language straightened out. They
took the commerciality standard out because the same arguments that
have existed in past languages don't exist any longer.
MR. BOYD thought the committee needed to consider in the
applicability section to exclude things in existing units because
a unit is formed to produce all the oil and gas within the unit.
If it's already in a unit, it's already been discovered.
SENATOR PEARCE asked if the unitization agreement is for a discrete
pool. MR. BOYD answered a unitization agreement generally covers
the field and all the pools within the field. He explained that
sometimes there is more than one participating area within one
unit. The participating area being that area of the unit that
actually contributes production.
SENATOR PEARCE asked if there could be a discovery royalty on a
well in an overlapping unit. MR. BOYD answered that he thought the
answer would be no because sometimes there is more than one
participating area within a unit. He said they would not want to
make this applicable to leases that already were eligible for the
old provisions of discovery royalties because of the conflict it
would recreate and he said that should be put in statute.
Number 390
SENATOR FRANK asked if there were leases from before 1969 that
don't have production on them. MR. BOYD answered yes. SENATOR
FRANK said he thought there had to be some kind of production to
extend a lease beyond 10-years. MR. BOYD explained that some of
the old leases are DL 1 leases and are still not producing, but
have provisions of the earlier law.
SENATOR FRANK asked why they would be extended if they didn't have
any production on them. MR. BOYD replied that he would have to
check that out.
MR. BOYD asked if it was the committee's intention to have multiple
discovery royalties on one lease or should there be one per lease.
In other words would you want the discovery well to discover all
the pools that might be discovered from a single well or would it
be possible to have two discovery royalties if two pools were
discovered. SENATOR FRANK said he would not allow that.
MR. BOYD thought the place that need clarifying was on page 3, line
31. He was also concerned with the retroactivity of the bill. He
opposed making something retroactive that is a discovery royalty
activity. He explained that when we became a state we adopted
federal law about discovery royalties which was there for years.
People knew nothing about the North Slope or Cook Inlet. He
questioned whether the discovery royalty provision ever helped
discover any oil.
MR. BOYD pointed out that coal bed methane under discovery
royalties would create something unusual because coal is difficult
to define. It occurs differently than normal sediments.
Number 297
MR. PAUL RICHARDS, Stewart Petroleum, said he felt the purpose of
the bill seems to have gotten lost in the discussion. He
appreciates the way the bill is drafted now. Speaking on behalf of
independents who could possibly come into marginal fields within
the Cook Inlet, the intent of the bill is to help those companies
who do not have the financial weight to invest millions of dollars,
but look for assistance through royalty credit. If this bill gets
passed, more independents would go into Cook Inlet which would
create good paying jobs for an industry that is being flattened
out.
One question he has is on page 4, line 3 - undiscovered oil or gas
pool within five years of the effective date of the lease. He
thought there was a collective agreement on Senator Taylor's
amendment to delete "within five years of the effective date of the
lease" which would apply the royalty for future leases and to
leases that are active now.
SENATOR PEARCE explained that Senator Taylor's amendment was
divided into two parts and the committee didn't actually take
action on that part.
MR. RICHARDS said his second concern was with applicability of the
effective date and whether it referred to the date of the
regulations or the effective date of this particular bill.
Number 192
SENATOR TAYLOR said that the primary concern he had was that they
provide the discovery opportunity for existing leases and the
initial amendment he offered went back too far. The intent of the
effective date is to have it start with the bill so that when it's
signed into law in July any discoveries made after that on existing
leases would receive that benefit.
SENATOR HALFORD said he thought they had to delete the "within five
years of the effective date of the lease" and then the
applicability section would work if they changed the effective date
of the regulations to the effective date of this law. SENATOR
TAYLOR agreed.
Number 168
MR. BOYD commented that however they adopt the effective date, if
there are no regulations that means there are no definitions which
means there are no tools at all to define anything. He said that
none of the terms the committee wants defined are in law and
regulations take time. If they want the law applicable now, then
there will be a period of time when there will be nothing.
SENATOR HALFORD moved to delete on page 4, line 3 "within five
years of the effective date of the lease." There were no
objections and it was so ordered.
There was general discussion on how to deal with the regulations.
SENATOR PEARCE asked what the drilling season in Cook Inlet was.
MR. BOYD answered that it ran from April to November.
SENATOR FRANK suggested saying "were entered into before May 1,
1996" or something like that. MR. BOYD said there would be no way
of knowing it was a valid credit because the Commissioner would
have to certify with no rules. He thought that they would have to
have regulations prior to certifying anything, awarding any
credits, or giving anybody a hint that you might do so.
SENATOR FRANK asked if it didn't take a long time to actually start
drilling. MR. BOYD replied that it did.
PATRICK COUGHLIN, Division of Oil and Gas, explained that the old
regulations define what is "first encounter" and further define
what evidence you have to submit in order to prove it. If someone
was unable to produce that evidence, then under the old
regulations, they couldn't qualify.
MR. BOYD added that if companies wanted certainty, they would have
to have a clear definition of what they would be expected to do.
The State would be at risk to certify something it shouldn't be
certifying. He thought we would be subject to a potential lawsuit.
SENATOR HALFORD said to get any incentive that has an effect this
year, the accrual has to start based on events and investments and
spending that maybe occurs in May or June of this year. He wanted
language saying the credit would be available pursuant to
regulations and definitions, etc, being promulgated. If there's
royalty paid in the meantime, it's paid at the rate and credited
back and there probably wouldn't be any anyhow, he said.
SENATOR PEARCE asked Mr. Boyd if he thought there could
realistically be any wells drilled this season that hadn't already
been permitted. MR. BOYD replied in general no, but given the
extent of the bill not necessarily no. He thought that coal bed
methane or shallow gas wells in the Northern part of Cook Inlet
could be drilled.
TAPE 96-30, SIDE A
Number 001
SENATOR PEARCE commented that she thought the bill should be moved
to the Finance Committee where Senator Frank and Senator Halford
could work on it.
SENATOR FRANK asked if they could do a temporary regulation that
was broad enough to capture all new wells. MR. BOYD replied that
there have been many lawsuits going on for so many years on
virtually every one of the applications. The lawsuits are over the
definition of words - who was the first person who discovered it.
MR. COUGHLIN added that there is the question of whether you want
to use an objective or a subjective test. He said the committee
could make an effective date, then they could adopt regulations,
but a person who drilled in the interim would run the risk of not
complying with the regulations.
SENATOR FRANK added that the State would be at risk for losing a
lawsuit, too.
SENATOR TAYLOR said that he thought the risk was that the
regulations might be found to be inappropriate relative to the law.
The only thing we would lose would be the incentive credit which we
were going to give up in the first place.
MR. BOYD said he understands what reasonable people would like to
do, but there are thousands of pages of lawsuits that argue against
what he's saying. Big money is involved.
SENATOR HOFFMAN asked if the June 1 date suggested by Senator
Halford would be enough time for the Department to promulgate
regulations. SENATOR PEARCE responded that that wouldn't work
because the bill doesn't have an effective date and it becomes a
law 90 days after the Governor signs it and they don't know when he
would sign it. So it could be the first of October before it goes
into effect. Unfortunately putting in a date before it becomes law
or they have a chance to write regulations is not appropriate.
Number 197
MR. RICHARDS said he realized there needs to be some negotiation
and regulatory development of this bill. He said no one was going
to make a decision to drill this year. The bill tells investors
that it's marketable to invest in a company that will do it. He
thought passing the bill would be a good indication to investors
getting the financing part going and also give the Department
enough time to write regulations.
SENATOR FRANK asked if it was reasonable for the Department to
start immediately on regulations when the bill is signed. MR. BOYD
replied absolutely.
SENATOR TAYLOR commented that they had already done all the
research and he didn't see why regulations would take so long. MR.
BOYD responded that every one of the "warts" was still being
litigated. Adopting what's already there is not the right answer.
He has been told it takes a year to promulgate regulations because
of all the reviews it takes. When he developed exploration
incentive credit regulations, it took two years, for example.
MR. BOYD said the problem with the discovery royalty process is
that it has been a lawsuit generator.
MS. KREITZER reviewed the issues in the first proposed amendment
for the committee. Does the committee intend to allow more than
one discovery royalty per lease or do they want DNR to define it in
regulation.
Number 300
SENATOR TAYLOR moved to amend line 13 to delete "are" and insert
"were nonproducing leases on the effective date of the act."
SENATOR PEARCE noted that was on another topic and they were
considering the issue of allowing one or more discovery royalties
per lease.
SENATOR FRANK moved to adopt an amendment limiting it to one.
There were no objections and it was so ordered.
MS. KREITZER then reviewed the second issue of applicability and
whether to include "nonunitized" wherever "nonproducing" is used.
MR. BOYD interjected that if leases are determined not to be
producible, they are removed from the unit. So he recommended that
things in units should be excluded.
SENATOR FRANK asked if you could get out of a unit without the
approval of the State. MR. COUGHLIN answered that you couldn't and
the reason you would want to stay in the unit if you're not
producing is because you would expect to eventually drill a well.
MR. RICHARDS asked if the bill intends to reference unitization you
have done before the bill. The committee answered no. MR. BOYD
explained the credit would apply to future unitization.
SENATOR FRANK moved to add "nonunitized" wherever "nonproducing"
leases were mentioned. There were no objections and it was so
ordered.
Number 495
MS. KREITZER said the final issue was whether the committee wanted
to make a policy decision regarding the nonapplicability of the old
discovery royalty where the new one applies because of the
conflicting nature of the two.
SENATOR TAYLOR moved to disallow usage of the old program in areas
where the new program would apply once it goes into effect. There
were no objections and it was so ordered.
Number 523
There was more discussion on the effective date issue.
TAPE 96-30, SIDE B
Number 554
SENATOR TAYLOR and SENATOR FRANK moved to adopt a conceptual
amendment to make the act effective on all leases now and in the
future on nonproducing and nonunitized leases after the certifiable
discovery six months after the effective date.
SENATOR PEARCE objected to the amendment and asked for a roll call
vote. SENATOR FRANK, SENATOR TAYLOR, and SENATOR HOFFMAN voted
"Yes" and SENATOR PEARCE voted "Nay;" and so, the amendment was
adopted.
SENATOR TAYLOR moved to pass CSSB 112(RES), as amended, from
committee with individual recommendations. There were no
objections and it was so ordered.
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