Legislature(1997 - 1998)
04/15/1998 03:30 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS
CHAIRMAN HALFORD announced HB 380 to be up for consideration.
REPRESENTATIVE HODGINS, sponsor, said HB 380 adopts a royalty
relief for shut in fields. Cook Inlet has been a very productive
field and is now declining. The six fields in this bill are
actually on the outside edges and are uneconomical to produce at
this stage. For the past 30 years, there have been hydrocarbons
found at these locations, but there hasn't been any production
because it hasn't been feasible. He said that a small field of gas
has been discovered at Anchor Point and if there was enough gas,
they could gasify Homer. Anchor Point is 40 - 50 miles from any
infrastructure which makes it uneconomical to produce.
Legislative Legal has said that a price cap becomes very cumbersome
as evidenced by similar legislation which was attempted a couple of
years ago.
REPRESENTATIVE HODGINS said the reason for a reduction is because
the State hasn't received anything from these fields, yet, and he
wanted to offer some incentive for industry to start production and
bring royalties into the State coffers. On an off-shore platform,
approximately 30 million to 40 million barrels of oil is needed to
justify it. This has been capped at 25 million because they feel
it is sufficient to offer some sort of incentive to cap the State's
interest.
He pointed out that there is a royalty discovery reduction of five
percent currently in statute which has no cap which goes for 10
years. He said there was an argument on the other side that there
was no economic assessment; but, on the contrary, there has been
one because they have discovered hydrocarbons in these six
locations, but they haven't been developed in over 30 years. The
price of oil has been up to $25 per barrel and there still has been
no incentive, even at that price, for people to go in and develop
these fields. In the Kenai, Nikiski, Soldotna area, they have
unemployment as high as 17 percent and there are six or seven
buildings that are completely vacant that used to have 5 - 15
people working to service the oil fields. That's gone because the
oil fields declined. He hoped to create jobs and bring in some
royalties to the State. He added if large reserves are
discovered, there may be enough economic incentive to build
pipelines that would bring other remote fields on line.
Number 397
SENATOR GREEN asked what was the likelihood that any of the
original owners would go back in and attempt to produce in today's
market.
REPRESENTATIVE HODGINS answered that he didn't have any idea, but
the reason they chose these six fields is because they have been
shut in for over 30 years. Legislative Legal Services told him if
they delete any of the six fields, it would become too specific and
would not be good legislation. He said there are people who are
trying to get natural gas into Homer and there has been some
activity on Redoubt Shoals.
CHAIRMAN HALFORD said a proposed amendment says that the approval
for the royalty reduction requires a plan to utilize as much as
possible Alaskan manufacturing materials, construction, etc. and
provides that the Royalty Oil and Gas Development Advisory Board
makes that determination. He asked if that was a problem.
REPRESENTATIVE HODGINS said it wasn't, but on page 2, lines 7 - 17
he questioned what the relative cost of the materials in proportion
to the benefit to manufacturers in the State meant.
CHAIRMAN HALFORD explained that it is intended to provide a
reasonable incentive which will be a judgement call by the Alaska
Royalty Oil and Gas Advisory Board that all reasonable efforts are
made. As far as he's concerned, if it costs substantially more to
have it done in Alaska, it's probably not reasonable. If it costs
the same or close, do it here. It is not intended to be any
numerical scale.
REPRESENTATIVE HODGINS said he had visited the Adriatic Ape, a
jack-up platform, and it was amazing to understand the gamble they
make whenever they set those legs down which leads him to wonder if
we have the expertise in the State of Alaska to do this. If it
isn't here, are we still going to hold these six fields to that
standard?
CHAIRMAN HALFORD responded, if the expertise isn't here, then it
never reaches the level of consideration.
REPRESENTATIVE HODGINS said his whole intent on this legislation
was to create Alaskan jobs and he didn't have problems with the
amendment as long as it doesn't become too subjective and lend
itself to unreasonable caps. He said he would also hate to see
someone lose money waiting for a compressor, for example, to come
through an Alaskan distributor when he could get one from someplace
else.
CHAIRMAN HALFORD reiterated that it wasn't the intent to have them
buy things through Alaskan wholesalers that are not fabricated in
Alaska. The question is fabrication, construction, and the jobs in
Alaska versus the materials coming to Alaska from someplace else
and the difference in who gets the dealer mark up.
SENATOR TORGERSON said he agrees with REPRESENTATIVE HODGINS, but
he didn't think the amendment went to the level of detail they are
talking about.
CHAIRMAN HALFORD said he assumed this was one determination at the
point they decide to go forward. It doesn't get reviewed over and
over again.
REPRESENTATIVE HODGINS asked him how he saw the companies lose
their reduction if they didn't follow their plan.
CHAIRMAN HALFORD said once there was a plan, there would probably
be all kinds of conditions, so they would have to follow their own
work plan. He didn't think it would come up.
SENATOR LINCOLN asked if they provide relief without there being an
economic evaluation performed.
REPRESENTATIVE HODGINS replied that the economic evaluations have
been the hydrocarbons that have already been discovered in these
six fields, although they have never been proved up. The idea
behind this bill is that they don't have to delineate the fields.
That was a big problem with the existing royalty program (SB 205).
He said if you drill through one of the designated fields and find
more oil, you're in another field. These fields have already been
specifically named and the economic analysis is that they have not
had any infrastructure put onto them and have not been producing,
even though they have been known for years. Cook Inlet has a lot
of pockets of oil.
SENATOR LINCOLN said she thought it was helpful to have incentives
in any industry to have production, but she didn't see where giving
relief in this form to this company would necessarily do anything
for the Alaskan coffers. She has heard from Marathon how their
plans in Sterling and Beaver Creek fields were a direct result of
their 3-D seismic work. Technology is changing so much that we can
better pinpoint where it is and not have to go to extremes on
giving incentives to the industry for exploration. She said they
have a fiduciary responsibility to the citizens of the State.
REPRESENTATIVE HODGINS agreed with Senator Lincoln's concerns and
explained that the fields in Sterling and Beaver Creek are very
close to infrastructure and don't need to put in a pipeline or
production facilities. These six fields are a distance from
facilities, about 40-50 miles, which is very expensive especially
for the size of the field.
TAPE 98-28, SIDE B
Cook Inlet has a lot of oil, but it's uneconomic to produce. These
fields have lain dormant for 30 years. But the bill has a cap, if
a big field is found.
MR. PAUL FUHS, Alaska Resource Alliance, said they are a marketing
consortium of 23 Alaskan oil field supply and service companies and
are trying to make it easier for Alaskan oil firms to purchase from
Alaskan suppliers. He supported HB 380 saying that the jobs that
are created are not just the oil hands on the oil rigs; it's all
the companies that supply products from paper clips to valves and
pipe and everything in between. A lot of people's jobs depend on
the oil field developments.
He said he understood that it's their responsibility to try and
figure out if the wool is being pulled over their eyes by being
asked for a tax break, but he thought it was good proof that these
fields have lain dormant for 30 years. If they were economic, they
would have been developed. He said there was a cap on six specific
fields as a protection in case someone really hit a big field.
MR. GARY CARLSON, Vice President, Forcenergy, supported HB 380 and
said it is a clear incentive to invest in Alaska in a timely way.
He thought it was important for Alaska to act within the time frame
that is set out. There is a low administrative burden and it's not
complicated and the volume decision was a result of clear thinking.
He said that even failed projects will generate jobs for Alaska.
His primary concern is uncertainty caused by a requirement to go in
front of an unfamiliar board that may or may not have experts on it
and being subject to litigation by disgruntled suppliers, although
he knew that wasn't the intent behind the amendment. He thought it
was a real possibility. They have already made the commitment and
worked hard to encourage Alaskan companies to participate in
projects they are looking at.
Number 524
SENATOR LINCOLN asked him to explain how he thought Alaska was
protected on the upside. She also asked how his company would help
with Alaska hire.
MR. CARLSON said the 25 million barrel volume cap that would allow
the State to participate in any upside potential. On Alaskan hire,
his company has set up an office in Alaska and has hired 22
employees who are all Alaskan. They took over a bankrupt company
and hired the people who were already in place. They have used
Alaskan contractors almost exclusively to the point that the
expertise is not available. Many of their investments in
geophysics and drilling wildcats throughout the State are using
drilling equipment that was already here and in one case they are
using a piece of drilling equipment that was idle for 10 years.
They have an Alaskan hire policy already in place in his company
and he offered to supply it to the Committee. His company is
acting like they would want him to act and he thought it was good
business. His main concern with the amendment is that litigation
or lack of understanding would destroy the incentive.
SENATOR LINCOLN asked why he purchased the leases knowing the way
Alaska does business with its lease structure. She asked why it
was economical at that time and not now.
MR. CARLSON answered that he wouldn't say that it was attractive to
them then and not now. They came to Alaska because they felt it
was an area that the major oil companies had lost interest in (Cook
Inlet). They felt there was an opportunity for a small company to
come in and look hard and be able to figure out ways to invest and
get a fair rate of return on fields that were left behind. The
incentives they are talking about would come into play at two
different times - once you pick up your leases, you decide if
you're going to spend the money for 3-D seismic or to drill
exploratory wells. You have to look at the whole cost structure
and part of that is the burden of pipeline tariffs or royalties or
whatever is facing them to making a commercial project. This will
make a difference on some fields. If they knew they had a 100
million barrel oil field, they wouldn't be worrying about the
royalty, although they would appreciate a reduction. If it's a 40
million barrel oil field, it may make the difference. The concept
of putting a time frame on investments is going to encourage
companies like his and other small ones in the Anchor Point area,
especially, to take action that they wouldn't otherwise.
SENATOR LINCOLN asked if their company did a bit of that cost
structure before they went in for the leases.
CHAIRMAN HALFORD said it isn't his intention to come up with an
amendment that get's an ongoing review process; he just wants some
way to have a statement about maximizing local hire, fabrication,
and construction.
Number 408
MR. KEN BOYD, Director, Division of Oil and Gas, first explained
that 4-D seismic was time lapse 3-D seismic. It is a production
tool, not an exploration tool. He said they don't support the bill
because there is no economic evaluation and there is no upside
potential for the State. They recognize that the bill has changed
somewhat from the beginning. He said it didn't make sense to talk
about millions of barrels, if you didn't put a price term on it.
At some point, you have to fill in the price term or you don't know
if the field is economic. He, personally, had not seen an analysis
done on the Cook Inlet fields that said they are uneconomic. He
suggested using a sliding scale royalty so the State could capture
the upside.
An economic analysis saying the fields haven't been developed for
25 or 30 years also doesn't mean a lot to him if you look at what
Anadarko is doing at West Moquawkie, another field that has been
shut in for 25 or 30 years. He thought that the State needed to
have protection in case there was a lot of oil found or if oil
prices went up or both.
SENATOR SHARP asked how long a State lease could be owned without
having production or any explanation whatever.
MR. BOYD answered in Cook Inlet, if you don't have it in a unit or
producing, the lease goes back to the State and is available for
leasing in seven years.
SENATOR SHARP noted that most of the leases had been acquired in
the last 10 years.
MR. BOYD said some of the gas fields are older leases that are in
older units that have been held. The oil field leases are recent,
with one exception of a Mobil lease in Starichkof.
SENATOR LINCOLN asked him to respond to the discoveries that
haven't been proved up and said it makes sense to her to have an
economic evaluation for the protection of the State and for the
companies that are involved. She asked what the objection was to
those two areas by supporters of this bill.
MR. BOYD explained that the objection is that it adds complexity
and uncertainty, although he thought they could do something that
was not complex or uncertain. He thought it was important to look
at what was the most probable amount of oil there. He said before
Forcenergy bought the prospect, there were old wells there and one
of them had some oil in it that flowed fairly well, but they could
go back with 3-D seismic and reinterpret it and make their best
guess. 3-D seismic doesn't show oil, it shows structure or
possibilities, but at the end of the day, you still have to drill
to prove it up. He hadn't seen anything like an economic analysis
that shows what field size would be required to make this project
economic.
SENATOR LINCOLN asked why someone would be opposed to an economic
evaluation.
MR. BOYD answered that he has heard it adds complexity and
uncertainty.
SENATOR LINCOLN asked when companies bid on a lease, do they have
some of the historical information available to them to look at to
make a decision.
MR. BOYD answered, "Sometimes yes and sometimes no." It has been
a problem in Alaska to have the data available. Companies can buy
data from vendors over fields, sometimes data can't be bought for
any price. Sometimes a partnership can be negotiated on data.
SENATOR LINCOLN asked him to respond to the amendment.
MR. BOYD said he had no objection to the amendment and he presumed
that the Board would consist of three commissioners and three
members of the public.
SENATOR SHARP said he could see difficulty in establishing economic
parameters with more than just limiting the size of the field, but
if you are handling 100 barrels of water for every one barrel of
oil that's coming out of the well, the economics can be bad, too.
MR. BOYD said you can run into water usually later in the field,
but there certainly were other problems you could run into.
CHAIRMAN HALFORD asked why he thought companies always like royalty
relief rather than relief in corporate income tax which would
automatically be profit sensitive.
MR. BOYD replied that maybe the taxing of the sovereign can be
changed more easily. It's harder to get a royalty and it's harder
to change it once you get it. He didn't know if that was the right
answer.
CHAIRMAN HALFORD said he would like the amendment just to let
people know that there is a goal to have some kind of determination
beforehand, but that it be one determination, not a continuous
review.
SENATOR SHARP moved to adopt amendment #1. There were no
objections and it was so ordered.
SENATOR TORGERSON moved to pass SCSHB 380(RES) from Committee with
individual recommendations and the accompanying fiscal notes.
There were no objections and it was so ordered.
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