Legislature(2001 - 2002)

02/27/2002 03:43 PM Senate RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
        SB 319-SHALLOW NATURAL GAS: LEASING & DISCHARGES                                                                    
                                                                                                                                
CHAIRMAN TORGERSON announced SB 319 to be up for consideration.                                                                 
                                                                                                                                
MR. DARWIN PETERSON, staff to Senator Torgerson, told members:                                                                  
                                                                                                                                
     SB  319  is  an  act  related  to  shallow  natural  gas                                                                   
     leasing. Shallow gas leasing  was originally proposed as                                                                   
     a program  that would enable exploration  and production                                                                   
     of shallow natural gas deposits.  One of the features of                                                                   
     the  program is  to  encourage a  new  energy supply  to                                                                   
     villages, mines  and other rural  users. The  program is                                                                   
     fully  operational with  over 100  leases processed  and                                                                   
     nearly  200  more  pending.  The program  has  become  a                                                                   
     vehicle  for commercial  gas  development in  Fairbanks,                                                                   
     Big Delta, Mat-Su Valley and  the Lower Kenai Peninsula.                                                                   
     SB 319  is intended to advance  the program into  a more                                                                   
     robust  and   viable  commercial  program   that  should                                                                   
     benefit  all parties.  Because  the program  has  become                                                                   
     more  commercial  in nature,  increasing  revenues  from                                                                   
     application fees and annual  rental fees is appropriate.                                                                   
     The  program  will  still  neither  involve  competitive                                                                   
     bidding  nor require  bonus  bids. However,  application                                                                   
     fees  for shallow  gas leases have  been increased  from                                                                   
     $500  to  $5,000  and  an annual  rental  fee  has  been                                                                   
     increased from  $0.50 to $1.00  per acre. The  increased                                                                   
     fees are  designed to increase  revenue and pay  for the                                                                   
     program costs while not discouraging  parties of genuine                                                                   
     interest  and ability  from  developing shallow  natural                                                                   
     gas resources.                                                                                                             
                                                                                                                                
     The  requirement that  DNR annually  notify a lessee  by                                                                   
     certified mail of rent due has  been deleted. Rent would                                                                   
     automatically  be  due on  the  date determined  in  the                                                                   
     lease.  Deadlines have  proved to be  unworkable and  do                                                                   
     not  recognize  the  work required  by  DNR  to  prepare                                                                   
     leases in areas that are populated  and may have complex                                                                   
     land  ownership patterns.  The  limitation  on depth  to                                                                   
     3,000 ft.  has been replaced  with the requirement  that                                                                   
     some portion of  the field must be within  3,000 ft. The                                                                   
     total  amount of  acreage that  may be  held by  shallow                                                                   
     natural  gas  lessees  has been  increased  from  46,080                                                                   
     acres  to an  aggregate of  100,000  acres. The  acreage                                                                   
     increase  reflects the  fact that large  acreage may  be                                                                   
     necessary  as a  shallow  gas program.  The  requirement                                                                   
     that  the  applicant  conduct  a title  search  will  be                                                                   
     removed. DNR routinely conducts  a title search for land                                                                   
     before  leases are  issued. Additionally,  there are  no                                                                   
     title  companies  that  will conduct  a  thorough  title                                                                   
     search  of the  subsurface  estate and  warranty  title.                                                                   
     These changes will improve reservoir management…                                                                           
                                                                                                                                
TAPE 02-5, SIDE B                                                                                                             
                                                                                                                              
MR. PETERSON continued:                                                                                                         
                                                                                                                                
     New  bonding provisions  would  demonstrate lessees  are                                                                   
     fiscally  responsible  and would  help  protect  surface                                                                   
     owners.   The  lessee   must  secure   the  bond  as   a                                                                   
     precondition to  obtaining the lease. In the  event that                                                                   
     the surface  estate is owned  by a private  property, an                                                                   
     additional bond  may be required  if the lessee  and the                                                                   
     private  party cannot reach  an agreement. Lessees  will                                                                   
     have  from  July 1,  2002  through September  30,  2002,                                                                   
     approximately  90  days  to   convert  leases  from  the                                                                   
     existing program to the new program if they so choose.                                                                     
                                                                                                                                
MR. MARK MYERS,  Director, Division of Oil and  Gas, Department of                                                              
Natural Resources  (DNR), said that DNR strongly  supports SB 319,                                                              
which recognizes that  the original intent of  shallow gas leasing                                                              
was to provide  rural energy in  remote areas. It would  take many                                                              
leases to  provide sufficient energy  to the rural  villages. That                                                              
was the  original intent, but the  program quickly evolved  into a                                                              
commercial  program. Right  now there  are pending  leases on  1.3                                                              
million acres of land. The leases  are clustered near fairly large                                                              
residential  areas and  communities  of Fairbanks,  the Big  Delta                                                              
area,  the northern  Mat-Su  area  and in  the  Homer area.  Those                                                              
leases  are appropriated  for  fairly large-scale  commercial  gas                                                              
development, assuming there is shallow  gas or coal bed methane or                                                              
both. DNR looks at the program in  terms of what it needs to be an                                                              
effective commercial  program as well as to maintain  the original                                                              
intent if it is used by villages  in rural and remote areas. About                                                              
1.5% of the leases are in higher density population areas.                                                                      
                                                                                                                                
DNR  tried to  come up  with some  changes  to balance  everyone's                                                              
needs  and, to  that end,  worked  with AOGA,  Cominco, and  other                                                              
folks who have  an interest in seeing a successful  exploration or                                                              
the shallow gas leasing program.                                                                                                
                                                                                                                                
MR. MYERS told members that amending  the 3,000 ft. depth is a big                                                              
issue. The problem with 3,000 ft.  is that geologic formations for                                                              
coal or shallow  gas typically tip at an angle and  often start at                                                              
3,000 ft.,  and continue  on below  that level.  There are  fights                                                              
with the  AOGCC over proving the  state's rights to get  that gas.                                                              
Another problem  is that  the 3,000 ft.  depth is a  surface depth                                                              
rather than  a fixed  depth based  on sea  level, but the  terrain                                                              
undulates.  This   creates  a  huge   problem  from   a  reservoir                                                              
management  standpoint and  furthermore, the  coal seams  for coal                                                              
bed methane  might extend from a  few hundred feet down  to depths                                                              
of 4,500  ft. DNR feels it  is fair for  the lessee to be  able to                                                              
capture  all  the   reserves  in  an  entire   area.  For  logical                                                              
development  and to maximize  production,  DNR feels that  mineral                                                              
rights, if  the field starts  above 3,000  ft., should be  for the                                                              
whole field's accumulation. All parties share this concern.                                                                     
                                                                                                                                
Regarding changing  the fee to $5,000,  it costs DNR $2,000  to do                                                              
the title per lease.  The current bill does not require  DNR to do                                                              
the title work, but DNR has found  that it has to. Private parties                                                              
cannot get insurance  on title work so they have  no way to verify                                                              
the  title  was  done in  a  reasonable  manner  without  actually                                                              
retracing it  anyway. He pointed out  that $5,000 is less  than $1                                                              
per  acre  for  a  lease,  which   is  well  under  any  of  DNR's                                                              
competitive leasing terms. They feel  the terms are reasonable and                                                              
affordable.                                                                                                                     
                                                                                                                                
MR. MYERS said  DNR also wants to increase the  total acreage from                                                              
46,000  acres under  the old  bill  to 100,000  acres maximum  per                                                              
company. The  reason is that a  coal bed is typically  produced in                                                              
fairly  large  units of  about  70  to 80,000  acres  to  maximize                                                              
production.  Around a small  village this  wouldn't be  necessary,                                                              
but in  a commercial  sense a company  typically needs  to acquire                                                              
more acreage.                                                                                                                   
                                                                                                                                
In terms of  raising the rents from  $.50 to $1 per acre,  this is                                                              
as  cheap as  they  get.  The original  lease  starts  at $1,  but                                                              
accelerates $0.50 each year for the  term of the lease. This stays                                                              
at  $1, which  is affordable  and  provides more  revenues to  the                                                              
state. They feel  that the state's oil and gas  programs should at                                                              
least pay for themselves.                                                                                                       
                                                                                                                                
MR. MYERS said DNR is concerned that  a lot of the current shallow                                                              
gas leases are  in areas where the private land  ownership is more                                                              
complicated  than on  the North  Slope or  in some  areas of  Cook                                                              
Inlet.  DNR is  concerned about  getting  an applicant  who has  a                                                              
tradition of oil  and gas development that may  not understand the                                                              
process of approvals and may actually  enter the land or do damage                                                              
to it without getting the landowner's  agreement. Putting the bond                                                              
amount up front gives extra protection  to the surface owners that                                                              
the department  feels is  appropriate. The  bond would  screen out                                                              
folks who  would not be  able to afford  the leases and  who might                                                              
cause incidental damage by not getting  a final operations permit.                                                              
This is an assurance to private landowners  that they do have some                                                              
protection, partly  necessary because this is  an over-the-counter                                                              
program, not  a program where the  state selects which  areas it's                                                              
leasing. People apply to DNR and  a lease is then granted based on                                                              
the application.                                                                                                                
                                                                                                                                
SB  319 provides  a chance  for someone  to convert  from the  old                                                              
program  that limits  rights to  3,000  ft. to  this new  program.                                                              
Several  companies want  to utilize  these  leases for  commercial                                                              
development. He stressed that this  is an important program to the                                                              
state in  terms of  providing energy  to Fairbanks  and the  Homer                                                              
area.                                                                                                                           
                                                                                                                                
SENATOR ELTON  asked why DNR made  the change on page 3,  lines 13                                                              
and 14,  that allows the  director to  terminate the lease  if the                                                              
renter fails to pay.                                                                                                            
                                                                                                                                
MR. MYERS replied that he thought  the issue was whether the state                                                              
has the obligation  to be sure to mail out the  request or whether                                                              
it is the  lessee's responsibility to  make sure to pay  the rent.                                                              
He explained:                                                                                                                   
                                                                                                                                
     We felt  that we're  not in the  mail order business  of                                                                   
     doing  that.  We don't  do  that with  our  conventional                                                                   
     program. So this  is an extra expense on  the department                                                                   
     that  a responsible  lessee  should have  no problem  in                                                                   
     fulfilling in the existing oil and gas program.                                                                            
                                                                                                                                
SENATOR ELTON asked if DNR still  has the authority to terminate a                                                              
lease if rent is not paid.                                                                                                      
                                                                                                                                
MR. MYERS replied that it does.                                                                                                 
                                                                                                                                
CHAIRMAN  TORGERSON  asked him  to  explain the  $500,000  bonding                                                              
requirement on page 16.                                                                                                         
                                                                                                                                
MR. MYERS responded that the $500,000  is a statewide bond for oil                                                              
and gas activities.  DNR feels that  requiring it upfront assures,                                                              
since there  are no other qualifications  that the lessee  has the                                                              
wherewithal  to  cover any  surface  damage  caused. If  a  lessee                                                              
already  has  a  $500,000  statewide   bond,  it  shows  they  are                                                              
responsible  and  that recourse  is  available  so the  lessee  is                                                              
exempted from the extra $50,000 requirement.                                                                                    
                                                                                                                                
SENATOR TAYLOR  noted that language on  page 5, line 23  refers to                                                              
$25,000 per incident.  He asked if he were to go  into the shallow                                                              
gas leasing  business, whether he would  have to come up  with the                                                              
$5,000, pay  the $1 per  acre annual fee and  also come up  with a                                                              
$500,000 bond.                                                                                                                  
                                                                                                                                
MR.  MYERS replied  that  he wouldn't.  He  added  that there  are                                                              
multiple bonds in the state and this  bill deals with some of them                                                              
in addition  to adding another  one. However, the  additional bond                                                              
on page 5 is a DEC bond that is based  on cuttings and weights and                                                              
other issues  that are related to  the operation of  drilling, not                                                              
acquiring a lease.                                                                                                              
                                                                                                                                
SENATOR  TAYLOR repeated  his question  that  if he  came up  with                                                              
$5,000 and the $1  per acre fee, would he need  to have additional                                                              
bonding before he could get the permits  to actually drill a hole.                                                              
                                                                                                                                
MR.  JIM  HAYNES,  Permitting,  explained  that  there  are  three                                                              
agencies within  state government that have  bonding requirements.                                                              
The Alaska Oil and Gas Conservation  Commission (AOGCC) requires a                                                              
$200,000  statewide bond  to plug  an abandoned  well that  may be                                                              
left improperly in place. DEC's bonding  requirements range from a                                                              
low of $25,000 to  as high as $121 million, depending  on the type                                                              
of facility.  DNR requires a $100,000  bond for a single  well and                                                              
$500,000 for  a statewide bond,  which would include  shallow gas.                                                              
The bill  says if  you have the  $500,000 bond  in place,  such as                                                              
UNOCAL  does,  no additional  bond  is  required for  shallow  gas                                                              
operation.                                                                                                                      
                                                                                                                                
CHAIRMAN   TORGERSON  asked   if  the   $500,000  statewide   bond                                                              
requirement  is  existing  law and  the  legislation  provides  an                                                              
exemption if  a company already has  one. They indicated  that was                                                              
correct. He asked if they didn't think that was a little low.                                                                   
                                                                                                                                
MR. HAYNES replied that it hadn't been low so far.                                                                              
                                                                                                                                
SENATOR TAYLOR  clarified if  he was going  to lease to  drill for                                                              
shallow gas, he  would need a $200,000 bond for the  AOGCC to make                                                              
sure he  would plug up  any holes that  he would leave,  a $25,000                                                              
per incident bond, and a $121 million  bond to DEC for whatever it                                                              
construes the risks to be and then,  if he was going to drill more                                                              
than  one single  hole,  he would  have to  come  up with  another                                                              
$500,000 for  a statewide bond for  DNR, which would  include this                                                              
gas.                                                                                                                            
                                                                                                                                
MR. HAYNES  replied that  is correct,  although he couldn't  speak                                                              
for DEC. The per  incident language, if you drill  a well with one                                                              
drilling rig and move it to another  hole, is another incident. If                                                              
you  have  three  drill  rigs  running,  that  could  probably  be                                                              
construed as  three incidents,  but he didn't  know how  DEC would                                                              
interpret that. He stated, "We're concerned with $500,000."                                                                     
                                                                                                                                
SENATOR  TAYLOR  said the  very  least he  could  get  by with  is                                                              
$725,000 in bonding before he could drill a shallow gas hole.                                                                   
                                                                                                                                
MR. HAYNES said that is correct.                                                                                                
                                                                                                                                
SENATOR TAYLOR indicated that was maybe too much.                                                                               
                                                                                                                                
MR. HAYNES  replied  that the question  is what  is being  bonded.                                                              
Some  of  the  bonds  are  to make  sure  the  well  is  abandoned                                                              
properly,  some of them  are to  protect the  surface estate,  and                                                              
others are to  deal with oil spill clean-up issues.  He explained,                                                              
"It's not  a combined pool that's  usable for all  these purposes.                                                              
They  are individual  bonds  for specific  purposes  that are  all                                                              
different."                                                                                                                     
                                                                                                                                
MR. MARK  SEXTON, President  and CEO,  Evergreen Resources  Alaska                                                              
Corporation,  said that  currently Evergreen  has 46,080  acres of                                                              
shallow gas lease applications located  in the Willow area pending                                                              
with  DNR.  He  supports  SB  319,   which  removes  obstacles  to                                                              
Evergreen's  ability to  explore for and  develop shallow  natural                                                              
gas. He told members:                                                                                                           
                                                                                                                                
     Evergreen  Resources  Alaska's   functional  specialties                                                                   
     extend to Alaska the main focus  of Evergreen Resources,                                                                   
     which is  unconventional natural gas extraction  such as                                                                   
     coal bed  methane extraction  and other shallow  natural                                                                   
     gas  development.  These  activities  require  at  least                                                                   
     100,000  acres to establish  the necessary economies  of                                                                   
     scale  for an  initial developing  program. We  strongly                                                                   
     support  increasing  the depth  limitation  to one  that                                                                   
     relies on science and geology  for the specific geologic                                                                   
     play in  concept. We're certain  we can drill,  complete                                                                   
     and produce natural gas wells  below 3,000 in a safe and                                                                   
     environmentally  responsible manner using  the currently                                                                   
     existing technologies that we  already employ every day.                                                                   
                                                                                                                                
     Finally, Mr.  Chairman, the shallow natural  gas program                                                                   
     is the primary  reason Evergreen is in Alaska  and we're                                                                   
     grateful  that the  legislature is  making this  program                                                                   
     possible as  well as improving it. The  changes proposed                                                                   
     in this  bill do  provide us  the necessary latitude  to                                                                   
     operate  in an  economically  sound and  environmentally                                                                   
     safe manner and  we acknowledge the Division  of Oil and                                                                   
     Gas for collaborating  with us and other  stake holders.                                                                   
     This is  in our mind an  excellent example of  how state                                                                   
     agencies and  industry can work together to  the benefit                                                                   
     of all  interested parties,  including and  particularly                                                                   
     the public. Thank you for allowing  me to testify today.                                                                   
                                                                                                                                
MR. SEXTON said  John Kanegawa, Alaska Projects  Manager, and Jack                                                              
Engstrom, Public Affairs,  would be in Juneau  Thursday and Friday                                                              
to provide further information.                                                                                                 
                                                                                                                                
SENATOR TAYLOR asked  if he could give the committee  a comparison                                                              
of the  bonding requirements required  from a company like  his in                                                              
other states where there is shallow gas.                                                                                        
                                                                                                                                
MR.  SEXTON replied  that it  varies from  state to  state and  in                                                              
general  it's quite  a  bit less  in  Colorado,  which requires  a                                                              
$25,000  statewide bond.  There  is a  separate  $25,000 bond  for                                                              
operating within federal units.                                                                                                 
                                                                                                                                
SENATOR TAYLOR asked if the requirements  in other states are that                                                              
dramatically  less  than  in  Alaska  where  the  minimum  bonding                                                              
requirement to punch the first hole is $725,000.                                                                                
                                                                                                                                
MR. SEXTON said that is right:                                                                                                  
                                                                                                                                
     But it  really has  come down to  the fact that  even as                                                                   
     large as  those numbers are,  when you look at  the cost                                                                   
     of  bonds, bonding  really represents  a small  portion,                                                                   
     just a few percent of the total  cost to drill, complete                                                                   
     and produce  a shallow gas  well. If an operator  cannot                                                                   
     afford a  bond, even if  it's just a $500,000  statewide                                                                   
     oil and gas bond, it's probably  unlikely that they will                                                                   
     have the  financial resources to successfully  drill and                                                                   
     produce   a   single   exploration   well,   much   less                                                                   
     implementing  a full  multi-well program  in an  orderly                                                                   
     development way  I think the state wants  to see.... The                                                                   
     operators  who can  afford to  do this  type of  program                                                                   
     could easily afford this type of bonding.                                                                                  
                                                                                                                                
SENATOR TAYLOR said  that is why he is concerned,  because through                                                              
this guise, the state may very well  be excluding this activity to                                                              
a limited club of operators who can  afford to do the drilling. He                                                              
understands  that over  30%  of the  oil  produced  in the  United                                                              
States  today comes  from wildcatters  and a  higher percent  than                                                              
that comes from  wildcatters drilling for gas. He  didn't think it                                                              
encouraged them to go out there if  the only boys that can play in                                                              
the game have to have a million dollar  check before they can show                                                              
up.                                                                                                                             
                                                                                                                                
MR. SEXTON  responded that  it is  going to be  more costly  to do                                                              
business in  Alaska. Evergreen has  taken the approach that  to do                                                              
this right,  it has to plan to  develop at least 100,000  acres to                                                              
get  the proper  economies of  scale.  He said  that in  populated                                                              
areas  such  as  the  Mat-Su,  infrastructure   and  services  are                                                              
generally  available  as  opposed  to  the effort  that  would  be                                                              
required  to drill  a few  wells  in outlying  villages where  the                                                              
market is limited.  Alaska should deal with  well-financed ethical                                                              
companies that are going to be able  to do it right, because while                                                              
the cost for  Alaska can be quantified relative  to drilling wells                                                              
in  Oklahoma  or Kansas,  the  reality  is  the cleanup  costs  in                                                              
Alaska,  especially  in remote  areas  if  someone doesn't  do  it                                                              
right,  would  be  greater  than down  south  where  services  and                                                              
equipment  are more readily  available.  He reminded members  that                                                              
Evergreen is  planning to bring  in specialized drilling  rigs and                                                              
specialized fracture  stimulation and  completion equipment  to do                                                              
the work in Alaska, which currently doesn't exist.                                                                              
                                                                                                                                
CHAIRMAN  TORGERSON   said  that   Senator  Taylor  is   making  a                                                              
comparison to  one well and there is  no such thing as  a one well                                                              
methane shallow gas  field that he knows of. He  offered, "There's                                                              
maybe 1,500 wells to a field… and $500,000 is a bargain."                                                                       
                                                                                                                                
MR.  SEXTON said  that  he was  looking  forward  to proving  that                                                              
statement true.                                                                                                                 
                                                                                                                                
MR. DAVE LAPPI, President, Lapp Resources,  Inc., supported SB 319                                                              
and said:                                                                                                                       
                                                                                                                                
     The  proposed bonding  to cover damages  to the  surface                                                                   
     will reduce the  cost to the Division of Oil  and Gas in                                                                   
     administering  these  provisions  while  providing  good                                                                   
     protection to local resources.                                                                                             
                                                                                                                                
The 100,000-acreage  limitation will allow companies  to establish                                                              
the larger  acreage positions necessary  to justify the  risks and                                                              
expenses in developing the new resource.  He discussed raising the                                                              
fees  to  cover  the  increased   administrative  costs  with  the                                                              
division and  he thought it would  be nice if monies to  cover the                                                              
increased  costs could  be  raised  closer to  the  source of  the                                                              
expense (the  drilling and  production phase)  rather than  at the                                                              
application stage. He  thought it was in the best  interest of the                                                              
state  not to  shortchange  the Division  of  Oil  and Gas,  which                                                              
manages the source of the vast majority of our state's income.                                                                  
                                                                                                                                
He supported  changing the  exploration level  to below  3,000 ft.                                                              
because  it will  increase the  potential  gas resource  available                                                              
under  this program  while  reducing the  cost  of developing  the                                                              
deeper  horizon.  He  supported  language  on page  5  that  would                                                              
eliminate reclassifying shallow gas  wells to oil and gas wells on                                                              
leases  other  than  shallow  gas  leases.  He  thought  the  same                                                              
language should be  used on page 6, line 26,  to prevent increased                                                              
bonding costs.                                                                                                                  
                                                                                                                                
MS.  JUDY   BRADY,  Executive   Director,   Alaska  Oil   and  Gas                                                              
Association, supported  this bill  for all the reasons  previously                                                              
heard.                                                                                                                          
                                                                                                                                
MR. KEVIN TABLER, Manager of Land  and Government Affairs, UNOCAL,                                                              
supported SB 319 and told members:                                                                                              
                                                                                                                                
     UNOCAL  is  conducting  an  aggressive  gas  exploration                                                                   
     program in  the Cook Inlet  area and is very  interested                                                                   
     in   any   legislation   dealing  with   gas   and   gas                                                                   
     exploration.  The shallow gas  leasing program  augments                                                                   
     the existing area wide leasing  program and enhances the                                                                   
     access  to  development  of   the  state's  natural  gas                                                                   
     resources.  We're very  supportive of  this program  and                                                                   
     other leasing  programs providing access to  the state's                                                                   
     mineral wealth. I have listened  today to the remarks of                                                                   
     Director  Myers   at  the  Division   of  Oil   and  Gas                                                                   
     testifying  in support  of this  bill and  wish to  lend                                                                   
     UNOCAL's support in passage of this legislation…                                                                           
                                                                                                                                
MS.  CHARLOTTE  MCKAY,  Senior  Administrator,  Environmental  and                                                              
Regulatory Affairs,  Tech-Cominco of Alaska, said  Tech-Cominco is                                                              
partners with NANA Regional Corporation.  She wanted to talk about                                                              
the potential for  shale bed methane gas around the  Red Dog mine.                                                              
They employ 400  people, about 60% are NANA shareholders  and they                                                              
produce over  one million tons of  zinc and lead  concentrates per                                                              
year. She said:                                                                                                                 
                                                                                                                                
     To  crush  the ore  and  make the  concentrate  requires                                                                   
     about  28  megawatts  of power  using  approximately  18                                                                   
     million gallons of diesel per  year that we transport to                                                                   
     the  port and  then  up the  road by  truck  on a  daily                                                                   
     basis. Replacing  the diesel consumption with  gas would                                                                   
     reduce our air  emissions by half as well  as reduce the                                                                   
     risks of the oil transport to  the port, the storage and                                                                   
     the transfer up to the mine site.                                                                                          
                                                                                                                                
She showed the committee  a picture of the terrain  at the Red Dog                                                              
Mine, which  is not flat  like Mat-Su or  Prudhoe Bay. It  is very                                                              
rugged and they  need a more flexible determination  for the depth                                                              
limitation for the  shallow gas lease. It would  be very difficult                                                              
to follow a surface depth at Red Dog.                                                                                           
                                                                                                                                
MS.  MCKAY said  that  currently,  Tech-Cominco  holds four  state                                                              
shallow  gas  leases for  about  23,000  acres  and NANA  has  the                                                              
adjoining land  to the east where  there is nearly  100,000 acres.                                                              
The current  lease limitation of  46,000 acres to any  one company                                                              
is not  sufficient for the project  and they support  the 100,000-                                                              
acre  limit as  well  as the  fee changes,  if  the monies  remain                                                              
within the shallow  gas program. Otherwise, they would  find it an                                                              
expenditure that would not be good for business.                                                                                
                                                                                                                                
Development of  shallow gas fields  in Northwest Alaska  have many                                                              
impediments and  location is the major  one due to access  and the                                                              
ability to  bring large  equipment in and  out only in  the summer                                                              
months.  They  do not  have  access by  ice  roads  in the  winter                                                              
months. She explained:                                                                                                          
                                                                                                                                
     It's  very  difficult,  if not  impossible,  to  test  a                                                                   
     shallow  gas lease  within the three  years provided  in                                                                   
     the current lease when work  is so seasonal. Logic would                                                                   
     say a lease should be at lease  five years for a primary                                                                   
     term  with renewal  options as provided  in the  current                                                                   
     lease.   Although   this   is  not   provided   in   the                                                                   
     legislation,  we  would support  a five-year  term  with                                                                   
     renewal options.  Development of a shallow  gas field is                                                                   
     much different  than a conventional field in  Cook Inlet                                                                   
     or on  the Slope. Instead of  2 to 5 holes to  develop a                                                                   
     gas field,  it would take 50  to 100 holes and  the cost                                                                   
     per  hole needs  to  be kept  at a  minimum  or a  field                                                                   
     becomes uneconomic quickly.                                                                                                
                                                                                                                                
     To date,  Cominco has opportunistically  piggy-backed on                                                                   
     the mineral exploration effort  in the Red Dog area as a                                                                   
     tool to  defray the  costs and  delineate the areas  for                                                                   
     potential gas  resource. The  methane gas we  have found                                                                   
     is  low   pressure  and  is   located  lateral   to  and                                                                   
     underlying  the  ore  zones.  Extensive  work  has  been                                                                   
     completed to  date using the mineral  exploration tools,                                                                   
     but the  next phase is to  conduct the flow test  to see                                                                   
     if that  gas will  let loose. This  flow test cannot  be                                                                   
     supported until  the depth below the surface  of a field                                                                   
     is better  defined. We have  already found gas down  2 -                                                                   
     3,000 ft.  and we know it's  at least that deep  and the                                                                   
     geologic  structure indicates  it  will go  considerably                                                                   
     deeper. Arctic  operations will always  present numerous                                                                   
     challenges  not present  elsewhere. Tech-Cominco  Alaska                                                                   
     and NANA  address these each  and every day at  Red Dog.                                                                   
     By passing  this legislation,  you will help  us address                                                                   
     some more.                                                                                                                 
                                                                                                                                
SENATOR TAYLOR asked if she wanted a five-year term.                                                                            
                                                                                                                                
MS. MCKAY replied yes.                                                                                                          
                                                                                                                                
SENATOR TAYLOR  explained that the  legislature does not  have the                                                              
ability  to dedicate  funds  so keeping  the  revenues within  the                                                              
shallow gas  program may  be beyond  their capacity. Even  program                                                              
receipts   are  subject   to  the   appropriation   by  the   next                                                              
legislature.                                                                                                                    
                                                                                                                                
SENATOR LINCOLN said  the bill addresses wells  "within" 3,000 ft.                                                              
of the surface and asked if that language is a problem.                                                                         
                                                                                                                                
MS. MACKAY replied that this bill  would allow a well to go deeper                                                              
if they are within the same resource unit.                                                                                      
                                                                                                                                
MR. MYERS  said that there is  also discretion to add  three years                                                              
to the five-year  term. He said that production on  a larger scale                                                              
would  be from  unitized production,  particularly  in their  area                                                              
where there are two different subsurface owners.                                                                                
                                                                                                                                
5:10 p.m.                                                                                                                     
                                                                                                                                
MR. KEN  BOYD, Oil and  Gas Consultant,  said he was  representing                                                              
himself, but that  he was director of the Division  of Oil and Gas                                                              
when  this  program   was  originally  established   in  1996.  He                                                              
supported the changes  in the bill. Extending the  3,000 ft. depth                                                              
and increasing the number of acres  just increases the opportunity                                                              
to  use the  bill. The  increase in  fees is  appropriate and  the                                                              
bonding may help by giving the landowners more comfort.                                                                         
                                                                                                                                
5:12 - 5:16 AT-EASE                                                                                                           
                                                                                                                                
SENATOR  HALFORD  said his  concern  is  that  in these  kinds  of                                                              
operations, multiple rigs are operating  in fairly high densities.                                                              
He is worried that a $500,000 bond  for surface damage will not be                                                              
enough. He wanted  to hear what the Division has  to say about the                                                              
level of the bond when it's applied  statewide, because he thought                                                              
there would be more and more conflicts  between the people who own                                                              
the  surface  estate   and  the  subsurface.  Most   people  don't                                                              
understand that  they don't control authority over  the subsurface                                                              
estate. He noted, "In fact, it's reversed."                                                                                     
                                                                                                                                
MR. MYERS  replied that  they should  keep in  mind that  the risk                                                              
wouldn't occur all at once. The $500,000  has to be replenished if                                                              
there are  multiple, simultaneous  draws on that  individual bond.                                                              
He thought  the bonding issue needed  to be reviewed in  the sense                                                              
of their  overall oil and  gas program  where there's oil  risk as                                                              
well. He  explained, "I think  we're comfortable with  the current                                                              
levels, but if we  do look at more, I think it  needs to be looked                                                              
at in regards  to the conventional program as well."  He said they                                                              
have the  authority to  request larger bonds  if there  is unusual                                                              
risk.                                                                                                                           
                                                                                                                                
SENATOR  HALFORD  said  there  is  a difference  in  the  kind  of                                                              
expectations  from  parcels  and   the  expertise  of  the  people                                                              
involved when you're dealing with  small subdivision lots in small                                                              
parcels of land.                                                                                                                
                                                                                                                                
MR. MYERS concurred  with that and said DNR needs  to be concerned                                                              
about the economic effect on the industry as well.                                                                              
                                                                                                                                
SENATOR HALFORD asked what he thought  the cost of a $500,000 bond                                                              
would be for a reasonable sized independent company.                                                                            
                                                                                                                                
MR. MYERS  replied that he  thought it was  about 20% of  the bond                                                              
amount. He added that depended on market conditions that change.                                                                
                                                                                                                                
SENATOR HALFORD  asked if that is  a cost that is  annually earned                                                              
or an amount that has to remain in escrow.                                                                                      
                                                                                                                                
MR. MYERS replied that it is an annual premium.                                                                                 
                                                                                                                                
TAPE 02-6, SIDE A                                                                                                             
                                                                                                                              
SENATOR  ELTON asked  if reservations  were  expressed during  the                                                              
public comment  period that the  director or the  department would                                                              
be able to negotiate the bond price.                                                                                            
                                                                                                                                
MR. HAYNES  replied that  under AS  38.05.130(a), a surface  owner                                                              
(either party) who cannot come to  terms with proposed activity on                                                              
his land  has the right  to request a  hearing by the  director of                                                              
the Division of  Oil and Gas. They had experience  with that a few                                                              
years  ago and  it was  peacefully  resolved. They  hoped the  new                                                              
legislation  with  $500,000 in  place  would  allow them  to  tell                                                              
someone who  wanted a hearing  that they  are entitled to  it, but                                                              
$500,000 is a pretty  high bond and it's in place  for the surface                                                              
owner's benefit.                                                                                                                
                                                                                                                                
SENATOR TAYLOR asked if they are  allowed to exceed that amount if                                                              
they determine there is a greater risk.                                                                                         
                                                                                                                                
MR.  HAYNES  replied  yes.  He said  that  Alaska's  oil  and  gas                                                              
business is changing and for the  first time [companies] are going                                                              
into  areas  that  are  not  only   residential,  but  areas  with                                                              
complicated ownership patterns. DNR  is aware of it and is dealing                                                              
with it.                                                                                                                        
                                                                                                                                
SENATOR HALFORD  asked if  determinations are  all made on  a very                                                              
large area before  the actual location of where  somebody is going                                                              
to drill is even considered.                                                                                                    
                                                                                                                                
MR. HAYNES replied  no and that there is no  best interest finding                                                              
as the state does with conventional  sales or with its exploration                                                              
licenses.  The environmental  requirements  are  adjusted area  by                                                              
area; the  bonding requirements are  more specific and  are geared                                                              
toward the  risks of a particular  operation. The  lease operation                                                              
approval  process that  occurs looks at  each individual  activity                                                              
whether it  is putting a  road in or  drilling a well  or shooting                                                              
seismic.                                                                                                                        
                                                                                                                                
SENATOR HALFORD asked  if a site could be in a  10-acre lot within                                                              
a 100,000 acre area wide activity.                                                                                              
                                                                                                                                
MR. HAYNES  replied that one of  the concerns is that  the surface                                                              
owner, should it be different than  the state, needs to have clear                                                              
protection.  The   up-front  bonding  requirement   provides  some                                                              
protection against  surface damage  if a person  got on  that site                                                              
prematurely with  his bulldozer and  decided he wanted to  clear a                                                              
path  to  his  well.  Secondly, when  they  went  to  their  final                                                              
operations,  they would  have enough protection  for that  surface                                                              
owner  in addition  to  the other  bonds to  deal  with the  other                                                              
risks.                                                                                                                          
                                                                                                                                
SENATOR HALFORD  commented, "I  hope they never  get to  the point                                                              
where they end  up draining some large recreational  lake, because                                                              
I think they're going to have a lot more money involved."                                                                       
                                                                                                                                
SENATOR   TAYLOR  moved   to  delete   "competition"  and   insert                                                              
"completion" on page  3, line 1. There were no  objections and the                                                              
amendment was adopted.                                                                                                          
                                                                                                                                
SENATOR TAYLOR  moved to  pass CSSB  319(RES) from committee  with                                                              
individual recommendations.  There were  no objections and  it was                                                              
so ordered.                                                                                                                     

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