Legislature(2011 - 2012)BUTROVICH 205
03/23/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB209 | |
| SB215 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 209 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 215 | TELECONFERENCED | |
SB 209-DEVELOPMENT PLANS FOR OIL & GAS LEASES
3:34:15 PM
CO-CHAIR PASKVAN announced consideration of SB 209.
SENATOR BILL WIELECHOWSKI, sponsor of SB 209, said this bill is
a pro-development bill that seeks to get more oil in the
pipeline.
Last year the Department of Natural Resources reported roughly
25 percent of the state's 1,320 leases could be sitting idle.
That means no development wells, no exploratory wells, no
permits; it appears not much is being done. This is not in
Alaska's best interests. In fact the state is going through
litigation right now with Point Thomson, the largest undeveloped
oil and gas field in North America, that has been sitting vacant
for more than 30 years, and finally when the state exercised its
sovereignty taking away the leases it was sued! "This is not the
way we should be managing our resources," he said, "I think
there is a better way."
Recently, the state had a lease sale where one company took out
34 tracts of land. When asked a week later what their
exploration plans were, they said they might not even explore
and wanted to see what happens with the oil tax structure first.
SENATOR WIELECHOWSKI stated that leases are legal documents: the
state gives up its exclusive right to a piece of property when
it puts out a lease and ,in exchange, the company that takes out
that lease is legally obligated to explore and produce when it
can make a profit on it.
He said the state has many leases where the profits are
"extraordinary" and yet development is not being seen for some
reason. Our leases are seen as options to develop or explore
rather than a contract to develop. The state has a
constitutional obligation to get the maximum benefit for its
resources and can do better than that. He said this bill
requires basic plans for exploration; it requires DNR to review
leases on a periodic basis to ensure the state gets the maximum
benefit for its resources and it would put more oil in the
pipeline quicker than just about anything else he could think
of.
MICHELLE SYDEMAN, staff to Senator Wielechowski, said the
purpose of SB 209 is to encourage greater development of the
state's oil and gas leases consistent with Article VIII of the
Alaska Constitution. Section 8.1 of the Alaska Constitution
states: "It is the policy of the State to encourage the
settlement of its land and the development of its resources by
making them available for maximum use consistent with the public
interest."
She said SB 209 was developed in response to concerns that some
oil companies are winning exclusive leases of petroleum-rich
state lands, and then sitting on those leases - in effect
warehousing Alaska's resources - while investing elsewhere.
MS. SYDEMAN said committee members are all aware of the Point
Thomson case in which state lands with vast quantities of oil
and gas were leased more than three decades ago and have yet to
be developed.
3:38:28 PM
The sponsor's intent with SB 209 is to ensure that the state
doesn't have more Point Thomsons and to reform Alaska's leasing
laws now to avoid spending millions of dollars 20 or 30 years
from now to regain control over valuable state lands and
resources. Of course, these are not just any resources. They are
the state's most valuable resources. They are commonly referred
to as our "lifeblood." They provide tens of thousands of jobs
for Alaskans. By one estimate nearly 42,000 jobs are directly or
indirectly induced by the oil and gas industry. They are roughly
90 percent of our unrestricted state revenue and they support
economic development in all other sectors of our economy from
seafood to timber. They are critical to our economy, wellbeing
and future. This importance clearly raises the stakes. It means
we must exercise the greatest diligence when it comes to the
management of our oil and gas resources.
3:39:28 PM
MS. SYDEMAN addressed the magnitude of the problem. Last year
DNR examined 1,320 leases; 578 of them were part of production
units or were producing oil or gas, 404 had been sold in the
preceding three years so might still be in the planning stages,
and 338 could be "idle" as lessees had not applied for a single
permit to explore or develop them. The problem could be quite
significant.
3:40:10 PM
SENATOR FRENCH asked what the typical term of a non-producing
lease is.
MS. SYDEMAN replied her understanding is that they have varied
from 3 to 10 years, but typically might have been for up to 7
years. The most recent lease sale on the North Slope had leases
with a 10 year primary term.
3:40:48 PM
What is the resource potential of these lands? Could they
support production at some point? Could they ever be produced
and help to fill the pipeline and provide jobs for Alaskans? Ms.
Sydeman said the answer is that they simply don't know. One
company gave the state a bonus bid some years back and continues
to pay rent (usually $1/acre per year)), indicating the land
might have potential, but that potential has never been explored
or realized.
She said Alaskans have gained little from having taken these
lands off the public rolls that puts them out of reach from
other companies who may actually want to explore or develop
them. This is no way to ensure "maximum use" of our resources,
especially as production in Alaska's largest fields declines,
pipeline volumes decrease and concerns over the state's future
fiscal health intensify. Regular litigation to take back idle
leases is not the answer and should be the last resort.
Carefully crafted laws that result in clear expectations about
each party's responsibilities and intentions is the better way
to go.
3:42:14 PM
MS. SYDEMAN said that Alaskans deserve to know precisely what
they are getting when they give exclusive 10-year leases, as was
done recently on the North Slope, to resource-rich lands. They
deserve commitments they can count on, so 10 or 20 years down
the road they don't feel misled or betrayed and ready to do
battle against some of the world's most powerful corporations.
3:42:33 PM
How does SB 209 accomplish this? First, Ms. Sydeman said it
requires bidders for an oil and gas lease to submit a plan of
exploration or, if appropriate, a plan of development for areas
it seeks to lease prior to submitting a formal bid. The plan
could outline seismic work that will be performed or exploration
wells that will be drilled. Actual production commitments would
not, of course, be required if the tracts have yet to be
adequately explored.
Secondly, the bill requires the commissioner to review each
bidder's plan to determine if it is "reasonably expected to
develop the lease in the best interest of the state." A company
may not be qualified to bid if the commissioner finds it has
submitted a plan that is not in the state's best interest or the
bidder is not "reasonably capable" of implementing the plan.
While this "best interest" finding sounds vague and subjective,
this terminology is used frequently in Alaska law and governs
many state procedures. It appears 131 times in state statute and
is used to determine what actions the state should take as well
as to select among bidders and competing proposals.
3:44:20 PM
Thirdly, she said SB 209 requires that these plans be included
in leases and requires DNR to review leases annually to ensure
that plans are being implemented. It allows the commissioner to
waive a work commitment if conditions preventing drilling or
exploration were beyond the lessee's reasonable ability to
foresee or control. It also allows for a waiver if the lessee
demonstrates through good faith efforts an intent to drill or
develop the lease in the following two years.
3:44:45 PM
Under existing statutes, Ms. Sydeman explained, DNR has the
option of including a minimum work commitment in a lease, along
with penalties if the lessee does not fulfill the commitment.
This bill simply requires that work commitments, developed by
bidders and approved by the state, be part of all future leases.
3:45:09 PM
Fourth, Ms. Sydeman said, SB 209 also requires DNR to analyze
the economics of each "participating area" (a unitized reservoir
where sustained production is occurring) every five years to
determine whether the area is capable of increased production.
There are 42 "participating areas" in Alaska. They are within
the Badami, Colville River, Duck Island, Kuparuk, Milne Point,
Nikaitchuq, Northstar, Oooguruk, and Prudhoe Bay units.
MS. SYDEMAN said knowing whether a prospect is reasonably
economic matters, and the state currently lacks this knowledge.
It determines what lessees obligations are under contracts they
have willingly signed. The following is language from new oil
and gas leases (Form DOG 200204) which speaks to lessees'
obligations to develop:
13 (b): Upon discovery of oil or gas on the leased
area in quantities that would appear to a reasonable
and prudent operator to be sufficient to recover
ordinary costs of drilling, completing, and producing
an additional well in the same geologic structure at
another location with a reasonable profit to the
operator, the lessee must drill those wells as a
reasonable and prudent operator would drill, having
due regard for the interest of the state as well as
the interest of the lessees.
3:46:45 PM
SENATOR FRENCH asked if she had any idea what a reasonable
profit is.
MS. SYDEMAN replied that an oil and gas attorney would be on the
phone later and he would be able to better answer that. She
continued that language in old leases (referred to as DL-1
leases) addresses the same obligations as follows:
Upon discovery of oil and gas in paying quantities on
said land, Lessee shall drill such wells as a
reasonably prudent operator would drill having due
regard for the interests of Lessor as well as the
interests of Lessee.
3:47:44 PM
As this contractual language makes explicitly clear, knowing
whether a particular prospect is economic is key to enforcing
the binding terms of leases Alaska has signed with its partners
in the oil and gas industry. The economic data the state has
today is limited, but indicates that Alaska remains a highly
profitable place to do business. Net income per BOE is nearly
double in Alaska what it is elsewhere, at least for
ConocoPhillips. She provided a slide of ConocoPhillips' SEC
filings indicating that the average net income in Alaska is
$15.10 per barrel and in the Lower 48 it's $8.79;
internationally it's $8.57.
3:48:25 PM
CO-CHAIR PASKVAN commented that the Department of Law (DOL) is
analyzing SB 209 and offered to comment on it next week.
MS. SYDEMAN said they also know that two of Alaska's three
largest producers have made extraordinary profits in Alaska
since ACES passed. BP Alaska's net income was $8.7 billion under
ACES (from annual reports filed in UK) and ConocoPhillips has
reported $7.8 billion in profits under four years of ACES
according to state data.
SENATOR WIELECHOWSKI added that in 2011 ConocoPhillips profits
were about $2 billion and BP's were about $2 billion, to add on
to those figures.
SENATOR STEVENS asked how those profits compare to anywhere else
in the world like Saudi Arabia and the Lower 48.
SENATOR WIELECHOWSKI responded that roughly 13 percent of
ConocoPhillips' oil and gas comes from Alaska and from that they
have routinely generated anywhere from 28 to 30 percent of their
worldwide profits (excluding refining).
3:51:53 PM
MS. SYDEMAN said they also know that Gaffney Kline, consultants
retained by both the administration and legislature, estimated a
return of 123 percent when oil was selling at $80 a barrel in
Prudhoe Bay.
3:52:30 PM
She said a final provision in SB 209 requires DNR to annually
submit a report to the legislature that lists each lease found
to be out of compliance and the action taken by the commissioner
to bring the lessee back into compliance.
She said the DNR had expressed its view on timely lease
development in a variety of public statements. The following
statements were made in the context of Point Thomson, but could
apply to any lease on which no exploration or development has
taken place over an extended period of time:
The State and the public are primarily interested in
timely oil and gas production from State leases. Every
year that production is delayed costs the State
millions of dollars in unrealized interest on
production revenue....(Denial of the proposed plans
for the development of the Point Thomson Unit, page
18)
3:53:48 PM
Another statement:
It is not in the public interest to grant a state
lessee an indefinite extension on development merely
because development in their view is not currently
profitable enough or is too risky. (Denial of the
proposed plans for the development of the Point
Thomson Unit, page 20)
Another statement:
It is not in the public interest to change leasehold
intent by allowing a lessee's parochial interests to
supersede the State interest for orderly and
reasonably prompt development. (Denial of the proposed
plans for the development of the Point Thomson Unit,
page 20)
Another statement:
… delaying timely production also constitutes waste."
(Denial of proposed plans for the development of the
Point Thomson Unit, page 21)
Another statement:
One of the state's most significant interests in oil
and gas leasing is production. The interest is
realized by compliance with the terms of the oil and
gas leases....(DNR Commissioner decision on appeal
from DNR oil and gas Director's October 27, 2005
decision on the 22nd PTU POD, page 15)
3:54:31 PM
Another statement:
The unitization scheme is intended to cause state
leases to be developed efficiently. It is not intended
to allow lessees to simply hold oil and gas leases
indefinitely until such time as the probable profit
from a project meets their subjective and internal
expectations or the state agrees to modify its royalty
or other contract rights or the state's right to
collect taxes. (DNR Commissioner decision on appeal
from DNR oil and gas Director's October 27, 2005
decision on the 22nd PTU POD, page 17)
3:55:07 PM
MS. SYDEMAN said the last slide was of particular interest in
light of statements made by ConocoPhillips' Exploration Manager
Michael Faust following Conoco's successful acquisition of 35
North Slope tracts this past December. Mr. Faust said that
exploration funding would depend in part on whether changes are
made to the state's ACES production tax. He said, "One of the
things that certainly weighs into that decision is the fiscal
regime in Alaska." (Michael Faust, Petroleum News, December 8,
2011)
She said the sponsor believes this is an inappropriate approach
to the development of leased state lands and violates the terms
of leases ConocoPhillips has signed.
3:55:51 PM
A DNR statement:
The state oil and gas leasing system is not intended
to require DNR to engage in a murky subjective contest
about a Lessees' internal economics, development risk,
or view of the difficult of developing the unit. One
of the state's primary interests is production. If
production is not the plan, the state's remedy is to
terminate the unit and find another means to develop
the unit." (DNR Commissioner decision on appeal from
DNR oil and gas Director's October 27, 2005 decision
on the 22nd PTU POD, pg 17)
3:56:43 PM
And:
Continuing this 30-year record of non-development and
delay of an oil and gas lessee's obligations to
develop and produce its oil and gas leases makes a
mockery of the statutory, regulatory and contractual
protections for the State as owner of the oil and gas
estate. (Denial of proposed plans for the development
of the Point Thomson Unit, page 21)
MS. SYDEMAN said as the legislature considers strategies to
increase oil and gas production, the sponsor believes it's
important to review and strengthen the state's leasing laws and
commitment to lease enforcement. Changing fiscal terms is not
the only way to increase production. As John Minge, the
president of BP Exploration Alaska, recently said, "It's not
always only about taxes."
During Alaska's constitutional convention, Bob Bartlett warned
fellow delegates that outside interests might "attempt to
acquire great areas of Alaska's public lands in order not to
develop them until such time as … they see fit." He saw this as
a danger to the state's development.
Senate Bill 209 attempts to pre-empt that danger by requiring
the state to include meaningful work commitments in all state
oil and gas leases and to enforce those leases to ensure our
resources are developed for the maximum benefit of all Alaskans.
3:58:06 PM
SENATOR STEVENS said it seems often in the end what is
understood best are penalties and financial loss. It is a shock
to hear that the state receives only $1 a year rent per acre. He
asked if the bill addresses that.
SENATOR WIELECHOWSKI replied the bill doesn't have penalties and
that he is trying to set up a structure to avoid litigation and
penalties, but he was open if the committee decided to change
that. He wanted a structure where everything is clear.
He said that Norway has a system that doesn't bid out lands.
They do seismic studies and then invite companies to come in and
whichever company comes forward with the best development plan
that is in the best interests of the country is the one that
gets picked. He said he is trying to get more to a system like
that with concrete plans up front where they are not fighting
with industry. Penalties could be an option but a better
approach is to work together and be in alignment.
MS. SYDEMAN added that there are existing penalties for
violation of work commitments in statute and this bill doesn't
change those.
4:00:07 PM
CRAIG RICHARDS, oil and gas tax attorney with Walker and
Levesque, Anchorage, said he was asked to address two points in
SB 209 and to broaden the scope of the testimony to explain the
duty to develop under American oil and gas law.
His first question posed by SB 209 was should the state modify
the terms of its leases to prevent acreage from being held with
no present intent to develop. In answering that, he thought
through some of the situations where they know warehousing and
speculation has occurred in the past in Alaska and the three
primary examples are Point Thomson, North Star and Prudhoe Bay.
The North Star story is from the mid-1990s, a situation where
Shell, Amerada Hess and Murphy did leases in the early 1980s;
they bid not only 1/8 royalty, but the state made a net profit
share one of the bidding variables. The average net profit share
of those leases was 89 percent. That means that Amerada Hess and
Shell agreed to not only pay 1/8 royalty, but after costs of
development and royalty were paid, to then pay 89 percent of the
profits to the state.
Those leases went undeveloped when oil prices collapsed in the
early 1980s through 1995. The leases were held in defect by the
unit agreement. Amerada Hess and Shell ultimately sold them to
BP in 1995 and BP took the position that it was profitable to
develop the leases, but they weren't going to do so unless the
state renegotiated terms. The outcome of BP's position is that
the state waived the 89 percent profit in return for a slightly
increased royalty, some in-state hiring preferences and the
building of some of the modular units in Alaska.
MR. RICHARDS said he brought this up as a microcosm of the
debate that is occurring as a whole: where development is
economic and profitable, there is a reasonable expectation of
profit but the lessee is unwilling to go forward with
development because it feels it can gain some advantage through
negotiation.
4:03:59 PM
The third classic example of warehousing in Alaska is Prudhoe
Bay; it has about 30 tcf and they are currently authorized to
take off about 2.7 bcf and 8 bcf/day are being re-injected. But
there has been no marketing of that resource.
So they have examples of warehousing and non-development within
existing units and the question is what can be done about
putting those resources into development without renegotiating
tax or royalty terms.
MR. RICHARDS said an important distinction to make in looking at
SB 209 is between the primary term and the secondary term of a
lease. He said American oil and gas leases are structured pretty
much the same way; in the Lower 48 a primary lease is for 1-5
years (it's longer in Alaska). This is where you don't have an
obligation to produce from the lease to maintain the estate, but
it's about proving up the resource and getting it into
production. You lose the leases at the end of the primary term
unless oil and gas is being produced in paying quantities. If
you have production in paying quantities from a lease or a unit,
it stays in effect indefinitely. Then the addendum clause kicks
in or the secondary term of the lease.
4:05:41 PM
SENATOR STEDMAN joined committee.
MR. RICHARDS said SB 209 focuses primarily on how to ensure
development during the primary term of leases. The primary term
in Lower 48 oil and gas leases might be as short as one year or
up to five years or longer. In Alaska, from 1965 through the
1990s all leases had a 10-year primary term. In the 1990s he
started seeing seven-year terms and in 2003 to 2009 he saw model
DNR lease forms using seven years, as well. He ran across a
model form for the Beaufort with a primary term left blank.
4:07:07 PM
He explained that in the primary term you generally get your
lease under development. It's often recognized that speculating
(holding a lease without the present intent to develop) on a
lease can have some value or be destructive. The reason there
isn't mandatory production in the first 5 or 10 years is because
it is often good policy on the part of the landowner to give
somebody the lease and let them get out there and raise capital
and get business partners interested or alternatively to sell it
to someone else as a pure speculator that will in turn develop
it.
MR. RICHARDS said of course, the natural consequence if the
speculation does not work out is that the lease will terminate
at the end of the primary term. So, SB 209 removes some of the
speculation element by inserting mandatory work commitments. It
is very common in the Lower 48 for oil and gas leases to have
mandatory work commitments. The downside of having them in a
lease is that it might freeze out the role of the speculator in
the market place. He went on to explain that speculators provide
real liquidity in some markets and as entrepreneurs they do
provide some value.
One of his concerns with SB 209 is the high cost of developing
Alaska leases; it is difficult to get rigs up here and bonding
requirements are high. So the cost of doing business could
become compounded with mandatory work commitments if they were
very expensive and the net effect of that might be to freeze out
some otherwise good speculation. Mr. Richards said he didn't
know if speculation was occurring in a positive way in Alaska's
oil and gas basins. His intuition was that speculation was
occurring in Cook Inlet, but it was harder for him to imagine
how the role of the independent speculator on the North Slope
could have a lot of value to someone and he suggested doing a
study that looks at whether any speculators had historically
taken on land with no work commitments and then turned around
and either brought in financiers to drill or alternatively been
able to convince another party to take on that activity.
4:10:21 PM
Another thought he had about how to deal with warehousing is to
shorten the primary term to a year or two so the problem has
less of an impact. Having a dual primary term would be another
option where the first one would be for five years and if
something hasn't been drilled in five years, then a company has
to make a showing of a work commitment to get an approved plan
by DNR to get maybe the next five or three years on the primary
term. But SB 209 is really aimed at preventing speculation on an
ongoing basis and maybe they should focus more on the secondary
term after the lease has been through the fixed period of time
and is into its indefinite term, because there is either
production or an operation.
CO-CHAIR PASKVAN asked what risk a speculator has if they are
not able to transfer to an actual developer at the end of the
primary term.
MR. RICHARDS replied that reflects the common treatment of oil
and gas leases in America. He explained that the landowner can
be paid in three ways: the leasing bonus, rental and royalty. As
mentioned earlier rentals in state leases are often nominal
amounts. The real risk comes in to the bidding entity in forms
of paying the leasing bonus which can be small or large
depending on the interest that is shown at the auction. A
speculator's primary risk is having nothing to show for the
leasing bonus.
4:13:10 PM
Two specific harms the state can suffer from warehousing are
one, when unitization is used as a tool to maintain leases that
are not in production (Point Thomson is an example of this). A
similar thing happened in North Star where the state, rather
than terminating the unit agreement at the end of its primary
term when no production had occurred essentially allowed an
extension and then allowed renegotiation rather than sticking to
the terms of the lease directly. So, the state as a matter of
policy should not allow unitization as a means to extend the
terms of un-producing acreage indefinitely. A subcategory issue
(although he didn't know that it had occurred enough in Alaska
to be an issue) is where an existing unit is in production and
lessees have received permission to attach adjoining leases to
it without the actual direct intent that that lease ever be
drilled. That happened a couple of times in Cook Inlet over the
last one or two decades.
The second concern the state (and all landowners) should have is
when there is production in a unit or on a lease but it isn't
being fully developed, a classic oil and gas leasing scenario.
For example a landowner in Texas leases his land to an oil
company that drills a well that is marginally profitable. As a
royalty owner, you want to see a second well drilled some
distance away from it so you can produce even more, but the oil
company doesn't want to. Because they have this one well, under
the addendum clause their lease will remain in effect
indefinitely and will never be cancelled, and the owner will
never see additional royalty because the oil company isn't
willing to undertake a second well.
4:16:15 PM
MR. RICHARDS said this is a classic example that led the courts
to develop "implied covenants" that are obligations that an oil
or gas lessor has to an oil and gas lessee once production has
commenced. This is the same sort of argument the state would
make if it was upset about the lack of development in Prudhoe
Bay, for instance. Traditionally, a state would go to court to
prove that it would be profitable to undertake project X.
SENATOR STEVENS asked the possible value of speculators who just
want to hold a lease and turn it over to somebody else at a
profit. What is he missing when Mr. Richards says "good
speculator."
MR. RICHARDS asked him to imagine a more dynamic and smaller
marketplace - like Texas where one county might have 2000
different land owners that all want to get somebody to drill a
well. They can't go hold a big lease sale that gets every oil
company in the world going over their financials; so they might
find a speculator who puts the deal together and gets the
financing. The speculator performs a very fluid function in that
situation; he could be called a market maker and that certainly
can have value. In the context of Cook Inlet, there might be
some circumstances where individuals are taking on leases and
trying to get capital and bring up drill rigs when they can't
commit to do it. He said he wasn't familiar enough with what was
occurring in Cook Inlet to say whether not that was the case.
SENATOR STEVENS asked him how speculators might operate in
Prudhoe Bay.
MR. RICHARDS replied that he couldn't think of a way speculation
would be beneficial on the North Slope just because the cost of
putting a project together would be so high; the skill sets
needed would be high as well. But he cautioned people to do
their homework before passing legislation to disallow it.
CO-CHAIR PASKVAN asked him to restate what duties developed out
of the implied covenant doctrine.
MR. RICHARDS answered that the implied covenant doctrine serves
several purposes in oil and gas leases, but the relevant one
here is they provide a mechanism for the landowner to be able to
force development when a lease is under production and can't
otherwise be terminated. That is the express purpose of the
covenants.
Section 804 of Wayman Meyers (the leading treatise on oil and
gas) says:
An oil company has a duty to reasonably develop a
producing lease. That means that operators have a
legal obligation to drill known and producing
formations. They have a duty to explore further, which
means they must drill past wells and non-producing but
potentially productive formations. They have a duty to
market, which means that they have an obligation to
exercise diligence in selling oil and gas from the
lease and they have a duty to conduct with reasonable
care and due diligence all operations on the leasehold
that affect the lessor's royalty interest.
He explained that this is a catch-all provision that stands for
various propositions such that you must develop a lease
reasonably and not damage the reservoir; you can't prematurely
abandon a lease; you must use advanced technologies in
production; and that you have a legal obligation to seek
regulatory approvals.
MR. RICHARDS said that different states and treaties might state
the obligations of implied covenants differently, but he didn't
think there was much dispute that they exist in all leases in
all states in some form. Alaska's Supreme Court, although they
have not addressed them specifically, has said they exist in a
footnote of one of its decisions on Alaska's leases.
4:22:44 PM
So, what do those implied covenants mean? Mr. Richards said
these issues first came up about 100 years ago when the courts
began to recognize that oil companies can act opportunistically
towards the royalty interest owners, and they might do what is
in their best interests and not the landholder's best interests.
One of the first things they wrestled with was the standard of
care or the implied obligation that an oil company owes a
landowner. Some of the early cases said that an oil company just
must exercise standard business judgment for a lessee's
perspective (basically, all an oil company has to do is behave
in a way that is sound business from the oil company's
perspective). This standard was uniformly rejected because it
didn't protect the landowner's interest enough.
Some of the early cases said that an oil company must act as a
fiduciary towards the landowner and that they must act in the
landowner's best interests. That was also pretty widely rejected
as going too far the other way. Virtually every jurisdiction,
with a few exceptions, developed the standard of care that is
called "the prudent operator standard" and quoted again from
William Meyers, Section 806.3 as follows:
The prudent operator is a reasonable man engaged in
oil and gas operations. He's a hypothetical oil
operator who does what he ought to do, not what he
ought not to do with respect to operations on a
leasehold. Since the standard of conduct is objective,
a defendant cannot justify his act or omission [sic]
on personal grounds or by reference to his peculiar
circumstances. It is no excuse the defendant failed to
drill the offset well a prudent operator would have
drilled because the defendant is short of cash or over
committing on drilling programs, has no need for more
production, or prefers to spend his money on other
things. In short, the question is not what was proper
for the defendant to do given his peculiar
circumstances, but what a hypothetical operator acting
reasonably would have done given the circumstances
generally obtained in the locality.
This means that the oil company owes a standard of care to the
landowner to behave as a reasonably prudent oil and gas company
would, and that's the standard at which actions to further
develop are measured. He said a subset of that requirement that
case law is also extremely clear on is that a reasonably prudent
operator undertakes all development activities for which there
is a reasonable expectation of profit. A reasonable expectation
of profit in modern cases and in academic literature is pretty
uniformly understood to mean that there is a positive net
present value on the project (well, new development field,
marketing gas et cetera) and there is an obligation to undertake
it so that the royalty owner can receive his royalty interest.
4:26:29 PM
SENATOR FRENCH said he is familiar with Point Thomson where
there is no development whatsoever, a foot-dragging oil company
and some pressure from the landowner to get things going, but he
asked him for examples of producing leases where there is an
allegation of insufficient investment or something along those
lines. He also was interested in any case law that further
defines reasonable profit.
MR. RICHARDS responded that Amanda Cohen with the Alaska
Dispatch asked him a similar question and he dug out a few law
review articles on that topic and he would forward those.
SENATOR WIELECHOWSKI said he thought he heard that a reasonable
expectation of profit is whether the project would have a
positive net present value.
MR. RICHARDS answered that was accurate in general.
SENATOR WIELECHOWSKI said from the state's perspective in
determining whether or not the state's leases are being adhered
to the first thing they would want to check for is a positive
net present value.
MR. RICHARDS agreed and said one of the things he liked about SB
209 was the idea of DNR having a mandatory obligation every few
years to run economic analysis on non-developed pools within
existing units and gas development in units that are producing
oil but gas has not been brought to market.
SENATOR WIELECHOWSKI said one of the big arguments they hear
over and over again is that Alaska is not competitive and asked
Mr. Richards if he believed that statement and philosophy was in
compliance with Alaska's leases.
4:29:12 PM
MR. RICHARDS replied no. Alaska has the right to have its
resources developed if the lessee has a reasonable expectation
of profit and development. The reason he read the quote from the
BP president about North Star is because he finds that entire
discussion to be a microcosm of what is occurring right now on
the North Slope where projects will be profitable but they are
refusing to develop until tax concessions are made that makes
them more profitable. If he were in charge of DNR, he wouldn't
tolerate that.
4:30:12 PM
He concluded that the state shouldn't be trying to address
declining oil production solely through the rubric of tax
incentives. Reducing taxes is not the only rational and
available policy means by which to get increased production. Yet
that seems to be what the debate is focused on.
First, Mr. Richards said the state should be focused on removing
competitive barriers to entry to independent producers; and it
should disallow warehousing, speculation and non-development in
producing leases when the operator has an expectation of profit.
Some of the ways it can do that (that are in SB 209) are to
mandate that DNR do economic analyses of non-producing pools and
gas that haven't been developed on a periodic basis.
Second, he said while the bill has an obligation for a unit
operator to submit a plan of development/exploration/operation,
there is no requirement to submit a plan of marketing. The thing
that would break the logjam on North Slope gas more than any
other item would be if the state mandated on an annual basis
detailed reports (any conversation they had, every conservation
they intend to have with any potential market participant
including, for instance, Japan and the Asian market) of all
efforts made demonstrating that the Prudhoe Bay lessees had
acted with due diligence to find a market for that resource.
That concluded his remarks.
CO-CHAIR PASKVAN found no questions and said SB 209 would be
held in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 209 Hearing Request SEN RES.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 Sponsor Statement.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 OG Leasing Fact Sheet.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 Bill Version A.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 Oil and Gas Leasing Statute.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 Sample Lease_OGL-DL-1-01Feb74(ADL63059)P.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 209 Sample Lease 2_OGL#DOG 200204RevOct03PB.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |
| SB 215_DRAFT AGDC Cost Estimates.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 215 |
| SB 209 Slide Presentation_Oil and Gas Leasing.pdf |
SRES 3/23/2012 3:30:00 PM |
SB 209 |