Legislature(1997 - 1998)

04/15/1998 03:30 PM RES

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

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