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