Legislature(2021 - 2022)BUTROVICH 205

03/10/2021 03:30 PM Senate RESOURCES

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**Streamed live on AKL.tv**
        SB 61-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE                                                                    
3:36:51 PM                                                                                                                    
CHAIR REVAK  announced the  consideration of  SENATE BILL  NO. 61                                                               
"An  Act authorizing  the commissioner  of  natural resources  to                                                               
modify a net profit share lease."                                                                                               
He asked  Mr. Meza and Mr.  Fitzpatrick to provide a  recap of SB
61 and an  overview of their response to  questions the committee                                                               
asked during the first hearing.                                                                                                 
3:37:47 PM                                                                                                                    
JHONNY  MEZA,  Commercial  Manager,  Division  of  Oil  and  Gas,                                                               
Department of  Natural Resources,  Anchorage, Alaska,  stated the                                                               
information the  department provided  related to the  three cases                                                               
for which the department granted royalty modification.                                                                          
He   explained  there   were  eight   applications  for   royalty                                                               
modification:  two  where denied,  three  were  withdrawn by  the                                                               
applicants,  and  the  department approved  the  remaining  three                                                               
applications.  For  the  approved  applications,  the  department                                                               
issued  recent findings,  received  public comments,  and gave  a                                                               
presentation  to  the  Legislative  Budget  and  Audit  Committee                                                               
MR. MEZA noted the department  included additional information in                                                               
their  email  response  letter to  the  committee  regarding  the                                                               
production that  came from  the royalty  modification as  well as                                                               
revenues  to the  state as  resource owner,  specifically royalty                                                               
and net profit share where applicable.                                                                                          
CHAIR REVAK asked Mr. Fitzpatrick if he had anything to add.                                                                    
3:40:02 PM                                                                                                                    
RYAN  FITZPATRICK,  Commercial  Analyst,  Department  of  Natural                                                               
Resources,  Anchorage,  Alaska,  stated   Mr.  Meza  covered  the                                                               
information that DNR provided to the committee.                                                                                 
CHAIR REVAK  asked why it  would benefit  the State of  Alaska to                                                               
modify royalty or net profit share leases.                                                                                      
MR. FITZPATRICK  replied the intent  of the bill is  to encourage                                                               
development of  resources would otherwise  be stranded.  He noted                                                               
Chair  Revak  mentioned  royalties  and  explained  that  current                                                               
Alaska  statute allows  the DNR  commissioner  to modify  royalty                                                               
rates  under  three  different scenarios:  1)  to  encourage  new                                                               
production  from a  field or  pool that  has not  previously been                                                               
produced, 2)  to extend  the life of  existing production  in the                                                               
event  that per  barrel costs  are increasing,  or 3)  to restore                                                               
ceased production in a pool or field that is shut-in.                                                                           
MR.  FITZPATRICK explained  that  SB 61  primarily  would do  two                                                               
things. First it  would allow for a fourth  condition for royalty                                                               
modification, or for potential modification  of net profit shares                                                               
in the  event that  a field is  producing but  additional capital                                                               
investments  is required  to  increase  marginal production.  The                                                               
scenarios would  include additional drilling, drilling  pads, and                                                               
enhanced oil recovery.  If those projects were not  economic on a                                                               
standalone basis  but could be  made economic through  royalty or                                                               
net  profit share  modification,  it  would encourage  additional                                                               
investment and production.                                                                                                      
He  said  the  second  objective  of   SB  61  is  to  allow  the                                                               
modification  of  net profit  shares  under  the same  regime  as                                                               
royalty  modification  as  currently allowed  in  statutes.  That                                                               
would  be one  of the  three  bases that  the department  already                                                               
discussed, or  potentially the fourth  additional basis  that the                                                               
bill would add.                                                                                                                 
3:43:30 PM                                                                                                                    
CHAIR  REVAK noted  he mentioned  enhanced  recovery efforts  and                                                               
asked him to confirm that as  an oilfield produces over time, oil                                                               
recovery becomes harder and more expensive.                                                                                     
MR.  FITZPATRICK   answered  yes,  an  oilfield   over  its  life                                                               
generally sees  a decline in  production. It is a  common feature                                                               
seen  in North  Slope  oil fields  and  oilfields throughout  the                                                               
world.  Initial  production is  high,  but  reservoirs drop  over                                                               
time. There  are methods  that producers can  use to  either slow                                                               
oil  production decline  or  temporarily  increase production  by                                                               
injecting water  or gas,  polymer flooding, and  a whole  host of                                                               
arrays that can be used.                                                                                                        
CHAIR  REVAK asked  him to  confirm that  DNR's position  is that                                                               
current oilfield  development will  become uneconomical  and that                                                               
is the reason for the legislation.                                                                                              
MR.  FITZPATRICK  answered  yes.  He  explained  over  time,  any                                                               
oilfield  can potentially  become uneconomic  as seen  throughout                                                               
the world  where oilfields  producing over  long periods  of time                                                               
eventually  decline and  no longer  provide adequate  revenues to                                                               
meet  operating  expenditures  and other  financial  commitments.                                                               
Hypothetically, as oilfield  production declines the modification                                                               
of  royalty rates  and net  profit share  rates could  extend the                                                               
life of  the oilfield a  couple of years with  increased revenues                                                               
rather than the oilfield shutting down.                                                                                         
MR. FITZPATRICK summarized that  the department believes the bill                                                               
could help to  increase production over time  from certain fields                                                               
that might otherwise be economically disadvantaged.                                                                             
3:47:03 PM                                                                                                                    
SENATOR  STEVENS  expressed interest  in  knowing  how often  the                                                               
department approves  or denies modified lease  requests. He noted                                                               
the  statement   that  there  were  eight   royalty  modification                                                               
requests.  He  asked  how  often  requests  occur  and  does  the                                                               
department approve or deny a lot more requests.                                                                                 
MR.  FITZPATRICK  explained  the  figures that  Mr.  Meza  shared                                                               
pertain to  when the statute was  first enacted in 1995.  DNR has                                                               
had  eight applications  for royalty  modifications from  1995 to                                                               
present. These requests  do not occur annually and  involve a lot                                                               
of review work.                                                                                                                 
CHAIR  REVAK  noted that  the  three  modified applications  were                                                               
substantially  lucrative  to the  state.  He  asked him  to  walk                                                               
through the internal processes when  somebody applies for a lease                                                               
MR. FITZPATRICK explained that  royalty modification is generally                                                               
reviewed by  the Commercial  Section within  the Division  of Oil                                                               
and  Gas. The  review  process varies  depending  on whether  the                                                               
application  is for  larger or  smaller oilfields,  or larger  or                                                               
smaller operators, but  it is always in depth.  The last oilfield                                                               
the department reviewed took approximately 10-11 months.                                                                        
MR.  FITZPATRICK   detailed  when  the  department   reviews  the                                                               
application,  there  is  generally  a back  and  forth  with  the                                                               
applicant to get  all the information. If it  is not forthcoming,                                                               
the department can deny modification due to lack of information.                                                                
MR. FITZPATRICK  said the department  has statutory  authority to                                                               
require or  request an applicant  pay for consultant fees  to aid                                                               
the  department  in  its application  review.  Those  consultants                                                               
would  provide expertise  that the  department may  not have  in-                                                               
house such  as reservoir  engineering, accountants,  or financial                                                               
industry members that might have expertise in financial review.                                                                 
3:52:04 PM                                                                                                                    
MR. FITZPATRICK explained that once  the applicant information is                                                               
received,  the department  does its  own evaluation  and economic                                                               
modeling.  The  primary  evaluation  objective  is  to  determine                                                               
whether  the application  meets  the  statutory requirements  for                                                               
royalty  modification that  were mentioned  earlier. Each  of the                                                               
three scenarios  potentially has  subparts that  each application                                                               
would have to meet.                                                                                                             
MR FITZPATRICK  said one  of the  primary considerations  is that                                                               
when  the legislature  passed the  statute in  1995 to  allow for                                                               
royalty modification, one of its  features is a heightened burden                                                               
of proof that  an application must meet  for royalty modification                                                               
eligibility. That is clear and substantial evidence.                                                                            
MR. FITZPATRICK  detailed once the applicant  review is finished,                                                               
the Commercial  Section briefs  the Division of  Oil and  Gas and                                                               
the  DNR commissioner  to determine  whether there  is additional                                                               
review  work  for  the  division   to  conclude  the  application                                                               
process;  at that  point, DNR  would prepare  and publish  a best                                                               
interest finding that includes a  public comment period, an offer                                                               
to  LB&A for  a hearing  on  the royalty  modification, the  best                                                               
interest finding  draft, and comments from  the DNR commissioner.                                                               
After  the  public comment  period  closes,  the department  must                                                               
consider all  public and legislative comments  to incorporate and                                                               
publish in its final best interest finding.                                                                                     
3:54:40 PM                                                                                                                    
CHAIR REVAK  noted the application process  includes oversight by                                                               
the public  and LB&A,  and only three  out of  eight applications                                                               
have been  approved. He  asked Messrs.  Meza and  Fitzpatrick why                                                               
the department is now asking  for a modification, noting oilfield                                                               
throughput has drastically decreased over the past few decades.                                                                 
MR. MEZA replied he is  correct in referencing that the declining                                                               
production  from  the  state's  producing  fields  may  create  a                                                               
possibility that some  of those pools may  become uneconomic. One                                                               
of the  main goals with the  proposed bill is that  modifying the                                                               
royalty rates,  or the net profit  share rate for the  net profit                                                               
share  leases, can  prevent  declining  oilfield production  from                                                               
abandonment and perhaps ensure  continuing production and revenue                                                               
to the  state. SB 61  provides the DNR commissioner  with another                                                               
lever to modify parameters to  encourage continuous or additional                                                               
incremental  production   versus  shutting  down  wells   due  to                                                               
economic disadvantages.                                                                                                         
CHAIR  REVAK noted  the  committee has  strictly  heard from  the                                                               
department on SB 61. He asked  the Alaska Oil and Gas Association                                                               
(AOGA) to provide their input.                                                                                                  
3:57:54 PM                                                                                                                    
KARA   MORIARTY,  President   and   CEO,  Alaska   Oil  and   Gas                                                               
Association, Anchorage,  Alaska, testified  in support of  SB 61.                                                               
She  explained AOGA  is the  professional trade  association that                                                               
represents the majority of  explorers, producers, refineries, and                                                               
pipeline company in Alaska.                                                                                                     
She  said 2020  was an  unprecedented year  for the  oil and  gas                                                               
industry.  Even with  COVID-19, the  industry also  experienced a                                                               
pre-pandemic price  war, and then  the whole world  turned upside                                                               
down about  a year ago  from COVID-19.  For the first  time since                                                               
Prudhoe  Bay  production started,  drilling  on  the North  Slope                                                               
virtually stopped.  There were  no drilling  rigs in  Prudhoe Bay                                                               
for the  first time in history  and the sector lost  thousands of                                                               
She noted  while oil prices  are rising and production  in Alaska                                                               
has largely  rebounded to where  production was  before COVID-19,                                                               
there   are  still   effects  from   2020.  While   the  proposed                                                               
legislation  is not  a new  concept to  allow for  potential [net                                                               
profit  share lease]  (NPSL) modifications,  the  timing for  the                                                               
legislation  might  be  right  because  the  state  needs  to  do                                                               
whatever it can  to make sure the state's  oilfields are economic                                                               
and  its fiscal  regime remains  competitive. SB  61 provides  an                                                               
additional regulatory tool in the  state's toolbox to incentivize                                                               
and grow production.                                                                                                            
MS.  MORIARTY said  she thinks  Mr.  Fitzpatrick did  a nice  job                                                               
discussing how  modifying current royalty  rates for oil  and gas                                                               
leases  is  not easy.  Modification  does  not happen  overnight.                                                               
There is  very much a  rigorous standard of proof,  the economics                                                               
absolutely have to  warrant a change, and modification  has to be                                                               
in the  best interest of the  state. Allowing NPSL to  go through                                                               
the same type of process could  be a very necessary and effective                                                               
tool  for  providing  flexibility   in  managing  different  cost                                                               
structures, market dynamics, and project economics.                                                                             
MS. MORIARTY stated AOGA sees SB  61 as an additional tool to use                                                               
on a case-by-case  basis. It provides the option for  DNR to work                                                               
with the industry on any particular development.                                                                                
She summarized AOGA  wants to see as much  production as possible                                                               
because  it  is  good  for  the state,  economy,  jobs,  and  all                                                               
4:02:18 PM                                                                                                                    
CHAIR REVAK  opened public testimony  on SB 61; finding  none, he                                                               
closed public testimony.                                                                                                        
4:02:43 PM                                                                                                                    
CHAIR REVAK held SB 61 in committee.                                                                                            

Document Name Date/Time Subjects
SB 61 CS (RES) Work Draft 32-GS1706.B.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 61 DNR Response to Committee Questions 2.17.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 61 LAA Legal Opinion 2.19.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 62 Sectional Analysis Version A 2.2.2021.pdf SRES 3/10/2021 3:30:00 PM
SB 62
SB 62 Sponsor Statement 1.28.2021.pdf SFIN 2/1/2022 1:00:00 PM
SFIN 3/18/2022 9:00:00 AM
SRES 3/10/2021 3:30:00 PM
SB 62
SB 61 AOGA Letter of Support- 3.9.21.pdf SRES 3/10/2021 3:30:00 PM
SB 61
SB 62 DNR Presentation- Gas Leases; Renwable Energy Grant.pdf SRES 3/10/2021 3:30:00 PM
SB 62