Legislature(2003 - 2004)
05/04/2004 03:42 PM Senate STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSSSHB 364(O&G)-NATURAL GAS LEASES NEAR KACHEMAK BAY
CHAIR GARY STEVENS announced the first order of business to come
before the committee to be CSSSHB 364(O&G).
REPRESENTATIVE PAUL SEATON, sponsor, explained that the bill is
designed to contain the shallow natural gas leases in the Homer
area to their original three year term and places a moratorium
on reissue of those leases. It does not in any way compromise
future leases for conventional gas in the Homer area.
To understand why this bill is necessary, a brief history of the
shallow natural gas leases is in order, he said. He referred to
maps of the area and explained the following:
In 1976 the State of Alaska bought back leases in
Katchemak Bay and the uplands of this area. Now, there
were no wells in these uplands, but the area that is
described in this bill is the upland areas that were
in the original buyback in 1976.
In 1996 the State of Alaska came forward with the
shallow natural gas program which was an over the
counter sale, not a competitive bid. The main benefit
of the program is that the leases are cheap and the
incentive was to allow rural areas to have an easy way
to get gas with small rigs - that could be not
requiring the big deep rigs for conventional gas - and
make it cheap for rural areas to develop energy.
In 1999 the State of Alaska formed the Cook Inlet
Area-wide Lease Sale Program and it specifically
excluded this area, this lower portion of the Cook
Inlet Basin from that area-wide lease sale program.
And ironically it's this exclusion of the Homer bench
area from the area-wide lease sale, which made it
vulnerable or available for the shallow natural gas
program.
In June of 2003 leases were granted to Lapp Resources
who had applied for those. And it's interesting when
you look at those leases - again, they were
noncompetitive leases, just over the counter. It was
only $500 per nine square miles. There was no best
interest finding required. And a best interest finding
of course is where you have a balancing act where you
have comments and the state balances.
In the 1996 shallow natural gas lease program, there
was a general finding that said, "It's in the best
interest of the state to develop shallow natural gas."
Period, wherever it was - so that precluded the
necessity for an individual specific best interest
finding, which is what has led to most of these
problems.
There was effectively no notification of the local
area that these leases were going to be issued or
applications because we have two newspapers in the
Homer area. The Homer Tribune and the Homer News and
it was published in neither of those. There was a
publication in the Peninsula Clarion, which is on the
north end of the Kenai Peninsula and is read by very
few people on the southern Kenai.
The way this works is that the criteria for issuing
the leases are if the Department of Natural Resources
can see any benefit to gas to the local areas then the
leases have to be issued. So comments that could be
received couldn't be considered anyway. And that's
another fault of the program because if people bring
up positives and negatives, none of the negatives can
be weighed in whether they're going to issue the
leases for the shallow natural gas program. It's only
if there is any benefit to gas to the local area then
the leases would have to be issued. And they were
issued at the time and there were not then and there
still are no operational regulations in place for how
the shallow natural gas wells have to be - procedures
have to be conducted.
The goal of this sponsor substitute is to allow the
current leases in the Homer area not to be extended or
reissued and to exclude the lands of the Homer bench,
which is shown up here - a highly populated area -
from future leasing under the shallow natural gas
program, which again is the non-competitive, over the
counter lease program.
But again, this bill in no way keeps the state from
forming a new area-wide lease sale, expanding the Cook
Inlet area area-wide lease sale or issuing oil or gas
leases for this area. It is only a moratorium on the
issuance or re-issuance of shallow natural gas leases.
The sectional analysis of the bill is that the first
section just excludes the area of Katchemak Bay from
leasing under the shallow natural gas program.
Section 2 is the main guts of the bill and what it
does, it lays out discretionary provisions or
conditions so that the director of Oil and Gas has
criteria under which to reissue leases.
Now the Division of Oil and Gas supports these
recommendations. Currently what would happen is if
their three year lease runs out, it almost has to be
an automatic extension because if the director of Oil
and Gas doesn't extend the leases, the State is
exposed to a takings claim for arbitrary and
capricious decisions by the director of Oil and Gas
because the Legislature has not set out the conditions
under which they should be reissued, extended or not
extended.
Section 3 of the bill modifies or amends the law to
prohibit the issuance or re-issuance of shallow
natural gas leases before the date and if the leases
terminate. In other words, if somebody goes through
here and does not perform on the leases, does not have
paying quantities of gas, has no plan in place for
investing in the leases, then this would mean that
those would terminate and would not be re-issued. And
it also covers a breach of contract in which they
would be let -they would revert to the state or they
would be canceled and not re-issued.
Section 4 is just the immediate effective date.
I would like to note one other thing and that is this
has a zero fiscal note. It requires no buy back. It
requires no purchase. It does have an indeterminate
note on the potential loss of revenue, but there are
two things to consider. One is that as long as these
shallow natural gas leases are in place, the State
cannot go in and do an oil and gas lease. And there's
good potential for conventional gas in this area.
However, you have what is called correlative rights
problems. Because under the shallow natural gas
program you can drill down to 3,000 feet and if you
can geologically demonstrate that you found gas above
3,000 feet and that same structure goes down to lower,
deeper reservoirs, you can follow that gas on down to
the lower deeper reservoirs. However if it's not
contiguous or continuous with the upper gas, then that
lower gas is trapped and you cannot access it. And
that's where the value is to the State. Now these
would probably be thought of as highly sought after
leases in a competitive bid situation because the area
just north of this area is a high gas area. In fact,
[pointing to a map] these cross hatches are state
leases that are in here. All this other area
interspersed are subsurface rights that are owned by
private individuals. They were pre-statehood
homesteads so those rights are privately owned. {Blue
portions on the map] These blue sections are all
privately owned subsurface. These cross hatches here
some are under the school and the hospital. Up here is
the area, which is the watershed for the city's
reservoir. North of this line, right up here, this is
the North Star Field, which is just going into
production now. There's a contract to bring the
pipeline over to service Homer. There's oil or gas
drilling out here. Unocal has just gone to unitization
up here. So this area is in the Cook Inlet Basin gas
field, but having this area leased under shallow
natural gas - the department has said that they would
never - as long as there's just 3,000 foot leases,
they would never consider doing an all gas lease a gas
and oil lease below that because of the legal
complications it would entail.
So the other thing about the fiscal note is that it is
indeterminate however, as you'll notice in Section 2,
the conditions of non-extension of the lease is that
the department has determined that there is
practically no chance that extending the leases will
lead to gas production. So basically there's not much
indeterminate because to not extend the leases they
have to make the determination that extending them,
there won't be any drilling - or any production. We're
not losing any royalties at all if we're not going to
produce gas on them.
REPRESENTATIVE SEATON noted there were resolutions in the
packets from Kachemak City, Homer, and the Kenai Peninsula
Borough. All are in favor of the bill.
CHAIR GARY STEVENS asked when the leases were awarded and when
they are up.
REPRESENTATIVE SEATON said that under the shallow natural gas
program, the leases have a three year duration and they may be
extended for an additional three years. The leases in the Homer
area were issued in June 2003 so there are about two years left
on the leases. Currently there is no application for a drilling
permit and no publicly issued plans for going forward and
drilling. Lapp Resources has made an agreement giving Unocal the
right to be a producer if they want to explore six of the nine
square mile leases.
Either conventional gas or coal bed methane could be developed.
The latter is gas taken from a coal seam, but there's a lot of
water produced with this method and dealing with the
contaminated water is problematic. Unocal isn't in the business
of doing coal bed methane; they tried it in the past and got out
of the business. They were looking at the possibility of doing
conventional gas - being able to find some of that that was
above the 3,000 foot and they could show geologically that it
went to six or eight thousand feet and develop that conventional
gas using the shallow gas program. That was never intended by
the authors of the shallow natural gas program and so our
indications are that Unocal is not planning on trying to do deep
conventional gas under the shallow natural gas program, but
there is no assurance of that. That's part of the problem;
people don't know what will happen in their front yard next
week, he said. This bill would remove that uncertainty in two
more years.
SENATOR COWDERY asked whether the blue area on the map showed
homestead land with subsurface rights and whether anyone in the
private sector had leased their land.
REPRESENTATIVE SEATON clarified that the blue areas were private
and the crosshatch blue had subsurface rights, and there was no
record of any private sector lease. In fact there has been no
exploration or seismic work in this area specific to shallow
natural gas.
SENATOR COWDERY asked whether natural gas is used for heating in
that area.
REPRESENTATIVE SEATON told him oil is used for the most part,
but there is an established gas field at the North-fork and
there are plans for another well. Once that is accomplished,
there is an agreement to put a pipeline in to Anchor Point,
which would ultimately supply the Kenai Peninsula with natural
gas.
SENATOR COWDERY asked how many companies have bid on the leases.
REPRESENTATIVE SEATON advised there was no bidding process
because the leases were over-the-counter sales, which are first
come first served.
SENATOR COWDERY asked how many sales were involved.
REPRESENTATIVE SEATON said Lapp Resources put $500 down and
bought eight tracts each of which is nine square miles. About
half of the area is state subsurface rights and half is private
subsurface rights.
CHAIR GARY STEVENS clarified for the record that the amount paid
for the leases was just a few thousand dollars.
REPRESENTATIVE SEATON agreed.
SENATOR COWDERY asked whether there was any investment to date
in the leases.
REPRESENTATIVE SEATON said, "There has been absolutely no
investment made in the leases." He added that Dave Lappi of Lapp
Resources has participated in discussions regarding this issue
but they haven't invested money. They have, however, worked out
an agreement with Unocal for six of the leases.
CHAIR GARY STEVENS remarked that consistent throughout the
discussions is the point that the notification process was
inadequate. Local people simply were not aware that these leases
were going to occur.
REPRESENTATIVE SEATON said that's true, but it wouldn't have
mattered anyway because under the terms of the Shallow Natural
1996 Gas Act, negative comments may not be considered. The
director of DNR is charged with looking at whether an area might
benefit in any way whatsoever from shallow natural gas
development in an area. "That's one of the things that the
Division of Oil and Gas does not like about this program," he
said. They put out a notification, but their hands are tied with
regard to doing anything other than issuing the leases.
CHAIR GARY STEVENS pointed out that the City of Homer was
concerned that leases were let under their water supply and some
tidal areas.
REPRESENTATIVE SEATON agreed and explained that Homer relies on
one water source that is outside the city. The borough gave the
city extra-territorial powers on the watershed surrounding the
reservoir but now, under the shallow natural gas program, the
entire area has been leased.
SENATOR STEDMAN asked whether people that have subsurface rights
could drill a well and hook up their house.
REPRESENTATIVE SEATON replied that is possible, there are few
regulations on someone who owns both the surface and the
subsurface rights for doing shallow natural gas.
SENATOR STEDMAN questioned whether it a cost factor that keeps
these people from drilling their own wells.
REPRESENTATIVE SEATON thought that was probably the case.
SENATOR COWDERY asked for an explanation of exactly what
subsurface means and questioned whether it's six inches or six
feet from the surface.
REPRESENTATIVE SEATON said he didn't really have the answer, but
he thought that if you're extracting anything such as gravel
that's all part of the subsurface mineral estate. He wasn't sure
about a basement for example, but he did know you didn't need a
state permit to put in a basement.
SENATOR COWDERY asked whether the leaseholder could do anything
without the permission of the property owner.
REPRESENTATIVE SEATON said the existing law requires a surface
use agreement and the surface owner must give reasonable access
to the holder of the subsurface rights. If no agreement can be
reached, then the leaseholder may post a bond through DNR to
cover potential damages and go forward. There is pending
legislation to change that, but that's the way it is currently.
CHAIR GARY STEVENS added that is one of the many concerns people
have. They really don't have control over what could happen on
their property.
REPRESENTATIVE SEATON said that's correct. HB 69 changed the law
a bit and allows administrative override by the deputy
commissioner of DNR of any local ordinances that would attempt
to restrict shallow natural gas. Proposed legislation attempts
to correct that but as it is, it certainly feeds people's fears.
SENATOR COWDERY remarked that the gas fields can be very large
and he wondered how you keep track of which property the gas
might be under.
REPRESENTATIVE SEATON said the Division of Oil and Gas works on
this problem all the time and in Homer it would be difficult
because there is so much private land interspersed with the
state land. Areas are unitized in terms of how far a particular
gas field reaches. Then everyone within a unit has a period of
time to join the unit, but if they do that then they just lose
their gas. When a unit is formed the landowners in that unit get
a portioned share of the royalties of the gas that's produced in
that unit. But, he said,
To make our understanding clear. The way the law is
now, if you have the occupied land and there is five
acres unoccupied right next to you, if the gas company
would decide to put it on your land, there is nothing
you can do about that. You can disagree with that and
then it goes to DNR for a posting of a bond and that
bond has nothing to do with your wishes or desires.
That bond is strictly related to what damage they
would cause in their drilling operations and what it
would take - $8,500 $10,000 - to repair that damage
when they leave. And that would be the only recourse.
And that's one of the things that the other bills are
trying to clean up. Is so that they would have to
demonstrate that they couldn't go to one of these
other parcels of land around you. Now granted I don't
want to mean that the gas companies that we've been
dealing with would want to inflame the situation any
more by doing that, hopefully they would go to the
other parcels of land that were unoccupied or that
would like to have a surface use agreement, but the
current law doesn't require them to do that. The other
shallow natural gas bills that are coming forward
through HB 395, which is in Resources, would require
them to demonstrate that they needed to use your
particular piece of land where they could get that
bond.
4:10 p.m.
CHAIR GARY STEVENS remarked that if it was determined that your
property was the only one that could be drilled, potential
impacts might be that roads would be constructed, a drill might
be placed on your property, a generating plant put in to power
the drilling, and above ground piping could be installed. It all
adds up to quite an impact on the local property owner.
REPRESENTATIVE SEATON said the companies are interested in
working out problems, but legally that could happen. The burden
of cooperation legally falls on the surface owner.
MIKE McCARTHY, Homer resident and retired registered geologist,
testified via teleconference to say that he represents over
1,220 members of the Kachemak Bay Property Owners Alliance. He
stated the following:
Currently the coal bed methane leases here impact
22,000 acres, which includes Homer's Bridge Creek
watershed, an elementary school, three churches, and a
portion of the designated critical wetland habitat
area. We, the 1,200 members have expended thousands of
volunteer hours to get the City of Homer, Katchemak
City and the Kenai Peninsula Borough to pass
resolutions supporting a moratorium and a buyback
proposal for the coal bed methane leases in this area.
This bill presently before you is not going to fix all
the ills of the current CBM statute, but it's a solid
start and it shows government responsiveness to
Alaska's citizens. I would like to applaud both
yourself and Representative Seaton for your efforts on
our behalf.
MR. McCARTHY then read a letter from a Homer Realtor outlining
the decidedly negative impact that the coal bed methane issue is
having on the area wide real estate market. [A copy may be found
in the bill file.]
He pointed out that there are 1,084 properties that are impacted
and they're worth $66.4 million in assessed value yet the leases
were acquired for just $28,000.
SENATOR COWDERY asked whether he was aware that property deeds
and title insurance for property that's sold in Alaska say that
the property owner does not have subsurface rights.
MR. McCARTHY agreed, but the situation here is that a number of
property owners didn't know that a subsurface lease had been let
and if they'd known they wouldn't have purchased the property.
SENATOR COWDERY again asked for information regarding where
subsurface rights begin.
MR. McCARTHY said he didn't have that information.
REPRESENTATIVE SEATON advised that property owners that dig a
water well must apply for water rights from the State if you
want the property right on that water.
CHAIR GARY STEVENS noted that the Resource Committee would hear
the bill next and he wanted the bill to move if at all possible.
SENATOR COWDERY motioned to report CSSSHB 364(O&G) and attached
fiscal notes from committee with individual recommendations. He
asked for unanimous consent. There being no objection, it was so
ordered.
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