Legislature(2023 - 2024)ANCH LIO DENALI Rm
12/23/2024 09:00 AM House LEGISLATIVE BUDGET & AUDIT
| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Kitchen Light Unit Oil Royalty Modification | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
Anchorage, Alaska
December 23, 2024
9:04 a.m.
MEMBERS PRESENT
Representative Ben Carpenter, Chair
Senator Bert Stedman, Vice Chair (via teleconference)
Representative DeLena Johnson
Representative Sarah Vance (via teleconference)
Representative Frank Tomaszewski (via teleconference)
Representative Andy Josephson (via teleconference)
Senator Bill Wielechowski (via teleconference)
Senator James Kaufman (via teleconference)
Senator Scott Kawasaki (via teleconference)
Representative Mike Cronk (alternate)
MEMBERS ABSENT
Senator Lyman Hoffman
Senator Click Bishop (alternate)
OTHER LEGISLATORS PRESENT
Representative Tom McKay
Representative Julie Coulombe
Senator Elvi Gray-Jackson
COMMITTEE CALENDAR
PRESENTATION(S): KITCHEN LIGHTS UNIT OIL ROYALTY MODIFICATION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOHN CROWTHER, Deputy Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided introductory remarks and answered
questions during the Kitchen Lights Unit Oil Royalty
Modification presentation.
HALEY PAINE, Deputy Director
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Co-presented a PowerPoint during the
Kitchen Lights Unit Oil Royalty Modification presentation.
RYAN FITZPATRICK, Commercial Section Manager
Division of Oil and Gas
Department of Natural Gas
Anchorage, Alaska
POSITION STATEMENT: Co-presented a PowerPoint during the
Kitchen Lights Unit Oil Royalty Modification presentation.
JUSTIN BLACK, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Co-presented a PowerPoint during the
Kitchen Lights Unit Oil Royalty Modification presentation.
ACTION NARRATIVE
9:04:41 AM
CHAIR BEN CARPENTER called the Legislative Budget and Audit
Committee meeting to order at 9:04 a.m. Representatives D.
Johnson, Vance (via teleconference), Tomaszewski (via
teleconference), Cronk (alternate), and Carpenter and Senators
Wielechowski (via teleconference), Kaufman (via teleconference),
Kawasaki (via teleconference), and Stedman (via teleconference)
were present at the call to order. Representative Josephson
(via teleconference) arrived as the meeting was in progress.
Also present were Representatives McKay and Coulombe, and
Senator Gray-Jackson.
^PRESENTATION(S): Kitchen Light Unit Oil Royalty Modification
PRESENTATION(S): Kitchen Lights Unit Oil Royalty Modification
9:05:37 AM
CHAIR CARPENTER announced that the only order of business would
be the Kitchen Lights Unit Oil Royalty Modification
presentation.
9:06:16 AM
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), said he and his colleagues would be providing
an overview of the proposed determination for royalty
modification for a portion of the Kitchen Lights Unit (KLU) in
the Cook Inlet. The intent is to reflect the economic realities
of this particular field within the context of department-wide
efforts to boost natural gas supply in the region.
9:07:10 AM
HALEY PAINE, Deputy Director, Division of Oil and Gas,
Department of Natural Resources (DNR), said the Division of Oil
and Gas was delegated, by the commissioner, the responsibility
of performing an analysis and writing a best interest finding
for the KLU royalty modification, entitled "Preliminary Findings
and Determination Regarding the Kitchen Lights Unit Royalty
Modification Application" [included in the committee packet].
The preliminary findings were issued on December 6, 2024, and
are currently in the 30-day comment period. She directed
attention to a PowerPoint presentation, entitled "Preliminary
Findings and Determination Furie Royalty Modification,"
beginning with an outline of the presentation on slide 2. She
noted that this is the first royalty modification that has been
granted in the 180J inlet and the first royalty modification
specifically for natural gas.
9:09:24 AM
MS. PAINE continued to slide 3, "Executive Summary," which read
as follows [original punctuation provided]:
•Furie Operating Alaska, LLC ("Furie"), operator of
the Kitchen Lights Unit ("KLU"), submitted a royalty
modification application to DNR on September 5, 2024
•The application to reduce royalty is intended to
prolong the economic life of the unit as per barrel
equivalent costs were increasing due to declining
production
•DNR engaged in an extensive review and analysis
process of confidential financial and production
information provided by the applicant
•DNR concluded that, absent additional production from
new drilling, the unit would likely reach the end of
the economic field life in June 2025
•DNR has recommended a royalty modification mechanism
based on cumulative gross revenues beginning on
September 1, 2024
•DNR analyses showed that royalty modification would
extend the life of the field by 10.5 years with an
expected $37.62 million increase in direct revenue to
the State
9:11:41 AM
The committee took a brief at-ease at 9:11 a.m.
[Due to technical difficulties, portions of the audio are
indiscernible throughout.]
9:12:19 AM
RYAN FITZPATRICK, Commercial Section Manager, Division of Oil
and Gas, Department of Natural Resources (DNR), continued the
presentation on slide 4, "Royalty Modification Relevant
Statutes," which read as follows [original punctuation
provided]:
•The Commissioner:
•AS38.05.180(j)(1)(B): may provide modification of
royalty "to prolong the economic life of an oil or gas
field or pool as per barrel or barrel equivalent costs
increase or as the price of oil or gas decreases, and
the increase or decrease is sufficient to make future
production no longer economically feasible."
•AS38.05.180(j)(4)(B) "may not grant a royalty
reduction ? under 1(B) of this subsection...of less
than three percent ..."
•The lessee needs to:
•AS38.05.180(j)(2): "make a clear and convincing
showing that a modification of royalty" meets the
statutory requirements and "is in the best interest of
the state."
•AS38.05.180(j)(3): The royalty modification mechanism
"? shall be based on a change in the price of oil or
gas and may also be based on other relevant factors
such as a change in production rate?"
9:17:09 AM
The committee took a brief at-ease at 9:17 a.m.
9:17:46 AM
MR. FITZPATRICK concluded slide 4 and turned to slide 5, which
showed a chart depicting the history of royalty modification
decisions starting in 1995 through 2023.
9:21:02 AM
JUSTIN BLACK, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources (DNR), advanced to slide 6, "KLU
Background Unit Location," which featured a map of the
northern portion of the Cook inlet and read as follows [original
punctuation provided]:
•Unit formed in 2009
•83,394 acres
•Julius R Platform ("JRP") installed in 2015 - newest
and smallest platform in the Cook Inlet
•Production began November 2015
•Furie management changed June 30, 2020, with HEX's
bankruptcy acquisition
9:23:27 AM
REPRESENTATIVE D. JOHNSON recalled that Mr. Black had stated
that technically, KLU has had the same operator. She asked why
that's important in this discussion.
MR. BLACK explained that anything before June 30, 2020, was
Escopeta Oil and Gas, considered the "old Furie," and anything
after June 30, 2020, was managed by John Hendrix's company, HEX
LLC, or "new Furie."
REPRESENTATIVE JOHNSON sought to confirm that the transfer of
ownership did not impact the royalty modification.
MR. BLACK confirmed, that is correct.
9:25:23 AM
MR. BLACK resumed the presentation on slide 7, which showed a
map of the lease boundaries within the unit and a list of the
lessees and their working interest. The combined interest of
Cornucopia Oil & Gas Company, LLC; Furie Operating Alaska, LLC;
and Corsair Oil & Gas LLC total 90 percent and are controlled by
HEX LLC. Overall, with 100 percent working interest there is a
75 percent net revenue interest. Essentially, the state's
royalty interest of 12.5 percent and the overriding royalty
interests (ORRIs), collectively, of 12.5 percent make a combined
burden on KLU leases of 25 percent and a total net revenue
interest for the KLU of 75 percent.
9:28:25 AM
MR. BLACK continued to slide 8, "KLU Background Lease
Information," which read as follows [original punctuation
provided]:
•Overriding Royalty Interests (ORRIs) total 12.50%
•KLU ORRIs were created between 2002-2010
•Last ORRI transaction was in 2010, five years before
KLU began production
•DNR only approves initial creation of an ORRI and
does not take action to approve or post records of any
subsequent assignments of ORRIs
CHAIR CAPENTER asked for confirmation that the State of Alaska
royalty interest of 12.5 percent is paid by HEX to the state,
and the collective ORRIs of 12.5 percent is also paid by HEX to
those owners.
MR. BLACK answered yes, that is correct.
9:31:18 AM
SENATOR STEDMAN pointed out that companies have different
capital structures and asked why the ORRIs would be recognized
differently than those companies' debt level, or ownership
interest, for example.
CHAIR CARPENTER asked Mr. Black to explain why the ORRIs would
be important to the state's analysis on the viability of the
KLU.
MR. BLACK pointed out that the royalty modification statutes
make reference to extending the life of a field as per barrel
costs go up. He added that the context of a company's financial
structure affects those costs. This information, he said, is
being included as an extensive background overview of the
entity's costs and operations and provide context as to how the
royalty modification would change end of field life and royalty
return to the state.
SENATOR STEDMAN said he would like to see the analysis without
the ORRIs. He opined that this sets a precedent of looking at
the capital structure when considering the tax and royalty
structures throughout the state.
MR. FITZPATRICK clarified that ORRIs run with the land and are
part of the property record of that particular unit, as opposed
to being specific to the individual company. He noted that
during the course of royalty modification, DNR analyzes the
capital structure of a company for the purpose of market
comparison.
REPRESENTATIVE D JOHNSON asked, if the state believes that
changing the royalty share would help produce more gas in the
Cook Inlet, how could the other companies with royalty interest
be expected to participate in the same type of royalty
reduction.
MR. FITZPATRICK explained that per the statutory authority
granted to the department, royalty modifications cannot be
actively sought out by DNR. Instead, those decisions are based
on applications submitted to the department by the operator. He
deferred to Mr. Crowther for further comment.
9:39:36 AM
MR. CROWTHER agreed that as a condition of the department's
royalty modification authority, DNR cannot solicit modification
from owners. Nor can it change or adjust royalties once issued.
He shared his belief that the net revenue to the state from the
KLU royalty modification would be positive. In addition, it
would extend gas production and the end of field life
projections significantly further.
CHAIR CAPENTER suggested that if the department does not have
the ability to solicit a royalty reduction that is intended to
produce more gas, perhaps this concern should be addressed by
the legislature.
9:41:54 AM
MR. BLACK noted that Furie had stated that it unsuccessfully
attempted to reduce the ORRIs on its own. In addition, through
this royalty modification, DNR is looking at the things it has
control of. He reiterated that once an ORRIs is created, it
runs with the land and the department does not have the
authority to "claw back" that interest; however, it does have
the statutory authority to consider royalty modification if it's
in the best interest of the state, which Furie demonstrated with
a projected $30 million-plus in revenue to the state. He
resumed the presentation on slide 8 and continued to slide 9,
"KLU Background Production History," which featured a graph of
KLU production history and read as follows [original punctuation
provided]:
•Current production averages ~10,000 thousand cubic
feet per day (mcf/d)
•~ Half comes from A-2a well
•Declining reservoir pressures pose a risk that any
well could cease producing
MR. BLACK described the graph as showing sustained production
beginning in November 2015 with a period of no production when
the sub-sea gathering line plugged up with hydrates under prior
management. He emphasized that beyond the production rate, the
declining reservoir pressure could become an issue that affects
production and poses a real risk to end of field life. He said
a royalty reduction would help Furie with its development and
re-working of the field.
9:45:49 AM
MR. BLACK advanced to slide 10, "Meeting Statutory Criteria,"
which read as follows [original punctuation provided]:
•The applicant made a clear and convincing showing
that the requested royalty modification met the
requirements of AS 38.05.180
•Furie provided sufficient technical and financial
information per AS38.05.180(j)(6)
•DNR examined cash flow models, production profiles,
and financial statements; held multiple meetings with
Furie
•Furie provided DNR information both initially and
during the review process
9:46:57 AM
MR. BLACK turned to slide 11, "Meeting Statutory Criteria,"
which read as follows [original punctuation provided]:
•Furie demonstrated the per-barrel-equivalent costs
increase will make future production uneconomic per
AS38.05.180(j)(2)
•The increase in per-barrel-equivalent costs is mainly
due to declining production from current wells
•Continued development of the KLU would be uneconomic
due to per-barrel-equivalent costs
•Furie demonstrated that royalty modification would
prolong the economic life of KLU per
AS38.05.180(j)(1)(B)
•Furie showed that the KLU would begin shutting down
in June 2025 as drilling or reworking wells would be
uneconomic without relief
•With relief, Furie showed how drilling would occur in
2024 and continue each year until 2028 with a total of
12 wells
•Furie proposed a royalty modification mechanism that
was fixed for 5 years and then sliding scale based on
price thereafter for a total of 20 years of relief
9:49:33 AM
SENATOR WIELECHOWSKI questioned the projected rate of return
that led to the conclusion that continued development of the KLU
would be uneconomic.
MR. BLACK stated that net present value without relief would be
a negative number; however, by granting royalty modification,
the negative number would be flipped to a positive, thereby
making it economic to continue development.
SENATOR WIELECHOWSKI asked for the rate of return that the
calculation is based on.
MR. FITZPATRICK reported that the analysis for this particular
application assumed a discount rate of 12.5 percent.
SENATOR WIELECHOWSKI agreed with Senator Stedman on the
importance of performing the analysis without the ORRIs. He
asked whether that analysis had been done.
MR. FITZPATRICK said DNRs analysis only looked at the field with
the ORRIs. He acknowledged that the ORRIs impact the economics
of the field because they're required to be paid by the
operator. Consequently, he shared his belief that the operator
does not have the potential to eliminate the payment stream of
those ORRIs from obligation to the unit.
SENATOR WIELECHOWSKI concluded that years ago, the field became
burdened by the ORRIs, and the owners are not taking cuts on
their interest, but the state is being forced to take massive
cuts on its royalties to make up for bad decisions from years
past.
MR. FITZPATRICK agreed that the ORRIs were created from 2002-
2010 and have continued to affect the unit's economics. He
reiterated his belief that even with the unit as is, the
consequences of the royalty modification would increase net
present value of total return to the state, extension of field
life, and gas supply. He opined that the state would continue
to be economically advantaged from this decision.
SENATOR WIELECHOWSKI asked whether the executive branch had ever
granted royalty relief for an ORRI. In addition, if the state
were to terminate the leases for failure to produce, he asked
whether those ORRIs would disappear.
MR. CROWTHER shared his belief that some of the other
applications may have featured ORRIs. It's common practice for
leases to include small ORRIs; however, the ORRI amount in these
leases is admittedly higher than usual. He confirmed that if
the leases were terminated, the ORRIs as a property right would
also be terminated.
9:56:06 AM
CHAIR CARPENTER asked whether the state would have the ability
to reduce the ORRIs if it were economically beneficial to the
state.
MR. CROWTHER hesitated to speculate on the scope of the
legislature's legal authority. Nonetheless, he acknowledged
that the legislature could pass laws that can diminish or
eliminate property rights subject to different constitutional
authorities. He reiterated that DNR, however, does not have the
statutory authority to take such action.
9:57:24 AM
MR. BLACK continued the presentation on slide 12, "Best Interest
of the State," which read as follows [original punctuation
provided]:
•DNR's royalty modification expected to extend field
life by 10.5 years
•The modification mechanism accounts for price and
production
•DNR model accounted for multiple price and shutdown
scenarios
•Modification is in the best interest of the State per
AS38.05.180(j)(2)
•DNR modification extends field life; generates
significant State revenues; offers indirect benefits
9:58:46 AM
MR. BLACK proceeded to slide 13, "Best Interest of the State,"
which read as follows [original punctuation provided]:
•To extend field life, Furie plans to continue its
drilling campaign for a total of 12 wells from the JRP
Drill eight new wells
•Re-drill the four existing wells
•JRP fully drilled out by the end of 2028
9:59:27 AM
MR. BLACK turned to slide 14, "Scenario Modeling: Key Results,"
which featured a chart of 5 different scenarios and the
following categories of projected outcomes: State of Alaska
royalty, end of field life, cumulative production from September
2024 in million standard cubic feet (MMSCF), production tax, the
state's share of property tax, and total state revenue. He
noted that all numbers are in millions of dollars and calculated
with a net present value of 12.5 percent. The baseline scenario
of no royalty modification anticipates $1.67 million in state
royalty with an end of field life of June 2025 totaling $2.71
million in total state revenue. The most likely scenario based
on Furie's updated prices due to its updated contract with
ENSTAR Natural Gas Company anticipates $17.11 million in state
royalty with an end of field life of December 2035 totaling
$40.33 million in total state revenue. He explained that the
various scenarios were modeled to ensure that the royalty
modification mechanism that's selected would not grant too much
and would be appropriate for a prudent operator to continue
development.
CHAIR CAPENTER asked how "too much" was determined.
MR. BLACK reiterated that the net present value at this discount
rate would become a positive number. He opined that it would
not be appropriate to grant a royalty modification that would be
"giving away the farm." He said it should do just enough to
enable the continued development of the field and continued gas
production from the KLU.
CHAIR CARPENTER asked whether the positive number is subject to
confidentiality.
MR. BLACK answered yes.
MR. CROWTHER stated that allowing the cumulative revenue number
to rise significantly higher would allow the operator to profit
past the cost of developing the field, so setting the number
higher than $713 million would give away too much.
CHAIR CARPENTER asked how the department is determining a fair
product.
MR. CROWTHER said DNR determined that recovering the cost of
development with the reduced royalty would be appropriate, but
profiting from the reduced royalty once costs are recovered
would not be.
CHAIR CARPENTER repeated his question, asking whether [Furie's]
potential profit is part of a confidentiality agreement.
MR. FITZPATRICK answered yes, certain financial information is
subject to confidentiality and cannot be publicly disclosed.
CHAIR CARPENTER referring to slide 14, asked whether the
modeling considered changes to the production tax and state
property tax.
MR. FITZPATRICK said the analysis is constrained to existing
statutes and does not take into account potential changes to
statutes. He added that the amount of production tax generated
by properties in the Cook Inlet tends to be relatively low
compared to production tax in other parts of the state. Slide
14 reflects the property tax paid to the state; however, an
equivalent portion would go to local municipalities, providing
additional benefit to the state.
CHAIR CARPENTER suggested that tax changes should be modeled in
conjunction with conversations about overcoming the structural
deficit during the next legislative session.
10:13:46 AM
MR. BLACK resumed the presentation on slide 15, "Quantified
Benefits of Royalty Modification," which read as follows
[original punctuation provided]:
•In the likely scenario 2, the quantified benefits of
royalty modification over the baseline scenario 1
include:
•$15.44 million (NPV 12.5) more in State royalty
•10.5 years of KLU field life extension
•63,228 million cubic feet of additional gas
•$6.06 million (NPV 12.5) more in Production Tax
•$16.12 million (NPV 12.5) more in State's share of
Property Tax
•$37.62 million (NPV 12.5) incremental direct revenue
to the State
10:14:58 AM
MR. BLACK advanced to slide 16, "Unquantified Indirect
Benefits," which read as follows [original punctuation
provided]:
•Ensuring Energy Supply for Alaskans
•Cook Inlet utilities face a natural gas shortfall as
soon as this winter
•Continued production at KLU provides a reliable and
potentially lower-cost alternative to LNG imports or
other energy sources
•Supports the energy supply for both residential and
industrial users, including critical facilities like
Marathon
•Maintains demand for energy services and supports the
Cook Inlet supplier and support services industry and
sustains competition and diversity among Cook Inlet
operators, fostering a robust energy sector
Environmental and Other Important Considerations
•Lease stipulations mitigate potential environmental
impacts, protecting fish and wildlife habitats,
subsistence activities, and waterfowl areas
•Furie employs 19 staff and two full-time contractors,
with 84 percent of employees residing in Alaska,
supporting local employment and economic activity
•The royalty modification is an administrative action
and does not convey authority for operations without
further regulatory approvals, ensuring ongoing
oversight of environmental and social impacts
10:17:59 AM
MR. BLACK continued to slide 17, "DNR Royalty Modification
Mechanism," which read as follows [original punctuation
provided]:
•3 percent royalty rate per month until gross revenue
generated from KLU beginning September 1, 2024,
reaches a cumulative amount of $712 million ("Gross
Revenue Target")
•Accounts for both production and price
•After the Gross Revenue Target is reached, the
royalty rate returns to 12.5 percent and royalty
modification will expire
•Depending on price and production levels, DNR
estimates royalty modification should lapse in the
early 2030s
•Gross Revenue Target was generated from total monthly
cost and expense estimates for continued development
from JRP
10:23:45 AM
REPRESENTATIVE CRONK questioned the oil intake of the wells.
MR. BLACK stated that there is no current or anticipated oil
production from the KLU. However, if a well were to be drilled
and oil discovered, the royalty modification would not apply, as
it only applies to gas production.
CHAIR CARPENTER asked whether all twelve wells covered under
this royalty modification would be drilled from the Julius R
Platform (JRP).
MR. BLACK answered yes, noting that slide 19 showed a map of the
seven leases that the KLU royalty modification would apply to
and are reachable from the JRP.
CHAIR CARPENTER sought to confirm that the JRP is the location
where the gas would come soonest.
MR. CROWTHER reiterated that the royalty modification focuses on
production from the seven leases and wells associated with the
JRP.
MR. BLACK added that due to the smaller size of the JRP, a jack-
up rig would be necessary to drill wells from the platform. He
emphasized that the infrastructure is already in place to do so,
versus installing a new platform in another location.
CHAIR CARPENTER asked whether a second jack-up rig had been
brought to the Cook Inlet in 2024.
MR. CROWTHER responded that only one jack-up rig is operating in
the Cook Inlet at this time.
10:29:15 AM
MR. BLACK continued the presentation on slide 18, "DNR Royalty
Modification Mechanism," which read as follows [original
punctuation provided]:
•Minimum royalty rate is 3 percent
•Subject to routine DNR royalty audit
•DNR shall have the right to obtain expense invoices
and financial/accounting records from Furie every six
months
•DNR shall have the right, upon notice to Furie, to
terminate the royalty modification in whole or in
part:
•If criteria of AS38.05.180(j)(1)(B) or
38.05.180(j)(2) are no longer met
•If DNR finds KLU operator to be in default per
11AAC83.374 (failure to comply with terms of an
approved plan of development), and the default is
not cured, royalty modification will terminate
•Royalty modification can only be assigned upon
written approval of the Commissioner
•Royalty modification applied retroactively to
September 1, 2024
CHAIR CARPENTER asked how long it would take on average to reach
the $712 million, as suggested by the modeling.
MR. BLACK said modeling suggests that the gross revenue target
of $712 million would be reached somewhere in the early 2030s,
wherein the royalty modification would expire and return back to
the 12.5 percent.
10:32:12 AM
MR. BLACK concluded on slide 19, "DNR Royalty Modification
Mechanism," which featured a map of the seven leases and read as
follows [original punctuation provided]:
•Royalty modification applies to seven leases:
•ADLs 389196, 389197, 389198, 389507, 389514, 389515,
and 389923
•KLU Tracts 10, 9, 12, 16, 6, 13, and 17 respectively
MR. BLACK noted that a scrivener's error was made with regard to
the KLU tract numbers in the preliminary findings document. He
said the error has been fixed on slide 19 and the correction
would be made in the final best interest finding.
10:33:43 AM
MS. PAINE concluded the presentation on slide 20, "Summary,"
which read as follows [original punctuation provided]:
•Royalty modification is in the best interest of the
State per AS38.05.180(j)(2)
•3 percent royalty rate per month until gross revenue
generated from KLU beginning September 1, 2024,
reaches a cumulative amount of $712 million
•Applies to seven leases in the KLU
•10.5 years of field life extension, 63.2 BCF of
incremental gas, and $37.62 million (NPV 12.5) in
estimated incremental direct benefit to the State
CHAIR CARPENTER, referring to page 16 of the Preliminary
Findings and Fetermination document, read that the best interest
finding is contingent upon agreeing to amend the Dismantlement
Removal, and Restoration Financial Assurances Agreement. He
asked whether there are any anticipated hurdles to making that
happen.
MR. CROWTHER answered no, DNR anticipates working with the
operator to effectuate the amendment without any challenges.
10:35:46 AM
REPRESENTATIVE JOSEPHSON invited the department to discuss how a
statutory reduction would have been better or worse than the
proposed regulatory reduction. He surmised that this process
would be longer and more cumbersome.
MR. CROWTHER acknowledged that preparing a royalty modification
application is a significant undertaking by the operator. In
addition, the department has devoted hundreds of staff hours to
this effort, which is standard for this practice. He agreed
that when there's a strong public policy interest, a statutory
general modification would result in administrative savings to
the state.
REPRESENTATIVE JOSEPHSON shared his understanding that Furie
would cite a lack of jack-up rig opportunities as a contributing
factor. He asked whether DNR could recommend something that
would be curative of that problem.
MR. CROWTHER acknowledge that an additional rig may be helpful
in the Cook Inlet; however, DNR does not have direct authority
to enable, finance, or compel a second rig. He said setting a
specific well target would obligate a producer to somehow
achieve that and may indirectly create pressure to bring in a
second rig to meet those commitments.
10:43:33 AM
SENATOR KAUFMAN asked whether any modeling had been done on the
changing energy portfolio in the Railbelt.
MR. CROWTHER said the department has not developed a global
model of state revenue associated with the energy mix in the
Cook Inlet.
SENATOR KAUFMAN inquired about the total impact to revenues with
any kind of energy transition from the status quo.
MR. CROWTHER explained that because the natural gas in the Cook
Inlet is a state-produced resource, there are state royalty and
production taxes and property taxes associated with it. If
different kinds of energy generation were to be imported, there
may be less mineral royalty and more property tax revenue
associated with it. He said its hard for DNR to speak to the
scope and scale of those relative potentials.
10:48:03 AM
REPRESENTATIVE CRONK conveyed Alaskans' frustration with the
inability to discern a reasonable profit margin because of
confidentiality agreements. He emphasized the importance of
maximizing state revenue and questioned whether the state is
getting the best return, despite wanting these companies in
Alaska to produce energy and jobs. He recognized the need to
trust the department on these issues.
10:49:38 AM
ADJOURNMENT
There being no further business before the committee, the
Legislative Budget and Audit Committee meeting was adjourned at
10:49 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2024 12 23 LBA DNR DOG Furie KLU Royalty Modification Presentation.pdf |
JBUD 12/23/2024 9:00:00 AM |
DNR Presentation |
| 12.6.24 KLU Royalty Modification Preliminary BIF.pdf |
JBUD 12/23/2024 9:00:00 AM |
Preliminary Royalty Modification |