Legislature(1995 - 1996)

04/30/1996 08:15 AM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     HOUSE FINANCE COMMITTEE                                   
                         April 30, 1996                                        
                            8:15 A.M.                                          
  TAPE HFC 96-148, Side 1, #000 - end.                                         
  TAPE HFC 96-148, Side 2, #000 - end.                                         
  TAPE HFC 96-149, Side 1, #000 - #414.                                        
  CALL TO ORDER                                                                
  Co-Chair  Mark  Hanley called  the  House Finance  Committee                 
  meeting to order at 8:15 a.m.                                                
  Co-Chair Foster               Representative Martin                          
  Representative Brown          Representative Mulder                          
  Representative Grussendorf    Representative Navarre                         
  Representative Kelly          Representative Parnell                         
  Representative Kohring        Representative Therriault                      
  Co-Chair Hanley was absent from the meeting.                                 
  ALSO PRESENT                                                                 
  Representative  Ramona  Barnes; John  Shively, Commissioner,                 
  Department of  Natural Resources; Robin  Randall, Fairbanks;                 
  Al Near, Fairbanks.                                                          
  HB 548    An Act authorizing,  approving, and ratifying  the                 
            amendment  of  Northstar Unit  oil and  gas leases                 
            between  the State  of Alaska  and  BP Exploration                 
            (Alaska)  Inc.;  and  providing  for an  effective                 
            The  Work  Session on  HB  548 was  recessed until                 
            transmittal of the legislation.                                    
  SB 112    An Act establishing a discovery royalty credit for                 
            the  lessees of  state  land drilling  exploratory                 
            wells and making the first discovery of oil or gas                 
            in commercial quantities.                                          
            SB 112 was rescheduled to another time.                            
  SB 289    An  Act  relating  to  runaway  minors  and  their                 
            families or legal custodians.                                      
            SB  289   was  HELD   in  Committee  for   further                 
  SENATE BILL NO. 289                                                          
       "An Act relating  to runaway minors and  their families                 
       or legal custodians."                                                   
  ROBIN  RANDALL, FAIRBANKS  testified via  the teleconference                 
  network.  She expressed concern  that the legislation remain                 
  strong.  She read a letter  to the Committee (copy on file).                 
  She emphasized that children run away  from good homes.  She                 
  maintained  that getting tough and attaching consequences to                 
  running away is effective.                                                   
  AL NEAR, FAIRBANKS testified via the teleconference network.                 
  He maintained that the House Judiciary Committee version has                 
  weakened the legislation.  He  stressed that the legislation                 
  is not  about abused,  homeless or  neglected children  that                 
  voluntary walk  into youth shelters.   He asserted  that the                 
  legislation  is  about  the  growing  number  of  rebellious                 
  teenagers  that  exploit weakness  in  the existing  laws to                 
  manipulate to  the system to  evade authority.   He stressed                 
  that  the revolving door policy must  be ended.  He spoke in                 
  support of the Senate version of SB 289.  He emphasized  the                 
  need for early intervention.                                                 
  SB 289 was HELD in Committee for further consideration.                      
  HOUSE BILL NO. 548                                                           
       "An  Act  authorizing,  approving,  and  ratifying  the                 
       amendment of Northstar Unit oil  and gas leases between                 
       the State of  Alaska and BP Exploration  (Alaska) Inc.;                 
       and providing for an effective date."                                   
  Co-Chair Hanley  noted that  the Committee  would conduct  a                 
  work session on HB 548.                                                      
  gave an overview of the Northstar oil field.  He  noted that                 
  Northstar is offshore of  the North Slope.  There  are seven                 
  leases; five   state leases  and two federal  leases.   Four                 
  leases were released in 1979.   The bid variable was the net                 
  profit rate.   A base rate of 20 percent was set and the oil                 
  companies bid how  much of their  profits they would  share.                 
  The average  net profit  bid was  approximately 89  percent.                 
  The fifth lease  was bid in 1983 and had a set net profit of                 
  40 percent with a  bonus bid of $72.0 thousand dollars and a                 
  12.5 percent royalty.                                                        
  Commissioner Shively  noted  that in 1979, most  people were                 
  estimating that  oil prices  would continue  to rise at  the                 
  astronomical rates of  the 1970's.  The  leases were awarded                 
  to a consortium  of companies headed  by Amerada Hess.   The                 
  field is estimated  to produce 130  million barrels of  oil.                 
  Original projections were approximately twice this amount.                   
  Commissioner Shively observed  that a  Department of  Energy                 
  study concluded that the field was uneconomic due to the net                 
  profits provision.  Amerada Hess came to the conclusion that                 
  they  could  not economic  develop  the field.   Development                 
  costs are  estimated at  $1.5 billion  dollars.   The leases                 
  were  offered  for sale.   The  leases  were won  by British                 
  Petroleum  Exploration  (Alaska), Inc.  (BP)  in 1995.   The                 
  State agreed to the  transfer and allowed BP three  years to                 
  look at a development plan.                                                  
  Commissioner Shively  stressed that  net profit  share is  a                 
  fairly  complicated way to due business.  Oil companies make                 
  expenditures, pay themselves back, and then start to pay the                 
  State.  This  is complicated by  a development account.   He                 
  explained  that  as  oil  companies  begin to  spend  funds,                 
  expenses  are  accrued into  the  Development Account.   The                 
  Developmental  Accounts  run with  the  leases not  with the                 
  company that spent  the money.   When BP  bought the  leases                 
  they  also  received  a  $200  million  dollar   Development                 
  Account.  The Account is currently at $262  million dollars.                 
  The greater the account  and the longer it  takes to pay  it                 
  off, the less  the net profits are worth.   He observed that                 
  the question is whether or not there is  enough money to pay                 
  off the Development  Account so  that the State  can get  to                 
  their  net profits.  This is driven by volume, price and the                 
  amount of money that has gone into the Development Account.                  
  Commissioner Shively stated  that the Department  of Natural                 
  Resources does not think Northstar is a marginal  oil field.                 
  He estimated that BP could make a 20 percent rate of return.                 
  In return  for giving up the net profits the State would get                 
  a  supplemental   royalty,  based  on  price   adjusted  for                 
  inflation.  This would earn the  State 7.5 percent above the                 
  base 20 percent  royalty.  In  addition, BP agreed to  raise                 
  the 12.5 percent  royalty to 20  percent.  This field  would                 
  have the highest royalty in the North Slope.  The State also                 
  received a promise from BP to  get the project sanctioned by                 
  their Board of Directors or return  the leases to the State.                 
  Commissioner Shively pointed out that BP is in the middle of                 
  a three  year development plan.   He did not  think that the                 
  State could take the leases back  until after the three year                 
  period.  The State could order BP into production in the end                 
  of April 1998.  At this time, BP could give the leases back,                 
  begin production or sue the State.                                           
  Commissioner Shively stressed that BP  is committed to build                 
  modules for the  project in Alaska.  He  noted that they had                 
  previously  indicated  that the  modules  would be  build in                 
  Commissioner  Shively  explained that  1996 dollars  and the                 
  State's mid case  scenario were  used to assess  value.   He                 
  estimated that the  State would receive $37  million dollars                 
  in supplemental royalty.   If the field were developed under                 
  net profit share  today the State would  receive $85 million                 
  dollars.  He  emphasized that it  is unlikely that BP  would                 
  develop  the  field  before  1998.    If  the  project  were                 
  developed in 1998 the  net profit share would drop  from $85                 
  to $41 million dollars.  The longer it takes for a  field to                 
  develop the less the  net profits.  He pointed out that more                 
  oil in  the pipeline reduces  the tariff  for existing  oil.                 
  Northstar  would be the  first off shore  development in the                 
  North Slope.   Northstar  development will  be on an  island                 
  with a buried pipeline.                                                      
  Commissioner Shively observed that the Department of Natural                 
  Resources submitted  a fiscal  note for  the State  Pipeline                 
  Coordinator's Office.                                                        
  Commissioner  Shively noted that BP thinks  it can bring the                 
  cost  of  the project  down  to  $350 million  dollars.   He                 
  pointed  out  that an  additional  $25.0 million  dollars in                 
  expenses would wipe out the net profits.                                     
  Commissioner  Shively  stated  that  the  legislation  needs                 
  legislative approval.   He maintained  that there should  be                 
  public review.                                                               
  In  response  to   a  question  by  Representative   Mulder,                 
  Commissioner Shively stressed  that it is to  BP's advantage                 
  to wait to develop the  field.  He maintained that  a volume                 
  of 130 million barrels is a reasonable amount.                               
  Representative Mulder noted  the value of BP's  agreement to                 
  give up  the lease if the project is not sanctioned.                         
  Representative Brown  questioned why  the solution does  not                 
  incorporate other fields.  Commissioner Shively  stated that                 
  Northstar is a  relatively unique situation.   He maintained                 
  that it is  a situation that can  be dealt with on  its own.                 
  He stressed that it would be difficult to find a generic fix                 
  for net profit leases.  He acknowledged that there are other                 
  net profit share  and bid  variable leases.   Representative                 
  Brown questioned  the precedent  of HB  548  in relation  to                 
  other leases.   Commissioner Shively  emphasized that it  is                 
  the responsibility of the  State to look at  the development                 
  of its resources.   He  noted that other  aspects of  leases                 
  have been changed.  He maintained that the legislature would                 
  have to approve any changes to net profit leases.                            
  Representative Brown pointed  out that  the State has  never                 
  changed  a  competitively bid  lease  outside the  statutory                 
  frame work.  She noted that the legislature is not permitted                 
  to violate the Constitution.                                                 
  In  response   to  a  question  by   Representative  Martin,                 
  Commissioner Shively clarified that the  total net profit of                 
  the field if it were developed in 1998 or 1999 would  be $41                 
  million dollars.  The State would receive over $400  million                 
  dollars with the addition of royalty.  The life of the field                 
  is estimated at 12 years.                                                    
  Commissioner Shively  noted that  the Department  of Natural                 
  Resources estimates that without the legislation development                 
  would begin around the year 2002.                                            
  REPRESENTATIVE RAMONA  BARNES spoke  in support  of HB  548.                 
  She stressed that the legislation  will bring the production                 
  on line earlier than  the year 2002.  She stressed  that the                 
  purpose of  HB 548 is  to bring  revenues to  the State  and                 
  assure local hire.  She maintained that CSHB 548 (WTR) would                 
  provide    for   local    hire    without   weakening    the                 
  constitutionality of the  bill.  She observed that  CSHB 548                 
  (WTR) reflects a lease agreement that was voluntarily signed                 
  by the Commissioner  of Department of Natural  Resources and                 
  Mr. Luttrell, Vice President, British Petroleum Exploration.                 
  (Tape Change, HFC 96-148, Side 2)                                            
  Representative Barnes discussed  CSHB 548 (WTR).   She noted                 
  that  the  complete   text  of   the  lease  agreement   was                 
  incorporated into the  legislation beginning on page 5.  She                 
  maintained  that the  legislation  meets the  constitutional                 
  test because of the voluntary agreement.  She noted that the                 
  agreement  demands that  BP file reports  every 6  months to                 
  demonstrate  how  they  have complied  with  the  local hire                 
  Representative  Barnes   referred   to   the   fiscal   note                 
  accompanying CSHB 548 (WTR).  A  letter from John C. Morgan,                 
  President, BP, was attached (copy on  file).  She noted that                 
  the legislative findings in HB 548 are extensive.                            
  Representative  Martin  expressed concern  that BP  may need                 
  outside expertise.   Representative  Barnes emphasized  that                 
  the legislation will create a module industry in Alaska that                 
  can be exported.  She maintained that it is in Alaska's best                 
  interest to try to provide jobs for its people and make sure                 
  jobs  are  not  just  entry  level.    She  noted  that  the                 
  legislation does not  require that every  job be held by  an                 
  Alaskan.    She  asserted  that  Alaskans  can  be  trained.                 
  Alaskan residency is detailed in the bill.                                   
  Representative  Grussendorf  questioned  if the  legislation                 
  allows  individuals   or  groups  to  challenge  the  lease.                 
  Representative Barnes noted  that anyone  can sue anyone  at                 
  anytime.    She  asserted  that  the  separation  of  powers                 
  doctrine is followed in the bill.                                            
  Representative  Navarre pointed  out that there  are already                 
  trained unemployed Alaskans that can be put to work.                         
  Representative Brown asked if  there is any recourse  if the                 
  terms of local hire and module production do not take place.                 
  Representative Barnes stressed  that BP would suffer  from a                 
  bad public image if they do not live up to the intent of the                 
  legislation.  She maintained that  the State could introduce                 
  sanctions against BP.                                                        
  Representative Brown asked for a  explanation of language on                 
  page 6, lines 8  - 10:  "In determining  feasibility, lessee                 
  shall consider commercial, health, safety, and environmental                 
  conditions  and  requirements"  in determining  feasibility.                 
  Representative  Barnes stated  that "commercial"  means that                 
  Alaska has in place a system to build the modules.                           
  Representative Brown  referred  to a  memorandum  from  John                 
  Miller,  Attorney to  Bill  Allen,  VECO Corporation,  dated                 
  April 4, 1996 (copy on file).  Mr. Miller concluded that any                 
  requirement  for  BP to  adopt  a  resident hire  policy  or                 
  procedure  would constitute impermissible State action.  Mr.                 
  Miller added that:   "If it could be shown that the State of                 
  Alaska  exercised  coercive  power or  provided  significant                 
  encouragement, either overt or covert, BPXA's  actions would                 
  be deemed to be  that of the State."   Mr. Miller  concluded                 
  that the local hire provisions would be struck down.                         
  Representative Barnes noted  that the  opinion was given  to                 
  Mr.  Jack  Chenoweth,  Legislative  Counsel.   Mr  Chenoweth                 
  responded to Mr. Miller's statements  in a memorandum, dated                 
  April 29, 1996.   Representative Barnes asserted  that there                 
  was no coercion in any way.                                                  
  Representative Brown  stressed  that  there  is  significant                 
  encouragement  that  local  hire be  part  of  the proposal.                 
  Representative  Barnes  reiterated  that,  in  exchange  for                 
  giving up the net profit share, BP voluntarily agreed to the                 
  local hire provision.  She referred to a memorandum by James                 
  Baldwin, Assistant  Attorney General,  dated March  26, 1996                 
  (copy  on file). She noted  that Mr. Baldwin maintained that                 
  the State must  show public  benefit for giving  up the  net                 
  profit  share.    She  emphasized  that  public  benefit  is                 
  established  through  the  lease  document which  institutes                 
  local hire and module building in  Alaska, and allows for an                 
  early production date.                                                       
  Representative Brown agreed that local hire is a significant                 
  part of the proposal.  She  maintained that the inclusion of                 
  local hire would  open the  legislation to a  constitutional                 
  challenge.  Representative Barnes disagreed.  Representative                 
  Brown maintained that the State required the local provision                 
  to  be  part   of  the  proposal.     Representative  Barnes                 
  maintained  that  the  House  World Trade  Committee  record                 
  reflects that BP  voluntarily reached the agreement  to give                 
  up something for something.                                                  
  Representative  Mulder   supported  Representative   Barnes'                 
  claims that BP did submit to the terms voluntarily.                          
  Discussions     continued     regarding     the    proposal.                 
  Representative  Brown  reiterated  concerns   regarding  the                 
  constitutionality of the proposal.                                           
  Commissioner Shively gave  a brief history of  the proposal.                 
  He noted that  BP approached  the State and  asked that  net                 
  profit   shares  leases  be   included  in  HB   207.    The                 
  Administration decided that  HB 207 was not  the appropriate                 
  vehicle.  He felt that there was not legal authority for him                 
  to  make  an  agreement.    He  indicated  that  legislative                 
  approval  would  be needed.    He observed  that  there were                 
  discussions   about   the   issue   of   local   hire    and                 
  constitutionality throughout the negotiations.                               
  Representative Brown questioned the lost  value to the State                 
  if  other net profit oil leases were modified.  Commissioner                 
  Shively stated that each lease has different conditions.  He                 
  clarified that there have not be discussions regarding other                 
  net  profit leases.   There are  approximately 40  net share                 
  leases, with 9  that are producing.   He reviewed other  net                 
  profit leases.                                                               
  Representative  Mulder  questioned  if it  would  be  in the                 
  financial interest  for other net  profit leases  to make  a                 
  modification to  a 20  percent base  royalty.   Commissioner                 
  Shively did not  have any statistics regarding  the proposed                 
  change.     He did  not  think it  would be  advantageous to                 
  change other net profit leases.                                              
  In  response   to  a  question  by  Representative  Navarre,                 
  Commissioner Shively  noted  that the  Superior Court  ruled                 
  that  the  Development  Account could  be  transferred.   He                 
  thought  that  the  Court  would  consider  the  legislative                 
  record.  He  noted that the Legislature  has included intent                 
  language.  He  pointed out that  the law is the  legislative                 
  Representative Martin expressed concern that the contract is                 
  outside of the legislation.   Commissioner Shively responded                 
  that the State can encourage but not require BP to institute                 
  local  hire.  He observed that BP's voluntary agreement made                 
  the  legislation   acceptable  to   the  Legislature.     He                 
  emphasized that the main issue is how the State encourages a                 
  company to institute  local hire.   He stressed that BP  has                 
  been  made  aware of  how  important  local hire  is  to the                 
  political leadership,  Administration and  Legislature.   He                 
  noted that  BP initially  proposed to  build the  modules in                 
  Representative  Martin   questioned  if  there   are  enough                 
  unemployed people in  the state of  Alaska to fill the  jobs                 
  that would  be created.   Commissioner  Shively pointed  out                 
  that  many  of  the  best  jobs  available are  in  the  oil                 
  industry.  Representative  Martin stressed  that it is  easy                 
  for  oil  companies  to  bring  in  their own  people.    He                 
  questioned   if  union   contracts  need   to  be   changed.                 
  Commissioner Shively noted that unions have local chapters.                  
  (Tape Change, HFC 96-149, Side 1)                                            
  In  response   to  a   question  by  Representative   Kelly,                 
  Commissioner  Shively  explained  that  Kuupik  is   a  non-                 
  producing unit.   Most of the  leases are net profit  share.                 
  He  stressed that  there is  not enough oil  for production.                 
  The State has never  received any money for the  Duck Island                 
  net profit share leases.                                                     
  Representative  Therriault observed  that net  profit leases                 
  were only  issued from 1980 - 1984.  He noted that testimony                 
  in  1979,  argued   that  net   profit  share  leases   were                 
  uneconomical for the State.  Commissioner Shively  clarified                 
  that lower oil prices are not  conducive to net profit share                 
  leases.  He stressed that the Oil and Gas Policy Council has                 
  suggested that  the State  may want  to take  more risks  in                 
  order  to  encourage  development.   He  noted  that a  more                 
  traditional system of sharing risks or a profit  proxy could                 
  be used.                                                                     
  In  response to  a  question  by Representative  Therriault,                 
  Commissioner  Shively  reviewed  supplemental royalty.    He                 
  noted that royalty is  based on a per barrel price of $17.35                 
  dollars.  Anything above  $17.35 dollars a barrel, ANS  West                 
  coast, would result in an  increase in supplemental royalty.                 
  The price is adjusted for half of the inflation factor on an                 
  annual   bases.     The   escalator   begins   April   1996.                 
  Commissioner  Shively noted that  the State  would currently                 
  receive  an  additional 7.5  percent,  if the  agreement was                 
  Representative  Brown pointed  out that  4 of  the 5  leases                 
  already have a  20 percent  base royalty.   The fifth  lease                 
  that was raised  from 12.5 to  20 percent has no  production                 
  allocated to it.   She  questioned if the  conditions in  AS                 
  38.05.180(j) were considered.                                                
  Commissioner Shively explained  that State tried to  get the                 
  same information from BP that would  have been required in a                 
  application for  reduction under HB 207.  The Department did                 
  not go through the 16 step process contained in HB 207.   He                 
  stressed that there was no legislative authority to use this                 
  process  for  decision making.   He  noted  that HB  207 was                 
  designed to look  at marginal oil fields.   The commissioner                 
  must declare that the royalty reduction is necessary for the                 
  development.  He observed  that a finding that a  royalty is                 
  necessary to make Northstar economically viable could not be                 
  found.  He reiterated  that Northstar is not a  marginal oil                 
  field.  He  stressed that  the timing of  development is  of                 
  concern to the State.  He observed that there  is a question                 
  as to whether net profit share  can be considered a royalty.                 
  He emphasized that he testified that HB 207 did not apply to                 
  net profit share leases.                                                     
  In  response   to  a   question  by  Representative   Brown,                 
  Commissioner Shively noted that no outside  contractors were                 
  hired to assess  the hydrocarbon  potential production.   He                 
  stressed  that  the  Department was  confident  that  the in                 
  house, economic model was accurate.   He emphasized that the                 
  public record has been made in the legislature.                              
  In  response   to  a   question  by  Representative   Brown,                 
  Commissioner Shively stated  that the process  in HB 207  is                 
  onerous.   He pointed  out that  HB 207  was changed from  a                 
  three to sixteen step process.  He observed that there is no                 
  final legislative approval in HB 207.  He maintained that if                 
  there were not  legislative approval for the  proposal under                 
  discussion  that  the Department's  process would  have been                 
  more  extensive.     He  maintained  that  the  Department's                 
  decision is getting full public review.                                      
  Representative Brown  asked if the  Department conducted  an                 
  oil price sensitivity  analysis to compare net  profit share                 
  capturing  of  up  side  and   down  side  economics  versus                 
  supplemental  royalty.    Commissioner  Shively stated  that                 
  there is no net profit share on the down side.                               
  Representative Brown  provided members  with charts  showing                 
  the effect of up  side and down side prices (copy  on file).                 
  She observed that if  oil prices are 10 percent  higher than                 
  the State's base case assumes there is a significant benefit                 
  from the  use of net profit  share.  She  concluded that the                 
  State is giving up a significant  part of the up side.   She                 
  agreed that supplemental  royalty protects the State  on the                 
  down side.                                                                   
  Commissioner Shively pointed out that  even a small increase                 
  in expenses eliminates  the net profit share.  He reiterated                 
  that timing is a problem.  He felt that the State's mid case                 
  oil scenario is aggressive.  He concluded that the certainty                 
  of the supplemental royalty was worth the trade offs.                        
  Representative Brown  asked the effect  of a lawsuit  on the                 
  State. Commissioner Shively  observed that if a  lawsuit was                 
  lost and the proposal returned to  a net profit share, there                 
  would  be a further  delay of  any net  profit benefit.   He                 
  stressed that the  effect is worse  on the net profit  share                 
  leases  because  of  the  accumulation  of  the  Development                 
  Account.  He stated that the longer the delay the better the                 
  supplemental royalty.  He noted that if there was a delay to                 
  the  year  2003,  the  supplemental  royalty goes  to  $80.0                 
  million dollars,  and the  net profit  share falls  to under                 
  $20.0 million dollars.   By 2005 the net profit  share would                 
  be zero.                                                                     
  Representative Therriault referred  to the fiscal note.   He                 
  observed  that  the  House Department  of  Natural Resources                 
  Subcommittee  determined that the  Agency's budget would not                 
  be cut  to accommodate  the  legislation.   The fiscal  note                 
  would fund the legislation.                                                  
  HB 548 was HELD in Committee for further consideration.                      
  The meeting adjourned at 10:05 a.m.                                          

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