Legislature(1995 - 1996)
05/01/1996 08:45 AM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
MAY 1, 1996
8:45 A.M.
TAPE HFC 96 - 152, Side 1, #000 - end.
TAPE HFC 96 - 152, Side 2, #000 - #171.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 8:45 A.M.
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Navarre
Representative Grussendorf Representative Parnell
Representative Kelly Representative Therriault
Representative Kohring
ALSO PRESENT
Annette Kreitzer, Staff, Senator Loren Leman; Kenneth Boyd,
Director, Division of Oil and Gas, Department of Natural
Resources, Anchorage; Patrick Coughlin, Deputy Director,
Division of Oil and Gas, Department of Natural Resources,
Anchorage.
SUMMARY
SCR 23 Relating to long range financial planning.
SCR 23 was rescheduled for hearing at a later
date.
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.
HCS CS SB 112 (FIN) was reported out of Committee
with a "do pass" recommendation and with fiscal
notes by the Department of Revenue dated 3/29/96
and the Department of Natural Resources dated
3/25/96.
SB 98 An Act making changes related to the aid to
families with dependent children program, the
Medicaid program, the general relief assistance
program, and the adult public assistance program;
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directing the Department of Health and Social
Services to apply to the federal government for
waivers to implement the changes where necessary;
relating to eligibility for permanent fund
dividends of certain individuals who receive state
assistance, to notice requirements applicable to
the dividend program; and providing for an
effective date.
SB 98 was rescheduled for a hearing at a latter
date.
SB 89 An Act relating to the members of the board and
staff of the Alaska Permanent Fund Corporation.
SB 89 was rescheduled for a hearing at a latter
date.
SB 289 An Act relating to runaway minors and their
families or legal custodians.
SB 289 was rescheduled for a hearing at a latter
date.
SENATE BILL 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."
ANNETTE KREITZER, STAFF, SENATOR LOREN LEMAN, testified in
support of SB 112. She noted that SB 112 had been
introduced by the Senate Resources Committee, which would
return language to where the law had been when it was
repealed in 1969; recognizing that terms such as "in
commercial quantities", "geologic structure" and "first
discovery" would have to be discussed.
Ms. Kreitzer indicated that vague terms resulted in
litigation over previous discovery royalty programs. The
Senate Resources Committee worked closely with the
Department of Natural Resources (DNR) and industry to write
legislation which narrows the opportunity for litigation
over who could be awarded a discovery royalty under current
proposal.
The new program would reward the first person to drill a
well, resulting in a new discovery. That person must also
complete the well, resulting in production. Ms. Kreitzer
continued that the discovery royalty provision was available
to all Cook Inlet Sedimentary Basin future leases and to
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non-producing, non-unitized leases entered into before the
effective date of the act.
She summarized that it is the sponsor's intent that the
legislation encourage new activity in the Cook Inlet region.
Ms. Kreitzer provided a sectional analysis of the proposed
legislation.
Representative Martin referenced a letter from Mayor Gilman,
Kenai, regarding the retroactive section. [Copy on file].
Mr. Kreitzer replied that Page 4, Lines 17 - 24 addressed
the retroactive concern. If a lease currently exists and
until the time the regulations are promulgated, 180 days
after the effective date of the act, a party would then be
eligible to apply for discovery royalty.
KENNETH BOYD, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES (DNR), added, if a person had a pre-
existing lease which was not working or producing, they
would retroactively be permitted to pick up the discovery
royalty provision. The Department supports a prospective
discovery lease program.
In response to Representative Martin's query, Ms. Kreitzer
stated that the terms "geologic structure" or "first
discovery" do not occur in the bill. That language created
litigation concerns in other legislation.
Mr. Boyd continued, the Department has worked to more
clearly define the regulations within the legislation.
Discovery royalty had been in Alaska since statehood in
1959, and was then repealed in 1969. At that time, the big
lease sale around Prudoe Bay was "coming up". The
regulations were repealed in 1979. Regardless, there
existed a discovery royalty in Alaska for 10 years. He
questioned if the State, after 40 years, really wanted to
bring back the program.
Mr. Boyd commented that very few companies support the bill.
The bill will apply to existing leases. He suggested that
if the Committee intends to pass the legislation, it should
be made "prospective". That way the bill would not capture
any upside potential.
Mr. Boyd advised that 180 days to draft regulations was not
reasonable. The repealed regulations could be resurrected
to provide a basic outline. The regulations could not be
drafted in less than one year. A law without regulations
could place litigation concerns before the State. Mr. Boyd
concluded, speaking briefly to the timing of the bill. The
"ten year clock" should begin as soon as possible to receive
discovery, although, the actual certification would be
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placed later.
Representative Brown agreed with Mr. Boyd's suggestions.
She asked if a "force majeure" provision would affect the
concern. Mr. Boyd thought it would not. Representative
Brown understood that condition would provide people
incentive to begin production earlier.
Representative Brown questioned the effect of the proposed
incentive versus other exploration incentive credits. She
believed that the benefit would be delayed. Ms. Kreitzer
replied that the Committee had considered other credits,
pointing out that discovery royalty had been considered two
other times. In the fall of 1994, Senator Leman asked big
oil companies for suggestions which the Legislature could
implement to address the overall picture. "Discovery
royalty" was the predominate request.
Representative Brown stated that the proposed legislation
appeared to be a mandatory retroactive application and would
not be a beneficial tool to the Department of Natural
Resources. She continued, a general principle is that the
Legislature should not retroactively amend contracts by
changing material terms in the contracts which were made
competitively. The legislation would violate that legal
principle. Representative Brown asked if the bills sponsor
was receptive to making the bill prospective.
Ms. Kreitzer responded that the Senate Resources Committee
debated that issue, deciding to make it retroactive to only
those leases that are not producing. It was a deliberate
decision to include that language. Representative Brown
asked for a description of litigation the State has been
involved in regarding the proposed issue.
PATRICK COUGHLIN, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, spoke to the cases he was
familiar with. The first was a Pan American case in the
early 1960's. The issue of concern with that case was
determining the meaning of "commercial quantities" which had
been defined by regulation. Although, the regulation was
not in effect at the time of discovery. There was
substantial disagreement between the two companies as to the
meaning. The director issued a decision, which the court
affirmed, explaining that the issue was a "competition"
between two companies.
The issue was separate from the concern the State had with
Conoco. Here again, commercial quantities was the issue.
That situation resulted because Conoco had been the first to
discover the quantities referred to as the Shradder Bluff.
Their claim was made, even though, there were 87 previous
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wells which had penetrated that formation. There was no
risk in the exploratory drilling. That case was appealed to
the commissioner, and was then appealed to the superior
court.
Representative Brown proposed a hypothetical situation of
drilling, which would result in a pool at another location.
She asked if that would be considered a discovery royalty.
Mr. Boyd stated it probably would, depending on the
definition of the word "pool". A pool means something that
is structurally distinct from a neighboring entity. The
fault would separate it structurally, making it a separate
pool. Ms. Kreitzer commented that the Senate Resources
Committee had considered that concept in their final
decision.
Representative Brown MOVED to adopt Amendment #1 which would
remove language on Page 5. [Copy on file]. There being NO
OBJECTION, it was so ordered.
Representative Brown MOVED to adopt Amendment #2 which would
remove the retroactive issue. [Copy on file]. Ms. Kreitzer
noted that the Senate Resource Committee deliberately placed
that language in the legislation and would not support the
amendment.
Representative Therriault OBJECTED.
A roll call was taken on the MOTION.
IN FAVOR: Navarre, Brown, Martin.
OPPOSED: Parnell, Therriault, Kelly, Kohring,
Foster.
Representatives Grussendorf, Mulder and Hanley were not
present for the vote.
The MOTION FAILED (3-5).
Representative Brown MOVED to adopt Amendment #3. [Copy on
file]. The amendment would provide the Department a year to
draft the regulations. She pointed out that the Division's
budget was being cut substantially this fiscal year and that
there had been other complex programs linked to further add
responsibilities to that Division.
Ms. Kreitzer replied that the Senate Resources Committee
felt that because regulations had been created in the past,
the Department would not be beginning from scratch.
Representative Navarre countered that the regulations had
been repealed in 1979. He asked if the Senate Resources
Committee had gone through the litigation to predetermine if
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the regulations should be redrafted. Ms. Kreitzer noted
that the Department had advised the Committee of the
previous litigation.
Mr. Boyd pointed out that the Division's budget had been
reduced by $50 thousand dollars, which would affect the pre-
sale position, those employees who create regulations.
Representative Brown added, there had been a substantial
reduction to the Civil Division within the Department of
Law. That Division is responsible for addressing review of
the regulations.
Representative Martin believed that one year would be too
much time. Representative Navarre MOVED to adopt a
"friendly" amendment to Amendment #3, changing one year to
270 days, which would be a compromise between the
legislation and Amendment #3.
(Tape Change, HFC 96-152, Side 2).
There being NO OBJECTION, it was adopted. Representative
Parnell OBJECTED to Amendment #3 as amended.
A roll call was taken on the MOTION.
IN FAVOR: Brown, Navarre.
OPPOSED: Parnell, Kelly, Kohring, Foster.
Representatives Therriault, Grussendorf, Mulder and Hanley
were not present for the vote.
The MOTION FAILED (2-5).
Representative Brown questioned the effect if the
regulations were not in place when the legislation went into
effect. Mr. Boyd replied that the law would go into effect
without regulations.
Representative Kelly MOVED to report HCS CS SB 112 (FIN) out
of Committee with individual recommendations and with the
accompanying fiscal notes. Representative Kohring voiced
support for the legislation and surprise that the Department
opposed the legislation. He reiterated that SB 112 was a
"good" piece of legislation.
Representative Navarre MOVED an amendment. Representative
Kelly WITHDREW the MOTION to move the bill from Committee.
Representative Navarre MOVED a change to Page 2, Line 11,
deleting "completion of the" and "well in", and inserting
"of". The same change would occur on Page 4, Lines 8 & 9.
Mr. Boyd stated that it was a technical amendment. Ms.
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Kreitzer agreed with the proposed amendment, noting that it
had been a change made in House Resources Committee. There
being NO OBJECTION, the amendment was adopted.
Representative Brown MOVED a technical amendment to Page 2,
Lines 8 & 9, deleting "as that term is defined in AS
38.05.180(f)(4)". Ms. Kreitzer agreed. There being NO
OBJECTION, the change was adopted.
Representative Kelly MOVED to report HCS CS SB 112 (FIN) out
of Committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
HCS CS SB 1120 (FIN) was reported out of Committee with a
"do pass" recommendation and with fiscal notes by the
Department of Revenue dated 3/29/96 and the Department of
Natural Resources dated 3/25/96.
ADJOURNMENT
The meeting adjourned at 9:30 A.M.
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