Legislature(1995 - 1996)
03/15/1995 05:03 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 15, 1995
5:03 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Bill Williams
Representative Tom Brice
Representative Gary Davis
Representative David Finkelstein
Representative Bettye Davis
MEMBERS ABSENT
Representative Scott Ogan
COMMITTEE CALENDAR
HB 207: "An Act relating to adjustments to royalty reserved to
the state to encourage otherwise uneconomic production of
oil and gas; relating to the depositing of royalties and
royalty sale proceeds in the Alaska permanent fund; and
providing for an effective date."
HEARD AND HELD
HO&G - 3/15/95
HB 209: "An Act relating to the authority of the commissioner of
natural resources to allow reductions of royalty on oil
and gas leases; and providing for an effective date."
SCHEDULED BUT NOT HEARD
WITNESS REGISTER
KEITH BURKE, General Manager
Alaska Support Industry Alliance
421 B Street, Suite 200
Anchorage, Alaska 99501
Telephone: (907) 563-2226
POSITION STATEMENT: Testified in favor of HB 207
CARL PORTMAN, Communications Director
Resource Development Council for Alaska
121 W est Fireweed Lane
Anchorage, Alaska 99503
Telephone: (907) 276-0700
POSITION STATEMENT: Testified in favor of HB 207
PAUL WESSELLS, Director of Tax
BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, Alaska 99519-6612
Telephone: (907) 564-5585
POSITION STATEMENT: Testified in favor of HB 207
JOHN PETERSON
Alaska Interstate Construction
649 West 54th
Anchorage, Alaska
Telephone: (907) 562-2792
POSITION STATEMENT: Testified in favor of HB 207
KEN BOYD, Deputy Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503-5948
Telephone: (907) 762-2547
POSITION STATEMENT: Answered questions on HB 207
PREVIOUS ACTION
BILL: HB 207
SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
JRN-DATE JRN-PG ACTION
02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE
02/27/95 501 (H) FISCAL NOTE (DNR)
02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV)
02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER
03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) #3
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
03/09/95 (H) MINUTE(O&G)
03/14/95 (H) O&G AT 10:00 AM CAPITOL 124
03/14/95 (H) MINUTE(O&G)
03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211
BILL: HB 209
SHORT TITLE: OIL & GAS ROYALTY REDUCTION
SPONSOR(S): REPRESENTATIVE(S) GREEN, Rokeberg
JRN-DATE JRN-PG ACTION
02/27/95 503 (H) READ THE FIRST TIME - REFERRAL(S)
02/27/95 503 (H) OIL & GAS, RESOURCES, FINANCE
03/01/95 551 (H) COSPONSOR(S): ROKEBERG
03/09/95 (H) O&G AT 12:00 PM CAPITOL 17
03/09/95 (H) MINUTE(O&G)
03/14/95 (H) O&G AT 10:00 AM CAPITOL 124
03/14/95 (H) MINUTE(O&G)
03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211
ACTION NARRATIVE
HO&G - 03/15/95
TAPE 95-11, SIDE A
HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES
Number 000
CHAIRMAN NORMAN ROKEBERG: ...4:03 and March 15th, 1995, and for
the record, committee members present at moment are Representative
Bill Williams, Representative Tom Brice and Chairman Norman
Rokeberg. We do not have a quorum, but we will proceed anyway.
The important nature of this testimony requires that we, and the
large number of people that wish to testify, we just do proceed.
Therefore, as the first witness today -- the chair takes note that
we have a quorum with Representative Gary Davis and Representative
David Finkelstein now in attendance. We'd like to start on the
teleconference today with Mr. Keith Burke of the Alliance in
Anchorage. Keith, are you there? Hello. Anchorage, are you
there? Hello. (Indisc.--problems with teleconference) This, is
my bill, 207, and the problem is I've read it.
UNKNOWN: Oh, oh. Now we are in trouble.
CHAIRMAN ROKEBERG: Except, do I remember what I've read?
UNKNOWN: It's a relatively easy bill now, Norm.
CHAIRMAN ROKEBERG: Standing at ease right now. Waiting for our
teleconference. And for the record, Representative Bettye Davis is
now in attendance. Paul, how long is your testimony going to be?
PAUL WESSELLS, DIRECTOR OF TAX, BP ALASKA: (Indisc.) of the
minutes.
Number 057
CHAIRMAN ROKEBERG: In light of, Keith Burke, are you, are you in
attendance, sir.
KEITH BURKE, GENERAL MANAGER, ALASKA SUPPORT INDUSTRY ALLIANCE OF
ANCHORAGE (TELECONFERENCE): Yes, I am.
CHAIRMAN ROKEBERG: Well, Keith, we're waiting anxiously and would
you please state your name and affiliation and address for the
record?
MR. BURKE: My name is Keith Burke. I am general manager of the
Support Industry Alliance organization, and our business address is
421 B Street, Suite 200 here in Anchorage. I'd like to
(indisc.)...
Number 066
CHAIRMAN ROKEBERG: Could you get closer to the mike, Keith?
You're breaking up on us.
MR. BURKE: Okay, is that better?
CHAIRMAN ROKEBERG: Yes, yes.
MR. BURKE: Okay. I'd like to start off first of all with just a,
I believe you each have a copy of my testimony and I'll just go
ahead and read through that and get started. I'd like to thank
Chairman Rokeberg for allowing me to speak here today and to the
members for their (indisc.) agenda. I am the general manager of
the Alaska Support Industry Alliance. I have been a participant in
Alaska's oil industry for the past 20 years. I am here today to
represent The Alliance, myself and my family. I am here to support
HB 207.
(problems with teleconference)
CHAIRMAN ROKEBERG: Hello.
MR. BURKE: Yeah.
(Teleconference people: What happened? -Getting some really bad
feedback from you. -So are we, but I'm not sure why yet.)
Number 087
CHAIRMAN ROKEBERG: This is Juneau talking. Are people's ears in
order there? Anchorage, you on line?
ANCHORAGE TELECONFERENCE: Yeah, we're on line.
CHAIRMAN ROKEBERG: Is, who else is on line teleconferencee? Go
ahead, Keith. Maybe we can give her another shot here. Excuse us
for the technical breakdown.
Number 092
MR. BURKE: No problem. I'll just start over where we're supposed
to begin. I'm the general manager of the Support Industry
alliance. I have been a participant in Alaska's oil industry for
the past 20 years and I'm here today to represent the Alliance,
myself and my family. I am here to encourage you to support HB
207.
This legislation will be a great step forward in reversing the
downward trend in oil and gas exploration and development
activities in Alaska. It also would encourage continued investment
in development of alaska resources by many major multi-national oil
companies, the very companies who allow members of The Alliance to
provide many quality jobs to our Alaskan employees.
Since 1990, four oil and gas companies have closed their offices
and have suspended operations in Alaska: Chevron, Conoco, Amoco,
and Texaco.
The downturn in labor, the labor force and lost jobs. Oil and gas
companies have downsized and consolidated operations in an effort
to affect maximum cost savings to remain competitive.
With the completion of GHX2, the last major construction project
currently planned on the North Slope, job levels are anticipated to
continue a slow and steady decline.
According to Neil Fried, Department of Labor, producers will
probably experience a statewide decrease of 20 percent or more in
1995 over 1994. Producer employment from February, 1994 to
February, 1995 shows a decrease of 18 to 19 percent. The combined
downturn factoring in support industry jobs, will provide, will
probably be around 10-11 percent.
Since its peak in 1991 of more than 10,541 jobs, industry
employment has declined substantially and is predicted to be
approximately 8,000 in 1995, about the same level of employment as
in 1987. Attached to copies of my testimony is a graph from the
Department of Labor titled "Alaska's Oil Industry Employment is on
the Wane."
According to the University of Alaska, Institute of Social and
Economic Research, oil revenues provide 30 percent of Alaskan's
personal income and account for one in every three jobs. As oil
production and revenues decline, so too will the number of Alaska
jobs supported by petroleum revenues.
Alaska Production/Revenue Decline: Alaska's revenue future closely
tracks the continued depletion of petroleum reserves. (Table 1.
(attached to my testimony) shows the Department of Revenue's Base
Case projected petroleum revenues as a percent of total projected
state restricted revenues.)
Current forecast scenarios project total Alaskan oil production to
decline at an average annual rate of 6 percent Fiscal Year 95 to
Fiscal Year 2000, falling to one-half of current production levels
by 2006, in the base case scenario. Although higher oil prices
would offset some of the negative impact of lower production
levels, ultimately revenues will fall barring some unforeseen oil
discovery. (Table 2., attached,) shows current and projected oil
production through FY 2010.
Half of the oil production projected for the year 2000 and beyond
depends on investments yet to be made. This means the fiscal
outlook could be worse than current projections unless the state
acts to ensure that the new investments implicit in the Department
of Revenue's projections are actually made. If the industry is
forced to cut back on investment, we'll not only sacrifice
significant future growth, but near-term production could plummet
as well.
Number 165
CHAIRMAN ROKEBERG: Keith, excuse me, if you would.
MR. BURKE: Yeah.
CHAIRMAN ROKEBERG: We do have the written record you submitted
here for the committee. Because of the large number of people who
want to testify I'd appreciate it if you could perhaps try to wrap
it up and let us know your final thoughts on this, and we really
appreciate your testimony.
Number 169
MR. BURKE: You betcha. I'll do that, and I want to thank you. It
is extremely critical that you all know as representatives for
people of Alaska that we (indisc.) industry, (indisc.) industry
that can provide the engine for (indisc.) and for Industry Alliance
of people of Alaska, but we encourage one of you to look through
the testimony, if you have any questions, please let me know and I
would encourage you each and every one of you to please vote for,
and in favor of House Bill 207. Thank you very much.
Number 178
CHAIRMAN ROKEBERG: Thank you, Mr. Burke. We appreciate that and
the support of the Alliance. Next, we'd like to hear from Mr. Carl
Portman in Anchorage.
Number 180
CARL PORTMAN, COMMUNICATIONS DIRECTOR, THE RESOURCE DEVELOPMENT
COUNCIL FOR ALASKA - ANCHORAGE (Teleconference). On behalf of the
RDC, thank you for the opportunity to testify on HB 207. RDC is a
proponent of the strong oil and gas industry and has worked for,
has worked in advance in subjects that encourage the industry to
explore for new oil fields in Alaska and to bring production, new
production into line. Oil revenues, as you heard in the earlier
testimony, account for about 80 percent of the state revenues and
one in every three jobs in Alaska, and I saw oil production and
revenues decline. So will a number of Alaska (indisc.) We are
really concerned about this. Current forecast scenarios indicate
Alaska's oil production will decline to about half the level by
2006 as was just reported. And that could be worse. If (indisc. -
sneezing) not being elective is at a competitive disadvantage in
attracting of capital investments because of high transportation,
exploration and development costs. Long lead time include oil
characteristics that discount North Slope oil and occurs in other
crudes and it's state revenue pressure that takes a bigger share of
profits. What Alaska needs is a strategy to counter these
disadvantages to make Alaska more competitive in the world market
so that more dollars are invested here. HB 207 is step in the
right direction. Through a reduction in royalties this bill
encourages otherwise uneconomic production from marginal fields and
prolong the production life of declining fields. This is important
because much of Alaska's future production will be from marginal
fields. There a number of undeveloped North Slope oil
accumulations, many of which would be in production if they were
located in the Lower 48. But, in Alaska high costs combined with
low volume(?) prices make them uneconomic. HB 207, however, would
encourage the state and the industry to work together to change the
economic depression from marginal fields. The passage of HB 207
allows stability to keep (indisc.) capital to improve as would the
prospects for enabling economy with steady, well paying jobs. The
benefits to Alaska are obvious: new jobs, more production and long
term additions to the tax base for state and local property taxes.
HB 207 sends a clear signal to board rooms in London, Los Angeles
and Houston that Alaska means to be competitive in the world market
and attract the investments necessary to develop this oil and gas
potential. It provides DNR with the flexibility needed in working
with investors (indisc. - static) statehood to make new development
a reality. This bill will make a difference in attracting
investment capital to Alaska instead of its going elsewhere. HB
207 will help get marginal fields into production, fields that
might otherwise go in half, or would be shut in without a royalty
reduction. Without HB 207, there may be no revenue from these
fields. RDC believes this bill provides adequate safeguards to
protect the states best interest. HB 207 would require the lessee
to make clear and convincing case that a royalty reduction is
necessary and its in the best interests of the state. It also
provides (indisc.) change in the future the commissioner of DNR can
rate(?) the royalties that were previously reduced. We encourage
you to pass HB 207. Thank you for the opportunity to comment.
Number 193
CHAIRMAN ROKEBERG: Thank you very much, Mr. Portman. At this time
we will go to testimony in Juneau, and we'd like to invite Mr.
Wessells to present his testimony. Please state your name and
(indisc.) and -- oh, very good --.
Number 234
PAUL WESSELLS, DIRECTOR OF TAX FOR BP EXPLORATION (ALASKA): Good
afternoon, Mr. Chairman. My name is Paul Wessells. I'm director
of Tax for BP Exploration (Alaska). I live in Anchorage, and thank
you for the opportunity to testify on behalf of BP regarding HB
207.
BP supports House Bill 207 and encourages this legislature to enact
the bill. This bill represents a very positive step along the road
to development of the state's marginal new oil fields, and marginal
projects within existing fields. It is our belief that initiatives
such as HB 207 signal a new spirit of cooperation between the oil
industry and state government. And it is a joint effort that will
be required for the state to fully realize the value of its oil and
gas resources.
In what manner does HB 207 promote full development of the state's
resources? First, it clarifies the existing statute by specifying
that new development, that is, properties that have never produced
oil and gas, may qualify for royalty reduction. Second, the bill
provides that relief may be granted with respect to individual
leases, rather than solely as part of a unit application.
The bill takes additional steps to protect the public interest by
assuring that the Commissioner of Natural Resources will receive
the financial and technical information necessary to allow a
reasoned judgment on the merits of an application, and by requiring
that the cost of third party professional assistance to the
Commissioner in analyzing the application be borne by the
application. In addition, the public interest is served by the
provision in the bill that the state may condition a reduction in
royalty on a readjustment at a later time if the circumstances
which supported the grant of the reduction change.
It is this last aspect of the bill that makes it clear that it is
not just about reducing the royalty obligations of producers in the
absolute sense. Indeed, it is entirely possible that a royalty
adjustment program negotiated by the state and a leaseholder will
lead to greater royalty payments over the full life of a property.
We in BP believe that HB 207 will make it possible for the state
and the oil industry to devise, through open sharing of information
and good faith negotiation, methods for sharing the risks of
developing marginal properties. It is imperative that we capture
the potential of these properties to assure a strong and stable
industry and a strong and stable Alaskan economy. That concludes
my prepared remarks, Mr. Chairman, but I would be happy to answer
an questions that you or the committee members may have.
Number 271
CHAIRMAN ROKEBERG: Well, thank you, Mr. Wessells. I, just, in
listening to your testimony, you indicate there's a provision in
the bill that the state make additional reduction royalty or a
readjustment at a later time if circumstances change? Would you,
with you interpretations would you direct me to that provision in
the bill? Is that possible? Is it the, the
Number 282
MR. WESSELLS: 325? Thanks. Right. I would direct your attention
to page three, line 25.
Number 286
CHAIRMAN ROKEBERG: Okay. So, that would be your interpretation of
changes, etc. Is that, so what your testimony expresses, your
interpretation of what the bill says at that point, is that what
you're saying?
MR. WESSELLS: That's correct, what, if I could elaborate just a
bit.
CHAIRMAN ROKEBERG: Please.
MR. WESSELLS: The bill allows the commissioner to effectively
renegotiate the royalty terms of an existing lease and as part of
that negotiation, the parties could condition, or they, the
commissioner could condition as a term in the lease provision, that
the reduction would either be reversed or changed, or reopened for
discussion if circumstances that are assumed and stated in the
renegotiation were to change. So, it would be a part of the
contract itself. It would not be a unilateral power on the part of
the commissioner. It would be a matter of agreement of the parties
at the time they renegotiated the arrangement.
Number 301
CHAIRMAN ROKEBERG: Excellent. So, as you say there could be a
condition, but it isn't necessarily a condition on this existing
statute.
Number 303
MR. WESSELLS: That's subject to the negotiation between the
parties.
Number 304
CHAIRMAN ROKEBERG: Do you know if your firm would have any
objections if that was made part of the bill itself, where it would
be reopened?
Number 306
MR. WESSELLS: Well, I think that if, if there is a reopener that
is mandated in the bill itself it creates a significant amount of
risk as far as the lessees are concerned that the terms, the terms
of the agreement and the premises on which they base the
development could change in the future beyond what they might
expect that they would change at the time that the lease was
negotiated, or the new provisions were negotiated. I think what,
what is acceptable is that the parties make a good faith agreement
and have a meeting of the minds during the course of the
negotiation as to what conditions would allow for reopening, or how
the actual amount of royalty would change given certain conditions
such as price change, amount of oil and gas in the reserve, or in
the deposit, or pool. If they were to change beyond what the
expectations as stated in the renegotiation were. Things of this
nature rather than just a unilateral power on the part of the
commissioner to say this royalty arrangement is no longer any good.
Number 321
CHAIRMAN ROKEBERG: Very good. There are a few other witnesses
today that, there will be a few other questions I know.
Representative Ogan, you have a question?
Number 324
REPRESENTATIVE SCOTT OGAN: Thank you, Mr. Chairman. You pretty
much answered the question somewhat, maybe I'll follow up to it in
about an hour, that, you know, I guess the risk that I could see
would be that, you know, if that, that was written into the
language that it would be perceived as a risk, a greater risk on
the part of your company. Basically, the only way that I would see
that it would be written in if there was a price change and
hopefully, it's up and, you know, there's more oil there than you
anticipated and that's, that's the risk, I hope we all have, you
know, and, therefore, had to pay a little more because of the
increase in price or, or more oil than anticipated through either
honest mistake that didn't quite estimate enough, or increase, or
a change in the technology where you can recover more, which has
already happened to existing fields. So, basically, I wouldn't
have an objection if there was some sort of language either in the
intent of the bill or the, written into the bill that would cover
that and recover the state's costs if there is an increase in price
or volume.
Number 340
MR. WESSELLS: Well, I think the language that I referred to that
exists in the current version of the bill actually does state that
purpose. It, that particular power or ability is, is implied in
any event. The commissioner, if the commissioner is granted the,
the authority in the discretion in renegotiating contracts, lease
contracts, then the commissioner can negotiate what terms they
think is necessary to protect the state's interest, including
protectors; things that would protect the state's interest and
readjust the level of the royalty, where if the underlying
circumstances which led to the grant of the reduction in the first
place were to change, and I think that is implied in the, actually
stated directly, in the provision, the area I referred to earlier,
which is in line 24 or 25 on page three. It makes clear a power,
or an ability that already exists.
Number 354
REPRESENTATIVE OGAN: May I make one more follow up?
CHAIRMAN ROKEBERG: Okay. Representative Ogan.
REPRESENTATIVE OGAN: That's true. That's the problem I guess that
I'm not totally comfortable with, just for the record I'd like to
state that. And it's not meant to be a reflection on any
particular person, but, or any particular commissioner, but whoever
the commissioner may be now or in the future, it is totally up to
his discretion and so it's, I'm not totally comfortable with it.
I think there should be some sort of safeguards to protect the
public's interest that maybe the commissioner is too busy, or he's
not getting good information, or for whatever reason, the people's
money is not being covered there. As a legislator I know how busy
we are and how many decisions we make on a very limited amount of
information sometimes. There's a possibility that could happen
with a commissioner. Personally, I always had a greater comfort
level if there was something a little bit more specific written to
this, but at the same time, would not cause you guys to get real
nervous about, about investing in a field, for example, if it's
marginal. If you can help us with a way to do that I would
appreciate it.
Number 372
CHAIRMAN ROKEBERG: Representative Ogan, we are, we are working on
that, so.
REPRESENTATIVE OGAN: Okay.
CHAIRMAN ROKEBERG: Hopefully, in the committee substitute we will
be able to cover some of those questions. Representative
Finkelstein, did you have a question?
Number 374
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. I have two
quick questions. One of them is just understanding the dialogue
that went on before with the Chair. The, for a company in your
company's situation it would be better, this is my understanding of
what you said, that if royalty reduction had in it some certainty
that the reopener wouldn't occur until the price of oil rose to
certain level, whatever other conditions would trigger it. It'd
be, did I understand you right that it would be better to have it
laid out at the time of the royalty reduction, what exactly would
occur later? You know, at the point where essentially it was a
sliding scale or a set of triggers that you knew ahead of time so
you weren't, you know, developing something or investing something
that you didn't know what lay ahead?
Number 382
MR. WESSELLS: That's correct. I think it's, it's important that
we have, we can't have absolute certainty about the facts, which is
never the case, at least we have to have absolute certainty about
the process which occurs when the facts do change rather than
having the possibility of having, not knowing what the decision-
making process, or the adjustment process would be, and if there
were to be a change in the underlying circumstance. And, of
course, these things are typically the subject of negotiation in
normal commercial relationships. And that would be what we
envisage would happen, or would occur in the course of making the
reduction in the first instance.
Number 391
REPRESENTATIVE FINKELSTEIN: Okay, Mr. Chairman, the other, other
question is on confidentiality. Do you have any experience with
the current, or any awareness of the current confidentiality
provisions under this section, and do you have any problems with
how it's laid out now, or required, you know requirement that you
essentially separate your information in what you want confidential
and what isn't confidential?
Number 396
MR. WESSELLS: I do not have any experience personally with this
sort of matter. Within the Department of Natural Resources, they
have quite a lot of experience with this sort of matter within, in
dealing with the Department of Revenue on tax matters, and as you
probably are aware, there is quite a lot of company, individual
company information that is confidential that must be disclosed to
the Department of Revenue during the course of an examination of
tax returns and we have never had a bad exp... We have never had
a bad experience in terms of information actually being leaked or
disclosed to other people, at least persons in BP, by any member of
the Department of Revenue, and I would presume that the same sort
of standards and safeguards would exist and we respect the
information that's disclosed in the course of dealing with the
Department of Natural Resources.
CHAIRMAN ROKEBERG: Does Representative Finkelstein have a follow
up?
Number 408
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Just to
understand the, I guess what I was asking, and maybe the answer is
you haven't experienced this, do you have any problem with
justifying the confidentiality in saying, we want this material to
be confidential because of such and such? I assume with the
Department of Revenue that isn't much of an issue, that it's all
treated as confidential?
MR. WESSELLS: Yes.
REPRESENTATIVE FINKELSTEIN: It's a different standard here under
DNR.
Number 412
MR. WESSELLS: Well, I think that, that whatever, the way the bill
is written is that whatever is disclosed in terms of financial and
technical information will be held confidential unless the
applicant elects to have it disclosed.
REPRESENTATIVE FINKELSTEIN: I was trying to ask about the status
quo now with DNR.
Number 415
MR. WESSELLS: To my knowledge, there has not been a problem.
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman.
Number 417
CHAIRMAN ROKEBERG: Just one more question from the Chair, Mr.
Wessells. In discussions with various companies in the industry,
and trying to put together a sliding scale royalty graph, or a
scheme for the sliding scale royalty, (indisc.) do you think that
that should be mandatory in this bill, or just part of a
panoply(ph) of options for the commissioner? And secondly, and
obviously, let's open the discussion knowing that each type of a
formula or scheme would be put together for a discrete project,
obviously. One size doesn't fit all, obviously, in that regard.
But given the fact that with a, I like to call it step one in terms
of putting together a sliding scale, your going to use a graph that
will show royalty rate and prices, oil prices. So, could you, with
your background in this area, would you tell me at what price that
your firm would use or would recommend using, for the price
component, and number two, if, in fact, you had a sliding scale
royalty what do you think about the necessity of the effect of
putting a, like a GDP deflator factor in that to adjust for the
price of oil all the time?
Number 432
MR. WESSELLS: Yes, Mr. Chairman, I think that you referred to
something in the first part of the question is really the reason
why I think it's very difficult, if not impossible, to standardize
this sort of thing, at least based on the knowledge that we have.
That is that all of these properties that might be subject to
applications are quite different. They're unique, in fact. They
will have different characteristics in terms of size, remoteness,
from existing infrastructure or transportation facilities. They
will all have different cost structures. It's very difficult to
prescribe a standard that would fit every situation. And that is
why the, the idea, I believe is the idea behind this bill is to
empower the Department of Natural Resources to, to decide what sort
of scheme fits the purpose most correctly. And without having to
choose from a menu that is preordained, and in order that the
department can make rational judgement the bill provides that there
will be full disclosure of the information as necessary to make
that sort of judgement, and I think that that is how that
particular problem is dealt with in this bill. And as far as our
company, answering the second part of the question, BP having an
idea of what the right price is, and whether a specific version of
the GDP deflator is correct for any particular circumstance, we
would not. We would, we would enter into discussion concerning
these matters the same way that the department would on a, you
know, discrete basis regarding the specific property that was the
subject of the discussion, and we might have a different standard
for a different property.
Number 453
CHAIRMAN ROKEBERG: Just, (indisc.) you said the full disclosure?
Number 455
MR. WESSELLS: Yes.
Number 456
CHAIRMAN ROKEBERG: Where in the process would you have full
disclosure?
Number 457
MR. WESSELLS: When you make the application it's important, the
applicant is required to disclose both financial and technical
information.
Number 458
CHAIRMAN ROKEBERG: But that's confidential. It's under the
confidential...
MR. WESSELLS: What I meant was full disclosure to the department.
CHAIRMAN ROKEBERG: Oh, full disclosure to the department. Ah,
okay. I, forgive me. It's a public perspective that I have.
Right. Forgive that. Representative Brice, you have a quick one?
Number 459
REPRESENTATIVE TOM BRICE: Yeah. Just a quick one. Basically, a
statement, you know, I agree with what you're saying, Mr. Wessells,
about the development of these fields and to try to prescribe and
that some type of sliding scale or other type of, you know, royalty
share table. I think it would be very difficult and you're not
going to be able to find something that's going to be able to fit
in all the circumstances, so, you know, I'd just like to bring in
on the side that what we need to do is allow the flexibility for
this discussion to continue between industry and the department,
and that's basically about it. You (indisc.) what I was talking
about.
Number 467
CHAIRMAN ROKEBERG: Well, thank you very much, Mr. Wessells. If
you will make yourself available for questions. I know you will.
MR. WESSELLS: Thank you.
CHAIRMAN ROKEBERG: Appreciate your testimony today. Moving on to
Anchorage, I believe we have a Mr. Peterson for testimony. Are you
available, Mr. Peterson.
Number 470
JOHN PETERSON, ALASKA INTERSTATE CONSTRUCTION, INC. - ANCHORAGE
(TELECONFERENCE): Yes, I'm here. Can you hear me?
CHAIRMAN ROKEBERG: Yes, sir, five by five.
MR. PETERSON: Okay. Senator Rokeberg and others, I am John
Peterson. I work for Alaska Interstate Construction at 649 West
54th here in Anchorage. I am addressing House Bill 207. I am
testifying this morning as a five year Alaska resident and have
seen almost all resource development diminish as a result of
regulations (indisc.) controlled by agencies (indisc.) the state
and I (indisc.). I believe that House Bill 207 as proposed will
provide the industry with enough protection, with incentives to
develop the small and marginal fields by removing some of the
risks, by protecting the state and its resident's interests. House
Bill 207 will allow development of these marginal fields with less
risk by removing some of the obstacles such as the price of oil as
a factor and these developments would provide jobs, not only during
the construction installation and operations, but still provide the
long-terms positions to the state and local tax base. I, I feel
very positive about House Bill 207 and I think you for the
opportunity.
Number 487
CHAIRMAN ROKEBERG: Thank you very much, Mr. Peterson. We
appreciate your testimony and we really appreciate that. Is there
anybody else on line in Anchorage or any other locations on line
right now? Hearing nobody, the teleconference portion of the
testimony can cease and then it's that Mr. Boyd was here, Bill.
Yeah, maybe, we had some questions the other day. We can take
advantage of his time here. I'm not sure. Is there anybody else
in the audience that want's to testify today. For example, no?
Okay. Mr. Boyd, if you, if you, we have some time if you'd like to
come up here and perhaps use this time to make any statements you'd
like and perhaps respond to some of the queries we had the other
day.
Number 497
KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF
NATURAL RESOURCES: Mr. Chairman, members of the committee. For
the record. My name is Ken Boyd. I'm the acting director for the
Division of Oil and Gas. Mr. Chairman, I got a fair few
assignments the other day, yesterday. As you know, the attorney
that worked on this for some time is, is not in town, but that's
not to say there aren't other attorneys and other people in the
state, but I've been working on things and I do have some things I
hope to be able to share a few more tomorrow perhaps. I have not
shared them with the commissioner, but I do have at least one
thing, perhaps two things. The first one is, one of the
discussions yesterday the committee was on contractors. There is
a provision in the bill that you can use a third-party contractor
that, if the state required it. If the, if there was an
application that we needed some technical work on it, as I
described it yesterday, that could be picked. And the current
language as a condition of evaluating an application (indisc.) the
commissioner may require of lessee to pay the cost of contractor
selected by the commissioner to assist in the evaluation. That's
on page three, three lines, the pertinent language is lines nine
and ten. I have a suggestion. And there was some discussion about
that. How do you, how do you, maybe you don't like the person that
the commissioner picks. So we went back and looked at a case that
in Western Alaska that happened last year, a couple of years ago
actually, called Good News Bay, and we've gone back to look at some
of the federal, the way the federal government does, selects
contractors for the EIS process, another tax paying process. And
here's what we've come up with. And this is just a suggestion
again. The way it works is that the state would pick three
contractors, you know, three people who could do the work, and then
industry gets to pick off that list of three. Then industry would
pay the contractor. The state would define the scope of work,
whatever the work that needs to be done, and it would be a little
different each time perhaps, but generally speaking, I think it
would be mostly technical grinding of numbers. But, in any case,
the state would define the scope of work. Industry would pick from
the list of three. Industry would pay the contractor without the
state being involved in the procurement process, and you know all
the acronyms we use to trade money around. I believe that's
eliminated. And it was found by the court that that is an
acceptable procedure. So, I can, I will try to assemble more of
the background information on that, Mr. Chairman, but in concept,
we would agree to that, and perhaps, you know, the industry would
care to comment. But that's something I'd like to bring forward.
Number 526
CHAIRMAN ROKEBERG: Well then, Mr. Boyd, we would avoid the
necessity of going through state procurement code for this? Is
that what you, that would speed up the process?
Number 527
MR. BOYD: Yes, Mr. Chairman. Truly, the way it works is we would
supply the list of three and with industry picking from the list,
the one they would say, okay this is what we want you to use. From
then on all of the financial negotiation, if you like. All the,
all the dealing in terms of dollars is done in the background. But
we would provide the foreground, the scope of work that we perceive
was needed to be done. And again, the state does not involve in
any of the bill paying; doesn't even see the bills; doesn't care
what the bills are.
Number 532
CHAIRMAN ROKEBERG: So, there is precedence and there is some case
law that provides (indisc.)
MR. BOYD: Yes, Mr. Chairman.
CHAIRMAN ROKEBERG: That'd be, I think, excellent because there has
been suggestions like this on both sides. That may solve that
problem if you could help us with some language we'd appreciate it.
And you had some more for us.
Number 535
MR. BOYD: Yes, Mr. Chairman. I do have some other things, Mr.
Chairman, but again, I just have not had an opportunity to talk to
Commissioner Shively about some of them.
CHAIRMAN ROKEBERG: I can appreciate that.
MR. BOYD: And, until I do so, unless, unless the committee has
some other questions, I, I know there's a, I say I know, I believe
there's a hearing tomorrow.
CHAIRMAN ROKEBERG: Yes, there is.
MR. BOYD: And I hope to be prepared by then to, to bring up some
of the other issues, but would be glad to answer any questions that
were left over from yesterday.
Number 540
CHAIRMAN ROKEBERG: Did anybody have any questions here? Advise
we've got a couple minutes. Mr. Boyd, would you like to comment on
the statements by Mr. Wessells as relates to the reopeners and even
perhaps you could even expand that and even comment on a sunset
clause and the pros and cons of that.
Number 544
MR. BOYD: Mr. Chairman, I agree with what Mr. Wessells said that,
what, I believe what he's saying. I won't speak for him. Since
he's here he can, he can give me a bad glare if I do say something
wrong. But what he's saying is that when the applicant comes in
for a royalty reduction you're entering into a new contract.
You're talking to the commissioner and saying, we believe we need
a royalty reduction. We just started the process. We need to
negotiate what it is that has to be done for us to reach our
objective, or hopefully, a calm objective. As part of that, you
will negotiate as he said, no specific thing right away. There's
no, you don't pick out a check list and say, well, it's this field
and that field and this field so you have to do it this way. No.
It's, what, what are you trying to achieve? And how do you do it?
And you work through that, but as part of that the commissioner
should be able to also say, ah, very good, you know I recognize
that you need this, this benefit now perhaps, but what about if the
oil price changes? Or your field is four times bigger than you
thought it was? I want the ability to raise your royalty at some
point in time. And I think that's, think that's all Mr. Wessells
is saying, that the negotiations, you don't need a reopener in law,
because, I think it's because it's a disadvantage to have that
because it just invites more work for one thing, but just an
opportunity for somebody to just leap in and say, well, something
is changed. We need to reopen. Perhaps on some spurious basis
that has no basis. And then you have to decide how will you
resolve whatever it is you've reopened upon. Who gets to chose?
I mean, who is right? Does it wind up in court? Does it wind up
as with an arbitrator? There's just more expense and I think it's
unneeded expense. I have a, I have a potential solution and it's
a one-word change. I'm going to offer it now as a consideration,
but not as an official, if you like, position, but it's something
to consider and perhaps discuss tomorrow. On page three, line 21,
where it says the commissioner may condition a royalty reduction
granted under the subsection in any way necessary to protect
state's best interest. That sentence. Instead of saying may, say
shall. It, it's, in a sense it should give you some certainty that
the commissioner will have to consider the upside and the downside
potential. That's the way I read that. I'm trying to avoid the
idea of having a reopener in law when I believe that a reopener is
a reasonable part of a new contract; that would certainly be part
of a new contract. As to the sunset provision, I have talked to
Commissioner Shively, but not at any great length about this and we
do not support a, he does not support a sunset provision. I,
perhaps the easiest reason to say we don't support a sunset
provision is this bill is, is part of a whole concept, I think,
that we're trying to attract new players to Alaska and encourage
the players we have here to stay. A sunset provision might very
well encourage the players we have now today to stay, but when you
think about attracting, and yesterday it was talked about, a five-
year sunset, but think about it. With the delineation requirements
in this bill you try to attract a new player with a new law, with
a five-year commitment they have to make a delineated field and
apply for royalty reduction. I think you don't have enough time.
I really don't think the new player is going to be that attracted
to something where that company has to sort of play catchup with
companies that are here today. So, I believe if you think it's a
good law it should be a good law, and it should stay a law, and if
it turns out to be a lousy law that it could be repealed at some
point, but I don't think a built in sunset is an advantage for new
players.
Number 587
CHAIRMAN ROKEBERG: Mr. Boyd, going back to the reopeners issue, I
know it, because like Representative Ogan mentioned some of his
concerns to stipulate that reopeners should be part of a bargain
that the commissioner would make with a applicant, wouldn't the
provisions for reopener, if they were stipulated to be based on a
well price consideration, or a field production volume...
TAPE Number 95-11, Side B
Number 000
CHAIRMAN ROKEBERG: ...without being too specific. Wouldn't that
be acceptable?
MR. BOYD: Mr. Chairman. I absolutely agree that those can be two
parts of a, of a very long equation. I guess the problem I have
with adding more and more words, I mean, certainly, I could make
that line very, very long, and if I drag petroleum engineers up
here, we could make it really long as to what factors might change
over time. I think all this bill says is that if something changes
the commissioner is going to look at that change say what, what
should I do now? And that will be part of the negotiated contract.
Each field will have different characteristics. A field would be
so well delineated you just know it's not going to triple in size.
Another one might not be quite so well delineated. So, I, I agree
with you that you can make a list with other, of other things that
may change, but I still believe that just the fact that you have
that statement there that the commissioner will consider that.
That is again, goes back to the idea of having a contract, that
you're going back and you're talking to the company, the company is
talking to the state, and you're saying, okay, you need a benefit
now; we need a benefit if this happens, and you work through the
financials. You work through the many, many different things that
may go into the equation. I, I'm not certain that you could ever
make a list long enough. I also am afraid of lists that if you
make a list too long people begin to think that that's the only
things you consider. And that's, quite honestly, my opinion.
Number 028
CHAIRMAN ROKEBERG: I think I'm really concerned about the 60
occupants of this building and what they're concerned about.
That's....
MR. BOYD: Mr. Chairman, I am only offering my opinion.
CHAIRMAN ROKEBERG: Right. And the rest of the people in the
state, who we represent. I mean, that's what I'm driving at.
That's the only reason we're bringing this up.
Number 033
MR. BOYD: I quite understand, Mr. Chairman. Again, I'm only
trying to point out both sides of looking at this. I'm not
suggesting that you do one thing or another, only that you consider
that sometimes lists can be used to knit the rope that hangs you.
And sometimes discretion is something that a reasonable person will
do in a contract and perhaps you can get it right.
Number 040
CHAIRMAN ROKEBERG: Any questions? Representative Finkelstein.
Number 047
REPRESENTATIVE FINKELSTEIN: Thank you, Mr. Chairman. Before we
leave this subject, I just want to make sure I fully understand
what you're saying here, that if the two choices on when to make
this deal on when the royalty goes back up. If the one choice is
at the time of the royalty reduction request and the other that,
under this idea you'd go and you'd make it as part of the package.
You'd say it would go up in the future as oil prices go up a dollar
then the royalty goes up X percent, that you would not think,
prefer that, that you'd prefer just some indeterminate reopener
clause where it could be reopened by the state at a later date, and
changed then based on a variety of factors. Is that what I -- am
I interpreting....
Number 055
MR. BOYD: Mr. Chairman and Representative Finkelstein. In a
sense, yes. Again, it, it may not even come to a reopener. It may
be that it's a simple enough deal, say, that you could understand
it well enough that you can project things for a life of a certain
field. But, in many cases, I think you may have to have trigger
points, and I believe Representative Rokeberg has talked about this
in terms of sliding scale. It can mean many things. Sliding
scales don't have to be linear. Sliding scales can be steps.
There's all different ways to, to create things. You may create
trigger points in time, or in terms of dollars, or in terms of
volume that you would have to consider. But I, again, I'm only
afraid that if you specify something in law that becomes, it can
become the only think you consider, and I believe that you can
craft a better decision through negotiation of the company and the
state after it's determined that you need to have a negotiation at
all.
REPRESENTATIVE FINKELSTEIN: Mr. Chairman.
CHAIRMAN ROKEBERG: Representative Finkelstein.
Number 072
REPRESENTATIVE FINKELSTEIN: Just a (indisc.), Mr. Chairman. I
think I understand it now and I, I don't pretend to understand all
the ramifications, but it just seems that, and correct me if I'm
wrong, that that, what the state will be giving up is a strategic
advantage that when a company is in trying to work out a royalty
reduction they're going to be pretty willing at that point to go an
make a deal for future. If it goes back up, you know, we're
willing to pay more because they're getting a benefit that if it's
six years down the road that you're, instead of trying to do this,
the company's interests are, leave us alone. You know, they,
you're trying to get them to the table. You're trying to negotiate
them with more, or impose it if you have to, but all of the
political battles and all the kind of battles that go on then,
they, it seems to me you've lost your advantage. You've given them
the benefit six years ago and now you're asking them to do
something and try, and you know, with the ability to impose if you
have to, but with a variety of political pressures and a variety of
ramifications on your relationship with them, it seems to me you've
lost your chance to have an advantage.
Number 089
MR. BOYD: Mr. Chairman, Representative Finkelstein. Again,
writing the contract does not foreclose any opportunity, I think.
And you, you could build in a reopener. You might decide that,
depending on the company, the field, the economic conditions at the
time, perhaps you need to reopen. But, again, I think it should be
an opportunity of the contract rather than the force of law, to say
you have to look at it. I'm saying that not every case will you
need that. Or perhaps the commissioner may decide in every case
you do need that, but I, I don't believe every contract needs to
have that provision, but I think it should be, and again, it is,
there is no prohibition of reopeners in the bill as it is now. I'm
not sure that you have to say that you have to do this because
there are some cases where I think if older fields in Cook Inlet,
I don't think you would ever need to do that, and it becomes a time
consuming and perhaps time wasting process. I believe all the
opportunities for negotiation are open under this bill.
Number 101
CHAIRMAN ROKEBERG: Mr. Boyd, it appears that you and the
commissioner agree that the state would like to have maximum
flexibility with not too much intrusion by the legislature and
bargaining your arrangements, and I can appreciate that. But, I,
we're kind of running down time here and I did have a question for
Mr. Wessells, if I can remember it. Let's see now. Oh, what was
it now? Well, Paul, if I can remember what it was. Why? No, no,
that's my normal one. Something about the, I don't know. Oh yes,
I know. Thank God, I remembered. I understood that your firm, and
perhaps some other firms, were going to help us out, this committee
out, by providing a definition of fields. Does that ring a bell
with you?
Number 127
MR. WESSELLS: Not with me in particular. I did hear, listening to
the testimony from yesterday in which a suggestion was made that
the term be expanded to include horizons within an existing field,
and I think that is a helpful suggestion. But beyond that, I had
not had any conversations with anyone about it.
Number 133
CHAIRMAN ROKEBERG: Well, forgive me, because you're the moving
target for BP today, that's why I asked you the question. Perhaps
you could help us out by tomorrow on that. And I think Unical's
got some ideas and I got some from ARCO today too, so, it's
something perhaps we can discuss tomorrow morning. Are there any
other questions of the committee? Good. Well then, we'll look
forward to seeing everybody at 10:00 a.m. tomorrow with bells on
our toes. This meeting is adjourned.
Meeting adjourned at 6:00 p.m.
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