Legislature(1993 - 1994)

03/22/1993 05:00 PM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
              HOUSE SPECIAL COMMITTEE ON OIL & GAS                             
                         March 22, 1993                                        
                            5:00 p.m.                                          
  MEMBERS PRESENT                                                              
  Representative Joe Green, Chairman                                           
  Representative Pete Kott, Vice Chairman                                      
  Representative Harley Olberg                                                 
  Representative Gary Davis                                                    
  Representative Jerry Sanders                                                 
  Representative Joe Sitton                                                    
  Representative Jerry Mackie                                                  
  MEMBERS ABSENT                                                               
  COMMITTEE CALENDAR                                                           
  *HB 199:  "An Act providing for oil and gas exploration                      
            licenses, and oil and gas leases, in certain areas                 
            of the state; and providing for an effective                       
  *HB 200:  "An Act providing for oil and gas exploration                      
            incentive credits for certain activities on                        
            certain land in the state; and providing for an                    
            effective date."                                                   
            HEARD AND HELD IN COMMITTEE FOR FURTHER                            
  (* First public hearing.)                                                    
  WITNESS REGISTER                                                             
  Jim Eason, Director                                                          
  Division of Oil & Gas                                                        
  Department of Natural Resources                                              
  P. O. Box 107034                                                             
  Anchorage, Alaska  99510-0734                                                
  POSITION STATEMENT: Supported HB 199; Felt HB 200 encouraged                 
  Jim Davis, Senior Vice President                                             
  Arco Alaska, Inc.                                                            
  9421 Spring Hill Drive                                                       
  Anchorage, Alaska  99507                                                     
  POSITION STATEMENT:  Supported HB 199                                        
  Tom Lohman                                                                   
  North Slope Borough                                                          
  Department of Wildlife Management                                            
  (address not available)                                                      
  Barrow, Alaska                                                               
  POSITION STATEMENT:  Asked questions related to HB 199                       
  Mary Shields, General Manager                                                
  Northwest Technical Services                                                 
  4041 B Street                                                                
  Anchorage, Alaska  99503                                                     
  (907) 562-1633                                                               
  POSITION STATEMENT: Stated There is Need For Development                     
  Pete Nelson, Land Manager                                                    
  Alaska Regional Office                                                       
  2550 Denali                                                                  
  Anchorage, Alaska  99503                                                     
  (907) 278-9611                                                               
  POSITION STATEMENT: Supports the licensing concept and                       
                      offered amendments to HB 199                             
  Dave Lappi, President                                                        
  Lapp Resources, Inc.                                                         
  4900 Sportsmen Drive                                                         
  Anchorage, Alaska  99515                                                     
  (907) 248-5684                                                               
  POSITION STATEMENT: Supported HB 199                                         
  Al Hastings, Director of External Affairs                                    
  CONOCO - Anchorage Division                                                  
  3201 C Street                                                                
  Anchorage, Alaska  99503                                                     
  POSITION STATEMENT: Suggested amendments to HB 199                           
  Mr. Mano Frey, Land Manager                                                  
  Unocal of Alaska                                                             
  909 W. 9th Avenue                                                            
  Anchorage, Alaska  99501                                                     
  (907) 276-7600                                                               
  POSITION STATEMENT: Supported HB 199                                         
  Kevin Tabler, Land Manager                                                   
  Union Oil Company of California                                              
  909 W. 8th Avenue                                                            
  Anchorage, Alaska  99501                                                     
  POSITION STATEMENT: Felt HB 199 needs modification                           
  Robert Erickson, Administrative Assistant                                    
  Teamsters Local 959                                                          
  4300 Boniface Parkway                                                        
  Anchorage, Alaska  99508                                                     
  (907) 269-4122                                                               
  POSITION STATEMENT: Supported HB 199                                         
  John Ringstad, Associate Director                                            
  Government Affairs                                                           
  BP Exploration Alaska, Inc.                                                  
  900 E Benson Blvd.                                                           
  Anchorage, Alaska  99508                                                     
  (907) 561-5111                                                               
  POSITION STATEMENT: Opposed HB 199                                           
  Larry Kimball, Chair                                                         
  Alaska Federation of Natives                                                 
  1577 C Street                                                                
  Anchorage, Alaska  99503                                                     
  (907) 274-3611                                                               
  POSITION STATEMENT: Felt the state needed to look at its                     
                      interest in oil and gas                                  
  PREVIOUS ACTION                                                              
  BILL:  HB 199                                                                
  BILL VERSION:                                                                
  SPONSOR(S):   RULES BY REQUEST OF THE GOVERNOR                               
  TITLE: "An Act providing for oil and gas exploration                         
  licenses, and oil and gas leases, in certain areas of the                    
  state; and providing for an effective date."                                 
  JRN-DATE     JRN-PG               ACTION                                     
  03/05/93       549    (H)   READ THE FIRST TIME/REFERRAL(S)                  
  03/05/93       549    (H)   OIL & GAS, RESOURCES, FINANCE                    
  03/05/93       549    (H)   -ZERO FISCAL NOTE  (REV)                         
  03/05/93       549    (H)   GOVERNOR'S TRANSMITTAL LETTER                    
  03/15/93              (H)   O&G AT 05:00 PM CAPITOL 124                      
  03/16/93              (H)   O&G AT 08:00 AM CAPITOL 124                      
  03/22/93              (H)   O&G AT 05:00 PM CAPITOL 124                      
  BILL:  HB 200                                                                
  BILL VERSION:                                                                
  SPONSOR(S):   RULES BY REQUEST OF THE GOVERNOR                               
  TITLE: "An Act providing for oil and gas exploration                         
  incentive credits for certain activities on certain land in                  
  the state; and providing for an effective date."                             
  JRN-DATE     JRN-PG               ACTION                                     
  03/05/93       550    (H)   READ THE FIRST TIME/REFERRAL(S)                  
  03/05/93       551    (H)   OIL & GAS, RESOURCES, FINANCE                    
  03/05/93       551    (H)   -ZERO FISCAL NOTE  (REV)                         
  03/05/93       551    (H)   GOVERNOR'S TRANSMITTAL LETTER                    
  03/15/93              (H)   O&G AT 05:00 PM CAPITOL 124                      
  03/16/93              (H)   O&G AT 08:00 AM CAPITOL 124                      
  03/22/93              (H)   O&G AT 05:00 PM CAPITOL 124                      
  ACTION NARRATIVE                                                             
  TAPE 93-08, SIDE A                                                           
  Number 000                                                                   
  CHAIRMAN JOE GREEN called the meeting to order at 5:07 p.m.                  
  Members present were Representatives Green, Kott, Olberg, G.                 
  Davis, Sanders, Sitton, and Mackie.  Chairman Green noted                    
  there were numerous people who wanted to testify and                         
  introduced Mr. Jim Eason as the first person to testify.                     
  Number 027                                                                   
  NATURAL RESOURCES (DNR), stated that competitive leasing is                  
  an appropriate and successful way of offering oil and gas                    
  lands based upon past performance.  Another method of                        
  leasing which has been successfully used in several other                    
  oil and gas producing nations is large tract licensing, he                   
  HB 199:  OIL & GAS EXPLORATION LICENSES/LEASES                               
  MR. EASON stated HB 199 introduces this concept as an                        
  incentive to frontier areas of Alaska as an exploration                      
  incentive which would not be in competition with the                         
  currently used competition leasing program.  A written                       
  determination would be made to the areas for licensing.                      
  Certain rights would be granted to a licensee among them,                    
  the exclusive right, for up to 10 years, for the licensee to                 
  conduct exploration and evaluation.  This license carries                    
  the right to convert part or all of the area of the oil and                  
  gas lease based upon all the obligations which are committed                 
  to when the license is issued.  Under this legislation a                     
  license could be issued for up to but no greater than 30,000                 
  acres.  A license would be positioned on a specified work                    
  commitment in terms of hours.  The license would also carry                  
  a performance bond not less than the work commitment amount.                 
  The license would also require a non-refundable $1 per acre                  
  license fee and it would require an explicit recognition by                  
  the lessee that all costs incurred under a license are                       
  subject to an audit.  Exploration licenses could either be                   
  proposed by the Commissioner or by a potential licensee and                  
  solicitations would occur annually to encourage                              
  solicitations from the public.  The Commissioner would be                    
  free to initiate a proposal for a specific area, but if the                  
  industry initiates a proposal it would require public                        
  notice, since solicitations and competitive proposals.  If a                 
  potential licensee initiates a proposal, it must be accepted                 
  or rejected by the Commissioner of the DNR within 30 days by                 
  a written decision.  After considering proposals and public                  
  comments the Commissioner submits a written finding which                    
  would address the same matters that are addressed in                         
  findings in an oil and gas competitive lease sale.  If a                     
  license is found to be in the state's best interest, the DNR                 
  would determine which limitations, stipulations, and                         
  conditions for changes for those proposed by potential                       
  licensee would be required to make that license in the                       
  state's best interest.  If there was only one proposal, the                  
  identity of the prospected licensee would be made known and                  
  a copy of the license.  If more than one licensee is                         
  involved there are provisions for an up front auction under                  
  regulations to be adopted.                                                   
  MR. EASON further stated if a licensee fulfills the                          
  obligations of a license they would have the opportunity to                  
  convert that license, or any portion of it to a lease.  Any                  
  lease resulting from a license would be conditioned to a $3                  
  per year, per acre annual fee and subject to other terms and                 
  conditions that the Commissioner may find necessary for the                  
  state's best interest.                                                       
  Number 275                                                                   
  ARCO ALASKA, INC., spoke in support of HB 199.  He stated                    
  the supplement to the state's leasing program can invigorate                 
  exploration for oil and gas.  It can do this by                              
  substantially reducing the time required to acquire and                      
  secure title to enough land to justify exploration                           
  activities while meeting all environmental laws and                          
  MR. DAVIS said that Mr. Eason provided the committee with a                  
  very complete review and analysis of HB 199 at the hearing                   
  last Tuesday and supplemental today.  He said, "First, I                     
  would like to review how this bill came to be.  I think this                 
  will help us see the policy choices facing the state.  Next,                 
  I would like to supplement the remarks you have heard from                   
  the DNR about the contents of the bill.  Finally, I would                    
  like to address the main objections that I have been hearing                 
  and explain why they don't change our support for this                       
  MR. DAVIS stated a little over a year ago, he sat in joint                   
  hearings before this body and introduced the concept of                      
  exploration licensing.  There was general concern that                       
  exploration in Alaska was declining and that oil companies                   
  were scaling back or ending their operations; presumably in                  
  favor of more attractive overseas prospects.  He felt a                      
  sense of loneliness as he tried to interest prospective                      
  partners to join with ARCO in drilling Kuvlum in the                         
  Beaufort Sea; and now it has turned out to be a discovery.                   
  MR. DAVIS went on to say at that time the legislature asked                  
  ARCO to talk about ways in which exploration in Alaska could                 
  be stimulated.  As ideas were developed ARCO considered                      
  various options.  He said, "Standing back and looking at                     
  exploration in Alaska, we recognized that it is a very                       
  costly and high risk venture."  ARCO thought about ways the                  
  state could reduce ARCO's direct exploration investment.  It                 
  was tempting to think of tax credits, because they have been                 
  proven in other countries, such as Canada, to be very                        
  effective in stimulating drilling.  However, ARCO concluded                  
  that the state would not be able to bear these up front                      
  costs, especially in light of the fiscal gap crisis it was                   
  MR. DAVIS stated the other alternatives examined were                        
  reducing the time required to find and develop oil.  ARCO                    
  then focused on the state leasing program.  Here ARCO found                  
  real possibilities to shorten exploration time.  For                         
  example, under the present leasing system, it can take five                  
  to ten years to accumulate enough of a land position to                      
  justify the high expense of an exploratory well.  This puts                  
  Alaska at a competitive disadvantage with foreign countries,                 
  and this is one reason other oil companies are leaving                       
  Alaska and investing abroad.  ARCO wanted to level the                       
  playing field.  Two activities which take time are waiting                   
  first for a prospect to move through the five year leasing                   
  schedule, and then developing a consolidated ownership out                   
  of the patchwork of individual lease ownership covering the                  
  prospect.  Even more uncertain is consolidation of ownership                 
  on adjacent leases after a discovery.  ARCO believes that                    
  speeding up the process of securing title would help the                     
  state's goal of invigorating exploration.                                    
  MR. DAVIS stated ARCO found some interesting ideas in                        
  methods used by many foreign countries.  In the other                        
  countries, development rights are given after government                     
  chooses the specific work proposal that will most likely                     
  yield discovery and development.  The basic concept for                      
  exploration licensing in Alaska came from this approach.                     
  ARCO felt the existing lease process could be supplemented                   
  with licensing based upon work commitments, public                           
  disclosure, and competition.                                                 
  MR. DAVIS stated a major aspect of HB 199 is that an                         
  exploration license is applicable to unleased land.  A                       
  prospective licensee identifies an area not to exceed                        
  500,000 acres and proposes a work program, expressed in                      
  dollars, to be conducted over a time period of not more than                 
  10 years.  If the state does not reject the proposal, it                     
  then solicits competitive proposals.  Since the original                     
  proposal is a matter of public record, and in order to not                   
  put the original proposer at a disadvantage, an oral auction                 
  is held to determine the prospective licensee that is                        
  willing to make the greatest work commitment; again,                         
  expressed as total dollars.  During this process, the state                  
  makes a best interest finding before awarding the license.                   
  At the time the license is awarded, the terms of the                         
  subsequent leases are established.  In addition, the                         
  licensee posts a performance bond that reverts to the state                  
  for all committed work not completed by the end of the                       
  license term.  The bond is critical in that it provides the                  
  incentive to do real work.                                                   
  MR. DAVIS further stated after getting all of the normal                     
  environmental and other permits, the new licensee conducts                   
  the work.  Upon completion of the work, the licensee, at its                 
  option, converts all or part of the license to appropriate                   
  sized leases.  This conversion to small leases is critical                   
  to keeping licensing from becoming a vehicle for land                        
  speculation.  It allows the state to take back leases after                  
  the primary term expires, where no development potential is                  
  shown.  Therefore, the leases would be administered just as                  
  they are today.  House Bill 199 provides for leases acquired                 
  through licensing to not be subject to the current 500,000                   
  acre limit.                                                                  
  MR. DAVIS summarized and said, HB 199 is really quite simple                 
  in its concept.  Its main purpose is to shorten the time                     
  required to explore.  It gives a secure land position in                     
  return for a bonded work commitment.  It relies on market                    
  competition to prevent abuse or giveaways.  And it provides                  
  protection to the state by allowing the Commissioner to                      
  reject any proposal and revert to the existing leasing                       
  MR. DAVIS said he would respond to some of the major                         
  arguments that have been heard against HB 199.  Foremost,                    
  ARCO can't understand why others would not see that it's in                  
  the state's interest to get exploration moving: to find and                  
  develop oil and gas as quickly as possible.  In that light,                  
  maybe HB 199 should be titled the "Exploration Work                          
  Commitment Bill."  He said, "That title captures for me the                  
  fact that while land is being acquired, the real effect of                   
  licensing is to get exploration work done.  All of the                       
  criticisms or amendments that have been heard serve to                       
  weaken or dilute the goal of speeding up exploration.  Let                   
  me illustrate by looking at these objections one at a time."                 
  MR. DAVIS stated that some say the leasing system is working                 
  fine and that no license bill is needed.  He continued,                      
  "Yes, leasing does happen and clearly the state and the                      
  industry have benefited.  But benefits have not come because                 
  of leasing: discovering and developing Prudhoe, for example,                 
  had much more to do with the quality of the reservoir than                   
  the effectiveness of the leasing system.  Further, revenues                  
  to the state from bonuses and rental have amounted to less                   
  than one percent of total revenues from 1981 through 1992.                   
  Clearly the state benefits most from discovery and                           
  development.  A way to supplement the lease system with a                    
  faster process such as licensing is needed."                                 
  MR. DAVIS stated a more specific complaint is that HB 199                    
  should exclude broad portions of the North Slope and Cook                    
  Inlet from licensing.  The reason is that licensing is only                  
  needed in "frontier" areas.  Two thoughts Mr. Davis offered                  
  was that first we agree that this should be a frontier area                  
  bill: but that licensing should be available for both                        
  intellectual as well as geographic frontiers.  ARCO's Cook                   
  Inlet discovery, the first in 25 years, is a good example of                 
  this.  Most basins go through cycles of discoveries.  Cook                   
  Inlet is now in its second cycle.  We rethought the geologic                 
  concepts in Cook Inlet and by applying them, found oil in an                 
  area that industry had all but abandoned.  There is land in                  
  both the Cook Inlet and on the North Slope that has been                     
  leased and returned to the state, or offered for sale and                    
  not bought.  These areas are intellectual frontiers and when                 
  new concepts are developed, these areas should be available                  
  for licensing.                                                               
  MR. DAVIS' second thought was that the Arctic North Slope is                 
  a particularly poor choice for blanket exclusion.  Because                   
  new sources of oil are needed to keep TAPS (Trans Alaska                     
  Pipeline Service) running as long as possible.  Crude rate                   
  through TAPS will be declining significantly over the next                   
  ten years and modifications such as shutting down pump                       
  stations will be needed.  Over time, it will be more and                     
  more expensive to bring TAPS capacity back up.  New                          
  discoveries will have to bear those costs.  As time                          
  proceeds, discoveries will have to be larger and larger to                   
  justify TAPS investments.  Arco must try to find many                        
  smaller sized fields as soon as possible to maximize the                     
  economic efficiency of TAPS and to keep rates from declining                 
  too quickly.  There is an added benefit that the longer TAPS                 
  operations continue, more oil will be produced from existing                 
  fields like Prudhoe and Kuparuk.  Exploration licensing is                   
  especially applicable on the North Slope because there is                    
  only a limited window of opportunity.                                        
  MR. DAVIS said the performance bond has also been criticized                 
  as being too onerous.  But it would be a mistake to provide                  
  relief from bonding.  The reality is that Alaskan                            
  exploration is high risk and high cost.  Nothing has changed                 
  for players without the financial ability or interest in                     
  licensing.  They can continue to participate through the                     
  existing competitive leasing program, or they can form joint                 
  ventures with others and seek licensees.  Losing the bond                    
  requirement encourages speculation, not exploration.  And                    
  holding land without exploring is of no benefit to the                       
  MR. DAVIS stated the oral outcry form of bidding has been                    
  criticized as not being viable.  ARCO sees oral auctions as                  
  protection for the person who submits the initial proposal,                  
  which may be subject to partial disclosure.  The originator                  
  may be disadvantaged during bidding by competitors having                    
  that information.  After the state has solicited and                         
  evaluated proposals, it develops a common basis for the                      
  bidding and the competitors bid a work commitment in terms                   
  of dollar amount.  There really is not anything unworkable                   
  here.  Also, this concept is not new, its been utilized in                   
  numerous countries for many years.                                           
  Number 450                                                                   
  MR. DAVIS mentioned, one of the fundamental protection for                   
  the state and the industry is the existence of market                        
  competition.  One of the most disturbing arguments heard                     
  against this is that some companies will not use licensing                   
  because they have only limited funds for Alaska.  In                         
  essence, these people are saying that the state should not                   
  speed up the pace of exploring for and discovering oil until                 
  they are prepared to reinvest in Alaska.  This is probably                   
  because they have better foreign opportunities.  He stated,                  
  "This demonstrates that Alaska is at a competitive                           
  disadvantage as I mentioned earlier.  Exploration Licensing                  
  will help level the playing field by making Alaska more                      
  attractive for exploration."                                                 
  MR. DAVIS said critics of HB 199 are quick to point out that                 
  ARCO has committed nearly one billion dollars to an active,                  
  ongoing five year exploration program and that exploration                   
  licensing is not fair to other companies who have not made                   
  such commitments.  He continued, "But we should remember                     
  that the goal of this legislation is to have a process which                 
  speeds up exploration and which creates competition for                      
  making work commitments.  Just the introduction of this bill                 
  has created a climate of competition within the industry to                  
  seek and win licenses.  I hope that ARCO can benefit from                    
  licensing, but I also hope that the state benefits from                      
  licensing; because that will mean that exploration in Alaska                 
  has been reinvigorated."                                                     
  Number 473                                                                   
  VICE CHAIRMAN PETE KOTT asked where small companies go to                    
  participate in exploration in the state of Alaska.                           
  Number 480                                                                   
  MR. DAVIS answered smaller companies would be able to                        
  participate in traditional lease sales and team up with                      
  other companies to work licenses.  A lot of large                            
  discoveries have been made by small companies who have been                  
  working in partnership with large companies.                                 
  Number 496                                                                   
  REPRESENTATIVE JERRY SANDERS asked what effect licensing                     
  would have on Native lands and other private lands as                        
  opposed to state lands.                                                      
  Number 499                                                                   
  MR. DAVIS felt exploration licensing as being a very                         
  effective way to merge the state and Native land interests                   
  together.  "If Native lands were located remotely from state                 
  lands I would not see an impact," he said.                                   
  Number 514                                                                   
  REPRESENTATIVE SANDERS asked if he thought the overall                       
  effect would be good for the Native lands.                                   
  Number 515                                                                   
  MR. DAVIS stated that from an explorationist point of view,                  
  Number 517                                                                   
  REPRESENTATIVE GARY DAVIS asked since there are no bonus                     
  dollars with this, where is the benefit to the state.                        
  Number 522                                                                   
  MR. DAVIS stated that bonus dollars have never been a                        
  consistent source of income for the state, but what is a                     
  consistent source of revenue is money from royalty and                       
  severance taxes from production.                                             
  REPRESENTATIVE JOE SITTON asked how many small companies are                 
  there in the state and what role do these small companies                    
  play in the oil and gas market.                                              
  Number 539                                                                   
  MR. DAVIS stated there are very few small players, Stewart                   
  Petroleum is the only active independent player in the state                 
  and he felt they would not be hurt by exploration licensing,                 
  but would benefit from it.                                                   
  Number 553                                                                   
  REPRESENTATIVE SANDERS asked Mr. Davis if he felt this would                 
  bring more independent, smaller companies, to Alaska.                        
  Number 557                                                                   
  MR. DAVIS felt this had the ability to bring in the larger                   
  Number 572                                                                   
  REPRESENTATIVE SANDERS asked how ARCO felt about the                         
  competition this would bring to Alaska.                                      
  Number 575                                                                   
  MR. DAVIS stated the competition was good for ARCO as their                  
  program is being run very intensive because of land access.                  
  He stated ARCO would rather have a smaller piece of many                     
  wells than a big piece of a few wells.  He stated ARCO                       
  benefits indirectly if anyone discovers oil in Alaska                        
  because it is a healthier environment for the state.                         
  Number 592                                                                   
  VICE CHAIRMAN KOTT asked if HB 199 did not pass, what impact                 
  would that have on ARCO's exploration schedule.                              
  Number 598                                                                   
  MR. DAVIS stated a lot of exploration is follow-up on                        
  discoveries they have been fortunate enough to announce.                     
  There is a base program underneath this level and it would                   
  carry on.  He felt it would be a tragedy for the state                       
  because it would bring the state one year closer to a                        
  decline.  He added "ARCO would go on and do our best, but                    
  things could be much better for the state, industry, and for                 
  ARCO if this bill (HB 199) is passed."                                       
  Number 608                                                                   
  TOM LOHMAN testified on behalf of THE NORTH SLOPE BOROUGH                    
  DEPARTMENT OF WILDLIFE MANAGEMENT.  He said, "The Borough                    
  has not taken a position on this, but I have a couple of                     
  questions.  Asked someone to compare a couple of points                      
  between leasing and licensing, if licensing proposal applies                 
  to state waters as well as state lands, and thirdly is there                 
  anyone who has taken a position on this bill (HB 199) other                  
  than ARCO?"                                                                  
  Number 620                                                                   
  REPRESENTATIVE JERRY MACKIE asked if anyone was going to                     
  answer the questions that Mr. Lohman has asked.                              
  MR. EASON answered Mr. Lohman's questions and said that "the                 
  Division of Oil & Gas would be looking at the same issues in                 
  licensing as we do in leasing, and involve the public in the                 
  same fashion."  He stated that the Division has not proposed                 
  off-shore licensing.                                                         
  Number 656                                                                   
  ALLIANCE, stated as a manager of a contract firm it is her                   
  interest that the more exploration in the state of Alaska                    
  and more development, the better off her people will be.                     
  She stated jobs are going to become relatively scarce over                   
  the next five to ten years as Prudhoe winds itself down,                     
  just as it will affect the state of Alaska.  She stated the                  
  more land the state can open up the better picture it has of                 
  its overall land, and the more work that is out there, the                   
  better off the state will be.                                                
  CHAIRMAN GREEN stated there was written testimony from                       
  Alaska Federation of Natives, Doyon, and Cook Inlet Regional                 
  Corporation and that they were all in support of HB 199.                     
  Number 686                                                                   
  OFFICE, stated that HB 199 presents a workable concept of a                  
  licensing program which will encourage exploration and                       
  hopefully development of the state's frontier areas.  She                    
  stated the amendments Texaco would like to see made were 1)                  
  to include mature areas, such as the North Slope and Cook                    
  Inlet, in a large block leasing/licensing program is                         
  inappropriate and that language be drafted to eliminate                      
  these types of areas from availability; 2) the issuance of                   
  the licenses should be conditioned upon the annual revenue;                  
  3) the commissioner should adopt regulation to evaluate the                  
  proposal; and, 4) merging from a lease/license to a lease or                 
  leases should be accomplished under existing state leasing                   
  TAPE 93-08, SIDE B                                                           
  Number 000                                                                   
  MS. NELSON stated Texaco supports the licensing concept and                  
  requests the committee consider amendments which will                        
  address these concerns.                                                      
  Number 041                                                                   
  DAVE LAPPI, PRESIDENT OF LAPP RESOURCES, INC., a small                       
  exploration company based in Anchorage, stated they are                      
  interested in exploring in Alaska.  He supported HB 199 and                  
  felt it would bring in higher revenue than the now 85% for                   
  the state.  He stated that there should be a review by the                   
  DNR of the work program in progress and the bidding progress                 
  should include a detailed work program submitted by                          
  companies on a competitive basis; not on the dollar amount,                  
  but a work program.  He stated companies know best where to                  
  explore for oil and if a company submits a bid in an area                    
  that is not thought to be prospective, the state should                      
  perform the best interest finding and then it would be                       
  subject to that finding.  He felt the performance bond                       
  should be eliminated from HB 199, or drastically modified.                   
  ANCHORAGE DIVISION, stated since Conoco views large block                    
  licensing as an adjunct to the current leasing program, they                 
  believe the terms and conditions of the licensing should be                  
  consistent with the existent leasing program.  There are                     
  five areas in HB 199 that could be strengthened:  1) stated                  
  in Section 38.05.132(a) the areas subject to large block                     
  licensing would be areas that are not under current five                     
  year leasing programs and should also exclude areas such as                  
  the North Slope and Cook Inlet that are currently producing;                 
  2) in section 38.05.132(c)(2) the total acreage for any one                  
  licensee should be limited to 500,000 acres; 3) the                          
  requirements in section 38.05.132(c)(5) as currently                         
  proposed, pertaining to economic waste industries annual                     
  resources.  The license areas may have already been proven                   
  by initial work in the license area.  Conoco believes a                      
  better alternative would be to require the licensee to bond                  
  annually for each year's work; and 4) section 38.05.133(h)                   
  which proposes an oral outcry for getting license proposals,                 
  should be modified by developing regulations that would                      
  require competing proposals by the DNR.  The DNR would then                  
  make a selection based on regulations and information from                   
  the proposals.  The sealed bidding process would be similar                  
  to the bidding process that is very successful in the                        
  current leasing program.  It would be possible for a                         
  licensee to have proposals for different acreage, different                  
  durations, and different times of distribution of the                        
  voluntary work program.                                                      
  Number 256                                                                   
  MANO FREY, PRESIDENT OF ALASKA AFL/CIO, stated he fully                      
  supports and encourages the committee to pass HB 199 out of                  
  Number 339                                                                   
  CALIFORNIA, UNOCAL here in Alaska, stated Unocal has                         
  conducted business in the state of Alaska since the early                    
  1900s. Initially they sold and distributed petroleum                         
  products, and in the thirties followed with the beginnings                   
  of an exploration strategy and geological programs.  Their                   
  exploration efforts resulted in significant major oil and                    
  gas discoveries in the Cook Inlet Basin.  Unocal, along with                 
  partners and other exploration companies, actively produced                  
  hydrocarbons from the Cook Inlet Basin for over thirty five                  
  years.  On the North Slope of Alaska, Unocal has ownership                   
  in two of the three currently producing oil fields and has                   
  been involved in numerous exploration wells throughout this                  
  region.  In the 1993/94 drilling season alone, Unocal has                    
  announced plans to participate in two rank wildcat                           
  exploration wells on the North Slope.  Since the beginning                   
  of oil and gas exploration activities in the state, hundreds                 
  if not thousands of miles of seismic survey have been                        
  conducted and untold man hours expended interpreting the                     
  information collected from these two mature exploration                      
  MR. TABLER said the state's oil and gas leasing programs is                  
  clearly defined, well understood, and designed to make                       
  available for competitive sale, the state's oil and gas                      
  natural resources pursuant to an analytical evaluation and                   
  best interests finding.  Unocal believes in the current                      
  competitive lease sale process and feels, that it is the                     
  best way to achieve evaluation of the state's oil and gas                    
  resource potential.  Industry input, through expressions of                  
  interest under the five year leasing program and call for                    
  comment process, have provided the DNR with guidance in the                  
  offering of available state lands.  This process has                         
  provided the oil and gas industry with a stable and                          
  predictable competitive lease sale schedule in mature                        
  exploration areas where planning for large capital                           
  expenditures are necessary.  Unocal believes that                            
  exploration licensing in mature exploration areas, such as                   
  the North Slope and Cook Inlet Basin, is inappropriate and                   
  will not lead to an earlier evaluation of the state's oil                    
  and gas resource potential and, therefore, should not apply                  
  in these areas.                                                              
  MR. TABLER believes, however, exploration licensing could                    
  encourage oil and gas exploration activity in frontier                       
  areas, such as Interior Alaska, and be a very effective                      
  means in which to augment the state's leasing program in                     
  areas for which insufficient or undocumented geologic and                    
  geophysical information exists concerning the oil and gas                    
  potential of that land, or state land that has not or is not                 
  currently subject to an oil and gas lease sale.                              
  MR. TABLER said the concept of exploration licensing,                        
  introduced some time ago to industry, was specific in its                    
  design and presented as having application in frontier areas                 
  where little or no scientific information and/or industry                    
  activity occurred.  Industry in general, supported this                      
  concept, subject to review of its utilization and                            
  administration.  Since introduction of HB 199 on March 1,                    
  1993, Unocal has evaluated its specific provisions, its                      
  intended purpose, and its objective.  Unocal feels HB 199 as                 
  currently written, needs modification to clearly reflect the                 
  intended purpose expressed by the Division of Oil and Gas at                 
  the joint House and Senate Oil and Gas Committee hearing on                  
  March 16, 1993.                                                              
  MR. TABLER stated to this end, Unocal would like to make the                 
  following specific comment about HB 199:  1) large block                     
  licensing is an attractive addition to the state's leasing                   
  program to accelerate exploration and potential development                  
  of Alaska's frontier areas; 2) lands which should be                         
  excluded from licensing are state lands that have not or are                 
  not currently subject to an oil and gas lease sale, and all                  
  state lands north of 68 degrees, 30 minutes north latitude;                  
  3)  total lands under license to any one licensee should                     
  conform to existing leasing statutes and regulations to                      
  assure compliance therein and prevent the warehousing of                     
  leases; 4)  licensing should be conditioned upon the annual                  
  posting of work commitment performance bonds or other                        
  security in favor of the state in amounts not less than the                  
  equivalent work commitment for that year; 5) the                             
  Commissioner should adopt regulations to evaluate competing                  
  proposals and the evaluation process must be based only on                   
  the original written proposals submitted by the prospective                  
  licensees; and 6) conversion from license to lease should be                 
  under existing state leasing regulations AS 38.05.180 (I) -                  
  (u) and (x) - (z), and should be subject to the acreage                      
  qualifications of AS 38.05.140 (c).                                          
  Number 434                                                                   
  LOCAL 959, stated he represents about 4,500 members of the                   
  state of Alaska who are both public and private employees,                   
  along with 3,000 retirees.  He stated that all of these                      
  people will be affected by the declining revenues in the                     
  state.  He supported HB 199 and urged the committee to pass                  
  it out of committee with a recommendation to pass it.                        
  Number 488                                                                   
  EXPLORATION ALASKA, INC, stated that BP supports the idea of                 
  large-block licensing for the relatively unexplored areas of                 
  Alaska.  While BP's focus is on the North Slope and will                     
  remain there, the licensing approach could facilitate the                    
  exploration of the so called "interior basins" in Alaska --                  
  basically, all of the state outside of the Cook Inlet Basin                  
  and the North Slope.  He declared BP applauds the governor                   
  and those in his administration who worked to develop HB
  199, for breaking out of the "traditional mind-set" of 30                    
  years of using the same practice, and for having the                         
  willingness to propose a new system that they think will                     
  work better than leasing.                                                    
  MR. RINGSTAD stated despite support for the general idea of                  
  large block licensing for the relatively unexplored areas of                 
  Alaska, BP opposes HB 199 as currently written.  He added BP                 
  has three specific matters of concern:  1) its application                   
  to the North Slope, 2) the oral outcry auction provision,                    
  and 3) the exemption which allows the warehousing of                         
  MR. RINGSTAD stated BP's first concern is that HB 199 would                  
  allow licensing on the North Slope, particularly in the                      
  planning areas for the remaining state lease sales scheduled                 
  for the Slope.  He said BP believes the state's interests                    
  would harm, not help, by allowing the currently planned                      
  lease sales to be cast aside in favor of a licensing                         
  program.  Lease sales bring in cash bonuses; the licensing                   
  program would not.  Unlike lease sales in unexplored areas,                  
  which bring in minimum bonuses, the recent state lease sales                 
  on the Slope show there is enough interest to make the                       
  bonuses there substantial.  Thus, to stop using lease sales                  
  on the Slope would represent a significant cash cost to the                  
  state.  For licensing to be justified, therefore, it has to                  
  be great enough to offset this cost.                                         
  MR. RINGSTAD said the chief advantages that licensing offers                 
  are the possibility of more exploration and earlier                          
  exploration.  There is already more exploration interest on                  
  the Slope than anywhere else in the state, and the Slope is                  
  likely to end up being just as thoroughly explored under                     
  convention led leasing as it would with large block                          
  licensing.  Moreover, it is not clear that licensing would                   
  bring about exploration on the Slope any faster than                         
  conventional leasing would.  It is expected that exploration                 
  drilling under a licensing program would begin as early as                   
  two years after a license is issued.  He disclosed BP's                      
  Cascade Well that they are drilling this year is on land                     
  leased only two years ago in 1991.  He disclosed further                     
  that BP plans to drill the Yukon Gold Well later this year,                  
  and it, too, is on a lease issued in 1991.  ARCO's Cave Bear                 
  well, scheduled to be drilled next year, is on land they                     
  leased just last year.  Even though it is sometimes true                     
  that exploratory drilling doesn't begin until eight or nine                  
  years after a lease is issued, it is also true that much of                  
  the current exploratory drilling on the Slope is occurring                   
  as soon after a lease sale as it would under a large block                   
  licensing program.                                                           
  MR. RINGSTAD said there is one more thing to consider before                 
  letting the Slope be opened up to large block licensing.                     
  Conventional leasing allows companies to come in and bid for                 
  leases even though they do not plan to operate the leases                    
  they may acquire.  They are, in effect, investors rather                     
  than operators.  The licensing program, in contrast, gives a                 
  tremendous advantage to companies who are already operators                  
  in the vicinity of a license; because they already have a                    
  base of operations there and have working knowledge and                      
  experience with the area.  On the Slope, there are two                       
  dominant operators.  He asked, "Is it good state policy to                   
  let one, or both, 'lock up' the rest of the Slope under a                    
  licensing program?  Or would it be better to continue                        
  letting other companies have a chance for a piece of the                     
  action, as they do with conventional lease sales?  For BP's                  
  part, we are not afraid of having more competition, but                      
  welcome it."                                                                 
  MR. RINGSTAD stated BP's second concern is about the nature                  
  of the auction for a large block license.  House Bill 199                    
  calls for an "oral outcry" auction -- that is, the bidders                   
  are all in a room together and each one keeps bidding higher                 
  and higher about how much exploratory work they will do,                     
  until finally no one is willing to bid any higher and the                    
  license goes to the last, and highest, bidder.  This is a                    
  singular departure from the way similar "concessions" are                    
  offered elsewhere around the world.  The usual method is                     
  with sealed written bids that are submitted in advance, much                 
  the same way bonus bids are submitted to Alaska in its                       
  competitive oil and gas lease sales.  The system of sealed                   
  bids in advance makes everyone bid on the basis of their                     
  best view of the prospect, and it is likely to attract more                  
  participants in the auction than the "oral outcry".  He                      
  advised that BP prefers sealed bids.                                         
  MR. RINGSTAD said their third concern is whether a lease                     
  being carved out of a license area counts against the                        
  state's limits on how much acreage a company may have under                  
  lease at one time.  House Bill 199, at lines 8 and 9 on page                 
  5, specifically exempts such a lease from the acreage                        
  limits.  He declared BP sees no reason for the state to give                 
  such an exemption.  The acreage limits were enacted as part                  
  of the original State Land Act in 1959 in order to prevent                   
  companies from warehousing large numbers of leases.  The                     
  state wanted companies to either explore and develop the                     
  leases they got, or else surrender them back to the state.                   
  This is shown by the fact that leases in an exploration unit                 
  or a development unit are not counted against the acreage                    
  limit.  With a unit, the state knows there is a plan, and                    
  has to approve that plan, either to explore the leases or to                 
  develop and produce the leases, depending on the type of                     
  MR. RINGSTAD said, "If you think about it for a moment,                      
  there is no reason for such an exemption even from a license                 
  holder's point of view.  Why would a licence holder be                       
  trying to get a lease for part of his license area in the                    
  first place?  Because he either has found something there or                 
  has good reason for believing something is there.  But in                    
  either case, there is no reason why he cannot put the lease                  
  into a unit if he does not want it to count against his                      
  acreage limits.  And if he does unitize the lease, then the                  
  state will continue to have assurance that there are real                    
  plans for further exploration and/or development for that                    
  lease."  He added BP believes a lease being carved out of a                  
  license area should count against the acreage limits.                        
  MR RINGSTAD said in summary, "BP supports the general idea                   
  of large block licensing for the relatively unexplored areas                 
  of Alaska.  But we oppose HB 199 in its present form because                 
  it does not deal adequately with the issue of licensing on                   
  the North Slope."  He stated BP is seriously concerned about                 
  the provision in HB 199 to use "oral outcry" auction instead                 
  of sealed bids, and about its exemption from the anti-                       
  warehousing acreage limits for leases carved out of a                        
  license area.  With corrections in these areas, BP would                     
  welcome HB 199 as a progressive new approach for encouraging                 
  oil and gas exploration in Alaska.                                           
  Number 582                                                                   
  CHAIRMAN GREEN stated his intention to revert HB 199 to a                    
  sub-committee to work out some of the differences, and                       
  appointed Representatives Sitton, G. Davis and himself to                    
  serve on the subcommittee.                                                   
  Number 593                                                                   
  REPRESENTATIVE JERRY MACKIE felt the committee had the same                  
  intent to foster new exploration in the state and the                        
  comments by ARCO and BP's people were very encouraging.                      
  Some of the smaller companies made some comments which were                  
  constructive and he felt it was a good idea to have everyone                 
  sit down and work some of the problems out.                                  
  Number 617                                                                   
  REPRESENTATIVE HARLEY OLBERG brought up the fact that April                  
  3rd is coming up very quickly.                                               
  Number 622                                                                   
  CHAIRMAN GREEN stated this would have to be done post haste,                 
  but without some ironing out of some of the problems HB 199                  
  doesn't accomplish or promote from all sectors some                          
  increased activity.                                                          
  Number 626                                                                   
  REPRESENTATIVE OLBERG asked if HB 199 was still going to the                 
  House Resources Committee.                                                   
  Number 630                                                                   
  CHAIRMAN GREEN replied in the affirmative.                                   
  Number 635                                                                   
  REPRESENTATIVE OLBERG stated if HB 199 is heard next week it                 
  cannot be scheduled before the third of April.  He suggested                 
  Representative Green and other members of the House                          
  Resources Committee could form a sub-committee there and                     
  make appropriate changes.                                                    
  Number 638                                                                   
  CHAIRMAN GREEN stated if HB 199 goes to the House Resources                  
  Committee they will be somewhat at a loss of what is coming                  
  over with some changes of substance and "lose some of the                    
  time we tried to gain."                                                      
  Number 641                                                                   
  REPRESENTATIVE MACKIE stated from past experience, anytime                   
  you can craft a piece of legislation that is acceptable to                   
  everyone involved, legislation can be moved through the                      
  process.  He stated that with Chairman's Green experience                    
  and understanding of this issue and the fact that many of                    
  the parties involved want to sit down and work things out he                 
  felt HB 199 should be moved to a sub-committee for further                   
  Number 656                                                                   
  CHAIRMAN GREEN stated he was moving to form a sub-committee                  
  and that he would contact the people who have indicated an                   
  interest outside this committee.  He then stated he would                    
  take testimony on HB 200 at this time.                                       
  HB 200:  OIL & GAS EXPLORATION INCENTIVE CREDITS                             
  Number 668                                                                   
  MR. EASON felt HB 200 encourages exploration in the state.                   
  He stated, "They are proposing that the new legislation                      
  would actually amend Title 41 because it is exploration                      
  incentive credit provision that we want to make for all land                 
  not just state land.  They are also proposing the process be                 
  changed somewhat.  Credits be available for the review for                   
  specific expiration be undertaken whether they be on state                   
  land, federal, or private lands.  It is not mandatory that                   
  we give the credit it would be discretionary by the                          
  Commissioner.  The rationale for selecting the different                     
  percentage participation is twofold, first although there                    
  may be very valuable information leading to the evaluation                   
  of state lands, private lands, under all circumstances, are                  
  more remote and data is therefore less applicable."                          
  TAPE 93-9, SIDE A                                                            
  Number 000                                                                   
  MR. LAPPI stated he does not think the state needs to be in                  
  the business of deciding what area should be supported as                    
  far as private exploration goes in the state, and that the                   
  industry needs to have the state participation financially                   
  or assisting them in deciding which program should be                        
  supported with state money.                                                  
  Number 028                                                                   
  REPRESENTATIVE G. DAVIS asked Mr. Eason if HB 200 was                        
  similar to MAPCO\Tesoro's proposal as far as the state                       
  assisting development.                                                       
  SB 134:  CREDITS AGAINST PURCHASE OF ROYALTY OIL                             
  Number 039                                                                   
  MR. EASON stated that it is up to the Commissioner to make a                 
  determination each time it is in the state's interest to                     
  fund or participate in a project.  He said, "Under SB 134                    
  the proponents of that legislation have presented a bill                     
  that truly is nondiscretionary in finding what is a clear                    
  and convincing finding of the project that they propose to                   
  build with state money.  Under the EIC (Exploration                          
  Incentive Credit), we identify the ones we want to                           
  participate in, set the limits, and the amount of money that                 
  can be credited.  Under SB 134 there is no such control                      
  because there is potential to create new disputes at any                     
  time on the instate refiners' part.  The EIC's encourage                     
  competition and they are available to all lessees in a lease                 
  sale.  Senate Bill 134 we believe, is a very anti-                           
  competitive bill and will tilt the competitive balance.  The                 
  EIC's represent no forgiveness, they don't establish                         
  precedent of fighting the state for years and years in court                 
  only to be found wrong and not have to pay.  Everyone who                    
  equally wants to participate in the program and they do it                   
  without having to renegotiate the contract position."                        
  Number 139                                                                   
  REPRESENTATIVE G. DAVIS asked if he saw any amendments that                  
  would make SB 134 amendable or agreeable by the                              
  Number 149                                                                   
  MR. EASON stated that he personally does not think so, but                   
  he has not talked with the administration on that specific                   
  Number 163                                                                   
  the state needs to look at what is considered to be its                      
  interest in oil and gas and that interest has changed.  He                   
  said, "There are a series of court cases in which the state                  
  has determined that the state is to pick up lands throughout                 
  the state.  To say the state's interest may be diluted by                    
  remote areas is misleading, it may be true, or more true, if                 
  we were looking at the old state land selections."  He                       
  stated they do not have any selections that do not have a                    
  major encroachment by the state's interest.                                  
  Number 206                                                                   
  CHAIRMAN GREEN adjourned meeting at 6:50 p.m.                                

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