Legislature(1993 - 1994)
03/22/1993 05:00 PM House O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 None 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 date." PLACED IN SUB-COMMITTEE FOR FURTHER CONSIDERATION *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 CONSIDERATIONS (* First public hearing.) WITNESS REGISTER Jim Eason, Director Division of Oil & Gas Department of Natural Resources P. O. Box 107034 Anchorage, Alaska 99510-0734 762-2547 POSITION STATEMENT: Supported HB 199; Felt HB 200 encouraged exploration Jim Davis, Senior Vice President Arco Alaska, Inc. 9421 Spring Hill Drive Anchorage, Alaska 99507 265-6101 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 Texaco 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 564-7600 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 276-7600 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 SHORT TITLE: OIL & GAS EXPLORATION LICENSES/LEASES 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) 3/5/93 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 SHORT TITLE: OIL & GAS EXPLORATION INCENTIVE CREDITS 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) 3/5/93 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 JIM EASON, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF 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 noted. 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 JIM DAVIS, SENIOR VICE PRESIDENT OF EXPLORATION/LAND FOR 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 regulations. 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 bill." 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 facing. 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 program. 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 state. 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, absolutely. 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 independents. 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 MARY SHIELDS, GENERAL MANAGER FOR NORTHWEST TECHNICAL SERVICES AND ON THE BOARD OF DIRECTORS FOR THE ALASKA 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 PETE NELSON, LAND MANAGER FOR TEXACO, ALASKA REGIONAL 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 regulations. 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. AL HASTINGS, DIRECTOR OF EXTERNAL AFFAIRS FOR CONOCO'S 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 committee. Number 339 KEVIN TABLER, LAND MANAGER FOR UNION OIL COMPANY OF 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 areas. 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 ROBERT ERICKSON, ADMINISTRATIVE ASSISTANT TO THE TEAMSTERS 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 JOHN RINGSTAD, ASSOCIATE DIRECTOR, GOVERNMENT AFFAIRS FOR BP 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 acreage. 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 unit. 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 work. 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 administration. Number 149 MR. EASON stated that he personally does not think so, but he has not talked with the administration on that specific point. Number 163 LARRY KIMBALL, CHAIR FOR ALASKA FEDERATION OF NATIVES, felt 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 ADJOURNMENT CHAIRMAN GREEN adjourned meeting at 6:50 p.m.