Legislature(1995 - 1996)
02/13/1996 10:11 AM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 13, 1996 10:11 a.m. MEMBERS PRESENT Representative Norman Rokeberg, Chair Representative Scott Ogan, Vice Chair Representative Gary Davis Representative Bill Williams Representative Tom Brice Representative Bettye Davis Representative David Finkelstein MEMBERS ABSENT All members were present. COMMITTEE CALENDAR * HOUSE JOINT RESOLUTION NO. 54 Encouraging the lessees of Alaska's vast North Slope natural gas reserves to reach agreement to market gas, expressing the legislature's support for an Alaska North Slope (ANS) gas transmission pipeline, and requesting the President of the United States and the Governor of the State of Alaska to publicly support and take action that will help expedite the construction of that system. - MOVED OUT OF COMMITTEE * HOUSE BILL NO. 394 "An Act authorizing a program of natural gas and coal bed methane development licensing and leasing; relating to regulation of certain natural gas exploration facilities and coal bed methane exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; amending the duties of the Alaska Oil and Gas Conservation Commission as they relate to natural gas exploration activities and coal bed methane exploration activities; and amending the exemption from obtaining a waste disposal permit for disposal of waste produced from coal bed methane drilling." - HEARD AND HELD HOUSE BILL NO. 342 "An Act relating to water quality." - SCHEDULED BUT NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: HJR 54 SHORT TITLE: FAVOR TRANS-ALASKA GAS SYSTEM & LNG SALES SPONSOR(S): REPRESENTATIVE(S) KUBINA, GREEN, BARNES, NAVARRE, MACKIE, GRUSSENDORF, PHILLIPS, B. DAVIS, WILLIS, SANDERS, ROBINSON, ROKEBERG, OGAN JRN-DATE JRN-PG ACTION 01/16/96 2453 (H) READ THE FIRST TIME - REFERRAL(S) 01/16/96 2453 (H) O&G, RESOURCES, FINANCE 02/05/96 2633 (H) COSPONSOR(S): ROBINSON 02/07/96 2666 (H) COSPONSOR(S): ROKEBERG 02/09/96 2707 (H) COSPONSOR(S): OGAN BILL: HB 394 SHORT TITLE: GAS & COAL METHANE LICENSES & LEASES SPONSOR(S): REPRESENTATIVE(S) OGAN,ROKEBERG JRN-DATE JRN-PG ACTION 01/05/96 2369 (H) PREFILE RELEASED 01/08/96 2370 (H) READ THE FIRST TIME - REFERRAL(S) 01/08/96 2370 (H) O&G, RESOURCES, FINANCE 02/08/96 (H) O&G AT 10:00 AM CAPITOL 124 02/08/96 (H) MINUTE(O&G) 02/13/96 (H) O&G AT 10:00 AM CAPITOL 124 BILL: HB 342 SHORT TITLE: WATER QUALITY STANDARDS SPONSOR(S): REPRESENTATIVE(S) ROKEBERG JRN-DATE JRN-PG ACTION 05/09/95 2042 (H) READ THE FIRST TIME - REFERRAL(S) 05/09/95 2042 (H) O&G, RESOURCES 10/17/95 (H) O&G AT 1:00 PM ANCHORAGE LIO 10/17/95 (H) MINUTE(O&G) 02/13/96 (H) O&G AT 10:00 AM CAPITOL 124 WITNESS REGISTER REPRESENTATIVE GENE KUBINA Alaska State Legislature State Capitol, Room 406 Juneau, AK 99801 Telephone: (907) 465-4859 POSITION STATEMENT: Sponsor of HJR 54 DONNA FISCHER, Business Owner P.O. Box 395 Valdez, Alaska 99686 POSITION STATEMENT: Supported HJR 54 DAN LaSOTA, Assemblyman Fairbanks North Star Borough Assembly 693 Manchester Loop Fairbanks, Alaska 99712 Telephone: (907) 479-6198 POSITION STATEMENT: Testified in support of HJR 54 SARA HANNAN, Executive Director Alaska Environmental Lobby representing the TransAlaskan Gas Systems Environmental Review Committee P.O. Box 22151 Juneau, Alaska 99802 Telephone: (907) 463-3366 POSITION STATEMENT: Supported HJR 54 PAUL FUHS, Lobbyist Southwest Alaska Pilots Association 10652 Porter Lane Juneau, Alaska 99801 Telephone: (907) 790-3030 POSITION STATEMENT: Supported HJR 54 MANO FREY, President AFL-CIO 2501 Commercial Drive Anchorage, Alaska 99501 Telephone: (907) 272-4571 POSITION STATEMENT: Testified in support of HJR 54 DAVID LAPPI, Owner LAPPI Resource, Incorporated 4900 Sportsman Drive Anchorage, Alaska 99502 Telephone: (907) 248-7188 POSITION STATEMENT: Provided information on HB 394 JAMES HANSEN, Leasing/Evaluation Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 269-8804 POSITION STATEMENT: Provided information on HB 394 MARK MEYERS, Petroleum Engineer Division of Oil and Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 269-8768 POSITION STATEMENT: Provided information on HB 394 TOM CHAPPLE, Program Manager Industry Preparedness and Pipeline Program Division of Spill Prevention and Response Department of Environmental Conservation 411 West 4th Avenue, Suite 2-C Anchorage, Alaska 99501 Telephone: (907) 271-4336 POSITION STATEMENT: Provided information on HB 394 ACTION NARRATIVE TAPE 96-9, SIDE A Number 000 The House Oil & Gas Special Committee was called to order by Chairman Norman Rokeberg at 10:09 a.m. Members present at the call to order were Representatives Rokeberg, Ogan, Williams, Brice, B. Davis, and Finkelstein. A quorum was present. This meeting was teleconferenced to Anchorage, Valdez, and Fairbanks. CHAIRMAN NORMAN ROKEBERG announced that the agenda was HJR 54 and HB 394. HJR 54 - FAVOR TRANS-ALASKA GAS SYSTEM & LNG SALES Number 196 REPRESENTATIVE GENE KUBINA, sponsor of HJR 54, was first to testify. He said HJR 54 is a resolution attempting to encourage the construction and marketing of natural gas. He stated that there is over 30 trillion cubic feet of natural gas on the North Slope which can benefit the state of Alaska if it is marketed. The HJR 54 incorporates a number of "whereas" statements settings out facts about the gas and the gas pipeline. The HJR 54 has gone through a process of gaining consensus from the oil companies, Yukon Pacific Corporation, and the Governor's office. He said the first draft of HJR 54 was done last March. REPRESENTATIVE KUBINA said the essence of HJR 54 is requesting four specific things be done. The first requests the President of the United States to include the Alaska gas pipeline as part of a national trade issue. To do this, HJR 54, requests that he mention the pipeline at appropriate times to heighten its interest and also to direct the Presidential staff who focus on trade to make it a priority with their negotiations in the Asian market. REPRESENTATIVE KUBINA said the second request of HJR 54 is that it has the legislature, on record, requesting the Governor to create a gas pipeline and that it be a top priority in his Administration. A letter was received this morning, from the Governor, endorsing HJR 54 and also stating that the Governor has begun the process stated in the resolution. REPRESENTATIVE KUBINA said the third goal of HJR 54 is that it indicates the strong support of the legislature in seeking markets for our natural gas and constructing a gas pipeline. He said lastly, HJR 54 encourages the establishment of a forum for the various parties to come together and talk about the involved issues. He said this was the biggest problem with the pipeline development and, as a state, we can help facilitate that process. REPRESENTATIVE KUBINA said he has provided the committee with a committee substitute. REPRESENTATIVE GARY DAVIS made a motion to address CSHJR 54, version W, dated February 12, 1996. Hearing not objections, the committee addressed the CSHJR 54 version of the bill. CHAIRMAN ROKEBERG asked for clarification of line 13, on page two. REPRESENTATIVE KUBINA said the Alaskan Municipal League (AML) attempts, as does CSHJR 54, to avoid getting into the debate of whether the pipeline terminal is in Valdez, Kivalina or another location. The AML wants to get all participants involved in this issue, including the state of Alaska, to convene and develop an unified proposal. He added that CSHJR 54 asks the Governor to get everyone in the same room in order to get it resolved. CHAIRMAN ROKEBERG noted that Representative Gary Davis joined the committee meeting at 10:12 a.m. Number 650 CHAIRMAN ROKEBERG referred to page one, line seven, and asked if the 26 trillion cubic feet mentioned consisted of the amount at the Prudhoe Bay field. He mentioned that there is also gas in other fields in the North Slope, such as Point MacIntire. Number 697 REPRESENTATIVE KUBINA said he changed this section, at the request of the oil companies, to specifically read the amount is in Prudhoe Bay. He said there is 5 trillion cubic feet at Point Thomson and in other areas. Number 768 DONNA FISCHER, Business Owner, testified via teleconference from Valdez. She said the gas pipeline will diversify the state in numbers and types of businesses. She added that it will also diversify where income to the state is derived. She said she was a member of the Alaska Municipal League, who are strongly behind "the resolution." Number 845 DAN LaSOTA, Assemblyman, Fairbanks North Star Borough Assembly was next to testify. He referred to a resolution passed by the Fairbanks North Star Borough Assembly, number 96-009, which unanimously supports HJR 54. He said unanimous support for any resolution is not common, and it should be understood that it shows a strong measure of support for this issue. He added that there should be specific language placing the gas pipeline along the central corridor of Alaska. MR. LaSOTA said the reasons for placing the pipeline in the central corridor include timing and benefits for communities along this corridor. He said permits are already located for the central corridor and as he understood, the project must go through under a certain timetable. He said that Fairbanks, the North Slope Borough and the city of Valdez income from the pipeline as well as spin-off projects are important factors. These possible benefits include fleet vehicles running on natural gas, homes fueled by natural gas, and manufacturing factories develop along the central corridor using the gas as a raw material. MR. LaSOTA said CSHJR 54 addresses the placement of the pipeline and the assembly is glad to see that, but would encourage stronger language to specifically state that the pipeline would be put in the central corridor. He said the next item he wished to address was Alaska hire. He read from the resolution, "the Borough believes that it is also essential that labor for any project, especially of this scope, come from the skilled and ready work force that already exists in the state of Alaska." He added that it would be a shame to put through a project of this scope and not have Alaska residents working on it. He said it is important that an up front attempt be made for Alaska hire. MR. LaSOTA said CSHJR 54 meet the intent and wishes of the Fairbanks' resolution. Number 1135 SARA HANNAN, Executive Director, Alaska Environmental Lobby, Incorporated was next to testify. She said she was representing the TransAlaska Gas Systems Environmental Review Committee (TAGS ERC.) She said six years ago, Yukon Pacific Corporation, undertook an extreme and unusual experiment in working with the environmental community on a major development project. Yukon Pacific Corporation's interest and intent was to evoke a dialogue that would lead to the construction of a project that they think is socially, economically, and environmentally sound. To produce and equitable dialogue, Yukon Pacific Corporation invited the environmental community to form a committee that would actively work on the project with them. This committee, TAGS ERC, was formed and has worked on this project for the past six years. MS. HANNAN said TAGS ERC does not endorse this project in and of itself, but the committee does endorse this resolution and the open dialogue that CSHJR 54 advocates. She referred back to Yukon Pacific Corporation and the environmental community working together. She said Yukon Pacific Corporation has demonstrated itself to be a good neighbor and a good model. Yukon Pacific Corporation has not asked for regulatory reform and have show that they are willing to comply with the federal no net loss of wetlands policy as well as seeking to comply with state and federal regulatory oversight of the environmental laws currently in place. The committee believed that this resolution speaks to that and to the future of Alaska. She added that the environmental community of Alaska will work to see socially, economically, and environmentally sound projects go forward. MS. HANNAN said it is important that the southern pipeline corridor be used. She encouraged the legislature to work with the gas producers to get the project on line. She said to plan for the next century means that we must look beyond this years fiscal analysis. She said the long range vision that CSHJR 54 incorporates, leads us there. Number 1229 REPRESENTATIVE SCOTT OGAN asked if there would be the same sort of cooperation, between the various parties, if a new pipeline route was chosen. Number 1244 MS. HANNAN said the spirit of cooperation would continue, but the environmental analysis of where the TransAlaska pipeline lays is in place. She added that the southern corridor has the science of 20 years behind and development of that area in place. If the pipeline project was undertook in a different region, the basic environmental oversight, which has already taken place with the southern route, would have to occur. So, a route change would delay the project substantially and new environmental problems would have to be resolved. MS. HANNAN explained the problem with the proposed alternative routes. She said it means going from a non-ice free port to crossing an entire permafrost region. She said the southern pipeline corridor traverses arctic, sub-arctic, and near arctic habitats so not all the corridor is permafrost. She said the southern corridor involves a longer engineering feat, but more diversity. Having a pipeline route that is in an entire permafrost habitat involves different environmental concerns. MS. HANNAN said the spirit of cooperation for a gas pipeline community would be there from the environmental community. She added that, technically, an alternative route would be much further behind because the southern corridor has a lot of sound science behind it and a new route would require starting at ground zero. Number 1323 CHAIRMAN ROKEBERG asked if the environmental community had an opinion about a buried pipeline. Number 1334 MS. HANNAN said this issue was not specifically addressed. She said the TAGS ERC includes some community leaders, including Steven's Village, and they have had an opinion about a buried line versus a non-buried line. She said that within the review committee there is a variety of technical expertise, but she could not comment on this issue specifically. Number 1361 CHAIRMAN ROKEBERG asked if the TAGS ERC took no position on buried versus non-buried pipeline. MS. HANNAN said, no, they did not. Number 1376 PAUL FUHS, Lobbyist, Southwest Alaska Pilots Association, was next to testify. He said the pilots that he represent are currently the marine pilots who bring the tankers into Prince William Sound. He referred to a letter, dated February 8, 1996, from the Southwest Alaska Pilots Association. He said this letter supports HJR 54. He said in review of CSHJR 54, "it is fine in the form that it's in." MR. FUHS said the marine pilots are one of the service industries, in Alaska, related to the oil industry. The marine pilots would benefit greatly from this project, as would other firms that work as oil field service companies. MR. FUHS said the southwest marine pilots have been piloting LNG tankers into Nikiski, from the Phillips plant, for almost 20 years. He said LNG is a safe, clean cargo. He added that the fuel for the tanker, except for some actual fuel used in the harbor, is mainly derived from the fumes that evaporate off the LNG. MR. FUHS concluded by thanking the representatives who co-sponsored CSHJR 54 and urged its support. Number 1466 CHAIRMAN ROKEBERG asked if a western pipeline route were used, whether marine pilots would be utilized. Number 1487 MR. FUHS said yes, all foreign vessels and all vessels over a certain size are required to have pilots. He said it would be a different pilots group, the Alaska Marine Pilots in Western Alaska. Number 1502 CHAIRMAN ROKEBERG asked if there was an opinion from the marine pilots regarding Russian ice breakers. Number 1520 MR. FUHS said this option had been explored for many years on the North Sea route, and the vessels are capable but need some modifications to bring them up to Coast Guard standards. He said some ice strengthened Finnish ships are carrying LNG over on the western side of the Arctic. He added that there are additional costs associated with ice strengthened vessels, such as ice breaking tugboats. He said his organization had not objection to a western route, but added that it took Yukon Pacific Corporation ten years to get permits and mentioned the timing issue that would arise if a different route were chosen. Number 1562 REPRESENTATIVE OGAN asked for clarification of the role of a ships pilot versus a master of the ship. Number 1577 MR. FUHS said the purpose of a marine pilot is that when a ship comes into Alaska waters, there is someone aboard the ship with experience and knowledge of those waters. This knowledge includes hazards to navigation, current, winds, et cetera. Pilots are licensed on their local knowledge. The master is still technically in charge of the ship, but Alaska state laws require that a pilot be on board. He said in the case of the Exxon Valdez, pilots weren't required to be on board at that point in Alaska waters, but since then, under the law, pilots are required to be on board at that point. Number 1610 MANO FREY, President, AFL-CIO, was next to testify. He urged the passage of CSHJR 54. He said the AFL-CIO has been working with Yukon Pacific Corporation for some time and have an agreement in principle that his organization will negotiate a project labor contract for the construction of the pipeline if Yukon Pacific Corporation is ultimately involved in the project. He made an analogy to Yukon Pacific Corporation and a siphon hose as to their position of neither controlling the natural gas or the market. He hoped the gas producers would actively work to achieve a consensus on the timing, route and best methods to get this gas to market. He said at some point and time, the cost of getting this LNG will outstrip the market price of the LNG. Number 1759 REPRESENTATIVE TOM BRICE asked if there are negotiations relating to the maintenance and operation of the pipeline as well. Number 1768 MR. FREY said no, the discussions have centered around the construction of the line itself. He again stated the timing issue. He concluded that once the pipeline is becomes a formal project, then discussions regarding maintenance and operation of the pipeline will occur. Number 1807 CHAIRMAN ROKEBERG confirmed that there was a project-labor agreement in principle with Yukon Pacific Corporation and asked if there had been discussions with the gas producers on the same topic. Number 1819 MR. FREY said those discussions had not occurred, but would occur shortly. He said the gas producers are aware that a project of this size is clearly of interest to the AFL-CIO. At Chairman Rokeberg's prompt, he added that the AFL-CIO has had experience with pipeline construction. CHAIRMAN ROKEBERG said that Wayne Lewis had not arrived to testify and asked the committee to table CSHJR 54 temporarily in order to address HB 394. HB 394 - GAS & COAL METHANE LICENSES & LEASES CHAIRMAN ROKEBERG said it was not the intention of the Chair to move HB 394 today. Number 1900 REPRESENTATIVE OGAN, sponsor HB 394, said this bill spurs the development of coal bed methane gas. He said this methane gas is a high quality gas produced from high quality coal and is similar to North Slope gas. This gas has great potential, statewide, for coal bed methane development, primarily in the bush areas. Currently, the state of Alaska spends $20 million on power cost equalization in rural Alaska. He said coal bed methane gas could mitigate the state's expenditure for power cost equalization. REPRESENTATIVE OGAN said transportation of diesel fuel is hazardous and expensive. He mentioned the problem of leaking storage tanks in the bush communities, an issue which has not been addressed. Natural gas is a clean source of energy that could potentially occur in many rural regions. Locally occurring coal bed methane gas could supply fuel for the production of electricity, as well as heat, for rural community homes. Legislation such as HB 394 could help rural Alaska become energy independent. REPRESENTATIVE OGAN said the development of coal bed methane gas could stimulate the economy as it allows small, independent companies to enter the gas market. He said HB 394, or a similar version, makes environmental sense. REPRESENTATIVE OGAN said HB 394 is not the final version as discussions with the private sector and the Administration have unveiled problems with this version and it is undergoing revision based on those discussions. He said this is a first attempt and would welcome discussion and suggestions to help resolve the hurdles to the ultimate passage of HB 394. Number 2019 DAVID LAPPI, President, LAPPI Resource, Incorporated, was next to testify. He said LAPPI Resource is an independent oil and gas exploratory (indiscernible due to pens near microphone). He said his company is very interested in developing coal bed methane gas, especially in rural Alaska. He referred to Representative Ogan's testimony and reiterated the problems associated with diesel fuel in the bush. He said diesel fuel is expensive and can be messy to handle and store. He added that in certain areas, small gas developments can happen if aimed at local markets. MR. LAPPI said he is encouraged by the committees review of the laws relating to oil and gas development, specifically as they relate to coal bed methane gas development. He encouraged further work on HB 394 and said he would be in Juneau on Thursday and Friday to meet and assist with any questions. He referred to a letter, sent by fax, identifying four areas that need to be addressed in HB 394. Number 2107 REPRESENTATIVE BRICE asked if any coal bed gas was being used in the state. Number 2114 MR. LAPPI said no, there is no coal bed gas production in the state of Alaska. He said in the lower 48 states, there is a production of one trillion cubic feet per year increasing on a yearly basis. Most of the coal bed gas production is centered around the east coast in the Appalachian Basin. He then cited other areas of coal bed gas production including, the Black Warrior Basin in Alabama as well as the San Juan Basin in Colorado and New Mexico. He predicted that coal bed gas production will be one of the growth areas in the natural gas industry in the lower 48 states. MR. LAPPI said that in Alaska, with half of the United State's coal reserve, an opportunity is available to build on successful enterprise in the United States which would supply gas to potential markets. REPRESENTATIVE BRICE asked for a brief overview of the four areas where there might be marketable gas reserves, as mentioned in the letter. When it was clarified that the four areas were areas of HB 394 that needed adjustment, Representative Brice asked for information regarding geographical areas and asked if this would be the western coal reserve. Number 2190 MR. LAPPI said yes, and added that work done by the Division of Oil and Gas (DO&G), over the last few years, identified the Upper Cook Inlet Basin and western North Slope as having the greatest potential for large gas reserves. He mentioned it is unknown whether the interior basins have quantities of coal and coal bed methane gas. Number 2214 REPRESENTATIVE BRICE asked for information regarding the transportation of this gas. Number 2225 MR. LAPPI said it could be transported through a pipeline by liquefying or pressurizing the methane gas. He said the best method is to drill the well close to the local market. He cited the example of Fort Yukon, which has a vast resource of this gas 1200 feet below the streets of the town as identified by the drilling done in the summer of 1994. He said a question remains as to whether this gas is producible. He said this type of situation, where both gas and a market are available, is the most desirable. MR. LAPPI said areas, which do no have local gas reserves, could be served by small liquification plants with a up to 50 mile pipelines in bush conditions. It could also be served by compressed gas. Number 2279 CHAIRMAN ROKEBERG asked for a description of the drilling project currently being done in the Matunuska Valley and whether the drilling rigs had blow-up prevention. He asked what other safety materials and equipment would be used on those shallow gas rigs. Number 2306 MR. LAPPI said the pilot project was derived from a well the DO&G drilled in the Spring of 1994. He said the well had identified and quantified amounts of coal bed gas. He said the state determined that there were similar quantities of gas, as found in the lower 48 states. He said the state left it up to the private sector to commercialize that gas resource in the Upper Matanuska Valley. He said if this project is successful his company will attempt projects in rural areas which are currently served by high priced equalized fuel. MR. LAPPI said his company uses the same type of drilling rigs and similar types of equipment used by conventional oil and gas companies. He said the main difference is due to the shallow areas where the coal bed gas is located. Currently the well is at 2,100 feet, as compared to the depth of standard oil and gas wells. Due to this factor, the equipment can be down-sized considerably. He said obtaining this small equipment has been a problem, but one that they are working on to reduce the cost of coal bed gas extraction. He said large rigs with a 20,000 foot capacity can do the job, but it is an expensive, logistical problem to get them to the site. MR. LAPPI said his company would use the same types of blow-out prevention equipment used on conventional oil and gas equipment. Number 2400 REPRESENTATIVE OGAN asked what Alaska statutes and regulations are obstacles to extracting the coal bed gas in a cost effect manner. He then asked Mr. Lappi to describe the permit process which allowed his company to drill in Houston. Number 2416 MR. LAPPI said there are three things that prevent coal bed gas drilling in the state, they include access to the land at a reasonable price, cost of bonding because of the three bonds or insurance policies the state of Alaska requires, and the third is regulatory reform. TAPE 96-9, SIDE B Number 000 MR. LAPPI said the Houston site had five wells drilled in the late 1950s and early 1960s searching for oil deposits. The wells vary from a shallow well of 1,000 feet to a deeper well of 6,109 feet. He said the wells were abandoned because there was no pipeline or market for gas at that time. He said LAPPI Resources applied to the Alaska Oil and Gas Conservation Commission (O&GCC) in the summer of 1995, to establish a new gas field based on the presence of gas which was demonstrated by the previous drill hole. MR. LAPPI said the O&GCC then established the Houston gas field and set up a number of rules which govern the development of the Houston coal bed gas pool. He said this is the first time a set of rules was established pertaining to coal bed gas development. He said modifications in those rules will most likely be made, based on other coal bed gas developments. He said the new rules reduce the bonding requirements on (indiscernible due to overlapping voices) bonds from $100,000 per well to $10,000 per well because they are shallow wells in an acceptable area. MR. LAPPI said another change is the (indiscernible due to overlapping voices) requirements that the Department of Environmental Conservation (DEC) has a bond or insurance policy for $1 million for exploration wells drilled in the state. He said gas production wells are not required to bond under the DEC's rules. Therefore, a couple of bonds have been reduced because the site had an established gas pool in a developed area. Number 082 MR. LAPPI said the requirement of a $1 million bond, when developing a shallow gas resource in a rural area will probably be a disincentive. Number 138 REPRESENTATIVE OGAN asked how many independent gas companies there were in Alaska, similar to LAPPI Resource, Incorporated. Number 145 MR. LAPPI said he could probably count the number on one hand and probably have a finger or two left over. He added that it is a fledgling industry, but added that coal bed gas could lead to the development of a number of new companies. Number 177 REPRESENTATIVE OGAN asked how the number of companies compared to other parts of the country. Number 185 MR. LAPPI said in the lower 48 states, the Department of Energy estimated that there were about 8,000 oil and gas companies actively doing business. Number 195 JAMES HANSEN, Leasing/Evaluation, Division of Oil and Gas Department of Natural Resources, was next to testify on behalf of the Administration. He said the DO&G has been at the forefront of efforts to encourage coal and methane developments in the state. He referred to the well that was drilled in the Matanuska Valley and the Governor's CIP proposal for $400,000 (indiscernible due to paper ripping) 97. The proposal was that a three year study be done to further define coal bed methane development in the state. The Administration encourages any promotion of state resources. He said coal bed methane is a resource that should be studied and tapped for future development. MR. HANSEN said currently all the authority that is necessary to conduct (indiscernible due to paper rustling)...introducing a brand new program to specifically provide exploration of coal bed methane. This program would be one more program the DO&G would have to deal with in addition to its current oil and gas leasing (indiscernible due to paper shuffling.)" ...as we have to do by law each year." He stated concern about the concept of segregating the gas resources below 3,000 feet because it would lead to complications with leasing and lead to extensive litigation by the various companies wanting to extract their resources. He said there is a problem with combining shallow gas and the coal bed methane gas in HB 394. Cook (indiscernible due to microphone feedback) "a lot of the gas there is produced from conventional gas reserves probably with resource from the coals." So, it is a problem if you take a shallow gas and treat it differently than a deeper gas. He repeated that a study was being composed by the Department of Geological and Geophysical Surveys to study coal bed methane potential drilling. Number 368 MR. HANSEN stressed studying the issue before it is tapped. He said coal bed gas has potential in the Cook Inlet and western (indiscernible) Alaska, but it is an unknown potential in the interior basins. The state need to study and determine facts about the interior basin in Alaska before we press on. Another question needing to be resolved is who owns the coal bed methane in the state. Is it owned by the coal people or is it owned by the oil and gas people. In the lower 48 states, this question has been addressed, with each state is treating it differently. There is also a question of who would oversee the leasing program. He said the Administration knows what needs to be done. MR. HANSEN said if it is only a question of bonding issues, then legislation can handle this issue. He said the addition of a new program would answer that bonding issue. Number 424 REPRESENTATIVE GARY DAVIS asked if the coal bed gas methane was a subservice right of the state, and asked if there were provisions granted to the coal companies that gave them this right. Number 424 MR. HANSEN said the question arises when you have a coal company extracting coal who then discover gas. At that point, does this gas belong to the coal company or the gas company. He said this question has been addressed by various state supreme courts with different conclusions. He added that you can have leases for both gas and coal in the same area. Number 482 REPRESENTATIVE OGAN suggested that the Administrations's concerns stem from several discussions about having a coal bed methane on a coal type lease. Ken Boyd, the director of DO&G, said that 3,000 feet and above would be an acceptable number as there are no coal bed gas reserves in the Cook Inlet below that number. He said drilling above 3,000 feet would mitigate some of the environmental concerns. He applauded the Administration's efforts to study whether coal bed methane gas is cost effective. He suggested that government should provide incentives to the private sector to explore resources, rather than having the government do everything. He concluded that HB 394 attempts to make land available, make the leases simple, and make reasonable bonding requirements so that the private sector is able to go out and explore these areas. Number 567 CHAIRMAN ROKEBERG received clarification that there were coal seams below 3,000 feet in Alaska. He then asked if DO&G broke down the origins of coal bed methane gas and petroleum related gas in the Cook Inlet. Number 593 MARK MEYERS, Petroleum Engineer, Division of Oil and Gas, Department of Natural Resources, answered Chairman Rokeberg's question. He said all natural gas is basically the same as it is derived from hydrocarbons formed from many sources. Lake deposits and coal commonly produce natural gas. Rocks that were produced from marine and marine life (indiscernible due to overlapping voices) produce natural gas. In addition, the same source rocks that generate oil, generate natural gas in basins such as the North Slope. When the rock is subjected to heat and pressure, the oil is actually destroyed, and the natural gas remains. MR. MEYERS said, in Cook Inlet, the coal is the primary source of natural gas. On the North Slope there are tremendous reserves of natural gas in the fields at Prudhoe Bay, somewhere around the figure of 44 trillion cubic feet located in depths less than 3,000 feet. Some of the gas on the North Slope is frozen and some of it is pre-gas. He said this source is derived from the same oil source in the fields. He said natural gas is a resource located in the coal bed reservoir which serves as a trapping mechanism for certain types of gas reservoirs. He said in the lower 48 states it is common for gas to be produced along with coal in that coal bed. MR. MEYERS said there is nothing magical about 3,000 feet. He said that depth is a mechanical or safety issue because at an increased depth the pressures and the chance of encountering oil are more likely to be an issue. He said there is oil less than 3,000 feet and cited examples where this is the case. He said every area must be looked at geologically to determine those types of separations. MR. MEYERS concluded that from a technical perspective, segregating out coal bed gases is very problematic. Number 720 CHAIRMAN ROKEBERG asked if a majority of the gas was derived from coal in the Cook Inlet. Number 740 MR. MEYERS said that was a debated issue, but current opinion is that the gas in the Cook Inlet is derived from coal. CHAIRMAN ROKEBERG asked the estimated gas amount on the North Slope. MR. MEYERS said the estimates in the Kuparuk and Prudhoe Bay Units, for in-place, gas hydrates at shallow depths, to be 37 to 44 trillion cubic feet of gas. This translates into a recoverable 26 trillion cubic feet. Number 782 CHAIRMAN ROKEBERG asked what a gas hydrate was. MR. MEYERS said it is natural gas in a frozen state, some of it being pre-gas and some of it remaining frozen beneath the permafrost. He mentioned the North Slope reserves to point out that there were other natural gas sources besides coal bed methane. He mentioned a gas project in Barrow which will provide gas production from a well less than 2,000 feet deep. He said they have (indiscernible) exploring in that area for conventional gas. In areas such as the western North Slope, there is conventional gas, but it is not economic for the purposes of development. However, it might be economic to develop for a local, rural supply. MR. MEYERS said he was hesitant about supporting HB 394 because it segregates a specific type of gas. He said if you are a small rural community you want to produce all the gas that is available in that well and you don't want to be limited to 3,000 feet especially in the first well. Number 863 CHAIRMAN ROKEBERG asked for clarification on coal bed methane and shallow gas reservoirs. Number 882 MR. MEYERS said he would not differentiate gas found (indiscernible) versus gas found in more conventional sites such as sandstone reservoirs. He said they are all sources of gas. One of the advantages of coal bed methane is that there is less risk of not finding coal then there is finding conventional gas resources. He repeated that coal and coal bed gas are commonly found in the same basin. He said the rural areas need to produce all available gas for economic reasons. He said the 3,000 foot depth for bonding requirements may be an issue, but from a geological standpoint 3,000 feet is not a magical depth at all. He said HB 394 would segregate the mineral state, under leases at a certain depth, which is not a comfortable requirement in regards to the rural community or in areas where you have conventional oil and gas production. Number 975 CHAIRMAN ROKEBERG asked how long it would take a private company to enter state land and develop coal bed methane exploration under current law. Number 1076 MR. HANSEN said under the (indiscernible-low, muffled voice) licensing program would be the fastest way. An (indiscernible-low, muffled voice) "under SB 308 you would have to go through an extensive public comment period." He estimated that the whole process would take a year and a half to two years, from the time the public proposes to develop and area, to the actual licensing. He said this time frame is based on Alaskan law. Number 1146 CHAIRMAN ROKEBERG asked what the cost, to the Department of Natural Resources and related agencies, would be to put a best-interest finding together for that type of license. Number 1158 MR. HANSEN said it takes, a staff of four, six months to write a finding. After that it takes several months to incorporate public comment into a revised finding for a total time commitment of eight months. In addition to that time period, the Division of Land's needs time to do the title work. He said the cost of the proposed program, referring to the attached fiscal note, would be $386,000 for the first year and $352,000 each year after. He said using existing staff would create a problem scheduling existing oil and gas lease sales. He concluded that the current cost to produce a best-interest finding would be $100,000, more or less. Number 1158 TOM CHAPPLE, Program Manager, Industry Preparedness and Pipeline Program, Division of Spill Prevention and Response, Department of Environmental Conservation (DEC), was next to testify. He said his division, as well as the Administration, supports HB 394. He said HB 394 could provide long term environmental benefits if gas development and coal bed methane gas is used to generate space heating and rural electric needs of rural areas. Replacing diesel fuel with natural gas would (indiscernible due to paper shuffling.) MR. CHAPPLE commented on the intention of HB 394 to avoid unnecessary bonding requirement from the DEC. He said HB 394 accomplishes this by limiting wells to less than 3,000 feet and the requirement that the Oil and Gas Conservation Commission (O&GCC) certifies whether there is any likelihood of encountering oil. "We encourage those types of provisions because we would like to see a bill that did not require that level of bonding, if indeed the mission of HB 394 is encourage gas development. The DEC does not regulate gas production as long as we know that (indiscernible) because were not concerned about the spill impact. Overall we would like to see a way that type of objective could still be accomplished in the bill even if some of these concerns of DNR with the particular well depth is of concern." Number 1322 MR. CHAPPLE said the provision of HB 394, of concern to DEC, is if well drilling is taking place for gas and oil is encountered. The way in which HB 394 is drafted, if this scenario happens, the driller is allowed to extract the oil during the time period in which they are submitting an oil spill contingency plan. He said he assumed that this was written, so that the seasonal opportunity would not be lost. He added that there were a number of instances where approval for this contingency plan would not result in a delay. He said putting oil into production would involve a rethinking of the production plan by the exploration company as well as the need for additional geological information. MR. CHAPPLE said contingency plans for exploration oil wells are completed in 60 days or less. He said contingency plans in the North Slope can be done in as few as 30 days because they can be amended on existing plans. He concluded that the provisions in HB 394, allowing drilling to continue, is in conflict with most of the permit requirements (indiscernible due to overlapping voices) Title 46 of Alaska law. Most new activities must apply and obtain their permits before the activity is undertaken, but HB 394 allows the activity to be undertaken before the permits are acquired which could leave some environmental protections on hold or not fully met. Number 1504 CHAIRMAN ROKEBERG referred to the section of HB 394 which excludes the discharge or disposal of waste material or water from activities associated with coal bed methane exploration drilling and asked if the DEC had any problem with that exclusion. Number 1547 MR. CHAPPLE said there was no problem if it is a shallow well. He said a shallow well does not use mud that would be toxic to the environment. There would be a concern about waste disposal for deeper wells. Number 1577 CHAIRMAN ROKEBERG asked if 3,000 feet defined a shallow well. MR. CHAPPLE said he did not know specifically if 3,000 feet is the "magic number." Number 1607 CHAIRMAN ROKEBERG referred to a section of HB 394 which excludes coal bed methane gas from the bonding requirements and asked if it was acceptable to the DEC. Number 1644 MR. CHAPPLE said they found it acceptable because of the provision that the O&GCC to say that no oil is likely to be encountered. He said bonding provides a financial purse in case of an oil spill where the state needs to come in and clean up the spill. Number 1700 CHAIRMAN ROKEBERG said a concern was expressed that no geophysical information might be available in frontier areas. Number 1736 MR. MEYERS said the geology of the interior basin of Alaska is extremely complex and often in areas that are geologically disrupted. He said there is very little well control because there is little control over pressures. He explained that over-pressure can occur in conditions where you have normal pressure gradients, but for some reason certain zones have higher than normal pressures due to the geologic history. He said in the North Slope they have a lot of well control because of those conditions. He added that developing wells in a new areas creates different problems. He said you can take seismographic information and determine the layers of the rocks and possible faults, but doing this type of seismic data is very expensive and cost prohibitive if these types of wells are not commercially viable. This development would be prohibitive if the fuel was going to be used for local energy source. He said until several wells are done in one area you will not have sufficient data to make a determination, placing a heavy burden on the O&GCC. He said the O&GCC would probably need to speak to their level of documentation required in order for them to make that determination. He said, as a geologist, he would find it difficult if he didn't have any well control, especially in interior basins where there is not a lot of geological information. MR. MEYERS repeated that the 3,000 foot level is not a magical number. He said oil and gas producers should address their drilling programs and what mud is used where. He said a well drilled 4,000 to 5,000 feet, under different geological conditions, could use the same kind of mud as wells drilled at 3,000 feet. MR. MEYERS said it is very hard in law to regulate these factors when you are dealing with an unknown geologic quantity of reserves and unknown geology. He said to obtain data about these unknowns is very expensive. CHAIRMAN ROKEBERG said testimony on HB 394 was closed for today. He repeated that it takes over two years, if we know a resource is in place, for any company to go to an area and produce gas. The main purpose of HB 394 is assisting business and rural areas in developing their natural resources to provide energy near their communities. He said current state leasing hinders this development. Number 2056 REPRESENTATIVE OGAN said he wanted to associate himself with Chairman Rokeberg's comments. He said HB 394 benefits rural Alaskans. He would like to see the $20 million power cost equalization mitigated as well as addressing the diesel tank storage unit problem. HJR 54 - FAVOR TRANS-ALASKA GAS SYSTEM & LNG SALES Number 2112 CHAIRMAN ROKEBERG said he would like to bring back for the committee, CSHJR 54. Number 2140 REPRESENTATIVE OGAN made a motion to adopt CSHJR 54. Number 2149 REPRESENTATIVE BRICE objected to the motion for purposes of discussion. He proposed an amendment, on page three, after the last further resolve, from line 11 to 13, to include one other further resolve, before the copy section. "Further resolved that the Alaska State Legislature to ensure the highest level of Alaskan hire possible, strongly encourages the implementation of the project-labor agreement covering the construction, operation and maintenance of the gas transmission." He said part of CSHJR 54 speaks to the number of jobs, but includes no legislative intent to encourage Alaskan hire. He encouraged alternatives to Alaska statute to ensure that Alaskan companies are involved. He said we need to encourage Alaska hire on these large projects. Number 2329 REPRESENTATIVE OGAN objected to the amendment for purposes of objection. Number 2338 REPRESENTATIVE GARY DAVIS said his concern was based on the past efforts of the legislature, to attempt to initiate local hire legislation, have failed. He said that private enterprise should be encouraged in a cooperative effort with the state to hire Alaskans. He proposed an amendment on page three, line four, "we resolve that the Governor is respectfully requested to discuss issues and structure related to the pipeline." TAPE 96-10, SIDE A Number 000 REPRESENTATIVE BRICE questioned the importance of the Governor's involvement, and said the word, "resolve," speaks specifically towards certain procedural and administrative types of functions versus the legislature requesting this from the owners of the project. Number 077 REPRESENTATIVE GARY DAVIS said he agreed with Representative Brice and suggested local hire could be inserted on page three, line nine, where it directs the Governor to meet with all parties to determine how the state can help facilitate an ANS gas transportation system. He said that local hire discussions could be incorporated in that section. He said he preferred adding line four to specifically address local hire policy. Number 130 REPRESENTATIVE BRICE suggested, under line four, something along the lines of, "that the Governor is respectfully requested to encourage developers and the Alaskan labor forces to implement a project-labor agreement covering the construction, operation and maintenance of the gas transmission line." Number 179 CHAIRMAN ROKEBERG asked Representative Kubina to take a sense of the will of this committee and amend CSHJR 54 in the next committee. Number 223 REPRESENTATIVE KUBINA said he would work with Representative G. Davis and Representative Brice to have language that they both agree on and included it in a CSHJR 54 for the next committee. Number 257 REPRESENTATIVE BRICE said he withdrew his amendment. He said the issue he addressed, raises the types of concerns that this committee should be looking at. Number 311 REPRESENTATIVE GARY DAVIS withdrew his amendment. He suggested some modifications in the language of the CSHJR 54, that on page one, line seven, instead of 26,000,000,000,000 it should read 26 trillion. He also added on page two, line five, he suggested changing the definitive wording to "would" or "could" provide. Number 405 CHAIRMAN ROKEBERG suggested that a copy of HJR 54 be directed to the Governor. He suggested including the fact that this would be the largest civil project in the history of the world in CSHJR 54. Number 520 REPRESENTATIVE BETTYE DAVIS made a motion to move CSHJR 54 out of the committee with attached fiscal note, individual recommendations and the proposed amendment. Hearing no objections the CSHJR 54 was moved out of the House Special Committee on Oil and Gas. ADJOURNMENT There being no further business to come before the House Oil & Gas Special Committee, Chairman Rokeberg adjourned the meeting at 11:52 a.m.