Legislature(1993 - 1994)
04/06/1993 08:00 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL & GAS
April 6, 1993
8:00 a.m.
MEMBERS PRESENT
Representative Joe Green, Chairman
Representative Pete Kott, Vice-Chairman
Representative Harley Olberg
Representative Gary Davis
Representative Joe Sitton
MEMBERS ABSENT
Representative Jerry Sanders
Representative Jerry Mackie
COMMITTEE CALENDAR
Presentation by Bill Stewart, of Stewart Petroleum Company
and Bob Gardner, of ENSR Consulting & Engineering
WITNESS REGISTER
Mr. Bill Stewart, President
Stewart Petroleum Company
2550 Denali Street, Suite 1300
Anchorage, Alaska 99503
(907) 563-2830
POSITION STATEMENT: Provided information about his company;
commented on HB 199
Mr. Bob Gardner
Regional Program Manager for Oil & Gas Services
ENSR Consulting & Engineering
750 W. 2nd Avenue
Anchorage, Alaska 99501
(907) 276-3895
POSITION STATEMENT: Commented on HB 199
ACTION NARRATIVE
Tape 93-11, Side A
Number 000
CHAIRMAN JOE GREEN called the meeting to order at 8:08 a.m.,
members present were Representatives Green, Kott, Olberg,
Davis, and Sitton. He noted that Representative Gail
Phillips was in the audience.
Number 049
BILL STEWART: "Mr. Chairman and members of the Oil & Gas
Committee, my name is Bill Stewart, PRESIDENT OF STEWART
PETROLEUM COMPANY. We are a small independent oil and gas
exploration and production company based in Alaska. We are
active in Alaska and seven other states. Our current area
of interest within Alaska is Cook Inlet Basin. We have been
fortunate in discovering an oil field of significant size on
the west side of Cook Inlet and are in the early stages of
development of that field (named West McArthur River Oil
Field) at the present time. Production of the discovery
well is about to commence and, according to available
information, we are the first independent company to
establish commercial oil production in Alaska in modern
times.
HB 199: OIL & GAS EXPLORATION LICENSES/LEASES
"We are familiar with House Bill 199 which provides for oil
and gas exploration licensing. There is nothing wrong with
the concept of exploration licensing and it has been used
successfully in various places around the world. There are
variations on them and such licenses are sometimes referred
to as 'concessions' or 'work concessions.' I am familiar
with the program as it exists in Canada on federal or
'Queen's' lands and, to a lesser degree, I am familiar with
the programs in Australia and in the North Sea.
"With respect to Alaska, any licensing program should not
include the mature areas which are the North Slope and Cook
Inlet Basin. Such a program is appropriate for, and should
be utilized in, frontier areas. Alaska has in the order of
20 sedimentary basins. Only half a dozen have been explored
and only two have been extensively explored.
"While the concept of exploration licensing has merit for
the State of Alaska, certain provisions of House Bill 199
will preclude participation in the arrangement by
independent producers and probably by the smaller of the
major oil companies, as follows:
"1. The bill (HB 199) as drafted allows for licenses
covering as much as 500,000 acres. With the
contemplated license fee in the amount of $1.00
per acre, many independents will not pursue the
arrangement further. The entire Prudhoe Bay
field, the largest oil field on the North American
continent, covers less than half of the 500,000
acre maximum, and the likelihood of discovering
another Prudhoe Bay is highly unlikely. A license
limit of 100,000 acres is more appropriate and
will allow competition by smaller companies.
Also, reduction of the license area over time as
the exploration process defines specific prospects
is in order. In addition, total land under
license to any single licensee should be limited
to, say, 500,000 acres to prevent 'warehousing' of
acreage.
"2. The bill (HB 199) as drafted, provides for an
obligation to perform a specified minimum work
commitment, expressed in dollars. We submit that
the work commitment should be expressed in terms
of activity (i.e., 35 miles of seismic work plus
one exploratory well to be drilled to a depth of
10,000 feet). Independents can operate cheaper
than major companies. The bill as drafted
punishes efficiency. If we were to bid in terms
of dollars for the work program just cited, we
might bid $1.5 million for the seismic and $10
million for drilling, for a total of $11.5
million. If we were able, through efficiency,
innovation, or luck to perform the entire program
for $9.5 million, the $2 million 'savings' would
be forfeited to the state of Alaska under terms of
the bill.
"3. The required 'performance bond or other security
in favor of the state in an amount not less than
the amount of work to be performed' will, of
course, preclude participation by smaller
companies. Bonds of that nature are simply not
available in today's market. We are a small but
successful company with a good financial
statement, but we were unable to obtain, at least
initially, a $100,000 drilling bond, which is
currently required as a condition of the drilling
permit. We satisfied the obligation by pledging a
certificate of deposit to the state of Alaska. We
could not possibly pledge the $11.5 million
utilized in our example, and allow those funds to
be tied up for long periods of time, plus do the
actual work. That arrangement amounts to paying
double for the activity. We suggest a performance
bond posted annually in the amount of 10% of
estimated expenditures for the ensuing year.
"Setting aside our 'example' for the moment and
looking at reality, our company has expended, or
caused to be expended, close to $20 million in
connection with the West McArthur River project.
If we had been required to post a bond in that
amount, the project would never have happened.
During periods of drilling, approximately 40 full-
time on-site jobs are created together with
approximately 20 support jobs in Anchorage or
Kenai. Pipeline construction involves
approximately 25 full-time on-site jobs and 15
support jobs. After full development of the
field, about 15 permanent on-site and support jobs
will be involved in producing operations. Upon
full development of this field, we estimate taxes
and royalties to the state of Alaska will exceed
$1 million per month. Total revenues to the state
are estimated at $250 million over field life.
"4. Finally, the oral outcry arrangement provided in
HB 199 will, again, preclude real competition by
the independent sector. We submit that the sealed
bid arrangement presently utilized in the state's
competitive oil and gas leasing program is more
appropriate.
Number 200
"As an independent producer, we are in touch with many other
independent producers. There are roughly 10,000 members in
IPAA, the Independent Petroleum Association of America.
Most of the IPAA members will never venture to Alaska, but
in the wake of our success, we are beginning to hear
expressions of interest from quite a few who have the
financial capability of operating or investing here.
Exploration licensing with the modifications we have
suggested will attract those independents. Exploration
licensing as currently set forth in House Bill 199 will
discourage them.
"Thank you for hearing us. We look forward to continued
work with the committee in this matter and are prepared to
assist with specific language to accomplish these suggested
changes."
Number 250
REPRESENTATIVE JOE SITTON asked Mr. Stewart to elaborate on
the mature areas that he previously mentioned.
Number 264
MR. STEWART said the Division of Oil & Gas has recently
worked with industry and determined upon the Umiak baseline
- anything North of the Umiak baseline, would be excluded.
There is also an exclusion for the entire Cook Inlet Basin.
Mr. Stewart said these arrangements were fine with his
company, and the rest of the industry with the exception of
one large company.
Number 274
REPRESENTATIVE SITTON felt there was potential with the
different parties for compromise on things like the oil
outcry and the performance bond.
Number 280
CHAIRMAN GREEN agreed with Representative Sitton and stated
there was a rewrite of HB 199 that takes these things into
consideration.
Number 282
REPRESENTATIVE SITTON asked why Cook Inlet would be excluded
and not the other.
Number 284
MR. STEWART stated the portion of the North Slope north of
the Umiak baseline is in about the same status in terms of
level of exploration and in these instances about specific
prospects not broad regional studies, whereby one company
can lock up 500,000 acres and hold it for 10 years and
exclude it from everyone else. He further stated that these
two areas are much further along than the other 18 basins he
previously mentioned.
Number 293
REPRESENTATIVE SITTON asked how he would feel if the size
maximum was changed to 100,000 acres.
Number 295
MR. STEWART said he would still not recommend it in those
two specific areas. He felt this would be fine in the
frontier areas, and that the frontier areas are a very
different operation.
Number 303
REPRESENTATIVE SITTON said one large oil company has said
that the other companies are objecting to this because this
one large oil company has the money and commitment to do the
exploration and nobody else does, and they want them to
"hold their cards until the other companies can belly up to
the table."
Number 311
MR. STEWART said his testimony last week in the Senate Oil &
Gas Committee was absolutely parallel to all the other oil
companies. These other oil companies do not want to see
Cook Inlet or North Slope involved nor do they want to see
large warehousing of acreage happening.
Number 324
CHAIRMAN GREEN stated his question does not necessarily
reflect his position, but more what he has heard; that if
you rely totally on the undrilled basins that the state
have, there may be a reluctance to go in there because there
is no way to get a discovery to a market.
Number 331
MR. STEWART said this was another issue altogether and
something that industry and specific companies will have to
make.
Number 337
CHAIRMAN GREEN stated the way HB 199 is currently written it
requires bonding for the total 10 year work commitment,
which is extremely costly, and asked Mr. Stewart what he
thought about an annual bond. Then comes that year or
years, in this program that might be laid out where you have
a lot of seismic and you also have a well; is there any
possibility that an oil company, that is not well known,
comes to Alaska and bid a 10% bond, but they cannot make it,
so they pull out.
Number 351
MR. STEWART said that then the state would have a couple
million bucks and still have their land. He said that the
mere speculators will not play around with $1 or $2 million.
He further stated he did not feel that new, unknown, oil
companies would even come to Alaska.
Number 370
CHAIRMAN GREEN asked, "If you went from a dollar to a work
commitment could you determine the amount of bond?"
Number 372
MR. STEWART stated, "You would have to accompany your
proposal with an estimate." He also stated there were
people in the state that can look it over to see if it was
reasonable.
Number 379
CHAIRMAN GREEN asked if there were two or three companies
trying for the same area, would Mr. Stewart suggest the
awarding be done on a work commitment or a dollar amount.
Number 380
MR. STEWART said it would be done on the scope of work.
Number 383
CHAIRMAN GREEN asked how to equate someone who says they
will do a lot of seismic and one well and someone who says
they will do two wells with a little seismic.
MR. STEWART said it was subjective and would be done by a
board. Mr. Stewart said, "At this point you could
synthesize the two or three proposals and say this is what
we want done and see who shows up at the table."
Number 395
CHAIRMAN GREEN felt the latter part might preclude the state
from possible legal action down the road.
Number 399
MR. STEWART thought it would be rare to have two or more on
the same parcel of land.
Number 402
REPRESENTATIVE SITTON asked how the State can encourage the
recipient of these licenses to do the work the first year
and not the ninth year or whatever.
Number 409
MR. STEWART stated the bidding process could easily include
a work time-line.
Number 416
REPRESENTATIVE SITTON asked what would motivate Arco, for
example, to get one of these licenses and not do anything up
front.
Number 418
MR. STEWART said, "Excluding all the rest of the oil
companies."
Number 422
CHAIRMAN GREEN said he has talked about trying to encourage
earlier work and maybe even present working the amount so
the person who bids a big job in 10 years may get outbid by
someone who does a smaller job in three years.
Number 429
MR. STEWART asked Chairman Green if he meant on the same
parcel.
Number 431
CHAIRMAN GREEN said yes and asked Mr. Stewart whether from
an independent standpoint some sort of an incentive like
that would make a difference.
Number 432
MR. STEWART said that yes, he thought this would cause
competition to happen.
Number 434
REPRESENTATIVE SITTON asked Chairman Green what the 10 year
period was for.
CHAIRMAN GREEN stated the first year you look things over,
the second year you send geologists out, so by the time the
oil company is ready to do much, you're in the third or
fourth year, and this is under the best of circumstances.
Chairman Green further stated there were many hurdles to go
through, like permitting.
Number 443
REPRESENTATIVE SITTON felt the horizontal permitting process
needs some changing.
Number 445
CHAIRMAN GREEN said, "Yes, and it is not fair to someone
bidding on a wide area leasing, or concession leasing, to
say the government is now going to take care of this
permitting process."
Number 449
MR. STEWART stated he started their project in 1985, "now
eight years later we are coming into production."
Number 452
CHAIRMAN GREEN asked Mr. Stewart if they put their big money
in the well two and a half years ago.
Number 454
MR. STEWART said, "Yes, but the geological work started in
1985."
Number 455
CHAIRMAN GREEN asked Mr. Stewart if dollars were going out
for eight years and just now starting to get some return.
Number 457
MR. STEWART said this was not unusual in Alaska.
Number 458
REPRESENTATIVE SITTON asked how it would be somewhere else,
for example, Texas.
Number 459
MR. STEWART said the geological work is non-specific, but
once you make a discovery you are on stream in two weeks.
Number 464
REPRESENTATIVE SITTON stated this crosses party lines when
these regulations come up and that everyone is interested in
getting out of all these regulations.
Number 467
MR. STEWART said he has 22 permits involved in this
particular project so far, and if it was for 22 chores to do
it would not be too bad, but there are conflict situations
where you get caught in between agencies all the time.
REPRESENTATIVE SITTON asked Mr. Stewart if he had to deal
with the defense as opposed to a situation like say in
Texas.
Number 478
MR. STEWART said in Texas you're not dealing with Federal
lands. He favored the lead agency concept. One agency
where you go to that agency and tell them what you want to
do. At that time that agency contacts all the others for
their comments and concerns. He further stated that one
agency should be the Alaska Oil and Gas Conservation
Committee (AOGCC), that they are the only people who
understand what the oil companies do.
MR STEWART further stated that the biggest problem the oil
companies have is in the Department of Environmental
Conservation (DEC). That ever since the oil spill it has
mushroomed beyond belief with the DEC. He said he dates it
back to the first Hammond administration. It has been a
very slow growth in the regulatory "rain forest" then when
the oil spill happened it went crazy.
Number 499
REPRESENTATIVE SITTON appreciated Mr. Stewart's point. He
said everyone loved and admired Jay Hammond, but people
forget that he was anti-development.
Number 501
CHAIRMAN GREEN asked Mr. Stewart if Alaska had a lead
agency, like some years ago there was a Coastal Zone
Overview ADGC (Alaska Division of Governmental Coordination)
that was supposed to be a permit collector, but they really
have no authority - they are more like an escrow.
Number 507
MR. STEWART felt the AOGCC should be in this role.
Number 508
CHAIRMAN GREEN asked if he felt this agency would have
enough teeth; that when say, Stewart Petroleum comes to the
AOGCC, that the AOGCC, or whoever is set up as a lead agency
then becomes a proponent; will they have the authority to
move things.
Number 512
MR. STEWART stated this was something that would have to be
done through legislation, "but it is what we want."
Number 514
REPRESENTATIVE SITTON asked, "But we do not necessarily want
to create an energy czar, or do we?"
Number 515
MR. STEWART said he would not call it a czar, "I would call
it an agency that understands what the oil companies do, and
wants to see activity and move it along."
Number 524
REPRESENTATIVE SITTON asked Mr. Stewart if they prefer
committee work rather than dealing with a single person.
Number 525
MR. STEWART said he runs into situations where one
personalty could stop them. "If you run into one person who
has the mentality of stop or go, I feel they elevate
themselves from regulator to policy maker at that point."
He further stated, "They do not have to answer to anyone and
this makes them very powerful people."
Number 533
REPRESENTATIVE SITTON asked, "With a pro-development
governor and a pro-development the Department of Natural
Resources (DNR) Commissioner, how come things have not
loosened up along the process?"
Number 536
MR. STEWART said it does not filter down to the rank and
file. He stated he has been personally disappointed in
this. "The DNR Commissioner may be pro-development, but he
does not understand what the oil companies do," he added.
Number 542
CHAIRMAN GREEN asked Mr. Stewart, "If there was a lead
agency concept and a problem came up between getting
something done in an environmentally satisfactory manner but
they were confronted by some of these underlings of maybe
DEC, or some other organization, do you foresee that moving
ahead would jeopardize the applicants position with the
Federal Government?"
Number 551
MR. STEWART felt he could not answer this question.
"Obviously, we are talking brand new legislation and many of
the statutes as they exist are pretty good, it is the
regulations that they are under and the way they are
implemented that causes the grief," he said.
Number 558
REPRESENTATIVE SITTON said hopefully there will be something
on the ballot in the next general election that would ask
the people to give the authority to overturn regulations.
Number 561
MR. STEWART said that Independents have been around for a
long time in the state of Alaska, and that he is "doing a
list of Independents." So far he has come up with 38 that
have drilled wells here in Alaska, going all the way back to
1898.
Number 588
REPRESENTATIVE SITTON said the only other independent he
knew of just speculates, and asked if this was prevalent or
not.
Number 591
MR. STEWART stated there used to be non-competitive leasing
in Alaska, years ago. He stated he thought he knew who
Representative Sitton was referring to in Fairbanks. Some
of this still happens down south. There are still non-
competitive leasing programs, grab-bag deals, he added.
Number 602
REPRESENTATIVE SITTON stated, "Even with the reduction to
the acreage to 100,000 is that still too much?"
Number 603
MR. STEWART said the normal speculator would not get
involved with that to lose it forever; to have to do a bond
and forfeit the bond.
Number 606
REPRESENTATIVE SITTON told Mr. Stewart he is very grateful
for the work that he has done and, "for your independence,
discovery and production."
Number 613
CHAIRMAN GREEN talked about some of the "ridiculous
regulations," of the government entity that takes care of
spills on water. He said, "If you have a sheen, this is an
offensive and you will be fined, but if someone accidentally
dumps 20 or 30 times this amount and it can't be seen
because it is dark, there is no problem."
Number 621
REPRESENTATIVE SITTON asked if this was a Federal Agency
that Chairman Green was referring to. And asked if it was
the Coast Guard or the Environmental Protection Agency.
Number 623
CHAIRMAN GREEN stated it was one of those.
Number 625
MR. STEWART stated the Exxon Valdez should have been set on
fire.
Number 626
CHAIRMAN GREEN stated this was a very interesting point
because that is exactly the thing to do with a major spill
like that and that is why there is so much burn boom around.
Number 635
CHAIRMAN GREEN thanked Mr. Stewart for coming and introduced
Mr. Bob Gardner.
Number 647
BOB GARDNER: "Mr. Chairman, Members of the House Oil & Gas
Committee; my name is Robert Gardner. I am the REGIONAL
PROGRAM MANAGER FOR OIL AND GAS SERVICES FOR ENSR CONSULTING
AND ENGINEERING. Thank you for the opportunity to present
our comments on House Bill 199, the exploration licensing
bill which is before you. My comments will be from the
perspective of the service and support sides for the
petroleum industry.
"We believe that exploration licensing is a concept that can
stimulate exploratory activities and accelerate development
in the frontier basins of our state. These basins are
mainly in Interior Alaska and are currently unexplored or
only marginally explored. Properly implemented, exploration
licensing would attract new operators to Alaska, in addition
to being attractive to oil and gas operators already here.
From the service and support perspective we encourage the
state to adopt programs, such as exploration licensing,
which will broaden the base of clients and customers we
serve. Unfortunately, with the single exception of reducing
the time required to explore for and develop oil and gas
deposits, House Bill 199, in its present form, does little
to achieve this goal. Specifically, our objections are as
follows:
"1. The dollar for dollar bond required to ensure that the
work commitment is discharged, is a disincentive to all
independent operators, and I imagine to many major
companies as well. Since the only variable in the
exploration license bidding proces is the work
commitment, and this work commitment is to be
considered mainly in light of dollars obligated, it
follows that the deepest pocket wins. The required
dollar for dollar bond simply ups the ante.
Incidentally, bonds, in the size we are anticipating,
are nearly impossible to obtain except by the largest
of companies.
"In addition, as the bill (HB 199) now stands, if an
operator secures a license and performs the work
commitment in its entirety, but doesn't spend all of
the obligated dollars in doing so (in other words he
does an excellent job of managing his operations), the
difference is subject to forfeit. In our opinion the
scope of work and not dollars obligated should be the
variable here. We agree that some form of bond should
be required to ensure that the work gets done. In our
opinion that bond should be limited to 10% of the
amount of work scheduled to be performed each year or
one million dollars, whichever is more.
"Proponents of the legislation (HB 199) in its present
form say the dollar for dollar bond is necessary to
keep "speculators" out of the exploration licensing
program. I submit that there may be some confusion
here between independent operators and speculators. We
believe a one million dollar bond will easily flush out
the speculators and not prove a major disincentive to
independent operator participation in the program.
"2. As it is presently drafted, House Bill 199 would allow
for the "warehousing" or "banking" of large tracts of
land up to 500,000 acres under a 10 year exploration
license, provided the work commitment was discharged as
planned and the dollar for dollar bond maintained. We
believe some shrinking of the license area, triggered
by work commitment milestones, would be appropriate.
In other words, as the exploration license moves
through the exploratory process and toward the possible
eventual conversion of parts of the license area to a
lease, there is some specific percentage of the acreage
in the original license area relinquished annually.
This would encourage further industry interest in the
surrendered areas and prevent the amassing of huge
tracts of land by the licensee with the greatest
financial resources.
"3. House Bill 199 in the present form gives extraordinary
discretionary powers to the Commissioner of the
Department of Natural Resources. As you know, this is
an appointed position, and the possibility therefore
exists that the way in which the exploration licensing
program is administered can be subject to political
pressures. We encourage your committee to consider the
establishment of an independent board made up of
knowledgeable Department of Natural Resources and
private sector participants to administer the program.
"4. As I remember, the exploration licensing concept
developed from a desire to stimulate activity in the
unexplored basins of Alaska. The Department of Natural
Resources currently has an active and effective five
year oil and gas leasing program. Obviously the
exploration licensing program and the five year leasing
program have to interface in some manner. As presently
drafted, House Bill 199 essentially opens all areas of
the state to exploration license applications. While a
strong case can be made that both Cook Inlet and the
North Slope are inadequately explored, we believe these
areas should not be subject to exploration licensing.
"The possible exception might be those areas of the
North Slope lying south of the presently producing
areas and encompassing the Arctic foothills belt.
Activities in Cook Inlet Basin and on the North Slope
north of the 8N Township are best left to the existing
state leasing program. Since the existing bill does
not specifically define the term 'insufficient or
undocumented geologic and geophysical information,' the
potential is there for the deepest pocket to tie up
most of the unleased land in areas that already have
some proven production. We believe this is not an
appropriate role for exploration licensing and it will
lead to fewer, rather than more, operators being
involved in the state.
Number 635
"In summary, we support exploration licensing as a vehicle
to encourage and stimulate exploratory activity in frontier
areas of Alaska. We believe exploration licensing will
improve the health of oil field service and support
companies by providing expanded work opportunities. We
encourage your committee to consider a committee substitute
for House Bill 199 which would address the inequities in the
current bill which I have described, and basically level the
playing field. I would be honored to work with your staff
to develop the language of these changes, if you feel these
concerns have merit."
TAPE 93-11, SIDE B
Number 047
REPRESENTATIVE SITTON asked Mr. Gardner if he and Mr.
Stewart work together.
Number 050
MR. GARDNER stated he works for ENSR Consulting &
Engineering and Stewart Petroleum is one of their clients.
Number 055
REPRESENTATIVE SITTON asked if a czar is being created, a
single individual that would be able to be corrupt.
Number 063
MR. GARDNER said going back to Mr. Stewart's comments
earlier, the program needs to be administered in as non-
political a manner as possible. He did not feel it would be
beneficial to have someone handle the program that is
subject to political pressures or is appointed by a
governor.
Number 077
REPRESENTATIVE SITTON asked Mr. Gardner when he mentioned
the independent board, "Were you actually thinking AOGCC?"
Number 080
MR. GARDNER stated AOGCC would work.
Number 081
REPRESENTATIVE SITTON asked what type of representatives
AOGCC has.
Number 083
CHAIRMAN GREEN said the three commissioner positions are
made up of a registered petroleum engineer, a registered
geologist, and the other can be either or neither of those.
Number 089
MR. GARDNER stated it is not a panel involving industry
people.
Number 095
CHAIRMAN GREEN stated from time to time there have been some
allegations that the conservation commission is too pro-
industry. He then asked, "Do you think by doing this it
would cause all kind of problems? Would it be better to
have that board meet independently with someone else so it
could defuse the thought that it is all an industry ploy?"
Number 107
MR. GARDNER replied, "A board like the Permanent Fund which
operates pretty independently and something along those
lines."
ADJOURNMENT
Number 126
CHAIRMAN GREEN thank Mr. Gardner and Mr. Stewart for
speaking and adjourned the meeting at 9:00 a.m.
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