Legislature(1995 - 1996)
03/07/1995 11:12 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 AND GAS
March 7, 1995
11:12 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Scott Ogan, Vice-Chair
Representative Gary Davis
Representative Tom Brice
Representative Bettye Davis
Representative David Finkelstein
MEMBERS ABSENT
Representative Bill Williams
COMMITTEE CALENDAR
Committee work session with questions and answers on Oil and Gas
royalties by the Department of Law, and the Department of Natural
Resources.
WITNESS REGISTER
PATRICK COUGHLIN, Assistant Attorney General
Oil, Gas, and Mining Section
Department of Law
1031 West 4th Avenue
Anchorage, AK 99501
Telephone: (907) 269-5255
BILL VAN DYKE, Petroleum Manager
Division of Oil and Gas
Department of Natural Resources
3601 C street, Suite 1380
Anchorage, AK 99501
Telephone: (907) 762-2550
ACTION NARRATIVE
TAPE 95-7, SIDE A
Number 000
CHAIRMAN NORMAN ROKEBERG called the House Special Committee on Oil
and Gas to order at 11:12 a.m. The members present at the call to
order were Representative(s) Rokeberg, Ogan and Brice. Chairman
Rokeberg stated that today's meeting would be a work session.
Number 015
CHAIRMAN ROKEBERG informed committee members there were two people
from the Administration to give testimony. Chairman Rokeberg asked
if they would identify themselves for the record. The gentlemen
introduced themselves.
BILL VAN DYKE, Petroleum Manager, Division of Oil and Gas,
Department of Natural Resources, stated his responsibilities
included unitization, permitting, and royalty administration.
PATRICK COUGHLIN, Assistant Attorney General, Oil, Gas, and Mining
Section, Department of Law, said his primary client agent is the
Division of Oil and Gas.
Number 030
CHAIRMAN ROKEBERG informed the members their objective for the
meeting was to review HB 207 which is the Governor's royalty
reduction bill, and to raise questions for the commencement of the
hearings. Chairman Rokeberg stated this would be an informal
meeting, and proceeded to begin the discussion. The bill will be
introduced by Commissioner Shively on Thursday.
Number 056
CHAIRMAN ROKEBERG began the discussion by mentioning Section 1 of
the bill, which refers to the "hold harmless" provision of the
permanent fund which restricts the 25 or 50 percent depending on
the ages of the leases, in doing so it sets a floor under the
reduction of what royalties can be reduced to; number one and
number two provides income for the permanent fund in such a manner
that, for example, on a 12.5 percent royalty if you were at a 50
percent lease you could only go down to 6.25 percent. If the
commissioner then decided to lower the rate to 8 percent, the yield
would then be only 1.7 percent to the general fund, and 6.25
percent to the permanent fund if that were the circumstance. The
Chair had some concern for this because of our great need for
income in the state. He then asked Mr. Coughlin and Mr. Van Dyke
if they could provide some insight into this issue.
Number 088
MR. COUGHLIN said one of the principles that the Governor wanted to
see in regards to the bill was that the permanent fund would be
"held harmless," consequently, the bill was drafted so the amount
of royalties which would otherwise be paid to the permanent fund
would continue to be paid. This was basically how the provision
came into the bill. Mr. Coughlin said, I understand, if there was
not a provision to make this payment to the permanent fund then
there would have been some constitutional problem we would have
been forced to address.
Number 108
CHAIRMAN ROKEBERG stated as he understands it, the Attorney General
thinks there may be some constitutional problems if Section 1 is
deleted. He asked if this was correct.
MR. COUGHLIN stated it was indeed correct.
Number 111
REPRESENTATIVE TOM BRICE then asked if the royalty goes down, would
the share which goes to the permanent fund go down.
Number 115
CHAIRMAN ROKEBERG responded by stating the permanent fund would
receive the same share of the 25-50 as it does now. Right now the
statute creates an artificial floor. He said, "By this, I mean
that you can not go below that level of funding." This may not be
the best way to go about solving this problem. Chairman Rokeberg
then stated he would like to move on.
Number 137
MR. VAN DYKE stated at this point there is a provision for the
existing exploration incentive credits that are available to
companies, and when they cash in those credits, the permanent fund
gets paid and then they take their credit against the general fund.
This is not as explicit as this bill is.
Number 150
CHAIRMAN ROKEBERG mentioned we should look at this and see what
kind of relationship there is. He asked, in what instances does
this have a relationship with the severance tax? Chairman Rokeberg
said, for example, in the Cook Inlet, many of the wells have a
position under the ELF where there is a zero severance tax, but
they are still paying 12.5 percent royalty. But then there may be
other fields which have an existing severance tax in place albeit
reduced on this numeric order. Therefore, I would be curious to
know if there is any statistical interplay in the total package.
Number 165
MR. VAN DYKE stated there is some interplay. He mentioned the tax
payments would go up a little as the royalties went down.
Number 170
CHAIRMAN ROKEBERG informed the committee of some new information
that was given to the committee members before the meeting. The
handout to the committee was the "International Oil Tax Comparison
Study" which was prepared by Aberdeen University, and Gaffney Cline
Associates. He then asked Mr. Van Dyke if a model is available for
us to use, or if we have run any numbers on this topic.
Number 190
MR. VAN DYKE answered he was not sure if that model has been
preserved in its entirety, but there are models available. He
explained he has worked with staff from the Department of Revenue
when the study was done.
CHAIRMAN ROKEBERG then asked if the study has been updated due to
the new changes that have taken place in recent years in the model
itself.
MR. VAN DYKE responded that there are models being housed in the
Department of Revenue, and he would check on their public
availability.
CHAIRMAN ROKEBERG suggested he might check with Mr. Logsdon as
well.
Number 207
CHAIRMAN ROKEBERG then moved on, and mentioned there was some
unclear language on page 2, Section 2. Chairman Rokeberg mentioned
he was not sure if the language covers old fields and new fields.
He explained the Section in question was on lines 28-31.
Number 215
MR. COUGHLIN stated the new language beginning on line 28 is to
cover, what I would call a "new field," meaning a field that has
not gone into production whereas the previous statute covered
fields which had been producing.
Number 225
CHAIRMAN ROKEBERG asked if the distinction was that Section J
covered old existing fields, and not new fields. He was answered
in the affirmative.
CHAIRMAN ROKEBERG asked if by redrafting this, would they be
excluding old fields?
Number 228
MR. COUGHLIN said their intent was to give a greater amount of
flexibility to the commissioner so he could grant relief in a wider
range of circumstances.
Number 235
CHAIRMAN ROKEBERG suggested there should be the word "and" inserted
on line 29 to make the language clear.
Number 237
MR. COUGHLIN said he calls these things "trigger events."
Previously, there have been two trigger events. The first allowed
the commissioner in his discretion to grant relief to prolong the
economic life of a field. The second, where you see the word "or"
on line 31 allowed the commissioner to re-establish commercial
production from a field. He stated they have added a third prong
which allows the commissioner in his discretion to grant royalty
relief to a shut-in field that has not gone into production at all.
Number 248
CHAIRMAN ROKEBERG asked if the language provides for existing
fields.
MR. COUGHLIN said the Chairman was correct.
CHAIRMAN ROKEBERG asked if "or" is a disjunctive word.
Number 253
MR. COUGHLIN said the word "or" is from the previous version of the
statute, and has not changed. Before you could do this to prolong
the economic life of a field, "or" to re-establish commercial
production of a shut-in field. He stated, now you can do this for
those two, "or" a field which has not been previously produced.
Number 257
CHAIRMAN ROKEBERG stated, now we have existing producing fields,
shut-in fields, and new fields?
MR. COUGHLIN stated he was correct.
CHAIRMAN ROKEBERG explained he wanted to clarify that aspect of the
bill to make sure it would impact some of the older fields in the
state, for example the Cook Inlet fields.
Number 270
MR. COUGHLIN asked the Chairman if he could address this issue for
a moment. He said this was the specific purpose of the second
prong which was to prolong the economic life of an existing
producing field as costs increase and production decreases in the
later stages of the fields life.
Number 280
CHAIRMAN ROKEBERG said one of the areas of controversy which has
arisen is the disclosure of confidential financial and technical
data. He stated there were certain levels of comfort within the
industry about this issue. Chairman Rokeberg asked if it was
correct that the bill provides for a third party analysis of those
records. He also asked how this would work -- would it be done by
contract basis.
Number 290
MR. VAN DYKE stated if a third party evaluation was going to be
completed it would be done by contract, with an appropriate level
of confidentiality agreement as part of the contract.
Number 294
CHAIRMAN ROKEBERG said one of the concerns people have expressed is
the provision in the bill which provides the Commissioner of
Natural Resources almost absolute discretion in a type of black box
environment. He stated he has had some discussions where the topic
has been trying to open up that discretion. For example, could we
have a kind of triad decision making process with the Commissioner
of Revenue and the Attorney General. He asked what problems would
arise with a system like this?
Number 305
REPRESENTATIVE BRICE stated he understood what the Chairman was
trying to get at. He then said, they do however trust the Attorney
General to handle all oil settlements without oversight.
Number 311
CHAIRMAN ROKEBERG stated the question is, how can we put a collar
around the commissioner.
Number 312
REPRESENTATIVE BRICE asked, to make sure that he doesn't give the
farm away?
Number 313
CHAIRMAN ROKEBERG said, exactly! How do we fence in that decision,
this I think is the primary job of the legislature, so we will want
to look at mechanisms which would have that effect. Among those,
the Chairman stated, he remembered reading the Conoco request from
Milne Point for reduction, there was stipulated an establishment of
enumerated criteria which the commissioner could work with.
Chairman Rokeberg asked if they would be prepared to talk about
this issue in the future rather than just leave this matter to the
discretion of the commissioner. The reason for this is there are
no other stipulations other than oil prices that hold the
commissioner in check.
Number 331
MR. COUGHLIN stated the bill could be changed to add collars if
they wanted to, but there is more than complete discretion here.
The commissioner must make a finding that one of the three trigger
events exists, and that finding would have to be based on the
information presented by the companies before the commissioner
could even consider whether to grant royalties.
Number 340
CHAIRMAN ROKEBERG asked if there are existing regulations in place
now that provide the best finding process which you have to follow,
or do the additional regulations have to be bill created?
Number 343
MR. VAN DYKE stated there are no stipulated measures or hurdles
which would have to be met in the regulation right now.
CHAIRMAN ROKEBERG asked if they would have to draft regulations if
the bill was based as it is?
Number 347
MR. COUGHLIN said they would not have to.
Number 348
CHAIRMAN ROKEBERG stated it is for this reason we must fiddle with
the proposed legislation.
Number 351
MR. COUGHLIN noted there are a number of provisions in 38.05.180
where the commissioner makes a decision based on an analysis. This
is not the only place where this appears. For example, we have a
royalty reduction provision which allows the commissioner to reduce
royalties for coal. The standard in this case is simply whenever
a reduction is necessary to serve the public interest, he can grant
one.
Number 362
MR. VAN DYKE said two of the prongs have to do with either
re-establishing production from a shut-in field or prolonging the
life of a currently producing field. In those two cases, there is
a fair amount of public information on the table already. People
know what the rates are and what facilities have been constructed.
The new prong will certainly have less public information available
due to the fact it is a new field that has not begun production.
He stated the best interest finding would be a public document.
Number 374
MR. COUGHLIN asked if he could address this topic for a moment. He
said, for example, in Conoco, there were two versions of the
decisional document. There was a confidential version and a
nonconfidential version. The confidential version did in fact keep
confidential the information which Conoco had requested.
Number 378
CHAIRMAN ROKEBERG stated this decision was a denial. If this was
an approval, it would still be a confidential document?
Number 387
MR. COUGHLIN said the way this was drafted, it is up to the company
whether they want to keep the information confidential or not.
Typically the statutes now require us to keep technical data
confidential and we do keep financial data confidential at the
request of the company for obvious competitive reasons. He then
stated they would only keep it confidential upon the request of the
lessee.
Number 394
CHAIRMAN ROKEBERG stated he has been presented with an idea to gain
some additional oversight over the Commissioner of Natural
Resources. It was suggested that the Alaska Oil & Gas Conservation
Commission (AOGCC) become involved as part of the whole loop which
provides some oversight. He said he would like to receive some
input from the Administration. He added, the process would work by
letting the commissioner make his decision, and rather than it
being the final determination, they should send the finding to the
AOGCC and have them review it and either accept, reject, or return
if for further analysis. This would seemingly provide some
additional oversight to the singular discretion of one
commissioner. He said he would like the Attorney General's Office
to comment on whether putting the commission in the loop won't help
to insulate the process from action by third parties. This is
beneficial because the AOGCC is used to working with confidential
materials, and are accustomed to that process. This may even
increase the comfort zone of the commissioner himself.
Number 426
MR. VAN DYKE mentioned there is a royalty board, but stated the
board does not generally see the detailed information that comes
along with an application.
Number 427
CHAIRMAN ROKEBERG asked if the conservation commission works for
the commissioner, and stated this could be a problem if it did.
The Chairman was told it was an independent board. Chairman
Rokeberg then asked if they served at the pleasure of the Governor,
or if they can only be removed for cause. He was told that the
board does not serve at the pleasure of the Governor. Chairman
Rokeberg mentioned there was no sunset provision in this law. He
stated one of the concerns which has been brought up about not
having it, is that if there were a sunset provision it may appear
as if the bill is being passed for specific members of the
industry. In other words, if there is a tight sunset on this
legislation, it may look like a setup job for specific projects.
I do not think this is the case of this bill from the Governor, and
it certainly isn't going to be the case of this committee.
Number 446
REPRESENTATIVE BRICE said he thinks not having a sunset clause will
provide a certain level of stability to the industry. They won't
have to worry about having to fight for this legislation every two
or three years.
Number 448
CHAIRMAN ROKEBERG said he thinks the committee should discuss this
because he looks at this as a collar on the commissioner. He then
stated this also puts the legislature back into the loop. Chairman
Rokeberg asked if there should be a re-evaluation every five years,
or should they index the formulas we come up with. He said
Representative Joe Green will be working with the committee in his
capacity as Chairman of the House Resources Committee. He then
stated Representative Green has some formulaic questions which he
would like to work on. Chairman Rokeberg commented he noticed the
legislation calls for adjustment based on oil prices, but there
doesn't seem to be anything in the bill speaking to the fact that
we may have stumbled upon a mini-elephant. He said a firm would
pray for relief because it is a marginal field. Many times we
really don't know until the area is not only delineated, and the
reservoir is defined; it can turn out to be a better prospect than
originally thought. Therefore, I think there should be at least
narrative stipulation if not a formulaic stipulation to cover that
occurrence, and we would like some help on that.
CHAIRMAN ROKEBERG then stated there are obviously a lot of
variables in any kind of consideration like this, and we might want
to talk to the Department of Revenue about making sure all of these
variables are covered adequately in the legislation. Chairman
Rokeberg mentioned he would like to hear some arguments for or
against net profits, and also payout processes. He said he likes
the payout structure, but when you have a smaller field, by the
time you pay it out there may not be anything left for the state.
When you lower the royalty up front under a bell curve style of
formula, which seems to make a lot of sense, because lowering the
royalty at the beginning it helps the company recover their capital
cost, then it can go up for a higher adjustment on a sliding scale
for the state to recover there and then gradually go down as the
productivity of the field goes down to help the firm maintain the
field. This is another problem with the PFD floor, if you have a
bell curve formula and there is a floor at 6.25 percent, for
example, the Badami field has a variable royalty which is between
13.25 percent and 14.5 percent.
Number 498
MR. COUGHLIN said there are some leases with 12.5 percent rates and
some with 16 2/3 percent. He then said he believes the overall
effective rate on a combined basis is slightly under 14 percent.
Number 501
MR. VAN DYKE stated each lease is specific, it is either 16 2/3
percent or 12.5 percent. He then stated some are old leases and
some are new leases.
Number 509
CHAIRMAN ROKEBERG then asked if the field is unitized. Both Mr.
Coughlin and Mr. Van Dyke stated it was not unitized yet.
CHAIRMAN ROKEBERG then stated he would like to discuss delineated
fields. He asked if there was anything in statute that defined
delineation, and is there a need because of this statute to define
delineation.
Number 519
REPRESENTATIVE BRICE mentioned the committee was at a very good
position to start the discussion.
Number 523
CHAIRMAN ROKEBERG suggested to the committee that they read the
August 1994 Gaffney Cline executive summary, the AOGCC summary, and
the Division of Natural Resources rejection of the Conoco
application for royalty reduction.
MR. VAN DYKE handed out maps to the members of the committee.
Number 534
CHAIRMAN ROKEBERG reminded the committee members they had copies of
the existing statutes relating to this discussion. At this time
Chairman Rokeberg asked the members of the committee if they had
any questions they would like to ask.
Number 543
REPRESENTATIVE DAVID FINKELSTEIN stated he had a couple of
questions. He mentioned the permanent fund section of the statute,
and stated it was easier for him to visualize the kind of areas
which fall into the leases after 1979, specifically, areas which
have the potential to be developed but at this time are too
marginal. He asked about the leases that were granted before 1979,
what leases were those?
CHAIRMAN ROKEBERG stated there was a list of those leases in the
research report which was given to the members.
REPRESENTATIVE FINKELSTEIN asked about the types of old leases
which will benefit from this legislation. More specifically, which
of the old leases not being produced are close enough to the margin
to be produced.
Number 559
MR. COUGHLIN stated there could be one pre-1979 lease, yet he
believed they are all post-1979 leases.
CHAIRMAN ROKEBERG asked if that one lease was the Badami field.
MR. COUGHLIN said the Chairman was correct. Mr. Coughlin then
stated, in the application that BP has submitted, the area would
encompass leases which are virtually all, or primarily post-1979
leases.
Number 567
REPRESENTATIVE FINKELSTEIN asked about the way a lease works if it
was granted in the 1970s but not put into production; is there an
expiration provision in the lease?
Number 570
MR. VAN DYKE stated Representative Finkelstein was correct. He
continued, most of the North Slope leases have a ten year primary
term. If they are not proven to be productive within that ten year
period the lease will expire. Mr. Van Dyke mentioned there were
certain leases which have gone farther because there were some
problems with the state receiving title to the land. The leases
were issued before the state had title to some of the land, and the
leases have been in limbo. Mr. Van Dyke said there are some leases
in this category in the Colville River Delta, in what is labeled
Kuukpik (ph) on the map, and certainly Prudhoe, and Kaparuk are
older leases within those unit areas.
Number 584
REPRESENTATIVE FINKELSTEIN said this leads to the question of what
would be the significance of justifying this legislation to leases
after 1979 that are little known in this pre-1979 category, and
would there be any disadvantage in leaving out the pre-1979 leases.
Number 587
MR. VAN DYKE responded a majority of the Cook Inlet leases pre-
1979, however, most of those leases that are still in effect are
producing leases or have produced at some time in the past.
Number 594
REPRESENTATIVE FINKELSTEIN stated he was presenting a theory which
he is sure has some exceptions.
Number 600
MR. COUGHLIN stated they were the target of the law before this
amendment, and they remained a concern of the industry and the
Division of Natural Resources in trying to maximize revenues for
the state, because you can have a lease which has been producing
for a long time which would have been issued before 1979, and
because it has now started to decline in production profile curve,
it may need a royalty reduction which would be to the mutual
benefit of the state and to the lessee to reduce the royalty so we
can get increased production and more money. Otherwise, the
company may stop producing.
Number 610
CHAIRMAN ROKEBERG stated we could reach the point of a zero royalty
and a zero severance and still be worthwhile to produce because it
creates jobs. He asked Representative Finkelstein about the
comments he made about the shut-in wells.
Number 615
REPRESENTATIVE FINKELSTEIN stated he was trying to get to the
broader category of what is covered here and your point reminds me
there are plenty of marginal ones on the downside, as well.
CHAIRMAN ROKEBERG responded to Representative Finkelstein by
stating he has addressed a question he has had, which is, are there
shut-in wells whose leases have expired that might be subject to
reopening, and what scenario would they be under, the 25 or 50
percent?
MR. VAN DYKE said if the lease has expired, then it is gone.
CHAIRMAN ROKEBERG agreed and said there would presumably be a new
lease to reopen the shut-in well. He then asked if there were
expired leases with shut-in wells which might benefit from the
royalty reduction?
Number 625
MR. VAN DYKE stated, for the most part the wells would have been
plugged and abandoned so they would not be very easy to reenter.
Number 628
CHAIRMAN ROKEBERG mentioned when you plug a well on the North
Slope, there may still be the possibility of future production.
This probably would not be the case on the Kenai Peninsula due to
the amount that it would cost.
Number 630
MR. VAN DYKE said they have certainly reissued leases in the past,
and issued leases on land that contain plugged and abandoned wells.
Number 633
CHAIRMAN ROKEBERG stated he would like to bring up two other major
questions. First, is the issue of appealability, what it means and
its relationship to a third party and due process. This is because
the legislation says the decision of the commissioner is not
appealable, and we want to figure out what that means. The other
big issue, which this statute is silent on, but which I am very
concerned about is what I call the integrity of the bid leasing
process. In other words, if we enact this particular royalty bill
will this encourage them to engage in "bait-and-switch" bidding on
competitive lease sale where they can highball a bid to get control
of the acreage, then come back later and ask for a royalty
reduction. I think we must establish trust and faith, but this is
a concern I have. I would like to have some feedback on these
topics.
Number 654
MR. VAN DYKE said they would share some ideas with the committee.
He then mentioned, a lot of this depends on whether you are bidding
the royalty rate and then you bid higher than you wanted to, or
whether you are bidding cash and there is a fixed royalty rate to
start with.
Number 657
CHAIRMAN ROKEBERG stated it may be preferable to just have fixed
royalty bidding in the future and let the other variables come into
play. This, however, would only marginally affect future leases.
There are also some which it would have no affect on. He then
stated he was concerned about future bidding, and it may be a fix
to leave the rate at 12.5 percent without any other variable.
There are some other things that I won't bring up right now.
Number 666
CHAIRMAN ROKEBERG asked if there were any further questions.
Number 667
REPRESENTATIVE FINKELSTEIN mentioned he would like see if there was
any way the statements could be removed from the law could be
retained with some variations. He mentioned the two statements on
page 3 dealing with the possible economic return. He asked if
there was a way to put this into the context of long-term economic
return, or if there was a way to keep the concept but require a
long-term economic analysis.
Number 675
CHAIRMAN ROKEBERG asked about a reasonable rate of return for this
program.
CHAIRMAN ROKEBERG thanked Mr. Coughlin and Mr. Van Dyke for
attending.
ADJOURNMENT
At 11:55 a.m. Chairman Rokeberg adjourned the meeting.
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