02/01/2002 01:15 PM House RES
| Audio | Topic |
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 1, 2002
1:15 p.m.
MEMBERS PRESENT
Representative Beverly Masek, Co-Chair
Representative Drew Scalzi, Co-Chair
Representative Hugh Fate
Representative Joe Green
Representative Lesil McGuire
Representative Beth Kerttula
Representative Mary Kapsner
MEMBERS ABSENT
Representative Mike Chenault
Representative Gary Stevens
COMMITTEE CALENDAR
HOUSE BILL NO. 307
"An Act delaying to June 30, 2007, the last date by which
hydrocarbon exploration geophysical work must be performed or
drilling of a stratigraphic test well or exploratory well must
be completed in order for a person to qualify for an exploration
incentive credit."
- MOVED HB 307 OUT OF COMMITTEE
HOUSE BILL NO. 232
"An Act permitting state residents to purchase remote
recreational cabin sites."
- HEARD AND HELD; ASSIGNED TO SUBCOMMITTEE
HOUSE BILL NO. 308
"An Act extending to discoveries of oil or gas in the Tanana
River drainage basin the discovery royalty credits that are
authorized for lessees of state land drilling exploratory wells
and making the first discovery of oil or gas in an oil or gas
pool and for licensees under oil and gas exploration licenses
making the first discovery of oil or gas in an oil or gas pool
that convert those licenses to oil and gas leases."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 307
SHORT TITLE:OIL/GAS EXPLORATION INCENTIVE CREDIT
SPONSOR(S): REPRESENTATIVE(S)FATE
Jrn-Date Jrn-Page Action
01/14/02 1955 (H) PREFILE RELEASED 1/4/02
01/14/02 1955 (H) READ THE FIRST TIME -
REFERRALS
01/14/02 1955 (H) O&G, RES, FIN
01/16/02 1992 (H) COSPONSOR(S): DAVIES
01/31/02 (H) O&G AT 10:00 AM CAPITOL 124
01/31/02 (H) Moved Out of Committee
01/31/02 (H) MINUTE(O&G)
02/01/02 2113 (H) O&G RPT 6DP 1NR
02/01/02 2114 (H) DP: CHENAULT, DYSON, KOHRING,
FATE,
02/01/02 2114 (H) JOULE, OGAN; NR: GUESS
02/01/02 2114 (H) FN1: INDETERMINATE(DNR)
02/01/02 2114 (H) FN2: INDETERMINATE(REV)
02/01/02 2128 (H) COSPONSOR(S): DYSON, GREEN
02/01/02 (H) RES AT 1:00 PM CAPITOL 124
BILL: HB 232
SHORT TITLE:REMOTE RECREATIONAL CABIN SITE SALES
SPONSOR(S): REPRESENTATIVE(S)FATE
Jrn-Date Jrn-Page Action
04/05/01 0860 (H) READ THE FIRST TIME -
REFERRALS
04/05/01 0860 (H) RES, FIN
04/05/01 0860 (H) REFERRED TO RESOURCES
04/06/01 0890 (H) COSPONSOR(S): WILSON
04/11/01 (H) RES AT 1:00 PM CAPITOL 124
04/11/01 (H) <Bill Postponed>
04/20/01 (H) RES AT 1:00 PM CAPITOL 124
04/20/01 (H) Scheduled But Not Heard
01/23/02 (H) RES AT 1:00 PM CAPITOL 124
01/23/02 (H) Scheduled But Not Heard
02/01/02 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources (DNR)
550 West Seventh Avenue, Suite 800
Anchorage, Alaska 99501-3560
POSITION STATEMENT: Testified on HB 307.
DICK MYLIUS, Resource Assessment & Development Manager
Division of Mining, Land and Water
Department of Natural Resources
550 West 7th Avenue Suite 1050
Anchorage, Alaska 99501-3579
POSITION STATEMENT: Testified that DNR is concerned that HB 232
duplicates an existing program that is working.
ACTION NARRATIVE
TAPE 02-4, SIDE A
Number 0001
CO-CHAIR BEVERLY MASEK called the House Resources Standing
Committee meeting to order at 1:15 p.m. Representatives Masek,
Scalzi, Fate, Green, McGuire, and Kerttula were present at the
call to order. Representative Kapsner arrived as the meeting
was in progress.
HB 307-OIL/GAS EXPLORATION INCENTIVE CREDIT
Number 0010
CO-CHAIR MASEK announced that the first order of business before
the committee would be HOUSE BILL NO. 307, "An Act delaying to
June 30, 2007, the last date by which hydrocarbon exploration
geophysical work must be performed or drilling of a
stratigraphic test well or exploratory well must be completed in
order for a person to qualify for an exploration incentive
credit."
Number 0212
REPRESENTATIVE FATE, speaking as the sponsor, explained that HB
307 is an extension of a bill already in existence that sunsets
in 2004; this bill extends the life of that bill to 2007. He
explained that this bill provides an exploration incentive
credit (EIC) to the industry. He said the [EIC] already exists
and this bill extends the incentive for [an additional] three
years. He said the [EIC] allows a company to explore in the
Nenana basin, which he suggested has an extremely high
potential. Currently, there is only one company to bid on the
area and therefore only one explorer in the Nenana basin. He
indicated that this legislation would allocate money to be used
as an incentive credit toward future royalties. He noted that
Mark Myers was on teleconference and could provide the details.
REPRESENTATIVE FATE referred to a previous debate in the House
Special Committee on Oil and Gas; he suggested that the
committee was neutral on this bill and that is why it was moved
out.
Number 0389
REPRESENTATIVE GREEN asked if Mark Myers could explain what the
legislation is granting with the EIC.
Number 0401
CO-CHAIR MASEK announced that Representative Kapsner had
arrived.
Number 0434
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, testified via teleconference. He informed
the committee that HB 307 does extend the economic incentive
credit program that was passed by the legislature in 1994. He
said the [EIC] had a ten-year period, which is slated to sunset
in 2004. He explained that the EIC grants a credit against
either royalties, taxes, lease-bonuses, or rentals; the credit
can be up to 50 percent of the cost of certain activities.
Those activities include: drilling wells, exploration,
stratigraphic test wells, or geophysical information such as
seismic data.
MR. MYERS said the [EIC] can be up to 50 percent of the cost of
the exploration well, the stratigraphic test well, or the
seismic data on "unleased" state land; the [EIC] can be up to 25
percent on federal or Native-owned land. He explained that the
program was designed to limit the total exposure to $30 million;
an individual project, which was never defined, can get up to $5
million total in credit.
Number 0576
MR. MYERS suggested that the legislative intent behind the
program was fundamental for the state to acquire information
that it would not otherwise be able to acquire regarding oil and
gas. He said the state takes that data and shows it to third
parties to bolster competition in the industry. He offered some
history about this bill. He said this [legislation is based on
a] stratigraphic test well program, which is a program that
companies participate in before the exploration season or
exploration in an area.
MR. MYERS explained that the [exploration company] would go into
an "unleased" basin or area, drill a well as a consortium among
10 or 12 companies, for example, and drill deliberately in a
nonprospective area where the company can understand the
representative geology. Since [the area] would be "unleased,"
the [exploration company] would not want to find commercial
hydrocarbons, but would want to test and see what the geology
looked like. He said the [exploration company] would take that
information and use it in its evaluation prior to a competitive
lease sale to determine where and how much it wants to bid.
Number 0670
MR. MYERS explained that the concept of the [program] was that
prior to a lease sale, an [exploration company] might drill in
some of the Interior basins [using this type of] test. He said
there wasn't the same interest that there was in the past,
especially in the offshore basins where a dozen different
companies are participating. He said in those cases the state
could accelerate an [exploration company's] drilling one of the
wells or subsidize the drilling of the well up to 50 percent on
unleased state lands, or to a lesser extent on federal or Native
lands. Having the criteria for evaluating this program is what
is valuable about this information to the state.
MR. MYERS said Andex Resources, the company interested in
[drilling] in Nenana basin, has proposed [obtaining] an
exploration license from the state. He said the [legislature]
enacted this program in 1994; it allows exclusive exploration
rights to an individual company for up to 5,000 acres. He
explained that Andex Resources has applied for such a license
and it is anticipated that if all goes well the [license] will
be granted over [a period of time].
MR. MYERS said in doing this, the state has to issue a best-
interest finding, which means it is in the state's best interest
to issue the license. He explained that a license is different
from a conventional lease because the state receives a one-time
application fee of $1 per acre, and then receives no bonuses or
rentals from the land.
MR. MYERS said the state receives a work commitment from the
company, which is the competitive part. He explained that when
a company applies for a license the state publishes information
that announces that the license is available and [accepts bids
on which company] will spend the most money on legitimate
exploration activities. The company will typically bid so many
millions of dollars; Andex Resources bid approximately $2.5
million, which doesn't go to the state but instead goes into its
exploration program. He said in the areas that the state had
deemed that exploration wasn't rapidly occurring or where it
wasn't going to have an area wide sale, it had a mechanism to
offer a large amount of acreage as an incentive to development.
Number 0808
MR. MYERS said in a typical case the exploration license is a
very positive incentive; in this case, it is estimated to be
worth about $10.5 million in terms of what the state would
normally have gotten if it had received its minimum $5 bid per
acre and had received the normal rentals during the period of a
typical seven-year license. He reiterated that he thinks it is
a good inducement. He expressed enthusiasm because there is a
current applicant that is in the process of attempting to obtain
a license.
MR. MYERS explained that the way the exploration credit would
apply in this particular case. Prior to drilling a well, the
applicant would come to the state and announce that it was
requesting an EIC. He said the state would then have to [review
it] and the Department of Natural Resources (DNR) commissioner
would determine whether the information was of sufficient value
to the state that it wanted to contribute to the cost of the
well. The commissioner would have the discretion to give up to
50 percent [EIC] on leased state land or 25 percent of the cost
of the well if it was drilled on privately owned or federally
owned land; the cost will be determined on a footage basis by
the well or by line-mile or square mile on the seismic data.
Number 0914
MR. MYERS reiterated that if the state values the information,
it could contribute to the cost of the well. He suggested that
the state has other advantages such as being allowed to show the
data to third parties, which in some cases could be a
significant value to the state. If the well was drilled on
"unleased" land and the state was going to have a conventional
sale in the area and wanted to promote the well, it couldn't
give the data to a third party but it could show the third party
the prospective seismic data, well data, etcetera. He said the
challenge in regard to an exploration license is that another
company could not be promoted into the basin because of the
exclusive exploration rights given to the third party.
Number 0988
MR. MYERS explained that the EIC would also be valuable if the
state valued the information on a well drilled on privately
owned land or federal land for which the state would not
typically receive the data for 24 months. He said on state land
the state gets the data within 30 days after the completion of
the well, and it gets the seismic data after it is shot via the
permit to shoot on state land. He said on privately owned land
the state does not get the seismic data, but that data may be of
value to the state, and it may want to pay for it. He said on
private lands, the [EIC] would either accelerate the state's
getting the data, if needed, or would allow the state to acquire
seismic data that it wouldn't otherwise receive.
Number 1016
MR. MYERS explained that this program has never actually been
used; in the last seven years [DNR] has received two
applications for an EIC under this program, one was for seismic
data regarding National Petroleum Reserve-Alaska (NPR-A) by
Anadarko [Petroleum Corporation]; the state looked at the
request and said, "Yes, we're not going to get this data
[otherwise]. It's important to our state lands immediately
adjoining NPR-A." Therefore, the state offered an EIC of 18
percent to Anadarko. He said Anadarko decided it did not want
to accept the EIC because of the state's ability to show the
[seismic] data to third parties however. He explained that in
the other case, some geochemical data was being shot in an area
where the state had some great seismic coverage and didn't think
the data was important enough to grant an EIC, so it was denied.
He said the $30 million in the EIC fund is still fully there and
intact; to date, the state has had no applications for an EIC
for wells. He stated that DNR is neutral on this bill and
believes it is the [committee's] policy call on how this bill is
used.
Number 1190
CO-CHAIR MASEK asked if this bill is applicable statewide to
[those wanting to explore] beyond the Nenana basin.
MR. MYERS said yes, it would certainly apply statewide as well
as to federally and privately owned land. He said one of the
challenges with this bill, in applying it to a licensed area, is
that [DNR] would have to [determine] whether the value of that
information is significant to the state. He reiterated that
that was the intent of the program. He commented that the
intent was not to decrease the risk in the drilling of
commercial wells; rather, it was all focused toward the value of
the information. He suggested that if the state wants the
program to be applied differently in order to stimulate
commercial development, then it should set the intent to limit
the risk to the party drilling. He commented that the intent is
the value of the data and the legislative history really
strongly supports that.
Number 1204
REPRESENTATIVE GREEN explained that he'd asked for that review
because several members of the committee were not present in
1994 or [may not] have understood what this bill did. He asked
if it was true that several basins have not [been drilled] and
as a result there is a lot of speculation about what those
basins might have. He suggested that the remoteness from
[transportation] to market may be a deterrent to using the
[EIC]. He reiterated that the [committee] would like to keep
this bill if there is a [company] that would like to use it,
especially a [company] within proximity to an existing pipeline
to be able to get it to market if it does discover something.
Number 1265
MR. MYERS concurred with Representative Green's comment. He
explained that there have been positive indications. Currently,
DNR has three applications for exploration licenses: two in the
Susitna basin and one in the Nenana basin; DNR has also granted
a license in the Copper River basin. He said approximately 2
million acres is involved in these licenses; the pattern
indicates these are all primarily gas-prone basins.
Number 1389
MR. MYERS suggested that they are pretty much along the route of
a prospective pipeline, near the Anchorage Bowl or the Fairbanks
area, where there are local markets that should have a demand
for gas, either now or in the future. He suggested that this is
a positive indication that the market is driving this and that
the expectation of a commercial gas line is driving a new round
of exploration.
MR. MYERS commented that one of the encouraging things about the
Nenana basin, in particular, is that the market in Fairbanks is
right for the gas; the geology of the basin is very
"prospective," and right now gas commands a very high price. He
said liquefied natural gas (LNG) shipped to [Fairbanks] gets
about $8 per mmBtu [million British thermal units] or million
cubic feet (mcf) at the burner tip, which is a very lucrative
price. He reiterated that the economics are there for gas
exploration in the basin. He said the basin is not that far
from the Fairbanks infrastructure, and he thinks that there is a
very commercially viable opportunity in the Nenana basin. He
commented that the license will help that process a lot.
MR. MYERS said the question [involves] how much "incentivizing"
needs to be done versus how much will be done naturally by
market forces. He said in regard to economics, at current
prices there is a netback of about $4 a mcf to the wellhead,
which is itself a great incentive if the basin has commercial
gas. He explained that the basin is about 20,000 feet deep with
lots of coal; DNR has good geochemical data to support that it
has generated the gas and there are good reservoir rocks. He
reiterated that it is a very prospective basin. He said DNR was
encouraged by it back when it did the final state land selection
and therefore picked up as much of the acreage as possible in
the basin. He said the positive news is that exploration will
occur in this basin; a license is a great tool to get it there.
He indicated that licensing is in progress for the Susitna
basin, as well as potentially to the north in the Yukon Flats
where both oil and gas may exist.
MR. MYERS suggested that earlier rounds of exploration in these
basins stopped mainly because there wasn't really a market for
gas. He said [companies] were looking for commercial oil, and
in these cases the test wells did not suggest good oil source
rocks in many of these basins.
Number 1459
REPRESENTATIVE KERTTULA asked if the original policy behind
using exploration credits was so the state could get more
information, which it could then show to third parties, and have
a better understanding of what was happening in those areas.
Number 1476
MR. MYERS answered yes; it was the value of the information to
the state. He explained that at that point in time the
exploration-licensing program [did not exist]. He said if this
information is made available before a competitive sale, it
might increase the level of activity and interest. He suggested
that the data is valuable when the state needs that data to
assess land selection or other purposes. The value of getting
data that it would not otherwise receive on private lands or
federal lands was also important.
Number 1500
REPRESENTATIVE KERTTULA asked if the exploration licensing
statute that Mr. Myers had explained was in place.
MR. MYERS answered yes.
Number 1514
REPRESENTATIVE KERTTULA asked if that allows $1 an acre and if
the license can be converted to a lease if a discovery is made.
MR. MYERS explained that it is $1 a acre for the state, so that
on a 500,000-acre application an [exploration company] would pay
a $500,000 application fee. He said the [exploration company]
commits to a certain-million-dollar [amount] of exploration
expenditures; DNR doesn't dictate what the expenditure amounts
are, which just have to be reasonable exploration costs. He
said those costs could be for wells; seismic, gravity, or
magnetic data; or geologic fieldwork. He explained that that is
the competitive part: the party that bids the highest level of
work commitment, which is based on dollars, is the party that
wins the competitive part of the bid. Once the party has the
license, it has a negotiated period with DNR for that license,
typically, five up to a maximum of ten years; at the end of ten
years, it has the right to convert the entire amount of acreage
into a lease. He explained that the lease term is at 12.5
percent. At that point, it pays rentals, but no bonus; it's a
noncompetitive program which allows the company to explore. He
mentioned exploring to "high-grade" the acreage that it wants or
taking it all in a noncompetitive [way]. He reiterated that
this is a good tool to see for exploration in the Interior
basins.
Number 1603
REPRESENTATIVE KERTTULA asked if this would add onto the
legislation already in place.
Number 1610
MR. MYERS answered that she was correct. He said it is also an
existing program; up to [the year] 2004 both programs could be
used. He pointed out that the issue that had not been addressed
is that it's clearly on state land, unleased acreage. He said a
license is not really a lease; it still [gives] exclusive
exploration rights to the party. He said DNR is checking with
the Department of Law to make sure that a license is not a
lease; the preliminary view of it is that they are distinct. He
suggested that it would allow DNR to give extra credit on a
license. He reiterated that it's still preliminary.
Number 1651
REPRESENTATIVE KERTTULA asked how much is known about certain
areas of the state such as the Tanana River basin. She
commented that she had heard testimony that there was a high
potential there. She asked if her understanding was accurate.
Number 1668
MR. MYERS said there are two wells drilled into the basin. One
was drilled by Union Oil Company of California (Unocal), and the
other was drilled by ARCO Alaska, Inc. (ARCO). Following a
competitive sale in 1982, ARCO drilled the last well into the
basin. He said state sold a fair amount of acreage in that
sale; there have been competitive sales. He explained that at
that point in time the companies were looking for oil; two wells
were drilled, one by Unocal and one by ARCO, and a regional grid
of seismic data was shot.
MR. MYERS explained that the state has that [information]
available, which very clearly outlines the basin; there is also
gravity and magnetic data that support the belief that this is a
very deep basin, about 20,000 feet in depth; it's a very young
basin and has good reservoir rocks as well as lots of coals.
MR. MYERS said the basin has generated enough geochemical data
to suggest that those coals have generated plenty of gas; there
is a fairly low likelihood of oil in the basin, based on some
potential oil source rocks that are primarily gas-prone source
rocks. He said basin [indisc.] very abruptly and has exposures
of some of the reservoir and source rocks on the planks of the
basin.
Number 1749
MR. MYERS said the Usibelli Coal area is an example of those
similar rocks exposed at the surface. He suggested that the
coals and the sandstones found at Usibelli would make good
reservoirs into the basin. He said that basin has generated gas
and has lots of good reservoir rocks; the challenge is whether
it has a good seal or good tracking mechanism. He mentioned
that the regional seismic data has very nice geologic structures
on it, large structures; the key elements appear to be there,
but it still has an element of risk to it. He said DNR has a
lot more data on this basin than on most of the Interior basins
because of the wells and the seismic [data]. He said the data
was very positive for gas, but not so positive for oil. He
commented that he thinks this is why earlier explorers left.
Number 1785
REPRESENTATIVE KERTTULA said it looks as though there is not a
whole lot of risk there and now there is a market for it. She
said the policy debate is about how far the [legislature] should
go in terms of giving a break to a company that comes in when it
is already known that it is a good area and a ready market. She
mentioned that it appears it is going to happen whether the bill
is [passed] or not. She asked Mr. Myers for a response.
Number 1825
MR. MYERS said if the original intent is the value of the
information, then that would be the determinate that the
commissioner would have to weigh in deciding what size of EIC is
[given]; that judgment can't be made until the locations of the
well are known, etcetera. He said the second question is much
more difficult, which is when an incentive is effective and when
is it "icing on top of the cake." He suggested that the problem
with the EIC is that it isn't automatic. The commissioner has
discretion to look at those factors and could give 10 percent if
he/she thought it was appropriate, for example. It is also
difficult to know if the company would explore [because of] or
without the incentive. He said in his personal experience, the
license itself is a very powerful incentive. He said in his
opinion, because a license requires a work commitment, the
company will have sufficient data to decide whether it wants to
drill; that drilling will largely be based on "prospectivity,"
based on what is seen in the seismic data and how the geology is
tied into that, as well as the company's assessment of the costs
of development, building the pipeline, and getting into the
market.
Number 1921
MR. MYERS said he thinks it is the market forces that drive it,
and generally the incentives are a fairly ineffective tool. He
said is a somewhat subjective judgment based on his own industry
experience and background, rather than someone else's. He
suggested that companies would argue that the [EIC] does reduce
risks for them. He wondered if it was enough risk-reduction to
change behavior; he noted that is always the challenge and the
question. He said in this case, the way that he reads the
current EIC statutes and regulations, the commissioner would
really have to look at the value of the data. He said a license
diminishes the ability to use that data to raise competition, so
the question is how large a grant [the commissioner] would make,
which Mr. Myers said he cannot answer. He said the
[commissioner] would have to weigh the individual situation.
Number 1959
CO-CHAIR MASEK turned attention to page 1, lines 9-11, which
refers to the commissioner and says the qualified applicant must
be approved before drilling or geophysical work commences. She
commented that that probably has a lot of "weight to carry."
She refers to the last part of the bill, which says, "copies of
all raw and processed data derived from drilling"; and goes on
to say that it's "within 30 days after the completion,
abandonment, or suspension of the well." She said there are
good safeguards in [place].
Number 2019
REPRESENTATIVE GREEN addressed Representative Kerttula's
concern. He said the biggest oil field in North America is
Prudhoe Bay, located on the Barrow "arch", which was a highly
prospective area. He explained that the North Prudhoe Bay fault
has separated the Prudhoe Bay field, which is productive, and
another sister field that BP drilled years ago and spent about
$50 million on. He said it was the same "arch," the same
"trap," and it was barren; there were 13 wells drilled before
the discovery of Prudhoe Bay. He suggested that this bill does
not give anything; it's just as an incentive that if all of
those things that look good prove up, then maybe there is some
incentive for an oil company. He said even if things look good,
there is still an enormously high risk. He suggested that if
the [oil companies] can be encouraged to [explore], then it
certainly is in the state's best interest.
Number 2103
REPRESENTATIVE FATE thanked Mr. Myers for the time spent on his
testimony. He said he didn't want to suggest to anybody that
"it's a slam-dunk." He said the belief is that there is a high
potential in a basin. He commented that to his knowledge there
had never been any three-dimensional (3-D) seismic work done in
there, which he said really is the state of the art. He asked
Mr. Myers how much 2-D [seismic work] had been done and how that
basin was delineated [from] the two wells that had been done
almost 20 years ago.
Number 2150
MR. MYERS said he doesn't have the exact line-miles, but there
were two regional seismic grids shot there, basically far-apart
lines just to kind of outline the basin sufficiently to get the
fringes of the basin. He said it was 2-D data, which is fairly
good-quality data, but it's certainly not adequate to drill a
prospect in the basin with any confidence. He said the normal
procedure would be to go into the [basin]; depending on the
style of trapping mechanism [needed], it would be either a
series of closely spaced 2-D lines or a series of 3-D lines.
MR. MYERS said the other part of the data is the gravity and
magnetic data. Sedimentary rocks are distinguished from igneous
rocks in their lower density, and they have a different gravity
profile because of that lower density; gravity data outlines the
basin very clearly because the reservoir rocks are low-density
even when compared to some of the North Slope rocks. He
explained that the basin stands out very clearly in gravity and
magnetic data; this helps to provide a good model of the basin.
He said this is based on some work done in a [capital
improvement project (CIP)], in terms of getting the gravity and
magnetic data interpreted, which the state did. He expressed
confidence and commented that the regional seismic grid is good.
Number 2224
MR. MYERS said the two wells did not hit the heart of the basin;
the Totek Hills ARCO well was drilled on the fringe of the
basin, and the Nenana 1 Unocal well was not drilled in the
deepest part. He said it is encouraging that they have good
sedimentary sections and good potential reservoir rocks, and
that gas shows in the well. He commented that this doesn't mean
they have encountered a commercial reservoir. He said the
deepest part of the basin has not been tested; any exploration
program would go in there and either shoot a closely spaced 2-D
survey in the area where they are interested or a 3-D survey if
they are looking for stratigraphic traps, which are much more
subtle. The [exploration program] would also try to apply
techniques that looked for direct indications of hydrocarbons,
which can be done in these types of rocks, particularly if
there's gas. He explained that the [exploration program] would
look for flat spots and bright spots on closely spaced 2-D or 3-
D data; direct hydrocarbon indicators are a possibility here for
gas.
Number 2286
MR. MYERS said all of those would be prudent before a
[exploration program] spent between $6 million and $6.5 million
per well; it would need to be fine-tuned with seismic [work].
He said the EIC gets the workmen a long ways toward that seismic
grid; it probably wouldn't cover all that they want to shoot,
but it would cover a lot of it. He explained that the company
would have to decide whether it thought it had a commercially
viable prospect that came from that data. He reiterated that it
was not [guaranteed].
MR. MYERS remarked that the weakest geologic potential is
proving a seal. He said the structures, reservoir, and gas are
there, but he questioned whether there was a seal to hold the
gas inside that reservoir. That is something that 3-D seismic
and 2-D [work] would provide more certainty about before
drilling [commenced]. He said the other issue is in building
the commercial infrastructure; the findings have to be [good]
enough to justify building a gas treatment plant, if necessary,
and a pipeline from those facilities. He mentioned that these
are the kinds of risks that oil companies take.
MR. MYERS said one of the positive things that exploration
licensing does to accelerate is not only lower capital costs,
but allow a large area of exclusive rights; that allows
companies to bring in other companies that will pay part of the
exploration costs. He offered an example: Andex could share
with two, three, or four other companies, giving them a smaller
percentage of interest "in the play" for the capital to explore.
Number 2360
MR. MYERS explained that that kind of "farming out" of interest
is very common; it happens all of the time in the industry,
including on the North Slope [presently] and Cook Inlet. He
said this is particularly appropriate here, where the risk
sharing could be done between companies; it also provides more
capital and minimizes the individual companies risks. He
suggested that would be a typical model followed in the basins
if exploration gets to the drilling station.
Number 2396
REPRESENTATIVE KERTTULA asked him if getting the exploration
license itself was an enough of an incentive in regard to the
Tanana basin.
Number 2499
MR. MYERS said that is what he personally believes, although the
exploration company may have a very different opinion of that in
how it assesses the risk. He explained that at this time, the
exploration program license is new. It has only issued one
license and is in the process of "this" and two other licenses;
the programs need to have a chance to work. He reiterated that
the EIC program is discretionary. The DNR commissioner has the
discretion not to grant an [EIC] if he/she doesn't think it is
appropriate, and the commissioner has the discretion to limit
the amount of dollars given in the program.
MR. MYERS explained that the difficult part in that
determination will be how the [commissioner] assesses the value
of that data, because it's not going to promote a competitive
lease sale. The [commissioner] is going to have to justify the
value of that data under the current intent, which might make it
problematic for a large grant of an EIC. He commented that he
is not prejudging what the commissioner would or wouldn't do.
He said if he looks at the straight intent of the EIC language,
he is not sure what the commissioner would decide regarding the
application, which would be looked at individually. He
suggested that the "flip-side" is that there are other areas of
the state where the [EIC] might be of use as well.
Number 2487
REPRESENTATIVE KERTTULA asked Mr. Myers in what other areas of
the state foresees this coming up.
Number 2499
MR. MYERS said he suspected if anything was done on the Tanana
basin, then the other basins that have licenses would want equal
treatment; the two licenses in the Susitna basin and the one in
Copper River would have similar expectations and could make
similar arguments. He mentioned the Yukon Flats as an area of
interest to the north of a prospective gas line; it is not a lot
of state land, but federal land.
MR. MYERS said the other Interior basins are more difficult;
they're farther from infrastructure, pipelines, and large enough
markets. In those cases, it would be smaller [companies]
wanting to test things such as coal-bed methane on unleased
acreage or maybe gas hydrates or some more exotic technology.
He suggested it would largely be done as a science experiment,
perhaps by the Department of Community and Economic Development
or maybe by a Native corporation, for example; it wouldn't be
large-scale development. He said places where this is most
likely to be seen are along the route, such as a local market
like Fairbanks that's large enough to be serviced and has high
value for gas.
Number 2586
REPRESENTATIVE GREEN moved to report HB 307 out of committee
with individual recommendations and the accompanying fiscal
notes.
Number 2594
REPRESENTATIVE KERTTULA asked for more discussion on it.
Number 2609
REPRESENTATIVE GREEN withdrew his motion to move HB 307 out of
committee.
Number 2614
REPRESENTATIVE KERTTULA said she thought that Mr. Myers raised
two interesting points. The first point, she explained, is that
it seems the [EIC] is [designed] to give an incentive to
companies when there's really a risk, rather than just the
state's wanting to get the information. She said she is not
really sure how she feels about that, because in some ways maybe
the only thing that should be measured is whether the
information being gained by the company is valuable to the
state.
REPRESENTATIVE KERTTULA asked if it is the risk to the company,
which she said seems to be a fairly low risk, that [the
committee] is worried about. She asked if that is the measure
the [committee] wants in regard to the areas around the gas
line. She said the second point is the question of what the
risk is back to the state: if it's a sure thing or very close
to it, then how much money does the [state] stand to lose? She
indicated she is not sure if this applies to this legislation or
to future legislation. She suggested this may provide several
ways for companies to get breaks. She asked if the other
committee members had similar thoughts or concerns.
Number 2680
REPRESENTATIVE GREEN reiterated that there is risk to the
company, not to the state. He said the company would have to
weigh that, which is probably the biggest portion of determining
whether to spend the money. He mentioned probability and said
both are added up and assigned percentage factors. He
reiterated his point about the drilling done in Prudhoe Bay.
Drilling is very expensive. In drilling wells one through
twelve, [the company] lost out, but it was the thirteenth well
that hit [oil], by chance.
REPRESENTATIVE GREEN reiterated that there are all sorts of
risks. The [company] has to first find the "trapment" and then
find that it is filled with something. He said the state is
risking some amount of money that it might have received, had
the [exploration company] gone in there on its own without the
EIC. He pointed out that, as Mr. Myers had testified, there
were two [instances] when there was a possibility of using the
EIC, but they didn't work out: in one instance, the company
didn't want to share the information; in the other, it wasn't
worth it for the state to [give an EIC] for the information the
state would receive, so it didn't go forward.
Number 2769
REPRESENTATIVE GREEN reiterated that it is no guarantee that the
EIC would be given; it is at the commissioner's discretion. He
indicated that it could be the exploration company that does not
want to pursue the EIC due to a provision requiring it to share
that information. He said information is available on the two
wells that were drilled and nobody has come forward in the
Tanana [basin]. He suggested that there are many concerns that
need to be addressed before a company will go in and spend
money; if the [legislature] can ease some of those concerns, it
might result in a huge payback to the state. He said if the
[exploration company] goes in there and finds something, then
there would still be land available in the basin for
conventional leasing.
Number 2809
REPRESENTATIVE FATE reiterated Representative Green's statement
that the risk is huge. He said the [committee] failed to assess
the deliberations of the boards of directors of these
corporations, including small corporations, when they [pursue
exploration]; they have to make the decision of whether or not
to spend $6 million on one hole. He said the 3-D seismic [work]
is extremely expensive; the board has to determine whether or
not it has the money to do 3-D seismic [work]. Representative
Fate asked how to weigh the risk of not developing an
environmentally clean resource against the risk of the
[exploration company's] not drilling. He suggested that this
presents a big question for the state. He said the [state] runs
the risk of no development if there are no incentives and still
wants to have that incentive produce revenues to the state later
on. He said these are the types of things he is concerned
about. He suggested there are certain types of incentives that
dig so deep into the credits given, eventually the state will
not recapture a great deal of funds; then it may need to be
seriously looked at. He said this was not one of those cases.
He suggested that this bill is an extension of legislation that
currently exists and is going to [result] in a win-win
situation.
Number 2917
CO-CHAIR SCALZI drew attention to the original intent of the
bill and the question of why the [committee] was looking at
reauthorization. He said the [discretion] that the commissioner
has on the level of risk assessed to each individual area
satisfied him somewhat. He said that although the argument
could be that the commissioner is not going to be as stringent
as he/she should be, that is something that the [legislature] is
going to have to put in the hands of a representative of the
state.
TAPE 02-4, SIDE B
Number 2975
REPRESENTATIVE MCGUIRE commented that she could see the value to
the state in collecting the raw and processed data that is
derived from the [stratigraphic] test wells. She indicated that
there is risk and the EIC could be offered as an incentive. She
suggested that the value of that data would be of good value to
the state. She said the incentive is the development of new
sources of energy for the state, particularly in rural Alaska.
She suggested that this bill presents an opportunity [for
development]. She commented that this is some of the cleanest
and most environmentally friendly energy [available].
Number 2907
REPRESENTATIVE GREEN reiterated Mr. Myers' comment that the
basin has a huge amount of sedimentary rock as opposed to
igneous rock in which oil is not found. He said sedimentary
rock is an encouragement because both oil and gas hydrocarbons
can be found in it, [but there is no] guarantee.
Number 2875
REPRESENTATIVE KERTTULA said this bill in and of itself really
isn't such a concern. She explained that if the next bill comes
along and it looks as though the three [bills] work together,
however then she would start to have a much bigger concern. She
said while development should be encouraged in areas that
present a return back to the state, it is hard to know if [this
is an incentive]. She commented that she is satisfied with the
current language that the commissioner's decision has to be
based on whether or not the [EIC] provides worthwhile
information to the state.
Number 2805
REPRESENTATIVE GREEN moved to report HB 307 out of committee
with individual recommendations and a zero fiscal note. There
being no objection, HB 307 was moved out of the House Resources
Standing Committee.
HB 232-REMOTE RECREATIONAL CABIN SITE SALES
Number 2786
CO-CHAIR MASEK announced that the next order of business before
the committee would be HOUSE BILL NO. 232, "An Act permitting
state residents to purchase remote recreational cabin sites."
Number 2722
DICK MYLIUS, Resource Assessment & Development Manager, Division
of Mining, Land and Water, Department of Natural Resources,
testified via teleconference. He informed the committee that
this bill creates a new state land disposal but is similar in
some respects to the remote recreational program established in
1997 by the legislature. It allows people to pick where they
wish to stake and then apply to DNR for that site. The law
generally describes what state land would be available under the
program; it establishes spacing requirements for distances
between sites and contains limits on the amount of waterfront
land that can be staked.
MR. MYLIUS explained that the program is on a first-come, first-
served basis; applicants stake their two and a half acres, apply
to DNR, and then survey, appraise, and purchase the parcel.
Unlike laws regarding the existing state land disposal programs,
the law does not authorize DNR to determine what areas are open
when openings occur or to ensure there is adequate access before
areas are opened. He said DNR's biggest concern with this
program is that it duplicates an existing program that is
working, creating a new state land disposal very similar to the
existing remote recreational cabin program.
Number 2630
MR. MYLIUS explained that this program was established by
statute in 1997, but was funded for the first time only two
years ago; last year DNR offered 295 parcels in ten areas. The
department received almost 700 applications for the existing
remote recreational cabin program opening last year. He said
because the program was a new program and there wasn't time to
prepare new areas for offering, the initial offerings were in
[previously] homesteaded remote-cabin areas. He said DNR plans
to offer another 300 "stakings" under this program in June.
MR. MYLIUS said in future years, DNR will offer new and better
areas under the existing remote recreational cabin program. It
takes two to three years to make new areas available due to
public review and notice requirements, best-interest findings,
land-title work, and the need to coordinate with municipalities
on platting and planning issues. This last step, the need to
meet borough platting requirements, is essential to allow
municipalities to have some control over how they develop. He
said the amount of time to do this is significant; to get
approvals of last year's projects in four Boroughs required 11
separate meetings before platting boards and planning
commissions.
MR. MYLIUS explained that the current program costs about
$400,000 a year, and DNR forecasts annual revenues of about
$400,000 starting in FY 05 [fiscal year 2005]. Because of the
time needed to survey and appraise parcels, revenues are limited
during the first several years of any stake-it-yourself program.
Regardless of how the program is set up, stake-it-yourself
programs are not big moneymakers; many past programs cost the
state more to administer than the state ever received in
revenue, although DNR believes the current program might
generate a positive cash flow.
Number 2610
MR. MYLIUS said in addition to duplicating this existing
program, the remote recreational cabin program proposed by [this
legislation] has several significant problems. First, the
program does not provide an opportunity for either public
notice, as required by the constitution, Article VIII, Section
10, or a best interest finding as required by AS 38.05.035(e).
The bill requires that the sale be consistent with the public
interest, but does not allow time for this to occur. He said
the bill gives DNR only 30 days to approve an application; it is
impossible within 30 days to do a land title review, best-
interest finding and public notice; to receive and process
public comments; and to issue a final decision.
Number 2534
MR. MYLIUS said the second problem is the program will cause
difficulty in meeting most municipalities' platting
requirements. The current remote recreational cabin program was
designed so that municipalities could exercise some control over
how land disposals occur within their boundaries. [This
legislation] does not allow for such municipal input. For
example, it sets a maximum lots size of 2.5 acres, which is
below minimum lot sizes required in many boroughs and below the
10-acre size generally accepted for onsite sewage disposal.
Number 2493
MR. MYLIUS explained that DNR has been working closely with
municipalities to make the existing remote recreational cabin
program work. For example, last year DNR had 11 meetings on the
program including 4 separate meetings with the Fairbanks North
Star Borough Platting Board and 2 with the Matanuska-Susitna
Platting Board. He said as a result of input from the
Matanuska-Susitna Borough, DNR dropped four of the eight areas
it was considering for last year's sale. He said under this
bill there is no opportunity to work with the boroughs on these
kinds of issues. If this bill does not exempt this program from
municipal platting requirements, then DNR would need to either
approve parcels that have not been approved by the platting
authority or disapprove any applications submitted for parcels
within boroughs. It would be difficult to imagine that DNR
would ignore local platting requirements.
MR. MYLIUS offered his third point, that this program will be
difficult to implement because the legislation gives limited
guidance to DNR or the public. The law has few restrictions.
It does not allow DNR to determine what areas are open or when
openings occur, or to ensure there is adequate access before
areas are open, he reiterated. As a result, DNR anticipates
that when the program goes into effect, there will be
considerable confusion with the public regarding where state
land exists that is available, conflicting claims to parcels,
and arguments about staking. The Department of Natural
Resources also anticipates significant access concerns, such as
staking on trails, staking on non-state land, and more. He
pointed out that the current program avoids those problems by
carefully doing land status research and access research before
areas are made available for disposal.
Number 2445
MR. MYLIUS said DNR's fourth concern is that the program will be
expensive, particularly in its initial years. The Department of
Natural Resources' fiscal note shows $585,000 for the first year
and slightly less in subsequent years. Because such large areas
are being opened, there will be considerable confusion with the
public regarding what land is available. He explained that with
few rules, there will be conflicting claims that DNR will need
to resolve.
Number 2418
MR. MYLIUS suggested that this will place considerable demands
on DNR to provide information to the public, particularly
through the DNR public information offices in Anchorage,
Fairbanks, and Juneau. He said DNR will need to provide the
public with accurate land-status information for millions of
acres of state land so the public knows what land is available,
including the location of existing third-party interests, Native
allotment locations, and trail and access information. He said
this program is also very inefficient because it allows
applicants to stake where and when they decide, and then
requires DNR to meet deadlines for approvals for each individual
parcel. The program will require DNR to do separate title
reports, best interest findings, public notices, and so forth
for each applicant. The current program allows DNR to combine
those for large areas. He said DNR also has several very
specific concerns about the bill that it would be happy to share
with the committee.
Number 2351
CO-CHAIR MASEK asked Mr. Mylius to provide a copy of his written
testimony to the committee.
Number 2340
MR. MYLIUS, in response to Representative Kerttula, reiterated
his concern about the difficulty of meeting borough platting
requirements. He explained that borough platting approval is
required in order to subdivide land; subdivision is defined by
creating even one new lot. He said each one of the parcels is
going to be considered by municipalities as a subdivision.
Under the existing program, before DNR identifies which areas it
will open, it goes to the platting board and asks for conceptual
approval of the land offering. He said this program doesn't
allow such an opportunity. The most significant of the types of
things that the platting boards look at is probably minimum lot
size.
MR. MYLIUS explained that most boroughs have minimum lot sizes
of 5 to 10, which allows adequate space for onsite sewage
disposal system; this law sets a parcel size of 2.5 acres, which
is below that minimum. He said it doesn't provide DNR with any
ability to go to the boroughs and get their approval or
disapproval. The concern is that there is no way to involve the
borough platting authority. One problem is that when the final
survey is done, the borough platting boards may not approve
those surveys because they aren't minimum lot size; that [would
occur] after the person had already invested money into staking,
surveying, and appraising the land.
Number 2203
REPRESENTATIVE GREEN pointed out that the language used in
proposed AS 38.05.610, line 5, of the bill - "the commissioner
shall" - may conflict with the language in AS 38.05.600, which
is that the commissioner "may". He expressed concern that some
of the "notwithstandings" may not be in the best interest of the
state. He commented that he is in favor of private ownership of
more land, but isn't sure this is the way to do it. He said
this bill bypasses the previously used lottery system. He noted
that the terms of sale are covered. He expressed concern that
the bypass in AS 38.05.067, which allows preference for
veterans, may not be in the best interest of the state. He
commented that there are some concerns that probably need to be
addressed with somebody from the director's office.
Number 2094
CO-CHAIR MASEK appointed Representatives Fate, Green, and
Kerttula to a [subcommittee] to prepare a proposed committee
substitute (CS) and try to resolve the issues.
Number 2016
REPRESENTATIVE FATE, speaking as sponsor of HB 232, stated that
during the last two years there has been acceleration of the
land disposal by the State of Alaska. He pointed out that the
bill was put together with the help of Carol Carroll, Director,
Division of Support Services, Department of Natural Resources,
who is [also] employed by the Department of Military & Veterans'
Affairs. He said there are some things that he tried to
incorporate that the [committee] had discussed.
REPRESENTATIVE FATE suggested that everything is done by lottery
not by design, but because of necessity. He suggested that
there are too many applicants for one piece of disposal
property; the [state] has the disposals because of efficiency in
larger projects, and the disposals [are] near subdivisions. He
said the [current] disposals do have the advantage of [acquiring
land] in remote areas. He suggested that these [issues] can be
overcome. He said he believes it is necessary to allow people
to obtain the piece of property that they want, especially those
people who have used those pieces of property for three or more
years. He indicated that the amendments pertain to these
issues. He reiterated that he would like to have Carol Carroll
involved in the subcommittee.
Number 1872
CO-CHAIR MASEK indicated HB 232 would be held for further
consideration.
ADJOURNMENT
Number 1858
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:25 p.m.
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