04/23/2004 02:15 PM House RES
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ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 23, 2004
2:15 p.m.
MEMBERS PRESENT
Representative Beverly Masek, Co-Chair
Representative Cheryll Heinze, Vice Chair
Representative Carl Gatto
Representative Bob Lynn
Representative Nick Stepovich
Representative Kelly Wolf
Representative Beth Kerttula
Representative David Guttenberg
MEMBERS ABSENT
Representative Nancy Dahlstrom, Co-Chair
COMMITTEE CALENDAR
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 364
"An Act establishing a moratorium on the issuance of state
shallow natural gas leases in the vicinity of Kachemak Bay, and
precluding the commissioner of natural resources from reissuing
or otherwise extending leases within the moratorium area if the
leases fail to produce gas in paying quantities within the terms
of the lease or if there is a breach of a term or condition of
the lease; and providing for an effective date."
- MOVED CSSSHB 364(O&G) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 364
SHORT TITLE: NATURAL GAS LEASES NEAR KACHEMAK BAY
SPONSOR(S): REPRESENTATIVE(S) SEATON
01/12/04 (H) PREFILE RELEASED (1/2/04)
01/12/04 (H) READ THE FIRST TIME - REFERRALS
01/12/04 (H) O&G, RES, FIN
02/19/04 (H) SPONSOR SUBSTITUTE INTRODUCED
02/19/04 (H) READ THE FIRST TIME - REFERRALS
02/19/04 (H) O&G, RES, FIN
03/09/04 (H) O&G AT 3:15 PM CAPITOL 124
03/09/04 (H) Heard & Held
03/09/04 (H) MINUTE(O&G)
04/01/04 (H) O&G AT 3:15 PM CAPITOL 124
04/01/04 (H) Moved CSSSHB 364(O&G) Out of Committee
04/01/04 (H) MINUTE(O&G)
04/05/04 (H) O&G RPT CS(O&G) NT 2DP 1NR 3AM
04/05/04 (H) DP: KERTTULA, CRAWFORD; NR: MCGUIRE;
04/05/04 (H) AM: HOLM, ROKEBERG, KOHRING
04/14/04 (H) FIN REFERRAL REMOVED
04/19/04 (H) RES AT 1:00 PM CAPITOL 124
04/19/04 (H) Scheduled But Not Heard
04/23/04 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE PAUL SEATON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as the sponsor of SSHB 364.
SEAN PARNELL, Deputy Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During discussion of SSHB 364, answered
questions.
ACTION NARRATIVE
TAPE 04-25, SIDE A
Number 0001
CO-CHAIR BEVERLY MASEK called the House Resources Standing
Committee meeting to order at 2:15 p.m. Representatives Masek,
Gatto, Lynn, Stepovich, Wolf, and Kerttula were present at the
call to order. Representatives Heinze and Guttenberg arrived as
the meeting was in progress.
HB 364-NATURAL GAS LEASES NEAR KACHEMAK BAY
[Contains discussion of HB 531 and HB 312.]
CO-CHAIR MASEK announced that the only order of business would
be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 364, "An Act
establishing a moratorium on the issuance of state shallow
natural gas leases in the vicinity of Kachemak Bay, and
precluding the commissioner of natural resources from reissuing
or otherwise extending leases within the moratorium area if the
leases fail to produce gas in paying quantities within the terms
of the lease or if there is a breach of a term or condition of
the lease; and providing for an effective date."
Number 0123
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, spoke as
the sponsor of SSHB 364. Representative Seaton explained that
originally HB 364 was buy-back legislation. However, SSHB 364
is a moratorium on reissuance of the shallow natural gas leases
in the Homer area if those are forfeited or aren't renewed. The
current version, CSSSHB 364(O&G), removed the findings from the
legislation and added criteria by which the director of the
Division of Oil & Gas can reissue oil and gas leases.
Representative Seaton informed the committee of the
circumstances that created the legislation. In 1976 the state
bought back the offshore oil and gas leases in the Kachemak Bay
area and placed a moratorium on any future offshore leases. The
valuable renewable resources of the area were cited as part of
the reasoning. In 1996 the state created the shallow natural
gas program, which provides low-cost, over-the-counter leases
for shallow natural gas at less than 3,000 feet. The main
benefit to the aforementioned is the low cost lease. The
program was created to stimulate shallow natural gas [leases] in
rural areas. However, in 1999 the Cook Inlet areawide lease
sale area was created, which allowed for oil and gas leases to
be offered every year. The [Kachemak Bay area] was excluded
from the areawide lease sale, although it has the same gas
potential as the rest of [the Cook Inlet]. He noted that there
was no best interest finding specifying why it was excluded
because the area was excluded for political reasons. Therefore,
the reason [the Kachemak Bay area] is available for shallow
natural gas leasing while nothing else in Cook Inlet is
available is because of its original exclusion from the
aforementioned oil and gas leasing program.
Number 0455
REPRESENTATIVE SEATON informed the committee that June 1, 2003,
the state issued the shallow natural gas leases for the
subsurface rights in the land just north of Kachemak Bay within
the same region that was excluded from the areawide lease sales.
He specified that it includes areas underneath the Paul Banks
school, the hospital, the watershed and reservoir for the Homer
area. Representative Seaton related that the shallow natural
gas leases are noncompetitive leases granted at a cost of $500
per nine square miles and there was no specific best interest
finding for [the Kachemak Bay area]. However, in 1996 there was
a general best interest finding, which specified that it was in
the best interest of the state to develop shallow natural gas
wherever it is found. He noted that no consideration was given
to local comments. One of the problems with the shallow natural
gas program is that it specifies that if there is any benefit of
shallow natural gas to the local area, then the director of the
Division of Oil & Gas has to issue the leases. Therefore, all
the comments received with regard to impacts can't be considered
under the shallow natural gas program. Furthermore, there was
no effective notification in the Homer area nor any operational
guidelines or regulations in place.
REPRESENTATIVE SEATON specified that the goal of SSHB 364 is to
ensure that the current leases in the Homer area aren't extended
or reissued and to exclude the lands and waters of Kachemak Bay
from future leases under the shallow natural gas program. In no
way does this legislation complicate future leasing in this area
under other programs. In fact, the inability for an extension
or reissuance simplifies things because with shallow natural gas
there is the ability to recover the gas above 3,000 feet and if
part of the field occurs above 3,000 feet, conventional gas
could be [recovered] below 3,000 feet. Under the shallow
natural gas program, one must demonstrate that part of the field
is contiguous with the upper shallow natural gas field, which
isn't necessarily the case. In fact the greatest value for the
state could lay in the deeper areas, although the state policy
is to not offer that area for conventional gas leases if there
is shallow natural gas above it. The reasoning has been the
notion that there would be a lawsuit regarding who owns what
gas. Therefore, this legislation simplifies the possibility of
future conventional gas in the Cook Inlet area, which is more
profitable to the state.
Number 0805
REPRESENTATIVE SEATON reviewed the sectional analysis of the
legislation, which is included in the committee packet. Section
1 excludes certain lands in the vicinity of Kachemak Bay from
leasing under the shallow natural gas program. Anything that
could've been leased is excluded from the moratorium on
reissuance of leases. Section 2 amends the statute by
establishing the discretionary guidelines for the director of
the Davison of Oil & Gas when making a decision regarding
whether to reissue the leases. The leases have a three-year
term and are renewable for an additional three years. One of
the problems has been that the statute doesn't specify on what
basis the director is to reissue the leases. Therefore,
currently if the director decides not to reissue the leases, it
could be seen arbitrary and result in a takings claim against
the state. By incorporating the discretionary guidelines in the
statute, the state is no longer liable for such a claim so long
as the director [follows those guidelines]. Section 3, he
related, amends the uncodified law to prohibit the reissuance of
these shallow natural gas leases issued before the effective
date of this act. Although the director is allowed to not
reissue those leases, the conditions are such that there can't
be any development on the leases and very little potential that
development will take place.
REPRESENTATIVE SEATON highlighted that the fiscal note is zero,
although there is a question concerning the indeterminate lack
of revenue. The aforementioned isn't the case because the only
condition under which these won't be reissued is if the director
has determined that the probability is extremely low that anyone
will produce gas within the next three years. He noted that the
committee packet should include supportive resolutions from the
City of Homer, Kachemak City, and the Kenai Peninsula Borough,
all of which are the local government units of the area.
Number 1122
REPRESENTATIVE SEATON, in response to Representative Stepovich,
confirmed that the current version of the legislation prohibits
the extension of the leases in the area excluded from the best
interest finding for the areawide lease sale.
REPRESENTATIVE STEPOVICH mentioned his desire to entertain an
amendment to this legislation.
REPRESENTATIVE WOLF inquired as to the size of the area this
legislation would impact.
REPRESENTATIVE SEATON answered that it's 22,000 square acres of
state land of which approximately 18,000 acres are non-state
owned subsurface rights. Therefore, in total it amounts to
about 40,000 acres, which is eight leases of nine square miles
each. He noted that the area is a patchwork of state and
private subsurface rights.
REPRESENTATIVE WOLF inquired as to the average depth of the
water wells in the area.
REPRESENTATIVE SEATON related his knowledge of some wells that
are in the 150-200 foot range. He further related that much of
the area has very poor water, and therefore the water comes from
the municipal delivery services. He noted that there are coal
seams in the area. There isn't good ground water in the area to
the east. He indicated that in some areas almost all of the
water is delivered by truck from the reservoir, where the city
has extraterritorial powers. Towards Anchor Point is where one
finds shallow wells that are 20-25 feet, although most financed
homes in the area require a drilled well of over 100 feet.
REPRESENTATIVE WOLF recalled hearing concern with contamination
of water wells due to shallow natural gas development in the
Kachemak Bay area. However, if much of the water is trucked
into the area, he questioned from where the concern stems.
REPRESENTATIVE SEATON said that water wells aren't the only
problem. Part of the problem is related to the procedures in
which shallow natural gas leases were let without public
comment. There wouldn't have been problems in a rural area,
however, what was available was urban Homer. Homer has
traditionally had an economy based on eco-tourism, tourism, and
fishing, which is why the state bought back the Kachemak Bay oil
and gas leases back in 1976. "This is within that same area.
In fact, we're using the same line; those were all sub-tidal and
this is the uplands," he explained.
Number 1534
REPRESENTATIVE GUTTENBERG inquired as to why only the Kachemak
Bay area is addressed. He noted that there are leases in
downtown Healy as well as the Matanuska-Susitna Valley area.
REPRESENTATIVE SEATON highlighted that the Kachemak Bay area has
some specific peculiarities. First, it was in the area of an
oil and gas buyback and was specifically excluded from the
areawide lease sale best interest finding, which made that area
available. The aforementioned conditions didn't occur in the
other areas mentioned by Representative Guttenberg.
Furthermore, there has been no activity on the leases, which is
also different than the other areas mentioned. Under this
legislation, the discretionary terms are whether "they are
paying quantities of gas, which means if you're getting more gas
out of the well than it costs you to produce that gas ... the
leases are automatically extended." Under the conditions of DNR
if there is any production or significant planned production,
the leases would be extended. Representative Seaton clarified
that this legislation merely stops speculative holding of leases
if the director of the Division of Oil & Gas determines those
aren't going to be put into production. Furthermore, it keeps
the state from doing a best interest finding for all gas as does
an oil and gas sale due to correlative rights.
Number 1711
REPRESENTATIVE KERTTULA declared a conflict of interest with the
Matanuska-Susitna Valley area [because of her family's land
holdings in that area].
REPRESENTATIVE STEPOVICH asked if SSHB 364 is related to HB 531
and HB 312.
REPRESENTATIVE SEATON clarified that SSHB 364 only relates to
the shallow natural gas program. The passage of HB 531 or HB
312 would eliminate the shallow natural gas program. The
legislation before the committee today, SSHB 364, speaks to
leases issued before and now being held and not developed. He
reminded the committee that if the shallow natural gas wells are
being developed, production is taking place, or there is a
production plan the director views as a plan for development,
the director will reissue the leases. The aforementioned is the
discretionary provision. The only time the director of the
Division of Oil & Gas wouldn't reissue those leases for the
second three years is if the leases appear to be held
speculatively and it doesn't appear that there will be
production on the leases. Representative Seaton emphasized that
the aforementioned is the case in the Homer area.
Number 1840
REPRESENTATIVE STEPOVICH inquired as to the length of the
moratorium.
REPRESENTATIVE SEATON explained that the leases, which have a
three-year term, were issued in June 2003. This legislation
specifies that if there is no development on those leases and no
plan for development, then the lease expires at that three
years. Therefore, there would never be another shallow natural
gas lease on that property, although there could be another gas
lease or oil and gas lease on that property. In further
response to Representative Stepovich, Representative Seaton
explained that if these leases weren't reissued and there wasn't
a moratorium, another individual/entity could come along and
start the process again.
Number 1940
SEAN PARNELL, Deputy Director, Division of Oil & Gas, Department
of Natural Resources, turned to Representative Guttenberg's
inquiry regarding whether there are any other areas of the state
where this [lease] program is available under the same scenario.
He related his understanding that this legislation proposes a
moratorium on shallow natural gas leases in the Homer area.
Therefore, this legislation could be extended to any area in
which other leases have been issued. Mr. Parnell informed the
committee that [the division/department] supports Section 2 of
[CSSSHB 364(O&G)], which limits the discretion of the Division
of Oil & Gas director for extending shallow natural gas leases.
However, [the division/department] doesn't support Section 1 and
3, which would implement a moratorium and prevent DNR from
reissuing leases. He related that DNR actually supports the
broader statewide approach offered in HB 531.
REPRESENTATIVE SEATON noted that he supports HB 531 as well, but
no one knows if that legislation will pass. Therefore, Sections
1 and 3 of [CSSSHB 364(O&G)] take care of the program if HB 531
doesn't pass. Moreover, if HB 531 doesn't pass and Section 2 of
[CSSSHB 364(O&G)] is in place and the leases aren't extended,
anyone can apply for the leases on a noncompetitive basis under
the same program. He explained:
And so, that's what this is to prevent and so that's
what Sections 1 and 3 do, and they would, of course,
just apply to this and [HB] 531 would take care of the
entire shallow natural gas program. If [HB] 531
passes, [Sections] 1 and 3 are moot. Because if these
weren't extended, the shallow natural gas program goes
away anyway and so you couldn't issue leases under the
shallow natural gas program because HB 531 would
eliminate the shallow natural gas program. And this
only addresses termination and reissuances of leases
under shallow natural gas; this does not prevent, in
any way, the formation ... a Cook Inlet areawide lease
sale, or the issuance, under [HB] 531, of all gas
leases.
Number 2168
REPRESENTATIVE HEINZE asked if [DNR] could make it work. "How
bad would this be if this bill went through ...," she asked.
MR. PARNELL said that it depends upon HB 531. He explained that
[DNR] is trying to address issues on a statewide basis and if
CSSSHB 364(O&G) passes, it may take care of Representative
Seaton's area. However, there would still be statewide issues
with the program. He informed the committee that there will be
other leases that expire in the Matanuska-Susitna Valley and
near Fairbanks. Therefore, [DNR] is focusing on addressing this
issue on a statewide basis rather than in a piecemeal fashion.
REPRESENTATIVE HEINZE asked whether [DNR] could make it
[Sections 1 and 3 of CSSSHB 364(O&G)] work if HB 531 is taken
off the table.
MR. PARNELL explained that if Sections 1 and 3 of CSSSHB
364(O&G) pass, uncertainty will be created about the state's
leasing program, both the shallow natural gas program and any
other program. He predicted that there will be problems
statewide if the state is carved up as is the case under [CSSSHB
364(O&G)] rather than approaching the problem statewide in a
best interest finding process. If [CSSSHB 364(O&G)] passes, a
moratorium would be imposed on leasing in the Homer area and
would have statewide implications with regard to uncertainty
with the state's leasing program. Furthermore, passage of
[CSSSHB 364(O&G)] could [prevent] future industry investment in
the state if [the industry] thinks other areas of the state
might be at risk. He noted that this would go beyond shallow
natural gas.
REPRESENTATIVE KERTTULA surmised then that if HB 531 passes,
Sections 1 and 3 would be "wiped out" because there is no more
shallow natural gas program. She noted that Section 2 of
[CSSSHB 364(O&G)] is already included in HB 531. Therefore, the
question is if the shallow natural gas program doesn't go away
as planned in HB 531, then this legislation would exempt only
the Kachemak Bay area rather than the entire state and Section 2
would add in the protection for the entire state.
MR. PARNELL indicated agreement with Representative Kerttula's
understanding.
Number 2384
REPRESENTATIVE GUTTENBERG asked if [CSSSHB 364(O&G)] provides
[DNR] the technical tools to implement the moratorium.
MR. PARNELL replied, "For the Homer area, yes."
Number 2424
REPRESENTATIVE GATTO inquired as to Mr. Parnell's thoughts on an
amendment to include the entire state.
MR. PARNELL said whether to impose a moratorium on shallow
natural gas throughout the state would be a policy call.
REPRESENTATIVE STEPOVICH questioned why Kachemak Bay received a
buyback, but not the Matanuska-Susitna Valley area.
REPRESENTATIVE SEATON reiterated his earlier testimony regarding
the unique situation of the Kachemak Bay, which resulted in this
legislation.
REPRESENTATIVE STEPOVICH related that the state does buyback
leases in which a mistake was made by issuing the lease. He
noted that he owns leases. He inquired as to why the state
bought back the leases originally.
REPRESENTATIVE SEATON noted that it was an entirely contentious
situation between the state and the Kachemak Bay area for quite
some time. Ultimately, the state decided that it wasn't in its
best interest to have those leases, and therefore bought back
the leases in [the Kachemak Bay area]. He pointed out that the
best interest finding that excluded this area from oil and gas
leases was the establishment of the Cook Inlet areawide lease
sale.
REPRESENTATIVE STEPOVICH indicated that he may offer a
conceptual amendment to include the Matanuska-Susitna Valley in
the buyback.
CO-CHAIR MASEK clarified that the legislation before the
committee isn't buyback legislation.
REPRESENTATIVE SEATON reiterated that [CSSSHB 364(O&G)] is a
moratorium on the reissuance of leases that weren't extended
because they were nonproductive.
The committee took an at-ease from 2:58 p.m. to 3:02 p.m.
CO-CHAIR MASEK informed the committee that Representative
Stepovich had provided the committee with an amendment during
the at-ease.
Number 2777
REPRESENTATIVE STEPOVICH said that his amendment would broaden
the legislation. Representative Stepovich moved that the
committee adopt Amendment 1 [23-LS1464\S.1, Chenoweth, which
read:
Page 1, line 5 following "lease;":
Insert "directing the commissioner of natural
resources to reacquire shallow natural gas leases in
the Matanuska-Susitna Borough;"
Page 3, following line 30:
Insert a new bill section to read:
"* Sec. 4. The uncodified law of the State of
Alaska is amended by adding a new section to read:
REACQUISITION OF CERTAIN SHALLOW NATURAL GAS
LEASES. (a) The commissioner of natural resources
shall enter into negotiations to reacquire, by
purchase in the name of the state, the title to or
accountable interests in shallow natural gas leases
entered into under AS 38.05.177 before the effective
date of this Act within the boundaries described in
(d) of this section.
(b) In lieu of cash payment for a negotiated
repurchase of a leasehold interest described in (a) of
this section, the commissioner of natural resources
may authorize a credit of the purchase price plus
interest at the rate prescribed in AS 09.30.070 to be
granted to the seller, to be applied against future
lease bonus or rental payments, permit fees,
royalties, or oil and gas taxes that may become owing
on new production from other leases or property held
by the seller for oil and gas development, including
shallow natural gas development. The commissioner may
also negotiate to reimburse, in like manner by credit
provision a reasonable amount to compensate the lessee
for expenses and other costs incurred by the lessee.
(c) If the commissioner of natural resources is
unable to negotiate a satisfactory price for
repurchase of a leasehold interest described in (a) of
this section, the commissioner may acquire a leasehold
interest described in (a) of this section through
exercise of the power of eminent domain.
(d) The provisions of this section apply to
shallow natural gas leases issued under AS 38.05.177
before the effective date of this Act on land and
water described in the Matanuska-Susitna Borough."
Renumber the following bill section accordingly.
REPRESENTATIVE HEINZE objected.
CO-CHAIR MASEK related what Amendment 1 would do to Mr. Parnell
who didn't have a copy to review. She asked Mr. Parnell if he
believes Amendment 1 should be added to the legislation.
MR. PARNELL replied no, he reiterated [DNR's] opposition to a
buyback, which could be expensive and could shut down
exploration for rural energy alternatives. The approach in HB
531 is preferred, he reiterated.
Number 2880
REPRESENTATIVE STEPOVICH related that constituents have asked
for [what is proposed in Amendment 1].
REPRESENTATIVE SEATON highlighted that Amendment 1 changes the
entire character of the legislation. He noted that Amendment 1
would've been appropriate with the original HB 364, which was
buyback legislation. With [the changes to the current version
of HB 364], the accompanying fiscal note has become zero.
TAPE 04-25, SIDE B
REPRESENTATIVE SEATON indicated that Amendment 1 would require a
large fiscal note. Representative Seaton related his opposition
to Amendment 1.
Number 2918
REPRESENTATIVE GATTO inquired as to what would happen if,
instead of the buyback, the same language was extended "that
called for a moratorium on inactive nonrenewal of inactive
leases to other areas besides Kachemak [Bay]." He surmised that
doing the aforementioned would maintain a zero fiscal note while
allowing inactive leases not to be extended or bought.
REPRESENTATIVE SEATON agreed that "in one way" Representative
Gatto is correct. However, there are rural leases that are
nonproductive because individuals haven't gotten their permits
in line. He related that through this legislation he has no
intention of shutting down Healy or Pogo, a couple of the areas
of the state in which the shallow natural gas leases were
ongoing but hadn't yet become productive. Representative Seaton
reiterated his earlier testimony regarding the unique situation
of Homer, which is an area opposed to the shallow natural gas
program and where it isn't underway at all. Therefore,
extending it into areas where there are developmental wells
could result in a situation in which the Division of Oil & Gas
is in more of a quandary regarding which [leases] should be
extended. He reiterated that such isn't the case in the
[Kachemak Bay] area where it's completely speculative. The
purpose of this legislation, he clarified, is to not extend
speculative leasing, although it doesn't intend to stop leasing
that's under development. However, if "it's expanded out
throughout the state, that could well be the intent," he said.
REPRESENTATIVE STEPOVICH agreed that he didn't want to shut down
any more leasing either. He said he wouldn't want to impose a
moratorium in other areas unless it was brought to the attention
of the area and those in the area wanted it. Representative
Stepovich asked if the administration has discussed a buyback in
the Matanuska-Susitna Valley.
Number 2730
MR. PARNELL related that the governor, on a number of occasions,
has said that a buyback should be a last resort. In this case,
[DNR] believes a buyback would be very expensive, would be a
disincentive to the development of rural energy alternatives,
and undermines the state's leasing programs. Mr. Parnell opined
that there is a better statewide solution. The desire, he
related, is to include the public in a best interest finding
process and move through a competitive process rather than
through the over-the-counter program that currently exists.
Therefore, he related opposition to Amendment 1.
REPRESENTATIVE KERTTULA declared a conflict of interest with
regard to Amendment 1 [because her family owns property in the
Matanuska-Susitna Valley area].
The committee took an at-ease from 3:12 p.m. to 3:15 p.m.
REPRESENTATIVE GATTO declared a conflict of interest.
REPRESENTATIVE STEPOVICH withdrew Amendment 1.
Number 2621
REPRESENTATIVE HEINZE moved to report CSSSHB 364(O&G) out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, it was so ordered.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:16 p.m.
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