Legislature(1993 - 1994)
04/11/1994 09:15 AM Senate FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE April 11, 1994 9:15 a.m. TAPES SFC-94, #58, Side 1 (263-end) SFC-94, #58, Side 2 (575-end) SFC-94, #60, Side 1 (000-338) CALL TO ORDER Co-chair Drue Pearce convened the meeting at approximately 9:15 a.m. PRESENT In addition to Co-chairs Pearce and Frank, Senators Kelly, Kerttula, and Sharp were present. Senator Rieger arrived as the meeting was in progress. Senator Jacko did not attend. ALSO ATTENDING: Senator Adams; Senator Leman; Senator Salo; Shelby Stastny, Director, Office of Management and Budget; Ken Boyd, Deputy Director, Division of Oil and Gas, Dept. of Natural Resources; Mike Greany, Director, Legislative Finance Division; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 308 - ADMIN ACTION RE LAND/RESOURCES/PROPERTY Co-chair Pearce advised that amendments to the bill were still being drafted. She then directed that discussion be continued to the afternoon portion of the meeting. The bill was thus HELD in committee. HB 199 - OIL & GAS EXPLORATION LICENSES/LEASES Lengthy overview and discussion was had with Ken Boyd of the Dept. of Natural Resources. The bill was subsequently HELD in committee for placement on the April 12, 1994, agenda. HB 505 - APPROP: BUDGET RESERVE FUND TO GEN.FUND Overview and updated information was provided by Shelby Stastny, Office of Management and Budget. The bill was then HELD in committee for further consideration. SENATE BILL NO. 308 An Act modifying administrative procedures and decisions by state agencies that relate to uses and dispositions of state land, property, and resources, and to the interests within them, and that relate to land, property, and resources, and to the interests within them, that are subject to the coastal management program; and providing for an effective date. Co-chair Pearce announced that although it was scheduled, SB 308 would not be discussed at the present meeting. She explained that an amendment was being drafted and would not be available until later in the day. HOUSE BILL NO. 505 An Act making appropriations to and from the constitutional budget reserve fund under art. IX, sec. 17(c), Constitution of the State of Alaska, for operating and capital expenses of state government for fiscal year 1994; and providing for an effective date. Co-chair Pearce directed that CSHB 505 (Fin)(brf fld)(efd fld) be brought before committee for presentation of an overview by representatives of the administration. The Co- chair referenced file materials consisting of transmittal information from the Governor, the original House Bill, and the version that ultimately passed the House. She specifically noted House failure of both the budget reserve fund and the effective date. Senator Kerttula inquired concerning a legal analysis. Co- chair Pearce said there is none. She explained that Judge Reese provided a one-page decision with details to follow. SHELBY STASTNY, Director, Office of Management and Budget, came before committee. He advised of support for the original bill as submitted by the Governor and lack of support for the version passed by the House. The intention of HB 505 was to lay out in the findings a history of amounts flowing to the constitutional budget reserve fund and thereafter placed in the general fund. The administration believes that action taken by the attorney general was appropriate. The administration subsequently did as required and followed the attorney general's opinion in placing moneys in the general fund. To cure problems raised in litigation, the administration proposed appropriation of $945 million from the general fund to the constitutional budget reserve fund. Addition of interest through the end of March brings the total to $978 million. Once appropriated to and deposited in the constitutional reserve, the funding would be immediately transferred back to the general fund to meet ongoing expenditures. That action would satisfy the court's direction. The administration's proposal was that funding would be transferred under Sec. 17(c) of the constitutional amendment--the subsection that requires the three-quarters vote. Discussion followed between Co-chair Pearce and Mr. Stastny concerning disputed amounts to accrue to the constitutional budget reserve. Mr. Stastny advised of ongoing Dept. of Revenue research over whether the amount in question was the acknowledged $70 million or up to $200 million--the amount collected on cases where an assessment was made but the case was settled prior to informal conference. Co-chair Frank referenced SB 331 (APPROP: BUDGET RESERVE FUND TO GEN.FUND), the Senate version of the bill, and noted that Sec. 4 appropriation of $416.6 million represents the amount the legislature anticipated would be needed to balance the current budget. Mr. Stastny concurred. He added, however, that with the reduction in revenues from the decline in oil prices, an additional $529 million will now be required to fund the budget. Further, "another couple of hundred million dollars" will be required "to be taken out by a vote to fund capital and operating budgets." Co-chair Frank voiced his understanding that Sec. 6 would appropriate an unspecified amount to be determined at the end of the fiscal year. Mr. Stastny concurred. The last estimate of that amount is approximately $350 million. Co-chair Frank noted that foregoing amounts total the $1.3 billion draw from the constitutional reserve needed to bring the budget "flush to the end of fiscal year 94." Mr. Stastny again concurred. Senator Kerttula asked if Judge Reese's decision would be appealed. Mr. Stastny said that the administration intends to await a detailed explanation of the ruling prior to making a decision. He then voiced his personal opinion that appeal would be pursued. Senator Rieger inquired concerning the total of the constitutional budget reserve fund once the proposed $945 million is appropriated back to the fund. Mr. Stastny responded, "about $1.7 billion." The Senator then observed that approximately $400 million would remain following withdraws to satisfy FY 94 budget needs. Mr. Stastny concurred. In response to questions from Senator Kerttula, Mr. Stastny said that while the administration may not agree with Judge Reese's opinion that HB 58 is unconstitutional, the administration believes that appropriations should be based on a three-quarter vote to eliminate the question in the future. Co-chair Frank voiced his recollection that the administration supported the House plan for funding of education from the budget reserve. Mr. Stastny said that the administration is supportive of any reasonable approach that "gets the three-quarter vote." Mr. Stastny next spoke to $150 to $200 million in funding based on assumptions of transfers from AHFC ($180 million), and a $60 million transfer from AIDEA resulting from AIDEA purchase of assets owned by the Dept. of Commerce and Economic Development. He further advised of an agreement by the administration to a $50 million reduction in the proposed budget. Calculation of all of the foregoing results in a $130 or $140 million balance in the constitutional budget reserve fund after funding of the FY 95 budget. The current spending plan indicates that if at the end of FY 95 the state continues to spend, based on the Governor's budget and the latest revenue projection, at the end of FY 95 the constitutional budget reserve fund would have a -$82 million balance, "assuming everything is funded out of the constitutional budget reserve fund." The above $50 million reduction, moneys transferred from AHFC ($180 million) and AIDEA ($60 million), and one half ($60 million) of hoped for additional tax revenues provide a counter balance. Senator Kerttula inquired concerning support for additional taxes. Mr. Stastny acknowledged that revenue raising measures had not received a warm reception. In response to a question from Senator Kelly, Mr. Stastny said that the $50 million reduction would be unrestricted. It could flow from both operating and capital funding. Senator Kerttula asked if future settlements had been factored into spending plans. Mr. Stastny responded that while the administration is aware of them, they were not factored into budget projections. Co-chair Pearce called for additional questions. None were forthcoming. She advised that CSHB 505 (Fin) (brf fld) (efd fld) would be HELD in committee for further review. RECESS - 9:40 A.M. RECONVENE - 9:50 A.M. HOUSE BILL NO. 199 An Act providing for oil and gas exploration licenses, and oil and gas leases, in certain areas of the state; and providing for an effective date. Co-chair Pearce directed that CSHB 199 (O&G)am be brought on for discussion and referenced a work draft SCS CSHB 199 (Fin) (8-GH1012\Q, Chenoweth, 3/22/94), two amendments by Senator Kerttula, and March 29, 1994, correspondence (copy appended to these minutes as Attachment A) from the Dept. of Natural Resources containing a comparison of House and Senate legislation. She advised that the "Q version" incorporates provisions from Senator Leman's version of SB 150. KEN BOYD, Deputy Director, Division of Oil and Gas, Dept. of Natural Resources, came before committee. He directed attention to the side-by-side comparison (Attachment A) of the Senate bill heard last year and the proposed House bill and explained that both industry and the state were in favor of the program but differed in individual approaches. Interim work with 18 companies (both in Alaska and Houston) achieved consensus between single entrepreneurs, the largest oil companies, and everyone in between. End: SFC-94, #58, Side 1 Begin: SFC-94, #58, Side 2 Co-chair Frank voiced need for an understanding of the purpose of the bill as well as deficiencies and advantages of licensing and leasing programs. Mr. Boyd acknowledged that the current state leasing program has worked well for a number of years. Lease sales of three-mile by three-mile squares (5,760 acres) have resulted in a checkerboard pattern of ownership. However, when over a million acres on the north slope of the Brooks Range were recently offered, no one came to the sale. Exploration licensing provides a company a large amount of land to explore, in exchange for a work commitment. The original bill provided for 2,500,000 acres. Through discussions with companies, the amount now allowable under license totals 500,000 acres. Mr. Boyd explained that the purpose of the bill is "to chase geology." The proposal must be balanced with the dollar amount of the work commitment and a determination of whether or not the proposal makes sense. Licenses primarily apply in areas that have not been explored. They provide companies with money and a work commitment a chance to explore, unencumbered by people who might have plans to do something else with adjacent lands. Co-chair Frank asked why the department proposes a new licensing program rather than merely expanding the size of tracts under the leasing program. Mr. Boyd explained that licensing relates only to the exploration phase. Following exploration, part of the land may be converted to lease. Mr. Boyd attested to need for leases to remain small for future administrative purposes. A large block of licensed land converted to lease under that program would be more difficult to deal with. The major difference between a license and a lease rests in the fact that licensing provides for exploration by a company or group of companies with a commitment to "do 25% of the work within four years." That provides certainty that an entity does not merely license the land and then sit on it. The entity must do some of the work or lose its license. Co-chair Frank voiced his understanding that the lease program originally contained work commitments. He then recalled that that philosophy was abandoned because of associated problems. Mr. Boyd acknowledged problems associated with constraints. Requiring a work commitment during the exploration licensing phase is a better approach. In response to an additional question from Co-chair Frank, Mr. Boyd explained that the work commitment does not specify the type of work to be done. The license is awarded based on "whoever bids the most money . . ." in the work commitment. The department will be able to tell from the amount proposed, what kind of work will need to be done. In some basins wells will be drilled as part of the commitment while in other areas geophysical work will be done. Co-chair Frank asked if a licensee would have the opportunity to convert the whole 500,000 acres under license to lease. Mr. Boyd responded, "Only to the extent that they had fulfilled their entire work commitment obligation." He cited as an example an instance where a licensee had a $50 million commitment over a ten-year period. If the licensee spent $25 million to drill a successful well, the licensee would not have the right to "take anything to lease until they spend the other $25 million." A licensee may not convert to lease until the entire work commitment has been fulfilled. There is no intermediate conversion to lease. Everything happens at the end of the licensing term. Further, if the licensee does not do 25% of the work commitment, it loses its license. If it does 50% of the commitment in four years, it can keep the land. If between 26% and 49% is done by the fourth year, the licensee must return 25% of the acreage to the state and 10% of the acreage each succeeding year for the term of the license. Senator Kerttula voiced his understanding that a licensee could secure four adjoining 500,000-acre areas for a total two-million-acre exploration area. Mr. Boyd concurred, advising that two million acres is the cap for land under license. Under lease, the 500,000-acre limit, in state law for a long time, still applies. Senator Kelly asked if the existing licensing program would be repealed and converted to exploration licensing only. Mr. Boyd advised that no licensing program presently exists. The existing leasing program would not be repealed. He further advised that lands on the North Slope and most of Cook Inlet would be off limits to the licensing program and handled through the ongoing lease program. The reason for the licensing program is that lands that fall within it have been available for leasing for a long period of time, and no one has shown much interest in them. They are risky, remote, and potentially expensive to develop. The proposed bill is intended to give companies with the time, money, and inclination the ability to explore. Mr. Boyd next referenced maps showing the geographical restrictions of the program. He then noted modifying language restricting surface entry in the Bristol Bay Fisheries Reserve. Mr. Boyd next spoke to relinquishments. He explained that exploration licensing is utilized world wide, and concessions are features of many programs. Consensus provisions require that: 1. If at the end of the fourth year of licensing, the licensee has not done 50% of the work, the licensee must begin relinquishing land. 2. If 50% of the work commitment has been fulfilled by the end of the fourth year, there is no relinquishment provision. 3. If 25% of the work has not been done by the fourth year, the license is cancelled. 4. For work effort that falls within the 26% to 49% range, relinquishment begins and 25% must be returned at the end of the four-year period. Ten percent of the remaining acreage is relinquished each year thereafter for the term of the license. Industry believes that this arrangement gives it a positive opportunity to "not have relinquishments." The 50% relates to the total work commitment and is auditable in dollar amounts. There is no schedule requiring a certain amount of work to be done each year. The measuring point is the fourth year when 50% of the work must have been done. The Commissioner evaluates the number of dollars spent rather than the scope of the work performed. Mr. Boyd noted that bonding requirements are linked to relinquishments. The proposed bill contains a bonding formula which determines the amount of the bond for the upcoming year. Mr. Boyd directed attention to Page 4, Line 10, and read formula provisions. Comments followed regarding application of the formula using a $10 million work commitment as an example. Failure to post the annual bond will result in cancellation of the license. Co-chair Frank inquired concerning need for a bond. Mr. Boyd described the relationship between the bond and the bid amount. He spoke to need to be able to determine whether or not a bid is legitimate. The bond forces companies to be responsible in both the bidding process and the work commitment over the term of the license. Mr. Boyd advised of objection by many companies to bid by oral outcry. To cover situations where multiple companies are interested in exploration licensing in a particular area, the final determination will be made by sealed bid. That was part of the compromise. Speaking to conversions, Mr. Boyd pointed to bill provisions establishing license areas at between 20,000 and 500,000 acres. All or part of license areas may be converted to lease tracts. The amount of land that can be held by license is limited to 2 million acres. Current statutory restrictions limiting lease holdings to 1 million acres (500,000 acres of upland and 500,000 acres offshore) would apply to license conversions. The proposed bill does not change that restriction. The legislation establishes a floor of 20,000 acres and a ceiling of 500,000 acres under license. Mr. Boyd described the situation that led to establishment of the 20,000 acre floor. The public notice process, best interest findings, and other process requirements, do not make licensing of small areas feasible. The acreage cap of 2 million acres under license at any one time was added in the House bill. The application fee of not more than $1.00 per acre responds to concerns raised by small companies. The fee is intended to eliminate the nuisance of entities "that could never, ever . . . or even want to really be in the program." Senator Kerttula voiced his belief that licensees should pay $1.00 per acre. Mr. Boyd described the discussion with oil company representatives that led to fee provisions of "not more than $1.00 an acre." End: SFC-94, #58, Side 2 Begin: SFC-94, #60, Side 1 In response to a question from Co-chair Frank, Mr. Boyd acknowledged that the license fee may be different in different areas. He advised that fees would be worked out in regulations. In compromise discussions, participants felt this one-time fee was appropriate. Mr. Boyd next advised that provisions lowering financial responsibility for onshore exploration facilities from $5 to $1 million have been removed from the proposed bill and incorporated within separate legislation (SB 239). Mr. Boyd referenced the annual $3.00 lease fee per acre applicable to license lands converted to lease. An existing feature of the lease program specifies an annual rental of $1.00 an acre at the time of the lease sale. That amount increases in 50-cent increments to a maximum of $3.00 after five years. Lease terms are generally ten years on the North Slope and seven years in Cook Inlet. Speaking to the public notice amendment, Mr. Boyd observed that the public notice process of Title 38 is one of the important features of the proposed legislation. While all the features of Title 38 are present, the amendment at Page 8, Line 7, provides for public notice of the commissioner's findings. Senator Sharp asked if regulations would allow for licensing of 20,000 acre tracts or would they be written to restrict the size to 100,000 acres of more. Mr. Boyd acknowledged that regulations could restrict the size. He further noted that the Commissioner has the right to "reject any application . . ." Senator Sharp voiced concern that many do not consider the 20,000-acre threshold a nuisance limitation. He suggested that a licensing program with a minimum size that is four or five times larger than tracts in the existing lease program could be used "against smaller developers" the state should be encouraging. Senator Sharp next asked if staking of claims for exploration and development of minerals other than oil and gas would be allowed in license areas while licenses are in effect. Mr. Boyd responded affirmatively. He also pointed to existing statutory restrictions prohibiting unreasonable interference with the operator. Most restrictions relate to safety. All surface rights are reserved, and navigable waters are never to be blocked. Senator Kerttula asked if the licensee would incur liability similar to that of a private property holder. Department staff responded that "Anything over which the operator had jurisdiction would be subject to liability." The operator would not be responsible for things beyond the operator's control. Senator Sharp again expressed concern that regulations might establish minimums and parameters that would be prohibitive to some operators. Mr. Boyd voiced his belief that regulations would fairly implement language in the proposed bill. He reiterated that the program would not apply to the North Slope and Cook Inlet. The program is thus removed from areas with existing infrastructure. It is difficult to imagine conduct of operations on a very small tract of land in interior basins. The cost of construction of infrastructure for a small discovery in a small area would be prohibitive. Discussion followed between Mr. Boyd and Senator Sharp regarding the administration's effort to seek alternative energy sources for small villages through small gas fields, etc. The Senator remarked that the proposed bill appears to present an excellent opportunity for that effort. He then questioned whether the effort would be feasible with a minimum threshold of 20,000 acres and a multimillion dollar work commitment for exploration. Mr. Boyd stressed that "There is no minimum dollar commitment, except what would make sense." There is no particular relationship between the number of acres and the dollar amount of the work commitment. The proposed bill would not preclude attempts to find a gas source for a remote village. Mr. Boyd noted that the legislation would only apply to state land. Federal and Native lands fall outside its jurisdiction. Further, the state lease-sale program is also available. Senator Sharp again voiced concern that the program would favor larger companies over smaller operations. Mr. Boyd told members that both the proposed bill and the existing lease program "accommodate anybody that wants to play." Co-chair Frank referenced language at Page 9, Lines 12 and 13, and noted ability of the Commissioner to reduce royalties to 5% where it appears to be in the state's best interest to do so in unproven areas. He then questioned the wisdom of that provision. Mr. Boyd explained that questioned language reflects existing law. Co-chair Pearce added that it has never been used. Mr. Boyd directed attention to language at Page 8, Lines 16 and 27, and noted that leases must be conditioned upon a royalty amount or value of not less than 12.5% of production. Co-chair Pearce asked that Mr. Boyd review the background of the 12.5% royalty set forth in the leasing program. She noted that it appears to be in conflict with a possible incentive for a lowered royalty in the proposed bill. Co-chair Frank voiced his understanding that Native corporations have allowed exploration licensing on Native lands, but oil companies have not taken advantage of the arrangement. Mr. Boyd advised that, to his knowledge, Native corporations do not have a formal program. He said that "They take an area, and they make a deal." A formal procedure must be in place for public land. Co-chair Frank next asked that Mr. Boyd respond to assertions that the proposed program would end up with much public land being tied up in license arrangements. Mr. Boyd stressed that the land has been unexplored or underexplored for many years. The proposed bill promotes exploration. He stressed that exploration with a bonded work commitment does not amount to "locking anything up or giving anything away." Senator Sharp voiced his understanding that the proposed bill provides for exploration only. No production would be allowed. Mr. Boyd acknowledged that production would occur under lease. RECESS Co-chair Pearce advised that the meeting would be recessed at this time and possibly reconvened later in the afternoon. The meeting was recessed at 11:10 a.m.