Legislature(1993 - 1994)
04/11/1994 09:15 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= 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.
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