Legislature(1993 - 1994)

04/01/1993 05:15 PM Senate O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
              SENATE SPECIAL COMMITTEE ON OIL & GAS                            
                          April 1, 1993                                        
                            5:15 p.m.                                          
                                                                               
  MEMBERS PRESENT                                                              
                                                                               
  Senator Loren Leman, Chairman                                                
  Senator Bert Sharp                                                           
  Senator Al Adams                                                             
                                                                               
  MEMBERS ABSENT                                                               
                                                                               
  Senator Rick Halford                                                         
  Senator Judith Salo                                                          
                                                                               
  COMMITTEE CALENDAR                                                           
                                                                               
  SENATE BILL NO. 150                                                          
  "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."                                            
                                                                               
  PREVIOUS ACTION                                                              
                                                                               
  SB 150 - See Oil & Gas minutes dated 3/16/93 and 3/23/93.                    
                                                                               
  WITNESS REGISTER                                                             
                                                                               
  W. R. Stewart                                                                
  Stewert Petroleum                                                            
  2550 Denali, Suite 1300                                                      
  Anchorage, Alaska 99503                                                      
  POSITION STATEMENT:  Supported concept of SB 150.                            
                                                                               
  William Hopkins                                                              
  AOGA                                                                         
  Anchorage, Alaska                                                            
  POSITION STATEMENT:  Supported concept of SB 150.                            
                                                                               
  Jim Eason, Director                                                          
  Division of Oil and Gas                                                      
  Department of Natural Resources                                              
  P.O. Box 107034                                                              
  Anchorage, Alaska 99510-7005                                                 
  POSITION STATEMENT:  Commented on SB 150.                                    
                                                                               
  R. C. Gardner                                                                
  Enser Consulting                                                             
  4640 Business Park Blvd.                                                     
  Anchorage, Alaska 99503                                                      
  POSITION STATEMENT:  Supported concept of SB 150.                            
                                                                               
  Pete Nelson                                                                  
  Texaco                                                                       
                                                                               
                                                                               
  Anchorage, Alaska                                                            
  POSITION STATEMENT:  Supported concept of SB 150.                            
                                                                               
  Kevin Tabler                                                                 
  UNOCAL                                                                       
  Anchorage, Alaska                                                            
  POSITION STATEMENT:  Supported concept of SB 150.                            
                                                                               
  ACTION NARRATIVE                                                             
                                                                               
  TAPE 93-13, SIDE A                                                           
  Number 001                                                                   
                                                                               
  SENATOR LEMAN  called the Special  Committee on Oil  and Gas                 
  meeting to order at 5:15 p.m. and announced SB 150 OIL & GAS                 
  EXPLORATION LICENSES/LEASES to be up for consideration.                      
                                                                               
  BILL STEWART, President, Stewart Petroleum Company, said his                 
  was  a  small,  independent  oil  and  gas  exploration  and                 
  production  company based  in  Alaska -  active  in 7  other                 
  states.   Currently, they  have discovered  an oil  field of                 
  significant size in the west side of Cook Inlet and they are                 
  in the early stages of development of that field.                            
                                                                               
  Exploration licensing has been used successfully in  various                 
  places  around  the  world.    In  respect  to  Alaska,  any                 
  licensing program should not include  mature areas which are                 
  the North Slope and Cook Inlet Basin.  Such a program should                 
  be used in  frontier areas.  Alaska  has in the order  of 20                 
  sedimentary  basins.  Only  half a dozen  have been explored                 
  and  only  2  have been  extensively  explored,  MR. STEWART                 
  explained.                                                                   
                                                                               
  Certain provisions of SB 150  will preclude participation by                 
  independent producers  and probably  by the  smaller of  the                 
  major oil companies.                                                         
                                                                               
  1)  The  bill, as  drafted allows for  licenses in areas  as                 
  much as 500,000 acres.   The contemplated license fee  of $1                 
  per acre will  discourage producers from going  any further.                 
  He noted that the entire Prudhoe  Bay field covers less than                 
  half  the  500,000   acre  maximum.     The  likelihood   of                 
  discovering  another  Prudhoe  Bay is  highly  unlikely.   A                 
  license  area of 100,000 is more  appropriate and will allow                 
  competition by smaller  companies.  Also, production  of the                 
  license area over  time as  the exploration process  defines                 
  specific prospects  is in  order.   In addition,  total land                 
  under  license to any  single licensee should  be limited to                 
  500,000 acres to prevent warehousing of acreage.                             
                                                                               
  2)  Another concern is the obligation to perform a specified                 
  minimum  work   commitment  expressed  in  dollars.     Work                 
  commitment should be expressed in terms of activity,  ie. 35                 
  miles of seismic work, plus 1  exploratory well drilled to a                 
                                                                               
                                                                               
  depth of 10,000 feet.                                                        
  Independents can operate cheaper than  major companies.  The                 
  bill, as drafted, punishes efficiency.   If they were to bid                 
  in terms of dollars for the  work program just sighted, they                 
  might bid $1.5 million  for the seismic and $10  million for                 
  drilling for a  total of $11.5 million.  If  they were able,                 
  through  efficiency,  innovation,  or  luck to  perform  the                 
  entire  program  for $9.5  million,  the $2  million savings                 
  would be  forfeited to  the state  of Alaska.   Requiring  a                 
  performance bond or other security in  favor of the state in                 
  an amount not  less than the amount of work  to be performed                 
  will preclude participation by smaller  companies.  Bonds of                 
  that nature are simply not available on today's market.                      
                                                                               
  They are  a small successful  company with a  good financial                 
  statement  and  they   were  unable  to  obtain,   at  least                 
  initially, a  $100,000 drilling  bond which  is currently  a                 
  requirement  on  the drilling  permit.   They  satisfied the                 
  obligation by pledging a certificate of deposit to the state                 
  of Alaska.  They couldn't  possibly pledge the $11.5 million                 
  which  would tie  the funds  up for  a long period  of time.                 
  They  suggest  a  performance bond  posted  annually  in the                 
  amount  of  10% of  estimated  expenditures for  the ensuing                 
  year.                                                                        
                                                                               
  3)   The oral  outcry arrangement  provided in  SB 150  will                 
  again preclude real  competition by the  independent sector.                 
  They suggested that  the sealed bid arrangement  utilized by                 
  the state's competitive oil and gas leasing program would be                 
  appropriate.                                                                 
                                                                               
  As an  independent producer,  they are  in  touch with  many                 
  other  independent  producers.   The  Independent  Petroleum                 
  Association of American  (IPAA) has roughly  10,000 members,                 
  most of whom  never venture to Alaska.  In the wake of their                 
  success, they are beginning to  hear expressions of interest                 
  from quite  a  few  who have  the  financial  capability  of                 
  operating or investing here.                                                 
                                                                               
  Exploration  licensing   with  the   modifications  he   has                 
  suggested will attract those independents.                                   
                                                                               
  Number 162                                                                   
                                                                               
  BILL  HOPKINS,  Alaska Oil  and  Gas Association  (AOGA), 1)                 
  supported large block exploration licensing as an attractive                 
  addition  to  the  state's  leasing  program  to  accelerate                 
  exploration and  potential development of  Alaska's frontier                 
  areas.                                                                       
                                                                               
  2)  MR.  HOPKINS said  state land that  has insufficient  or                 
  undocumented geologic and  geophysical information or  state                 
  land that is not (indistinct) or currently is not subject to                 
  an oil and gas  lease sale program should be  considered for                 
                                                                               
                                                                               
  explorataion licensing.   All lands north  of 68 degrees  30                 
  minutes north latitude should be excluded.                                   
                                                                               
  3)    He said  the license  should  be conditioned  upon the                 
  annual posting of  work commitment  or performance bonds  or                 
  other security in  favor of the state in an  amount not less                 
  the amount of the  work permit per year or  the Commissioner                 
  should adopt  regulations to  evaluate competing  proposals.                 
  All licenses  should  be awarded  on  the bases  of  written                 
  sealed bids.                                                                 
                                                                               
  4)  and,  conversion from license  to lease should be  under                 
  existing state leasing  statutes, AS 38.05.180  (indistinct)                 
  and subject  to the acreage   chargeability of  AS 38.05.140                 
  (c).                                                                         
                                                                               
  SENATOR  ADAMS  said  he  and  Senator Leman  have  prepared                 
  amendments that address his concerns.                                        
                                                                               
  Number 202                                                                   
                                                                               
  JIM EASON, Director,  Division of Oil  and Gas, said he  was                 
  prepared to answer questions.                                                
                                                                               
  SENATOR LEMAN asked why they chose 500,000 acres as the high                 
  number.  MR. EASON said they wanted to allow the flexibility                 
  to include a  large area  if it was  determined there was  a                 
  basin  or  portion  of a  basin  that  would  be subject  to                 
  nomination for licensing.   He said there  was probably some                 
  number at  which  you are  likely  to subvert  the  original                 
  intent of the  provision by limiting  the amount of  acreage                 
  that potentially can be explored and developed.                              
                                                                               
  SENATOR LEMAN asked  if they would  have the ability  within                 
  the Department of  Oil and  Gas to restrict  the acreage  to                 
  something  less than 500,000  acres if they  believe it's in                 
  the interests of  the state to do  so?  MR. EASON  said that                 
  was correct.                                                                 
                                                                               
  Number 240                                                                   
                                                                               
  BOB  GARDNER,  Regional  Program  Manager  for Oil  and  Gas                 
  Services, Enser Consulting and Engineering, said exploration                 
  licensing   would   stimulate   exploratory   activity   and                 
  accelerate development in the frontier basins of Alaska.  SB
  150, as it is presently drafted does little to achieve these                 
  goals.                                                                       
                                                                               
  Their objections are:                                                        
                                                                               
  1) The dollar for dollar bond  required is a disincentive to                 
  all independent  operators and probably to  major companies,                 
  as  well.   Bonds  in  the  size they  are  anticipating are                 
  practically impossible to  obtain except  by the largest  of                 
                                                                               
                                                                               
  companies.  Also, if  the project is finished for  less than                 
  the bid, the difference is subject  to forfeit to the state.                 
  The scope of  work and not  the dollars obligated should  be                 
  the variable here.  The bond should be limited to the amount                 
  of  work  scheduled  to be  performed  in  each  year or  $1                 
  million, whichever is less.  A $1 million bond should easily                 
  flush  out  the  speculators  and  still   not  be  a  major                 
  disincentive to independent operator participation.                          
                                                                               
  2)  SB  150 presently  allows for the  warehousing of  large                 
  tracks of  land under a  10-year exploration license.   They                 
  believe some shrinking of the license area triggered by work                 
  commitment milestones would be appropriate.  There should be                 
  some specific percentage of the area in the original license                 
  area relinquished annually.                                                  
                                                                               
  3)     SB  150   gives  extraordinary   discretion  to   the                 
  Commissioner of the  DNR. This is an appointed  position and                 
  the  possibility  exists  that  the  administration  of  the                 
  program could be subject to political pressures.                             
                                                                               
  4)  The DNR currently has an active and effective 5-year oil                 
  and gas leasing program.  The exploration program and the 5-                 
  year leasing program have  to interface in some manner.   SB
  150    essentially opens  all  areas to  exploration license                 
  applications.  Both Cook Inlet and the North Slope should be                 
  left out with the  possible exception of on the  North Slope                 
  those areas lying south of the presently producing areas.                    
                                                                               
  Since the  existing bill  does not  specifically define  the                 
  term "insufficient or undocumented  geologic and geophysical                 
  information," the potential is there  for the deepest pocket                 
  to tie  up most of the  unleased land in areas  that already                 
  have some proven production.                                                 
                                                                               
  Number 322                                                                   
                                                                               
  PETE NELSON,  Land Manager,  Texaco Alaska  Regional Office,                 
  said they  strongly support  the concept  of SB  150.   They                 
  believe intent should  be reflected  in the legislation  and                 
  not be left to administrative discretion or regulations.                     
                                                                               
  She felt including the  North Slope and Cook Inlet  in large                 
  block licensing and leasing was inappropriate.                               
                                                                               
  They believe licensing should be conditioned upon the annual                 
  posting  of  work  commitment  performance  bonds  or  other                 
  security in  favor of the state  in an amount  not less than                 
  the amount of the work commitment for each year.  Failure to                 
  do so should cause cancellation of the license.                              
                                                                               
  MS. NELSON said the Commissioner should adopt regulations to                 
  evaluate competing proposals.  The evaluation process should                 
  be  based  on only  written  sealed  bids  submitted by  the                 
                                                                               
                                                                               
  prospective licensee which  meets at least the  minimum work                 
  commitment for the license and minimum qualifications of the                 
  licensee.                                                                    
                                                                               
  Conversion from the license to leases should be accomplished                 
  under  existing  regulations and  should  be subject  to the                 
  existing acreage chargeability regulations. Number 349                       
                                                                               
  KEVIN TABLER, Land Manager, Union Oil Company, supported the                 
  position AOGA took.                                                          
                                                                               
  Number 378                                                                   
                                                                               
  SENATOR SHARP  moved to adopt  amendment #1.   SENATOR ADAMS                 
  commented that  he had no  problems with the  amendment, but                 
  the $100,000 on page 2, line 3 was out of line and needed to                 
  be  discussed.   He  said  it  used  to  be $5  million  per                 
  accident.                                                                    
                                                                               
  SENATOR  SHARP  said  that  all  other states  have  between                 
  $100,000 and $200,000 tops for on-shore exploration.                         
                                                                               
  SENATOR SHARP withdrew  his amendment for for  further work.                 
  There were no objections and it was so ordered.                              
                                                                               
  SENATOR LEMAN moved to  adopt amendment # 2.   SENATOR ADAMS                 
  wanted  to  make  sure  that  the legal  description  really                 
  exempts Cook Inlet and the North Slope.                                      
                                                                               
  MR. EASON hadn't seen amendment #2 and couldn't comment.                     
                                                                               
  SENATOR ADAMS stated  his proposed language and  asked which                 
  version the Department would like.                                           
                                                                               
  MR. EASON said he didn't see  a problem with excluding North                 
  Slope acreage  and describing  it as 68  degrees 30  minutes                 
  north latitude.  Identifying acreage in the Cook Inlet Basin                 
  is subject to  dispute.   There is no  firm definition  that                 
  would be agreed to by all parties.                                           
                                                                               
  SENATOR LEMAN asked what  he thought about a distance  limit                 
  in Cook Inlet like 6 miles or some distance restriction from                 
  existing leases.  MR.  EASON said that would be  much easier                 
  to identify and administer.                                                  
                                                                               
  MR. EASON explained  that some companies  wanted to be  sure                 
  that areas that are currently on the 5-year leasing schedule                 
  would  not be offered  for licensing.   Most companies would                 
  not want areas  (indistinct) existing production be  offered                 
  for licensing.   Most companies  agreed that at  some point,                 
  after  competitive  leasing,  perhaps  large  areas  of  the                 
  foothills  would   be  appropriate   for  licensing.     The                 
  department agrees with all those positions.                                  
                                                                               
                                                                               
  In considering  68 degrees  30 minutes  north latitude,  MR.                 
  EASON said he came up  with compromise language... "excluded                 
  lands  would include lands  north of  69 degrees  30 minutes                 
  north  latitude."    He  commented  that  would  be  a  line                 
  approximately half way between 68 degrees 30 minutes and the                 
  coast  line.   It would  also pick  up some  lands that  are                 
  currently on the  schedule.  In  addition, "no lands  within                 
  the boundaries of the proposed  competitive lease sale areas                 
  57, 80, 87, 88, as those areas are delineated DNR 5-year oil                 
  and  gas  leasing program,  be  offered for  licensing until                 
  after they are  first offered for competitive  leasing under                 
  the provisions of AS 38.05.180."                                             
                                                                               
  SENATOR  LEMAN asked  if  he had  any  suggestions for  Cook                 
  Inlet.  MR. EASON  said he hadn't because he  hadn't figured                 
  out  all  the concerns  with Cook  Inlet.   He  thought that                 
  language could be crafted once the issues were  agreed upon.                 
                                                                               
                                                                               
  Number 549                                                                   
                                                                               
  KEVIN TABLER suggested  land which  should be excluded  from                 
  licensing should  include state lands which have been or are                 
  currently subject to an oil and gas sale program.                            
                                                                               
  Number 553                                                                   
                                                                               
  MR.  EASON  said  this  language   creates  ambiguities  and                 
  challenges of  its own,  because there were  non-competitive                 
  leases as well as competitive leases over a very long period                 
  of time.  He  was certain we couldn't say  which leases have                 
  or  have  not been  offered  and  would be  available  to be                 
  offered  in  a lease  sale  program  - competitive  or  non-                 
  competitive.                                                                 
                                                                               
  MR.  TABLER  said  he  would  be  happy  to  work  with  the                 
  administration on appropriate language.                                      
                                                                               
  SENATOR LEMAN said they would lay  amendment #2 on the table                 
  for work until next  Tuesday.  There were no  objections and                 
  it was so ordered.                                                           
                                                                               
  SENATOR LEMAN moved amendment #3.  SENATOR ADAMS said he had                 
  no objections if he read the amendment for the public.                       
                                                                               
  TAPE 93-13, SIDE B                                                           
                                                                               
  SENATOR LEMAN read, "it must conditioned upon the posting of                 
  an  annual  work   commitment  performance  bond  or   other                 
  security..."    then on  page  2,  line 30,  after  the word                 
  "commitment"  insert  "for  that  year."    So  the  bonding                 
  commitment would be annually.                                                
                                                                               
  There were no objections  to amendment #3 and it  was passed                 
                                                                               
                                                                               
  from Committee.                                                              
                                                                               
  Number 577                                                                   
                                                                               
  SENATOR LEMAN moved to adopt amendment #4. MR. EASON pointed                 
  out that he  hadn't time  to evaluate where  there might  be                 
  potential conflicts or inconsistencies.   SENATOR LEMAN said                 
  they would lay that  aside for work until the  next meeting.                 
  There were no objections.                                                    
                                                                               
  SENATOR LEMAN moved amendment #5.   There were no objections                 
  and it was so ordered.                                                       
                                                                               
  Number 542                                                                   
                                                                               
  SENATOR SHARP  resubmitted  revised amendment  #1  with  the                 
  following change  on page 2,  item 3  strike "$100,000"  and                 
  leave "$5 million" in and he would do some more research for                 
  committees down the line.   There were no objections  and it                 
  was so ordered.                                                              
                                                                               
  Number 550                                                                   
                                                                               
  SENATOR LEMAN adjourned the meeting at 6:03 p.m.                             
                                                                               

Document Name Date/Time Subjects