Legislature(1993 - 1994)
04/01/1993 05:15 PM Senate O&G
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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.
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