Legislature(1995 - 1996)
04/17/1996 04:10 PM Senate RES
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SENATE RESOURCES COMMITTEE
April 17, 1996
4:10 P.M.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Georgianna Lincoln
Senator Lyman Hoffman
MEMBERS ABSENT
Senator Robin Taylor
ALSO IN ATTENDANCE
Representative Beverly Masek
Representative Joe Green
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 325(FIN) am
"An Act relating to modification of royalty to encourage production
from an oil pool containing heavy oil; and providing for an
effective date."
CS FOR HOUSE BILL NO. 59(RES)
"An Act relating to raffles and auctions of certain permits to take
big game; and providing for an effective date."
SENATE BILL NO. 180
"An Act authorizing the commissioner of the Department of Natural
Resources to negotiate and enter into timber sale contracts that
provide for local manufacture of high value-added wood products;
and establishing an Alaska Forest Products Research and Marketing
Program within the Department of Commerce and Economic
Development."
CS FOR HOUSE BILL NO. 265(FSH)
"An Act relating to the export of live dungeness crab."
HOUSE BILL NO. 329 am
"An Act providing for restitution to the state for the unlawful
taking of game."
CS FOR HOUSE BILL NO. 447(RES)
"An Act relating to traditional means of access for traditional
outdoor uses and to the classification and the sale, lease, or
other disposal of state land, water, or land and water."
CS FOR HOUSE BILL NO. 547(RES) am
"An Act relating to a four-year moratorium on entry into Southeast
Alaska dive fisheries; and providing for an effective date."
SENATE BILL NO. 285
"An Act relating to management of discrete salmon stocks and to a
salmon management assessment; and providing for an effective date."
SENATE BILL NO. 318
"An Act authorizing, approving, and ratifying the amendment of
Northstar Unit oil and gas leases between the State of Alaska and
BP Exploration (Alaska) Inc.; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
HB 325 - No previous action to consider.
HB 59 - See Resources minutes dated 4/10/96 and 4/12/96.
SB 180 - See Resources minutes dated 4/10/96.
HB 265 - See Resources minutes dated 4/12/96.
HB 329 - See Resources minutes dated 4/3/96, 4/10/96 and 4/12/96.
HB 447 - See Resources minutes dated 4/12/96 and 4/15/96.
HB 547 - See Resources minutes dated 4/12/96.
SB 285 - See Resources minutes dated 3/13/96 and 4/12/96.
SB 318 - See Resources minutes dated 3/29/96, 3/30/96, 4/3/96,
4/11/96, 4/13/96 and 4/15/96.
WITNESS REGISTER
Ed Bain, Heavy Oil Asset Team Leader
OXY USA
Midland, TX.
POSITION STATEMENT: Supported on HB 325.
Jon Tillinghast, Attorney
Oxy USA
One Sealaska Plaza
Juneau, AK 99801
POSITION STATEMENT: Commented on HB 325.
Tom Boutin, Director
Division of Forestry
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on SB 180.
Cheryl Sutton, Legislation Aide
House Resources Committee
State Capitol Bldg.
Juneau, AK 99801-1182
POSITION STATEMENT: Supported HB 547.
Frank Hohman, Commissioner
Limited Entry Commission
8800 Glacier Hwy., Ste 109
Juneau, AK 99801-8079
POSITION STATEMENT: Supported HB 547.
Tom Neiswander
Milne Point Commercial Manager
BP Exploration
Alaska
POSITION STATEMENT: Supported HB 325.
ACTION NARRATIVE
TAPE 96-57, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 4:10 p.m and announced that the Confirmation Hearing for
J. David Norton, Commissioner, Alaska Oil and Gas Conservation
Commission, would be rescheduled for April 18 at 5:00 p.m.
CSHB 325(FIN) am No. Slope Heavy Oil Royalty Modification
CHAIRMAN LEMAN announced CSHB 325(FIN) am to be up for
consideration.
ED BAIN, OXY USA, explained that Oxy has an 8.8 percent interest in
the Milne Point Unit. They were one of the original owners and
have participated in the commercial development since it was
initiated about 12 years ago. He said the shallow well oil sands
were not economic to develop and current production occurs only
from the Green Area Tract 14, about 3,000 barrels per day for 21
wells. They support the Oil and Gas Policy Council's recognition
that an incentive is needed for heavy oil and, therefore, support
HB 325.
SENATOR FRANK asked Mr. Bain to explain some of the company's costs
that were exhibited to the committee on an overhead projector.
MR. BAIN said that he thought HB 325 went too far with the two
percent floor that was added to the holiday. He provided other
scenarios like 450 barrels per day with a two percent royalty which
would add one year of royalty reduction to HB 325. A total of
three percent royalty for a period of eight years would be required
to get to the same level of profitability for a $4 million
investment.
Number 147
SENATOR FRANK asked what exactly made heavy oil more expensive to
produce. MR. BAIN replied that the biggest hurdle is the up-front
cash flow rates. They also produced at a low rate. He illustrated
that a North Slope well might bring in typically 5,000 barrels a
day, but the very best heavy oil wells produce less that 600
barrels per day. They expect a 40 year life with heavy oil and
they get about 1/2 the recovery compared to lighter oils.
SENATOR PEARCE asked if they paid a penalty on the quality bank for
the pipeline. MR. BAIN replied that it's a poor crude and their
tariff cost is higher. They currently have a $6 deduct going to
the West Coast market.
Number 299
SENATOR FRANK asked how the Schrader Bluff accumulation related to
West Sak. MR. BAIN replied that the two sand groups they produce
are basically West Sak sands.
MR. BAIN explained that the next figure shows the progression of
time with ARCO's first West Sak pilot well done where they spent
over $100 per barrel trying to get heavy oil to work. They spent
about $10 per barrel when Conoco was the operator and the analysis
he is showing them for a typical well is about $3 per barrel. The
reason it's much cheaper is because they are doing further
development from existing pads.
Number 351
CHAIRMAN LEMAN asked him to explain the difference between $2.90
and the $1.80 that was represented last week by BP. MR. BAIN
replied that their difference is based on cost demonstrated to date
and BP's involved more speculative goal type of costs and a
projected business plan. He said that their operating expenses
would be about the same level as the capital expenses, about $2.80
or $2.90 per barrel.
MR. BAIN said the last figure was a synopsis of the University of
Alaska study done to assess the fiscal impact of significant heavy
oil development such as full or partial development of the Milne
Point Unit's heavy oil. He said essentially there would be the
creation of 322 nine-year jobs associated with the capital phase,
which would a drilling of 20 to 40 over a nine-year period of time,
and then the creation of 122 41-year jobs, basically careers.
Although this is not a royalty for jobs bill, there are a lot of
jobs associated with this level of expenditure over this period of
time.
Number 401
SENATOR LINCOLN asked how he defined "Alaska resident."
MR. JON TILLINGHAST, Milne Point Unit Attorney, explained the term
was from the UAA of study and they didn't give a definition of
Alaska resident. He thought it meant long-term resident, because
the jobs were so long-term.
SENATOR LINCOLN said she would be interested to compare what their
company projects with resident and non-resident employees. MR.
TILLINGHAST replied that the UAA report broke down the number of
jobs that would go to residents and non-residents based on their
analysis and experience. The jobs listed on the chart are only the
jobs projected by UAA. There would be additional jobs going to
non-residents and the UAA's conclusions were that of the total
jobs, 75 - 80 percent would be filled by Alaska residents.
Number 428
MR. TILLINGHAST added that they feel the 15 percent hurdle rate was
within the realm of industry standard when they presented it to the
Oil and Gas Policy Council. Arthur D. Little did a report for them
that mentioned several times that to encourage new projects you
need to get over 15 percent to get most oil companies to look at
it. Also, in reference to Senator Frank's earlier question about
what made heavy oil more expensive to produce, he said that low
production rates and high transportation costs were mentioned, but
added that some of the attributes which make heavy oil particularly
on the North Slope difficult to produce is that it lifts slowly
because it is heavy and it needs artificial lift to pump from the
beginning and also the oil is entrained in sand. Gravel packs need
to be installed to separate the sand from the oil. These get
clogged and need to be replaced. Another thing is that because the
oil is so shallow the oil is very cold and heat tapes are needed to
keep the oil warm enough.
SENATOR FRANK asked what he thought was the most expensive
producing field was. MR. TILLINGHAST replied that he didn't know
and thought BP could give him an answer, but he cautioned against
giving an across-the-board comparison, because of each unit's
unique features.
MR. TILLINGHAST said he had an amendment which clarifies the intent
of the royalty which is if you take advantage of the oil relief
granted by this bill, you can't apply for a royalty over the next
20-years for the heavy oil well you have already gotten relief for
under this legislation.
REPRESENTATIVE GREEN commented that he hadn't seen the amendment.
CHAIRMAN LEMAN asked him to review it and give them his opinion.
CHAIRMAN LEMAN announced they would set CSHB 325(FIN) am aside and
deal with some other issues.
CSHB 59(RES) Raffle or Auction of Big Game Permits
CHAIRMAN LEMAN announced CSHB 59(RES) to be up for considerat
and there was a proposed committee substitute that incorporates an
amendment by Senator Taylor to add elk.
SENATOR HALFORD moved to adopt SCS CSHB 59(RES). There were no
objections and it was so ordered.
SENATOR HALFORD moved to pass SCS CSHB 59(RES) from committee with
individual recommendations. There were no objections and it was so
ordered.
SB 180 Value-Added Timber Sales; Marketing
CHAIRMAN LEMAN announced SB 180 to be up for consideration. H
explained that the proposed committee substitute adds the Alaska
Forest Products Research and Marketing Program.
ANNETTE KREITZER, Staff to Senate Resources, explained the changes
in the Resources CS.
TOM BOUTIN, Director, Division of Forestry, said he didn't support
deleting the "J" relating to letting an individual have more than
one contract. He did support the other changes and was pleased
that it included the Alaska Forest Products Research and Marketing
Program.
SENATOR FRANK moved to adopt CSSB 180(RES). There were no
objections and it was so ordered.
SENATOR LINCOLN objected to find out what "J" meant. MS. KREITZER
explained that Senator Taylor requested the amendment and the last
time the bill was before the committee a constituent testified
against it. SENATOR LEMAN added that deleting "J" would mean there
is no limit.
SENATOR LINCOLN said she wanted to hear the Department's opinion.
MR. BOUTIN explained that the chief reason they don't support
taking that out is that the Board of Forestry went through a very
extensive public process on this value-added bill and that wasn't
one of the recommendations they made.
SENATOR FRANK said he thought the concern was that it wouldn't
allow for joint ventures. MS. KREITZER agreed and said even with
this provision taken out the Commissioner can say no.
SENATOR FRANK asked if MR. BOUTIN could accommodate the joint
venture concern, but still prevent a monopoly of all the available
timber. MR. BOUTIN replied that he didn't think the bill precluded
having a single dry kiln that people like Northland and Al Peg
could ship lumber to out of these contracts.
SENATOR FRANK moved to pass CSSB 180(RES) from committee.
SENATOR PEARCE said she wanted it on the record that her husband
works for one of the regional corporations that has timber
interests in the State and she didn't know if this would create any
opportunities for the company.
SENATOR LINCOLN commented, then, that she is also on a regional
corporation board that enters into timber sales.
There were no further objections to CSSB 180(RES) and it was passed
from committee.
CSHB 265(FSH) Export of Dungeness Crab
CHAIRMAN LEMAN announced CSHB 265(FSH) to be up for consideratio
He said they had heard this bill and there was no opposition to it.
SENATOR FRANK moved to pass CSHB 265(FSH) from committee with
individual recommendations. There were no objections and it was so
ordered.
Number 580
HB 329 am Restitution For Certain Game Violations
CHAIRMAN LEMAN announced HB 329 am to be up for consideration.
SENATOR PEARCE moved to adopt SCS HB 329(RES). There were no
objections and it was so ordered.
SENATOR PEARCE moved to pass SCS HB 329(RES) from committee with
individual recommendations and a $0 fiscal note. There were no
objections and it was so ordered.
CSHB 447(RES) Protect Access For Tradit'nl Outdoor Uses
SENATOR LEMAN announced CSHB 447(RES) to be up for consider
REPRESENTATIVE MASEK, sponsor, said she would answer any questions
regarding the bill.
TAPE 96-57, SIDE B
Number 580
SENATOR HALFORD moved to pass CSHB 447(RES) from committee with
individual recommendations. There were no objections and it was so
ordered.
CSHB 547(RES) am Moratorium on S.E. Dive Fisheries
CHAIRMAN LEMAN announced CSHB 547(RES) am to be up for
consideration. He said the bill was heard and there was
substantial interest in moving it. However, it was not unanimous.
At least one person would be affected by it and he thought the bill
was now represented a reasonable consensus on limiting the number
of divers for abalone, sea urchins, sea cucumbers, and geoducks.
SENATOR HOFFMAN said there was concern that the people who
pioneered the fishery would be left out and there was testimony
that half of them were Alaskan residents.
SENATOR PEARCE asked if the catch was limited in any of the
fisheries.
CHERYL SUTTON, Legislative Aide, House Resources Committee,
answered that the purpose of the bill is to establish a moratorium
on four of the dive species in Southeast so the development of the
fisheries can be observed and consistent, sustained yield
management plans can be devised. She said the bill is widely
supported and they had worked closely with all the communities and
divers in Southeast Alaska. There is a lot of compromise contained
in this bill.
CHAIRMAN LEMAN asked her to comment on the fisherman who would be
excluded from the fishery as a result of this bill. MS. SUTTON
explained that he was basically a Kodiak fisherman and this is a
Southeast Alaska moratorium on specific species in Southeast
Alaska.
Number 540
SENATOR FRANK moved to pass CSHB 547(RES) am from committee.
SENATOR HALFORD objected because he didn't want to limit
participation in any more fisheries. SENATOR HOFFMAN pointed out
that this did not limit fisheries, but it was a four-year
moratorium so that the resource could be further evaluated.
MS. SUTTON commented that there was a lot of assessment work that
needed to be done with these developing fisheries and that funding
had been cut for this. The participants in this fishery are
interested in looking at a self-funding mechanism to have on-going
management and stock assessment. She said there are already too
many participants in the fishery.
SENATOR FRANK asked if they already limit the catch. MS. SUTTON
replied that they do have quotas already.
SENATOR FRANK asked if the openings could be structured so that
they would favor Alaskan residents. MS. SUTTON replied that the
Department was trying to do that, but there is such a rush from
folks in failing fisheries that a sound management cannot be
developed because of the unknown number of participants. A
moratorium would fix some numbers and give them the opportunity to
develop more effective management.
SENATOR FRANK suggested closing the fishery down altogether and let
the stocks come back and have surprise openings.
Number 484
REPRESENTATIVE WILLIAMS, sponsor of HB 547, said he couldn't add
much more to what Ms. Sutton said.
SENATOR HALFORD said he was concerned that half the participants
now are outsiders. MS. SUTTON replied that that was incorrect.
Number 458
FRANK HOHMAN, Limited Entry Commissioner, explained that in three
of the fisheries a substantial majority are resident fishermen. In
the geoduck fishery their latest statistics indicate 50/50 and this
is the newest fishery. He explained that the rush to get into the
open fisheries has mushroomed and the reason for the moratorium is
to cap it to have time to study it.
SENATOR HALFORD suggested having the fisheries managed for resident
participation while the information is gathered, use those
participants as a starting point, and then make the permits non-
transferable. He noted that all the other fisheries with
transferable permits have a huge debt-load and they are all going
down hill.
MR. HOHMAN answered that those things had been tried and the
abalone fishery, for example, is down to one day per year. He said
that 95 percent of the harvesters in that fishery are residents.
He added that this moratorium might be an opportunity for them to
investigate some of the methods he just mentioned.
Number 415
SENATOR FRANK asked the status of the moratorium on the dungeness
crab fishery they instituted a few years ago. MR. HOHMAN answered
that was completed and it was operating with the input from people
within the fleet and the Department. They developed a new type of
limited entry system which has a new phase called the tiered pot
system. Each participant, based on their past production, is given
a number of pots they can fish. This preserves the resource and
allows a certain number of pots to be fished and it preserved the
economic opportunity for those who are in it. He thought this was
a very successful conclusion to that fishery.
MR. HOHMAN added that there would likely be some non-transferable
permits within that fishery, but there would also be transferable
ones. It is based on a complicated point system.
SENATOR HALFORD asked why we should ever create another
transferable fishery. REPRESENTATIVE WILLIAMS said that he agreed
with him, but the dive fishery required large boats to service the
divers and fishermen from down south are equipped to handle that.
This makes it difficult for the residents to invest money if they
are not assured they will have a fishery. That is what basically
is happening.
SENATOR LINCOLN asked what the objection was to having the
moratorium reviewed in two years instead of waiting for four years.
MR. HOHMAN replied that the reason for the four years is to give
time to the Commission. This isn't the only issue before them and
their last experience with the Southeast Dungeness Crab fishery
took a four year period of time. He said it took at least three
public hearing phases throughout Southeastern to come to agreement
there.
SENATOR HALFORD withdrew his objection with the condition that he
would come up with a floor amendment that prohibits the creation of
new transferable fisheries.
CHAIRMAN LEMAN asked if there was further objection to the motion
to pass CSHB 547(RES) am from committee. Hearing none, it was so
ordered.
SB 285 Discrete Salmon Stock Managmt & Assessment
CHAIRMAN LEMAN announced SB 285 to be up for consideration.
SENATOR HALFORD said they needed to come up with some changes for
the financing mechanism, but he thought that could be done in
Finance. He moved to pass SB 285 from committee with individual
recommendations.
CHAIRMAN LEMAN objected to say that he thought the bill needed
substantial work. He wanted to be consistent with our positions
before Congress regarding the Endangered Species Act and with
Canada regarding the U.S.-Canada Salmon Treaty. He also noted
that not all salmon spawn in rivers and this bill suggests that
they do.
SENATOR HOFFMAN said he thought that sports fishermen benefit from
this fishery and there should be some fees associated with it.
SENATOR HALFORD agreed and said they were looking at some ways to
do that.
SENATOR LINCOLN said she thought this was a resource piece of
legislation and if there were any amendments, they should be made
in the Resources Committee.
CHAIRMAN LEMAN requested a roll call vote on the motion to move SB
285 out of committee. SENATORS HALFORD, FRANK, PEARCE, AND HOFFMAN
voted yes; SENATORS LINCOLN AND LEMAN voted no; and so, the motion
carried.
Number 290
CHAIRMAN LEMAN announced CSHB 325(FIN) am to be back up for
consideration.
MR. TILLINGHAST explained that Oxy thought there were a number of
criteria that are important for an effective incentive. One is
that it is sufficient to materially impact project economics. The
second thing is that it should be an up-front incentive because
they are trying to encourage new capital investment.
Other states have found that royalty holidays and severance tax
holidays are the most effective way of encouraging new investment
as opposed to having a reduced royalty over the life of the field
which is more effective if you are trying to reduce somebodies
operating costs over the long run.
The virtue of the "purple option" is that the three percent royalty
is about 25 percent of Oxy's lease royalties. Therefore, if it's
the legislature's desire to assure that the Permanent Fund's
constitutional share of royalties continue to go into it, it gives
the legislature the ability to do that.
CHAIRMAN LEMAN asked on page 1, line 15, at what point it was
intended that the $15 price be measured. MR. TILLINGHAST answered
at the well-head lack meter.
CHAIRMAN LEMAN asked on page 2, line 22, why a two-year period was
selected for the production records instead of using the same
period the State has for its audit rights for taxes and royalties.
MR. TILLINGHAST replied that they ought to be consistent whatever
they are. He said the issue came up in the House and they couldn't
find out what the audit period was for royalty records in
generally.
CHAIRMAN LEMAN asked on page 3, line 8, if the 450 should be
changed to 500. MR. TILLINGHAST said that was correct and he added
there was another correction needed on page 2, line 3 in the
definition of "actual initial drilling", but the subparagraph only
refers to "initial drilling." "Actual" should be deleted, he said.
Number 205
REPRESENTATIVE GREEN said he had no problem with their first
proposed amendment.
CHAIRMAN LEMAN asked on page 3, line 9, what happens if oil with
the higher gravity is blended with lower gravity oil to produce a
blend that is higher than the low gravity oil, but lower than the
20 degrees API cutoff in the bill. MR. TILLINGHAST replied that
wouldn't be a problem at Schrader Bluff because there are no dual
completions. REPRESENTATIVE GREEN answered that they are really
talking about a very small area.
MR. TILLINGHAST added that an up-front incentive is superior from
the State's perspective because heavy oil fields have a very slow
decline rate and an up-front incentive will net the State more
royalties than a similar incentive spread out over the life of the
field.
TOM NEISWANDER , Milne Point Commercial Manager, BP Exploration,
said this is a resource they have known about for a very long time.
It is undeveloped despite three tries. They have developed 15
million barrels out of that 26 billion that are in-place. The
reason for that is that heavy oil reserve is uneconomic. Their
bottom line on development costs is $2.75 per barrel. Add that to
the other typical characteristics of this project and that makes it
uneconomic.
TAPE 96-58, SIDE A
Number 001
MR. NEISWANDER said that the industry needs to continue to work at
bringing its costs down and increasing the initial production rates
of those wells. He said it takes spending money to figure out how
to do these things. He thought the State should encourage those
types of initiatives and HB 325 is a simple, clear tool to help
them do that.
CHAIRMAN LEMAN apologized for interrupting, but said there were
other time constraints and he thanked him for his testimony. He
said they would prepare a Resources SCS to HB 325 and set it aside.
SB 318 North Star Oil & Gas Lease Amendment
CHAIRMAN LEMAN announced SB 318 to be up for consideration. He
said a committee substitute had been prepared which included the
"findings" from their hearings and had the agreement with a few
suggested changes dealing with enforceability of Alaska-hire,
Alaska contracting provisions and the effective date.
SENATOR HALFORD moved to adopt CSSB 318(RES), version "C." There
were no objections and it was so ordered.
CHAIRMAN LEMAN recessed the meeting at 6:00 p.m.
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