Legislature(2001 - 2002)
02/27/2002 03:43 PM Senate RES
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* first hearing in first committee of referral
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ALASKA STATE LEGISLATURE
SENATE RESOURCES COMMITTEE
February 27, 2002
3:43 p.m.
MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Gary Wilken, Vice Chair
Senator Rick Halford
Senator Robin Taylor
Senator Ben Stevens
Senator Kim Elton
Senator Georgianna Lincoln
MEMBERS ABSENT
All Members Present
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 241(RES)
"An Act relating to a railroad utility corridor for extension of
the Alaska Railroad to Canada and to extension of the Alaska
Railroad to Whitehorse, Yukon, Canada."
HEARD AND HELD
SENATE BILL NO. 319
"An Act relating to shallow natural gas leasing; and providing
for an effective date."
MOVED CSSB 319(RES) OUT OF COMMITTEE
SENATE CONCURRENT RESOLUTION NO. 28
Establishing the Joint Legislative Salmon Industry Task Force.
MOVED CSSCR 28(RES) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
HB 241 - See Transportation minutes dates 1/31/02.
SB 319 - No previous action to record.
SCR 28 - No previous action to record.
WITNESS REGISTER
Representative Jeanette James
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HB 241.
Mr. Bill Britt
Gas Pipeline Coordinator
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on HB 241.
Mr. Dick Mylius, Director
Division of Mining, Land and Water
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on HB 241.
Mr. James Kubitz
Vice President, Real Estate
Alaska Railroad Corporation (ARRC)
P.O. Box 107500
Anchorage AK 99510-7500
POSITION STATEMENT: Commented on HB 241.
Ms. Phyllis Johnson
Vice President and General Counsel
Alaska Railroad Corporation
P.O. Box 107500
Anchorage AK 99510-7500
POSITION STATEMENT: Commented on HB 241.
Mr. Mark Sexton, President and CEO
Evergreen Resources Alaska Corporation
POSITION STATEMENT: Supported SB 319.
Mr. Dave Lappi, President
Lapp Resources, Inc.
4900 Sportsman Dr.
Anchorage AK 99502
POSITION STATEMENT: Supported SB 319.
Ms. Judy Brady, Executive Director
Alaska Oil and Gas Association (AOGA)
121 W. Fireweed
Anchorage AK 99503
POSITION STATEMENT: Supported SB 319.
Mr. Kevin Tabler
Manager of Lands and Government Affairs
UNOCAL
P.O. Box 196247
Anchorage AK 99510
POSITION STATEMENT: Supported SB 319.
Ms. Charlotte McKay
Senior Administrator of Environmental and Regulatory Affairs
Tech-Cominco AK
No address provided
POSITION STATEMENT: Supported SB 319.
Mr. Ken Boyd
Oil and Gas Consultant
No address provided
POSITION STATEMENT: Supported SB 319.
Mr. Jim Haynes, Lease Administrator
Division of Oil and Gas
Department of Natural Resources
550 W 7th Ave., Ste 300
Anchorage AK 99801-1724
POSITION STATEMENT: Supported SB 319.
Mr. Ian Fisk
Staff to Senator Austerman
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on SCR 28.
Ms. Sue Aspelund, Executive Director
Cordova Fishermen United
P.O. Box 939
Cordova AK 99574
POSITION STATEMENT: Supported SCR 28.
Mr. Chris Berns
P.O. Box 26
Kodiak AK 99615
POSITION STATEMENT: Supported SCR 28.
Mr. Oliver Holm
P.O. Box 3865
Kodiak AK 99615
POSITION STATEMENT: Supported SCR 28.
ACTION NARRATIVE
TAPE 02-5, SIDE A
Number 001
HB 241-RAIL AND UTILITY CORRIDOR TO CANADA
CHAIRMAN JOHN TORGERSON called the Senate Resources Committee
meeting to order at 3:43 p.m. and announced HB 241 to be up for
consideration.
REPRESENTATIVE JEANETTE JAMES, sponsor of HB 241, said she filed
this legislation to increase the size of the transportation and
utility corridor from 300 to 500 ft. wide. A corridor from
Fairbanks to Seward has been identified; this bill would create a
railroad connection to the North American rail system. She has
had a lot of support for this idea from the Canadians, as well as
from within the state. The accelerated interest is due, in part,
to Senator Murkowski's effort to support a bilateral commission
to do a feasibility study at the federal level. However, the
Canadians will have to do the same, so while the U.S. has
appropriated $6 million for this three-year process, no funds
have been expended yet.
HB 241 authorizes the Alaska Railroad Corporation (ARRC) to
survey on the ground and monument the corridor. Right now there
is great interest in building a gas pipeline along the same route
and she wants to be sure that neither the gas line nor the
railroad exclude the other by taking a position that doesn't
leave anything for the other. In discussions with the gas
producers, it has become apparent that there may be some
synergies between the two.
This particular legislation authorizes ARRC to investigate
extension of the railroad to White Horse, Yukon Territory. She
personally thought this would be a hand out to Canada. The other
issue is that the White Pass Railroad could go to White Horse,
but currently it only goes as far as Carcross. The Canadians have
indicated to her that if the Alaska Railroad went to White Horse,
they would extend their schedule to go there, too. This would
open the deep-water port of Skagway to that part of Alaska and
the Yukon.
The part of the bill that may be more controversial provides that
once ARRC has received the funds to do the surveying, the state
would transfer the state land within that corridor to ARRC.
REPRESENTATIVE JAMES said that many things have changed since an
aerial survey was done 20 years ago and it may well be that some
changes in the direction of the already delineated route would
have to be made. NASA did a fly-over with a high-resolution
evaluation of the whole area two years ago that is currently
being mapped by the Department of Natural Resources (DNR) and
will soon be finished.
In 1994 a route from Fairbanks to the Seward Peninsula was
authorized that excluded the requirement in Title 38 to identify
the use of the lands. She reminded the committee that ARRC has
eminent domain authority and that it is looking at a
transportation and utility corridor wide enough to possibly
include fiber optics or anything else that would need to go in
the corridor in the future.
CHAIRMAN TORGERSON said the first issue he wanted to discuss was
on page 2, lines 18 - 22. It gives DNR the authority to transfer
the land without legislative review. He has heard rumblings that
[legislators] would like to see a report when it's completed and
then do the final transfer.
REPRESENTATIVE JAMES said that would not necessarily negatively
affect the direction she is going in.
CHAIRMAN TORGERSON said the committee requested a legal opinion
on the reference to AS 42.40.370, which transfers all subsurface
rights, including the surface materials, mineral rights, the
right to use the timber, etc. to the corporation, but clearly the
[legislature] is not interested in giving the oil and gas to
ARRC. If they happen to build a road, they don't want to transfer
it and then buy the gravel back either. So, they are working on
an equal access issue to where the state would take care of a lot
of the right-of-way if needed, but still achieve the purpose they
want for ARRC.
REPRESENTATIVE JAMES said she had no problem with that either.
She never intended to include the subsurface rights with the
exception of gravel, which ARRC will need. She had discussed this
with ARRC and they were working on language about who would
manage the gravel while giving the state access to it.
CHAIRMAN TORGERSON next questioned giving ARRC the authority to
own property in Canada in the last sentence in the bill, which
says, "the corporation may acquire land or interest in Canada".
4:00 p.m.
SENATOR TAYLOR said he was concerned that the fiber optic
contract alone renders a significant income and that the state
should manage those revenues.
REPRESENTATIVE JAMES said she shares his concerns and she would
not have sponsored this bill if she didn't believe that this is
going to benefit Alaska as a whole. She noted that Alaska has a
lot of stranded resources that have the potential to be developed
if better connections were available. It appears to her that, for
safety reasons, wherever ARRC has a right-of-way, that land
should be managed by ARRC.
SENATOR TAYLOR expressed concern about giving ARRC title to the
500 ft. width. He questioned, "Why don't they just have a right-
of-way or easement for the use of that portion, but not an
exclusive right-of-way or easement." He said that he would give
ARRC the exclusive right to run the railroad on a 100 ft.
corridor but cautioned, "I wouldn't give them the exclusive right
to control all other uses that might be compatible with theirs."
REPRESENTATIVE JAMES said currently ARRC has fee simple title to
its railroad corridor and she believes it should all be the same.
She assumed that the basic minimum is 100 ft. for one track and
that they would need some double tracks and ancillary things
along the way. She said she didn't think the existing corridor is
going to work for future needs. She added:
If there is an EIS to do for the Railroad down there, I
was of the opinion that we could do the whole thing at
once and so when it comes to putting a transmission
line down, it'll be already done…
She said she didn't agree with Senator Taylor that it was that
much of a problem and in Fairbanks ARRC is working with federal
money to make separated grade crossings over 46 different at-
grade crossings. She noted, "The goal is to have separated grade
crossings, not at-grade crossings."
SENATOR LINCOLN commented the bill provides for "at least" a 500
ft. corridor, but that is just a minimum. She asked if there was
a reason to have a minimum and no maximum.
REPRESENTATIVE JAMES replied there is a reason, that being the
corridor needs to be wider in some areas to allow for turning,
double tracks and other things a railroad needs, but those
locations can't be determined until a survey is done.
SENATOR LINCOLN asked what the maximum could be.
REPRESENTATIVE JAMES said she didn't think they could know that
until the survey is complete. She reiterated that nothing would
happen until the survey and monuments were actually done on the
ground and people knew what was required and where.
SENATOR ELTON said the bill proposes that ARRC can identify a
corridor (page 2, lines 18 to 23) in accordance with cited
statutes and convey state land within the railroad utility
corridor. He asked who will negotiate if there are prior claims
on that land, whether they be mineral claims or farm leases.
REPRESENTATIVE JAMES replied that it is her understanding that if
DNR were to transfer any land to anyone for any reason, it would
have to identify the existing rights, whatever they happen to be.
Generally, if a piece of property that has existing rights on it
is purchased, you either make an agreement of compensation or
provide satisfaction or you accept the land with the existing
rights. She assumed this transfer would be handled in the same
way, but it needs to be clearer in the statute.
SENATOR ELTON said he understood then that it wouldn't be up to
DNR. It would be up to ARRC to extinguish those previous existing
rights that might conflict with ARRC's use and ARRC would incur
any costs associated with extinguishing those rights.
REPRESENTATIVE JAMES responded that she thought that is how it
would work.
SENATOR TAYLOR asked what was meant by "associated rail land" on
line 17 and in several other places.
REPRESENTATIVE JAMES said she understood that to mean sites and
other kinds of facilities along the line, including passenger and
freight stations.
SENATOR TAYLOR asked if they would be outside the corridor.
REPRESENTATIVE JAMES said she thought it would be part of the
corridor.
SENATOR TAYLOR asked if there was a definition of "associated
rail land" and whether it could go beyond the intended 500 ft. He
wondered if "associated rail land" meant lands beyond 500 ft.
REPRESENTATIVE JAMES replied that they can't specifically
describe what they need until the legislature authorizes the on-
the-ground survey.
CHAIRMAN TORGERSON said he thought that is the reason the
legislature wants to review the findings. He said he would set
the bill aside and work with the sponsor to resolve some of the
issues.
SENATOR LINCOLN asked if DNR would testify today.
MR. BILL BRITT, Gas Pipeline Coordinator, said that a majority of
DNR's concerns had already been identified. He explained:
First, there is likely to be some overlap between the
railroad corridor and the gas pipeline right-of-way as
has been indicated. Any gas pipeline right-of-way lands
transfers the railroad would stake [indisc.]
authorization, construction, operation, maintenance and
[indisc.] of the gas pipeline. The transfer would also
reduce the lease payment and may also affect the
tariff… This is not an abstract concern, given that the
railroad [indisc.] about 10 times what the state does
for fiber optics right-of-way.
Having the contract returned for review should be considered so
that other state interests can be identified. The bill should
also make conveyance subject to third party interests, a concern
that Senator Elton brought up. The state's mineral rights need to
be protected as well and the transfer should be made subject to
AS 38.05.125. The bill does not protect public use and access
within and across the corridor. At a minimum, the bill should
make the transfer subject to AS 38.05.127, retaining access along
navigable waterways. He suggested the committee might want to do
more. The bill also needs to clarify who will bear the expense
associated with the conveyance and there doesn't appear to be an
upper limit on the amount of land that can be conveyed.
CHAIRMAN TORGERSON asked him the difference between AS 38.05.125
and AS 38.05.035.
MR. DICK MYLIUS, Director, Division of Mining, Land and Water,
Department of Natural Resources (DNR), answered that AS 38.05.125
is language DNR uses when conveying land out of state ownership
while it retains the mineral rights.
CHAIRMAN TORGERSON asked if he agreed that AS 42.43.070 transfers
mineral rights.
MR. MYLIUS said that is DNR's understanding of it.
SENATOR ELTON noted that the only fiscal note in the packet
affects DCED and was written by the staff to the Senate
Transportation Committee. He thought DNR should prepare one also.
SENATOR TAYLOR asked if ARRC's purpose could not be just as well
provided for with an easement within a declared utility corridor
that was retained and owned by the state.
MR. JIM KUBITZ, Alaska Railroad Corporation, replied that depends
on what you want to accomplish. ARRC hopes this business will be
profitable or it may need to do other things on the land until it
is. He also explained that every once in a while you have to turn
a train around and that can't be done in a 500 ft. corridor. So,
every fifty miles or so ARRC will need a bigger piece of land on
which to do that.
SENATOR TAYLOR asked if that could also be accomplished by an
easement.
MR. KUBITZ said it could probably be accomplished by an exclusive
easement.
SENATOR TAYLOR said he wanted ARRC to stay in the railroad
business. He maintained, "I don't intend to give you I don't how
many thousand acres of land and resources and mineral rights so
you can go into the oil drilling business or go into the land
selling business or the land leasing business…"
MS. PHYLLIS JOHNSON, general counsel to the Alaska Railroad
Corporation, added:
From the Railroad's perspective, certainly we don't
have to have full fee title. It's an administrative
convenience to treat all the land we're involved with
the same way, but we can certainly differentiate. What
we would need to be especially careful about, though,
is in crafting or defining the language that creates
this easement interest, even if we don't say exclusive
- because I know that raised a few eyebrows just a
second ago when Jim said exclusive - we feel the need
to be able to have a very strong say about other
activities. Again, we get back to the safety sort of
angle of things. So, even if we have an easement, we
would need to be careful about how we define it so the
Railroad can protect both itself and the public and the
environment and all the interests there from those kind
of peculiar railroad hazards that goes along with the
kind of business we're in…You can call it an easement
or a duck as long as we're able to protect those
important public interests.
CHAIRMAN TORGERSON asked why the legislature would want to give
ARRC authority to own land or interest in Canada. He asked if it
is an important provision.
MR. KUBITZ replied that all ARRC is after is to be able to
control its corridor and right-of-way for its own reasons.
MS. JOHNSON asked them to envision the border and the interchange
with other rail lines and other activities; ARRC would need a
fairly spread out area to work in there. ARRC envisions buying a
little additional land to make it work out right at the border.
CHAIRMAN TORGERSON said they would work on language with them.
SENATOR TAYLOR asked if she could draft a paragraph indicating
what the essential elements are of an easement providing for a
priority of use by the railroad, but not an exclusive use.
MS. JOHNSON said she could take a stab at it and use the Federal
Transfer Act as her guide, because that would cover the most
important interests that need to be protected.
CHAIRMAN TORGERSON said they would hold this bill for further
work.
4:30 p.m.
SB 319-SHALLOW NATURAL GAS: LEASING & DISCHARGES
CHAIRMAN TORGERSON announced SB 319 to be up for consideration.
MR. DARWIN PETERSON, staff to Senator Torgerson, told members:
SB 319 is an act related to shallow natural gas
leasing. Shallow gas leasing was originally proposed as
a program that would enable exploration and production
of shallow natural gas deposits. One of the features of
the program is to encourage a new energy supply to
villages, mines and other rural users. The program is
fully operational with over 100 leases processed and
nearly 200 more pending. The program has become a
vehicle for commercial gas development in Fairbanks,
Big Delta, Mat-Su Valley and the Lower Kenai Peninsula.
SB 319 is intended to advance the program into a more
robust and viable commercial program that should
benefit all parties. Because the program has become
more commercial in nature, increasing revenues from
application fees and annual rental fees is appropriate.
The program will still neither involve competitive
bidding nor require bonus bids. However, application
fees for shallow gas leases have been increased from
$500 to $5,000 and an annual rental fee has been
increased from $0.50 to $1.00 per acre. The increased
fees are designed to increase revenue and pay for the
program costs while not discouraging parties of genuine
interest and ability from developing shallow natural
gas resources.
The requirement that DNR annually notify a lessee by
certified mail of rent due has been deleted. Rent would
automatically be due on the date determined in the
lease. Deadlines have proved to be unworkable and do
not recognize the work required by DNR to prepare
leases in areas that are populated and may have complex
land ownership patterns. The limitation on depth to
3,000 ft. has been replaced with the requirement that
some portion of the field must be within 3,000 ft. The
total amount of acreage that may be held by shallow
natural gas lessees has been increased from 46,080
acres to an aggregate of 100,000 acres. The acreage
increase reflects the fact that large acreage may be
necessary as a shallow gas program. The requirement
that the applicant conduct a title search will be
removed. DNR routinely conducts a title search for land
before leases are issued. Additionally, there are no
title companies that will conduct a thorough title
search of the subsurface estate and warranty title.
These changes will improve reservoir management…
TAPE 02-5, SIDE B
MR. PETERSON continued:
New bonding provisions would demonstrate lessees are
fiscally responsible and would help protect surface
owners. The lessee must secure the bond as a
precondition to obtaining the lease. In the event that
the surface estate is owned by a private property, an
additional bond may be required if the lessee and the
private party cannot reach an agreement. Lessees will
have from July 1, 2002 through September 30, 2002,
approximately 90 days to convert leases from the
existing program to the new program if they so choose.
MR. MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said that DNR strongly supports SB 319,
which recognizes that the original intent of shallow gas leasing
was to provide rural energy in remote areas. It would take many
leases to provide sufficient energy to the rural villages. That
was the original intent, but the program quickly evolved into a
commercial program. Right now there are pending leases on 1.3
million acres of land. The leases are clustered near fairly large
residential areas and communities of Fairbanks, the Big Delta
area, the northern Mat-Su area and in the Homer area. Those
leases are appropriated for fairly large-scale commercial gas
development, assuming there is shallow gas or coal bed methane or
both. DNR looks at the program in terms of what it needs to be an
effective commercial program as well as to maintain the original
intent if it is used by villages in rural and remote areas. About
1.5% of the leases are in higher density population areas.
DNR tried to come up with some changes to balance everyone's
needs and, to that end, worked with AOGA, Cominco, and other
folks who have an interest in seeing a successful exploration or
the shallow gas leasing program.
MR. MYERS told members that amending the 3,000 ft. depth is a big
issue. The problem with 3,000 ft. is that geologic formations for
coal or shallow gas typically tip at an angle and often start at
3,000 ft., and continue on below that level. There are fights
with the AOGCC over proving the state's rights to get that gas.
Another problem is that the 3,000 ft. depth is a surface depth
rather than a fixed depth based on sea level, but the terrain
undulates. This creates a huge problem from a reservoir
management standpoint and furthermore, the coal seams for coal
bed methane might extend from a few hundred feet down to depths
of 4,500 ft. DNR feels it is fair for the lessee to be able to
capture all the reserves in an entire area. For logical
development and to maximize production, DNR feels that mineral
rights, if the field starts above 3,000 ft., should be for the
whole field's accumulation. All parties share this concern.
Regarding changing the fee to $5,000, it costs DNR $2,000 to do
the title per lease. The current bill does not require DNR to do
the title work, but DNR has found that it has to. Private parties
cannot get insurance on title work so they have no way to verify
the title was done in a reasonable manner without actually
retracing it anyway. He pointed out that $5,000 is less than $1
per acre for a lease, which is well under any of DNR's
competitive leasing terms. They feel the terms are reasonable and
affordable.
MR. MYERS said DNR also wants to increase the total acreage from
46,000 acres under the old bill to 100,000 acres maximum per
company. The reason is that a coal bed is typically produced in
fairly large units of about 70 to 80,000 acres to maximize
production. Around a small village this wouldn't be necessary,
but in a commercial sense a company typically needs to acquire
more acreage.
In terms of raising the rents from $.50 to $1 per acre, this is
as cheap as they get. The original lease starts at $1, but
accelerates $0.50 each year for the term of the lease. This stays
at $1, which is affordable and provides more revenues to the
state. They feel that the state's oil and gas programs should at
least pay for themselves.
MR. MYERS said DNR is concerned that a lot of the current shallow
gas leases are in areas where the private land ownership is more
complicated than on the North Slope or in some areas of Cook
Inlet. DNR is concerned about getting an applicant who has a
tradition of oil and gas development that may not understand the
process of approvals and may actually enter the land or do damage
to it without getting the landowner's agreement. Putting the bond
amount up front gives extra protection to the surface owners that
the department feels is appropriate. The bond would screen out
folks who would not be able to afford the leases and who might
cause incidental damage by not getting a final operations permit.
This is an assurance to private landowners that they do have some
protection, partly necessary because this is an over-the-counter
program, not a program where the state selects which areas it's
leasing. People apply to DNR and a lease is then granted based on
the application.
SB 319 provides a chance for someone to convert from the old
program that limits rights to 3,000 ft. to this new program.
Several companies want to utilize these leases for commercial
development. He stressed that this is an important program to the
state in terms of providing energy to Fairbanks and the Homer
area.
SENATOR ELTON asked why DNR made the change on page 3, lines 13
and 14, that allows the director to terminate the lease if the
renter fails to pay.
MR. MYERS replied that he thought the issue was whether the state
has the obligation to be sure to mail out the request or whether
it is the lessee's responsibility to make sure to pay the rent.
He explained:
We felt that we're not in the mail order business of
doing that. We don't do that with our conventional
program. So this is an extra expense on the department
that a responsible lessee should have no problem in
fulfilling in the existing oil and gas program.
SENATOR ELTON asked if DNR still has the authority to terminate a
lease if rent is not paid.
MR. MYERS replied that it does.
CHAIRMAN TORGERSON asked him to explain the $500,000 bonding
requirement on page 16.
MR. MYERS responded that the $500,000 is a statewide bond for oil
and gas activities. DNR feels that requiring it upfront assures,
since there are no other qualifications that the lessee has the
wherewithal to cover any surface damage caused. If a lessee
already has a $500,000 statewide bond, it shows they are
responsible and that recourse is available so the lessee is
exempted from the extra $50,000 requirement.
SENATOR TAYLOR noted that language on page 5, line 23 refers to
$25,000 per incident. He asked if he were to go into the shallow
gas leasing business, whether he would have to come up with the
$5,000, pay the $1 per acre annual fee and also come up with a
$500,000 bond.
MR. MYERS replied that he wouldn't. He added that there are
multiple bonds in the state and this bill deals with some of them
in addition to adding another one. However, the additional bond
on page 5 is a DEC bond that is based on cuttings and weights and
other issues that are related to the operation of drilling, not
acquiring a lease.
SENATOR TAYLOR repeated his question that if he came up with
$5,000 and the $1 per acre fee, would he need to have additional
bonding before he could get the permits to actually drill a hole.
MR. JIM HAYNES, Permitting, explained that there are three
agencies within state government that have bonding requirements.
The Alaska Oil and Gas Conservation Commission (AOGCC) requires a
$200,000 statewide bond to plug an abandoned well that may be
left improperly in place. DEC's bonding requirements range from a
low of $25,000 to as high as $121 million, depending on the type
of facility. DNR requires a $100,000 bond for a single well and
$500,000 for a statewide bond, which would include shallow gas.
The bill says if you have the $500,000 bond in place, such as
UNOCAL does, no additional bond is required for shallow gas
operation.
CHAIRMAN TORGERSON asked if the $500,000 statewide bond
requirement is existing law and the legislation provides an
exemption if a company already has one. They indicated that was
correct. He asked if they didn't think that was a little low.
MR. HAYNES replied that it hadn't been low so far.
SENATOR TAYLOR clarified if he was going to lease to drill for
shallow gas, he would need a $200,000 bond for the AOGCC to make
sure he would plug up any holes that he would leave, a $25,000
per incident bond, and a $121 million bond to DEC for whatever it
construes the risks to be and then, if he was going to drill more
than one single hole, he would have to come up with another
$500,000 for a statewide bond for DNR, which would include this
gas.
MR. HAYNES replied that is correct, although he couldn't speak
for DEC. The per incident language, if you drill a well with one
drilling rig and move it to another hole, is another incident. If
you have three drill rigs running, that could probably be
construed as three incidents, but he didn't know how DEC would
interpret that. He stated, "We're concerned with $500,000."
SENATOR TAYLOR said the very least he could get by with is
$725,000 in bonding before he could drill a shallow gas hole.
MR. HAYNES said that is correct.
SENATOR TAYLOR indicated that was maybe too much.
MR. HAYNES replied that the question is what is being bonded.
Some of the bonds are to make sure the well is abandoned
properly, some of them are to protect the surface estate, and
others are to deal with oil spill clean-up issues. He explained,
"It's not a combined pool that's usable for all these purposes.
They are individual bonds for specific purposes that are all
different."
MR. MARK SEXTON, President and CEO, Evergreen Resources Alaska
Corporation, said that currently Evergreen has 46,080 acres of
shallow gas lease applications located in the Willow area pending
with DNR. He supports SB 319, which removes obstacles to
Evergreen's ability to explore for and develop shallow natural
gas. He told members:
Evergreen Resources Alaska's functional specialties
extend to Alaska the main focus of Evergreen Resources,
which is unconventional natural gas extraction such as
coal bed methane extraction and other shallow natural
gas development. These activities require at least
100,000 acres to establish the necessary economies of
scale for an initial developing program. We strongly
support increasing the depth limitation to one that
relies on science and geology for the specific geologic
play in concept. We're certain we can drill, complete
and produce natural gas wells below 3,000 in a safe and
environmentally responsible manner using the currently
existing technologies that we already employ every day.
Finally, Mr. Chairman, the shallow natural gas program
is the primary reason Evergreen is in Alaska and we're
grateful that the legislature is making this program
possible as well as improving it. The changes proposed
in this bill do provide us the necessary latitude to
operate in an economically sound and environmentally
safe manner and we acknowledge the Division of Oil and
Gas for collaborating with us and other stake holders.
This is in our mind an excellent example of how state
agencies and industry can work together to the benefit
of all interested parties, including and particularly
the public. Thank you for allowing me to testify today.
MR. SEXTON said John Kanegawa, Alaska Projects Manager, and Jack
Engstrom, Public Affairs, would be in Juneau Thursday and Friday
to provide further information.
SENATOR TAYLOR asked if he could give the committee a comparison
of the bonding requirements required from a company like his in
other states where there is shallow gas.
MR. SEXTON replied that it varies from state to state and in
general it's quite a bit less in Colorado, which requires a
$25,000 statewide bond. There is a separate $25,000 bond for
operating within federal units.
SENATOR TAYLOR asked if the requirements in other states are that
dramatically less than in Alaska where the minimum bonding
requirement to punch the first hole is $725,000.
MR. SEXTON said that is right:
But it really has come down to the fact that even as
large as those numbers are, when you look at the cost
of bonds, bonding really represents a small portion,
just a few percent of the total cost to drill, complete
and produce a shallow gas well. If an operator cannot
afford a bond, even if it's just a $500,000 statewide
oil and gas bond, it's probably unlikely that they will
have the financial resources to successfully drill and
produce a single exploration well, much less
implementing a full multi-well program in an orderly
development way I think the state wants to see.... The
operators who can afford to do this type of program
could easily afford this type of bonding.
SENATOR TAYLOR said that is why he is concerned, because through
this guise, the state may very well be excluding this activity to
a limited club of operators who can afford to do the drilling. He
understands that over 30% of the oil produced in the United
States today comes from wildcatters and a higher percent than
that comes from wildcatters drilling for gas. He didn't think it
encouraged them to go out there if the only boys that can play in
the game have to have a million dollar check before they can show
up.
MR. SEXTON responded that it is going to be more costly to do
business in Alaska. Evergreen has taken the approach that to do
this right, it has to plan to develop at least 100,000 acres to
get the proper economies of scale. He said that in populated
areas such as the Mat-Su, infrastructure and services are
generally available as opposed to the effort that would be
required to drill a few wells in outlying villages where the
market is limited. Alaska should deal with well-financed ethical
companies that are going to be able to do it right, because while
the cost for Alaska can be quantified relative to drilling wells
in Oklahoma or Kansas, the reality is the cleanup costs in
Alaska, especially in remote areas if someone doesn't do it
right, would be greater than down south where services and
equipment are more readily available. He reminded members that
Evergreen is planning to bring in specialized drilling rigs and
specialized fracture stimulation and completion equipment to do
the work in Alaska, which currently doesn't exist.
CHAIRMAN TORGERSON said that Senator Taylor is making a
comparison to one well and there is no such thing as a one well
methane shallow gas field that he knows of. He offered, "There's
maybe 1,500 wells to a field… and $500,000 is a bargain."
MR. SEXTON said that he was looking forward to proving that
statement true.
MR. DAVE LAPPI, President, Lapp Resources, Inc., supported SB 319
and said:
The proposed bonding to cover damages to the surface
will reduce the cost to the Division of Oil and Gas in
administering these provisions while providing good
protection to local resources.
The 100,000-acreage limitation will allow companies to establish
the larger acreage positions necessary to justify the risks and
expenses in developing the new resource. He discussed raising the
fees to cover the increased administrative costs with the
division and he thought it would be nice if monies to cover the
increased costs could be raised closer to the source of the
expense (the drilling and production phase) rather than at the
application stage. He thought it was in the best interest of the
state not to shortchange the Division of Oil and Gas, which
manages the source of the vast majority of our state's income.
He supported changing the exploration level to below 3,000 ft.
because it will increase the potential gas resource available
under this program while reducing the cost of developing the
deeper horizon. He supported language on page 5 that would
eliminate reclassifying shallow gas wells to oil and gas wells on
leases other than shallow gas leases. He thought the same
language should be used on page 6, line 26, to prevent increased
bonding costs.
MS. JUDY BRADY, Executive Director, Alaska Oil and Gas
Association, supported this bill for all the reasons previously
heard.
MR. KEVIN TABLER, Manager of Land and Government Affairs, UNOCAL,
supported SB 319 and told members:
UNOCAL is conducting an aggressive gas exploration
program in the Cook Inlet area and is very interested
in any legislation dealing with gas and gas
exploration. The shallow gas leasing program augments
the existing area wide leasing program and enhances the
access to development of the state's natural gas
resources. We're very supportive of this program and
other leasing programs providing access to the state's
mineral wealth. I have listened today to the remarks of
Director Myers at the Division of Oil and Gas
testifying in support of this bill and wish to lend
UNOCAL's support in passage of this legislation…
MS. CHARLOTTE MCKAY, Senior Administrator, Environmental and
Regulatory Affairs, Tech-Cominco of Alaska, said Tech-Cominco is
partners with NANA Regional Corporation. She wanted to talk about
the potential for shale bed methane gas around the Red Dog mine.
They employ 400 people, about 60% are NANA shareholders and they
produce over one million tons of zinc and lead concentrates per
year. She said:
To crush the ore and make the concentrate requires
about 28 megawatts of power using approximately 18
million gallons of diesel per year that we transport to
the port and then up the road by truck on a daily
basis. Replacing the diesel consumption with gas would
reduce our air emissions by half as well as reduce the
risks of the oil transport to the port, the storage and
the transfer up to the mine site.
She showed the committee a picture of the terrain at the Red Dog
Mine, which is not flat like Mat-Su or Prudhoe Bay. It is very
rugged and they need a more flexible determination for the depth
limitation for the shallow gas lease. It would be very difficult
to follow a surface depth at Red Dog.
MS. MCKAY said that currently, Tech-Cominco holds four state
shallow gas leases for about 23,000 acres and NANA has the
adjoining land to the east where there is nearly 100,000 acres.
The current lease limitation of 46,000 acres to any one company
is not sufficient for the project and they support the 100,000-
acre limit as well as the fee changes, if the monies remain
within the shallow gas program. Otherwise, they would find it an
expenditure that would not be good for business.
Development of shallow gas fields in Northwest Alaska have many
impediments and location is the major one due to access and the
ability to bring large equipment in and out only in the summer
months. They do not have access by ice roads in the winter
months. She explained:
It's very difficult, if not impossible, to test a
shallow gas lease within the three years provided in
the current lease when work is so seasonal. Logic would
say a lease should be at lease five years for a primary
term with renewal options as provided in the current
lease. Although this is not provided in the
legislation, we would support a five-year term with
renewal options. Development of a shallow gas field is
much different than a conventional field in Cook Inlet
or on the Slope. Instead of 2 to 5 holes to develop a
gas field, it would take 50 to 100 holes and the cost
per hole needs to be kept at a minimum or a field
becomes uneconomic quickly.
To date, Cominco has opportunistically piggy-backed on
the mineral exploration effort in the Red Dog area as a
tool to defray the costs and delineate the areas for
potential gas resource. The methane gas we have found
is low pressure and is located lateral to and
underlying the ore zones. Extensive work has been
completed to date using the mineral exploration tools,
but the next phase is to conduct the flow test to see
if that gas will let loose. This flow test cannot be
supported until the depth below the surface of a field
is better defined. We have already found gas down 2 -
3,000 ft. and we know it's at least that deep and the
geologic structure indicates it will go considerably
deeper. Arctic operations will always present numerous
challenges not present elsewhere. Tech-Cominco Alaska
and NANA address these each and every day at Red Dog.
By passing this legislation, you will help us address
some more.
SENATOR TAYLOR asked if she wanted a five-year term.
MS. MCKAY replied yes.
SENATOR TAYLOR explained that the legislature does not have the
ability to dedicate funds so keeping the revenues within the
shallow gas program may be beyond their capacity. Even program
receipts are subject to the appropriation by the next
legislature.
SENATOR LINCOLN said the bill addresses wells "within" 3,000 ft.
of the surface and asked if that language is a problem.
MS. MACKAY replied that this bill would allow a well to go deeper
if they are within the same resource unit.
MR. MYERS said that there is also discretion to add three years
to the five-year term. He said that production on a larger scale
would be from unitized production, particularly in their area
where there are two different subsurface owners.
5:10 p.m.
MR. KEN BOYD, Oil and Gas Consultant, said he was representing
himself, but that he was director of the Division of Oil and Gas
when this program was originally established in 1996. He
supported the changes in the bill. Extending the 3,000 ft. depth
and increasing the number of acres just increases the opportunity
to use the bill. The increase in fees is appropriate and the
bonding may help by giving the landowners more comfort.
5:12 - 5:16 AT-EASE
SENATOR HALFORD said his concern is that in these kinds of
operations, multiple rigs are operating in fairly high densities.
He is worried that a $500,000 bond for surface damage will not be
enough. He wanted to hear what the Division has to say about the
level of the bond when it's applied statewide, because he thought
there would be more and more conflicts between the people who own
the surface estate and the subsurface. Most people don't
understand that they don't control authority over the subsurface
estate. He noted, "In fact, it's reversed."
MR. MYERS replied that they should keep in mind that the risk
wouldn't occur all at once. The $500,000 has to be replenished if
there are multiple, simultaneous draws on that individual bond.
He thought the bonding issue needed to be reviewed in the sense
of their overall oil and gas program where there's oil risk as
well. He explained, "I think we're comfortable with the current
levels, but if we do look at more, I think it needs to be looked
at in regards to the conventional program as well." He said they
have the authority to request larger bonds if there is unusual
risk.
SENATOR HALFORD said there is a difference in the kind of
expectations from parcels and the expertise of the people
involved when you're dealing with small subdivision lots in small
parcels of land.
MR. MYERS concurred with that and said DNR needs to be concerned
about the economic effect on the industry as well.
SENATOR HALFORD asked what he thought the cost of a $500,000 bond
would be for a reasonable sized independent company.
MR. MYERS replied that he thought it was about 20% of the bond
amount. He added that depended on market conditions that change.
SENATOR HALFORD asked if that is a cost that is annually earned
or an amount that has to remain in escrow.
MR. MYERS replied that it is an annual premium.
TAPE 02-6, SIDE A
SENATOR ELTON asked if reservations were expressed during the
public comment period that the director or the department would
be able to negotiate the bond price.
MR. HAYNES replied that under AS 38.05.130(a), a surface owner
(either party) who cannot come to terms with proposed activity on
his land has the right to request a hearing by the director of
the Division of Oil and Gas. They had experience with that a few
years ago and it was peacefully resolved. They hoped the new
legislation with $500,000 in place would allow them to tell
someone who wanted a hearing that they are entitled to it, but
$500,000 is a pretty high bond and it's in place for the surface
owner's benefit.
SENATOR TAYLOR asked if they are allowed to exceed that amount if
they determine there is a greater risk.
MR. HAYNES replied yes. He said that Alaska's oil and gas
business is changing and for the first time [companies] are going
into areas that are not only residential, but areas with
complicated ownership patterns. DNR is aware of it and is dealing
with it.
SENATOR HALFORD asked if determinations are all made on a very
large area before the actual location of where somebody is going
to drill is even considered.
MR. HAYNES replied no and that there is no best interest finding
as the state does with conventional sales or with its exploration
licenses. The environmental requirements are adjusted area by
area; the bonding requirements are more specific and are geared
toward the risks of a particular operation. The lease operation
approval process that occurs looks at each individual activity
whether it is putting a road in or drilling a well or shooting
seismic.
SENATOR HALFORD asked if a site could be in a 10-acre lot within
a 100,000 acre area wide activity.
MR. HAYNES replied that one of the concerns is that the surface
owner, should it be different than the state, needs to have clear
protection. The up-front bonding requirement provides some
protection against surface damage if a person got on that site
prematurely with his bulldozer and decided he wanted to clear a
path to his well. Secondly, when they went to their final
operations, they would have enough protection for that surface
owner in addition to the other bonds to deal with the other
risks.
SENATOR HALFORD commented, "I hope they never get to the point
where they end up draining some large recreational lake, because
I think they're going to have a lot more money involved."
SENATOR TAYLOR moved to delete "competition" and insert
"completion" on page 3, line 1. There were no objections and the
amendment was adopted.
SENATOR TAYLOR moved to pass CSSB 319(RES) from committee with
individual recommendations. There were no objections and it was
so ordered.
SCR 28-JOINT LEGIS SALMON INDUSTRY TASK FORCE
CHAIRMAN TORGERSON announced SCR 28 to be up for consideration.
MR. IAN FISK, staff to Senator Austerman, sponsor of SCR 28,
said:
I know that the Senate Resources Committee is well
aware of the crisis in Alaska's salmon industry and
well aware of the gravity of that crisis. What this
resolution does is allow the legislature to step up to
the plate and provide some real leadership to find
solutions to the salmon industry's problems. Previous
summits, there have been three of them, that the
Administration organized on this issue made some
strides and members of the industry put some good
effort into those. We will review the findings of those
summits, but they have essentially amounted to a strike
out. We're going to step up to the plate and we might
not hit the homerun that wins that game, but we'll at
least get a few men on base.
MR. FISK reviewed the changes in the committee substitute.
SENATOR TAYLOR moved to adopt the CS, Version L\Utermohle
2/27/02, to SCR 28. There were no objections and it was so
ordered.
SENATOR HALFORD said they might want to find people who are in a
broad sense involved in the commercial salmon industry for the
public members. He wanted to make sure that was the intent,
because they might be excluding people that might be worthwhile
to have on it.
MR. FISK agreed and said that is the intent.
SENATOR ELTON said he thought it would be important to have some
one from the transportation industry involved, because that
contributes to the cost effectiveness of the industry. He said
the language on lines 15 and 16 on page 3 could be construed by
some to be in conflict with the further resolved provision on
lines 27 - 29 where it says the task force shall be appointed to
represent the statewide salmon industry as a whole and not just a
particular region or harvesting sector of the industry.
MR. FISK said he was correct and that there wouldn't necessarily
be solutions that would affect the industry across the board as
each region of the state has particular issues. The intent of the
sponsor and this language is to make sure that in selecting
members for this task force they don't select people who have a
narrow interest in the industry.
SENATOR HALFORD agreed with narrowing the focus to commercial
fisheries issues from where it was initially, but said there is
one WHEREAS clause that tweaks the other interests unnecessarily
- "Whereas allocation issues between commercial fishers and sport
fishers are becoming more problematic all the time."
MR. FISK replied that the sponsor wouldn't have any objection to
deleting it. He added the intent of the membership is to focus on
the commercial industry and to make sure it is well represented
on the task force. They would be able to contract out and bring
in information from other sources.
CHAIRMAN TORGERSON said he agreed with Senator Halford.
SENATOR HALFORD moved to delete lines 8 and 9 on page 2 and asked
for unanimous consent. There were no objections and Amendment 1
was adopted.
SENATOR WILKENS said he has heard a lot about the threat of
farmed fish to our salmon industry, but that issue is not
addressed and he wondered if it would be appropriate, "Or are we
just whistling past the graveyard by not addressing it."
MR. FISK replied that salmon farming is responsible to a large
degree for what has changed the market place for our salmon and
the task force needs to consider what we can learn from that
industry. But there is broad based consensus that it should focus
on the strengths of the wild salmon industry to help it better
compete. Starting on the bottom of page 2 there is language to
that affect.
SENATOR LINCOLN said she didn't have a fiscal note.
MR. FISK replied that they would have a fiscal note before the
bill gets to the Finance Committee.
SENATOR HALFORD recommended that the fiscal note be substantial
enough to get the kind of expertise it would take to work on this
issue. He thought they would need at least $200,000 and maybe
considerably more than that.
CHAIRMAN TORGERSON said there had been some discussion about
$500,000 being available.
SENATOR STEVENS said that they tried to delineate seats on the
task force to be held by all the industries. They didn't want to
exclude anyone. He stated, "The most important thing is that we
get people that understand the business."
SENATOR ELTON said he thought the discussion was on point and
that the Legislative Council has approved requests that lead to
the kind of purchase of knowledge that we need to make reasonable
and rational decisions. He remarked:
Quite frankly, this task force is going to need some
staff that is dedicated only to this and I don't think
we can go down to the Department of Fish and Game and
ask to borrow their people. I don't think they've got
people to lend.
MS. SUE ASPELUND, Executive Director, Cordova District Fishermen
United (CDFU), supported CSSCR 28(RES). It provides CDFU with the
opportunity to begin the very important discussions on how to
restructure the evaluation of their industry. They feel that a
successful approach will involve three components:
· it must be on a statewide basis and be controlled by
Alaskans in Alaska;
· representatives of the salmon industry - fishermen, tenders
and processors - must be involved throughout the process
from the beginning and at the most basic levels;
· a funding mechanism is necessary to help them move forward
since the industry does not have the resources and
infrastructure necessary to facilitate the broad based and
far reaching considerations that have to occur in order to
achieve success.
MS. ASPELUND said she thought it was important to recognize that
in order to enable the participation of the processors in these
discussions, this process will have to be convened by government
in order to address antitrust concerns and the committee
substitute does a good job of outlining most of the problems of
the industry.
MR. CHRIS BERNS, Kodiak fisherman, supported SCR 28.
MR. OLIVER HOLM, Kodiak fisherman, said he has fished since the
sixties and supported SCR 28. He said that the salmon market is
world wide and a major cause of the crisis is the price of farmed
fish. There are some fair trade issues to look into and there is
Japanese and U.S. corporate involvement in Russian salmon
hatcheries and processing and Japanese workmen involved in
Chilean farms and Alaska salmon processing. SCR 28 should include
the examination of these issues. He supported Sue Aspelund's
comments about work being done on a statewide basis and involving
everyone in the industry.
SENATOR TAYLOR moved to pass CSSCR 28(RES) from committee. There
were no objections and it was so ordered.
CHAIRMAN TORGERSON adjourned the meeting at 5:45 p.m.
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