03/10/2021 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB61 | |
| SB62 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 61 | TELECONFERENCED | |
| *+ | SB 62 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 10, 2021
3:36 p.m.
MEMBERS PRESENT
Senator Joshua Revak, Chair
Senator Peter Micciche, Vice Chair
Senator Gary Stevens
Senator Natasha von Imhof
Senator Jesse Kiehl
Senator Scott Kawasaki
MEMBERS ABSENT
Senator Click Bishop
COMMITTEE CALENDAR
SENATE BILL NO. 61
"An Act authorizing the commissioner of natural resources to
modify a net profit share lease."
- HEARD & HELD
SENATE BILL NO. 62
"An Act relating to surface use restrictions for oil and gas
leases; relating to gas leases in Kachemak Bay; relating to the
renewable energy grant fund; and providing for an effective
date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 61
SHORT TITLE: OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/29/21 (S) READ THE FIRST TIME - REFERRALS
01/29/21 (S) RES, FIN
02/10/21 (S) RES AT 3:30 PM BUTROVICH 205
02/10/21 (S) Heard & Held
02/10/21 (S) MINUTE(RES)
03/10/21 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 62
SHORT TITLE: GAS LEASES; RENEWABLE ENERGY GRANT FUND
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/29/21 (S) READ THE FIRST TIME - REFERRALS
01/29/21 (S) RES, FIN
03/10/21 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
JHONNY MEZA, Commercial Manager
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding SB 61.
RYAN FITZPATRICK, Commercial Analyst
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding SB 61.
KARA MORIARTY, President and CEO
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Testified in support of SB 61.
HALEY PAINE, Deputy Director
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of SB 62.
ACTION NARRATIVE
3:36:05 PM
CHAIR JOSHUA REVAK called the Senate Resources Standing
Committee meeting to order at 3:36 p.m. Present at the call to
order were Senators Stevens, Kiehl, Kawasaki, von Imhof, and
Chair Revak. Senator Micciche arrived during the course of the
meeting.
SB 61-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE
3:36:51 PM
CHAIR REVAK announced the consideration of SENATE BILL NO. 61
"An Act authorizing the commissioner of natural resources to
modify a net profit share lease."
He asked Mr. Meza and Mr. Fitzpatrick to provide a recap of SB
61 and an overview of their response to questions the committee
asked during the first hearing.
3:37:47 PM
JHONNY MEZA, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources, Anchorage, Alaska, stated the
information the department provided related to the three cases
for which the department granted royalty modification.
He explained there were eight applications for royalty
modification: two where denied, three were withdrawn by the
applicants, and the department approved the remaining three
applications. For the approved applications, the department
issued recent findings, received public comments, and gave a
presentation to the Legislative Budget and Audit Committee
(LB&A).
MR. MEZA noted the department included additional information in
their email response letter to the committee regarding the
production that came from the royalty modification as well as
revenues to the state as resource owner, specifically royalty
and net profit share where applicable.
CHAIR REVAK asked Mr. Fitzpatrick if he had anything to add.
3:40:02 PM
RYAN FITZPATRICK, Commercial Analyst, Department of Natural
Resources, Anchorage, Alaska, stated Mr. Meza covered the
information that DNR provided to the committee.
CHAIR REVAK asked why it would benefit the State of Alaska to
modify royalty or net profit share leases.
MR. FITZPATRICK replied the intent of the bill is to encourage
development of resources would otherwise be stranded. He noted
Chair Revak mentioned royalties and explained that current
Alaska statute allows the DNR commissioner to modify royalty
rates under three different scenarios: 1) to encourage new
production from a field or pool that has not previously been
produced, 2) to extend the life of existing production in the
event that per barrel costs are increasing, or 3) to restore
ceased production in a pool or field that is shut-in.
MR. FITZPATRICK explained that SB 61 primarily would do two
things. First it would allow for a fourth condition for royalty
modification, or for potential modification of net profit shares
in the event that a field is producing but additional capital
investments is required to increase marginal production. The
scenarios would include additional drilling, drilling pads, and
enhanced oil recovery. If those projects were not economic on a
standalone basis but could be made economic through royalty or
net profit share modification, it would encourage additional
investment and production.
He said the second objective of SB 61 is to allow the
modification of net profit shares under the same regime as
royalty modification as currently allowed in statutes. That
would be one of the three bases that the department already
discussed, or potentially the fourth additional basis that the
bill would add.
3:43:30 PM
CHAIR REVAK noted he mentioned enhanced recovery efforts and
asked him to confirm that as an oilfield produces over time, oil
recovery becomes harder and more expensive.
MR. FITZPATRICK answered yes, an oilfield over its life
generally sees a decline in production. It is a common feature
seen in North Slope oil fields and oilfields throughout the
world. Initial production is high, but reservoirs drop over
time. There are methods that producers can use to either slow
oil production decline or temporarily increase production by
injecting water or gas, polymer flooding, and a whole host of
arrays that can be used.
CHAIR REVAK asked him to confirm that DNR's position is that
current oilfield development will become uneconomical and that
is the reason for the legislation.
MR. FITZPATRICK answered yes. He explained over time, any
oilfield can potentially become uneconomic as seen throughout
the world where oilfields producing over long periods of time
eventually decline and no longer provide adequate revenues to
meet operating expenditures and other financial commitments.
Hypothetically, as oilfield production declines the modification
of royalty rates and net profit share rates could extend the
life of the oilfield a couple of years with increased revenues
rather than the oilfield shutting down.
MR. FITZPATRICK summarized that the department believes the bill
could help to increase production over time from certain fields
that might otherwise be economically disadvantaged.
3:47:03 PM
SENATOR STEVENS expressed interest in knowing how often the
department approves or denies modified lease requests. He noted
the statement that there were eight royalty modification
requests. He asked how often requests occur and does the
department approve or deny a lot more requests.
MR. FITZPATRICK explained the figures that Mr. Meza shared
pertain to when the statute was first enacted in 1995. DNR has
had eight applications for royalty modifications from 1995 to
present. These requests do not occur annually and involve a lot
of review work.
CHAIR REVAK noted that the three modified applications were
substantially lucrative to the state. He asked him to walk
through the internal processes when somebody applies for a lease
modification.
MR. FITZPATRICK explained that royalty modification is generally
reviewed by the Commercial Section within the Division of Oil
and Gas. The review process varies depending on whether the
application is for larger or smaller oilfields, or larger or
smaller operators, but it is always in depth. The last oilfield
the department reviewed took approximately 10-11 months.
MR. FITZPATRICK detailed when the department reviews the
application, there is generally a back and forth with the
applicant to get all the information. If it is not forthcoming,
the department can deny modification due to lack of information.
MR. FITZPATRICK said the department has statutory authority to
require or request an applicant pay for consultant fees to aid
the department in its application review. Those consultants
would provide expertise that the department may not have in-
house such as reservoir engineering, accountants, or financial
industry members that might have expertise in financial review.
3:52:04 PM
MR. FITZPATRICK explained that once the applicant information is
received, the department does its own evaluation and economic
modeling. The primary evaluation objective is to determine
whether the application meets the statutory requirements for
royalty modification that were mentioned earlier. Each of the
three scenarios potentially has subparts that each application
would have to meet.
MR FITZPATRICK said one of the primary considerations is that
when the legislature passed the statute in 1995 to allow for
royalty modification, one of its features is a heightened burden
of proof that an application must meet for royalty modification
eligibility. That is clear and substantial evidence.
MR. FITZPATRICK detailed once the applicant review is finished,
the Commercial Section briefs the Division of Oil and Gas and
the DNR commissioner to determine whether there is additional
review work for the division to conclude the application
process; at that point, DNR would prepare and publish a best
interest finding that includes a public comment period, an offer
to LB&A for a hearing on the royalty modification, the best
interest finding draft, and comments from the DNR commissioner.
After the public comment period closes, the department must
consider all public and legislative comments to incorporate and
publish in its final best interest finding.
3:54:40 PM
CHAIR REVAK noted the application process includes oversight by
the public and LB&A, and only three out of eight applications
have been approved. He asked Messrs. Meza and Fitzpatrick why
the department is now asking for a modification, noting oilfield
throughput has drastically decreased over the past few decades.
MR. MEZA replied he is correct in referencing that the declining
production from the state's producing fields may create a
possibility that some of those pools may become uneconomic. One
of the main goals with the proposed bill is that modifying the
royalty rates, or the net profit share rate for the net profit
share leases, can prevent declining oilfield production from
abandonment and perhaps ensure continuing production and revenue
to the state. SB 61 provides the DNR commissioner with another
lever to modify parameters to encourage continuous or additional
incremental production versus shutting down wells due to
economic disadvantages.
CHAIR REVAK noted the committee has strictly heard from the
department on SB 61. He asked the Alaska Oil and Gas Association
(AOGA) to provide their input.
3:57:54 PM
KARA MORIARTY, President and CEO, Alaska Oil and Gas
Association, Anchorage, Alaska, testified in support of SB 61.
She explained AOGA is the professional trade association that
represents the majority of explorers, producers, refineries, and
pipeline company in Alaska.
She said 2020 was an unprecedented year for the oil and gas
industry. Even with COVID-19, the industry also experienced a
pre-pandemic price war, and then the whole world turned upside
down about a year ago from COVID-19. For the first time since
Prudhoe Bay production started, drilling on the North Slope
virtually stopped. There were no drilling rigs in Prudhoe Bay
for the first time in history and the sector lost thousands of
jobs.
She noted while oil prices are rising and production in Alaska
has largely rebounded to where production was before COVID-19,
there are still effects from 2020. While the proposed
legislation is not a new concept to allow for potential [net
profit share lease] (NPSL) modifications, the timing for the
legislation might be right because the state needs to do
whatever it can to make sure the state's oilfields are economic
and its fiscal regime remains competitive. SB 61 provides an
additional regulatory tool in the state's toolbox to incentivize
and grow production.
MS. MORIARTY said she thinks Mr. Fitzpatrick did a nice job
discussing how modifying current royalty rates for oil and gas
leases is not easy. Modification does not happen overnight.
There is very much a rigorous standard of proof, the economics
absolutely have to warrant a change, and modification has to be
in the best interest of the state. Allowing NPSL to go through
the same type of process could be a very necessary and effective
tool for providing flexibility in managing different cost
structures, market dynamics, and project economics.
MS. MORIARTY stated AOGA sees SB 61 as an additional tool to use
on a case-by-case basis. It provides the option for DNR to work
with the industry on any particular development.
She summarized AOGA wants to see as much production as possible
because it is good for the state, economy, jobs, and all
Alaskans.
4:02:18 PM
CHAIR REVAK opened public testimony on SB 61; finding none, he
closed public testimony.
4:02:43 PM
CHAIR REVAK held SB 61 in committee.
SB 62-GAS LEASES; RENEWABLE ENERGY GRANT FUND
4:02:48 PM
CHAIR REVAK announced the consideration of SENATE BILL NO. 62,
"An Act relating to surface use restrictions for oil and gas
leases; relating to gas leases in Kachemak Bay; relating to the
renewable energy grant fund; and providing for an effective
date."
4:03:20 PM
HALEY PAINE, Deputy Director, Division of Oil and Gas,
Department of Natural Resources, Anchorage, Alaska, explained
her presentation will provide the committee with an overview of
SB 62 including its purpose, any potential challenges if not
permitted, and a sectional analysis.
4:03:52 PM
MS. PAINE referenced slide 2 and stated the purpose of SB 62 is
to allow the Division of Oil and Gas to lease and capture
revenue from state-owned resources underlying lands restricted
to surface. The bill does not open Kachemak Bay or any other
closed area to surface development, the bill simply aims only to
capture royalty revenue from geology drained through adjacent
development on nearby unrestricted lands. With the use of modern
drilling technologies, oil and gas may be safely developed from
adjacent lands with no impact to the surface of the restricted
areas, to include the offshore.
MS. PAINE stated that the primary benefit of SB 62 is increased
state revenue. Lands with surface-use restrictions can still
provide revenue in the form of lease sale bids, annual rental
payments, and royalties if made available for subsurface-only
development. The state will be able to protect the land using
established regulatory methods while still maximizing the
economic recovery of its resources.
MS. PAINE turned to slide 3 and said the main concern is the
mechanism for collecting royalties if unleased land is drained
from wells on adjacent leases where the state does not realize
royalty payment and possible diminished revenue. For instance,
the wellhead may be located on private land; this may prevent
the state from realizing the royalty revenue unless the remedy
is sought through [Alaska Oil and Gas Conservation Commission]
(AOGCC) for correlative rights.
She explained leasing is the standard mechanism for establishing
a contractual relationship between the state and the developer.
The state exercises its authority through the lease for
mitigation measures compliance. The state also requires the
sharing of drilling and reservoir data, data integral to the
state understanding the extent of its resources.
4:06:21 PM
MS. PAINE said bill Section 2 addresses the subject area. The
bill seeks to allow gas-only leasing of the subject area while
maintaining the surface use restrictions that are currently in
place. The offshore state lands in Township 5 South, Range 15
West are shown both within the context of the Greater Cook Inlet
with more detail in addition to a closeup of the subject area
illustrated in the blue-hashmark region.
MS. PAINE detailed the subject area is adjacent to active
development on the Kenai Peninsula, including the Seaview Unit
which was recently approved by the division in October 2020. The
Cosmopolitan Unit to the northdepicted in olive colorare all
being developed from the onshore Hansen padlocated on private
landabout halfway up the unit along the coastline. The
Cosmopolitan Unit provides an example of successful access of
offshore resources without impacting the surface-use of the
waters.
SENATOR STEVENS asked how far the pipelines reach out into
Kachemak Bay.
MS. PAINE replied they are all accessed from the Hansen pad for
the Cosmopolitan Unit but she would follow up with the actual
distance to the wellbore.
SENATOR STEVENS said he assumed pipelines are able to extend
farther and farther from shore.
MS. PAINE answered yes, modern drilling technologies continue to
improve for safely accessing resources. The distance from shore
would depend on the variety of factors including the pool depth
within the geologynoting current examples. The blue-hash
subject area should be well within current technologies for
access via unrestricted surface land.
4:09:30 PM
MS. PAINE provided the following sectional analysis for SB 62:
Section 1 - Amends AS 38.05 to add a new section, AS
38.05.176 to specify that a statute restricting the
surface use of an oil and gas or gas-only lease area
does not also restrict drilling of the subsurface of
that leased area from an adjacent leased area not
subject to restrictions on surface use, unless
specifically provided.
Section 2 - Amends AS 38.03.184(b) to acknowledge the
exemption (created by Section 3 of this bill) to the
statute prohibiting the Department of Natural
Resources or any other state agency from issuing
leases for oil exploration or development on state
owned land and waters in and around Kachemak Bay and
extending to the three-mile offshore limit of state
ownership.
Section 3 - Amends AS 38.04.184 by adding a new
subsection (h) specifically authorizing the director
of the Division of Oil and Gas to offer gas-only
leases in an area adjacent to Kachemak Bay
specifically, within Township 5 South, Range 15 West,
Seward Meridian, Alaska. Such leases would carry no
right to use the surface of the land and would allow
only natural gas exploration or production drilling
from adjacent leased lands.
Section 4 - Amends AS 42.45.045(b) to allow the
legislature to appropriate to the Renewable Energy
Grant Fund the state's rentals, royalties, royalty
sale proceeds and net profit shares generated pursuant
to oil and gas, or gas-only leases issued pursuant to
AS 38.05.180(f) and (g), as well as such revenue
generated by gas-only leases issued pursuant to AS
38.05.184(h) (authorized by Section 3 of this bill).
Such appropriations would occur after the required
deposit of any such revenue to the Alaska Permanent
Fund required under art. IX, sec. 15 of the Alaska
Constitution.
Section 5 - Amends AS 45.45.045(c) requiring
investments funds to be managed by the Department of
Revenue, which shall be the fiduciary of the fund
under AS 37.10.071.
Section 6 - Provides an immediate effective date.
4:12:48 PM
SENATOR STEVENS noted Senator Micciche passed him a note saying,
"We are talking about extending out to 7.5 miles." He asked if
drilling from shore eliminates the need for the big platform
sites in the ocean.
MS. PAINE answered that [drilling from shore] may not be a full
replacement for any offshore development. Locations would depend
on where the resource is accessed. Locations primarily in the
Upper Cook Inlet are not near shore reach. SB 62 is looking to
direct specific leasing areas that are close enough for safe and
modern drilling technology to access from adjacent unrestricted
surface land.
SENATOR STEVENS remarked that drilling from shore seems like a
great goal.
4:14:26 PM
SENATOR KIEHL noted the focus on the Kachemak Bay area and asked
if the bill would apply to subsurface leases on all state land
with a surface restriction. For example, a critical habitat area
like in Gustavus, a state park, or a piece of state land that
has a private lease for a lodge.
MS. PAINE replied the intention of SB 62 is to provide a general
framework that would allow for specific designations in the
future should there be a specific lease-by-application (LBA)
that closes or restricts that. Consideration will always depend
on whether the state has the mineral estate and whether it can
be safely accessed from a nearby piece of unrestricted state
land. At this time, the bill is only contemplating the access of
the subject area.
SENATOR KIEHL asked her to confirm that the bill applies
everywhere, not just the Kachemak Bay area.
MS. PAINE answered yes, the bill is looking at addressing future
surface-use restrictions that may be imposed. At this time, the
Kachemak Bay oil and gas closure is a very unique location in
terms of its authorization through statute and the bill would
create the opening in case there are future opportunities.
4:16:27 PM
SENATOR VON IMHOF read the following from slide 3:
If unleased land is drained from wells on adjacent
leases, royalties may not be paid to the state or that
revenue could be diminished.
She said she looks at this as a revenue enhancement bill. She
offered her understanding that horizontal drilling technology is
becoming more capable and it could occur without the state
knowing.
MS. PAINE replied the state currently does not contemplate that
drilling from adjacent leases is actively occurring, but the
bill sets the stage for the state to not have to go through
AOGCC to maximize revenue for those lands.
SENATOR VON IMHOF recapped that the bill prepares for what could
happen and it ensures the state maximizes the revenue. She read,
"To allow the legislature to appropriate revenue from these
leases to the Renewable Energy Grant Fund." in Section 4 and
asked if some of the money will go to a designated fund.
MS. PAINE answered yes, the legislature may choose to
appropriate revenues from the leases to the Renewable Energy
Grant Fund.
4:18:50 PM
SENATOR VON IMHOF asked her to confirm that legislative
appropriation to the Renewable Energy Grant Fund is currently
not happening, but this would change that.
MS. PAINE answered yes.
SENATOR MICCICHE asked her to confirm that only funds from
projects that are associated with the specified type of lease
would be deposited into the Renewable Energy Grant Fund.
MS. PAINE answered yes, the bill would only authorize leases
from the specified area to have monies allocated to the
Renewable Energy Grant Fund.
SENATOR MICCICHE pointed out the bill only affects Township 5
South, Range 15 Westan area of interest because of the
[Cosmopolitan Unit] and other developments. He asked her if the
state has seismic [data] in that particular area that looks
interesting.
MS. PAINE replied the noted areas are currently under
development with their pools and being delineated. The state
does not have a specific reason at this time to say that the
development is going to occur. However, the bill simply allows
for departmental preparation to move forward with land leasing
should development occur within the Kenai Peninsula and Anchor
Point area.
SENATOR MICCICHE asked if separate legislationincluding a
"Section 3" that identifies the specific township and range
would occur if an additional area in Alaska at some point has
some potential or interest by someone.
MS. PAINE offered her understanding that with the general
provision in place the department would need to find out if
there is a specific closure area that is already enshrined for
that particular location, and then that particular statute would
require modification.
4:21:25 PM
SENATOR STEVENS asked her to confirm that appropriations are
currently deposited into the Alaska Permanent Fund and the bill
would allow for appropriations to the Renewable Energy Grant
Fund. He asked what the funds from the Renewable Energy Grant
Fund are used for.
MS. PAINE replied that from a broad perspective the Renewable
Energy Grant Fund has been used to fund projects in different
communities throughout Alaska that are in the research and
development stage. She offered to follow up with a more detailed
explanation.
SENATOR KIEHL said his question goes back to the general
applicability of directional drilling under lands that are
otherwise not open for oil and gas leasing, specifically parks
and some state marine parks that include both surface and
subsurface waters. He asked if her sense is that should the bill
pass, the state will not have to worry about some of the
incompatible use restrictions currently in the state management
plans for parks or other special areas. For example, things like
noise and lights associated with industrial development for oil
and gas extraction.
4:23:29 PM
MS. PAINE explained that imbedded in the current formal lease
contract is all the regulatory authority and protection for
mitigation measures and other authorization that dictates how a
development may occur in a particular area. The bill does not
set aside any plans or agreements that have been set out in any
way.
MS. PAINE said the department will continue to do successful and
safe resource development in areas throughout the state where
there are other management plans using the best interest
findings process as well as the mitigation measures for a
specific lease. The department addresses those and ensures those
aspects are only authorized in a manner that is compatible with
a plan of operations.
4:24:45 PM
CHAIR REVAK opened public testimony on SB 623; finding none, he
closed public testimony.
4:25:10 PM
CHAIR REVAK held SB 62 in committee.
4:25:46 PM
There being no further business to come before the committee,
Chair Revak adjourned the Senate Resources Standing Committee
meeting at 4:25 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 61 CS (RES) Work Draft 32-GS1706.B.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 61 DNR Response to Committee Questions 2.17.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 61 LAA Legal Opinion 2.19.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 62 Sectional Analysis Version A 2.2.2021.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 62 |
| SB 62 Sponsor Statement 1.28.2021.pdf |
SFIN 2/1/2022 1:00:00 PM SFIN 3/18/2022 9:00:00 AM SRES 3/10/2021 3:30:00 PM |
SB 62 |
| SB 61 AOGA Letter of Support- 3.9.21.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 61 |
| SB 62 DNR Presentation- Gas Leases; Renwable Energy Grant.pdf |
SRES 3/10/2021 3:30:00 PM |
SB 62 |