HOUSE BILL NO. 81 "An Act authorizing the commissioner of natural resources to modify a net profit share lease." 2:27:46 PM Representative Josephson MOVED to ADOPT Amendment 1 (copy on file): Page 7, following line 20: Insert a new bill section to read: "* Sec. 6. AS 38.05. I 80 is amended by adding a new subsection to read: (mm) The commissioner may not grant a net profit share modification under (j) of this section unless the net profit share modification is approved by the legislature." Co-Chair Merrick OBJECTED for discussion. Representative Josephson explained that the net profit share leasing program was not well known until the introduction of HB 81 and the Senate companion bill. He explained that the administration wanted more latitude to negotiate certain items embedded into royalty contracts. They were binding bilateral contracts that did not need to be revisited. The proposal could be rejected summarily. The administration's position was that by giving it the liberty to modify a net profit share lease (NPSL), it could help prevent field assets from being stranded. It begged the question about the nature of a lease and the duty to develop. He noted that previous legislators, Eric Croft and Harry Crawford, had introduced an initiative on the topic of the obligation to develop. Representative Josephson continued that fundamentally, his amendment would allow for agreements to be reached but would not bind them by law until they were approved by the legislature. His reason for offering the amendment had to do with trust. He suggested that legislators wanted reassurance that the administration would negotiate in an arms-length way, as the state was sovereign. He was unsure the administration was willing to negotiate in such a manner. He noted, for example, there were reports about press releases involving a large metallic mine Southwest of Anchorage. It was difficult to tell where the industry's words ended, and the state's words began. Separation was lacking and parroting occurred giving him pause. Representative Josephson continued that the legislature had given the industry substantial breaks. The legislature was looking at reforms of SB 21 [Oil and gas production tax legislation passed in 2013] in the form of HB 247 [Tax, credits, interest, refunds, and oil and gas legislation that passed in 2016] and HB 111 [Legislation passed in 2017 regarding oil and gas production tax, payments, and credits]. The legislature realized how complicated SB 21 had been. He argued that the punitive floor on gross tax was not really a floor except in narrow circumstances. The bill [SB 21] was favorable to the oil industry. Representative Josephson was torn because Mr. Fitzpatrick had presented evidence that the legislation could result in a solution where everyone benefited, with the state potentially benefiting in the long-run. He suggested there was no harm in the legislature looking at the contracts for approval. It had been done in 1996 with the North Star oil and gas lease in HB 548. The bill was vetted and passed within 6 weeks and gave the state the right to modify a NPSL. He thought the legislature should do the same. Representative Josephson noted a memo that indicated it might be unconstitutional or inappropriate. However, there were instances in current law where a royalty in-kind contract was accepted. He had voted on a couple of such contracts in the House Resources Committee then on the House Floor. Also, there were terms in the Alaska Gasline Inducement Act (AGIA) that required acceptance of an agreement related to AGIA and ratification by a bill from the House Rules Committee. There was some background for the requirement of legislative approval. Representative Josephson reiterated that he was unsure if he wanted to give the administration leeway. He relayed that the House resources Committee modified the bill so that it would not apply to royalty modification. He had been told that without the modification, Prudhoe Bay, where the state had seen $13 billion of royalties since it was developed, could have been modified without the legislature's participation. The Senate version did not include the same modification. He suggested that if there was not an easy concurrence between the bodies, the bill would go to conference committee where the legislature could be in a position of modifying Prudhoe Bay's royalty which he did not want to do. He thanked the committee. 2:37:12 PM Representative Thompson was apprehensive about the legislature having to approve any NPSL modifications. He was concerned with a potential timeline issue if a modification was need when the legislature was not in session. He trusted the Department of Natural Resources (DNR) to make modifications based on their history with previous modifications. He did not want to see a well shut down because of the legislature not meeting in a timely manner. Representative Carpenter relayed that the amendment stated that profit share modifications would have to be approved by the legislature. He thought the complexity of the issue would take a long time to properly vet in the legislative process. He also pointed out the need to take politics out of the decision about whether a NPSL modification should advance. He did not think it would contribute to setting an example of being business friendly in the state. Co-Chair Merrick agreed with Representative Carpenter's comment. 2:40:10 PM Representative Wool agreed the subject matter was complicated. He shared Representative Josephson's concerns about the amendments adopted in the House Resources Committee being removed from the committee substitute. He would be especially concerned with limiting the capital expenditure language to NPSLs only. The state had 26 leases, 2 of which were currently in production. Most of the leases had sat dormant for their existence - some leases were decades long. He would not comment on his trust level of the administration but shared some of the same concerns as Representative Josephson. There were several triggers that could influence production depending on the price of oil. Producers wanted to keep their wells in production, and he wanted to see the wells continue to produce oil. He suggested that future administrations could potentially negotiate new terms. The state had the ability to renegotiate royalty rates, although it occurred infrequently. He was concerned with the amendment's potential question of constitutionality. Representative Edgmon concurred with Representative Wool's comments. He appreciated the efforts of the maker of the amendment but could not support it. 2:43:03 PM Representative LeBon disagreed with the notion of politicizing the issue. He did not think the legislature was geared to weigh in on the issue. He had confidence the department would be motivated to negotiate the best possible settlement for the state. Representative Josephson did not know how it was possible to keep politics out of the issue. He explained that when producers were profitable, they paid a portion under a NPSL. It was essentially a contract that was entered into willingly by both parties. The legislature was being asked to trust that the industry would do something. He did not see himself as "Anti-industry." However, the most recent promises of record had not been great. He did not have confidence in the administration because of the lack of separation between the two institutions. He did not think that looking at the issue through a political lens would color it in a detrimental way. He suggested if the administration could make its case to the legislature, the legislature would approve it, just like it happened in 1996. His constituents were dissatisfied with the share of taxes and royalties the state received for its assets. Co-Chair Merrick MAINTAINED the OBJECTION. A roll call vote was taken on the motion. IN FAVOR: Josephson, Ortiz OPPOSED: Edgmon, Johnson, LeBon, Thompson, Wool, Carpenter, Merrick, Foster The MOTION to ADOPT Amendment 1 FAILED (2/8). 2:46:21 PM Representative Wool MOVED to ADOPT Amendment 2 (copy on file): Page 1, line 1: Delete "authorizing the commissioner of natural resources to modify a net profit share" Insert "relating to the modification of a royalty or net profit share in an oil and gas or gas only" Page 7, following line 20: Insert new bill sections to read: "*Sec.6.AS.38.05.180 is amended by adding a new subsection to read: (mm)The commissioner may grant a royalty or net profit share modification under U) of this section only if the Alaska Royalty Oil and Gas Development Advisory Board recommends that the commissioner approve the royalty or net profit share modification. "*Sec. 7. AS 38.06.040(a) is amended to read: (a) The board shall (1) in accordance with the criteria set out in AS 38.06.070, develop a plan for the wise development of the state's oil and gas royalty interests; the plan of development shall be consistent with (A) growth of the private sector of the economy; (B) environmental standards required by law: and (C) public fiscal stability; (2)hold public hearings on proposed sales, exchanges, or other disposals of royalty oil or gas to determine whether the proposals comply with AS 38.06.070; (3) examine proposed sales, exchanges, or other disposal of, and recommend to the legislature that it approve or disapprove a proposed sale, exchange, or other disposal of (A) the oil or gas that is obtained by the stale as royalty under AS 38.05.182; or (B) the rights to receive future oil or gas production under slate leases; [and] (4) recommend to the commissioner of natural resources the conditions relating to the sale, delivery, transportation, refining, or processing of oil or gas that [WI-IICI IJ the commissioner may include in the offer and sale of oil or gas obtained by the state as royalty under AS 38.05.182; and (5) review a royalty or net profit share modification under AS 38.05.180 and recommend that the commissioner approve or disapprove the modification." Co-Chair Merrick OBJECTED FOR DISCUSSION. Representative Wool explained that the amendment required any change to a NPSL or royalty (currently allowable under law) be approved by the Alaska Royalty Oil and Gas Development Advisory Board. The board currently helped to facilitate the wise development of Alaska's oil and gas royalty interests by providing means and procedures for sales, exchanges, or other disposition of those interests in ways calculated to promote private economic growth consistent with applicable environmental standards and public fiscal stability and in accordance with AS.38.05.183. The amendment would add the requirement that any change in royalty and NPSLs would have to be approved by the board. He thought it provided an extra safeguard layer. Representative Josephson supported the amendment. He spoke of the referral of royalty in-kind from the administration to the legislature. He argued that royalty in-kind was already politicized. He noted that the amendment would further politicize the advisory board. He did not know whether it would be a meaningful layer of protection. However, he admitted that public input would be a plus. Co-Chair Merrick WITHDREW the OBJECTION. Representative Carpenter OBJECTED without comment. Representative Carpenter MAINTAINED the OBJECTION. A ROLL CALL VOTE WAS TAKEN ON THE MOTION. IN FAVOR: Ortiz, Wool, Edgmon, Josephson, Foster OPPOSED: LeBon, Thompson, Carpenter, Johnson, Merrick The MOTION to ADOPT Amendment 2 FAILED (5/5). 2:51:04 PM AT EASE 2:52:16 PM RECONVENNED Vice-Chair Ortiz MOVED to report CSHB 81(RES) out of Committee with individual recommendations and the accompanying fiscal note. Representative Carpenter OBJECTED with no comment. A roll call vote was taken on the motion. IN FAVOR: LeBon, Ortiz, Thompson, Wool, Carpenter, Edgmon, Johnson, Foster, Merrick OPPOSED: Josephson The MOTION PASSED (9/1). CSHB 81(RES) was REPORTED out of committee with a "do pass" recommendation and with two previously published fiscal impact notes: FN1(DFG) FN2(REV). 2:53:38 PM AT EASE 2:55:10 PM RECONVENNED Co-Chair Merrick reviewed the agenda for the next meeting scheduled on Monday, May 3, 2021 at 9:00 a.m.