HOUSE BILL NO. 50 "An Act relating to the geologic storage of carbon dioxide; and providing for an effective date." 2:59:22 PM Co-Chair Foster noted the committee had left off on slide 23 in the last hearing on the bill. RYAN FITZPATRICK, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, continued a PowerPoint presentation titled "HB 50 Carbon Capture, Utilization, and Storage," dated April 11, 2023 (copy on file). He began on slide 24 titled "Funding Sources." He provided an overview of the three funding mechanisms in the bill, which all served different functions. The first was a regulatory program charge for the Alaska Oil and Gas Conservation Commission (AOGCC), which was similar to the regulatory cost recovery fee for oil and gas leases. The mechanism funded AOGCC operations for its work on Carbon Capture, Utilization, and Storage (CCUS) projects. The second was the leasing and licensing of state lands Department of Natural Resources (DNR) charge, which included lease rentals, carbon dioxide injection charges, and revenue sharing agreements between CCUS operators and DNR. He elaborated that the funds went to the state general fund with a portion diverted to the Alaska Permanent Fund. The leasing and licensing of state lands would be the primary revenue driver for the state. Mr. Fitzpatrick turned to slide 25 titled "Funding: Closure Trust Fund" and addressed the last of the three charges, the carbon storage closure trust fund. He explained that an injection charge went into a long-term fund to cover potential long-term liabilities for the state associated with the management of the carbon dioxide after a site had been closed and the state took title to the carbon dioxide. He noted it was a separate charge from the money that went to the general fund; the funding was kept in a separate fund to pay for the long-term liabilities. 3:02:17 PM Mr. Fitzpatrick moved to hypothetical revenue opportunities on slide 26. He underscored that DNR had developed the hypothetical scenarios based on potential opportunities. He clarified that the slides did not indicate the scenarios would occur or occur in the manner shown. The intent was to illustrate potential opportunities that Alaska may be able to take advantage of. The first scenario was a regional power facility sequestering approximately 250,000 tons of carbon dioxide per year. The amount was equivalent to many of the regional power facilities operating in Anchorage and the Fairbanks area. The second scenario was a North Slope emitting facility. There were currently several of the types of facilities operating on the North Slope. He explained that the scenario involved the retrofit of an existing facility. The third scenario was a carbon dioxide import and sequestration facility for carbon dioxide that did not originate from within the state's borders and could come into the state most likely through maritime transport from the Asia Pacific region for sequestration in Alaska. Mr. Fitzpatrick turned to slide 27 and provided caveats to the hypothetical revenue opportunities. He stated that not all carbon dioxide emissions were feasibly captured, but technology continued to rapidly develop. Capital expenditures required to retrofit existing facilities may not be met by existing incentives. For example, the 45Q tax credit only covered a certain amount of funding and some capture and sequestration opportunities were more expensive than the credits may support; therefore, not all opportunities may come to fruition. He noted the slide also included a bit more information about the assumptions that went into the revenue analysis. 3:04:59 PM Mr. Fitzpatrick turned to slide 28 and provided modeling detail on the hypothetical revenue opportunities. The slide showed a couple of different line items for each of the three hypothetical scenarios [presented on slide 26]. The first was the exploration license, which was the initial phase of project development where a company applied to DNR for an exploration license for a given amount of acreage. The revenue in early years corresponded to the per acre license fee. He elaborated that as the project developed and shifted into a development lease after going through the AOGCC permitting process. He explained that once the permit was obtained, the license could be converted into a lease (a longer-term guarantee). Typically, the acreage associated with the project was down selected to the acreage that would be included in the actual project. The revenue decreased in those years because there was less acreage under contract at that point. The majority of the revenue in all three scenarios began at the point where the project went into operation and carbon dioxide began to be injected underground. He stated that for all three scenarios there started to be injection fees, including per ton injection fees and revenue sharing agreements. The scenario on slide 28 modeled a $2.50 per ton injection charge. He noted the slide showed the injection piece associated with each of the project scenarios. Mr. Fitzpatrick noted that the North Slope scenario [shown on slide 28] included one additional revenue source. The scenario showed a 50/50 split between sequestration and enhanced oil recovery. He elaborated that some of the technical experts at the Division of Oil and Gas came up with a conservative estimate of what that volume of CO2 might be able to recover in terms of additional oil. The modeling compared the volume of oil to current revenue sources books in terms of the dollar value of oil to the state. 3:08:03 PM Representative Hannan stated when the committee had previously heard the bill it had been told that a number of partners had come to DNR to look at the opportunity. She asked if the opportunity had included all three revenue opportunity sectors. She wondered if half of the opportunities were power facilities. She stated that the only named corporations in the bill packets had been North Slope operators; therefore, she presumed it was what industry had come to the state with. She was curious whether transporters of future carbon sequestration and/or power facilities were the industry partners. Mr. Crowther replied they could not speak for individual companies on their decisions to undertake projects. He highlighted Usebelli as a fuel provider to power providers that was very interested in the projects. There was a power facility affiliate also interested. From the North Slope perspective, the current operators operating in Prudhoe Bay were working to understand what the projects would look like in addition to an Alaska liquid natural gas (LNG) associated project under evaluation for North Slope operators. There were countries and companies in the international market assessing what general sequestration capacities were in different jurisdictions. The department had reached out related to what Alaska's geology was like, what potential opportunities may look like, and what the framework would look like. He relayed that the scenario would require the development of technology for shipping that was not currently present. He thought it was fair to say that in a general sense and in an Alaska sense all three of the categories were being looked at by companies at some level. 3:10:26 PM Mr. Crowther addressed the bill's fiscal notes. He began with DNR's zero fiscal note and explained that the department believed it could handle the program startup with existing resources. Similarly, the Department of Environmental Conservation did not have a fiscal note. Additionally, the Department of Revenue did not have a fiscal note because the state was still working to assess the revenue potential based on how project economics developed. He reviewed the AOGCC fiscal note and explained that the funds would enable the pursuit of the Class VI primacy DNR believed was necessary for the program. Additionally, DNR believed the Environmental Protection Agency (EPA) had grant funding that would be identified hopefully as soon as the coming summer that could offset any costs incurred by the state to pursue primacy. Ultimately, the department did not expect the state would have to pay any cost for project standup. Representative Galvin thought it seemed like a nice pathway for oil and gas to find a greener way toward development and potentially a way for the state to get more revenue from other parts of the world. She wondered how the department came about the revenue component in terms of the agreement between the state and oil and gas companies. For example, a long-term oil and gas lease was typically around 12.5 percent of the price. She understood the topic under the bill was a little trickier. She highlighted the aim of maximizing the best for Alaska. She wondered if there was space for the state to seek more revenue. She did not want to chase anyone out of the state, but she thought there may be an opportunity to negotiate the rates. She asked what DNR had done to study the possibility. 3:13:15 PM Mr. Crowther referred to slide 26 showing the assumptions that went into the revenue including the per ton injection and rental charges. He stated that DNR was seeing in the market that the projects were very challenged by the cost of carbon capture. He detailed that it was very expensive to capture carbon dioxide. He explained that any other project costs were challenging to fit within the 45Q tax credit incentive. The legislation gave the [DNR] commissioner the authority and responsibility to identify different frameworks to best capture the value for the state, whether it was a per ton injection charge, rental fees, or other revenue sharing mechanisms. The department viewed the legislation as allowing flexibility to seek out the best deal for the state in different ways to recoup the revenue. He reiterated that the projects were cost challenged in some instances. He explained that it was necessary to take into account that if the state made a lot of revenue from a project that did not ultimately move forward, the state ultimately would make no revenue. He offered to follow up with additional information. Representative Galvin looked forward to the follow up information. She believed it was important for the legislature to be evaluating. She appreciated the work that went into the detail to be provided. She recognized that globally, oil and gas companies were moving "more in this direction" to be good stewards. She stated the companies would make the choices because they were doing it in other areas and it helped them to get the investments necessary to continue their projects. She wanted to encourage the companies to do so and to take on their fair share of the burden. She understood there were costs associated with the effort and she believed part of it was good business. She looked forward to seeing the numbers down the line. 3:15:34 PM Representative Coulombe looked at the fiscal notes on slide 29, including $988 million to AOGCC [in FY 26 onward, funded with receipts into the Carbon Storage Closure Trust Fund]. She noticed that the fiscal notes for HB 49 had been growing with time. She asked if the HB 50 fiscal notes were final. Mr. Crowther replied that the department did not anticipate changes to the fiscal notes. Mr. Fitzpatrick reviewed a sectional summary of the bill beginning on slide 31. He relayed that Sections 16 and 33 of the bill contained the lion's share of the lifting in terms of statutory enactments. He noted that many of the bill sections contained conforming language. • Section 1: Short title of bill: Carbon Capture, Utilization, and Storage Act • Section 2 (AOGCC): AS 31.05.027 Grants AOGCC jurisdiction to regulate carbon storage unit operations in the state like oil and gas (bill Sec. 16) • Section 3 (AOGCC): AS 31.05.030(h) Authorizes AOGCC to seek primary enforcement authority for permitting and regulating Class VI injection wells for CO2 (Class VI primacy discussed earlier in the presentation) • Section 4 (AOGCC): AS 31.05.030(m) Conforming changes to clarify authority in the Geothermal Resources part of AS 41.06 • Section 5 (AOGCC): AS 37.05.146(c) Adds carbon dioxide storage facility administrative fund to list of separate funds with sources not from UGF appropriations (bill Sec. 33, proposed AS 41.06.160) • Section 6 (DNR/AOGCC): AS 37.14.850 Creates Carbon Storage Closure Trust Fund to provide non-sweepable fund account for post-closure operations of State agencies. Fund source is an injection surcharge (bill Sec. 33, proposed AS 41.06.175) • Section 7 (DNR): AS 38.05.069(e) Adds carbon storage (bill Sec. 16) to mineral estate disposal exemptions for agricultural lands disposal • Section 8 (DNR): AS 38.05.070(a) Adds exemption for carbon storage leasing (bill Sec. 16) from generalized state land leasing provisions in AS 38.05.070105 (when state lands are leased for purposes other than extrication of natural resources) • Section 9 (DNR): AS 38.05.130 Adds carbon storage to provisions requiring lessees to pay damages to landowners and post bond for that purpose; and providing lessee access to the mineral estate if a surface owner refuses to engage in a surface use agreement; same statutory process that exists for other mineral estate development of split estate created by AS 38.05.125 (primarily for situations when CCUS project developers entered onto surface lands not otherwise owned by the state) • Sections 1013 (DNR/DOG): AS 38.05.135(a)(e) Adds carbon storage program (bill Sec. 16) to mineral leasing statutes primarily providing for revenue collection by adding reference to injection charges (proposed Sec. 38.05.700(c)) • Section 14 (DNR): AS 38.05.140(a) Adds carbon storage provision to exemptions for coal bed methane under AS 38.05.180(gg) and unconventional gas under AS 38.05.180(ff) because carbon storage leasing might be possible in unmineable coal seams • Section 15 (DNR): AS 38.05.184 Adds carbon storage leases to prohibition in the Kachemak Bay oil and gas closure area (DNR tried to track allowances for CCUS project development to where existing oil and gas project development was allowed) • Section 16 (DNR/DOG): Adds new sections to AS 38.05 Alaska Land Act as Article 15A Carbon Storage Exploration Licenses; Leases (proposed AS 38.05.700 795); detailed summary after next slide 3:19:38 PM Mr. Fitzpatrick briefly highlighted slide 32 showing a CCUS theoretical timeline. He provided Section 16 detail on slide 33. He relayed that the section addressed the DNR carbon storage license and lease provisions. He explained that the section enacted a number of new statutes: AS 38.05.700 Provision for applicability carbon storage statutes and authority for DNR to adopt regulations to implement these statutes. AS 38.05.705 Allows the commissioner to issue carbon storage exploration licenses on state land and establishes work commitment obligations, minimum economic terms, bonding requirements, default provisions, and renewal provisions. • 5-year exploration license term • Conversion of the license to a lease upon fulfillment of work commitment, acquiring storage facility permit from AOGCC, ability to meet commercial terms AS 38.05.710 Procedures for issuance of a carbon storage exploration license. These are modeled after existing procedures for oil and gas exploration licensing under AS 38.05.133 • Identify land, minimum work commitment, economic terms, 90 days for competing proposals • Written finding - including competitive process if competing proposals are submitted • Subsection 715(h) provides a right of first refusal opportunity for existing lessees under AS 38.05.135 181 (i.e., mineral lessees for coal, oil and gas, geothermal, or other exploitable minerals). AS 38.05.715 Provision allowing conversion of an AS 38.05.705-710 carbon storage exploration licenses to a carbon storage lease. AS 38.05.720 An oil and gas lessee converting from enhanced oil recovery to carbon storage must apply for a carbon storage lease. AS 38.05.725 Requirements for plans of development and operations, and provision for unitization, as with oil and gas leasing. Mr. Fitzpatrick elaborated on AS 38.05.720. He explained that when an oil and gas lessee reached a point where they were no longer engaged in enhanced oil recovery and had become more engaged in storage, the statute required the lessee to apply for a storage lease from DNR and AOGCC. Representative Galvin stated that at some point in the development of a well there came a time when the reinjection was no longer helping extract the oil. She asked how it was measured. She wondered if the state got involved or oil companies just reported that they had switched over to a storage area. Mr. Crowther responded that the nature of the injection through the well could be measured by AOGCC and/or the nature of production from the field could be measured by DNR in the course of its lease management. There were a number of variables to assess to set a reasonable industry standard to indicate a well was no longer in operation and transitioned to carbon [storage]. He stated at that time, the statutory authority requiring a switch to a carbon lease would be triggered. Representative Galvin asked if the lease rate would be different. Mr. Crowther replied that DNR would require an operator to obtain the right and compensate the state for the authority to inject carbon. Mr. Fitzpatrick concluded his review of Section 16 detail on slide 33: AS 38.05.730 Payments from carbon storage licenses and leases are to be deposited in the general fund except for the amount allocated to the Permanent Fund under art. IX, sec. 15, of the Alaska Constitution. AS 38.05.795 Definitions for specific terms used in the proposed Article 15A Carbon Storage Exploration Licenses; Leases Mr. Fitzpatrick continued the sectional summary on slide 34. • 17 (DNR/DOG): AS 38.35.020(a) Amended to include carbon dioxide for pipeline transportation right-of- way (ROW) leasing purposes • 18 (DNR/DOG): AS 38.35.020(b) Amended to allow the DNR commissioner to exempt pipelines from ROW leasing when transporting carbon dioxide for enhanced oil recovery or pressure support within existing fields (does not exempt pipelines from regulation, just a ROW) Mr. Fitzpatrick elaborated on Section 18 and explained it was similar to the way the state treated oil and gas pipelines: if they were transporting over long distances the state issued a right-of-way lease and infield lines were covered under unit regulations. He continued to review the sections on slide 34: • 19 (DNR/DOG): AS 38.35.122 Conforming amendment to bring some carbon dioxide pipelines under the same title as "product" pipelines • 2023 (DNR/DOG): AS 38.35.230 Amends definitions of "lease," "pipeline" or "pipeline facility," "transportation," and adds "carbon dioxide" to accommodate carbon dioxide pipeline provisions • 2432 (AOGCC): AS 41.06.005060 Conforming amendments separates AS 41.06 into two articles one for geothermal and one for carbon storage • 33 (AOGCC): AS 41.06 Adds new sections as Article 2. Carbon Dioxide Injection and Storage beginning at AS 41.06.105. Detailed summary on slide after next. Mr. Fitzpatrick turned to slide 35 and noted that Section 33 was the next large scale section of the bill and included AOGCC statutes. He pointed to the timeline on the slide and highlighted the AOGCC carbon storage permitting statutes. He reviewed Section 33 statutes in detail on slide 36: AS 41.06.105 Provides AOGCC jurisdiction over carbon dioxide storage facilities to prevent waste, protect correlative rights, and ensure public health and safety; "waste" is defined in AS 41.06.210 3:26:21 PM Mr. Fitzpatrick turned to slide 36 and continued to review the sectional detail: AS 41.06.110 Concerns AOGCC's authority to carry out the purposes and intent of AS 41.06.105-210 AS 41.06.115 Provides that waste is prohibited in a carbon storage facility or reservoir AS 41.06.120 Provides permit requirements for storage facilities AS 41.06.125 Creates a public hearing requirement for storage facility permits issued by AOGCC - notice is given to property owners within 1/2 mile AS 41.06.130 Specifies the criteria for the AOGCC to approve a carbon storage facility permit AS 41.06.135 Allows AOGCC to include parameters, limitations, or restrictions in a permit and to protect and adjust rights and obligations of persons affected by geologic storage AS 41.06.140 Concerns amalgamation of property interests for storage facilities Mr. Fitzpatrick explained that AS 41.06.140 addressed units that may have more than one property owner. 3:27:41 PM Mr. Fitzpatrick moved to slide 37 and continued reviewing bill sections: AS 41.06.145 Creates specifications for recording a carbon storage facility certificate to put future property purchasers on notice (recorded in the DNR Recorder's Office) AS 41.06.150 Creates statutory requirements for AOGCC to ensure environmental protection and reservoir integrity in storage facilities and reservoirs AS 41.06.155 Clarifies preservation of rights, including deconfliction of development of other minerals by drilling through or near a storage reservoir (AOGCC would be responsible for making sure that there was not a conflicting development plan between CCUS that the development of minerals occurring the same areas) AS 41.06.160 Authority for AOGCC to collect fees and establishes the "carbon dioxide storage facility administrative fund" under the general fund (regulatory cost recovery mechanism) AS 41.06.165 Specifies that storage operators hold title to injected carbon dioxide until a certificate is issued under AS 41.06.175, including liability for damage associated with injected carbon dioxide AS 41.06.170 Specifies the eight factor criteria for certificate of completion a transfer of title of CO2 (requirements to close a carbon storage facility) AS 41.06.175 AOGCC will collect a "carbon storage facility injection surcharge" for post closure administration, deposited in the "carbon storage closure trust fund" established in AS 37.14.850 (bill Sec. 6) (the surcharge funded the long-term liability account and the amount was set by the AOGCC on a facility by facility basis) AS 41.06.180 AOGCC may impose civil penalties for violations of its carbon storage statutes AS 41.06.185 Excludes AOGCC's carbon storage statues from enhanced oil recovery (EOR), except when an EOR related reservoir is converted for storage AS 41.06.190 Authority for AOGCC to enter into agreements with other government entities and agencies for carbon storage purposes AS 41.06.195 AOGCC authority to determine injection and storage amounts, and providing for fees AS 41.06.210 Definitions for terms used in AOGCC's carbon storage statutes 3:30:11 PM Mr. Fitzpatrick reviewed the last sections on slide 38. He explained that Sections 34 through 37 [were conforming amendments] related to areas currently open to oil and gas leasing that would be open to carbon storage leasing and areas closed to oil and gas leasing would be closed to carbon storage leasing. Section 38 was an amendment to the existing Alaska corporate income tax statute that prohibited the application of 45Q tax credits to the Alaska corporate income tax. He explained that the 45Q was the federal tax credit for CCUS. He detailed that because Alaska adopted the federal income tax code by reference, the bill section carved out the 45Q tax credit from the Alaska corporate income tax code, so Alaska was not renting the credit under its own state corporate income tax structure. Mr. Fitzpatrick relayed that Section 39 added a new subsection to existing statute for DNR to administer storage facilities and stored carbon after a certificate of completion was issued (when the state took title of the C02). Section 40 provided authority to the Department of Environmental Conservation to adopt regulations for carbon dioxide pipelines. Sections 41 through 43 were general provisions for adopting regulations, title changes, and effective dates. Representative Tomaszewski highlighted AS 41.06.115 on slide 36 related to the prohibition of waste. He looked at the definition of waste on page 29 of the bill: "waste" means, in addition to its ordinary meaning, physical 24 waste, and includes inefficient, excessive, or improper operation of a storage facility 25 or well. He asked about the ordinary meaning of waste. He asked for additional details on what the waste could be and what the department was anticipating. Mr. Crowther deferred the question to an AOGCC colleague online. Co-Chair Foster noted the individuals were not online. Mr. Crowther responded that the department would follow up with the information. Representative Galvin stated it was important work to think about how to roll back impacts of a hydrocarbon dependent world. She remarked it seemed like the work was just getting started. She thanked the department. She thought perhaps Alaska could be a proving ground or an opportunity as an active depository was yet to be seen. She understood the bill was a framework to determine whether there was interest in commercially pursuing [carbon storage] on a global scale. She appreciated the efforts and efforts made to protect the state's interests. She would be watching with optimism. She hoped they could make a dent in the global challenge in addition to bringing in some revenue. Mr. Crowther appreciated the committee's time. He looked forward to providing more information to move the bill forward. HB 50 was HEARD and HELD in committee for further consideration. Co-Chair Foster reviewed the schedule for the following day.