SENATOR LEMAN called the Special Committee on Oil and Gas meeting to order at 8:05 a.m. and announced SB 150 OIL & GAS EXPLORATION LICENSES/LEASES to be up for consideration. Number 010 JIM EASON, Director, Division of Oil and Gas, said SB 150 and SB 151 are very important pieces of legislation to accomplish focused goals. He recapped for the Committee, the state's competitive oil and gas lease program which this legislation does not try to replace, because competitive leasing works fine in areas that have known oil and gas potential. Exploration licensing might encourage exploration in areas that have not traditionally been explored with the competitive leasing program. Current statutes require any sale offered on competitive leasing terms to be under the five year schedule for at least two calendar years before the quarter in which it is scheduled to be held. There are exempt sales, however, that are very narrowly focused. He used charts to point out areas in Alaska that are mostly unexplored, but are known to have sedimentary rocks. This type of rock is the most likely to contain accumulations of oil and gas. It's unclear what their oil and gas potential really is. Last year they started looking for an alternative to the competitive leasing program that would work towards exploration in those areas. MR. EASON said that SB 150 would require, before any license, a preliminary written determination of the lands the Commissioner feels should be eligible for licensing. This would be published for public participation for 30 days. The next step would be a written determination of the applicability. The rights attached to a licensee under this legislation would be the exclusive right to explore the area covered by the license for a period of up to 10 years. There is a limitation on the total upland and tideland acreage a lessee could hold and there is a limitation on the size of the lease. Generally, the large revenues come from royalties and severance taxes and other related income that arises from successful development of oil and gas, MR. EASON said. In this case DNR is proposing that the money that would traditionally have gone to bonuses actually "get into the ground" and the bid variable for the license be the dollar amount of what is committed - for things like geophysical surveys and exploration wells. Number 240 The license can be revoked and requires a performance bond, MR. EASON explained. They are trying to build a responsible system that will bring the state some return for its commitment as well as the right to convert it to a longer term lease. There would be a nonrefundable $1 per acre license fee. The license would require an exclusive agreement by the licensee that the cost of the work commitment as it is performed is subject to audit. The license is eligible for conversion to a lease if all the commitments are met. SB 150 is a vehicle that will offer an opportunity for the vesting of rights, which are considerable in scale, for the opportunity to explore very large areas, up to 500,000 acres, for a predefined period of time, and without competition, to explore and develop that area. Number 384 SENATOR LEMAN asked what conditions would be present for the Commissioner to offer additional incentives, such as 5% royalties mentioned in section 2. MR. EASON said he was not clear on that. He said that that provision was in statute and he didn't think the legislation intended to link the two. By definition they do not intend to offer the 5% royalty as a license initially. REPRESENTATIVE GREEN tried to explain the first structure in what ultimately became a productive reservoir was a new discovery and that "first horizon" was subject to a 5% royalty, but subsequent horizons productive within that structure didn't enjoy the same royalty. MR. EASON said he was correct and that provision was repealed several years ago. Reduced royalties are still in statute. Number 439 REPRESENTATIVE GREEN asked if there was a possibility that bonding could be reduced to an annual performance. MR. EASON said they hadn't focused a great deal on options, but there are a number of ways to structure that. He said they have tried to give rights and keep obligations in a significantly proportioned way. Number 447 SENATOR LEMAN asked if it is possible for the Commissioner of the Department of Natural Resources to consider what the potential licensee would do and not just look at the dollar amount. MR. EASON said that was possible and they propose that if there are different proposals for the same area, the Commissioner would try to determine whether a mixture of terms would be in the state's best interest. Number 467 SENATOR LEMAN closed the hearing on SB 150 and announced SB 151 OIL & GAS EXPLORATION INCENTIVE CREDITS to be up for consideration. MR. EASON explained SB 151 is not related to SB 150, but it is intended to have many of the same goals as the large block licensing proposal. That is, to encourage the earlier exploration and evaluation of lands throughout the state, so the state will be in a better position of understanding the oil and gas potential of its lands and have better information from which to manage those lands. It is intended primarily for application where the Title 38 exploration incentive credit is not available. In the current legislation, in addition to the state owned lands, credits would be available for operations conducted on private lands. Under Title 38 there are no limitations on the maximum amount of credits that could be offered by the state over the years. Under the proposed bill there is a $50 million cap, the state's share for one project being no more than $5 million. One major difference for the geophysical exploration is that there is no requirement for the exploration to be conducted on land that is scheduled for sale. That gives them the flexibility to review any project that is proposed in advance. Number 534 SENATOR SHARP asked if this was an increase from 25% from eligible costs that was offered in previous years? MR. EASON said that was correct. The bill that was under consideration last year treated all lands equally and this bill treats private lands with more a more allowable credit which was a decision predicated on the likelihood that although those lands will have some value to the state, it is likely to be a reduced value simply because of the remoteness of those lands. Number 550 SENATOR HALFORD asked if the $50 million limit was the combined limit for the entire term of the legislation which goes until 2003. MR. EASON said the $50 million limit would apply to geophysical surveys or wells drilled under this proposal. This is a cost sharing arrangement that is not to pay for their entire program, but it is to encourage them to cross that hurdle in those situations where they are at, or very near, the point of making a decision, but for the participation of the state. SENATOR HALFORD did not disagree with it being cost sharing and not cost shifting, but he thought the limitation to be unrealistic if it was to be any real incentive for major exploration. SENATOR LEMAN asked what the impact would be if the limitation were lifted. MR. EASON said it would increase the state's exposure in an undefined way. He explained there is similar exposure under Title 38. TAPE 93-5, SIDE B Number 580 SENATOR HALFORD asked if the 10-year term was too long. He suggested using the $50 million allowance in the first 2 years and saying if you don't do it in the first 2 years, you don't get it. MR. EASON said there are some strong arguments to be made for that suggestion. SENATOR HALFORD commented that if you know the credit is going to continue, you don't have the incentive to accelerate your program. MR. EASON said his view was entirely correct. However, there have been a number of good developments on the North Slope and in Cook Inlet that have created a euphoria that has translated to several different companies outside the state who haven't been participants here. That, in itself, provides the biggest incentive. The time to look is now. In his opinion, people will be inclined, for a lot of different reasons, to pick projects that may be eligible early on. REPRESENTATIVE GREEN asked if the anticipated work commitment is time related or just within the 10-year period. MR. EASON explained once the state has committed to being a participant, they would put some time limit on the performance so they could keep the money available for other worthwhile projects. Number 519 SENATOR HALFORD asked if the credits could be assigned by the qualified applicant to any other person, meaning another tax payer, or if the credit could be sold. MR. EASON said that was the intent in recognition that, for instance, geophysical companies operating in Alaska have no royalty or severance tax obligations. It gives them the opportunity of using the credit by selling or trading it to others who can use it. SENATOR HALFORD asked how long they could hold the credit before they start to do the work. MR. EASON said there is no set limit in the statute, and that would be addressed in regulations. In general terms, they would try to establish a balance that allows for sufficient time. Number 501 SENATOR LEMAN said they would take these bills up again next Tuesday and adjourned the meeting at 9:00 a.m.