HB 199: OIL & GAS EXPLORATION LICENSES/LEASES Number 203 CHAIRMAN GREEN said that testimony on HB 199 would be taken up at this time in reference to the bonding situation. Number 225 SEN TAN, ASSISTANT ATTORNEY GENERAL, GENERAL CIVIL DIVISION, DEPARTMENT OF LAW, said he was available to answer any questions. Number 237 DAVID LAPPI, PRESIDENT OF LAPP RESOURCES, INC., made four points in reference to HB 199, as follows: 1) he thought a dangerous precedent was being set by requiring bonding of limited entry users of the state's resources; 2) it would be difficult for small companies to obtain bonds; 3) the higher up front costs to make the entrepreneurial activity extremely difficult for small companies; and, 4) if the fiscal gap is to be funded with increased production revenues and royalties in the state - explorers around the world need terms on exploration licenses that are at least as attractive as terms that can be obtained in overseas countries. Number 272 CHAIRMAN GREEN asked Mr. Lappi if there was not bonding if he had a suggestion as to how to handle this problem. Number 284 MR. LAPPI felt there were alternatives to be used in place of bonding. He further stated that insurance and regular inspections of operations is very important in countries where they have major problems with prior practice. If environmental regulations were lax or not in force at the time those operations were being carried out, but the situation in Alaska with full regulations and enforcement would preclude a lot of these problems. Number 297 JIM EASON, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, referred to Mr. Lappi's comments and stated the bonding provisions that are included in HB 199 are not intended for environmental purposes. He could not think of any instance in which someone is given the opportunity to explore without some cash, bonding, guarantee, or financial securities of some sort that give the host country some assurance that the proposed work commitment will be undertaken and completed. Number 325 BILL WEBB, GENERAL MANAGER, ALASKA SPORT INDUSTRY ALLIANCE, said the Alliance supported HB 199 for the most part, but felt the bonding was unnecessary as it is written. He said the Alliance would support bonding of the annual program. Number 359 KEVIN TABLER with UNOCAL stated they support the open position on annual bonding. Number 370 CHAIRMAN GREEN put the situation in perspective by saying the committee has heard testimony from one extreme supporting bonding for the entire program to the other end of the spectrum saying no bonding or if so a percentage of the amount of work commitment that would be bid on an annual basis. He stated the committee needed to bring these two extremes together if HB 199 would work and asked for input. Number 391 MR. EASON stated HB 199 is to encourage exploration, but encouraging serious participants. In concept, all companies should have the same resources, intent, and ability to perform, but he said this is not the case. He stated many times in the past there have been problems when you do not have financial security to back the performance that is promised to the state. There are possible legal ramifications that arise if you set a standard so low it becomes inconsequential. Litigation is likely to arise from several different perspectives. First, one would be potential litigation from unsuccessful bidders, who have bid from a responsible position against bidders that turns out are not responsible and do not perform. Secondly, in a situation where you have something as well defined as a work commitment, as opposed to a dollar amount, it makes it that much easier for disputes to arise between the licensee and the state over who has finished a work commitment and what exactly constitutes completion of a work commitment. Number 440 MR. TAN said the basic premise in the line is lifelong licensing. Legislation as it is written right now, not only speaks to the bond, but other financial security. Mr. Tan said if it is an open ended process, we are not protecting the interest of the state and would be in a position of future litigation. Number 469 MR. WEBB stated he does not see a major risk to the state, they undoubtedly are going to use qualified contractors here in Alaska. The worst case scenario is nothing happens. He stated a bond of $1 million certainly discourages small operators. He stated there are other provisions in law, as far as environmental damage, that would take care of any environmental problems. Number 501 CHAIRMAN GREEN said if HB 199 would minimize the amount of commitment that an operator would be held to, either through a bond or some sort of security, and the state could get the land back but it may be several years down the road before the state could reoffer that and the intent is to get that drilled early. Number 522 MR. TAN said the program is to essentially offer opportunity. During this period the State has given up the right to do anything with the land. The concensus would be if there is a requirement to put up a bond for other financial increments then there is an incentive to move and get something done. In the bid process, the commitment for the consideration for the contract is the work commitment. Number 546 MR. WEBB said he would suggest an annual bond, and if you do not perform you loose it at the end of one year. Number 574 MR. EASON said everyone is thinking what does or does not happen after a bid is selected. What we have forgotten is that we have taken away any objective way of evaluating a bid, whether it is sealed or outcry, if it costs nothing, people bid $100 million, no matter how much money they have. With large companies sitting at the tables there would be no way for an administrator who is responsible for selecting the apparent high bidder in a situation to make an informed choice. Number 616 REPRESENTATIVE SANDERS asked Mr. Richmond if there were other financial instruments available to the independent drillers that might protect the state's interest; anything besides bonds. Number 620 RICHARD RICHMOND said the major concern among all the people seems to be the availability of a bond. He feels some security is necessary to guarantee performance of a contract. He said there are other instruments that could be used, like irrevocable letters of credit, which are widely used in the rest of the world. There is no insurance product that would guarantee performance. The only product would be a bank guarantee or an individual type bond. Number 647 PETE NELSON, LAND MANAGER, TEXACO, said Texaco supports the AOGA's (Alaska Oil and Gas Association) position regarding the annual bond in the amount of the annual work commitment for that year with a provision that a bond would be forfeited if the work was not done in that one year. She felt this fell in the middle of what the large oil companies want and the smaller companies and independents. Number 000 MR. EASON said a few things that raised a red flag when he read the AOGA's proposal was looking at things on an annual basis, but it is subject to potential litigation because of the fining problem. It is very difficult to set up an RFP (request for proposal) to entertain and review proposals when you do not have the same schedule of events that are proposed to occur. Another problem is most companies do not want the state in their business. He stated an alternative he has would require less bonding or security up front, but it would also do some things that are very positive. It would encourage earlier more intensive exploration and evaluation of the acreage. It would leave a larger amount of money in the hands of the licensee to do that and at the same time it would incur some penalties if you did not. It would also provide some cash return to the state in the event the licensee walks away during any point of that commitment period, short of the entire body of this commitment. MR. EASON faxed a copy of his formula to the committee at this time. (A copy of this fax may be found in the House Special Committee on Oil and Gas Committee Room, Capitol Room 114, and after the adjournment of the second session of the 18th Alaska State Legislature, in the Legislative Reference Library.) Number 101 MR. EASON said the winning offer is for a five year work commitment of spending $50 million and the way this security provision would work is each year you would calculate the annual obligations that have to be posted by applying a formula. The formula would consist of a numerator, it would have the total value of the work commitment you proposed minus the cumulative expenses that are incurred. There would be a denominator that would consist of the number of years remaining in the program. He further stated costs allowable for the expenses would be very limited and very direct measurable costs labor, benefits, rentals, and contract costs. Overhead would be excluded, eliminate the costs of providing bonds. Number 186 CHAIRMAN GREEN asked Mr. Eason if before the Commissioner put out the bids as to what costs would be allowable, or would they be standard. MR. EASON said there would be a definition and he had a suggested one. He suggested that the definition be put into HB 199. Number 230 CHAIRMAN GREEN asked by using this method if it would limit licensing to major players. MR. EASON said for these size projects, this would be the kind of company that would need to do this. It is an option for the company, either a very small company or a very large company, to have the exclusive right to explore the area and to convert it to leases. Number 270 MR. LAPPI said the way HB 199 is currently written there is no requirement of any company to explore or extend any money before the tenth year. If the state is truly interested in promoting exploration and getting work done early on he said he felt this bill should then address this problem. He said the state should not shy away from trying to produce wealth because a lawsuit may result. The state needs to produce wealth and produce the wealth on the expectation that lawsuits may occur. Number 302 MR. RICHMOND did not realize HB 199 was written with a 10 year obligation. He said that would be impossible to get for any company, except for the very strong as far as a bond is concerned. The maximum bond that any company would want to write in terms of time would not exceed three years at the very maximum. He said speaking on the forfeiture type of bond, which in effect is a financial guarantee and for anyone, and again only the very strong company. Number 327 MR. EASON said other countries that have an easier way of dealing with this are not troubled by having to follow competitive procedures. The simple solution to this would be to amend the statutes to allow the Commissioner to negotiate with any individual he wants to have a work commitment performed on state lands that he at his discretion is in the state's best interest. Number 348 MR. WEBB said the state has land that nothing is happening on. He did not feel there would be too much of a competitive situation. Number 388 MR. TABLER said he would like to have the opportunity to write comments on Mr. Eason's proposal after UNOCAL has the chance to review it. ADJOURNMENT Number 399 CHAIRMAN GREEN adjourned meeting at 7:00 p.m.