Number 158 HB 199 - OIL & GAS EXPLORATION LICENSES/LEASES KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF NATURAL RESOURCES (DNR), said Chairman Green gave a good overview of the bill, and that he would highlight the features of the document under consideration. He explained this bill originated during the 17th session when, then Commissioner Heinze was challenged to stem the tide of companies leaving Alaska. There was a lot of controversy about the bill, and a new bill was crafted during the 18th session when it was introduced to the Oil & Gas Committee and to the counterpart committee on the senate side. This committee heard the bill as did the Finance Committee, and in the senate there was fireworks during the last session. The bill was pulled in different directions and no one seemed pleased with its configuration. He said industry has worked with DNR during the interim to reach this consensus document. He said it would be important that all parties involved remain on board with whatever changes are made because the alliance behind this document is strong. MR. BOYD explained that in the original bill the concept of exploration licensing applied to virtually any land that had never been leased before. Through a series of meetings and hearings it was determined to limit the bill to certain geographic areas. Mr. Boyd referred to maps in the room and illustrated that everything above the dashed line would be off-limits, thereby delineating lands north of the Umiat baseline from everything south of that line and from certain areas outside of the Cook Inlet box. MR. BOYD stated because many of the items in the draft were interdependent, it would be difficult to address one topic at a time. Having said that, he continued by addressing the concept of commitment. He said a company would have a commitment, subscribed to for a period of time, that would involve certain conditions. One condition would be a bond, which is the state's assurance that the work commitment would be fulfilled. In the original bill, bonding was on a dollar-for-dollar basis and any work left undone was forfeited to the state. In the October 25 draft, there is an attempt to reach middle ground. He explained the formula in the following way: " You take your work commitment and you subtract the amount of work you have done up to the point in time you are at and you divide it by the number of years left." He further illustrated this formula with the following example: "Let's say you have a 50 million dollar work commitment and you have not done any work yet, and it is a 10 year license; so it is 50 million minus zero, divided by 10. Your bond for the first year would be five million dollars. You do five million dollars worth of work your first year. What is your bond for the second year? It would be 50 minus five, divided by nine; it would be five million again, and so on." He stated that with this formula the state would not be protected on a dollar-for-dollar basis, yet there would still be a fairly high standard. He explained that if a company did not perform, their bond would be forfeited and they would lose their license. MR. BOYD said in the original house bill there was no relinquishment provision at all. He explained relinquishment as meaning that at some point during the licensing period a company would give back some of the land they were originally given. In the senate, the provision was that at the end of the fourth year, 25 percent of the original licensed area was to be relinquished, and then on each succeeding anniversary 10 percent of the original acreage would be relinquished. Once again, industry felt this was too harsh a standard, and from a long series of meetings, a compromise was established. It was determined that at least 25 percent of the work commitment should be done during the first four years, otherwise a company would risk losing its license. However, if 50 percent of the work was done in the first four years, there would be no relinquishment. He said this works to the advantage of the state because it increases the workload in the beginning. If the company does something in-between, then 25 percent of the original acreage is relinquished and then each succeeding year 10 percent of the remaining acreage, up to a maximum of 50 percent, is lost. This is characterized as a balance because companies are given the opportunity to not relinquish any land, yet they are still required to do 25 percent of the work, thereby pushing the work forward. He concluded that bonding and relinquishment are key points in protecting the state. MR. BOYD mentioned competitive bidding as another aspect of this bill. He said there was objection to this because it was difficult for some companies to have the authorization, with minimal notice, to bid higher. Both the senate version and the October 25 draft have incorporated competitive sealed bids. He said that in efforts to define what monies would be counted towards the work commitment, overhead costs were excluded, whereas direct exploration expenditures were included. He noted that sometimes a smaller company may have a real or perceived benefit over a larger company and be able to do a certain job cheaper. MR. BOYD said with regards to acreage chargeability, the licensed area would not be charged against the 500,000 acre maximum. He further stated the application fee would be lower than in the original bill and would not exceed one dollar per acre. He said in the original bill, all a company had to do was pay the work commitment. In the senate bill a company had annual reviews, which is a lot of work. With the bonding formula, middle ground is approached because a company would have to complete 25 percent of the work by the end of the fourth year. He added the bond would need to be in place at the beginning of each year. MR. BOYD stated Title 46, financial responsibility, is not present in the October 25 draft. In the senate there was a lot of discussion pertaining to the reduction of the financial responsibility from five million to one million dollars. Mr. Boyd said this issue is not DNR's responsibility, but is in fact a subset of Title 46 and is part of a financial responsibility package that was passed several years ago in response to the Exxon Valdez accident. He stated HB 567 introduced a lot of new financial responsibilities. He said that, as a convenience, every provision not pertaining to exploration licensing was taken out of the October 25 document. For the same reason, the so-called 90-day provision was also removed but will appear in some other legislation. Mr. Boyd also mentioned that the rental fee would actually begin at three dollars an acre, and move incrementally from there. He said another change refers to extending the phrase, "Acts of God" to the (undiscernible). MR. BOYD joined Chairman Green in commending the industry on the hard work done and the compromises made to arrive at this document. Number 501 CHAIRMAN GREEN thanked Mr. Boyd and asked if there were any questions from committee members before taking testimonies from the audience. Number 506 REPRESENTATIVE JERRY SANDERS asked if the regulations and rules generated from this would support the original intent of this legislature. Number 511 MR. BOYD responded that a lot of the regulations were already in Title 38. He said an annual meeting would need to be determined, and the regulations would need to be updated. Number 545 CHAIRMAN GREEN mentioned that Kotzebue was now on-line. Number 558 REPRESENTATIVE SANDERS asked if there was any commitment from the industry that companies would take advantage of this bill. Number 565 MR. BOYD replied he did not have anything in writing but believed that the companies would not spend so much time on this if they did not intend to take advantage of it. He said he could not make any promises, but saw this as an opportunity for Alaska. Number 598 REPRESENTATIVE PETE KOTT asked for clarification regarding the administrative effect this bill would have on DNR. Number 602 MR. BOYD replied the program could initially be administered without additional personnel and the status quo would be sufficient. He said if the program grew and became popular, changes in staff would probably ensue. Number 624 CHAIRMAN GREEN asked if more than 25 percent, but less than 50 percent of the work commitment were done, resulting in a situation where the licensed area would, during the fourth year still be in tact, who would determine which areas were to be relinquished? Number 626 MR. BOYD replied there was a provision in the bill pertaining to the commissioner's identification of the acreage to be relinquished if the company did not identify a compact and contiguous 25 percent of the acreage. Number 632 CHAIRMAN GREEN asked if this also applied to the subsequent 10 percents. Chairman Green also asked if this would, in effect, be administered in a fashion similar to that of unitization, thereby indicating that more personnel may be needed. Number 638 MR. BOYD answered in the affirmative to both questions. Number 639 CHAIRMAN GREEN reiterated that Mr. Boyd had finished highlighting the changes introduced to the bill, and asked if there were any questions from the remote areas. CHAIRMAN GREEN said testimony would be taken in the order in which people signed in. TAPE 93-15, SIDE B Number 001 BILL O'BRIEN, RESIDENT, south Anchorage, thanked the committee and testified in support of the October 25 draft. He said oil revenues have afforded Alaska tremendous prosperity and sustaining this prosperity requires replacing the declining production with new fields as well as legislation that will make Alaska attractive to the industry. He asked legislators to review the following two questions: 1) How many of the companies that currently operate oil and gas fields today are aggressively exploring within Alaska? and 2) How many of the companies who have left in recent years plan to return to explore? He said although Alaska is virtually unexplored, U.S. oil companies are investing more than half of their exploration and production capital overseas. He stated this bill, if passed in the next session, would signal to the industry that Alaska wants to improve its business climate. He further stated that exploration and development require time, especially in Alaska, and that Alaskans must plan for the future, a future that includes aggressive exploration because Alaska cannot afford to do otherwise. Number 038 CHAIRMAN GREEN thanked Mr. O'Brien. He said he would presume in this and other testimonies that this would be considered as the potential committee substitute. Number 040 MR. BOYD answered this was correct. He said in response to Representative Sander's earlier question that he was certainly in support of the current draft and hoped it would help to generate activity in the industry. Number 049 CHAIRMAN GREEN asked if any of the satellites had questions. There being none, he called upon the next witness. Number 059 JUDITH BRADY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS ASSOCIATION (AOGA), said it was the association's opinion that large block licensing would accelerate exploration and the potential development of Alaska's frontier areas. She stated the association supports the geographical delineations regarding the Umiat baseline, et cetera. She said AOGA supports the posting of an annual bond or other security in favor of the state and in which the security is calculated as the entire work commitment, expressed in dollars. Ms. Brady stated that AOGA supports a competitive program in which all licenses are awarded on the basis of a written sales bid. She further stated AOGA supports a program in which conversion is from license to lease. She said AOGA supports a program in which any relinquishment of a licensed area would not occur before the fourth anniversary of a license. (Note, much of the above was indiscernible.) Ms. Brady concluded by saying AOGA supports the October 25 draft. Number 100 MS. PETE NELSON, LAND MANAGER, TEXACO, said Texaco strongly supports DNR's October 25 draft, and also supports AOGA's position as presented today. She said Texaco believes this will encourage accelerated exploration and development of areas that have not been sufficiently evaluated, and it will present a great opportunity for Alaska and for industry. She said this draft does not cater to one specific party, but is a consensus document. Ms. Nelson stated her hope for the bill's passage with essentially the same contents as is currently existent. Number 122 CHAIRMAN GREEN noted that Representative Bill Williams of Ketchikan was now present. Number 128 BRAD PENN, AREA LAND MANAGER, MARATHON OIL COMPANY, stated the company supports the October 25 draft. He said the document provides a complement to the state's five-year leasing program and it represents a unanimous consensus of diverse companies on areas such as bonding, relinquishment, and work commitment. Mr. Penn commended Mr. Ken Boyd and the Division of Oil & Gas on their efforts to work with industry to develop this legislation. Number 141 GEORGE FINLEY, MANAGER OF GOVERNMENT AND PUBLIC RELATIONS, ARCO ALASKA INCORPORATED, testified in support of the October 25 draft. He stated the bill provisions were an integrated and fairly elegant combination of mechanisms for the following four reasons: 1) It is a frontier bill which excludes inappropriate areas; 2) it provides a fair and level playing field for the competition in awarding licenses; 3) it provides strong incentives to do the work quickly; and 4) it supplements the existing system very nicely. Number 165 REPRESENTATIVE SANDERS asked to what extent ARCO's participation could be assumed, given their support of the bill. Number 169 MR. FINLEY responded that this committee substitute has allowed ARCO to begin thinking about frontier prospects proposed for exploration licensing that would otherwise not be considered. Mr. Finley said he could not make any promises and obviously did not want to talk about any particular areas until the bill passed. Number 175 LIZ SHEPHERD, UNOCAL, testified in support of the October 25 draft proposal. Number 181 CHAIRMAN GREEN said he was pleased to hear UNOCAL's support. Number 190 TOM WILLIAMS, DIRECTOR OF GOVERNMENT AND PUBLIC AFFAIRS, BRITISH PETROLEUM EXPLORATION(BP), stated that British Petroleum completely supports the October 25 draft, recommended as a committee substitute. He said large block licensing is a useful addition to the state's conventional leasing program. He stated it would not be a substitute for the current leasing program, but the commissioner of DNR would have to use discretion to decide which system to use in appropriate circumstances. He stated experience elsewhere in the world indicates that these programs can in fact lead to discoveries as well as increased exploration activity. He said BP supports the bill and pledges to not seek to change it from this version as it moves forward. Regarding the necessary rewording of the draft, at the risk of sounding arrogant, he cautioned the legislators to not yield to distraction regarding particular style preferences. Finally, he commended the patience and flexibility of other companies who worked on this legislation. He also thanked Commissioner Noah for his leadership and Mr. Ken Boyd for his skillfulness. Number 228 CHAIRMAN GREEN expressed his appreciation for Mr. William's well-founded words of caution. Number 232 REPRESENTATIVE GARY DAVIS asked about the history and effectiveness of large tract leasing. Number 240 MR. WILLIAMS said he does not think any other state has a large block program, and that perhaps conventional leasing has been used because other states have a different land ownership pattern than that of Alaska. He said large block programs have been used in other countries with varying degrees of success and are usually referred to as "large tract concessions." He said BP's experience with this began in the early 1900s in Iran. Number 268 CHAIRMAN GREEN commented that Mr. Williams made an excellent point in mentioning that a lot of Alaskan land is owned by the state. Number 276 WALT FURNACE, ALASKA SUPPORT INDUSTRY ALLIANCE, stated the Alliance supports the October 25, 1993, draft. He said the provisions are pertinent and necessary in order to establish a large block leasing program in Alaska. For the record, he acknowledged the industry members who worked on this draft. Mr. Furnace expressed concern that the bill would change during the legislative process, and he encouraged Chairman Green to exercise his ability to safeguard the bill from substantial changes. He mentioned that Alliance's 320 members would be available to offer any support necessary regarding this issue. Number 318 JERRY BOOTH, VICE PRESIDENT, ENERGY AND MINERALS, COOK INLET REGION INCORPORATED (CIRI), stated CIRI is owned by approximately 6,700 Athabascan, Eskimo, and Aleut shareholders. He said CIRI owns and manages approximately 924,000 acres of surface estate and 1.6 million acres of subsurface estate in Alaska. CIRI has been active in Alaska's oil and gas industry for over 15 years. He added that it owns a subsidiary, Cook Inlet Region Production Company, and has other oil and gas involvements on the North Slope. He said CIRI supports the concept of large block leasing and licensing in Alaska. He concluded by saying that CIRI supports the drafting of this legislation in a way that respects the fragile compromises that have already been agreed upon. Number 360 CHAIRMAN GREEN said it was encouraging to have the support of a Native corporation on this issue. Number 368 MARY SHIELDS, GENERAL MANAGER, NORTHWEST TECHNICAL SERVICES and STATE LEGISLATIVE CHAIR, ALASKAN FEDERATION OF BUSINESS AND PROFESSIONAL BUSINESS WOMEN, testified in support of the October 25 document and stated on behalf of both organizations, she wanted to congratulate the extensive efforts of those involved with crafting this document. Number 392 CHAIRMAN GREEN asked if there were any comments or questions from the remote sites of Kotzebue, Fairbanks, Juneau, Soldotna, or from the audience. Number 407 DAVID LAPPE, PRESIDENT, LAPP RESOURCES, testified in support of the October 25 document. He said a majority of the oil industry in Anchorage met during the summer and worked hard to produce this compromise. He said Alaska needs to do what it can to remain competitive in this international market. Number 432 REPRESENTATIVE DAVIS asked Mr. Lappe if there was opportunity for independents in this bill. Number 434 MR. LAPPE replied in the affirmative. He said opportunities would depend, in part, on the state's implementation of the regulations. Number 459 CHAIRMAN GREEN referred to the 20,000 acre minimum in the current version, and asked if this amount of acreage would be attractive to an independent; the concern being that a smaller organization would find bonding to be quite difficult. Number 487 MR. LAPPE agreed that bonding would be extremely difficult for a smaller company because of a lack of cash resources. Regarding the size of the acreage, he said that 20,000 acres was not an unreasonable minimum to have. He stated this amount is roughly the size of four current state leases and this is certainly within the explorative capability of independents. Number 518 CHAIRMAN GREEN asked if JACK RODERICK would care to make a statement. Number 525 JACK RODERICK, LOCAL CITIZEN, WRITING A BOOK ON THE HISTORY OF THE OIL INDUSTRY, expounded on the concept of exploration during the 1950s and 1960s. He summarized historical information and mentioned the federal government's use of development contracts. He added that exploration would be useful and beneficial to the state. Number 600 CHAIRMAN GREEN asked if there were other comments. There being none, he thanked Mr. Ken Boyd and the industry for their hard work. He stated his appreciation of their efforts and emphasized the fact that Alaska is operating in a competitive international marketplace. ADJOURNMENT CHAIRMAN GREEN adjourned the meeting at 11:30 a.m.