HB 81-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE  1:38:50 PM CHAIR PATKOTAK announced that the final order of business would be HOUSE BILL NO. 81 "An Act authorizing the commissioner of natural resources to modify a net profit share lease." [Before the committee was the proposed committee substitute (CS) for HB 81, Version 32-GH1706\B, Nauman, 3/16/21, ("Version B"), adopted as a working document during the House Resources Standing Committee meeting on 3/17/21, with Amendment 1 tabled and Amendment 2 left pending with an objection.] CHAIR PATKOTAK briefly addressed the amendments that the Department of Natural Resources (DNR) worked on and invited Representative Hannan to speak about her amendment. 1:39:53 PM REPRESENTATIVE HANNAN described Amendment 2, which read as follows: Page 2, line 18, following "feasible;": Insert "a royalty modification may not be made  under this subparagraph;" Page 2, line 30: Delete "or (1)(D)" Page 4, line 5: Delete "or net profit share" Following "(1)(A)": Insert "of this subsection or a net profit share  reduction under (1)(A)" REPRESENTATIVE HANNAN reviewed that Amendment 2 was about encouraging production and said that she believes it should be limited to affecting only the 26 net profit sharing leases (NPSLs) instead of opening it to the thousands of leases that have royalties, because every lease has a royalty component. She said that the committee has learned that operators with royalty-only leases have other ways of renegotiating the royalty amount, but this bill was designed to get non-productive NPSLs into production. She said that the NPSLs could use the various avenues available in existing statute to evaluate renegotiation. She also noted that legislative oversight is required to change a lease agreement, and the Legislative Finance Division is most likely not prepared to provide oversight for thousands of royalty leases; however, oversight of 26 NPSLs is possible. She ended by summarizing that she supports changes that encourage NPSLs into production, but doesn't want to create a broad change that would allow thousands of royalty lease renegotiations in a given timeframe. 1:42:10 PM CHAIR PATKOTAK invited Ryan Fitzpatrick to clarify any actionable changes that would be made by the Amendment 2. 1:42:38 PM RYAN FITZPATRICK, Commercial Analyst, Department of Natural Resources, referred to the document "Changes in CS HB 81 Version I" [Version I was not moved for adoption until 3/22/21], which read as follows [original punctuation provided]: Page 2 Lines 16 19 - Clarifies language in subsection D regarding circumstances in which capital expenditures are needed to extend the economic life of an oil or gas field or pool - Specifies that subsection D only applies to net profit share lease modifications MR. FITZPATRICK explained that Amendment 2 would restrict the scenario to the 26 NPSLs and modify only the net profit share component of the 26 leases, not necessarily the royalty component. He said that he believes that, from the perspective of DNR, the issue with modifying only the net profit share component is that it sufficiently incentivizes the lessee to make the capital expenditures necessary to get the lease productive again. He said that if it was possible to modify royalty in addition to net profit share, then the leaseholder might be sufficiently incentivized to make capital expenditures, thereby extending the life of the field or pool. 1:45:21 PM REPRESENTATIVE HOPKINS stated that he supports Amendment 2 because of the title of the bill, which specifies "to modify a  net profit share lease." He noted that the presentations have involved the 26 NPSLs, but they've had no presentations or opportunities to learn about the royalty-only leases. If the committee wants to address royalty modifications for the previously described "scenario D," he said, there should be another bill up for discussion. He opined that Amendment 2 is "absolutely critical" to limit the bill to the information already received, the title, and the intent of the bill. 1:47:36 PM REPRESENTATIVE FIELDS stated that he supports HB 81 as it pertains to the NPSLs but not with impacts on royalties. He said that he supports Amendment 2 and cannot support the underlying bill without it or his "subsequent amendment to an amendment to make sure we are appropriately encouraging production and capital investment." He noted Representative Hopkins' comments regarding the text of the bill being consistent with the title. 1:48:24 PM CHAIR PATKOTAK invited Mr. Fitzpatrick or Mr. Meza to provide any further comments before the committee votes. MR. FITZPATRICK said that making a change in policy is the prerogative of the legislature, and noted that in the PowerPoint presentation (given by Mr. Meza during the House Resources Standing Committee meeting on March 5, 2021, and included in the committee packet), slides 21 and 23 were intended to convey that the newly proposed "scenario D" under HB 81 was to apply to both royalty modification and NPSL modification situations. 1:49:46 PM CHAIR PATKOTAK asked for clarification on Amendment 2 with reference to the PowerPoint presentation, titled "HB 81 - DNR MODIFYING NET PROFIT SHARES ON OIL & GAS LEASES," and whether it would limit the authority of the DNR commissioner as outlined in item 1A on slide 21 of the PowerPoint presentation, which read as follows [original punctuation provided]: 1. Expand the royalty modification process to include NPSLs: A. Commissioner would have the authority to modify net profit share rates in the same manner as royalty rates under AS 38.05.180(j). ? Objective is to encourage production of otherwise stranded resources. MR. FITZPATRICK answered that he believes Amendment 2 would not impact that provision, but it would impact other proposed changes, as shown in item 2A on slide 21 of the PowerPoint presentation, which read as follows [original punctuation provided]: 2. Other changes: A. Creates an additional qualifying scenario for modification of either royalty or NPSLs ? For producing pools, where incremental production requires incremental capital expenditures, which, in the absence of modification, would be uneconomic. MR. FITZPATRICK explained that the intent of DNR was for the modification allowance to apply to both royalty and NPSLs. 1:51:46 PM CHAIR PATKOTAK noted that Representative Rauscher had brought forth the original objection to Amendment 2 [on 3/17/21], for discussion purposes, but that Representative Rauscher's office approved of lifting his objection in his absence. There being no further objection, Amendment 2 was adopted. 1:52:23 PM CHAIR PATKOTAK referred to the amendment from Representative Fields, and he and Representative Fields briefly discussed which amendments are about to be put forth. 1:53:12 PM The committee took a brief at-ease. 1:53:25 PM CHAIR PATKOTAK reminded committee members that on 3/17/21, the committee had tabled Amendment 1. He announced that Amendment 1 was before the committee. Amendment 1 read as follows: Page 2, lines 17 - 18: Delete "for which additional capital expenditures  would make future production no longer" Insert "from which, without additional capital  expenditures, future production would no longer be" 1:53:50 PM REPRESENTATIVE FIELDS moved to adopt Amendment 1 to Amendment 1, labeled 32-GH1706\B.3, Nauman, 3/18/21, which read as follows: Page 2, lines 17 - 18: Delete "for which additional capital expenditures  would make future production no longer" Insert "from which, without additional capital  expenditures, future production would no longer be" Page 3, following line 9: Insert a new paragraph to read: "(6) may not grant a royalty or net profit  share modification for a field or pool under (1)(D) of  this subsection unless  (A) the modification requires the lessee or  lessees to make the capital expenditures necessary for  production to be economically feasible; and  (B) the commissioner determines that the  capital expenditures made under (A) of this paragraph  are sufficient to maximize production from the field  or pool;" Page 3, line 10: Delete "(6)" Insert "(7)" Page 3, line 16: Delete "(7)" Insert "(8)" Page 4, line 3: Delete "(8)" Insert "(9)" Page 4, line 28: Delete "(9)" Insert "(10)" Page 5, line 2: Delete "(10)" Insert "(11)" Page 5, line 4: Delete "(9)" Insert "(10)" Page 5, line 9: Delete "(11)" Insert "(12)" Page 5, line 16: Delete "(12)" Insert "(13)" Page 5, line 17: Delete "(9)" Insert "(10)" Page 5, line 29: Delete "(9)" Insert "(10)" Page 5, line 31: Delete "(13)" Insert "(14)" 1:53:56 PM CHAIR PATKOTAK objected for discussion purposes. 1:54:05 PM REPRESENTATIVE FIELDS thanked the collaborators for their assistance and described Amendment 1 to Amendment 1, which would ensure maximum production from the fields by ensuring that capital investments are made to prolong the lives of the fields. He said that if either capital investment or modified lease terms could extend the life of the field, then the capital investment should happen either before, or in conjunction with, modified lease terms, so that modified terms don't occur at the expense of capital investment. 1:54:56 PM MR. FITZPATRICK explained that this amendment would specify that if capital expenditures are necessary to extend the life of the field or pool and reduced lease terms are also allowed, then there would be a condition on the modification of the lease terms so that the capital expenditures must be made or else the modification would be rescinded. He described a specific case in which capital expenditures were not made, therefore the royalty modification lapsed, and he indicated that he believes DNR would support this amendment. 1:57:40 PM CHAIR PATKOTAK removed his objection. There being no further objection, Amendment 1 to Amendment 1 was adopted. He then spoke to Amendment 1, as amended, and addressed Representative Hopkins' earlier objection to Amendment 1. 1:58:22 PM REPRESENTATIVE HOPKINS withdrew his objection to Amendment 1, [as amended]. There being no further objection, Amendment 1, as amended, was adopted. 1:58:53 PM REPRESENTATIVE HOPKINS indicated his thanks to DNR for helping bring this proposed legislation forward and expressed that he still has some concerns about the bill, but that he would like it to continue going forward in order to maximize production. He said that he wants to ensure that HB 81, as amended, wouldn't "make profitable production more profitable," but rather would bring fields that wouldn't otherwise be developed into production. [HB 81 was held over.]