SENATE BILL NO. 150 An Act providing for oil and gas exploration licenses, and oil and gas leases, in certain areas of the state; and providing for an effective date. Co-chair Pearce directed that SB 150 be brought on for discussion. She referenced a draft CSSB 150 (Fin) (8- GS1012\D, Chenoweth, 4/19/93) which she explained contains amendments 1 through 5, adopted by committee at the April 18, 1993, meeting. Senator Sharp MOVED for adoption of the "D" version of CSSB 150 (Fin) as a working document. No objection having been raised, the "D" version was ADOPTED. Senator Sharp directed attention to amendment no. 6 at page 11, lines 11 through 20. He said the proposed language change would make administration easier for regulators and avoid the necessity of development of additional regulations since it defines average production on a monthly basis. Co- chair Pearce asked why proof of financial responsibility requirements were reduced to less than $20 million per incident. Senator Sharp cited need to encourage small developers and exploration companies to produce from limited capacity fields without being subject to $20 million liability on small production. He referenced a situation in Cook Inlet as an example of how the new provision would operate. Co-chair Pearce voiced concern over reducing liability for an on-shore facility to $1 million per incident. She then inquired concerning liability for off-shore exploration facilities. Senator Rieger noted that liability for off- shore facilities remains at $50 million. Brief discussion of on and off-shore facilities followed between Co-chair Pearce, Senator Rieger, and KEN BOYD, Deputy Director, Division of Oil and Gas, Dept. of Natural Resources. MEAD TREADWELL, Deputy Commissioner, Dept. of Natural Resources, came before committee in response to questions concerning proof of financial responsibility. He explained that the department accepts bonds, insurance, net assets, etc. The department seeks to ensure that an entity has the financial resources to clean up a spill and pay resource damages from the spill. Discussion followed between Co-chair Pearce and Mr. Treadwell regarding contingency plan requirements for exploration facilities. Co-chair Pearce again expressed concern regarding the lowering of liability requirements, citing costs associated with a recent cleanup by the Alaska Railroad. Mr. Treadwell pointed to broad authority by the Dept. of Natural Resources to set bonding requirements associated with surface leases. The Dept. of Environmental Conservation does not accept that bond as proof of financial responsibility. Senator Kerttula voiced need for adequate liability and proof of responsibility for operators. He expressed concern over proposed decreases. Co-chair Frank voiced his understanding that $20 million was "wildly more" than any other state for on-shore facilities. Mr. Treadwell informed members that Alaska's requirements are the highest in the country. They were developed following the EXXON VALDEZ oil spill. Further comments by Mr. Treadwell followed regarding surface and subsurface rights and respective ownership. He acknowledged a number of tank situations where long-time contamination has gone from one property to another. Co-chair Frank said that he did not disagree that potential liability may be greater than limits within the proposed amendment. He stressed need to look at risks and rewards in a broad context. The state has resources it wishes to develop. Alaska wishes to encourage oil and gas exploration and production. It thus seeks to encourage both small and multinational companies. On-shore cleanup is easier than a water spill. Proof of financial responsibility could thus be less. Co-chair Pearce reiterated her belief that $1 million is too low. On-shore facilities may be located close enough to tidal action to impact waterways. Senator Sharp recited a listing of other states and their on-shore liability requirements. Alaska also requires "plugging and abandonment bonding" amounting to $100,000 per well. The highest of any other state is $10,000. Senator Sharp further attested to oil and gas conservation commission responsibility for prescribing "absolute well- drilling procedures and safety equipment required to be used during the drilling." He then recited a listing of such equipment and other controls that must be in effect. Senator Kerttula voiced need to establish necessary minimum safety levels to guard against desecration by independent exploration. Senator Sharp advised that he would withdraw amendment no. 6. End, SFC-93, #67, Side 2 Begin, SFC-93, #69, Side 1 In response to a question from Co-chair Pearce, Senator Sharp explained that his amendment bases liability on monthly rather than daily production. Monthly production is easier to measure. Co-chair Pearce voiced her understanding that reduction of liability for on-shore exploration from $5 to $1 million was contained in the Senate Oil and Gas version of the bill. Senator Sharp concurred. Co-chair Pearce requested that Senator Sharp again offer amendment no. 6 since the area of contention that reduced liability for on-shore exploration was not part of the amendment. Senator Sharp MOVED for adoption of amendment no. 6. Senator Rieger directed attention to subsection (f) and suggested that proof of financial responsibility for an on-shore production facility be based on the higher of the average monthly production. Mead Treadwell explained that the intent of the language in subsection (f) is to set financial responsibility at either the average production of the past year for an ongoing operation or on maximum engineered design capacity for a new facility with no previous production. There may be situations where a well may have declined to ten or twenty barrels a day. If the facility was engineered for 4,000 barrels a day, addition of the words "higher of" to liability language could fix liability at original design capacity. That is not the intent of subsection (f). Co- chair Pearce suggested that subsection (f) be separated into two sections, one to apply to existing and the other to new facilities. Senator Rieger suggested that fields do not normally decline quickly. He held to need to add the new language, saying that there may be cases where production actually increases. Co-chair Frank voiced support for the language as submitted by the department. Senator Rieger formally MOVED to amend subsection (f) by adding "higher of the" before the word "average" on the second line. Senator Sharp OBJECTED, saying that actual production is a better indication of risk. Co-chair Pearce called for a show of hands on the amendment. Senator Rieger's amendment FAILED on a vote of 1 to 4. Senator Kerttula voiced need for a definition of "on shore." He voiced particular concern that facilities not impact bogs, marshes, and wetlands. Mead Treadwell said that he would phone the department and attempt to obtain a better definition. Senator Kerttula indicated need to ensure that it means dry land at some distance from contaminant potential. Co-chair Frank expressed reluctance to allow an agency to define the term. Further discussion followed between members and Mr. Boyd regarding definitions contained within Title 38. Comments followed regarding the location of the recent Alaska Railroad spill and costs associated therewith. Senator Rieger voiced discomfort with bill provisions lowering on-shore liability to $1 million. Co-chair Pearce directed that CSSB 150 (Fin) be held pending response to the above-noted concerns.