CS FOR HOUSE BILL NO. 199(O&G) am: An Act relating to the exploration and production of oil and gas and related hydrocarbons, to oil and gas exploration licenses, and to oil and gas leases in certain areas of the state; and providing for an effective date. Co-chair Pearce announced that HB 199 was before the committee. She invited Jim Eason, Director, Division of Oil and Gas, Department of Natural Resources, and Ken Boyd, Deputy Director, Division of Oil & Gas, Department of Natural Resources, to join the members at the table. Senator Kerttula MOVED amendment 1. Co-chair Pearce OBJECTED for discussion purposes. Senator Kerttula WITHDREW amendment 1 because it contained a drafting error. Senator Kerttula MOVED amendment 2. Co-chair Pearce OBJECTED for discussion purposes and asked Ken Boyd to comment. KEN BOYD said that amendment 2 was a policy call of the legislature. As a practical matter, the Commissioner was hired by the Governor, and, potential lease/sale programs were reviewed in discussions and cabinet meetings. He felt that amendment 2 would slow the process but again reiterated it was a legislative policy call. Senator Kerttula felt that important things could occur without enough input from the Governor. Discussion was had by Senators Kelly, Sharp, Kerttula, and Rieger regarding the implication of amendment 2. Senator Salo commented that the intent would be that the Governor would be another approval rather than another person to lobby. Mr. Boyd reminded the committee that the entire best interest finding and public process was a part of the legislation and believed a large part of the public process would have taken place before this point. Senator Kelly felt that there would be more exploration licensing without the amendment. Co-chair Frank said that SB 310 had a provision asking for the Attorney General for sign-off. He suggested that the Attorney General could give a second look at approval. Mr. Boyd was opposed to adding another formalized step in the process. After more discussion with Co-chair Frank, Mr. Boyd reiterated his position. End SFC-93 #67, Side 2 Begin SFC-93 #69, Side 1 Co-chair Kerttula MOVED a conceptual amendment to amendment 2 as suggested by Co-chair Frank by changing the words "approved by the governor" to "review by Attorney General in writing 30 days of time received". Senator Rieger OBJECTED saying he felt it was not a matter of legal discretion but was more a policy call. Discussion followed by Senator Kerttula and Co-chair Pearce regarding exploration decisions. Co-chair Pearce called for a show of hands and the motion amending amendment 2 FAILED. Senator Kerttula WITHDREW amendment 2. Senator Sharp MOVED amendment 3. Senator Kelly OBJECTED. Senator Sharp felt that a 20,000 acre threshold was too severe, that being twice the size of the largest state lease currently available for exploration and four times the standard federal lease size. He went on to list reasons to reduce the size to 10,000 acres. Mr. Boyd understood the concern of Senator Sharp that the "little guy" would be able to play and felt that had been addressed throughout HB 199. He also felt that 10,000 acres in a remote acre was not reasonable. Even though he had no objection, he pointed out 10,000 acres would be quite limiting for this program. Senator Sharp noted that the source of fuel for Barrow was on an even smaller piece of land. Mr. Boyd said that in the beginning a much larger area must have been explored before the area under development was confined to that small of an area which was characteristic of most developments. At this time Co-chair Pearce asked the committee to adopt the new version before them. Senator Sharp MOVED for adoption of SCSCSHB 199(FIN) version "Q". Hearing no objection, it was ADOPTED. Senator Sharp again MOVED amendment 3. Hearing no further objection, it was ADOPTED for incorporation within the Finance Committee Substitute for the bill. Senator Kerttula MOVED amendment 4. Co-chair Pearce asked for clarification of amendment 4. Mr. Boyd said that the 5 percent statute, other than the royalty provisions, was added to the laws in 1959. In 1964, it was repeated but renumbered. In 1967, the provision on page 9, line 12 beginning "In unproven areas..." was added to law and that became the basis for the discovery loyalty provisions which were used for awhile but later removed from law. Mr. Boyd said he had no objection to deleting that section. Co-chair Frank asked Mr. Boyd to restate that he did not object to amendment 4. JIM EASON said he did not recall the exact time of the repeal, but for a number of years, discovery royalty provisions were in the statutes and a number of wells did qualify for discovery royalty. The most recent incident of a qualifying discovery royalty lease was the discovery well for Point McIntyre. It was an old lease, had the discovery royalty provision, and allowed a reduction in royalty to 5 percent for the first ten years beginning at the time of the certification of eligibility. In most cases, the discovery royalty period was considerable less than 10 years. In answer to Co-chair Pearce, Mr. Eason said this new law would have no effect on existing leases. In answer to Co- chair Frank, Mr. Eason confirmed that the department did not oppose amendment 4 and viewed it as a policy call. No further objection being heard, amendment 4 was ADOPTED. Senator Kelly MOVED amendment 5 which deleted the words "in an amount determined by the commissioner, not to exceed" and insertion of the word "of" on page 4, line 23 and 24. Mr. Boyd felt there would be no objection to amendment 5. Hearing no objection, amendment 5 was ADOPTED. In answer to Co-chair Frank, Mr. Boyd said the geology and proposed work commitment would determine the size of acreage granted to prospective licensee. In answer to Co-chair Frank, Mr. Boyd felt that science determined and preferred not to limit artificially the input and consideration that the Commissioner and Division might have in reaching its decision regarding acreage. Senator Rieger MOVED amendment 6. Co-chair Pearce OBJECTED for discussion purposes. Senator Rieger spoke to the amendment. No further objection being heard, amendment 6 was ADOPTED. Senator Rieger asked for an explanation of language on page 5, lines 24 through 26. Mr. Boyd said that if less than 25 percent of the work commitment was done, the license was lost. If more than 50 percent of work commitment was done by the fourth year, there was no relinquishment of land. If between 26 and 49 percent of the work was completed, 25 percent of the acreage, but no more than 50 percent, would be relinquished. He agreed that if no work had been done by the fourth year, the license would be relinquished. If the company did not outline what property it wanted to relinquish, the Commissioner would decide. He pointed out that if the work was not done, a lease could not be issued. He also said that if work ceased, the bond would be continually increased. Senator Sharp pointed out that the company could lose everything if the work was not done by the tenth year. Senator Kerttula read from a statement by Donald Harris, "the major oil companies decide the direction of this legislation. (Senator Kerttula commented that Mr. Harris was worried Alaska was treating its oil and gas like Mexico did and it could become a concession causing much conflict.) HB 199 effectively created the ability for the state to allow concessions regarding oil and gas leasing. The history of concessions is the monetary rape of the state and its resources and lands. This has been overcome in the past. Most instances has been after the passage of considerable time and blood shed. Initial awarding of concessions should be done by competition, that is, through competitive bids under HB 199. The actual production phase, the original exploration tract granted, can be rolled into a lease with as little as 5 percent royalty. In HB 199, this is done at the Commissioner's discretion and frankly gives too much discretionary authority for the values involved. There are 10 hydro provinces with the possible of 2 million acres for exploration, production, concessions. Under this bill, tracts range from 20,000 acres (and now it's 10,000) to 500,000, thus a few major oil companies could take up all the valuable leases on state lands and waters and hold up all state production including that in existing leases citing economic concerns as the reason. Competition, to be fair, should come into play at the time of leasing, not later on. The rollover provision in HB 199 is especially harmful because it effectively creates a concession. This year, the summer of 1994, the state can know the boundaries of all carbon and hydro-carbon deposits. This information, in turn, could be marketed by the state in competitive leasing basis. Knowing the boundaries of carbon and hydro- carbon provinces creates large cost efficiencies for the major oil producers because they don't have to pay to conduct magnetic gravity seismic tests outside the province boundaries. Knowing the boundaries could also eliminate the disturbance on land and waters unnecessarily. HB 199 is a dangerous piece of legislation because it creates the potential for the greatest giveaway on public resource in state history." Senator Kerttula said this statement was given to him without his solicitation. Co-chair Pearce remarked, that in the world scheme, in the frontier areas (she included Alaska here), the leasing or the licensing for oil and gas exploration was done by exploration licenses. Perhaps Alaska was the only one that did not use exploration licensing. All of those countries and every country in North and South America, with the exception of the United State and Canada, have oil and gas reserves owned by the state or federal government. In every one of those frontiers, exploration licensing was used very successfully. She felt that Alaska would have to offer this exploration license. Senator Kerttula said Alaska did not have to compete with any warlike activities found in other countries. Co-chair Pearce said that Britain had a very stable country and exploration licenses was working in the world. Senator Rieger MOVED for passage of SCSCSHB 199(FIN) as amended from committee with individual recommendations. No objection being heard, it was REPORTED OUT of committee with "individual recommendations," and a zero fiscal note for the Department of Natural Resources. Co-chair Pearce and Senators Rieger and Kelly signed "do pass." Co-chair Frank and Senator Sharp signed "no recommendation." Senator Kerttula signed "do not pass." BILLS SCHEDULED BUT NOT HEARD: