CS FOR HOUSE BILL NO. 548(WTR) An Act authorizing the amendment of Northstar Unit oil and gas leases between the State of Alaska and BP Exploration (Alaska) Inc.; and providing for an effective date. Co-chairman Halford noted teleconference links to Anchorage and Barrow and directed that CSHB 548 (WTR) be brought on for discussion of proposed amendments for inclusion within a draft SCS CSHB 548 (FIN). Senator Rieger referenced an earlier distributed amendment by Senator Leman, relating to Limitation of Authority. He then pointed to a handwritten addition that he explained would clarify that the "cooling off period" on additional negotiations of lease modifications not apply to long standing, traditional modifications (allowed in statute) for declining fields, at the end of their lives. The original amendment would not have provided that exclusion. Senator Rieger then MOVED for adoption of Amendment No. 1 (the original amendment from Senator Leman plus Senator Rieger's handwritten addition). Co-chairman Halford asked if Amendment No. 1 relates to net profit share and royalty. He voiced his understanding that it would not apply to uneconomic late-field, production- continuation-type modifications such as Cook Inlet. Senator Rieger responded that his addition relates to modifications of competitively bid oil and gas leases, after the fact, on all except declining fields. He spoke to need for a cooling off period while the legislature and Governor sort out policy questions surrounding modifications. He expressed his hope that legislation during the next session would clarify the general framework. Co-chairman Halford voiced his understanding that the addition would have no impact on the Northstar agreement, since the amendment is prospective in nature. JOHN SHIVELY, Commissioner, Dept. of Natural Resources, said the department would not be authorized to negotiate marginal new oil field agreements under the proposed amendment. Senator Rieger acknowledged that if the field was let through competitive oil and gas lease, no negotiations could occur. If the field has not yet been subject to a competitive lease, it would be appropriate to "try to make terms that are workable for the players in the industry who want to have a chance to bid on it." The Commissioner spoke in opposition to the amendment. He indicated that the position of the administration is that such agreements should be submitted to the legislature for a vote on the merits. He acknowledged frustration on the part of legislative members due to the timing of this particular agreement and the difficulty of the issue. Senator Rieger referenced earlier testimony indicating that due to the prospect of subsequent modifications, bids might be higher. He noted that that does not mean the competitive process is well served. It also does not mean that actual total return to the state is as high as it would have been under an unmodified lease. Senator Rieger reiterated that his concern relates to the process. He voiced his belief that the oil and gas lease process has become politicized within Alaska. It is not proper to conduct oil and gas leasing via a process where bidders do not know all the bid terms. The state must set clear ground rules. The cumulative effect of modifications has the potential to destroy the competitive oil and gas leasing process. Legislation in the next legislature should clearly state policies and trade-offs. It should also define the role of both the Governor and legislature. Senator Rieger noted that he argued against politicization of the process when SB 207 was passed last year. The state is now involved in the type of dynamic he envisioned. He stressed that the process is not healthy and reiterated need for a cooling off period. Commissioner Shively said that, since statehood, all leases have contained provisions that allow lease terms to be changed. Modification is not a new concept. The law itself has changed over time. Companies signing state leases have known changes were possible. The Commissioner questioned Senator Rieger's concern regarding the process. He spoke to passage of generic legislation (SB 207), last year, and submission of a specific agreement, for approval, during the present session. The Commissioner expressed his belief that review of a "more generic approach on net profits might be worth doing on net profit shares." Additional discussion of circumstances surrounding passage of SB 207 followed. Senator Zharoff suggested that the proposed amendment appears to tie the hands of the administration when attempting to work out negotiations to bring something to the legislature for consideration. Senator Rieger reiterated need for a cooling off period to address areas of significant concern. Senator Zharoff voiced lack of support for the amendment. Commissioner Shively asked if the amendment would essentially repeal department authority to use AS 38.05.180 (j)(1)(A). Thereafter, if the lessee of a marginal field came in for negotiations, the department could not negotiate. Commissioner Shively asked if that was the intent of Amendment No. 1. Senator Rieger stressed that the amendment provides a cooling off period, not repeal. Co- chairman Halford voiced his understanding it would apply a moratorium. Commissioner Shively said that since there is no time frame associated with the amendment, the cooling off period would apply until subsequent legislation is enacted. Co-chairman Halford voiced accord with concern over intricate issues placed before the legislature in the waning hours of the session. He then asked if the amendment could be stated in the affirmative to require that the commissioner undertake a comprehensive review of the policy of modifying bid variable terms and present the legislature with legislation dealing with net profit leases. Language could include a provision that no modifications would occur until comprehensive legislation is presented next session. He cautioned against legislative action that might be perceived as anti-development toward a potential field. Senator Rieger expressed apprehension regarding the foregoing approach, advising that he was unaware of the extent to which a competitively bid lease could be modified. Co-chairman Halford voiced his understanding that particular concern relates to modification of the bid variable. That focuses on net profit leases which, at inception, were strongly opposed by the industry and have not been used since. In response to a question from Co-chairman Frank, Mr. Shively referenced an Exxon lease in which the company agreed to increase the based royalty to get rid of a set net profit. Discussion of net profit leases set at 30 or 40 percent versus 89 percent followed. Commissioner Shively added that the lower percentage leases were also bid at 12.5 percent base royalty as opposed to the 20 percent base royalty on the BP leases. Co-chairman Frank said he did not feel it would be inappropriate to have the administration "come back with a proposal . . . to treat the other lessees fairly and in a manner that will encourage continued development and production." He suggested that it would not be onerous to include language within Amendment No. 1 and then ask the administration to "come back with a general policy." Senator Rieger questioned whether the public perception of the state's oil and gas leasing policy was improved or degraded when lease modifications are decided in a legislative setting, with an "entire room full of people involved in the industry in the audience, with two days to go in the session." Commissioner Shively acknowledged that the circumstances do not improve the perception. He stressed, however, that the economics of the agreements must stand on their own. He remarked that every piece of legislation of major significance involves interested parties. Senator Sharp registered concern that the majority of Alaska's residents are not aware of the proceedings. He voiced his belief that when changes are made to a lease that was bid competitively, the lease should go to bid again under the new rules. Changing a bid after the competitive bid process disenfranchises other bidders. It does not make sense to negotiate down competitive bids when so many variables are involved. The perception is that many things can be wrong with that process. Senator Sharp advised that he would support the proposed bill, but he voiced reluctance to establish modification after competitive bid as a policy. Co-chairman Halford suggested that the committee proceed to review of additional amendments to CSHB 548 (WTR). Co- chairman Halford referenced a packet of amendment and designated them Amendments 2 through 6. Senator Randy Phillips MOVED for adoption of Amendment No. 2, Auditing and Reporting, provided by Senate Resources Committee. Senator Sharp voiced his understanding that Legislative Budget and Audit Committee could order an audit at will. He then questioned need for the amendment. Co-chairman Halford concurred that the contents of Amendment No. 2 could be placed within a letter from any legislator to the LBA committee, requesting an audit. The committee next proceeded to review of Amendment No. 3, relating to "Findings and intent." JIM EASON, Contractual Staff to Senate Resources Committee, explained that the amendment would, in effect, rescind findings within CSHB 548 (WTR) and replace them with findings from CSSB 318 (RES). Co-chairman Halford expressed a preference for adding language from the Senate Resources version rather than removing language from the House bill. The Co-chairman noted that Amendment No. 4 would change the effective date of the agreement to "some type of internal BP approval." Questions were raised regarding the term "project sanction." Co-chairman Frank voiced recollection of concern by Senator Leman that the leases could be placed in limbo should a lawsuit be brought. Mr. Eason concurred. He explained that by passage of the proposed bill, the legislature would be conferring contract benefits to the lessee without a commensurate agreement by the lessee that the terms the company is offering will be finalized. The amendment puts in place the state's agreement with "the specific terms of what you would like the commissioner to do as far as amending the lease but not making that effective until the lessee . . . acts to approve the project financing." Co-chairman Frank asked if the amendment would pose a problem for BP. ERIC LUTTRELL, Vice-President, Exploration and New Developments, BP Exploration (Alaska), Inc., responded, "Absolutely!" He advised that the company so stipulated in hearings before Senate Resources. The amendment would transfer "all the risk to BP." The company would have to approve the project and "start spending money before there's any opportunity for litigation to begin." It would have the effect of "not seeing Northstar developed." Further discussion of the impact of litigation followed. Mr. Luttrell explained that, per current bill language, litigation, in most cases, will not "have a big impact on going forward." BP would move forward and assume some of the risk because of the severability issue. Senator Sharp MOVED for adoption of Amendment No. 4 and asked that the following be added to the amendment: Page 4, line 4: Delete: 'to make' Insert: 'has' He explained that the amendment relates to qualifications for an Alaska resident, residents of Alaska, and resident personnel. It attempts to tighten provisions so that an individual who arrives in state, secures a driver's license, and voices intent to remain indefinitely does not immediately qualify as a resident. It also changes language saying that one intends "to make" a home in Alaska to require that one "have" a home in state. The first portion of the amendment requiring that the individual possess a resident fishing, trapping, or hunting license or receive a permanent fund dividend is intended to eliminate areas that qualify an individual as a resident in thirty days or less. In response to a question from Co-chairman Frank, Commissioner Shively advised of two issues. The first relates to Alaska hire and the second to how one counts "what is an Alaskan." Amendment No. 5 appears to relate to the count. He concurred in legislative desire to focus on "somebody who's really been here." The Commissioner acknowledged that a positive aspect of debate on the bill has been discussion of Alaska hire with a focus on "how to count people." He concurred in the residency standard of "at least a year." Senator Sharp agreed that was the intent of the amendment. It establishes a "measuring stick" without becoming onerous or restricting interstate travel for work. He stressed that the company could hire anyone it chooses. That hire will, however, be measured against standards within the bill. Further discussion of residency standards followed. Commissioner Shively acknowledged it is important for the legislature to "tell us how long they think a person should be here before we count them as a resident . . . ." END: SFC-96, #115, Side 1 BEGIN: SFC-96, #115, Side 2 Additional discussion followed between Co-chairman Frank and Commissioner Shively regarding state action that could legally be negotiated into the agreement. Further discussion of standards for Alaska hire followed. Commissioner Shively referenced Dept. of Labor comparison of employment security data against the permanent fund dividend list as the basis for determining local hire. Mr. Luttrell added that BP is comfortable with language in CSHB 548 (WTR). Wording within Amendment No. 5 makes the language more restrictive. The company is less comfortable because the implications are unknown. Senator Sharp called for a vote on adoption of Amendment No. 5. Senator Phillips referenced employment at Endicott and noted 125 employees, 50 of which are not residents. Mr. Luttrell said language within the proposed bill would completely exclude those 50 people. They would be counted as non-residents. Proposed language puts BP at greater risk of public outcry "about some people who come here to work for a long time but for a while are actually not residents by this very restrictive clause." Senator Sharp advised that the purpose of the amendment is to provide a greater level of comfort to legislators. Senator Phillips expressed concern that past performance is a good measure of what the company might do in the future. He stressed need to protect the best interest of the state and its residents. Mr. Luttrell advised that it is in the best interest of the company to hire Alaska residents. BP reluctantly brings in specialists from outside. Senator Zharoff said he was comfortable with provisions for local hire, in the proposed bill. He remarked on the irony of discussion of local hire while the state, in its promotion of development of ANWR, cites the potential for out-of-state jobs created as a result of industry activity in Alaska and stresses the benefit of these jobs to various states. Senator Zharoff further noted that many long-term Alaskans do not have a home, per se, in Alaska. He cited fishermen as an example. Commissioner Shively voiced concern regarding restricting the measure of residency to fishing, trapping, and hunting licenses as well as permanent fund dividends. Simply stating that an individual must have lived in the state a year or eighteen months might provide clearer direction. Co-chairman Frank asked why there would be resistance to the proposed language when no numerical goal is involved. Commissioner Shively registered support for the concept but expressed concern that application of only two measures when counting employees might not cover all residents. Co-chairman Halford called for objections to adoption of Amendment No. 5. No objection having been raised, Amendment No. 5 was ADOPTED. Senator Randy Phillips asked for an explanation of Amendments 6, 7, and 8. Mr. Eason advised of his understanding that Amendment No. 6 (by Senator Phillips) would apply residency standards to vendors, suppliers, and contractors in an attempt to ensure that Alaska vendors, suppliers, contractors, and consultants are used in Northstar development. It would supplement language within the House bill. Mr. Luttrell initially expressed discomfort with the language. He said a brief review indicates that much of the content is already within CSHB 548 (WTR) (Page 4, line 29) and inquired concerning need for additional provisions. After further review, Mr. Luttrell stated he saw nothing unconstitutional about the proposed amendment. He said it was in keeping with intent in terms of contracting relating to Northstar. Mr. Eason explained that two items are embodied within Amendment No. 7. The first portion of the amendment is directed at the following concern: If the modeling that forms the basis of the agreement between the state and BP turns out not to be accurate in a substantial way, in other words, if there happens to be a tremendously large recovery of oil or a large daily production rate (beyond a significant amount) that would result in a major difference in BP or the state's earnings under this agreement, there should be some sideboards to make sure that the benefits are redistributed. The first paragraph of the amendment provides that in the event the daily production rate is in excess of 50,000, or the cumulative production from the field exceeds 130,000 barrels, the agreement would be amended to provide a mechanism for readjusting the financial benefits. The second part of the amendment provides that if the lessee agrees to use on-site production and processing facilities, that would occur at lessee's expense. BP would be responsible for reimbursing the state for state expenses associated with fabrication, construction, or transportation of modules. Mr. Luttrell characterized the first portion of the amendment as requiring BP to assume all the downside risk but obtain none of the upside benefits. If that is included within the agreement, the field will not be developed. He voiced similar sentiments for the latter portion of the amendment. Co-chairman Halford voiced his understanding that adoption of both portions of Amendment No. 7 would necessitate a new agreement. Mr. Eason concurred. Discussion followed between Co-chairman Frank and Commissioner Shively concerning the variables within the first portion of the amendment. Senator Donley asked if state financing of module construction was part of the negotiations. Commissioner Shively responded negatively. He explained that discussion with contractors and BP focused on how much of the risk of development of the facilities contractors would bear as opposed to BP. The Commissioner acknowledged that review of module business in Alaska identified areas where the state could participate. There is no commitment by the state to spend "any money on development of any facilities." Mr. Eason explained that Amendment No. 8 is similar to the latter portion of Amendment No. 7. It would amend lease agreement provisions to require that BP use and install on- site production and processing modules. It would also replace findings of fact language relating to local hire, contained within CSHB 548 (WTR), with language from CSSB 318 (RES). Mr. Luttrell said that the amendment "revises the agreement in totality." He added that he could not negotiate the agreement in the current manner. Senator Sharp MOVED for adoption of Amendment No. 9. Referencing Page 5, line 29, he explained that the amendment would replace "not discriminate against" with "give preference to." Co-chairman Halford voiced concurrence with the language change but again cautioned that it appears to modify one of the provisions of the contract. He suggested that the language instead be inserted in the findings section. Commissioner Shively concurred. He explained that language within that portion of the bill was derived from the signed agreement. Senator Sharp then withdrew his motion for adoption of Amendment No. 9. Senator Randy Phillips referenced the following language at Page 5, lines 27 through 31: Lessee shall comply with all valid federal, state, and local laws in hiring Alaska residents and contractors and shall not discriminate against Alaska residents or contractors. He then inquired concerning use of the word "valid." Commissioner Shively advised that the foregoing consists of standard legal language. RECESS Co-chairman Halford directed that the meeting be recessed, subject to a call of the chair. The meeting was recessed at approximately 4:45 p.m.