HOUSE BILL NO. 198 am "An Act relating to the primary period of an oil and gas or gas only lease and the extension of a lease; relating to terms to be included in an oil and gas or gas only lease; relating to rental for an oil and gas or gas only lease; and providing for an effective date." 9:14:54 AM Senator Micciche announced that he sponsored the companion bill, SB 96, which was identical to HB 198 and he fully supported the legislation. Co-Chair Meyer noted that the committee heard SB 98 on May 8, 2013. WILLIAM C. BARRON, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, began a presentation titled "One-Time Lease Extension HB 198"(copy on file). He discussed Slide 1: What is HB 198? •Cannot allow lease extensions under current statutes •HB 198 allows a maximum 10-year primary term, including extension •Not automatic; may consider: •Funds already spent on exploration and development •Type of work already completed •Other relevant information •Granted extension may require •Increased rental up to $250/acre for last three years •Performance bond •Work commitments: specific $ amount to be expended; type and amount of work to be performed •Tool to help drive exploration and development Mr. Barron explained that the legislation authorized the commissioner of the Department of Natural Resources (DNR) to grant a one-time lease extension of up to ten years to approved applicants on current five to seven year leases. The length of the extension would be determined by the project. If the extension was granted for the full ten year period the per acre rental fee would increase by $250 for the last three years from $3 per acre. The increased acreage fees could be waived by the commissioner based on the amount of work already completed on the lease. The terms of the lease would be renegotiated to include work commitments as a condition of the lease extension. The department believed the extension conditions were a tool to compel exploration and development. Mr. Barron turned to slide 3: Why do we need HB 198? Background Maximum lease term is 10 years; minimum is 5 years. In 2007, 2008, and 2009, some leases had 5- and 7-year terms. Difficult to perform exploration, delineation, and production drilling in those time frames Unintended consequences of short lease terms Premature unit applications attempting to extend leases. Preference is unit decisions based on hydrocarbon accumulations proven by drilling Despite best efforts, diligent lessees may lose leases after significant investment. Mr. Barron spoke to Slide 4 titled: "Northern Alaska Lease Distribution." The slide depicted a chart showing the number of leases held by each lease holder and the year leases were set to expire. He detailed that the area encompassed the Beaufort Sea, North Slope, and Foothills. The leaseholders represented small, large, major, and independent companies. In two years 104 leases will expire and in two to five years 79 leases will expire. The department anticipated applications within the next two years from Repsol, Brooks Range Petroleum Company [AVCG, LLC], Conoco Phillips, and Donkel/Cade. He noted that Repsol obtained the leases from a negotiated business agreement with Armstrong [Armstrong Oil and Gas Inc.] and were actively drilling. The department would likely extend Repsol leases based on its work. Great Bear Petroleum, Donkel/Cade, and Repsol were the leaseholders expected to extend in the out years. He delineated that DNR did not intend to extend all of the leaseholder's acreage; only acreage that the companies actively worked and developed. He expressed that the department wanted to determine what work was actually completed on the lease and grant the extension to the same leaseholder in order for the work to continue as opposed to starting over with a new company. 9:20:48 AM Mr. Barron addressed Slide 5 titled: "Cook Inlet Lease Distribution." The slide depicted a chart showing the number of leases held by each lease holder and when the leases were set to expire in Cook Inlet. He noted that Apache Alaska Corporation was the predominant lease holder in all expiration years. Buccaneer Alaska LLC, Hilcorp Alaska,LLC, and Nordaq Energy Inc. were also major leaseholders. He added that Apache vigorously acquired leases and pursued a 3-D seismic program throughout its leases. He stressed that the extensions would be predicated on the work activity associated with each individual lease and not a grouping of leases. He reiterated that the department only wanted to extend leases involved in an active work commitment based on increased exploration drilling and production. Mr. Barron spoke to Slide 6: What are the benefits of HB 198? Benefits to diligent lessees •Accommodates short drilling windows •Lessees who have significantly invested in shorter- term leases may have time to bring qualified leases into production Benefits to the State •Allows State to require work programs during primary term •Encourages ongoing work to be completed •Increases the probability of bringing leases to production Mr. Barron elaborated that the five and seven year lease programs were designed to encourage drilling. An unintended consequence of the short term leases was that the work could not be completed within the confines of short seasons. The lessees were running out of time. He emphasized the importance of having the statutory authority that required specific work conditions on the lease. The legislation encouraged the completion of ongoing work and spurred development of the lease to production at a faster rate. Senator Bishop asked whether currently the lessees were paying a rent of $3 per acre. Mr. Barron replied that the leases applicable to HB 198 were from 2005, 2006 and 2007 and were leased at a rate of $3 per acre. Currently the rate was $25 per acre for the first seven years and increased to $250 for the last three years. The bill replicated the current lease sale program. The lessees felt that seven years for primary term exploration was usually adequate but wanted the opportunity to extend for three more years. The department developed the concept of extending leases at higher rates as a way to build a business relationship with leaseholders that truly wanted to develop the leases. The companies would be willing to pay the premium price. Co-Chair Meyer shared that he had not heard of some of the leaseholders. He inquired whether they were private individuals who did not intend to develop the lease but rather offer it for re-sale. Mr. Barron responded that many lessees were small companies or individuals. The department was required to open up acreage to anyone over 18 years of age without consideration of the intent of the leaseholders. He offered that some leaseholders "market" the lease to another entity to develop the lease. Vice-Chair Fairclough discussed the fiscal note. She noted that FN 1 (DNR) was a zero fiscal note. 9:27:40 AM Co-Chair Meyer OPENED public testimony. Co-Chair Meyer CLOSED public testimony. Vice-Chair Fairclough MOVED to REPORT HB 198 am out of committee with individual recommendations and the accompanying fiscal note. Co-Chair Meyer OBJECTED for the purpose of discussion. 9:28:21 AM AT EASE 9:28:51 AM RECONVENED Co-Chair Meyer WITHDREW his OBJECTION. There being NO further OBJECTION, HB 198 was REPORTED out of committee with a "do pass" recommendation and with a previously published zero fiscal note: FN1 (DNR) 9:29:10 AM AT EASE 9:31:37 AM RECONVENED