SENATOR LEMAN called the Special Committee on Oil and Gas meeting to order at 3:10 p.m. and said that this would be a work session on SB 150 (OIL & GAS EXPLORATION LICENSES/LEASES) which was being held in the Senate Secretary's pending file. KEN BOYD, Deputy Director, Division of Oil and Gas, briefed the committee on proposed changes which had been agreed upon during the interim. He said he would refer to the compromise document as the October 25th Draft. Two important points he made are that exploration licensing is not a replacement for the five-year oil and gas leasing program. The reason they added the exploration program is that it is a means to dispose of some lands in basins that people weren't coming to the table with under the five-year program. Since the five-year program works very well in certain areas of the North Slope and Cook Inlet, they have excluded those areas from exploration licensing. Number 118 MR. BOYD showed the Committee on a map which specific areas were excluded - North of the Umiat Baseline and areas that are coming up for lease under the five-year leasing schedule. He said this would apply to any off-shore areas as well. Other lands excluded are in a portion of the Cook Inlet area. CHAIRMAN LEMAN asked if it was the intent to exclude that portion of the coastal plain above the Umiat Base Line as indicated on the map. MR. BOYD said they wanted to keep the foothills open, because of their underexplored nature, but wanted to keep off the Colville Delta. It was their intent to cover it from side to side. MR. BOYD said they left out "insufficient or undocumented geophysical information" because it might confuse the clear boundaries the state had indicated. SENATOR ADAMS asked if this legislation was after that type of land to be explored? MR. BOYD answered yes, but the October 25 Draft by geographic definition excludes lands for which information is already known. Number 254 MR. BOYD said the original bill contained no relinquishment provision. They added one because when a company selects any area for licensing, it is very unlikely to pick the boundaries of an oil field. As they move through the exploration phase of their licensed area, certain areas would be determined by them to not be desirable. The state determined they should be able to relicense that land or give someone else the opportunity to have it. In the October 25 Draft, the company has to do 25% of the work commitment in the first 4 years or lose its license. If 50% of the work is accomplished in the first 4 years, there is no relinquishment. But half of the money is put into the ground in the first 4 years. If the work is something in between, relinquishment is followed by 25% and 10% of the remaining acreage each year thereafter. The maximum relinquishment is 50%. Number 326 Bonding was another top issue, MR. BOYD said. In the original bill, bonding was for the total commitment and the explorer forfeited anything not accomplished. In committee they decided on an annual bond based on the year's work commitment. The bond formula takes the amount of the commitment - for example $50 million in a 10-year license minutes the amount of work accomplished, zero for first year, and divide the number of years into that sum and the bond for the first year is $5 million. If $5 million worth of work is done in the first year, subtract that from the $50 million and divide that by the number of years left -9- which is $5 million for the next year, etc. MR. BOYD said the bond formula is important and fair. It gives the smaller companies an opportunity to play - not to necessarily compete on an equal basis with the largest companies in the world. If you don't have responsibility through bonding, the bidding won't be right, because you could just bid any large number and win. MR. BOYD said that all companies agreed to a sealed bid. Number 419 SENATOR ADAMS noted that he would like to see debate on the bonding issue so that it is clearly understood. MR. BOYD pointed out that they wanted to make sure that overhead was not included as one of the allowable expenses. Number 482 On acreage chargeability he said there was a lot of discussion on the 3 by 3 mile squares, but the companies all agreed this was the best size. The October 25 Draft says that licenses are not less than 20,000 nor more than 500,000 acres, because there was a bit of fear that people would misuse the program. He said that the parcels had to be big enough to do a best interests finding. He was afraid the Commissioner would be inundated with small requests that he would have to deny. Number 527 SENATOR SALO asked if the $3 per acre annual rental rate was a deal. MR. BOYD answered that they didn't make much money from rent. What they want to do is get people out exploring new land and making discoveries. TAPE 94-1, SIDE B Number 582 SENATOR LEMAN thanked Mr. Boyd for his presentation and said that was what he intended for this work session. He asked if there were questions or comments. SENATOR ADAMS said his concern was with the language on page 2, lines 23 - 24. He also commented that he preferred the October 25th Draft. SENATOR HALFORD suggested that the Committee draft an amendment to SB 150 to be offered on the floor of the Senate. Number 515 GEORGE FINDLING, ARCO, supported the October 25 Draft as a strong frontier licensing bill. He pointed out that it helped create an even playing field among the bidders. The bonding formulation strikes a balance that's appropriate among a variety of interests and provides equal financial footing - a "level playing field" because it provides solid protection for the state's interest. Leases are achieved only after the entire work commitment is complete which minimizes the chance of speculation. The bonding and relinquishment together provide incentives to get the work done early and expeditiously. The bonding allows the licensee the maximum flexibility to pursue the work program that makes sense to them. The licensing supplements dovetail into the proven state leasing system which provides the licensee with a fair amount of certainty as to how the process is going to work after the license is completed. The winning bid in any competition that's sealed is likely to be based upon the objective standards of total amount bid. Number 470 TOM LOHMAN, Barrow, asked how this program worked with the coastal zone management program and how would the licenses be subject to coastal management review. MR. BOYD answered that everything available under Title 38 has the same terms and conditions. All the public processes under the 5 year program are available under exploration licensing. MR. CLIFF BURGLIN, Fairbanks, said this bill should never see the light of day. He said this bill ties up all the state's best potential oil and gas lands. The companies that like the bill are laying off thousands of people and taking their money overseas. He said the bonding was too high. He said Alaska has goofy regulations. Number 353 SENATOR LEMAN thanked everyone for their comments and said the Committee would prepare an amendment. He adjourned the meeting at 4:18 p.m.