SRES 3/16/95 SB 112 DISCOVERY ROYALTY CREDIT SENATOR LEMAN announced SB 112 to be up for consideration. SENATOR LEMAN announced an at ease from 4:55 - 5:07 p.m. Number 428 KEN BOYD, Acting Director, Division of Oil and Gas, said that there has been a discovery royalty in statute since statehood. The term "geologic structure" has been used by the United States Geologic Survey since 1920 for oil and gas purposes. From 1937 - 1958 this term was used to establish reduced royalties on non-competitive leases under regulations implementing the Alaska Oil Proviso of the Federal Mineral Leasing Act of 1920. The Oil Proviso authorizes the Secretary of the Department of the Interior to establish special royalty rates on leases issued in the State of Alaska to encourage oil and gas development. MR. BOYD said that in 1959 Alaska became a state and the oil and gas resource was thought to be the best avenue for getting revenues. And it worked well. In 1969 the discovery royalty statute was abolished, because all the major oil fields were in production and it wasn't needed any more. Cook Inlet had been discovered and Prudhoe Bay was just being sold for over $900,000,000 in bonuses. Now production is declining, MR. BOYD said, and perhaps a discovery royalty is needed to bring back new explorers. SENATOR LEMAN said maybe they could clarify the application of discovery oil credit by specifying time or distance rather than using the term "geologic structure. " BILL VAN DYKE, Division of Oil and Gas, said that would be possible. The old royalty provisions show that they were effective in getting people out there early to try to be the first to discover, but there were some nasty arguments over what constitutes a known geologic structure and who discovered what reservoir first. SENATOR FRANK asked if the idea was to reduce the royalty from 12.5% to 5% for a period of 10 years for the first well discovered in a newly discovered geologic structure. MR. VAN DYKE answered that was his understanding. SENATOR FRANK asked if Lisburne, Kuparuk, Prudhoe, etc. were separate geologic structures. MR. VAN DYKE said that Prudhoe and Lisburne would be considered the same geologic structure. SENATOR FRANK said there was some criticism of the bill, because the commissioner has more discretion he could possibly abuse . MR. VAN DYKE explained that history shows that where you have a number of separate geologic structures very close to each other, people can disagree as to whether it's one big geologic structure or whether it's different geologic structures. Number 291 SENATOR LEMAN noted that he thought the drafter, Mr. Chenoweth, in drafting this legislation merely restored language from 1969 and he thought that a lot had been learned since then that needed to be applied to current legislation to keep the state out of continued litigation. SENATOR LEMAN asked if the reduced royalty applies to the discovery well or to the entire lease on which the first well is located. He thought the language meant the entire lease. MR. VAN DYKE said the old law applied to all production from the lease. He added that a field covers more than one lease usually. SENATOR LEMAN asked if it were limited to just the one well, it probably wouldn't be a substantial enough incentive. MR. VAN DYKE answered that was right. SENATOR FRANK asked if some units had many leases. MR. VAN DYKE said that Prudhoe has over 100. SENATOR FRANK asked if the reduction was applied to just one lease, would that be a significant incentive. MR. VAN DYKE replied that it has been in the past. Number 142 SENATOR FRANK asked if you could have enough production out of one lease to make an oil field economically viable. MR. VAN DYKE said that was almost impossible on the North Slope. SENATOR FRANK asked how many uneconomical pools of oil have been found on the North Slope. He wanted to know if the tax structure made it unviable. MR. VAN DYKE said there was currently only about a half dozen decent sized pools that are still "shut in" as uneconomic. SENATOR FRANK asked if the state was trying to spur activity on leases that have already been issued or is a long term policy being established to increase the chances of the state leasing more. MR. VAN DYKE answered that it would be nice to get some activity on some leases that have been issued in the last couple of years which haven't been drilled, yet, in addition to getting more activity on leases that will be issued in the next few years. He explained that North Slope leases are mostly issued for 10 years. SENATOR LEMAN asked how we have some leases from the old discovery days that are still not developed, but could still possibly apply if the leases are for 10 years. MR. VAN DYKE said some of them have not been developed, because the state has yet to receive title to the land under those leases; they're called conditional leases. Others are in unit areas which get extended.