HB 207 ADJUSTMENTS TO OIL AND GAS ROYALTIES JOHN SHIVELY, Commissioner-designee of the Department of Natural Resources, testified on HB 207. There are a variety of ideas about how to provide the oil industry with the incentive to develop marginal oil fields. HB 207 was a compromise effort that can be implemented this year, as opposed to other ideas that may be studied by the Governor's Oil and Gas Policy Commission. Royalty reduction legislation has been on the books since 1959, therefore the ability to change the amount of royalty is not a new idea. HB 207 specifically adds marginal fields and clarifies language in the existing law related to fields that might be shut in, or abandoned, to make the assessment process easier. Essentially, HB 207 requires the oil companies to have a delineated field or pool before proposing a royalty reduction. DNR would then look at the economics, based on the capital and operating costs, the price of oil, and the volume of oil. DNR would either internally review the proposal or hire experts to review it if the internal capacity was unavailable. If outside consultants were hired, the industry would pay for that service. If clear and convincing evidence is found that a royalty reduction is justified short and long term, the Commissioner would have to make a best interest finding that the royalty reduction would be in the best interest of the state. A public hearing process would then take place. In an amendment adopted on the House floor, the DNR Commissioner would give a presentation to the Legislative Budget and Audit Committee. Number 560 SENATOR LEMAN discussed changes made to the bill in the House. The original bill had a hold harmless provision for the permanent fund that was removed; a provision for legislative awareness was added; and the floor for reduction amounts was changed. He asked Mr. Shively if those changes were acceptable to the administration. MR. SHIVELY replied the House changed the language which held the Permanent Fund harmless to providing floors. The reduction can be 75 percent for new marginal fields, and no more than 90 percent for fields that are about to be shut in, or fields that have been abandoned. Current law allows a zero percent royalty for the latter fields, but the administration believes the floor should be no more than 75 percent of the existing royalty. That royalty would be split between the general and permanent funds. Regarding the oversight provision, added on the House floor, DNR would give a presentation anyway if Legislative Budget and Audit requested one. Confidential information would be protected by provisions under executive sessions. SENATOR LEMAN cited a newspaper article by Stan Jones and asked whether DNR would consider royalty reductions seriously if HB 207 passed. MR. SHIVELY answered that he hoped the situation referred to was a particular agreement between BP and OXY. He anticipated the industry to make serious proposals since they would be paying for the economic review. TAPE 95-47, Side B SENATOR LEMAN indicated he saw the need to include in the bill clear language describing the application process to avoid future litigation. MR. SHIVELY noted he believes the bill contains language that would prevent the industry from litigating the decision by the Commissioner. The administration does not believe the royalty reduction is a right, but rather a privilege. It can only be granted if justified, and in the state's best interest. He stated he would support language to further clarify the process. PAUL WESSELLS, representing BP Exploration-Alaska, read the following for the record. BP supports HB 207 and encourages this Legislature to enact the bill this year. This bill represents a very positive step along the road to development of the state's marginal new oil fields and marginal projects within existing fields. It is our belief that initiatives such as HB 207 signal a new spirit of cooperation between the oil industry and state government. It is this joint effort that will be required for the state to fully realize the value of its oil and gas resources. In what manner does HB 207 promote full development of the state's resources? First, it clarifies the existing statute, by specifying that new developments, that is properties that have never produced oil and gas, may qualify for royalty reduction. Second, the bill provides that relief may be granted for individual leases, rather than solely as part of a unit application, and allows for adjustments with respect to individual pools of oil and gas within lease releases. The bill takes additional steps to protect the public interest by assuring that the Commissioner of Natural Resources will receive the financial and technical information necessary to allow a reasoned judgment on the merits of an application, and by requiring that the costs of third party professional assistance to the Commissioner in analyzing applications be borne by the applicant. In addition, the public interest is served by the provision in the bill that the state must condition a reduction in royalty, on a readjustment at a later time, if the circumstances which supported the grant of the reduction change. It is this last aspect of the bill that makes it clear that it is not just about reducing the royalty obligations of producers in the absolute sense. Indeed it is entirely possible that a royalty adjustment program, negotiated by the state and a lease holder, will lead to greater royalty payments over the full life of the property. BP also believes the bill should allow the Commissioner of Natural Resources to modify state net profit share interests in the same way that it allows the Commissioner to adjust state royalties. Net profit payments and royalty payments are similar forms of economic rent, that the state receives from leasing its lands for oil and gas exploration and development. We think that giving the Commissioner flexibility to address the full economic picture when reviewing an application for adjustment, is a good idea, so it does not seem appropriate to us to give the Commissioner that flexibility with respect to just one form of economic rent and not the other. Just as the state may gain by modifications of the royalty obligations under a sliding scale royalty mechanism, so it should gain in similar circumstances by allowing appropriate modifications of a net profit interest. We in BP believe that HB 207 will make it possible for the state and the oil industry to devise, through open sharing of information, in good faith negotiations, methods for sharing the risk of developing marginal properties. It is imperative that we capture the potential of these properties to ensure a strong and stable industry and a strong and stable Alaskan economy. Thank you for the opportunity to testify. Number 532 SENATOR LEMAN asked Mr. Wessells if he believed the situation described in the newspaper article he referred to earlier was a unique circumstance because of the arrangement of the ownership. MR. WESSELS remarked BP's position is that the application referred to is a serious application. If one were to take the array of applications the company might make on existing properties, the one at Milne Point would be at the bottom of the spectrum, in terms of the expectation of receiving relief. He did not feel it would be appropriate to characterize the application as frivolous. There being no further testimony on HB 207, SENATOR LEMAN announced the next meeting would be held on Monday, and HB 208, HB 225, HJR 23, and HB 197 would be heard. He adjourned the meeting at 3:25 p.m.