SB 96-OIL AND GAS AND GAS ONLY LEASES  4:24:09 PM CHAIR GIESSEL announced SB 96 to be up for consideration. 4:24:34 PM LARRY SEMMENS, staff for Senator Micciche, sponsor of SB 96, Alaska State Legislature, Juneau, Alaska, said the bill proposed to allow the commissioner of the Alaska Department of Natural Resources (DNR) to extend oil and gas, and gas only leases on a one-time basis to allow a lease holder additional time to develop and get a lease productive. He stated that the DNR and industry supported SB 96. He explained that SB 96 had a zero fiscal note. He detailed that SB 96 would fix shorter-term, five and seven year issued leases that entailed situations where the leases should be extended. He noted that there was no statutory authority to extend the leases. He said oil and gas, or gas only leases did not expire as long the leases were producing, or if the lease land was part of a unit that was producing; otherwise the lease term was limited to the initial term. He explained that SB 96 would provide the statutory authorization to extend a lease if it was in the best interest of the state to do so. 4:26:56 PM CHAIR GIESSEL announced that the committee would stand at ease. 4:28:36 PM BILL BARRON, Director, Division of Oil & Gas (DOG), Alaska Department of Natural Resources (DNR), Anchorage, Alaska, said SB 96 would address areas in the statutes that were a bit remiss in the DNR's ability to manage state land. He asserted that there was no way to extend a lease out of its primary term other than through active drilling, being part of a unit, or was part of production. He said there were opportunities where short term leases issued by DOG had companies diligently trying to work their leases while coming up to the brink of their term without drilling a well or proving hydrocarbons. Rather than having oil and gas companies release their acreage just to go back into a lease-sale and take the risk of not being a party to pick it up, oil companies tend to bring forward unit applications which were not necessarily fully mature. He explained that DOG gets into a dialogue of what was and was not a "unit." He informed the committee that a simple one, two, or three year extension would have given the oil and gas companies the ability to drill wells and prove-up their acreage in a timelier manner. The DNR commissioner's decision would not be based upon work that was planned to be done. The first step in the decision process would address what work had been done on a lease. The lease extension decision was not about warehousing and the interaction with the lessees allowed the commissioner to look over a lease's history. Companies that had done little or no work on their lease would have a tough battle to get past the first step. The second step in the process was that the oil and gas companies would be buying a premium or an option in order for the DNR to manage the state's land. A performance bond or work commitment that identified the types of funding or work may be required. The process at the second stage was a contractual negotiation of a term. The process was an opportunity for the state to talk to companies about the lease work's scope, funding, and timing that they had in a primary term. Leases would expire if a company did not establish performance terms and conditions. He addressed a slide to the committee that displayed short term leases for the North Slope, Foothills, and Beaufort Sea regions. Short term leases were divided into three expiration groups: two years or less, two to five years, and outside of five years. There were 104 leases in the first group with multiple companies having leases that were to expire in two years or less. He noted that Repsol and Alaska Venture Capital Group (AVCG) were actively trying to work their short term leases and explained that they were running into a time clock. He said the DNR was trying to not have leases come back to lease-sale for companies that were working hard to develop their acreage. SENATOR FRENCH noted that Repsol stood head-and-shoulders above other oil companies for short term leases that were to expire in two years or less. He asked if Mr. Barrons could comment on the amount of leases Repsol had that were expiring. MR. BARRONS replied that Repsol stepped in a couple of years ago to acquire some of the acreage in joint cooperation with Armstrong Oil and Gas. Repsol recognized very clearly that they were under-the-gun and aggressively approached the opportunity immediately. Repsol had a rig up within the first drilling season and started processing drilling activities. Repsol was the kind of company that was actually trying to drive while recognizing the time frame. He asserted that DOG should not be put into a position to hurt the companies later. He noted that Repsol and AVCG were clearly the first two candidates. He said the big player for the out-years, the seven year leases was Great Bear Petroleum Ventures (GBPV). GBPV's focus was on shale based oil and their out-years would be addressed as well. He agreed that Repsol was a very interesting case and reiterated that they did not come into the primary lease activity. Repsol had shown their ability to get going and prove-up acreage as quickly as possible. Additional time would allow Repsol to continue their operations and Repsol had the knowledge with rigs under contract. Working with Repsol was the kind of game that the DNR was trying to make sure was played out correctly. 4:34:33 PM MR. BARRONS addressed the Cook Inlet and noted that Apache Alaska Corporation's (AAC) operations stood out. He explained that AAC did very similar activities that Repsol did with other companies in the Cook Inlet and bought a large area of acreage that was scattered across Cook Inlet's western and eastern sides. He said some of AAC's acreage was clearly coming up short in terms of time. AAC was the kind of player that DOG also wanted to encourage. He noted that AAC's diverse acreage was a challenge for DOG. Companies had to understand what work had to be done on specific acreage and not on the totality of their leases. Extended time would not apply to requests for seismic testing or getting wells drilled. He said the DNR commissioner and DOG wanted the committee to appreciate that the intent was getting a work program established for: drilling wells, advancing technology, and bringing resources to market as quickly as possible. The process would provide the state with a better understanding of its resources. SENATOR MICCICHE explained that his interest in the bill addressed the three top prospects for getting gas to market in Cook Inlet: AAC, Buccaneer, and Hilcorp. The three companies had a large number of leases that were coming up against the less than two year deadline. He said we certainly want to encourage the three companies to hopefully get some gas to market as soon as possible without starting over. 4:36:50 PM MR. BARRONS answered that he agreed. He said the intent was to assist people who have diligently tried to progress a lease without having to release it and try to get it back. There was also a balance that had to be recognized in the general business practice of lease-sales. Some companies were concerned that not managing extensions properly could be seen as a way to hold acreage in a competitive market. Some companies knew the geology as well as others and were waiting for leases to expire for the next bid-round. DOG understood the concerns for holding acreage and noted that the intent was for the state to benefit from lessees that were doing the work on their five or seven year lease. He remarked that if there were issues on timing, weather, rigs, equipment, or whatever the problems were, DOG would have an opportunity to listen and then firm up a strong contractual deal. He said a contractual deal would make companies drill wells with bonding, committed work programs, and elevated rental agreements. The clear intent was for the DOG to form a new contractual business relationship with companies for the next year or two if extensions were granted. He reiterated that extensions were not guaranteed, a five year lease would not get a five year extension. Extensions would be handled on a case basis with decisions based upon a company's committed work program. He said an example was a five year extension might be provided if annual performance-gates were set and not meeting the goals could lead to lease expiration. He explained that the extension process was an opportunity for the state to really engage with the industry in a very positive way by encouraging development. DOG was excited about the extension process and believed it to be an important issue for the division. He explained that both the industry and the state would benefit from the lease extensions. The industry would be accommodated for shorter drilling windows and additional time for working diligently. The state benefited from requiring a work program for the first time that encouraged ongoing work to be completed. He emphasized the importance of a work program for increasing the probability of leases being brought on to production more quickly. SENATOR FRENCH stated that he appreciated being brought up to speed by Mr. Barrons. He noted having a meeting with Mr. Barrons prior to the committee meeting and said there were some folks, including himself, that believed a work program should be setup in the first five years. He said he realized what the state's current philosophy was, but it struck him that having a firm set of work commitments earlier rather than later would benefit everybody. He noted that work commitments in an initial lease was not the bill in front of the committee and would set the point aside. 4:40:11 PM SENATOR FRENCH noted that Repsol's approximate 60 leases were coming up for expiration. He asked if Repsol's leases would be a lease-by-lease decision, or would the DOG just say that it really liked Repsol, the company had a lot of money, and they would be given a break. MR. BARRONS replied that DOG's clear intent was to require the companies to come in and explain what they had been doing on the leases. Some of the leases would be bundled with contiguous lease blocks identified and area work activity noted. Some of the leases could be packaged as A-B-C with extensions managed in a negotiated settlement where packaged leases were addressed separately. He addressed GBPV'S 500,000 un-unitized acreage of shale and noted that it was going to very interesting to see. SENATOR FRENCH asked how many individual leases there were within GPBV's huge swath of property. MR. BARRONS answered several hundred. SENATOR FRENCH asked to confirm that there could not be more than 5,000 acres per lease. MR. BARRONS answered correct. He explained that GBPV's leases were quarter-sectioned for reasons associated with shale development. GBPV did their work along the highway which was a smart and well-reasoned activity. He said DOG would ask GBPV what they were going to do at other parts of the acreage and the division would have difficulty with a reply where GBPV would get to other areas of their lease in five years. He specified that his comment was not an official stand, but if GBPV were to meet with DOG today, it would be a hard road for them to hoe. SENATOR FRENCH asked what would happen if a bigger company wanted to buy GBPV's leases. He said his view would be that the second company should start and stand in GBPV's shoes. The new company, despite their best intensions and deep pockets, decided to buy leases that were expiring. The scenario he presented would be a tough case for DOG to decide because suddenly there was a new player with a lot of money on leases that were expiring. MR. BARRONS replied that oil and gas was a very intelligent and sophisticated industry. When a company comes in and buys acreage from someone who already owns the lease; they would know what the rules and contractual obligations were. The new owner would have to abide by the original lease and it was not DOG's problem if the new company did not "action" activities associated within the given time frame. The DOG's problem was to make sure that the lease was either worked or returned so that the division could lease it to somebody else. SENATOR FRENCH replied that he appreciated Mr. Barrons' reply, especially given the shifting sort of ownership structures where a lessee created a new oil company to buy the leases in order to obtain five additional years. MR. BARRONS answered that Repsol was a good example of somebody who did buy-in, recognized what the rules were, and progressed as quickly as they possibly could. SENATOR FRENCH replied that Repsol hurried a rig up to their lease, had a blow out and some bad luck. He said the example of Repsol struck him as an easy case where a company ran into force majeure problems that they could not overcome. He asked Mr. Baron to address a letter for AAC where they raised two concerns regarding the performance bond and $250 an acre. He inquired how many leases in general would a $250 per acre charge be sort of out of bounds and above what was paid in the first place. MR. BARRONS replied that the $250 uplift applied to years eight, nine, and ten. The current lease terms were introduced two years ago on entry level leases at $25 an acre, previously it was $3 per acre and the lease terms were a very low entry price. He reiterated that oil and gas companies were sophisticated and knew how to make business decisions. Companies had a business choice if they had not been diligently progressing land for seven years. A company would have to decide if the increased cost of holding land as an exclusive right at $250 acre for the last three years was viable. The alternative was relinquishing the acreage, putting it back to the lease-sale, and allowing DOG to manage it through the lease-sale process. He noted that one company had leaned in and said the increased cost should only be 150 percent. He opined that 150 percent of $3 an acre really did not give him a warm comfort required from a business negotiating standpoint and allow a company to not be serious about moving the land. He said for the reasons previously noted, it was clearly the discretion of the commissioner to decide if a company had been doing work in order to authorize waving the $250 per acre charge and allow the original lease to be maintained. He addressed comments and concerns about a required work program. He reiterated that if a company wanted an extension, they would be asking for an option to hold land exclusively and there should be something that goes back to the state. If a company wanted the luxury to have land for an extended period of time, something had to be in it for the state. He asserted that the state required wells to be drilled in order to hold acreage longer and the requirement he set forth was a very simple business philosophy that the DOG followed to get wells drilled. SENATOR MICCICHE stated that the maximum lease extension to the primary terms was up to five years with a total primary lease and extension not to exceed ten years. 4:47:56 PM MR. BARRONS replied that Senator Micciche's statement was a critical piece and DOG was working with the Senator's staff to make sure that at no time would any of the primary terms exceed ten years. He emphasized that there could only be one and only one extension. SENATOR MICCICHE added that it was imperative for Alaskans to understand that the intent was getting leases to work and producing hydrocarbons. He emphasized that the extensions were not about a landholding program. MR. BARRONS concurred with Senator Micciche. 4:48:42 PM LISA PARKER, Manager, Government Relations & External Affairs, Apache Alaska Corporation (AAC), Soldotna, Alaska, thanked Senator Micciche for working with ACC and the administration in moving SB 96 forward. She said SB 96 would allow the DNR commissioner to extend the term of oil and gas leases or gas only leases beyond the original primary term. The legislation offered an alternative to last minute rushes to create units, proposed placement of rigs, or other lease saving operations that would allow an operator to hold its oil and gas leases. She noted that the DNR dealt with repeated requests for extensions that wasted time while a company continued to hold its units with no actual work being performed. She explained that AAC was a new operator in Alaska and the company acquired a significant amount of acreage with leases that were expiring prior to seismic exploration completion. AAC's seismic studies helped to delineate the potential for oil and gas resources. AAC had been aggressive in exploration and development efforts since the fall of 2010. ACC possessed and continued to find new and innovative ways to conduct seismic studies that created only the slightest disturbance while gathering good quality data. AAC employed a cutting-edge technology that in 2012 resulted in seismic acquisition on over 200,000 acres within the Cook Inlet basin. She informed the committee that AAC "spudded" their first well on the Cook Inlet's west side in late 2011. She stated that there was still a lot of work left to do and AAC was hopeful that in working with the DNR there would be an opportunity to continue its 3D seismic program to better identify the Cook Inlet's potential. She noted that AAC had submitted a letter to the committee on suggestion changes to SB 96. She summarized that AAC's general manager, John Hendrix, had stated on numerous occasions that, "Apache does not sit on its assets." AAC wanted an opportunity to delineate its assets before commencing with exploration efforts and that was the reason why the company was working with Senator Micciche and the administration. CHAIR GIESSEL announced that finding no further comments, public testimony was closed. 4:52:22 PM SENATOR FRENCH inquired if the only way to extend a lease term was through unitization. MR. BARRONS answered yes. He explained that lease extensions could occur through unitization or active drilling. SENATOR FRENCH clarified that what he meant was doing something short of doing something productive. MR. BARRONS responded that companies could process the application for unitization. SENATOR FRENCH noted that unitization would be tough to do if there had not been drilling, but it was an avenue that the companies pursued. He inquired if the ability to extend leases would be considered one more negotiation option between the industry and the department. MR. BARRONS answered that the DNR had thought about what Senator French had said. He explained a statute that stated companies would have to come to the commissioner 180 days prior to lease termination. Companies would have to plan and have an idea of where they were 180 days prior to lease expiration. Companies should provide the DNR with the latitude of time and come to them with a plan and a program. SENATOR FRENCH asked how many leases were turned straight back to the DNR where and owner-operator gives back their lease. MR. BARRONS asked Saree Timmons to answer Senator French's question. 4:54:19 PM SAREE TIMMONS, Petroleum Land Manager, Division of Oil & Gas (DOG), Alaska Department of Natural Resources (DNR), Anchorage, Alaska, stated that she did not have the information. SENATOR FRENCH asked for a "ballpark" answer. MR. BARRONS replied that the number was small number, less than ten percent. SENATOR FRENCH asked how often lease extensions would be used. MR. BARRONS replied that the Senator's question was speculative and he would reply with a speculative answer. He advised that companies would come in 50 percent of the time and ask for extensions without having done anything with their leases. He said requests for extensions without lease activity would be a very short conversation. SENATOR FRENCH asked how often the DNR would say "yes" to an extension request. MR. BARRONS replied that the decisions would clearly depend on the quality of the applications. CHAIR GIESSEL asked if Mr. Semmens had any closing remarks as carrier of the bill. MR. SEMMENS thanked the committee for hearing the bill. He acknowledged the DNR for their excellent work and appreciated hearing from the industry as well. 4:56:00 PM SENATOR DYSON moved to report SB 96 from committee with attached fiscal note and individual recommendations. CHAIR GIESSEL announced that, without objection, SB 96 moved from committee with attached zero fiscal note.