SB 161-GEOTHERMAL RESOURCES  4:05:55 PM CHAIR MICCICHE announced that the final order of business would be SENATE BILL NO. 161, "An Act relating to geothermal resources; relating to the definition of 'geothermal resources'; and providing for an effective date." 4:06:32 PM LAURA OGAN, Legislative Liaison & Special Projects, Alaska Department of Natural Resources, Anchorage, Alaska, explained that SB 161 seeks to attract attention to Alaska's geothermal exploration program. The bill will align with the state's existing oil and gas exploration license program and will diversify the state's energy portfolio. It will also increase the potential for affordable renewable energy to both rural communities and remote resource extraction projects. 4:07:31 PM CHAIR MICCICHE welcomed Senator Reinbold to the committee meeting. 4:07:47 PM STEVEN MASTERMAN, Director, Division of Geological and Geophysical Surveys, Alaska Department of Natural Resources, Fairbanks, Alaska, explained that geothermal resources offer the potential for sustainable, affordable, local and renewable power generation. He said Governor Dunleavy's administration supports enhancing geothermal energy development in Alaska and SB 161 is a progressive step in that direction. MR. MASTERMAN specified that the bill removes obstacles for exploration and development of Alaska's geothermal resources in a number of ways. The bill provides for five-year exploration licenses instead of the current two-year permits with one additional year, to allow more time to meet the challenges of bringing remote exploration projects into production. MR. MASTERMAN explained that SB 161 changes the statutory terminology for permits to lease to more closely align the geothermal program with the state's dominant model of petroleum leasing. It allows conversion of geothermal exploration licenses to production leases upon mutual state lessee approval of a workplan instead of upon production of commercial quantities to provide the state more flexibility in incubating a new resource industry. He detailed that the bill nearly doubles the maximum size of geothermal lease holdings to 100,000 acres to accommodate the expansive size of geothermal resource systems. This will attract greater interest in geothermal resources because developers will have a greater opportunity to explore the appropriate area to delineate geothermal systems. MR. MASTERMAN specified that SB 161 eliminates statutory reference to surface owners' preferential rights to purchase subsurface geothermal exploration rights to eliminate uncertainty among geothermal explorers and investors. It updates and refines the definition of a geothermal resource and provides an exclusion for domestic use of geothermal energy. He said that by enacting SB 161, Alaska will continue to responsibly manage its natural resources in a manner to provide maximum benefits to Alaskans through the development of needed energy sources. 4:10:36 PM MR. MASTERMAN provided the following sectional analysis of SB 161: Section 1 Relates to refining the responsibilities between the Division of Oil and Gas, and the Alaska Oil and Gas Conservation Committee. Sections 2-4 Relates to changing from permits to leases. Section 5 Increases the allowable acreage an entity can hold to 100,000 acres. Section 6 Amends the duration of geothermal leases and allows license conversion to leases. Section 7 Adds new clauses that allows the creation of similar unit agreements to those within the Division of Oil and Gas currently utilizes to manage oil and gas development. Section 8 Refines the definition of a geothermal resource. Section 9 Clarifies that DNR manages leasing and licensing of geothermal resources. Section 10 Exempts domestic use of geothermal energy from leasing requirements. Section 11 Updates the definition of geothermal resources. Sections 12-16 Conforming changes and provides for effective dates. 4:11:59 PM MR. MASTERMAN said the Alaska Oil and Gas Conservation Committee and the Division of Oil and Gas submitted zero fiscal notes. The fiscal note from the Division of Geological and Geophysical Surveys (DGGS) reflects restarting the Geothermal Program, which was terminated five years ago. The program would synthesize and provide data on Alaska's geothermal resources to support the Division of Oil and Gas leasing of geothermal resources, and to attract and assist companies wishing to develop the state's resources. The DGGS position would monitor developments in the quickly changing geothermal technology and seek to attract federal funding to support investigations to develop the state's geothermal resources. 4:13:40 PM SENATOR KIEHL noted the earlier testimony about removing the preferential right of a surface owner to the geothermal resources under their land and the deleted language that talks about notice. He asked, should the bill pass as currently drafted, what notice a surface owner would receive when there's a proposal to lease the geothermal rights under their land. 4:15:05 PM TOM STOKES, Director, Division of Oil and Gas, Alaska Department of Natural Resources, Anchorage, Alaska, answered that the notice would be similar to oil leases where entities on the division's mailing list would receive public notice and public comment would be solicited. SENATOR KIEHL asked if the mailing list includes all the surface owners. MR. STOKES answered yes. CHAIR MICCICHE directed attention to the language in section 7, lines 28-30, "The commissioner may not reduce royalty on geothermal lease issued under this section in connection with a unit agreement." He asked how royalties are paid on geothermal resources and if the payment is British thermal unit (BTU) based. MR. STOKES answered that the current geothermal royalty rate is 1.75 percent of gross revenue. CHAIR MICCICHE asked if gross revenue means that there is no royalty payment if the geothermal operation is not profitable. MR. STOKES answered that the royalty rate is based on gross revenue, not net revenue. 4:17:19 PM CHAIR MICCICHE summarized that the 1.75 percent is an expense that is not based on the profitability of the operation. MR. STOKES answered correct. CHAIR MICCICHE asked for an explanation of the sentence, "Except as provided in (f) and (j)." MR. STOKES explained that the rate charged to the company initially would be on a per acre rental cost basis. Once the lease becomes commercially viable, the rate would change from a per acre rental to the royalty rental. CHAIR MICCICHE referenced subsection (j) in section 7 on page 4, lines 3-5 and asked if it allows the commission to adjust royalty requirements on a postproduction basis. MR. STOKES said he believes the subsection is referring to renewals subsequent to the initial 20-year lease. 4:19:22 PM SENATOR KIEHL asked if the bill maintains the division in the existing statutes between little guys and industrial operations or if people will have to lease a minimum of 40 acres to tap into geothermal to heat their cabins in the winter. MR. STOKES replied the bill refers to commercial operations. An individual owner does not need a license to utilize geothermal resources under personal property. SENATOR KIEHL asked if an individual will continue to be able to use the geothermal resources under their property if a company leases those resources. MR. STOKES answered that it would only change if the individual owner turned their geothermal resource into a commercial operation. SENATOR KIEHL pointed out that there are some communities around the state that are using geothermal resources. He asked how potential conflicts will be worked out in the future if there was commercial interest in those geothermal resources. 4:21:44 PM MR. STOKES answered that those details would have to be worked out. He reiterated that the intent is for commercial operation and not for local usage. CHAIR MICCICHE suggested the department think about Senator Kiehl's question and provide the committee with their vision of how they will address a geothermal conflict. He said he knows of instances where Alaskans have used local resources for generations. SENATOR BISHOP referred to subsection (a) in section 2 that read, "The commissioner may, under regulations adopted by the commissioner, grant prospecting licenses and leases to a qualified person to explore for, develop, or used geothermal resources." He pointed out that a drill site has drilling fluids, drilling mud, and cement and asked what the department is thinking about for their regulations. MR. STOKES replied it would be equivalent to what the department does with oil and gas. The lessee would have to apply for a license and within the application the department would understand their level of operations and address any hazards or associated drilling. 4:23:53 PM CHAIR MICCICHE asked if he agrees that a prospecting license or lease is not required for exploration. MR. STOKES answered no; a commercial entity is required to have a license for exploration. CHAIR MICCICHE summarized that a license is not required for exploration or development if the intent is for domestic, noncommercial, or small-scale industrial use, and the ground temperature is not more than 30 degrees Celsius. MR. STOKES answered correct. SENATOR GIESSEL asked if the department could provide a map showing the potential geothermal areas in the state, including the nearby population centers that might be using the energy sources. MR. MASTERMAN answered yes. 4:25:21 PM CHAIR MICCICHE asked if there is a fairly good probability that there is domestic noncommercial or small-scale industrial use throughout the state that the department is not knowledgeable about. He inquired if there is a reason why the smaller-scale users would register with the department at some point in their production process. MR. MASTERMAN replied the technology for home-use systems that use ground source heat pumps will evolve, become more efficient, and develop into more widespread use. The department is trying to segregate that small-scale use from the heavier industrialized use that might be generating power for a community-scale operation or a large industrial facility. He noted that the warmer parts of the state will more likely see greater expansion and less so in places that are colder. CHAIR MICCICHE explained that his question ties to Senator Giessel's query on what the department knows about geothermal resources and Senator Kiehl's question about protecting smaller- scale users with regards to their unlikely affect on a commercial entity. 4:27:40 PM MR. MASTERMAN said there are a number of ways that other states have addressed the issue of safeguarding and segregating home use of geothermal energy from industrial uses. He pointed out that industrial uses of geothermal energy require a nearby hot spring system, fumarole system, or a local volcanic field that provides the large-scale heat source for a commercial operation. There are only a couple of places in the state where those things overlap with surface ownership or subsurface use of the geothermal resource and most small-scale users will steer clear because of the associated extra costs. Most residential- type uses will be shallow and on the low temperature side of the temperature spectrum. He said there will be a natural separation between small-scale users and commercial operations. 4:29:45 PM CHAIR MICCICHE said the committee did not want to put the geothermal presenters on the spot. He suggested that the queries will provide something to think about for a follow-up meeting. SENATOR GIESSEL asked if there are tax credits available for exploration and geothermal energy production. MR. MASTERMAN answered that he not familiar with that. SENATOR GIESSEL said the reason she asked is that the state gets itself into a revenue dilemma with tax credits. She said her intent is to make sure that there are not random exploration tax credit applications out there for geothermal energy. CHAIR MICCICHE said he would like additional information at the next meeting. He recalled when there was excitement a few years ago on the westside of Cook Inlet for a geothermal program. He said he did not know if the program sunsetted. SENATOR KIEHL noted that he could not track what the bill was changing and why. He asked the presenters to follow up on what the state is defining as geothermal resources. CHAIR MICCICHE said the committee would like their questions answered before moving the bill forward. 4:32:20 PM CHAIR MICCICHE held SB 161 in committee.