HOUSE SPECIAL COMMITTEE ON OIL & GAS January 28, 1994 12:30 p.m. MEMBERS PRESENT Representative Joe Green, Chairman Representative Pete Kott, Vice Chairman Representative Harley Olberg Representative Gary Davis Representative Sitton Representative Sanders MEMBERS ABSENT Representative Jerry Mackie COMMITTEE CALENDAR Briefing on Superior Court's Stay of Lease Sale 78 WITNESS REGISTER RAGA ELIM Special Staff Assistant to the Governor Capitol Building, Third Floor Juneau, Alaska 99811 Phone: 465-3500 KYLE PARKER Assistant Attorney General Civil Division 1031 West Fourth Avenue, Suite 200 Anchorage, Alaska 99501-1994 Phone: 269-5100 JAMES EASON, Director Division of Oil & Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99510-0734 Phone: 762-2547 BARBARA FULLMER Assistant Attorney General Civil Division 1031 West Fourth Avenue, Suite 200 Anchorage, Alaska 99501-1994 Phone: 269-5100 ACTION NARRATIVE TAPE 94-2, SIDE A Number 002 CHAIRMAN JOE GREEN called the meeting to order at 12:33 p.m. Number 011 CHAIRMAN GREEN stated that as he understood the issues, several environmental, fishing and other interests had sued the Department of Natural Resources Commissioner Harry Noah, for impermissible lack of consideration of various things, such as conflicts between oil and gas, the fisheries, subsistence use, environmental degradation, and water dependent/water related issues. Chairman Green said that Judge Cranston had found that Commissioner Noah did have a best interest finding. Judge Cranston then denied the stay of the best interest finding, but citing 6 AAC 80.040 (a), Judge Cranston decided that the Alaska Coastal Policy Council's administration of the Alaska Coastal Management Program must consider the following activities in preferential order: water dependent activities, water related activities, and those activities which are neither water dependent nor water related, but could not be performed from an inland location. In addition, there were three other criteria. One was that all reasonable and prudent steps have been taken to safeguard, and that there was no showing of a significant public need. Chairman Green comented that Judge Cranston's decision upset him and it apparently upset the Governor. He asked the Governor's office for an overview of what it is doing in response to the situation and that the Department of Law would give its position from a legal standpoint of what precedent may be established from this and what may happen to the efforts of the House Committee on Oil and Gas in their efforts to further the development of Alaska's resources. Number 045 RAGA ELIM, SPECIAL STAFF ASSISTANT TO THE GOVERNOR, expressed the concern of the Hickel administration about Judge Cranston's opinion, and how it may jeopardize the state leasing program. He said that on January 25, 1994, in response to the opinion, the Governor asked Shelby Stastny, Director of the Office of Management & Budget, to convene a group to look at the situation in a very quick fashion. He stated that Mr. Stastny convened a cabinet-level discussion involving the Division of Governmental Coordination, Department of Environmental Conservation, Department of Fish & Game, Department of Natural Resources (DNR) and Department of Commerce and Economic Development. He said the commissioners met on January 25 to figure out what to do. He indicated the commissioners have a tight time frame to work with the issue, and they want to work with the legislature on a fix, however they currently do not have a solution. He stated that Shelby Stastny had indicated he wanted to come to the legislature with ideas and then collectively figure out how to proceed within one or two weeks. Number 088 KYLE PARKER, ASSISTANT ATTORNEY GENERAL, CIVIL DIVISION, stated Judge Cranston's decision is indicative of a pattern that has been developing since the Alaska Supreme Court's initial decision on Lease Sale 50 in 1987, which specifically regarded and addressed the Title 38 best interest finding requirements. Since that time, the supreme court has issued two opinions on Lease Sale 50, both remanding to DNR for additional findings on the best interest finding and the coastal consistency determination. He said the most recent decision was on Lease Sale 55, where they remanded to DNR for additional findings in regards to the best interest finding. He stated that in early 1994, there was a decision in a mining case, Kutzarik Corp v. State of Alaska, where the Alaska Supreme Court again remanded for additional findings in regard to the best interest finding. He said that Judge Cranston's recent decision is just a continuation of that trend of losses for the State of Alaska. He indicated that Commissioner Noah and the other resource agencies are taking these decisions into consideration as they look for solutions, not only in the oil and gas sector, but in timber and mining, as well. Number 111 CHAIRMAN GREEN invited Representative Mike Navarre, Representative Gail Phillips and Senator Suzanne Little to sit at the committee table. He announced to the teleconference network that the following committee members were present: Representatives Gary Davis, Jerry Sanders, Pete Kott, and Joe Sitton. Number 124 REPRESENTATIVE GARY DAVIS said it appears the courts are taking a stance toward certain directions and have since 1987. He stated that Kyle Parker had indicated that in 1987 best interest findings and Coastal Management Plans were being scrutinized. It is his understanding that in this case the basis for the stay was based on Coastal Management Plans. KYLE PARKER said that was correct. Number 133 REPRESENTATIVE DAVIS said the court assumed the state should have recognized that the Coastal Management Plan was an issue. He asked if the state presented its defense related to the Coastal Management Plan. Number 137 CHAIRMAN GREEN stated that question might be better directed to Jim Eason in Anchorage. He said he knows the state has taken the same safeguards and precautions on Lease Sale 78 as they have done on many other lease sales. He indicated that it seems as if the courts are finding different problems, even though many prior lease sales have been held. Number 144 JAMES EASON, DIRECTOR OF THE DIVISION OF OIL & GAS (via Anchorage), said Lease Sale 78, as with all other sales in the coastal zone, had a conclusive consistence determination written and issued for it. The Division of Oil & Gas, as the issuing agency, all other resource agencies, and the Division of Governmental Coordination reviewed the consistency determination and approved it. He stated the consistency determination is a written document that looks at the proposed sale and the mitigating measures intended to be used, pairs those with the standards of the Coastal Management Plan and finds the proposed sale to be consistent based upon the selection of mitigating terms and conditions that are applied. He indicated this procedure was consistent with what the state has been doing since the Coastal Management Program was adopted. He said that as found in previous cases, the court is substituting its judgment for that, not only of the Division of Oil & Gas or DNR, but for the combined resource agencies and the Division of Government Coordination in their certification of consistency. MR. EASON said the court is taking the opportunity to give the state administration additional responsibilities that he believes are simply not provided for in the law, and Judge Cranston's decision provides a very graphic example of that. He stated there were three points on which Judge Cranston found that the Division of Oil & Gas' consistency determinations failed. One of them was Judge Cranston's belief that one cannot condition, with mitigating measures, a sale and find it to be consistent without understanding and knowing beforehand all of the activities that are likely to occur during the development of those leases that result from the sale. He indicated it was obvious from his reading of the statutes and regulations that not only is that not a requirement, but it is also an impossibility because no one knows when a lease sale is conducted whether there will be many wells drilled, a thousand wells drilled, or whether there will be production or no production. Yet the court seems to be telling the state the only way they can certify that the selected terms actually make a sale consistent with the Coastal Management Program, is to know all the things that will happen over the next ten or twenty years. He said the state simply cannot do that and the courts are telling it that it must. Number 180 REPRESENTATIVE NAVARRE asked if the state had just run into a rash of antidevelopment judges with these cases. He said that judging from the Governor's press release, the Governor feels this particular judge is not exercising his responsibility as a judge, and that he needs to understand what the judicial system's rule is when it comes to developing the state's resources. He asked if that is the court's responsibility or if it is interpreting the laws and the responsibilities that DNR has under the law. Number 190 KYLE PARKER said he believes the courts have been eroding the discretion, both in regards to the best interests finding and the coastal consistency determination, that the legislature intended the commissioner of DNR and the different coordinating agencies to have. He said the courts are not recognizing the intent, and one can look back at the legislative history and see where the legislature did intend to vest the directors and the commissioners in the administrative agencies with the discretion to determine what is in the best interest of the state, and whether a particular project is consistent with the Alaska Coastal Management Plan. Number 204 REPRESENTATIVE NAVARRE asked if the legislative intent was part of the state's argument in court. Number 205 KYLE PARKER said legislative intent has been a part of the state's argument before the supreme court and the superior court in each oil and gas lease sale that has been heard. Number 208 REPRESENTATIVE NAVARRE responded that in fact the state has lost. He asked if legislation has been introduced in the past to clarify the statutes with respect to what exactly the legislative intent is. He said he didn't mind clarifying the statutes, and the legislature definitely needs to do that, but he was upset because he knows Judge Cranston and he's very well respected in the legal community. He stated that he took exception to the remarks of the Governor in this particular case. With respect to what is required by DNR, he thought there were mistakes made by DNR that actually lead to a number of the parties joining in the lawsuit. He stated this loaded on to the case a number of people in opposition that would not have been involved had additional steps been taken by DNR to accommodate some of their concerns or at least spend a little more time in discussion with them. Number 226 KYLE PARKER stated he did not believe there was any intent to direct any pointed spears at Judge Cranston. He said what the state was looking to was the court not recognizing the discretion. He stated that not since the initial Lease Sale 50 decision came down and the legislature amended Title 38 to add Title 38.05.035(g), had the state seen legislation with respect to intent. He said the legislation apparently did not go far enough. He indicated the courts are still left wondering who has the discretion to make these decisions, so they have been substituting their judgment for that of the agencies. REPRESENTATIVE NAVARRE stated that while he agreed with Mr. Eason's assessment that one cannot possibly know everything that will take place in a lease sale, he thought one could know some things that would not be specifically allowed with respect to the development of those lease sales. He commented that some of those activities could have been articulated better. Number 247 CHAIRMAN GREEN stated, based on his previous employment with DNR, he knows there are discretions that are exercised by DNR, quite often to the chagrin of the applicants, because they seem somewhat oppressive and overbearing with respect to things that have happened in the past. He did not think the legislature will ever be able to legislate the specifics of what has to be or has not to be done in a lease sale; those specifics were going to have to stay at the discretion of the department. Number 259 REPRESENTATIVE NAVARRE agreed with the chairman in that there were good people within DNR. He said that one has a right to get to the lease and to develop it in a certain fashion, but one sets oneself up on the other end when attempts are made at restrictions and one ends up with a lawsuit from the people who bought the leases. He stated this has to be realized from the beginning. Number 275 REPRESENTATIVE SANDERS asked Mr. Parker if, in his opinion, the rulings handed down since 1987, in any way indicate a relaxed attitude on the part of DNR with regards to preparation for these lease sales. KYLE PARKER said that he did not believe so, and he thought it was the exact opposite. He stated that since the Lease Sale 50 decision, the time and resources dedicated toward creating the best interest findings, as well as doing the coastal consistency determinations, has expanded. He thought the staff of the Division of Oil & Gas and the .035 staff (a staff dedicated toward working on best interest findings), have been working closely with the Department of Law prior to issuing the findings and determinations. He believes that DNR is doing more now than they ever have. He thought Jim Eason could probably speak even more to that. Number 292 JAMES EASON (via Anchorage) stated he believes the Division of Oil & Gas is doing a credible and good job. He thought if one were to look at the decision more closely in Judge Cranston's case, one would see the problem that the state is running up against. He said in that particular decision the judge looked at whether he thought the plaintiffs would ultimately prevail in their challenge to the state's best interest finding and that he agreed that they would not, in other words, the judge indicated he believes that ultimately the best interest finding for Lease Sale 78 will be upheld by the courts. He said the judge could not find a reason to allow an injunction in the Lease Sale 78 case, but then the judge turned to the issue of whether or not the state's consistency determination was likely to sustain a challenge. He stated the state believed that the issue of whether or not the plaintiffs even had a right to raise the consistency determination was one that the plaintiffs had lost. He said the plaintiffs had 30 days to challenge the consistency determination beyond the time that it was issued as a conclusive determination and the plaintiffs failed to do that. As he recalled, it was about 15 days beyond the deadline the plaintiffs appealed the best interest finding, which was issued after the consistency determination. He believes that Judge Cranston should not have allowed the plaintiffs to raise the issue. He went on to say the court then based its injunction decision on arguments that were not raised by the plaintiffs in their brief or in their oral arguments. He stated the state essentially found itself in a court where the judge allowed the plaintiffs to approach an appeal, which technically they should not have been allowed to do because of the time line, and then constructed the arguments, which were not the plaintiffs arguments, which the judge believed should have granted the injunction. He said that against those kind of odds, he certainly did not know how the state could defend. Number 324 CHAIRMAN GREEN asked Mr. Parker if Mr. Eason's statement was his understanding from a legal point of view. Number 326 KYLE PARKER stated that Mr. Eason had articulated the situation the state faced with Lease Sale 78 very well. CHAIRMAN GREEN expressed that the situation posed a very serious threat. Number 329 REPRESENTATIVE NAVARRE asked whether or not Judge Cranston had ruled on the appeal issue. He said the state had indicated that the plaintiffs did not appeal in time and the plaintiffs had said the Coastal Management finding was part of the best interest finding; therefore could not be separated from the appeal. Number 336 KYLE PARKER stated that Judge Cranston did rule on the appeal issue. He said the Department of Law feels the judge was wrong, and that was one of the points they plan to appeal in the supreme court. Number 341 SENATOR LITTLE said she had spoken with Mr. Eason recently regarding the Governor's press release, which stated that changes had been directed regarding the Coastal Management Planning Process in order to rectify the situation. She commented that at that point, Mr. Eason did not know what direction DNR was headed. She asked if someone had that information at this point. Number 352 RAGA ELIM said the administration has convened a cabinet- level group, chaired by Shelby Stastny, which is looking into the situation. He stated the time frame was very tight because the problem requires legislation and the legislature is very busy. He indicated that their proposal would probably reach the legislature within two weeks. Number 362 SENATOR LITTLE expressed her concern, as she had just administered a Coastal Management Plan. She indicated that she saw the value of the Coastal Zone Management Program, but was very frustrated at the borough level, seeing the lack of detail coming out of the borough in their consistency determination, and also seeing the state depending upon the local entities' consistency determination as support for their consistency determination. She would hate to see the Coastal Management Planning Process gutted to make development happen more easily. She thought that the Coastal Management Planning Process, if done well, is a process that works well. She stated that although the process will never identify all of the conceivable problem areas, she does believe it can identify some areas that should not be in a lease sale. She said to that extent, she agreed with Judge Cranston that the planning process was not followed. She believes if the Coastal Management Planning Process had been done thoroughly, the findings from the court may have been different. She said it was a concern of hers that the process not be gutted, because she believes that it does serve a good purpose. Number 404 REPRESENTATIVE SANDERS stated that he only heard the first reason why the state lost the lawsuit and he would like to hear the other two. Number 410 JAMES EASON (via Anchorage) stated, the first issue was that under the regulations implementing the Coastal Management Act, there is a hierarchy or a prioritization of activity types that is presumed. He said the activity types are those that are dependent on water, those that are related to water, and those that are neither dependent nor related to water. He mentioned that when projects are proposed in the coastal zone there needs to be a determination as to whether they are water dependent, water related, or neither. He stated the hierarchy is designed so that if you have a water related activity that is competing with a water dependent activity, water dependent activity is presumed to deserve deference. He said in the Lease Sale 78 case, Judge Cranston indicated he could not tell whether or not offshore oil and gas leasing and development was water dependent or water related. He said the state believes the document does make clear that in certain cases offshore leasing and offshore development is water dependent. He stated that as a practical matter, anyone who looks out on the Cook Inlet has to recognize that in some cases where those platforms are located, those are water dependent activities in the coastal zone. He said that Judge Cranston determined it was not clear from the record whether the activities related to Lease Sale 78 were water dependent or not; therefore, the judge was not clear on whether it deserved priority over fishing and other activities that are water dependent in the coastal zone. MR. EASON said the second basis was the judge quoted one sentence from the state's findings and consistency determination and claimed that was all the state had said about the benefits of oil and gas leasing, in general. Mr. Eason said that was incorrect and there was considerably more in the record that dealt with that issue, but measured upon the judge's belief that there was one sentence dealing with the issue, the judge said the state had not demonstrated there was a significant public benefit from offshore oil and gas leasing. MR. EASON stated those two issues, coupled with the determination that in order to be consistent with the plan, the state has to know what is going to happen later to be sure that the mitigating measures that are selected are appropriate, are the three basis for the decision. Number 455 REPRESENTATIVE PETE KOTT asked, if this decision is upheld by the supreme court, what would the effect be of that decision on the state's leasing program. Number 460 JAMES EASON (via Anchorage) stated he was speaking on his own behalf and the commissioner may or may not have a different view. He said the state has two separate lines of decisions that have come in on the issue of whether or not one needs to know what will happen in the development stage before one can be sure that the consistency determination is correct. He stated that the Alaska Supreme Court decision from Goodnews Bay, as well as Lease Sale 55, presumes that one needs to know what is going to happen in order to make a best interest claim. He said the state finds itself in a strange position because Judge Cranston seems to have rejected the supreme court's recent declaration and has ruled that is not the case in the best interest claim, but it is the case on a consistency determination side. He said that it was his belief that under the current law the state cannot, since they cannot predict the future, draft a best interest finding or a consistency determination that will pass the Alaska Supreme Court, possibly the superior court's approval. He stated that if that is correct, it means the state cannot hold a lease sale that will survive a legal challenge, presuming anyone wants to challenge it. Number 494 REPRESENTATIVE NAVARRE asked what the current status of the appeal was, how soon would the court take it up, and what does the decision do specifically to Lease Sale 78 and the time line that it is on. Number 501 KYLE PARKER said the Department of Law is planning to file in Alaska Supreme Court a Petition for Review of Judge Cranston's decision on January 28, 1994. Number 505 BARBARA FULLMER, ASSISTANT ATTORNEY GENERAL (via Anchorage) stated that was correct. Number 506 KYLE PARKER stated there is no time line for the supreme court. He said the state has requested expedited consideration of their Petition for Review, so the state can better understand what is going to happen with Lease Sale 78. He said that because the Division of Oil & Gas must hold the lease sale within 90 days of the quarter in which it was scheduled, the drop dead date for the lease sale is June 29, 1994. He indicated that if Judge Cranston's decision to stay the lease sale has not been overturned by that date, the lease sale will have to go back on the five year plan. Number 522 CHAIRMAN GREEN said it was his understanding that DNR received a fairly significant number of bids on Lease Sale 78, and the state is holding these until the June 29 drop dead date. Number 526 KYLE PARKER indicated that was the case, but Jim Eason could address the situation further. Number 529 JAMES EASON (via Anchorage) said on the morning of the sale, the state announced the bidders had two options. The first was that all of the bidders were free to pick up their unopened bids. The second was that the bidders could leave their unopened bids sealed in the state's custody until the court made its decision, so if the bidders wanted to take the opportunity to preserve whatever rights they may have had if the sale had been able to happen that day, the state was willing to hold those bids as long as they could, which under the law is June 29. He stated that if the sale is not held by June 29, the state cannot hold the sale. He said presently those unopened bids are in the Division of Oil & Gas's custody, and as a matter of law, he cannot describe or tell the committee who the bidders were. He added the sale did have some significant interest and that approximately one-third of the tracks received bids. Number 554 CHAIRMAN GREEN said his purpose for stating that, was to confirm that procedurally the state would be ready to continue with the sale up until June 29, if it gets a favorable ruling from the court. Number 556 JAMES EASON said that was correct. Number 558 REPRESENTATIVE NAVARRE asked about the likelihood of the supreme court taking the case on an expedited basis in light of the June 29 date. Number 563 KYLE PARKER said he would not presume to guess. Number 566 REPRESENTATIVE NAVARRE stated one of his concerns is the injunction is ordered on the last day before the lease sale and it throws the sale into a legal system which is not very expeditious, and so the net result is that it delays the whole lease process for a significant period of time. He did not think that it was in the state's interest and the issue might be something that the legislature wants to look at, particularly with regard to the statutory 90-day time line. Number 585 CHAIRMAN GREEN said he had been told that should this issue go until June 30, the state goes back to ground zero and it will be at least two years, maybe more, before this location can come back up again. NUMBER 590 RAGA ELIM said the Governor's office shares Representative Navarre's concerns. He stated that last year when the state faced this situation with respect to the Camden Bay Lease Sale, one of the statutory changes that the Governor's office proposed was dropping the 90-day drop dead date off of Title 38. He indicated the Governor's office will be coming back to the legislature with the same proposal. Number 607 REPRESENTATIVE SANDERS stated he did not mean in any way to encourage the oil companies involved to do anything like the following, but as more of a warning to the people who encourage this type of legal action. He said, if he were an oil company in Alaska today and he had all of his money in a computer the way the oil companies do, he would have it transferred and he would not be available to bid this sale when it comes up. CHAIRMAN GREEN stated as a member of the Federal Energy Council of States, he has been informed that Latin America is ready for investment dollars. He said it is not in a risk mode, it is a guarantee that they need significant sums of money to process gas that is currently ready and available. He added it is only one of several areas in the world looking for that kind of capital. He said Representative Sanders made a very good point that industry may start to look elsewhere. Number 633 SENATOR LITTLE said she wanted to clarify with the Governor's office that there might be some legislation coming forward within two to three weeks. Number 639 RAGA ELIM said that was correct. He said the resource agencies have gathered together once and will be getting together again when Shelby Stastny returns to Juneau to try to craft some possible legislation that they could work with the legislature on. Number 645 SENATOR LITTLE said she would like to be involved in that process and wanted to be kept informed of those meetings. Number 648 RAGA ELIM said it was still a little early. He stated the Governor's office has asked the agencies to work on the issue, but the feeling is that once they have a sense of what they want to do, they would be coming to the legislature, not necessarily with a bill, but to have discussions on how to proceed. Number 654 CHAIRMAN GREEN stated that with the members of the Oil & Gas Committee's indulgence, he had volunteered the committee's services. Number 657 REPRESENTATIVE JOE SITTON said he would like to give a friendly reminder to the oil companies that while Latin America might be appealing, they should also remember the state in Latin America frequently seizes the property of oil companies and other companies, and they should put that into the equation as well. Number 664 CHAIRMAN GREEN agreed and stated that what they are doing is decentralizing and privatizing. Number 666 REPRESENTATIVE NAVARRE stated he hoped that the oil companies will bid when the lease sale does become available. He said the Cook Inlet area was where oil was first developed in the state and the state has had a longstanding cooperative working relationship between the oil industry and fishing interests. He indicated he has worked in the oil industry, as a commercial fisherman, and he is still a sport fisherman. He stated there needs to be an attempt towards more cooperation. He thinks that the members of the Oil & Gas Committee, and everybody in the state, recognized the value of the oil industry to Alaska and that the oil industry also recognized the value of Alaska to the oil industry. He thinks the state needs to encourage further development and hopefully, the legislature can do that with some changes in the law, as well as with the protections that need to remain in law. Number 684 CHAIRMAN GREEN agreed with Representative Navarre, and stated that Alaska does owe its livelihood to the oil industry, because the discovery at Swanson River was one of the major issues in whether or not Alaska became a state, because that ushered in the era that Alaskans would then be able to pay their own bills. Number 702 CHAIRMAN GREEN adjourned the meeting at 1:20 p.m.