HOUSE RESOURCES STANDING COMMITTEE January 24, 1994 8:00 a.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative Bill Hudson, Vice-Chairman Representative Con Bunde Representative Pat Carney Representative John Davies Representative Joe Green Representative Eldon Mulder Representative David Finkelstein MEMBERS ABSENT Representative Jeannette James COMMITTEE CALENDAR Confirmation: Harry Noah as Commissioner of the Department of Natural Resources ALL COMMITTEE MEMBERS PRESENT VOTED "DO RECOMMEND" WITNESS REGISTER HARRY NOAH, Commissioner Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1724 Phone: 465-2400 Position Statement: Provided information and answered questions related to his confirmation ACTION NARRATIVE TAPE 94-3, SIDE A Number 000 The House Resources Committee was called to order by CHAIRMAN BILL WILLIAMS at 8:10 a.m. Members present at the call to order were Representatives Williams, Bunde, Carney, Davies, Finkelstein and Green. Members absent were Representatives Hudson, James and Mulder. CHAIRMAN WILLIAMS stated the purpose of the meeting was to consider confirmation of the appointment of HARRY NOAH, Commissioner of the Department of Natural Resources and report back to the House on the committee's recommendation. Number 026 HARRY NOAH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES (DNR) told committee members he did not have a prepared speech, but rather hoped to answer member's questions. He reviewed his background contained in his resume (on file), including his many positions held. Number 063 COMMISSIONER NOAH said he began his present job as Commissioner of DNR July 1, 1993, and at that time, he reviewed the department as it existed, noting he was the sixth commissioner in seven years. He felt the constant changes had destabilized the agency to the point where the department was becoming counterproductive. COMMISSIONER NOAH explained his job initially involved calming people down, getting them focused on performing their job and providing support. He noted there was a real need to take care of DNR's business, including all of the transactions the department has to undergo to allow people in the state to do what they want to do. He stressed that DNR's ability to move things along in an efficient and calm manner is very important to the state's economy. Number 112 REPRESENTATIVE JOHN DAVIES asked COMMISSIONER NOAH to comment on the regulatory aspect of the Forest Practices Act and the issue of large scale versus small scale utilization of the Tanana Valley Forest. COMMISSIONER NOAH remarked in the Fairbanks area, the potential to diversify the economy is an important aspect to consider, and felt there is a tremendous resource existing in the Tanana Valley State Forest. He stated there has been a large scale timber sale proposed and the first step is to inventory what is currently there. He said based on the information found, sound decisions will be made on moving forward with the timber sale. COMMISSIONER NOAH continued that DNR is looking for a value added facility which might be located in Fairbanks, and noted the actual scale of the facility is yet to be determined. He said the determination will be based on economics, not wishes and desires. He mentioned there are many interests involved and part of DNR's job is to work within the system to achieve the value added facility. Number 149 (CHAIRMAN WILLIAMS noted for the record REPRESENTATIVES MULDER and HUDSON arrived at 8:20 a.m.) REPRESENTATIVE JOE GREEN asked COMMISSIONER NOAH to remark on his position in regard to the spruce bark beetle kill area. COMMISSIONER NOAH responded most of the kill area is located in the Kenai area, and mentioned there is a five year timber schedule, proposing an increase in logging activity on the Kenai Peninsula. He said the state has approximately 100,000 acres on the Kenai Peninsula, representing about 19 percent of the land there, so the state really is not the major player. COMMISSIONER NOAH explained the intent for the Kenai Peninsula is to put up a group of small sales, plus a couple of large sales, allowing the state to take value out of the dying trees. He stressed it also gives the state the opportunity to become more aggressive with the reforestation program along the Kenai, but added there are concerns relating to timber harvest there. He said it is important for DNR to listen to all sides in regard to resource management of the state, but also be in a position where the department can best utilize the resources which are the basis of the state's income. Number 200 REPRESENTATIVE GREEN believed the length of time a dead tree still has value is approximately five years, and questioned whether small sales will utilize enough of the timber to make it worthwhile. COMMISSIONER NOAH replied there is a concern, but advised there are legal constraints. He stressed with a four to five year timber sale, the court may not see it as a true emergency. He felt if the resource is going to be harvested, there must be an opportunity to do it. Number 222 REPRESENTATIVE DAVIES mentioned a past legislative audit which criticized the way in which forests are managed within the state, and he expressed concern that on every sale, the state only receives about 10 cents on every dollar spent managing the forest. He asked COMMISSIONER NOAH if there are any proposed increased fees, increased requirements for the industry due to reforestation, etc. COMMISSIONER NOAH responded that DNR looks at the return to the state and noted that state income is always measured relative to oil. He stated jobs created through the timber harvest, logging activities and value added are equally important. COMMISSIONER NOAH felt that with many of the other resource uses, the margins are much more narrow and there is a need to be careful. The state's share may increase, but ultimately, it may affect the state's ability to provide jobs in the economy. He stated he would not propose increasing fees at this time. Number 251 REPRESENTATIVE CON BUNDE asked COMMISSIONER NOAH to comment on the relationship between the current administration and the environmental community and with that relationship in mind, to remark on the role of DNR in the next 5-15 years. COMMISSIONER NOAH felt that as long as everyone is in court, the tasks cannot be accomplished. He stressed DNR does not work for industry nor the environmental community, but rather for the majority of the people in the state, and in trying to achieve that goal, DNR has to take the role of project manager, listening to all sides of an issue and attempting to get a consensus. COMMISSIONER NOAH said if DNR becomes lost in a maze and does not focus on having the state's resources available for lease and getting them on the market, the overall economy of the state will be hurt. Number 301 REPRESENTATIVE BUNDE asked COMMISSIONER NOAH to comment on long-term goals for resource development in the state. COMMISSIONER NOAH stated the central focus of the department will need to remain in oil and gas because of the fundamental revenues coming from that industry. He pointed out the opportunities have tended to be very large opportunities such as big mills, big gas and oil companies, etc. He said he would like to see the state take a more proactive role in bringing development to the state and not just focus on large opportunities. Number 350 REPRESENTATIVE GREEN asked COMMISSIONER NOAH if he believed there will be a continuation of every lease sale having potential litigation and if so, did he have any thoughts on how to avoid that happening. COMMISSIONER NOAH explained that for many years the state prepared best interest findings, but when it was time to get actual specifics, it was said the information will be obtained at the time of development and upon approval of operation. He said within the last eight months, the courts have become more active, saying any analysis should be completed before a lease sale takes place. However, he felt that created a problem, as the courts are pushing the state toward an Environmental Impact Statement (EIS) or National Environmental Policy Act (NEPA) process at the federal level, causing financial concerns in achieving that goal. COMMISSIONER NOAH stressed if the state follows what the courts say, the state will go from three or four oil and gas lease sales annually to possibly one. He said recently the Supreme Court handed down a finding on Goodnews Bay, which said the best interest finding was not detailed enough and an EIS was needed. He stressed the legislature approved the two-step process, yet the courts are saying do it in a different way. He said DNR is currently reviewing options to suggest to the legislature. Number 410 REPRESENTATIVE BILL HUDSON complimented COMMISSIONER NOAH on the manner in which he assumed the job. He said there is no doubt about the importance of managing the state's natural resources. He expressed concern regarding in-house resources, and asked COMMISISONER NOAH if his human resources, technological assets and legal assets are adequate to get the job done, and wondered what the implications would be if the legislature cut DNR's budget by ten percent. COMMISSIONER NOAH responded if DNR's budget was cut by ten percent, he would explain the cause and effects associated with the cut. He stressed DNR is beginning to struggle with what is statutorily being dealt with and the demands being placed on DNR. He felt, however, that DNR can manage if priorities are set and energies are focused. Number 472 REPRESENTATIVE DAVIES requested COMMISSIONER NOAH to comment on the Mental Health Lands Trust issue. COMMISSIONER NOAH replied the Mental Health Lands Trust issue is top priority, and stressed a tremendous amount of energy has been put forth on the issue. He said currently DNR is trying to understand the range of concerns existing with various groups, and noted the various groups include the settling plaintiffs, the dissenting plaintiffs, the resource groups, environmental groups, municipalities, and small land owners. COMMISSIONER NOAH stated DNR is attempting to determine a strategy to bring the different groups to consensus. He said in many instances the different groups have each other blocked. He mentioned negotiations are currently ongoing. REPRESENTATIVE DAVIES asked COMMISSIONER NOAH to comment on the Judge Green decision. Number 530 COMMISSIONER NOAH felt the decision was helpful and said Judge Green assembled a very well-reasoned analysis of the current status of the settlement. He explained it was her opinion that the settlement was not a vehicle for full funding of the mental health program, but rather the curing of a breach and not a full funding situation. The plaintiffs would receive equal to or greater compensation out of Chapter 66 than what would have been expected if the case was taken to court for final resolution. COMMISSIONER NOAH stated Judge Green expressed concern about a straight revenue type option, as the security needed was not there. He thought what was most important is she said this was in the range of options which could be approved. He stressed that statement, along with a number of other decisions, has laid the groundwork for DNR to develop a potential package which might be brought back to the legislature. COMMISSIONER NOAH stressed Chapter 66 in itself was not a settlement, but was a process to arrive at a settlement. He said the key question remains what the expectations of the plaintiffs are. Number 576 REPRESENTATIVE GREEN said there have been strong statements from the dissentient plaintiffs between settling and not settling and inquired following Chapter 66, if an exchange of land not requiring a cash settlement is possible. COMMISSIONER NOAH replied a land based settlement is complicated and any land that has value, someone else is usually interested in it. He said cash is not an option, due to the current budget situation. REPRESENTATIVE HUDSON stated the Governor has outlined two major solutions to the future of the state, and noted one of them is elimination of the oil export ban and the other is trying to market the state's natural gas. He asked how DNR is involved in the proposed solutions. Number 633 COMMISSIONER NOAH responded the major involvement on the oil export ban is through the Department of Law. He said he is involved in the natural gas pipeline issue, and explained the current market and why there is an opportunity for the state. He said that in December he traveled to Asia and Korea to speak directly to natural gas buyers. He advised it is clear that in the period 2000-2005, there will be a shortfall of liquid natural gas (LNG) in the Asian market of about 28 million tons per year. COMMISSIONER NOAH stressed two occurrences are happening in those countries he visited. One, an economic upgrading is occurring in that electric appliances not previously used are increasingly being used, resulting in a bigger demand for electricity. He said the second happening is the gas fields in Indonesia are being depleted much more rapidly than anticipated, and by the year 2003-2004 there will be a shortfall of LNG of 11 million tons per year. To put it in perspective, COMMISSIONER NOAH mentioned an Alaskan project currently proposed is about 14 million tons per year. COMMISSIONER NOAH stated all of the major LNG buyers said they are prepared to accept a proposal from Alaska and begin discussions. He pointed out there are four major projects in the world: The Alaskan project, Sakhalin, Nutana and Quatar II. He felt the Sakhalin is the most logical project for Asia, but the political unrest there is totally unacceptable to the Japanese. He explained that most LNG projects are developed on a 25-year contract and political stability is of great importance to buyers. TAPE 94-3, SIDE B Number 000 COMMISSIONER NOAH said the Nutana Island project has a few technical problems. For example, on the North Slope, the CO2 is taken out of the gas before it is shipped, and in Nutana Island, the gas is taken out of the CO2. He stated there is also a concern relating to the costs associated with that project, which may be higher than an Alaskan project. He remarked the Nutana Island project is not as developed as the North Slope project. COMMISSIONER NOAH stated although Quatar II is a lower cost project, there is a political stability question associated with that project. He said the Japanese are willing to trade off the analysis of political stability with the cost associated with the project. He noted the major oil companies, Arco, Exxon and BP are looking for ways to reduce capital costs associated with a project to make it more competitive. COMMISSIONER NOAH stressed Alaska has an opportunity in a very competitive world and should not let the opportunity pass by. He pointed out that in order to achieve a project in 2002, the majors would have to begin this summer. He explained there are two issues which still need to be dealt with. The delivery cost of gas is one. The second issue is that although there is a shortfall of gas happening, the largest LNG project in the world is being fitted into a market place which goes up in steps, so fitting the two together is difficult. He added that dealing with four countries, United States, Japan, Korea and Taiwan is also difficult. He concluded the Governor believes there is an opportunity for the state and every effort has to be put forth to make it happen. Number 037 REPRESENTATIVE HUDSON inquired how the Office of International Trade is involved with the LNG project. COMMISSIONER NOAH responded that Max Hodel is very much accepted by the Japanese and if the project is to move along, it will take a coordinated effort, both in Alaska and Japan. He said the state needs to be aware of what is happening in the Japanese and Asian markets, and cannot just listen to the major oil companies. REPRESENTATIVE HUDSON noted in prior discussions, the major oil companies have told members that gas is needed for the extraction of all of the oil. He remarked if oil companies are looking at a scaled use basis, they will need to work together to determine how exporting gas will impact the production of oil. Number 058 COMMISSIONER NOAH replied that is correct and added that the state also needs to consider the impact. He stated there may be a trade off between the economic potential of the project and potential loss, but pointed out the loss will be realized over a long period of time. He mentioned it is not just the sale of gas, but stressed there are also other economic benefits to the state. REPRESENTATIVE BUNDE inquired what the proposed time frame for an additional LNG plant in Alaska is. COMMISSIONER NOAH responded the time period would be 2001- 2005 and pointed out there will be five to six years of construction and a minimum of three years of engineering and permitting. He said a large lead time is needed to accomplish the project. REPRESENTATIVE BUNDE asked if the overall plan still includes the additional plant in Valdez. COMMISSIONER NOAH replied currently the proposal includes the Valdez plant. Number 105 REPRESENTATIVE GREEN said he heard that negotiations will be needed if the LNG project is going to happen, and asked what kind of impact the project will have on the people at DNR. COMMISSIONER NOAH stated the involvement of the Division of Oil and Gas in the LNG project is minimal, as that division has a heavy workload at this time, and this project is a potential project not an existing one. He said people from the pipeline coordinators office, who are more familiar with the up-front requirements, are involved. Number 150 REPRESENTATIVE GREEN asked COMMISSIONER NOAH to comment on the relationship between DNR and the Oil and Gas Conservation Commission. COMMISSIONER NOAH responded the relationship is in an awkward position currently. He stated the Commission is a group housed under DNR only for administrative purposes, and noted there is merit in them not being housed under DNR. He added that the Commission is an independent group, and there does not need to be a perceived conflict between their funding coming through DNR and the role they have to play. Number 193 REPRESENTATIVE DAVID FINKELSTEIN noted COMMISSIONER NOAH had served as a consultant to a variety of companies and asked if there are any which he has remaining financial interests in. COMMISSIONER NOAH responded in each case he worked on a contract and stated that currently he has no financial ties to any of the companies. However, he said one of his more recent projects was the Fairbanks gold project and when he took his current position, he delegated his authority to the Deputy Commissioner on that project. REPRESENTATIVE GREEN recalled from a trip to the Kenai River last year, there was a conflict between private land owners efforts to abate the erosion problem and the Department of Parks, and asked COMMISSIONER NOAH to comment on whether the Department of Parks is attempting to do something to abate the erosion and if not, are they impeding private owners efforts. COMMISSIONER NOAH asked Representative Green if he was referring to a specific state park. REPRESENTATIVE GREEN responded he was near the state park, but also traveled along other areas of the river. COMMISSIONER NOAH stated there is a specific area where the river takes a big bend and borders the state park. He said the Department of Parks is not impeding private land owners' attempts to abate the erosion, but are looking for ways to reduce erosion in the particular area mentioned. He noted the Department of Parks is attempting to find ways to spread people out along the river. Number 265 REPRESENTATIVE ELDON MULDER mentioned a recent study emphasizes the fact that whether there are fish or not, the fishermen will be there and additional controlled access points need to be provided. He asked COMMISSIONER NOAH if he supports determining and developing new access points. COMMISSIONER NOAH replied he does support new access points, but stressed they will cost money and funding at this point is difficult. REPRESENTATIVE MULDER pointed out that last year, $3 million from Exxon settlement funds was put through the budget for habitat restoration and enhancement along the Kenai River. Number 298 COMMISSIONER NOAH said there is a need to think about the general Prince William Sound area and the land which might be purchased. He explained 60 percent of all of the habitat along the Kenai River is located in a very narrow band, and focusing on those areas and buying those properties makes good sense. REPRESENTATIVE GREEN commented Alaska has a tremendous coal resource and asked if DNR is considering the easing of restrictions to make lands with coal reserves available. COMMISSIONER NOAH responded easing restrictions should not be considered. He felt coal is market driven and there may be an opportunity to sell coal to Asia. However, coal is not the same as natural gas because of the environmental aspects of LNG. He added if there is an indication the market has changed, DNR will put a senior project manager in place and make an effort to market Alaska coal. REPRESENTATIVE GREEN mentioned Alaska's coal is unique in that it is extremely low in sulphur and environmentally friendly. Number 375 REPRESENTATIVE HUDSON pointed out that over the years there has been an effort to determine ways to lessen the pressure on the Kenai and Russian Rivers, and at the same time provide greater outlet for sports fishermen. He said there was also a discussion of developing a road on the other side of the river. He asked if the administration is examining these type of expansions. COMMISSIONER NOAH replied in terms of transportation issues, the Department of Transportation would need to answer questions. Number 397 REPRESENTATIVE HUDSON MOVED to confirm the appointment of HARRY NOAH as Commissioner of the Department of Natural Resources with individual recommendations. CHAIRMAN WILLIAMS asked if there were any objections. Hearing none, the MOTION PASSED. CHAIRMAN WILLIAMS thanked COMMISSIONER NOAH for his presentation and stated he was looking forward to working with him. ANNOUNCEMENTS CHAIRMAN WILLIAMS announced the committee will meet on Wednesday, January 26, 1994 at 8:00 a.m. to hear HJR 49 regarding federal regulations under the Oil Pollution Act of 1990. ADJOURNMENT There being no further business to come before the House Resources Committee, CHAIRMAN WILLIAMS adjourned the meeting at 9:20 a.m.