HOUSE RESOURCES STANDING COMMITTEE March 24, 1995 8:05 a.m. MEMBERS PRESENT Representative Joe Green, Co-Chairman Representative Bill Williams, Co-Chairman Representative Scott Ogan, Vice Chairman Representative Alan Austerman Representative Ramona Barnes Representative John Davies Representative Pete Kott MEMBERS ABSENT Representative Irene Nicholia Representative Eileen MacLean COMMITTEE CALENDAR HB 207: "An Act relating to adjustments to royalty reserved to the state to encourage otherwise uneconomic production of oil and gas; relating to the depositing of royalties and royalty sale proceeds in the Alaska permanent fund; and providing for an effective date." HEARD AND HELD WITNESS REGISTER JOHN SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Ave. Juneau, AK 99801 Phone: 465-2400 POSITION STATEMENT: Commented on HB 207 REPRESENTATIVE NORMAN ROKEBERG Alaska State Legislature State Capitol, Room 110 Juneau, AK 99801 Phone: 465-4968 POSITION STATEMENT: Provided overview on CSHB 207(O&G) and answered questions TIMOTHY WAGNER P.O. Box 100078 Fairbanks, AK 99510 Phone: 248-0597 POSITION STATEMENT: Provided information on an invention RICHARD FINEBERG, Representative Research Associates P.O. Box 416 Ester, AK 99725 Phone: 479-7778 POSITION STATEMENT: Voiced concerns regarding HB 207 PREVIOUS ACTION BILL: HB 207 SHORT TITLE: ADJUSTMENTS TO OIL AND GAS ROYALTIES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 02/27/95 501 (H) READ THE FIRST TIME - REFERRAL(S) 02/27/95 501 (H) OIL & GAS, RESOURCES, FINANCE 02/27/95 501 (H) FISCAL NOTE (DNR) 02/27/95 501 (H) 2 ZERO FISCAL NOTES (DNR, REV) 02/27/95 501 (H) GOVERNOR'S TRANSMITTAL LETTER 03/08/95 665 (H) CORRECTED FISCAL NOTE (DNR) 03/09/95 (H) O&G AT 12:00 PM CAPITOL 17 03/09/95 (H) MINUTE(O&G) 03/14/95 (H) O&G AT 10:00 AM CAPITOL 124 03/14/95 (H) MINUTE(O&G) 03/15/95 (H) O&G AT 05:00 PM BELTZ ROOM 211 03/15/95 (H) MINUTE(O&G) 03/16/95 (H) O&G AT 10:00 AM CAPITOL 124 03/16/95 (H) MINUTE(O&G) 03/17/95 (H) O&G AT 05:00 PM CAPITOL 124 03/17/95 (H) MINUTE(O&G) 03/20/95 (H) O&G AT 05:00 PM CAPITOL 106 03/21/95 (H) O&G AT 10:00 AM CAPITOL 124 03/22/95 848 (H) O&G RPT CS(O&G) NT 4DP 1NR 2AM 03/22/95 849 (H) DP: OGAN,BRICE,ROKEBERG,B.DAVIS 03/22/95 849 (H) NR: G.DAVIS 03/22/95 849 (H) AM: WILLIAMS, FINKELSTEIN 03/22/95 849 (H) 0&G LETTER OF INTENT 03/22/95 849 (H) INDETERMINATE FISCAL NOTE (REV) 03/22/95 850 (H) FISCAL NOTE (DNR) 3/8/95 03/22/95 850 (H) ZERO FISCAL NOTE (REV) 2/27/95 03/22/95 850 (H) REFERRED TO RESOURCES 03/22/95 (H) RES AT 08:00 AM CAPITOL 124 03/22/95 (H) MINUTE(RES) 03/24/95 (H) RES AT 08:00 AM CAPITOL 124 ACTION NARRATIVE TAPE 95-39, SIDE A Number 000 The House Resources Committee was called to order by Co-Chairman Green at 8:05 a.m. Members present at the call to order were Representatives Green, Ogan, Austerman, Davies and Kott. Members absent were Representatives Williams, Barnes, MacLean and Nicholia. CO-CHAIRMAN JOE GREEN announced the committee would hear HB 207. He said it was not his intent to move the bill today, but rather have the committee become familiar with the bill. HRES - 03/24/95 HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES (DNR), testified via teleconference and stated the Governor has tried to develop the impression with the oil industry and others that Alaska is a good place to do business, because there are some people who do not believe that. He said the Administration believes there are a number of things which can be done, both in the state's best interest and in the oil industry's best interest, to help encourage greater oil development. He noted part of that may be done now but the bulk of that will be done through the study the Governor's Oil and Gas Policy Council will be conducting over the next several months. MR. SHIVELY said in discussing with industry the changes which might be done immediately, it was felt that amending the existing law which allows royalty reductions, to increase the flexibility, particularly to add marginal fields, and to allow a system where the commissioner could make a reasonable determination is something which could be done this year. He stated the Administration worked with industry to develop the original draft. The Administration then worked with Chairman Norman Rokeberg, Oil and Gas Committee (OGC), to come up with the committee substitute (CS). He complimented Representative Rokeberg on his excellent work on a very complex piece of legislation. He added, although the department would like to make a few changes to the OGC CS, he felt the OGC did a lot of work. MR. SHIVELY stated the Administration wanted certain principles in the legislation. The driving force was to allow the department to reduce royalties for marginal fields. The Administration did not believe that was allowed under current law. He noted the department could allow royalty reductions on shut-in fields or fields which were about to be abandoned but not for marginal fields. Therefore, the three were combined in HB 207. He explained another concept desired, was having the ability to get an expeditious decision, so a larger discretion was left in the hands of the commissioner. That issue has generated a lot of discussion. He thought the OGC ultimately decided there should be some review by the Alaska Royalty Oil and Gas Development Advisory Board (AROGDAB). MR. SHIVELY stated the third principle important to the Administration was that the state maintain some income from the royalty reductions. Current law allows the commissioner to go down to a zero royalty for shut-in or abandoned fields. The current CS keeps that principle but has a floor for marginal fields. He said the Administration had a slightly different approach, felt there should be some floor for all three situations and agreed to go to 25 percent of the existing royalties. Number 117 REPRESENTATIVE JOHN DAVIES recalled Mr. Shively had mentioned there were some changes the department would like to see in CSHB 207(O&G). He wondered if the department had those changes in the form of proposed amendments. MR. SHIVELY stated he did not have actual language to propose. He noted he is working off the Oil and Gas CS. He said the main desire of the Administration is a floor, which is contained on page 2, lines 30 and 31, and confines the royalty reduction to only section (1)(A), which is marginal fields. The Administration would recommend deleting the words "under (1)(A) of this subsection". He added the Administration felt the language on page 2, lines 16-29 was too cumbersome. MR. SHIVELY said the Administration did not agree with the concept of oversight by the AROGDAB. He stated the Administration felt the discretion should remain with the commissioner. He noted the OGC looked at several options. The OGC looked at oversight by the Attorney General's office, the Alaska Oil and Gas Conservation Commission (AOGCC), and the AROGDAB. He said the committee finally chose the AROGDAB. MR. SHIVELY stated there was intent language which the Co-Chairman was going to work on but he did not know what the final result was. He said many thought the intent language was much more restrictive than the law and would ultimately cause some problems. CO-CHAIRMAN GREEN asked Representative Rokeberg to overview HB 207. REPRESENTATIVE NORMAN ROKEBERG asked Mr. Shively if he had received the work draft CS, version K. MR. SHIVELY responded he had received the work draft CS but added he was working off CSHB 207(O&G) and his comments did not reflect the work draft CS. He said the Administration would like to also comment on the work draft CS at some point. Number 187 REPRESENTATIVE ROKEBERG explained the OGC made adjustments to the Governor's bill. He said the OGC removed the first section of the Governor's first draft of the bill which related to the hold harmless provision on the permanent fund. The rationale behind the deletion was that section would be a change in the law and the committee decided to keep the status quo. He noted the change in the law would have held a percentage of either 25 or 50 percent of the allocation to the permanent fund, as per the age of the leases. REPRESENTATIVE ROKEBERG explained that the OGC felt this section would have artificially set too high a floor on any type of sliding scale computation the commissioner may do. For example, leases made after 1980 would require a 50 percent floor. Therefore, the commissioner's hands would be tied, particularly in regard to older fields. For example, on a typical 12.5 percent royalty, if the commissioner decided to set it at 8 percent, that would allocate 6.25 percent to the permanent fund and only 1.75 percent to the general fund. Conceivably, the point could be reached where nothing goes to the general fund and whatever is received would go to the permanent fund. He said the committee felt that in light of the concept behind HB 207, which is to open up fields that would not otherwise be opened, both the general fund and the permanent fund should benefit conceptually. Therefore, to maintain the status quo on the allocation was the proper method. He added he had discussed this issue with the Governor and commissioner and the general consensus was that is the best way to go. Number 270 REPRESENTATIVE ROKEBERG explained on page 1, the OGC decided to break out and define the different types of areas which might be looked at such as new fields, existing fields, and shut-in fields. The committee added language to more clearly define what field means like pool or portion of a field or pool. He said the committee also added the language about sufficiently delineating a field to the satisfaction of the commissioner. REPRESENTATIVE ROKEBERG said subsection (3) on page 2 provides that all components of the agreement would be made up-front in order to recognize the prudence of the contract between the applicant and the commissioner. He explained the OGC, in its draft of HB 207, mandated that the commissioner and the applicant bargain up-front for some provision to compensate for any increase or decrease in the price of oil. The committee then went on to say the commissioner would have the flexibility to consider other relevant factors and stipulated such factors as proved reserves, well productivity, or capital investment, just as a reminder to the commissioner that he should consider those factors. He noted there could be a list of 100 items. REPRESENTATIVE ROKEBERG added that testimony from industry indicated one of their concerns, particularly in older fields, is if they were to make substantial investments in their fields and there was a unilateral reopener by the commissioner, there might be a chilling effect on their desire to invest if an agreement was not bargained up-front. He stated that is why it was stipulated in the language that the agreements be made up-front. Therefore, the state's interest would be protected, as well as the applicant's interest, in terms of an investment. Number 314 REPRESENTATIVE ROKEBERG stated after significant testimony, the OGC decided to adopt a provision, page 2, line 30, that provided a floor of 25 percent on a new field and recognized current law as it relates to older fields. He said the current statute, AS 38.05.180(j), does not stipulate any type of a floor--it is wide open in terms of the commissioner's discretion. Therefore, particularly in light of the economics of older fields, the OGC felt it was necessary to give the commissioner maximum flexibility as it relates to those fields and zeroed it out. He stated the committee tried to make certain distinctions between old and new fields, recognizing the provisions of existing law, removing some of those obstacles, and then allowing the commissioner to move forward on both fronts. Number 338 REPRESENTATIVE ROKEBERG said on page 3, beginning at line 8, the OGC added a provision which went through a quick evolution and the resulting language did not come out very artfully. The committee took testimony from producers in older fields, where there had been transfers of ownership from one leaseholder to another of existing production. He noted there were instances and a case history where a royalty reduction application was denied because of the regulatory schemes in place under AS 38.05.180(j). He explained that statute requires the entire history of the field be provided to the commissioner and the director of the Division of Oil and Gas in reviewing the application. In this case, the leasehold had changed hands on two occasions and the historical data did not follow with the purchase and sales transactions through the course and history of that particular field. Therefore, the company shut down production in Cook Inlet because it could not receive the royalty reduction due to the fact it did not have the required data from the prior situation. REPRESENTATIVE ROKEBERG stated the OGC tried to put a provision in HB 207 which lessened the burden of the applicant in instances where that particular data was not available to them. He noted Co- Chairman Green had artfully redesigned this language in the new work draft CS. Number 373 REPRESENTATIVE ROKEBERG told committee members the OGC added provisions such as the one on page 3, line 14, that the findings would be written. He said the original bill the Governor brought forward contained a provision where the commissioner could retain a consultant to review the technical data provided by the applicant and the applicant would pay for that consultant. He noted the OGC had received significant testimony about the nature of that relationship. The OGC decided to set up a system whereas the commissioner would provide a list of consultants, the applicant could choose from that list, the applicant would pay for the consultant, the commissioner would define the scope of work and the consultant would work for the commissioner. REPRESENTATIVE ROKEBERG explained this system had an added beauty because it allowed the process to happen rapidly, due to the fact that it avoided going through the state's procurement code, by having the direct contract or relationship between the commissioner's office and the consultant, since the applicant was hiring the consultant. The OGC decided to set up this system because testimony indicated there may be instances where the applicant has a bad experience with a consultant because there was no list contained in the original bill. The OGC wanted to provide some veto power on the part of the applicant, who is paying for the consultant, to have some say over who is paid. He said in order to have a certain amount of flexibility and have some control by the commissioner, the commissioner would bring forward the list. He noted the OGC and the Administration came to an agreement on this clause which was a conceptual change from the Governor's bill. Number 411 REPRESENTATIVE ROKEBERG stated one of the more difficult tasks the committee had was trying to generate greater oversight for the protection of the public's interest in the discretionary power of the commissioner. He said during several of the committee's discussions, the committee primarily discussed inserting the AOGCC into the loop to provide a review of the process. Testimony indicated the need to theorize there is the "evil" commissioner. Therefore, some oversight has to be provided because as some of the testimony pointed out, it is possible to go on a continuum from skullduggery on one hand all the way over to a plain stupid decision. The OGC felt some additional oversight was needed. REPRESENTATIVE ROKEBERG stated the OGC discussed adding the Attorney General as one entity who could provide that oversight. He explained that concept was voted down. The general consensus was the Attorney General is already part of the loop and is advising the commissioner anyway, so actual oversight could not be provided. He said the OGC then discussed the AOGCC. The OGC felt the AOGCC would be an excellent organization to provide the oversight, particularly because later in the bill there is a provision of confidentiality. The company can ask that the technical and financial data they forward to the commissioner, as a part of the application, be kept confidential. He noted the AOGCC is accustomed to working with confidential data and its makeup is such that the people on the commission are familiar with the petroleum industry and make those judgements, plus they are there. REPRESENTATIVE ROKEBERG stated the OGC received testimony from the commissioner's office and several firms within the industry indicating there was a conflict of interest. He hoped the memorandum from the Division of Oil and Gas regarding an Attorney General's opinion was in committee members folders as it is something the committee needs to review. He said he still believes the AOGCC is the best oversight group available. However, because of the testimony received and his own lack of knowledge of the AOGCC and inability to overcome the arguments, the OGC inserted the AROGDAB, which consists of three public members and the commissioners of the Departments of Revenue (DOR), Commerce and DNR. He noted the OGC's vote was 4-3 to approve the AROGDAB as the oversight entity. He strongly urged the committee to review the oversight situation. He explained the OGC also changed the transmission of where the documents go by putting in the officers and noted the committee had Representative Gary Davis's bill, which they made a citation of. Number 477 REPRESENTATIVE ROKEBERG explained Section 2, page 4, provides for royalty reductions in cooperative or unitization areas, which is the same as the Governor's bill. REPRESENTATIVE ROKEBERG noted the OGC discussed the entire regulatory situation. He said there are existing regulations that do apply to AS 38.05.180(j). He explained the evidence suggests that the statutory language supersedes and negates some existing regulations, but rather than include a provision in HB 207 which says the commissioner should adopt additional regulations to implement, the OGC felt there is existing authority to move forward if necessary. He stated the existing regulations should be adequate, with the statutory overview, to enable the commissioner to proceed post-haste on any application he might receive. Therefore, the OGC was silent on that area. REPRESENTATIVE ROKEBERG said the other issue the OGC discussed at great length was the provision about appealability, which is contained on page 3, line 16. There was substantial testimony taken on what this provision means, particularly where it says "the commissioner's determination is final and not appealable to the court;". He stated one of the main reasons this provision is in HB 207 is due to the case of Conoco-Oxy, which was a protracted, long royalty reduction application which was litigated and consumed substantial resources on the part of the department and industry in trying to come to a conclusion. REPRESENTATIVE ROKEBERG explained the application by Conoco and Oxy was for Milne Point where they paid for a portion of the leases, which had a stipulated bid for 20 percent, down to a 5 percent basis. He noted the committee may have in their folders the case history, which points out substantial obstacles to applicants from a historical perspective. He pointed out the only reduction in royalties that has ever occurred in the state has been as a result of the Conoco-Oxy case. He explained Oxy was a very small lease holder and in the settlement of the case, there was an agreement to lower the royalty from 20 percent to 12.5 percent. He added Conoco did not receive any benefit from that. He pointed out after an $800 million investment, Conoco decided to leave the state and sold their interest to British Petroleum (BP) in that field. Number 525 REPRESENTATIVE ROKEBERG reiterated that line 16, page 3, states "the commissioner's determination is final and not appealable..." He said the OGC discussed putting the word "applicant" in to keep everyone from twisting in the wind and to give some finality in the process. He noted that is intended in the language. He said the OGC did not put the word "applicant" in the language because the committee felt if a competing company would maintain standing, because their interest was violated, they would be allowed to bring a cause of action. He pointed out that leads to the major point. What does this language really mean? Does it mean that a third party like a citizen or taxpayer of the state could bring action, under due process, to challenge this particular finding? REPRESENTATIVE ROKEBERG explained the general consensus is that the due process rights of the state's citizens are not hampered in this language. Anyone who can find standing, particularly under the Alaska State Constitution, could bring a cause of action against the commissioner for the finding under the state's body of law and this language is not going to necessarily restrict that. However, the courts may intentionally look at the standing of a particular person, given the way this language is drafted. REPRESENTATIVE ROKEBERG stated he reviewed the work draft CS and he strongly endorses most of the revisions made by Co-Chairman Green. He felt Co-Chairman Green has made the Oil and Gas CS a much better bill. He said there are three areas which he disagrees with but those can be discussed as they come up. CO-CHAIRMAN GREEN noted that Representative WILLIAMS had joined the committee shortly after the meeting began. Number 556 REPRESENTATIVE DAVIES recalled that Representative Rokeberg had talked about the other factors listed on page 2, lines 27-29, and had referred to those factors as a mandate. He noted the words prior to that language is "may consider." REPRESENTATIVE ROKEBERG stated on page 2, line 23, it says the "commissioner shall include provisions..." and then goes on to say "in the price of oil or gas, and may consider..." He said that is the distinction. REPRESENTATIVE DAVIES clarified the commissioner has to provide the provisions but they do not necessarily have to include those particular relevant factors. REPRESENTATIVE ROKEBERG said that is correct. He stated the OGC's intention was to mandate the commissioner to include the price...Co-Chairman Green has made changes to this section in the work draft CS. He noted this part of the bill is a major substantive distinction between the OGC CS and the work draft CS. REPRESENTATIVE DAVIES recalled that Representative Rokeberg had mentioned the desire of the OGC for the commissioner to not have the ability for a universal reopener. He clarified there is nothing in the language in CSHB 207(O&G) which precludes a negotiated contract that would have some specific kinds of reopeners. REPRESENTATIVE ROKEBERG said that is correct. He explained the language in CSHB 207(O&G) is somewhat different than the work draft CS. He stated the OGC's intention is that any reopeners should be bargained for up-front. He pointed out the desire is to have a clear understanding that the commissioner does not have a unilateral right to a reopener after the fact, unless he has bargained for that right, because a reopener has a chilling effect on the investment, particularly in older fields. Number 596 REPRESENTATIVE DAVIES recalled that Representative Rokeberg had talked about the appealability issue contained on page 3, lines 14- 17 and had mentioned the Conoco/BP situation at Milne Point. He wondered if Representative Rokeberg could finish that story. REPRESENTATIVE ROKEBERG responded that BP bought the lease and made substantial investments in that particular field. He said there are several horizons there and BP is having certain success there. He noted he had asked BP why they were making money in that area and Conoco did not. He also asked BP what they had paid for the lease, as that is the issue, and they would not tell him. He stated there are two obvious reasons BP is making money--BP does not have capital investment costs and BP, with their ownership of the Trans-Alaska Pipeline System (TAPS) and their existing infrastructure they have on the North Slope, operates on a different set of economics. REPRESENTATIVE DAVIES asked what royalty level BP is operating at. REPRESENTATIVE ROKEBERG said there are a number of different royalties there, from 20 percent down to 12.5 percent. He recommended that Representative Davies ask BP representatives the question. He noted that BP is operating, other than the small Oxy decrease, under the royalty regime in place when Conoco applied for a reduction on the royalty. Number 628 TIMOTHY WAGNER, INDEPENDENT INVENTOR, ANCHORAGE, testified via teleconference and stated in regard to the general development of oil fields, he has an oil recovery enhancement process which can not only increase the prolonged life of fields such as Prudhoe Bay, but would also make the harvesting of the crude (indiscernible). He said the process would involve greater costs than standard recovery methods but has the potential for doubling expected output in such fields as Prudhoe Bay. He explained his process is an oil refinery and gas (indiscernible) process, which combined with the oil recovery enhancement process, would make the total process quite efficient and reduce the overall construction costs, as compared to each process being billed separately. MR. WAGNER said this process, combined with his transportation system, would allow shipments of the product directly from Prudhoe Bay to anywhere in the world. He stated he is hoping to work with oil companies in an effort to develop the processes. He noted he also needs financial support which could potentially be provided by an agency such as the Alaska Industrial Development and Export Authority. He mentioned he does realize that financial support will require legislative approval but he is hoping there will be cooperation there. CO-CHAIRMAN GREEN wondered if Mr. Wagner's inventions will have an effect on HB 207. MR. WAGNER replied he just wants to point out what his inventions could do and wants the legislature to respond appropriately. TAPE 95-39, SIDE B Number 000 CO-CHAIRMAN GREEN said the committee wishes Mr. Wagner well and stressed if he can double output, they are very interested. RICHARD FINEBERG, RESEARCH ASSOCIATES, FAIRBANKS, testified via teleconference and stated the graphs, which the committee has before them, will demonstrate that the case for using the state's existing royalty relief provisions has yet to be made. He recalled that Commissioner Shively's argument earlier was that people have the impression Alaska is not a good place to do business. He said a lot more information on that subject is needed because if DNR's production forecast for 1985, 1990, and 1995 is reviewed, a clear trend becomes evident. The North Slope production decline, although real, consistently plays out in a much more benign manner than forecasted. MR. FINEBERG explained if the 1985 forecast is compared to the current forecast for oil to be produced from 1985 through the year 2010, it will be found that the state can anticipate production of 3.75 billion more barrels of oil through 2010 than what was forecasted in 1985. In other words, over the last ten years, the current tax and royalty regime has generated five more years of production of two million barrels per day than what was forecasted in 1985. He stated each two years the state booked one more year of forecasted production at TAPS maximum throughput. He said this trend of increasing production was established in the face of declining prices and appears to continue today, despite the dire predictions by the industry in the late 1980s that the state had seen the last of such increases. (Representative BARNES joined the committee.) Number 080 MR. FINEBERG stated he would like to comment on CSHB 207(O&G) and the work draft CS. He said both are correcting a bill that he believes is going in the wrong direction and for which a compelling case has not been made. He stressed if it is decided to go forward with the bill, he felt the substantive points do need consideration and he would like the opportunity to deal with those at the committee's pleasure. CO-CHAIRMAN GREEN reiterated it was not his intent to move HB 207 today but would take input. He wondered if Mr. Fineberg had a desire to raise specific points now. MR. FINEBERG responded he would. First, he would like to flag two items, in terms of the substance of the bill. He said the first point is the question of confidentiality. He felt the oversight problem is created by the fact that the normal checks and balances have been removed by granting confidentiality. He pointed out the courts have spoken on that issue. He noted that in the footnotes of the document before the committee, there is a reference to how one judge, who has dealt with more confidential information from the industry than any other, looks at that issue. He stated he did not understand the granting of confidentiality. MR. FINEBERG said in both the work draft CS and CSHB 207(O&G), there is a mandate for the commissioner to not consider pipeline economics in granting royalty relief. He felt if that course is taken, there is a presumption that Conoco departed because it did not get royalty relief, not because BP was making the profit that Conoco paid on the pipeline. He stated everyone might make that simple mistake when viewing the economic map. However, he assured the committee that the industry, whose representatives are beholden to stockholders, will not make that mistake. Number 162 CO-CHAIRMAN GREEN said granting confidentiality is in regard to technical data used, not in the negotiations between the commissioner and a royalty reduction applicant--those would be matters of public record. He stated those things which are presently held confidential would remain confidential. He assumed that on the pipeline reference, Mr. Fineberg was referring to Representative Rokeberg's discussion of why one company might be able to operate either more efficiently or at less cost than another company. He stressed that is not part of HB 207 but was by way of an explanation only. MR. FINEBERG stated he was referring to page 2, lines 27-29, in CSHB 207(O&G) or in the work draft, page 3, lines 10-12. He said that language says what the commissioner shall consider and excludes the impact, pro or con, of the pipeline part of the operation. He felt in regard to confidentiality, the bill looks to be further reaching in its granting of confidentiality, at the request of industry, without review, which means it is up to the industry to decide. He pointed out the language is broader than what might be desired. He thought some clarification is warranted. CO-CHAIRMAN GREEN said there was no intent in the work draft CS to alter the list. He stated the list was intended to give the kinds of things...as it says may consider other relevant factors. He stressed if he had inadvertently omitted something, it was an oversight and not his intention. Number 208 REPRESENTATIVE ROKEBERG recalled that Mr. Fineberg had referred to a judge's opinion on confidentiality. He wondered if that opinion was referred to in testimony provided to the OGC. MR. FINEBERG responded that opinion was contained in the footnotes of his testimony to the OGC dated March 15, 1995. He said it was footnote 5, on page 2 of that testimony. He noted the footnote is compacted in the March 23, 1995, testimony before this committee. He stated the footnote is Memorandum Opinion and Order No. 92-71 of May 27, 1992, in the Alaska Native Sisterhood Royalty case. He quoted, "the court specifically refused to hold material confidential merely at the request of the industry because `the public's right to know what the executive branch is about' outweighed the industry's speculative assertion of possible damage resulting from the release of information about its business." MR. FINEBERG told committee members that if the record is checked, they will find that the judge did made the ruling reluctantly because he thought the state would come forward and represent the public's interest. When the state did not come forward, he made the ruling from the bench on his own. He reiterated this is the judge who has reviewed more confidential industry documents than any other judge in the state and possibly more than any citizen in the state, outside of the oil and gas managers. REPRESENTATIVE DAVIES requested that the March 15, 1995, testimony from Mr. Fineberg be distributed to the committee. Number 274 CO-CHAIRMAN GREEN stated he would review the changes contained in the work draft CS, version K. He noted this CS is not a proposed CS but one he would like the committee to review over the weekend. He said the first suggestion is to insert a legislative intent, Section 1. He recalled there had been an earlier discussion that this legislative intent language is perhaps too restrictive. He stressed the potential for the commissioner to negotiate royalty reductions and get something done which otherwise would not be done is needed but is something which is a stark adjustment from what has been done the last 20 years in the state. He pointed out since 85 percent of the state's revenue comes from the oil industry, the royalty issue is of significant importance to the state. He said while he does not like legislative intent language in most bills, he feels in this case it might be necessary. REPRESENTATIVE ROKEBERG stated he had requested this language to be drafted and noted that Co-Chairman Green had the foresight to adopt it as intent language which he appreciates. He noted there has been concern about the word "permit" on line 6 of the work draft CS. He suggested getting some input on that issue. He explained the concern is that the word "permit" is a strong or active word which might need reviewing. He expressed support for the insertion of the intent language. CO-CHAIRMAN GREEN wondered if words like "suggest" or "allow" might be better. REPRESENTATIVE ROKEBERG replied yes. He said the word "permit" assumes the granting of a permit, rather than allowing. Number 329 CO-CHAIRMAN GREEN said the next suggestion is on page 1, line 11, of CSHB 207(O&G), after the words "of this section", insert the words "or subject to an agreement described in (s) or (t) of this section". He stated section (p) provides for unitization and there are other combinations of leases in two other sections of the bill. He explained this is a housekeeping measure to show that even if it is a drilling unit that may be tested, the same thing applies to all sections referring to a unitization. CO-CHAIRMAN GREEN stated the next suggested change is on page 2, lines 3 and 4, of CSHB 207(O&G) where it says "the field, pool, or portion of the field or pool has not previously produced oil or gas", insert after the word "produced" the words "commercial quantities of." He said the reason for the suggested change is, "so there is not some stickler out there that says you have this delineation, you have a well and have tested the well. You did then produce oil or probably oil and gas but would that then preclude this section from being operative. By putting it as a commercial quantity, that would exclude the possibility of well tests, which are very frequent and would not change the intent of (ii)." Number 372 CO-CHAIRMAN GREEN said the next suggested change is a clarification. He explained the change is located on page 2, lines 5 and 6, of CSHB 207(O&G), inserting the words "oil or gas" before the word "production." He stated the suggestion is for continuity more than anything else. CO-CHAIRMAN GREEN stated the next suggestion is on page 2, line 9, of CSHB 207(O&G), after the word "increase," delete the current language and insert "as the sale value of oil or gas decreases, and the increase or decrease is sufficient to make future production no longer economically feasible; or". He explained, the reason for the suggestion is that the existing language in CSHB 207(O&G) says "as per barrel or barrel equivalent costs increase in the later stages of production decline;" He said he does not have a problem with that language but explained there could also be a per barrel value decrease, as what was witnessed last year, and a prolonged activity at a reduced value of oil is as imperative to a change as the increased cost of production. Number 401 CO-CHAIRMAN GREEN explained the next suggested changes are in subsection (3), on page 2, line 16, of CSHB 207(O&G): After the word "approved", delete the words "in the royalty reduction agreement", on line 23, page 2, after the words "provisions to", delete the words "increase or otherwise", and on line 25, page 2, after the word "upon", delete "the occurrence of a change" and insert "a showing, by clear and convincing evidence, that, because of a sufficient change in one or more of the following factors, further development or continued production of the field, pool, or portion of the field or pool is not economically feasible:". CO-CHAIRMAN GREEN stated what the suggested change is doing is rewriting subsection (3) in CSHB 207(O&G). He said the suggested change is not changing the context except for one point. He recalled that Representative Rokeberg pointed out that the language says the commissioner shall include provisions, including the price of oil and gas, and then may consider all the other factors listed. He explained the rewrite of that subsection indicates that the commissioner will make a sound, economical judgement as to why there should be a royalty reduction by considering clear and convincing evidence which he feels is necessary. REPRESENTATIVE RAMONA BARNES commented the clear and convincing evidence standard is a fairly high criminal standard and she wondered how it relates to oil and gas terminology. She questioned what would have to be shown in order to qualify as clear and convincing evidence. MR. SHIVELY responded the department has problems with the rewrite of this subsection (3). He said the rewrite changes the intent of what the Administration understood this subsection was to do. He explained the words "increase or otherwise modify" were in HB 207 for an important reason. He stated, "we were looking at some of the points Mr. Fineberg made and points that other people have made (indiscernible), because we are looking particularly at marginal fields and what could be a very long life of the field, things could also improve, so we have oil prices in the future. We very likely will have more volume because when a new field is in the feasibility stage, the industry just does not know what is in that field." MR. SHIVELY said the intent of subsection (3) was to continue to allow the department to drive the royalties further down but allow the state to recoup more (indiscernible) and allow the department to go above the existing royalty if such situations should prove. He felt that has been changed in the work draft CS. He stated the rewrite also made the list less inclusive, so the things listed are the only things the commissioner can consider. He said in CSHB 207(O&G), the things listed were just examples. He stressed there may be other things which change the economics, such as transportation. The department feels this list should be a permissive list, not an inclusive list. MR. SHIVELY explained "the "clear and convincing evidence" is probably not necessary in this kind of situation, because what you are looking at here is when we negotiate the royalty reduction with the oil companies, we would say okay, assuming that we agree that there was a delineated field and we agreed that with the economics at this point, there should be a royalty reduction, we then agree on some kind of formula, sliding scale, or reopeners or maybe some other system to take into account future changes in the economics." REPRESENTATIVE BARNES hoped that Mr. Shively would prepare different language for this subsection. Number 493 CO-CHAIRMAN GREEN said the points Mr. Shively made are well taken and added they are the points discussed with the OGC. He felt the language could be corrected. He stressed there is no intent to handcuff the commissioner. MR. SHIVELY stated the department would provide some language. He added this subsection is very complicated. REPRESENTATIVE ROKEBERG recalled Representative Davies' question about the mandate of a reopener on changed oil and gas prices in CSHB 207(O&G) versus the work draft CS addressed earlier. He wondered if Mr. Shively had an opinion on that subject. MR. SHIVELY recalled the OGC did not talk about mandating reopeners. He stated reopeners are just one way to deal with changes in situations. He said the problem with reopeners is that you go back into negotiations and if no agreement is reached, then you are back to the original royalty, etc. He is more inclined, in these kinds of arrangements, to try and take into account the three major factors one looks at in the development of oil and gas fields--the cost of those developments, the volume and price--and then have the royalty change as those factors change. He stated while there may be a situation where an agreement cannot be reached on how to do that fairly because the field is going to operate for a long period of time, the only thing left to do is a reopener. He stressed he would not mandate a reopener. Number 528 REPRESENTATIVE ROKEBERG stated he appreciates Mr. Shively's willingness to redraft that particular language. He agreed with Mr. Shively's statement that there is a need to have the language about "increasing" in the bill because of existing royalty contracts. He clarified that Mr. Shively and him are in agreement on the concept that any reopeners would be bargained for in the first instance--in other words when the agreement was made. MR. SHIVELY said he agreed with that concept. He recalled there was a discussion about the commissioner unilaterally raising a royalty just because he or she felt like it and stressed that has never been the intent. He stated the department would see a reopener negotiated as part of the deal when a royalty reduction is negotiated. He explained it would be agreed that a reopener would only happen if the volume or price increased significantly or if certain things happened. He noted if an agreement could not be reached, they would just go back to the royalty that was originally bid. He reiterated the Administration does agree that the commissioner should not have the unilateral right to arrange royalties without either being up-front in the agreement or being subject to a reopener. REPRESENTATIVE ROKEBERG felt that was an important point when looking at the work draft CS and hoped the language could be changed to that effect. He asked Mr. Shively if it is necessary to have the mandate for having the oil and gas price in this subsection or does he prefer Co-Chairman Green's approach on that. MR. SHIVELY responded the department does not care one way or the other because quite clearly the oil and gas price is going to be one of the factors. He said the problem with what is contained in this subsection (3) in the work draft CS is the department is confined to only looking at those subjects listed, whereas CSHB 207(O&G) contains a permissive list. He stressed the list needs to be expansive in order to take other factors into account. CO-CHAIRMAN GREEN said he is a strong proponent of the sliding scale concept. Therefore, what happened between the drafter and him was a breakdown. He stated subsection (3) will be reworded. Number 569 CO-CHAIRMAN GREEN said the next suggested change is to delete subsection (4) on page 2, line 30 and 31, page 3, lines 1 and 2. He stated, "what I have done by excluding that is again trying to make it possible that the commissioner and industry can get together...and in deference to the Chairman of the OGC, which says there should be a floor and albeit whatever that is...it would be shared under existing law with the general fund and the permanent fund and that is the way I think it ought to be. My concern is that even though that might seem like a small amount--3 1/8 percent of what started off as perhaps as much as 12.5 percent...if you leave that in, that is not very much and the state would then tend to recoup some of what has been changed." CO-CHAIRMAN GREEN continued, "my concern is that having looked at places such as the Cook Inlet where they got down to actually cooking their own meals on the platform because they were in an effort to try and cut costs...and I realize that the Oil and Gas version applies specifically to new fields and that existing old fields would not have the floor...it is my contention that if we were to lose an investment that would otherwise provide jobs and all the state would get by continuing to attract investment here... if we were to handcuff the commissioner, that he could not make a deal for 2 percent of which the state would still get something, or 1 percent that artificially...and it is an arbitrary number--we do not know where the 25 percent came from...there are some people who think that was the old amount that was supposed to go to the permanent fund dividend...but my concern is that just as we talked about earlier, the commissioner should have the ability to work and not be cornered into an area. It is my opinion that he should be able to do this. There is nothing in here that says he has to go below that and I would assume he will negotiate as much as he can above that, but I just do not want to put an artificial encumbrance in his ability to negotiate." TAPE 95-40, SIDE A Number 000 REPRESENTATIVE SCOTT OGAN stressed the state Constitution clearly states the natural resources belong to the people and not the state. He felt if the royalty reduction floor language is not contained in HB 207, the state could be giving away the portion of oil that truly belongs to the people. He noted these are new fields being discussed. Therefore, the state's interest might be better served by having that oil in the ground or in the bank at a time in the future when the prices might go up to where it would be economically feasible to recover that oil. CO-CHAIRMAN GREEN responded there is an infrastructure in place that never would have been there had it not been for Prudhoe Bay. He said if it had not been for the in excess of 20 billion barrels of oil there, the pipeline would never have been built. He stated, "by curtailing development of those fringe areas which we have now been doing up there such as Endicott, Point McIntyre, etc...hopefully we can continue that and keep the pipeline full and the infrastructure moving. If we were to allow that to shrivel and die because we are going to save the small fields for later development, they will never be developed. It is to the state's best interest to get what you can, when you can, and if there is an opportunity to get it now, it is better than to defer it down the future 10 or 20 years. Not only would you perhaps lose the infrastructure that is so necessary but we are in the technology advancement stage, that we might ultimately not even do that." Number 065 REPRESENTATIVE BARNES thought there was a section in the Pipeline Enabling Act which provides that when the flow of oil through the pipeline drops to a certain point, the pipeline has to be dismantled. She felt, under that scenario, it is better for the state to continue with marginal fields, at whatever cost, to keep the oil flowing through the pipeline until the time of another major find, such as in the Arctic National Wildlife Refuge. CO-CHAIRMAN GREEN stated those are excellent points. He agreed there is a certain level set at which time the pipeline becomes too inefficient to operate. Therefore, not only would the state not develop a field which would fall into the category in HB 207 but the production of existing fields would also be lost because of the inability to afford production. He stated there are several persuasive arguments that the legislature should act on before it is too late. Number 095 REPRESENTATIVE OGAN said the state is not at that point yet and there is nothing preventing the legislature, when the push and shove point is reached, to act at the time needed to make an appropriate adjustment. He felt in the meantime, the legislature may be giving away millions of dollars of the people's money. He reminded committee members the state Constitution clearly says the natural resources belong to the people, not the state. He noted the fact that the people get a permanent fund dividend is a tangible shred of evidence that the natural resources do belong to the people, not to the oil companies. He stressed as stewards of the state's natural resources, the legislature has an obligation to put the best interest of the state forward--the state being the people. REPRESENTATIVE ROKEBERG hoped the committee would look favorable upon reinserting the floor clause. He said this clause is one of the "fences" around the "evil" commissioner and is one method to put that "fence" up. He stated the distinction between older and newer fields in the OGC version, clearly ratified the existing statute which provides a potential zero royalty for older fields and only provides this "fence" as it relates to new fields, in the event there is some skullduggery or stupid decision making. He explained the "fence" is part of the framework protecting the people of the state from the "evil" discretion of the commissioner. REPRESENTATIVE ROKEBERG found it extremely interesting that the commissioner agrees with this. He noted the commissioner even wants to insert this floor as it relates to old production, which Representative Rokeberg vehemently opposes. He agreed the 25 percent was somewhat arbitrarily chosen, but stressed the number was selected because it is a "fence". Number 159 CO-CHAIRMAN GREEN clarified Representative Rokeberg would go from a negotiated position of 12.5 percent, down 9.5 percent to 3 percent and a fraction, but he does not want to go below that. He said, "My concern is that you have accepted, and the commissioner has accepted moving down significantly but to some minimum point. My point is where is that minimum point in an open negotiation. Is it 4 percent, 6 percent or 2 percent? This says that anybody who is interested in this, do not even show up if it is going to be less than 3 1/8 percent." REPRESENTATIVE ROKEBERG stated in the original Governor's bill, for new fields, there was a floor of 6 1/4 percent. He explained the OGC lowered the floor down to 3 1/8 percent to give the commissioner more room. He added the OGC deleted Section 1 of the Governor's bill because of the artificial floor. He said the consensus opinion of the OGC was that providing a smaller or reasonable floor for new fields only would still help contain the commissioner's discretion. He felt CSHB 207(O&G) gives the commissioner the flexibility to strike a good bargain with new development. CO-CHAIRMAN GREEN clarified that the commissioner, the Governor and Representative Rokeberg all agree there should be a lowering capability and now it is a matter of opinion as to where that level is. REPRESENTATIVE ROKEBERG replied that was correct. REPRESENTATIVE DAVIES felt the 3 1/8 percent is a bright line statement. He said the argument is where the level should be, not the principle that it should be reduced somewhat. He stated under existing statutes, which allow no reduction in royalties for new fields, there is a significant amount of development of marginal fields around the pipeline. He noted if the information provided by Mr. Fineberg is reviewed, the production in the non-Prudhoe Bay, non-Sadlerochit fields has been significant and is probably over half the throughput in the pipeline currently. He felt the fundamental economics are working and the oil companies have a large interest in keeping the pipeline full. He added to develop these other fields now will result in a potentially large profit, if a new field can be put on line in a reasonable way. REPRESENTATIVE DAVIES said, "I think what we are doing here is taking one step toward encouraging that process somewhat. It is working right now and we are just trying to encourage it a little more. I think that Representative Ogan's point is let us do this incrementally...let us look at this and see how it works and if it has the desired result we want, fine. If it does not quite work or it is a little too slow, we always have the opportunity to change that in the future. Why give away the farm right away. I think zero percent is pretty close to fire sale." REPRESENTATIVE BARNES stated she did not feel it is a giveaway. She felt it was in the state's interest to develop these marginal fields and the legislature can always come back and change the percentage. She agreed that up-front, there should be an attempt to make these marginal fields work as best as possible. Number 249 CO-CHAIRMAN GREEN said, "I would be the most vehement person when the commissioner goes to negotiate that he absolutely negotiate at the highest point he can from zero reduction to a very tiny little reduction to whatever might be necessary to get what is done, done. And I will even give further that if you are down talking in this very, very low range, it seems almost questionable if it is that marginal, should it even be developed and because it is in that marginal range, that it must be developed now because as we go on and on, those extremely close, close marginal fields are the ones that will not make it. I still would suggest that he allow and have the ability to negotiate freely, albeit well above this arbitrary cut." REPRESENTATIVE DAVIES disagreed with Representative Barnes that the legislature could always go back and change the reduction because once a contract is negotiated, it is fixed. REPRESENTATIVE WILLIAMS agreed with Representative Green. Number 280 CO-CHAIRMAN GREEN said the next suggested change is on page 3, lines 8-11 of CSHB 207(O&G). The new version says, "may require disclosure to only the financial and technical data relating to production that is reasonably available to the applicant;" He stated, "I can understand the concerns that an applicant has, especially one who bought an old lease and then tries to come in for some additional handling and if he has to go back to the first part of production, the cost records and investment records may not be in his possession. I think it is incumbent at this juncture that the commissioner would find it sufficient to say that yes, we certainly have the production records...the AOGCC has production clear back to the beginning but the costs that are associated with that would be perhaps only five or ten years and that is the period of time we are really talking about. As the costs approach the net value that is coming into the lease, that is when something has to happen. It is not what happened back in the (indiscernible) days." Number 319 REPRESENTATIVE DAVIES wondered if the change implies that if the data is insufficient, the commissioner must proceed. He asked does the commissioner still have the discretion, if the information is insufficient, to simply deny the request. CO-CHAIRMAN GREEN replied the commissioner has that right. MR. SHIVELY added that the Administration feels this change is a good improvement over the OGC CS. CO-CHAIRMAN GREEN explained the next suggested change is on page 3, line 16, of CSHB 207(O&G) delete the words after "the commissioner's determination" and insert the words "of royalty reduction is final and not appealable to the court;" He said the reason why the determination should not be appealable is because of frivolous lawsuits. He stated this change clarifies what decisions the commissioner may make that are not appealable. CO-CHAIRMAN GREEN said the next suggested change in on page 3, line 20, of CSHB 207(O&G) after the word "list" and insert the words "of nationally recognized consultants in hydrocarbon production and economics". He explained the reason for the change, "is to be sure that we are talking with someone who is looking at this from arm's length and is not necessarily a petroleum economist, for example, who might be either a member of the staff or has been, who may be capable of doing something locally but would not necessarily be really the person we want to look at something as major...as Representative Ogan said, to look at the people of the state of Alaska's resources. So it just causes that to be a very qualified organization." Number 380 CO-CHAIRMAN GREEN stated the next suggested change is on page 3, lines 28-31 through page 4, lines 1-7, of CSHB 207(O&G) and is a total rewrite of subsection (8)(A) and (B). He said the change makes that subsection more easily understood and is not intended to be a substantive change. CO-CHAIRMAN GREEN noted there has been a lot of discussion regarding the various groups that should be the oversight to the commissioner. He stated the next change is on page 3, lines 29 and 30 of CSHB 207(O&G). The new version goes back to the AOGCC as the oversight entity. He said, "after reading testimony and the arguments made against that which were furnished to me by the OGC, I can see where a technical group such as the AOGCC which would be I think necessary to determine whether applicant A in order to do what he is going to do to continue or to develop is going to have to have 19 widgets and there are very few people in the state that understand why he needs widgets. The technical expertise in the state is the AOGCC...yes 19 are sure enough and this nationally referenced consultant has said yes 19 and our oil and gas people say yes in order to operate this field safely, he needs 19 widgets." CO-CHAIRMAN GREEN continued, "Now the argument then goes to say that the AOGCC should not be involved in what determines how much royalty should be reduced. Then we are getting into economics and that is beyond the expertise of the AOGCC. So what I am proposing, that you do not have, is that this would be expanded to say after `Oil and Gas Conservation Commission,' on the new version, `as to the technical merits and the Department of Revenue, as to the economic merits'. That I think would adequately protect the people's interest in that technically this is needed...Revenue does not know if the widgets are needed so Oil and Gas says yes widgets are needed and Oil and Gas does not know if a reduction from 12.5 percent to 10 percent or 8 percent because the commissioner is going to bargain far above the little 3 1/8 percent. That should be left up to the people who deal with our finances." REPRESENTATIVE ROKEBERG felt that was a good change. He clarified that Co-Chairman Green had said the economic merits would be reviewed by the Department of Revenue. CO-CHAIRMAN GREEN said that was correct. REPRESENTATIVE ROKEBERG noted there had been discussions about a real conflict of interest between the commissioner...maybe it should be the commissioner not the department. He said it was the confidentiality aspect he is concerned about. CO-CHAIRMAN GREEN stated the Department of Revenue has confidential information as well. REPRESENTATIVE ROKEBERG expressed concern about the potential conflict of interest argument. He noted the Department of Revenue is supposed to increase revenues, not decrease revenues. CO-CHAIRMAN GREEN stated what the Department of Revenue will be reviewing is this proposal, how it affects the state, and is it in the best interest of the state. He noted the Department of Revenue may or may not agree with the commissioner. He added the two responses are forwarded to the various people. Number 448 REPRESENTATIVE ROKEBERG felt this suggested change is the ultimate fix because it takes out the judgement of the overview people and they just look at the process, to make sure there is nothing stupid or skullduggery going on. CO-CHAIRMAN GREEN stated it should not be opinion but rather should be fact. CO-CHAIRMAN WILLIAMS disagreed. CO-CHAIRMAN GREEN asked the committee to review CSHB 207(O&G) and the work draft CS. REPRESENTATIVE OGAN asked Co-Chairman Green if he intends to move HB 207 on Monday. CO-CHAIRMAN GREEN said it depends on what is found and what comes into the committee on Monday. He stated he is not going to rush it through. CO-CHAIRMAN GREEN noted an amendment was passed out by Representative Ogan for review. He stated he also passed out an amendment K.1, which is the technical fix for the two sections he referred to earlier. ADJOURNMENT There being no further business to come before the House Resources Committee, Co-Chairman Green adjourned the meeting at 9:55 a.m.