HOUSE RESOURCES STANDING COMMITTEE March 27, 1995 8:17 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 Pete Kott MEMBERS ABSENT Representative John Davies Representative Eileen MacLean Representative Irene Nicholia 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 two issues regarding HB 207 REPRESENTATIVE NORMAN ROKEBERG Alaska State Legislature Capitol Building, Room 110 Juneau, AK 99801 Phone: 465-4968 POSITION STATEMENT: Commented on HB 207 JERRY REINWAND, Representative Fina Oil & Chemical 2 Marine Way, No. 219 Juneau, AK 99801 Phone: 586-8966 POSITION STATEMENT: Commented on HB 207 TOM WILLIAMS, Alaska Tax Counsel British Petroleum Exploration P.O. Box 196612 Anchorage, AK 99515 Phone: 564-5955 POSITION STATEMENT: Supported HB 207 with changes RICHARD FINEBERG, Representative Research Associates P.O. Box 416 Ester, AK 99725 Phone: 479-7778 POSITION STATEMENT: Opposed HB 207 KEVIN TABLER, Land Manager UNOCAL Corporation P.O. Box 196247 Anchorage, AK 99516 Phone: 263-7600 POSITION STATEMENT: Supported HB 207 with changes KEN BOYD, Acting Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Ste. 1380 Anchorage, AK 99503 Phone: 762-2547 POSITION STATEMENT: Answered a question regarding the fiscal note on 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 (H) RES AT 08:00 AM CAPITOL 124 03/22/95 (H) MINUTE(RES) 03/22/95 (H) O&G AT 05:00 PM 03/23/95 (H) O&G AT 10:00 AM CAPITOL 124 03/24/95 (H) RES AT 08:00 AM CAPITOL 124 03/24/95 (H) MINUTE(RES) 03/27/95 (H) RES AT 08:00 AM CAPITOL 124 ACTION NARRATIVE TAPE 95-41, SIDE A Number 000 The House Resources Committee was called to order by Co-Chairman Green at 8:17 a.m. Members present at the call to order were Representatives Green and Ogan. Members absent were Representatives Williams, Austerman, Barnes, Davies, Kott, MacLean, and Nicholia. CO-CHAIRMAN JOE GREEN announced testimony would continue on the work draft of HB 207, version K, which was introduced to the committee on Friday. HRES - 03/27/95 HB 207 - ADJUSTMENTS TO OIL AND GAS ROYALTIES JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES (DNR), testified via teleconference and stated there are a few technical issues he and Mr. Boyd have discussed with Co-Chairman Green's staff which will hopefully be worked out. He said there are two major points he would like to make. First, the Administration objects to taking all royalties down to zero. The Administration did agree with the Oil and Gas Committee (OGC) to keep the permanent fund whole and thought there would be a minimum royalty of 25 percent of the existing royalties for all 3 situations. He noted the Administration does not feel it is good public policy to have a zero royalty. MR. SHIVELY said the second issue is the oversight, which is a very complicated system. He does understand why people want oversight over the commissioner. The problem involves how to provide oversight in a meaningful way. He said it really depends on what the legislature wants in terms of oversight. If the legislature wants oversight of the economic decision, there is no one in government who has the capacity to do that. He noted that in the legislation there is a request for industry to pay for such an economic analysis, if needed, because although the department has the skills, it does not always have the capacity. MR. SHIVELY stated in terms of oversight by the Alaska Oil and Gas Conservation Commission (AOGCC), their testimony has indicated they also would need an economist to make such authority. He noted the alternative is to look at the economics of the situation by looking at the process--whether or not the commissioner found there was a delineated field or pool, whether or not the commissioner made a reasonable attempt to look at the economics, and whether or not the commissioner found that such a reduction in royalty was in the state's best interest. He explained oversight has been done by having the commissioner ask for the recommendation and then allowing the commissioner to proceed with his or her decision. He felt that works in terms of reducing the potential bureaucracy but that would have to (indiscernible) to the process. MR. SHIVELY told committee members the Administration prefers the Alaska Royalty Oil and Gas Development Advisory Board (AROGDAB) over the AOGCC, in terms of oversight, because the AOGCC has a certain conflict of interest due to their role, which is to maximize oil development. He felt the AOGCC would have a tendency to run the royalty down even further than the commissioner would because they want to maximize the amount of oil coming out of a field. (Representative WILLIAMS joined the committee.) CO-CHAIRMAN GREEN said the two points Mr. Shively brought up were two of five brought up at Friday's hearing. He stated unfortunately the rewrite of the rewrite is not completed. He explained rather than look at either the AROGDAB, the AOGCC, or the Attorney General, the rewrite will provide that the commissioner make a determination, give public notice, and within 30 days of that public notice, the commissioner will receive public written comment, allowing the public to be the oversight rather than some bureaucracy. CO-CHAIRMAN GREEN noted with this suggested change, the fiscal note would not be adversely impacted and this change would also remove any aspersions which might be cast because of possible conflicts of interest. He felt the public oversight is the best possible situation. He mentioned the public oversight would be limited and the oversight would occur after the commissioner has made a preliminary determination. MR. SHIVELY stated that concept would be very acceptable. Number 180 CO-CHAIRMAN GREEN stated there has been a lot of discussion regarding the zero royalty. Many felt that going to a zero royalty might be a violation of the state Constitution. He said because of that possibility, the rewrite provides that the reduction be in two stages--the new, undeveloped delineated fields would not be reduced more than 80 percent of otherwise and existing marginal fields would not be reduced more than 90 percent of otherwise. He explained the concept is that anything less than 100 percent in either case could be viewed as giving away the state's resources. On the other hand, the reduction is an incentive from the original one-eighth to get someone else to come in with investment dollars to develop the resource and the state then would receive, in addition to a direct royalty, other benefits from the development as well. (Representative KOTT joined the committee.) MR. SHIVELY stated although progress is being made, the Administration's position remains that the royalty should only be reduced up to 75 percent. Number 221 CO-CHAIRMAN GREEN recalled Mr. Shively had brought up another issue at Friday's hearing on HB 207 and that was the legislative intent being too restrictive. He said in the rewrite, the legislative intent reads, "In amending AS 38.05.180(j) in sec. 2 of this Act, it is the intent of the legislature that the commissioner of natural resources encourage reduction of royalty where appropriate, to promote otherwise uneconomic production of oil and gas from marginal fields and pools upon a finding that the royalty reduction is in the best interests of the state." He felt that intent was generic in that it addresses both those fields which have been in production and are reaching their economic limit, and those that were not developed because the economics were not good enough for an investment. MR. SHIVELY said the intent language sounds good. However, he felt the word "encourage" should not be used. He felt "consider" might be a better word. He stated the tone of the intent language is better and increases the flexibility. Number 257 CO-CHAIRMAN GREEN stated there were was also discussion at Friday's hearing on HB 207 about subsection (1)(C) and (2) and the need for a language change. He said in the work draft committee substitute (CS), version K, on page 2, line 22, the word "commercial" preceded the word "production." He explained because "commercial" is a relative term, the word "commercial" will be eliminated in the rewrite. He explained on line 13, page 2, of the work draft CS, version K, the words "commercial quantities" was used. He felt to eliminate people from having a difference of opinion regarding those words, the rewrite will read, "oil and gas not previously produced for sale". He noted the reason for the change is that extended well tests might trigger this when that was not the intent of the well test. CO-CHAIRMAN GREEN said the information he gave to the writer of regulations in regard to subsection (3), page 3, line 3-8, of the work draft CS, version K, apparently led to the exclusive use of the various terms listed, which was not the intent. He stated there is a difference of opinion between him (Co-Chairman Green) and the OGC on the use of the word "change." He explained the rewrite says, "the commissioner shall include provisions in the agreement to modify the state's royalty share based on relevant economic factors including". He noted the writer has said when the word "including" is used, it is redundant to say "but not limited to" because that is automatically assumed. The commissioner then has the right to look at any or all of the factors listed as well as something else. CO-CHAIRMAN GREEN said those are the intentions of change from CSHB 207 (O&G) and the work draft CS, version K. He explained no typed versions are available. He asked Representative Rokeberg if he would like to discuss his changes. Number 350 REPRESENTATIVE NORMAN ROKEBERG stated that Mr. Boyd had recommended some changes in the definitions of "other relevant factors." He said in the work draft CS, version K, on page 3, line 10, the words "proved reserves" would be deleted and changed to "the projected ultimate recovery of oil and gas". He added that the words "capital investment" on page 3, line 11, of the work draft CS, version K, would be deleted and replaced with "development and/or operating costs". Number 414 JERRY REINWAND, REPRESENTATIVE, FINA OIL & CHEMICAL COMPANY, stated the focus on the commissioner's discretion had been going in the wrong direction but with the changes mentioned, the committee is now headed in the right direction. He said the issue is not discretion but rather oversight. He felt the legislature, by the state Constitution, has been given the responsibility for oversight. Clearly, the legislature can call in other people and solicit their opinions but the oversight responsibility is the legislature's. He noted the legislature has a lot of hooks in the commissioner. The legislature has the power of confirmation and every year the commissioner has to plead his or her budget before the legislature. MR. REINWAND said contracts are sometimes complex and difficult to understand. He stated HB 207 is a very complex bill. He noted the OGC, with people who are new to the legislative process, did an excellent job with the bill. He pointed out in regard to oversight of other kinds, he has seen legislators take their oversight responsibility seriously and get extremely active. For example, Representative Barnes managed to maintain oversight of the Department of Corrections and did a very good job knowing what was going on. He reiterated the issue is really oversight. He urged the committee to make the process as simple as possible and hold people accountable for their decisions. Number 457 REPRESENTATIVE SCOTT OGAN stated the issue is allowing the public process to be the oversight entity. He wondered if there is a constitutional problem regarding public oversight, since the legislature has authority over regulation of an administrative action. He noted the public does not have any authority over the commissioner. The public can tell the commissioner what they think but the commissioner can do what he wants. The public can say something is a bad policy but the commissioner is not obligated to change something which might not be in the best interest of the state. (Representative BARNES joined the committee.) MR. REINWAND said the concerns are legitimate. He noted he also represents Tesoro and Tesoro has gone through a two-year process trying to negotiate a contract. He stated the department and other agencies which have been involved have not given away the farm. In fact, it has been a very tough process. He pointed out there seems to be a presumption that the commissioner or other members of the Executive Branch are prone to give away the state's resources. He stressed that is not the case. He observed that although the concern is legitimate, practice has shown that is not the case. He added that the worse groups he has seen make decisions are the so- called independent groups, who tend to be out of control and are dominated by interests they are supposed to be regulating or controlling. MR. REINWAND stressed the commissioner has the authority, and he or she reports to the Governor. He said if a commissioner gets in trouble with a legislator and does not do a good job, the Governor will know about it. He felt the concern is legitimate, but in reality, better decisions are made when the responsibility is given to a person and that person is held to the decision. He noted there is a whole world of experts the legislature can call on for advice. He stressed that is different than giving the commissioner and then two or three other groups the authority to make the same decision. He felt that jugs up the process. MR. REINWAND said in his 13 years in government, he found the worst decisions came out of a process involving a lot of people. He stated people should be given the responsibility, they should be held accountable, and if they do not do a good job, they should be let go. Number 528 CO-CHAIRMAN GREEN stated he subscribes to that theory. He thought the legislature would say if there is a question, take it to the people because it is they who will be subjected to it and ultimately, they make the best decisions. He told committee members the drafter has indicated he will not be able to make the revisions to HB 207 before the meeting adjourns. He indicated there will be a copy of the revised version of HB 207 Tuesday morning at the latest. REPRESENTATIVE RAMONA BARNES recalled that Mr. Reinwand had served as Chief of Staff for Governor Hammond and was also Deputy Commissioner, Department of Environmental Conservation. She asked Mr. Reinwand if he recalls any new oil and gas development occurring during his government service. MR. REINWAND replied while he was on the Governor's staff, the Beaufort Sea lease sale was carried out. REPRESENTATIVE BARNES said she could not recall any oil and gas development taking place during the Hammond Administration. Number 559 TOM WILLIAMS, ALASKA TAX COUNSEL, BRITISH PETROLEUM (BP) EXPLORATION, testified via teleconference and stated BP believes HB 207 is a good piece of legislation. He said the bill represents a positive step forward in establishing a cooperative relationship between the state and the oil industry, based on their shared interests and objectives, instead of one focusing on their differences. BP applauds Governor Knowles and his Administration for developing and introducing this legislation and thanks the OGC and House Resources Committee for the time, effort, and study which have been applied to improve and advance the bill. MR. WILLIAMS stated both the CSHB 207(O&G) and the work draft CS, version K, continues to provide DNR greater flexibility to modify the state's royalty arrangements with producers, in order to obtain development introduction that otherwise would be unlikely to occur. BP believes there are several ways this good piece of legislation can be made even better. He explained the first change would be on page 1, line 10, of the work draft CS, version K. The work draft currently expresses an intent that royalty reductions under this bill would remain only if the commissioner of DNR determines that the applicant for such a lease "would not make the additional investments" without the royalty reduction. MR. WILLIAMS told committee members that BP believes it would be extremely difficult, if not impossible, for the commissioner to make such a finding in practical terms. He pointed out that few, if any investments are so (indiscernible) that one can say they are clearly viable economically under one scenario and are clearly not viable under the other. What usually happens instead is that the opportunity is clearly more attractive under one scenario than the other. He stated it is possible someone might proceed with an investment under the less attractive investment scenario and it is also possible they will not proceed with a project even under the better scenario. MR. WILLIAMS explained the commissioner usually will not be able to determine conclusively whether the royalty relief represents a go or no go factor for a given project. However, the commissioner can determine how much of a help the project will (indiscernible). He said BP suggests deleting the word "not" in line 10, page 1, of the work draft CS, version K, and replacing it with the words, "be significantly less likely to". He stated BP also has a technical suggestion for that same sentence. He explained page 1, line 11, of the work draft CS, version K, refers to the economic life of "the oil or gas field." Throughout the rest of the bill, the drafter has taken pains to include pool, or portion of a field or pool. Therefore, BP believes the words "pool, or portion of a field or pool" should be inserted between the words "field" and "without." MR. WILLIAMS stated as a result of these suggested changes, the important part of Section 1 would read, "it is the intent of the legislature that the commissioner of natural resources shall determine, in all cases, that the person or persons applying for the royalty reduction would be significantly less likely to make additional investments that are necessary to develop or prolong the economic life of the oil or gas field, pool or portion of a field or pool without the approval of the royalty reduction." He noted the alternative which Co-Chairman Green described would also be an improvement over what is contained in the work draft CS, version K and BP would also endorse that. Number 615 MR. WILLIAMS said BP also believes the bill should allow the commissioner of DNR to modify state net profit share interests, as well as state royalties. He explained net profit payments and royalty payments are both economic rent the state receives for leasing its lands for oil and gas exploration and development. BP believes that giving the commissioner greater flexibility to address the economic situation is a good idea. Therefore, it seems inappropriate to give the commissioner that flexibility with respect to one form of the economic rent and not for the other. He said just as the state may gain by modifications to the royalty obligation under a sliding scale royalty mechanism, it could also gain, under various situations, by allowing appropriate modifications of the net profit share interests. MR. WILLIAMS stated because HB 207 is not confined to situations where the state interests would be reduced--it allows for royalties to be increased from what they would otherwise be if economic conditions improve over what was expected--BP believes that on page 3, line 24, of the work draft CS, version K, the words "royalty reduction" is too narrow. He suggested the words should probably be "royalty modification." MR. WILLIAMS said in regard to the oversight of the commissioner to ensure that nothing foolish or sinister goes on, BP believes oversight is a matter the legislature has to satisfy themselves on. He stated in terms of how BP does its business, it is felt oversight will never be a problem. He noted whatever oversight the legislature decides is appropriate, should work fine with BP in practice. (Representative AUSTERMAN joined the committee.) Number 641 REPRESENTATIVE ROKEBERG asked why the committee should consider including net profit share interests. MR. WILLIAMS responded in 1979, in anticipation of the lease sale mentioned by Mr. Reinwand, the legislature authorized the issuance of net profit share leases for the first time and some tracts were offered on that basis. The traditional way for leasing a property was to put the property up for a cash bonus bid with a fixed royalty. In 1979, some leases were offered on that same basis but with a net profit share being the primary mechanism, rather than the royalty share. The idea was that when cash bonuses and a fixed royalty are involved, the state gets its money up-front and is taking little risk in terms of whether or not the project works out. MR. WILLIAMS explained when a net profit share is involved, the state is taking more of a risk. The rationale for taking a greater risk is if the project proves to be successful, the state would get a lot more money by having shared the risk rather than taking up- front cash. He pointed out in making that kind of arrangement, the net profit interest is a term of the deal, the same as the royalty is and in economic sense, it is economic rent the lessee will be paying to the state, the same as paying a royalty. MR. WILLIAMS stated BP believes it is possible, in certain circumstances, for the commissioner of DNR, in looking at a field or project, to want to modify a net profit share lease at the same time he is modifying a royalty. He said it is very difficult to anticipate in advance what all the situations might be but BP believes that since the commissioner is being given the flexibility to modify the royalty portion of the economic rent as appropriate in dealing with situations, it is also appropriate to allow him to deal with the net profit interests as well, if that is appropriate in the commissioner's mind. Number 677 CO-CHAIRMAN GREEN said, "the change from conventional leasing, where there is a variable bonus and a fixed royalty, in this case, of net profits, the net profits then become the bid variable. My problem with allowing that to be then changed at the discretion of the commissioner says that if that is the case, then why don't we go back to the conventional leases and also have the cash bonus be subject to payback or changed. The difference I think that in the cash bonus as the variable, the state and the applicant share the risk to pay out and in the case of the net profits lease, the state gets nothing until the applicant gets his pay out plus interest. I think that puts that in a completely different context than what we are trying to do here to initiate a field that would not otherwise be made profitable. CO-CHAIRMAN GREEN continued, "I can understand your concern that we are talking about the economic drag down and can the state do something about it. I would think the state would open itself up to more or any litigation in the fact that you allow the variable to be granted to the winner and then turn around and say because that was the bid variable, we will now allow you to change that. I also have a problem about the fact that does not apply to very many leases, certainly fewer than what are involved in a productive capacity, maybe because of the burden or maybe because of any number of reasons. My view is that should be held off from this bill, allow this bill to work and see how it works, because it is my understanding that the net profits lease or leases that would be in question are sometime in the future before that would become a problem. On that basis, we would have a chance to review this kind of legislation and then maybe address that at a later date." TAPE 95-41, SIDE B Number 000 MR. WILLIAMS felt that Co-Chairman Green raised some good points. He noted some of the leases offered in 1979 were on a royalty bid variable and this legislation would allow the commissioner to grant royalty relief, even where that was the bid parameter. He agreed it is not a good idea for the state to say they accept a high bid and then all of a sudden renegotiate the deal to the advantage of a certain company to beat the competition. He doubted the commissioner of DNR would ever let himself get in that kind of situation. He said the bridge has been crossed, in terms of the potential for something like that to happen, with the royalty bid variable leases, some of which were offered in 1979 and he did not know whether or not there are any producing units are not. MR. WILLIAMS said in regard to the net profit shares. BP has some tracts which are on a conventional royalty basis and one very important tract in that field which has a very high net profit royalty interest. He stressed there is a great deal of concern, discussion, and controversy between the lessees of that lease and the DNR over how the costs of the field are to be allocated to that tract in computing how much of the investment qualifies to be recovered under the net profit share lease before the state starts receiving its share of the net profit. He pointed out it may well be that in a particular situation, a commissioner would prefer to avoid those allocation issues altogether and negotiate a lower net profit share for an entire set of leases. He noted that flexibility would not be allowed under present legislation but would be allowed under the suggestion made. MR. WILLIAMS stated Co-Chairman Green's concerns are valid. He does not have any language to offer to prevent the abuse Co- Chairman Green is concerned about, where someone bids on a net profit percentage or a sliding royalty percentage and then comes back in a year or two years later and tries to get out of the deal. He felt the commissioner should be given the flexibility to deal with these other types of situations and to that extent, it seems appropriate to include net profit interests, as well as royalty interests. CO-CHAIRMAN GREEN requested Mr. Williams to fax language which BP might want the committee to consider on Wednesday. Number 090 RICHARD FINEBERG, RESEARCH ASSOCIATES, testified via teleconference and stated in regard to oversight by the public, he agreed with Mr. Reinwand about the need for fixed responsibility. He does not agree that the system has worked well. He stated the 30 days notice mentioned, in regard to the public oversight, seems reasonable but seems inconsistent with the broad scheme of the legislation, which basically ties the hands of the public by the granting of confidentiality, and by removing the regulations that presently require a public written determination to make it very clear what the commissioner shall do. He felt the weakening there is tying the public's hands, while at the same time relying on the public to respond in 30 days. Number 150 MR. FINEBERG stated in regard to the factors that the commissioner shall consider, he did not follow Co-Chairman's Green comments about the drafter saying that the factors "include" some factors, and does not exclude others. He stressed if economic factors are going to be included, he hoped that pipeline economics will be included. He noted he sent additional graphs down to the committee, again making the general case that there is not a substantive case being made for the need for royalty relief. MR. FINEBERG told committee members the data they received earlier indicates the state is over-estimating production from small or undeveloped fields. He said of the five major producing fields on the North Slope, only Lisburne has been worse than expectations and all others are showing better than what was forecasted, depending on the time frame looked at. This again leads to the question of why a substantive analysis is not being done on the royalty reduction issue. Number 225 REPRESENTATIVE BARNES asked Mr. Fineberg if he is the Mr. Fineberg who previously worked for the Office of Management and Budget. MR. FINEBERG replied yes. KEVIN TABLER, LAND MANGER, UNOCAL CORPORATION, testified via teleconference and stated UNOCAL concurs with the comments of Mr. Williams in regard to suggested changes in Section 1 of the work draft CS, version K. He felt the new intent language is less restrictive. He urged the committee to review some of the testimony given in the OGC and not disregard that testimony. He noted the OGC recognized the distinction between new and exhausted mature fields. He also urged the committee to reconsider its direction with regard to the zero royalty. UNOCAL does not believe there would be a constitutional conflict. He pointed out that the current statute provides for the ability to go to zero royalty. Therefore, a new requirement is not being created, but rather an attempt is being made to preserve the existing statute. MR. TABLER said UNOCAL believes it is in the state's best interest for the commissioner to have the flexibility to reduce royalties down to zero, as currently provided. He stated that finding would be supported by financial and technical data which would demonstrate that the benefits of such action is warranted. He added that UNOCAL believes there have been several enhancements to the bill and concur with the changes Co-Chairman Green mentioned earlier. CO-CHAIRMAN GREEN stated he is very impressed with the work the OGC has done. He stressed he wants to make sure that any changes the House Resources Committee makes do not reflect ill upon any of the work the OGC has done. Number 312 REPRESENTATIVE BARNES acknowledged the fiscal note attached to HB 207. She did not feel the fiscal note is necessary and asked if zeroing out the fiscal note could be considered. She noted on page 3, line 28, of the work draft CS, version K, it states the lessee or lessees have to use nationally recognized consultants in hydrocarbon production. She felt these consultants will do the job which the department is asking for an additional oil and gas engineer to do. CO-CHAIRMAN GREEN said the point had been discussed that if there was going to be an oversight by some other state jurisdiction, that might conceivably cause a fiscal note, but added that under the current version, that oversight goes back to the public. He agreed a zero fiscal note might be appropriate. REPRESENTATIVE ROKEBERG asked if the Acting Director of the Division of Oil and Gas could answer Representative Barnes' question. He said he understood that the Division of Oil and Gas, in the initial budget mark-ups already lost a petroleum engineer in the royalty section. He noted the information he received from Representative Therriault is that if a bill such as HB 207 passes, the Division of Oil and Gas would have a case to make for having that engineer reinstated. Number 344 KEN BOYD, ACTING DIRECTOR, DIVISION OF OIL AND GAS, DNR, testified via teleconference and stated the fiscal note provides for a petroleum engineer. He said the division currently has two petroleum engineers in the division--one is a unit manager and the other is the petroleum manager and also supervises the royalty accounting section. He stressed the division can do more work in- house with people in-house. He noted there is a provision in the bill to do the work outside with other contractors. He pointed out that institutional knowledge becomes something very important--the more you know, the faster you work, and the better job you may do. MR. BOYD felt it was up to the committee as to how much work they believe can be done in-house. He noted he does not know how many of these requests may come forward. He reiterated that he has found the more work done in-house, the more consistent the results and generally speaking, the better the results. He anticipated using contractors more for number crunching, not for policy making because they will report to the Administration--that is what an employee does and he or she can then be given policy direction. He summarized the petroleum engineer is there to do what is anticipated as extra work. REPRESENTATIVE BARNES felt Mr. Boyd does not understand that state employees do not set policy--the legislature does and the employees are there to carry polices out. She understood how the division would like to have another body, as most departments would like to have other bodies. She said this is a clear case where the private sector is paying the bill and the department is simply trying to add another body for whatever purpose. She stressed she wants a zero fiscal note. CO-CHAIRMAN GREEN agreed with Representative Barnes. He stated if there are numbers to be crunched, that should be done by the contractor to verify that the applicant's case is justified. Then it is up to the commissioner to accept or reject. He said that does not justify another in-house body. MR. ROKEBERG passed out two conceptual amendments regarding subsection (3). He explained one of the amendments is based on CSHB 207(O&G) and the other amendment is a tuned-up version that was provided by the commissioner's office. He felt subsection (3) is the most important part of the bill and urged committee members to review the amendments. CO-CHAIRMAN GREEN urged committee members to also consider modifications to subsections (s) and (t) which make those sections similar to subsection (p) of the existing bill. ADJOURNMENT There being no further business to come before the House Resources Committee, Co-Chairman Green adjourned the meeting at 9:22 a.m.