SENATE SPECIAL COMMITTEE ON OIL & GAS April 1, 1993 5:15 p.m. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Bert Sharp Senator Al Adams MEMBERS ABSENT Senator Rick Halford Senator Judith Salo COMMITTEE CALENDAR SENATE BILL NO. 150 "An Act providing for oil and gas exploration licenses, and oil and gas leases, in certain areas of the state; and providing for an effective date." PREVIOUS ACTION SB 150 - See Oil & Gas minutes dated 3/16/93 and 3/23/93. WITNESS REGISTER W. R. Stewart Stewert Petroleum 2550 Denali, Suite 1300 Anchorage, Alaska 99503 POSITION STATEMENT: Supported concept of SB 150. William Hopkins AOGA Anchorage, Alaska POSITION STATEMENT: Supported concept of SB 150. Jim Eason, Director Division of Oil and Gas Department of Natural Resources P.O. Box 107034 Anchorage, Alaska 99510-7005 POSITION STATEMENT: Commented on SB 150. R. C. Gardner Enser Consulting 4640 Business Park Blvd. Anchorage, Alaska 99503 POSITION STATEMENT: Supported concept of SB 150. Pete Nelson Texaco Anchorage, Alaska POSITION STATEMENT: Supported concept of SB 150. Kevin Tabler UNOCAL Anchorage, Alaska POSITION STATEMENT: Supported concept of SB 150. ACTION NARRATIVE TAPE 93-13, SIDE A Number 001 SENATOR LEMAN called the Special Committee on Oil and Gas meeting to order at 5:15 p.m. and announced SB 150 OIL & GAS EXPLORATION LICENSES/LEASES to be up for consideration. BILL STEWART, President, Stewart Petroleum Company, said his was a small, independent oil and gas exploration and production company based in Alaska - active in 7 other states. Currently, they have discovered an oil field of significant size in the west side of Cook Inlet and they are in the early stages of development of that field. Exploration licensing has been used successfully in various places around the world. In respect to Alaska, any licensing program should not include mature areas which are the North Slope and Cook Inlet Basin. Such a program should be used in frontier areas. Alaska has in the order of 20 sedimentary basins. Only half a dozen have been explored and only 2 have been extensively explored, MR. STEWART explained. Certain provisions of SB 150 will preclude participation by independent producers and probably by the smaller of the major oil companies. 1) The bill, as drafted allows for licenses in areas as much as 500,000 acres. The contemplated license fee of $1 per acre will discourage producers from going any further. He noted that the entire Prudhoe Bay field covers less than half the 500,000 acre maximum. The likelihood of discovering another Prudhoe Bay is highly unlikely. A license area of 100,000 is more appropriate and will allow competition by smaller companies. Also, production of the license area over time as the exploration process defines specific prospects is in order. In addition, total land under license to any single licensee should be limited to 500,000 acres to prevent warehousing of acreage. 2) Another concern is the obligation to perform a specified minimum work commitment expressed in dollars. Work commitment should be expressed in terms of activity, ie. 35 miles of seismic work, plus 1 exploratory well drilled to a depth of 10,000 feet. Independents can operate cheaper than major companies. The bill, as drafted, punishes efficiency. If they were to bid in terms of dollars for the work program just sighted, they might bid $1.5 million for the seismic and $10 million for drilling for a total of $11.5 million. If they were able, through efficiency, innovation, or luck to perform the entire program for $9.5 million, the $2 million savings would be forfeited to the state of Alaska. Requiring a performance bond or other security in favor of the state in an amount not less than the amount of work to be performed will preclude participation by smaller companies. Bonds of that nature are simply not available on today's market. They are a small successful company with a good financial statement and they were unable to obtain, at least initially, a $100,000 drilling bond which is currently a requirement on the drilling permit. They satisfied the obligation by pledging a certificate of deposit to the state of Alaska. They couldn't possibly pledge the $11.5 million which would tie the funds up for a long period of time. They suggest a performance bond posted annually in the amount of 10% of estimated expenditures for the ensuing year. 3) The oral outcry arrangement provided in SB 150 will again preclude real competition by the independent sector. They suggested that the sealed bid arrangement utilized by the state's competitive oil and gas leasing program would be appropriate. As an independent producer, they are in touch with many other independent producers. The Independent Petroleum Association of American (IPAA) has roughly 10,000 members, most of whom never venture to Alaska. In the wake of their success, they are beginning to hear expressions of interest from quite a few who have the financial capability of operating or investing here. Exploration licensing with the modifications he has suggested will attract those independents. Number 162 BILL HOPKINS, Alaska Oil and Gas Association (AOGA), 1) supported large block exploration licensing as an attractive addition to the state's leasing program to accelerate exploration and potential development of Alaska's frontier areas. 2) MR. HOPKINS said state land that has insufficient or undocumented geologic and geophysical information or state land that is not (indistinct) or currently is not subject to an oil and gas lease sale program should be considered for explorataion licensing. All lands north of 68 degrees 30 minutes north latitude should be excluded. 3) He said the license should be conditioned upon the annual posting of work commitment or performance bonds or other security in favor of the state in an amount not less the amount of the work permit per year or the Commissioner should adopt regulations to evaluate competing proposals. All licenses should be awarded on the bases of written sealed bids. 4) and, conversion from license to lease should be under existing state leasing statutes, AS 38.05.180 (indistinct) and subject to the acreage chargeability of AS 38.05.140 (c). SENATOR ADAMS said he and Senator Leman have prepared amendments that address his concerns. Number 202 JIM EASON, Director, Division of Oil and Gas, said he was prepared to answer questions. SENATOR LEMAN asked why they chose 500,000 acres as the high number. MR. EASON said they wanted to allow the flexibility to include a large area if it was determined there was a basin or portion of a basin that would be subject to nomination for licensing. He said there was probably some number at which you are likely to subvert the original intent of the provision by limiting the amount of acreage that potentially can be explored and developed. SENATOR LEMAN asked if they would have the ability within the Department of Oil and Gas to restrict the acreage to something less than 500,000 acres if they believe it's in the interests of the state to do so? MR. EASON said that was correct. Number 240 BOB GARDNER, Regional Program Manager for Oil and Gas Services, Enser Consulting and Engineering, said exploration licensing would stimulate exploratory activity and accelerate development in the frontier basins of Alaska. SB 150, as it is presently drafted does little to achieve these goals. Their objections are: 1) The dollar for dollar bond required is a disincentive to all independent operators and probably to major companies, as well. Bonds in the size they are anticipating are practically impossible to obtain except by the largest of companies. Also, if the project is finished for less than the bid, the difference is subject to forfeit to the state. The scope of work and not the dollars obligated should be the variable here. The bond should be limited to the amount of work scheduled to be performed in each year or $1 million, whichever is less. A $1 million bond should easily flush out the speculators and still not be a major disincentive to independent operator participation. 2) SB 150 presently allows for the warehousing of large tracks of land under a 10-year exploration license. They believe some shrinking of the license area triggered by work commitment milestones would be appropriate. There should be some specific percentage of the area in the original license area relinquished annually. 3) SB 150 gives extraordinary discretion to the Commissioner of the DNR. This is an appointed position and the possibility exists that the administration of the program could be subject to political pressures. 4) The DNR currently has an active and effective 5-year oil and gas leasing program. The exploration program and the 5- year leasing program have to interface in some manner. SB 150 essentially opens all areas to exploration license applications. Both Cook Inlet and the North Slope should be left out with the possible exception of on the North Slope those areas lying south of the presently producing areas. Since the existing bill does not specifically define the term "insufficient or undocumented geologic and geophysical information," the potential is there for the deepest pocket to tie up most of the unleased land in areas that already have some proven production. Number 322 PETE NELSON, Land Manager, Texaco Alaska Regional Office, said they strongly support the concept of SB 150. They believe intent should be reflected in the legislation and not be left to administrative discretion or regulations. She felt including the North Slope and Cook Inlet in large block licensing and leasing was inappropriate. They believe licensing should be conditioned upon the annual posting of work commitment performance bonds or other security in favor of the state in an amount not less than the amount of the work commitment for each year. Failure to do so should cause cancellation of the license. MS. NELSON said the Commissioner should adopt regulations to evaluate competing proposals. The evaluation process should be based on only written sealed bids submitted by the prospective licensee which meets at least the minimum work commitment for the license and minimum qualifications of the licensee. Conversion from the license to leases should be accomplished under existing regulations and should be subject to the existing acreage chargeability regulations. Number 349 KEVIN TABLER, Land Manager, Union Oil Company, supported the position AOGA took. Number 378 SENATOR SHARP moved to adopt amendment #1. SENATOR ADAMS commented that he had no problems with the amendment, but the $100,000 on page 2, line 3 was out of line and needed to be discussed. He said it used to be $5 million per accident. SENATOR SHARP said that all other states have between $100,000 and $200,000 tops for on-shore exploration. SENATOR SHARP withdrew his amendment for for further work. There were no objections and it was so ordered. SENATOR LEMAN moved to adopt amendment # 2. SENATOR ADAMS wanted to make sure that the legal description really exempts Cook Inlet and the North Slope. MR. EASON hadn't seen amendment #2 and couldn't comment. SENATOR ADAMS stated his proposed language and asked which version the Department would like. MR. EASON said he didn't see a problem with excluding North Slope acreage and describing it as 68 degrees 30 minutes north latitude. Identifying acreage in the Cook Inlet Basin is subject to dispute. There is no firm definition that would be agreed to by all parties. SENATOR LEMAN asked what he thought about a distance limit in Cook Inlet like 6 miles or some distance restriction from existing leases. MR. EASON said that would be much easier to identify and administer. MR. EASON explained that some companies wanted to be sure that areas that are currently on the 5-year leasing schedule would not be offered for licensing. Most companies would not want areas (indistinct) existing production be offered for licensing. Most companies agreed that at some point, after competitive leasing, perhaps large areas of the foothills would be appropriate for licensing. The department agrees with all those positions. In considering 68 degrees 30 minutes north latitude, MR. EASON said he came up with compromise language... "excluded lands would include lands north of 69 degrees 30 minutes north latitude." He commented that would be a line approximately half way between 68 degrees 30 minutes and the coast line. It would also pick up some lands that are currently on the schedule. In addition, "no lands within the boundaries of the proposed competitive lease sale areas 57, 80, 87, 88, as those areas are delineated DNR 5-year oil and gas leasing program, be offered for licensing until after they are first offered for competitive leasing under the provisions of AS 38.05.180." SENATOR LEMAN asked if he had any suggestions for Cook Inlet. MR. EASON said he hadn't because he hadn't figured out all the concerns with Cook Inlet. He thought that language could be crafted once the issues were agreed upon. Number 549 KEVIN TABLER suggested land which should be excluded from licensing should include state lands which have been or are currently subject to an oil and gas sale program. Number 553 MR. EASON said this language creates ambiguities and challenges of its own, because there were non-competitive leases as well as competitive leases over a very long period of time. He was certain we couldn't say which leases have or have not been offered and would be available to be offered in a lease sale program - competitive or non- competitive. MR. TABLER said he would be happy to work with the administration on appropriate language. SENATOR LEMAN said they would lay amendment #2 on the table for work until next Tuesday. There were no objections and it was so ordered. SENATOR LEMAN moved amendment #3. SENATOR ADAMS said he had no objections if he read the amendment for the public. TAPE 93-13, SIDE B SENATOR LEMAN read, "it must conditioned upon the posting of an annual work commitment performance bond or other security..." then on page 2, line 30, after the word "commitment" insert "for that year." So the bonding commitment would be annually. There were no objections to amendment #3 and it was passed from Committee. Number 577 SENATOR LEMAN moved to adopt amendment #4. MR. EASON pointed out that he hadn't time to evaluate where there might be potential conflicts or inconsistencies. SENATOR LEMAN said they would lay that aside for work until the next meeting. There were no objections. SENATOR LEMAN moved amendment #5. There were no objections and it was so ordered. Number 542 SENATOR SHARP resubmitted revised amendment #1 with the following change on page 2, item 3 strike "$100,000" and leave "$5 million" in and he would do some more research for committees down the line. There were no objections and it was so ordered. Number 550 SENATOR LEMAN adjourned the meeting at 6:03 p.m.