SENATE RESOURCES COMMITTEE May 1, 1995 7:48 p.m. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Robin Taylor MEMBERS ABSENT Senator Rick Halford Senator Georgianna Lincoln Senator Lyman Hoffman ALSO IN ATTENDANCE Senator John Torgerson COMMITTEE CALENDAR CS FOR HOUSE BILL NO. 207(FIN) am "An Act relating to adjustments to royalty reserved to the state to encourage otherwise uneconomic production of oil and gas; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION HB 207 - See Resources minutes dated 4/22/95, 4/26/95, & 4/28/95. WITNESS REGISTER Commissioner John Shively Department of Natural Resources 400 Willoughby Ave. Juneau, AK 99801-1796 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am Keith Burke, General Manager The Alliance 4220 B St., Suite 200 Anchorage, AK 99509 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am Joe Mathis, General Manager, Oil Field Operations NANA Development Corporation 1001 E. Benson Anchorage, AK 99508 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am Carl Marrs, President Cook Inlet Regional Corporation 2525 C St., Suite 500 Anchorage, AK 99509 POSITION STATEMENT: Supports CSHB 207(FIN) am Terry O'Beney British Petroleum P.O. Box 196612 Anchorage, AK 99519 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am Carl Portman, Communications Director Resource Development Council 121 W. Fireweed Anchorage, AK 99503 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am George Findling ARCO Alaska, Inc. Box 100360 Anchorage, AK 99510 POSITION STATEMENT: Testified in support of CSHB 207(FIN) am Jim Branch, Production Manager Exxon, Alaska Box 196601 Anchorage, AK 99519 POSITION STATEMENT: Supports CSHB 207(FIN) am Kevin Tabler, Land Manager Union Oil Co. P.O. Box 196247 Anchorage, AK 99519 POSITION STATEMENT: Outlined concerns with SCS CSHB 207(RES) Ken Boyd, Director Division of Oil & Gas Department of Natural Resources 3601 C St., Suite 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Offered information on CSHB 207(FIN) am Richard Fineberg P.O. Box 416 Fairbanks, AK 99725 POSITION STATEMENT: Does not support passage of any version of HB 207 Tom Lakosh P.O. Box 100648 Anchorage, AK 99510 POSITION STATEMENT: Believes HB 207 is unconstitutional ACTION NARRATIVE TAPE 95-52, SIDE A CSHB 207(FIN) am ADJUSTMENTS TO OIL AND GAS ROYALTIES  Number 001 CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 7:48 p.m., and stated the meeting was being teleconferenced. SENATOR LEMAN brought CSHB 207(FIN) am before the committee and said the committee would be working on a draft Resources SCS dated 4/29/95, version "B." Because the committee lacked a quorum, he said a motion to adopt the committee substitute as a working document would be delayed until a quorum was established. Number 060 COMMISSIONER JOHN SHIVELY, Department of Natural Resources, said in drafting the original legislation, the administration felt it was important, early on, to send a message to the oil industry that they wanted to be able to do things that would encourage responsible development, particularly in having to deal with much smaller fields than Prudhoe Bay. At the same time, it was important to protect the state's interest in income because of the fact that the income is declining. The administration thinks that the CSHB 207(FIN) am achieves their goals, although not precisely in the way they had originally designed the legislation. Addressing the Resources SCS, Commissioner Shively said although it is an improvement over the original committee substitute, there are still three major problems with the bill: (1) The sunset provision sends a bad message, particularly to new investors who might want to look at the state. (2) The original legislation dealt both with fields and pools of oil. Sometimes there are going to be pools or horizons in oil that might lie within a lease where there is already a producing field, but that pool itself, in order to be developed, could need some assistance. The House bill provides for that, but the Resources SCS does not. (3) The legislative oversight provision raises constitutional questions and it sends a message to the industry that this is a political decision and not an economic decision. Commissioner Shively stated that the administration thinks the Resources SCS makes the system much more complex and it is going to be very difficult to administer, but they are prepared to continue to work with committee staff to improve the legislation. However, he reiterated that the version that passed the House is acceptable to the administration. Number 150 SENATOR LEMAN pointed out that royalty oil contracts, as well as state leases over $10 million, have provisions for legislative approval, so it is not an unusual activity for the legislature to create some authority to do a review. COMMISSIONER SHIVELY responded that he recognizes and understands the reasons for wanting to do this, but, in this case, these could be fairly technical economic decisions and he wasn't sure the legislature was the best arena to make the final decisions. Number 210 KEITH BURKE, General Manager of The Alliance in Anchorage, stated it is critical for the legislation to pass the Senate, but as an organization and workers in Alaska they are disappointed with the proposed Resources SCS. Outlining problems with the Resources SCS, Mr. Burke said they believe the Legislative Budget & Audit Committee would be a much more effective and expeditious process as opposed to the legislative approval and oversight provision in the Resources SCS. He also suggested it would be of benefit to the Senate to install a reporting tracking mechanism within the commissioner's office back to the legislature once a negotiated deal is realized. He also spoke against a sunset provision because it would send the wrong message to the industry. Concluding his comments, Mr. Burke said CSHB 207(FIN) am is a more workable version, and he recommended moving more in that direction. Number 242 SENATOR PEARCE said one of the concerns of the industry on oversight appears to be the question of confidentiality of information and not letting operating and tax information go out to the entire Senate. She asked Mr. Burke how he would cover the same confidentiality question with a tracking mechanism because she didn't think the companies are going to be any more interested in the legislature having the information after the fact than they are before the fact. KEITH BURKE responded that he wasn't suggesting tracking reservoir information or technical engineering information of that nature. He was speaking more to the financial aspects of the reservoir itself, on the productions of the reservoir and any updates they may have on anticipated reserves. He thinks having an ongoing reporting working relationship with the commissioner would be just as beneficial as an oversight by the legislature on the front end. SENATOR PEARCE pointed out that it is very hard to go in and change a statute once a law has passed, so the legislature would be in the situation of it being real tough to come in and take the program away. With no sunset date and no way to effect any changes, she asked where the public trust would be of having some sort of confidence that the legislature can act should an administration make a poor decision. KEITH BURKE answered that if the program works and it creates jobs, revenue and production, he is convinced that there will not be a credibility problem with the general public. Number 321 SENATOR LEMAN asked Mr. Burke if he was aware of anywhere else in the world where they have a provision of royalty flexibility for new untested fields, and KEITH BURKE answered that he was not. Number 340 JOE MATHIS, General Manager, Oil Field Operations, NANA Development Corporation, spoke to the significant decline in revenues and the layoff of employees NANA and its subsidiaries have been experiencing because of the downturn in oil field activity in the state. They are trying to survive and they need development of marginal fields. Mr. Mathis stated NANA feels that the original HB 207 is good legislation. He said he finds it incredible that he is testifying before the committee, given the makeup of the legislature, and he would not have been surprised if it had happened eight years ago. He has heard many of the members speak to The Alliance during campaigns saying that they want to make a change in government and help industry get back on its feet, and he now feels that they are betraying their words. He asked that the senators rise above politics and do the right thing by passing HB 207 in its original form. Number 385 SENATOR LEMAN said the major areas of difference in the Senate version are the legislative oversight provision and the sunset provision. He asked if these were the areas where Mr. Mathis feels the legislators are "betraying their words." JOE MATHIS responded that there are several areas such as addressing social issues. He said it is an invitation for Trustees of Alaska and Greenpeace to bring suit and delay development of oil fields. Any time that a business decision is brought into the political arena, it is going to be subjected to not making a good decision. He added that he doesn't have a problem with legislative oversight, but he has problems with putting political delays into a system. Number 425 SENATOR PEARCE noted that best interest findings by the commissioner are always subject to appeal to the courts, and she questioned what the difference was with the best interest finding in the proposed Resources SCS that it is not appealable. COMMISSIONER SHIVELY said the concern is with paragraph (9) and what the commissioner can address in any findings and determinations. Allowing the commissioner to make a general best interest finding leaves it with the commissioner to decide what needs to go into those best interest findings. Listing things is always dangerous because you don't know whether you've included everything and you don't know how the courts are going to interpret those lists, he said. SENATOR PEARCE pointed out that the lack of lists is at least as dangerous. That was the reason SB 308 was before the legislature last year, because the courts came back and said that caribou hadn't been discussed enough when caribou on the North Slope were something that might someday be affected. COMMISSIONER SHIVELY observed that SB 308 dealt with development issues and this is not a development issue, but, instead, an economic determination. He conceded that in new and marginal fields, the issues addressed in the Resources SCS probably all would be in the best interest findings by the commissioner. However, he added that he can see situations in fields that are about to be abandoned where a number of those issues might not be important. SENATOR LEMAN responded that he made a good point and it was something he would want to be thinking about. Number 495 CARL MARRS, President, Cook Inlet Regional Corporation, said one of the company's principle lines of business is natural resource development. The development of CIRI's lands and resources will play a significant role in the future economic growth and development of Southcentral Alaska, especially in its oil and gas interests on the Kenai Peninsula, where unemployment is historically high and long-term job opportunities are few and far between. CIRI has been working to increase employment in the areas by marketing its lands on the Kenai Peninsula for oil and gas exploration, and it has been successful in bringing new exploration to its lands and adjoining state lands, but more needs to be done. Mr. Marrs said HB 207 is important to CIRI and they are asking that the committee pass the version that was passed by the House. In their view, the Resources SCS does not represent progress in the area of royalty adjustment and it sends a message to the industry that the State of Alaska is not yet serious about encouraging new high risk exploration and development dollars into the state. He outlined CIRI's concerns with the sunset provision, the non- assignability clause, and the extended legislative review and approval of the royalty adjustment application. He reiterated his request that the committee adopt CSHB 207(FIN) am. TAPE 95-51, SIDE B TERRY O'BENEY, Manager of New Developments for British Petroleum in Alaska, testifying from Anchorage, stated the House version of HB 207 would give the commissioner of the Department of Natural Resources clear authority to modify the terms of the state's oil and gas royalties in a variety of ways in order of facilitate and encourage the new investments that need to be made in order to bring marginal new fields into production and to sustain production from existing fields that are in decline. At the same time, it contains safeguards to protect the state's best interests. He said it is a good bill and it has British Petroleum's full support. Speaking to the Resources SCS, Mr. O'Beney said it is badly flawed and seriously out of touch with the realities of a mature oil industry in Alaska. Their number one concern is the requirement that any royalty adjustment be ratified by the legislature. This, combined with the extensive findings that the commissioner must make, is an invitation for long delays in final approval and litigation. The second major concern is that of encouraging development of new pools within existing fields which could have the effect of discouraging investment and development. Their third concern is with the sunset provision, and he suggested if the committee is set on having a sunset provision, it should be for a minimum of five years. Mr. O'Beney said that effective legislation can have a big impact on BP's decisions to develop both Badami and Northstar. It is expected that both of these decisions could be made in 1995 and lead to significant production and revenue by 1998. Number 200 Responding to questions from Senator Leman, Mr. O'Beney expanded on BP's development plans for Northstar and Badami. Number 300 SENATOR LEMAN asked if BP is asking the legislature to look at revisions that will allow the Alaska projects to compete with BP projects around the world. He said he assumed BP is establishing some type of economic threshold and then economic viability depends on how Alaska can compete via return with those other projects. TERRY O'BENEY replied that was correct. He said the economic thresholds that different projects would require in different parts of the world would depend on a lot of things in the equation. SENATOR LEMAN asked if when they negotiate with the commissioner on a project who is to say that they can't raise those expected rates of return on other projects to make the Alaska projects less economic unless revisions are made, or is there enough other worldwide competition in the marketplace to keep them from doing that. TERRY O'BENEY responded that there is more than enough competition for capital resources. Number 357 SENATOR TAYLOR said it is his understanding that the enabling act that allowed for the construction of the Trans-Alaska Pipeline provides that if oil flow drops below 300,000 barrels a day, the pipeline itself must be torn down. He asked what rate of reduced tariff TAPS is offering on marginal fields to keep up their flow. TERRY O'BENEY responded there is none, and he believes that TAPS does not have that discretion. As a common carrier, it has to charge the same rate for every barrel going through that pipeline. SENATOR TAYLOR wondered if some form of global incentive could be achieved so that we could get the price down to where we could really be talking about serious reduction in overall cost for marginal fields. TERRY O'BENEY said the common carrier pipelines are regulated and that's something that can't be done. There is more flexibility on shipping, but the cost to ship that incremental barrel is higher than shipping the base barrels. Number 450 SENATOR PEARCE asked how the commissioner is going to make an economic decision before the permitting process of a project, before an environmental impact statement has been completed, etc. TERRY O'BENEY answered that obviously, they have to do as much as they can concurrently. As an example, he pointed out that in a situation like Northstar, it wouldn't make a lot of sense talking in detail about the royalty scheme until the basic concept of development has been firmed up. He added that he thinks it is important to begin with these discussions as early as possible, even when there are a lot of uncertainties. SENATOR PEARCE noted that as the bill came over from the House, there is no legislative oversight and there's language that tells the court they have no oversight, so it ends up as a plan that has no oversight on either end. TERRY O'BENEY said he would remind the committee that the commissioner already had some power to make changes to royalty under certain conditions, so there is already some precedence out there for empowering the commissioner to deal with some of these issues. SENATOR PEARCE responded that she didn't disagree with that, but she pointed out that the present statute provides that the commissioner's decision is appealable to the court. Number 530 SENATOR LEMAN asked Mr. O'Beney if they have enough information from the wells to have delineated the Badami field. TERRY O'BENEY said there are currently four wells in the immediate field and there are other wells surrounding the field. They believe two of the wells have provided sufficient delineation, but they don't know for certain until all the interpretation is done, and they expect to complete that work by mid-summer. He added that they certainly would not go inside BP and request the other $300 million for sanction unless they thought the field is being sufficiently delineated. Number 575 SENATOR TAYLOR made a motion to move CSHB 207(FIN) am from committee and then objected to his motion. He stated he didn't necessarily support the House version or the proposed Resources SCS, but he thinks it is essential at this late date to move the legislation to the Senate Finance Committee. SENATOR FRANK objected to the motion. SENATOR TAYLOR withdrew his objection to the motion. SENATOR LEMAN stated there were insufficient votes to move the bill out of committee. Number 600 CARL PORTMAN, Communications Director, Resource Development Council, stated RDC's strong support for CSHB 207(FIN) am, because it provides the flexibility needed for the state and industry to work together to change the economic equation for marginal fields. It provides the flexibility for working with investors on a case- by-case basis to make new development and reduction a reality. However, the Resources SCS risks undermining the original purpose of the legislation because it opens the door to potential delays and uncertainty. He said he is not aware of anyone in their membership that is supportive of the Senate version. Number 690 SENATOR LEMAN commented that the only people who are pushing to have this done this year is BP with the Badami project, so he fails to see why the sunset provision jeopardizes any new field projects when the issue can be revisited next year or the year after. TAPE 95-53, SIDE A Number 001 GEORGE FINDLING, representing ARCO Alaska, Inc., voiced support for CSHB 207(FIN) am and stated opposition to the Resources SCS. Mr. Findling said Alaska leaders have said it is in the state's best interest to compete successfully for more capital. To accomplish this, the first step is to quickly signal to investors that the state has the desire and ability to change, and, if passed this year, this is what the House version will do. The second step is to harvest a major opportunity to increase industry investment. The third step is to implement a long-term process that would give the state the flexibility to have a competitive position, even if worldwide competition or market conditions change rapidly. Although the new Resources SCS is a slight improvement over the first version, it would still water down the effectiveness of the bill that passed the House. He said they find the Resources SCS to be less helpful than current law and do not support its passage. Number 190 JIM BRANCH, Production Manager, Exxon, Alaska, stated they have supported efforts by the Administration and the legislature that attempt to provide clarity, predictability and a reasonable balance to the commissioner's existing authority to grant royalty relief. The Administration's original bill, HB 207, and the substitute reported out of the House had that intention. However, the current Resources SCS appears to send a very negative signal to the industry. Mr. Branch said an incentive is ineffective if an investor concludes it can be taken away over time, it has a hidden price tag, or creates an environment for future disputes, and the Resources SCS would do all of that. The suggestion of reopeners, sunset provisions, legislative review and repeated references to "value" and marketing of oil and gas are enough to discourage any serious investor. Mr. Branch said investors are prepared to assume the traditional risks associated with finding and developing oil and gas, but not those created by the state in the form of concerns over increased taxes or uncertainty over an incentive granted under the Resources SCS. He urged that the committee reconsider the changes made in the committee substitute. Number 244 KEVIN TABLER, Land Manger for Union Oil Co., of California in Alaska, reviewed sections of concern in the Resources SCS. Referring to the sunset provision in the bill, Mr. Tabler related that most of the Unocal leases held today are located within producing fields, some of which are nearing the end of their economic viability. However, they do not endorse the concept of sunset provisions. Unocal believes the requirement for legislative approval will be a time consuming and unnecessary requirement resulting in an administratively burdensome process. Mr. Tabler suggested there needs to be clarification of the language "in amount or value of the production." He said if this is to mean a net 3 percent floor or a maximum 76 percent reduction of the current royalty rate, then Unocal is opposed to this revision. He pointed out that the House version of the bill established the floor for producing and shut-in fields at 90 percent. Mr. Tabler said that although Unocal appreciates the attempt in the Resources SCS to address the assignability question, they believe a strong argument still exists for elimination of this restriction all together. Unocal would like to see the subsection relating to contractor selection that was in the House version reinstated. Mr. Tabler also testified that Unocal believes that the commissioner should have the discretion to provide for the contents of the best interests finding and determination in a royalty adjustment application. He suggested that if the committee and the legislature feel the need to include the details of the finding and determination, they should only be suggestions and not requirements. In his concluding comments, Mr. Tabler said Unocal believes that legislative approval is unnecessary, time consuming and administratively burdensome. Number 350 SENATOR TAYLOR asked for a clarification of the difference in the defining of the term "economic feasibility" in subparagraph (B) on page 2 of both the Resources SCS and CSHB 207(FIN) am. COMMISSIONER SHIVELY stated the department has a problem with that language because it doesn't capture exactly what might happen. He said there are possibilities at the end of a field, depending how long that could be, where you might also need to make a capital investment. The language in the Resources SCS would not allow that capital investment to be taken into account, and, therefore, would nullify that particular opportunity to make this legislation work. Number 375 SENATOR FRANK asked if a field's operating costs and a field's operating revenues are defined in law. COMMISSIONER SHIVELY answered that they are not. The department has suggested that there are language problems in the Resources SCS, and they would like to continue working with committee staff on them, but they also believe CSHB 207(FIN) am is adequate to resolve these problems. KEN BOYD, Director, Division of Oil & Gas, Department of Natural Resources added that the language in the House version is more general. It gives the commissioner the latitude that says that if there is cost increase or decrease, if you can't make your production feasible then a royalty reduction is warranted to prolong the economic life of an oil or gas field. SENATOR FRANK commented that he would like to see a hypothetical example of the components of cost, how much royalty is, how much severance is, how much transportation is, etc., in order to get some understanding of this and how it would work. COMMISSIONER SHIVELY said he thinks BP is going to provide an example and the department will look it and give its comments as well. Number 500 SENATOR PEARCE said she doesn't understand the administration's fear of having some kind of oversight. COMMISSIONER SHIVELY responded that he thinks the protection for the state is right where it ought to be, which is in the rank and file of the Division of Oil and Gas where those professional people will be making these decisions. That is why the administration feels strongly that there should not be other kinds of oversight where there is not the expertise to make the decision. TAPE 95-53, SIDE B Number 030 SENATOR FRANK said if we're not going to have an oversight, as a legislator he would like to know more about the methodology that will be utilized by the experts that make these decisions. He is looking for some greater comfort level that the right decisions get made for the right reasons. COMMISSIONER SHIVELY responded that different companies have different ways of viewing projects, and he couldn't provide one methodology that would be used. However, he said he could provide the information on how they made the decision on Conoco at Milne Point, but it is not necessarily going to be the way they always do it. Number 065 RICHARD FINEBERG, testifying from Fairbanks, expressed his appreciation for the way the Resources SCS has been carefully drafted, although he does not support it. He said the House version has huge defects and he believes the committee has made a good faith effort to cure some of them. Mr. Fineberg said a defect he believes that will continue to be of concern to the public is the blanket application granting the industry, in statute, automatic confidentiality on request, which deprives the public of their right to know. Mr. Fineberg, speaking to an earlier question by Senator Taylor on pipeline tariffs, said, for the record, he believes it should be made very clear that the regulated tariff is a maximum pipeline tariff, and nothing prevents the carrier from lowering the tariff, which is a very crucial point of pipeline rate making. He said this is not the time to deal with it, but rather than looking at incentives that might be offered, he thinks careful observation of pipeline tariffs and careful scrutiny might find much more fertile fields for promoting future state development of the public resource. Addressing an earlier discussion on the definition of "marginal field," Mr. Fineberg he said he wanted to make it clear for the record that in a 1995 study that compares approximately 210 regimes from 135 countries, a marginal field is defined as one that yields the producer a net present value of $2.20 per barrel or less at a 15 percent discount rate. In his concluding remarks, Mr. Fineberg suggested that if legislators want to increase production and save time, simply go home and do nothing because it is happening. Number 220 TOM LAKOSH, testifying from Anchorage, stated his objection to passage of HB 207, which he believes is in direct contravention of Article I, Section 15 of the Alaska Constitution because it grants special privileges and immunities to the oil industry. Mr. Lakosh said he upset that there have been several suggestions that the legislative oversight should be withdrawn for the sole purpose of denying the pubic an opportunity for due process. He said it is a clear attempt to take the resources of Alaskans without due process. Mr. Lakosh said he would request that the attorney general specifically investigate whether there is an attempt to repair contracts with this legislation or provide special privileges or immunity from law. There being no further witnesses to testify on HB 207, SENATOR LEMAN adjourned the meeting at 10:40 p.m.