SENATE RESOURCES COMMITTEE September 12, 1995 10:00 a.m. Anchorage, AK MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Rick Halford Senator Georgianna Lincoln (Participated via teleconference from Rampart) MEMBERS ABSENT Senator Robin Taylor Senator Lyman Hoffman ALSO IN ATTENDANCE Representative Norman Rokeberg, Chairman, House Special Committee on Oil & Gas COMMITTEE CALENDAR -- ALASKA OIL AND GAS CONSERVATION COMMISSION BRIEFING ON CONSERVATION ORDER NO. 360 AND SUBSEQUENT ACTION BY AOGCC -- DEPARTMENT OF NATURAL RESOURCES BRIEFING ON HEARINGS FOR OPTIMIZATION OF NATURAL GAS LIQUIDS BLENDING AND UTILIZATION OF MISCIBLE INJECTANT WITHIN THE PRUDHOE BAY UNIT AND SUBSEQUENT ACTION BY DNR -- OVERVIEW OF FINAL WORK SESSION REPORT TO RESOURCES COMMITTEE -- AREAWIDE BEST INTEREST FINDING -- RESOURCE PERMITTING WITNESS REGISTER David Johnston, Chairman Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, AK 99501-3120 Ken Boyd, Director Division of Oil & Gas Department of Natural Resources 3601 C St., Suite 1380 Anchorage, AK 99503-5948 Annette Kreitzer, Staff to Senate Resources Committee State Capitol Juneau, AK 99801-1182 David Sutter, Land Manager ARCO Alaska 700 G St. Anchorage, AK 99501 Steve Porter, Director Exploration Permits Compliance ARCO Alaska 700 G St. Anchorage, AK 99501 Brad Penn Marathon Oil Co. 3201 C St. Anchorage, AK 99501 Diane Mayer, Director Division of Governmental Coordination Office of Management & Budget Box 110030 Juneau, AK 99811-0030 Al Bohn, Manager, Air Quality Permitting Air Quality Management Section Department of Environmental Conservation 410 Willoughby Ave., Suite 105 Juneau, AK 99801 Commissioner Frank Rue Department of Fish & Game P.O. Box 25526 Juneau, AK 99802-5526 ACTION NARRATIVE TAPE 95-61, SIDE A Number 001 CHAIRMAN LEMAN called the Senate Resources Committee meeting to order in the Anchorage Legislative Information Office conference room at 10:00 a.m. In his opening remarks, SENATOR LEMAN said the current Resources Committee, as well as the previous Resources Committee under the chairmanship of Senator Mike Miller, has been working to identify those impediments to the continued development of oil and gas. He noted the committee has introduced legislation that it will continue working on and hold hearings on, however, the purpose of the meeting is not specifically addressed to that legislation, although he believes there are peripheral issues that relate to them. He then invited David Johnston to make his presentation to the committee. Number 050 DAVID JOHNSTON, Chairman, Alaska Oil and Gas Conservation Commission, expressed his appreciation for the opportunity to testify before the committee on Conservation Order No. 360 and the commission's hearings earlier in the year concerning NGL blending and MI utilization in the Prudhoe Bay reservoir. Mr. Johnston explained that natural gas liquids (NGLs) and miscible injectant (MI) are both produced from natural gas. NGLs are saleable and at Prudhoe Bay are blended with the crude oil for transportation to market. On the other hand, MI is injected back into the reservoir to recover additional oil as part of an enhanced oil recovery project. NGLs blended with the oil stream are principally butane and heavier components often referred to as pentane plus. NGL components converted to MI are primarily ethane, propane and butane. The common component, therefore, is largely butane. He said the dispute between Atlantic Richfield Company (ARCO) and British Petroleum Exploration Alaska (BPXA), in large part, centers on the best use of butane. In other words, should it be used to make more MI for enhanced oil recovery operations, or to make more NGLs for sale in the marketplace. Another point that is important to understand to appreciate the dispute is the Prudhoe Bay equity that exists. When the Prudhoe Bay unit was formed in 1977, two participating areas were approved: one for the oil rim and one for the gas cap. Each PA has a different equity distribution. For example, BPXA owns approximately 51 percent of the oil rim, but only approximately 14 percent of the gas cap. ARCO, on the other hand, owns approximately 22 percent of the oil rim, but approximately 42-1/2 percent of the gas cap. Exxon has about the same situation as ARCO. The other minor working interest owners own significantly less of both, but, generally, they tend to own more oil than they do gas. For example, Texaco, who was a participant in these hearings, owns approximately .5 percent of the oil, but absolutely no gas from the gas cap. The dispute arose when Alyeska, earlier this year, approved an increase in the volume of NGLs allowed for blending. It implemented new vapor pressure control criteria that would allow an estimated additional 10 to 20,000 barrels per day of NGLs to be blended with the Prudhoe Bay crude oil. The commission first became aware of Alyeska's pending decision in late December 1994. They immediately wrote the operators, both ARCO and BPXA, to inquire what affect increased NGL blending would have on ultimate recovery from Prudhoe Bay. The two operators offered quite divergent views. ARCO stated that increased blending would add approximately 90 million barrels of additional recovery, principally in the form of NGLs. BPXA stated that increased blending would reduce the amount of MI available for enhanced oil recovery, which could be used to recover an additional 100 to 200 million barrels of oil. Because of these differences, the commission decided to hold a hearing to further investigate NGL thru-put, MI utilization and ultimate recovery from Prudhoe Bay. The hearing was scheduled for May. In February 1995, Alyeska approved the new blending limits. On February 9, ARCO increased NGL output to meet the new criteria. BPXA responded by restricting the volume of NGLs blended with Prudhoe Bay crude at Skid 50. The result was an impasse with NGL blending remaining unchanged and both companies petitioning the commission for intervention. The commission's public hearing began on May 16 and ran through June 1, 1995. They reconvened the hearing on June 20 & 21 to allow rebuttal testimony. Post hearing briefs were required by June 30. The commission rendered its decision, Conservation Order No. 360, on August 9, 1995. Hearing participants included ARCO, BPXA, Exxon, Phillips, Shell, Mobile, Texaco, Chevron, Amarada Hess, Marathon, Yukon Pacific, DNR and the Department of Revenue. Mr. Johnston directed attention to some of the conclusions reached in Conservation Order No. 360 which are: No. 6. Competition exists between the production of blended NGLs and MIs, but facility upgrade options are available to reduce or eliminate this competition. No. 8. The working interest owners disagree about how their property and contractual arrangements protect the correlative rights of both the oil rim owner and the gas cap owners to produce their just and equitable share of oil and gas without waste. This is possible because of the separate and disparate equity interest between the oil rim PA and the gas cap PA within the Prudhoe Bay reservoir. No. 9. It appears that all persons' correlative rights will best be protected by complete integration of interests in the reservoir under AS 31.05.110. No. 12. ARCO and BPXA agree that current production practices are producing physical waste from the Prudhoe Bay reservoir but disagree why. Current property and contractual arrangements governing operation and development of the Prudhoe Bay reservoir are inadequate to prevent and may promote physical waste. No. 16. At least in the short term, the quantity and rate of production of oil and gas most likely to prevent waste and ensure greater ultimate recovery is to blend for sale the maximum allowable volume of NGLs. No. 18. Sufficient evidence has been heard regarding the effects of property and contractual arrangements on Prudhoe Bay development and operation to convince the commission that the next phase of these proceedings should be more focused on the general investigation previously anticipated. It appears that more complete unitization and integration of interest in the Prudhoe Bay oil pool will be necessary to prevent waste, ensure greater ultimate recovery of oil and gas, and protect the correlative rights. Consequently, in the absence of voluntary efforts, further hearings in this matter will be directed toward developing a plan of compulsory unitization. No. 19. Competition between the gas cap and oil rim has compromised conservation principles and the development and operation of the Prudhoe Bay oil pool. If the competitive effects of disparate equity interests are eliminated, the working interest owners should be able to recommend a cooperative and uniform plan of operation and development to prevent waste and ensure a greater ultimate recovery of oil and gas within the Prudhoe oil pool. Mr. Johnston reviewed two of the rules of Conservation Order No. 360 which are: Rule 1: Requires the operators to immediately begin producing the maximum volume of NGLs that can be tendered to Taps from the Prudhoe Bay reservoir. This rule expires in one year. Rule 2: Establishes another hearing date which is currently scheduled for October 24 to begin developing a plan for compulsory unitization of the Prudhoe Bay reservoir. The hearing may be postponed if the owners are voluntarily working to integrate the separate and competing equities of the gas cap and oil rim. Mr. Johnston informed the committee that there are two applications for rehearing of Conservation Order No. 360 pending before the commission. One has been filed by BPXA and the other by Exxon. Concluding his direct testimony, Mr. Johnston introduced Commissioner Russ Douglas, and then stated he would take questions from the committee. Number 170 SENATOR HALFORD inquired as to the present status of requiring operators to produce the maximum volume of NGLs into the line. MR. JOHNSTON responded that they have received word that the operators are abiding by the order and NGLs being sent down the pipeline have increased. He thought it was in the 70,000 plus range. Number 184 SENATOR FRANK asked how they monitor this so that they know the operators are complying with the order. MR. JOHNSTON replied that they have inspectors out in the field to verify, but at this particular point, they are relying on the operators to monitor themselves. He noted that ARCO is the operator of the central gas facility where the NGLs are produced and they are in control of that process. BPXA is in control where the NGLs are blended with the Prudhoe Bay crude oil. Number 192 SENATOR LINCOLN said she noted from the testimony that there could be a possible increase of 20,000 additional barrels of NGLs a day, and she asked if there was any kind of time frame for determining when that will peak out. MR. JOHNSTON replied that the question was not an easy one to answer because the amount of NGLs that can be produced and blended is also a factor of the amount of oil that is being produced on a daily basis. The order directs the operators to increase the blending rate, so, presumably, if there was a cutback in oil rate, the percentage of NGLs would still be increased over what would have taken place prior to this order. He also pointed out that increasing NGLs is a process that takes a little bit of time to unfold. Number 220 SENATOR FRANK asked if the effort is to get the companies to voluntarily agree to a unitization of the entire Prudhoe Bay field. MR. JOHNSTON answered that they would like to see the separate and disparate equity interests that exist between the gas cap and the oil rim no longer exist. Instead, they would like to see that there be a common driver within the reservoir so that there is not a built-in incentive to produce gas or to produce oil. This is based upon the assumption that the current practices they are seeing right now, which is causing competition between the production of NGLs versus the production of oil via the enhanced oil recovery process of injecting MI back into the reservoir, is causing not the most optimum development plan being put forth by the operators. Testimony at the hearings was that waste was occurring, that ultimate recovery was being affected. Number 275 SENATOR FRANK asked if the commission's role was to protect the state's royalty interest or the state's general interest, and if there is any conflict there. MR. JOHNSTON replied that the commission is there to protect the reservoir, to ensure that that reservoir is properly developed. In that process, they do try to protect the correlative rights of BP, ARCO and the state of Alaska. He noted that nothing in the AOGCC's statutes really points to considering economics, but it does talk about good oil field engineering practices. So, even though the statute does not talk directly to economics, he thinks it is strongly implied. Number 295 SENATOR FRANK inquired as to the current number of units in Prudhoe Bay. MR. JOHNSTON responded that DNR and the Alaska Oil & Gas Conservation Commission have different concepts of "units." The property at Prudhoe Bay has been unitized where multiple leases have been combined together and are managing as if they were two properties: the gas cap and oil revenue. The commission would like to see these individual leases brought together and managed as if one property, where there is a common equity that exists between the gas cap and the oil rim. SENATOR FRANK asked if the best way to accomplish the unitization was to allow the companies to voluntarily negotiate that rather than imposing something that may not be as good as a negotiated agreement. MR. JOHNSTON replied that in his opinion, voluntary efforts are the best way to go. He said the plan at Prudhoe Bay worked very well for many years, but today they are beginning to see the conflict that is developing between the gas cap and oil rim. Number 340 SENATOR LEMAN asked if the two were combined, wouldn't the series of percentages be an ever changing thing, and if there wasn't some way to come up with a methodology that would provide equity. MR. JOHNSTON answered that he believes there is, and he observed that this has been seen in other fields in Alaska such as Point McIntyre, which has a gas cap and is unitized under one equity. There are not separate equities for the gas cap and for the oil rim. Number 365 SENATOR HALFORD asked if there are other jurisdictions that have a similar leasing system to what exists at Prudhoe Bay: unitization that is not complete. MR. JOHNSTON said the participants in the hearing were asked if they could refer to any other field in the U.S. where a dual equity like this existed, and they could not refer to another example of a reservoir that had this split. SENATOR HALFORD asked if the statutory framework actually allows for what exists at Prudhoe Bay. MR. JOHNSTON answered that in looking at the statute, a reservoir can be developed without unitization; the properties do not have to be integrated. The only time that you have to integrate is if you start violating conservation principles. He further explained that the commission does not feel that Prudhoe Bay has been fully unitized, although there has been an attempt. The property rights have been integrated as it pertains to the gas, and they have unitized as it pertains to the oil, but, essentially, two properties have been created. Number 435 SENATOR PEARCE commented that in 1992 she sponsored a bill in which the only change made was that the chairman of the commission cannot succeed himself or herself, but as a part of that, there were long and involved discussions over whether or not the commission should be allowed to regulate, not only for conservation purposes, but also for economic purposes. The problem with the statute is that the commission is given jurisdiction and authority to carry out the purposes of the chapter, but there is never a purposes section in a chapter. A policy decision was made in 1992 by the legislature and the administration not to add economics to the powers and duties of the commission. She said that since they chose not to put it in the statute that it is silent and there is not a common thread of economic recovery throughout the statute. MR. JOHNSTON agreed that there are not specific references to economics in the statute, although they are sensitive to those cites and they look at it as to what constitutes good oil field engineering practices. SENATOR PEARCE responded that that was good common sense, not economic sense, but what she is talking about is that they are not there to maximize the state's take from an oil field by deciding that they are going to lower the take now to raise it later, or vice versa. Number 510 SENATOR HALFORD observed that from the whole history of this commission, economics has always been a thread that has been there; it doesn't have to be stated directly. He questioned what is being conserved if there is no economics. Number 545 SENATOR LEMAN asked Mr. Johnston if he had any comments on the jurisdiction argument, other than just to acknowledge that it exists. MR. JOHNSTON said there have been some questions of jurisdiction, and on those questions the commission has already ruled that clearly they do have jurisdiction in this regard. They have jurisdiction over voluntary units on state lands, federal lands, etc. SENATOR LEMAN inquired if it was possible that there is overlapping jurisdiction with DNR. MR. JOHNSTON responded that if DNR renders a decision that is in direct conflict with the commission's, it may be a decision that only the courts can render, or it may be that the legislature may want to clarify its intent. He pointed out there is some overlapping language in the two statutes. Number 645 SENATOR HALFORD asked if the commission has the independent authority to hire counsel and MR. JOHNSTON clarified that the statute says the Department of Law will provide full-time legal counsel to them, but that they have the right to contract. SENATOR HALFORD pointed out that it could be the ultimate question if there is conflict between DNR and the commission and the attorney general represents both of them. Number 610 SENATOR LEMAN thanked Mr. Johnston for his participation in the hearing and then invited Ken Boyd to make his presentation. KEN BOYD, Director, Division of Oil & Gas, Department of Natural Resources, stated that DNR's hearing is ongoing so there is a fair constraint on what he can say. Mr. Boyd said DNR held hearings in August, and on October 3 there will be closing oral statements by the participants, as well as an opportunity for the public to comment, with the written public comment period closing on October 13. After that, the commission will render its decision. TAPE 95-61, SIDE B Number 001 Mr. Boyd commented that with all of the testimony in these hearings, he has to believe that somebody believes that there is an authority question here, having spent this much time, money and effort on it. He said the authority question is one that Commissioner Shively would like to see addressed in a separate hearing and would like to address personally. SENATOR LEMAN said when the timing is appropriate, the committee would be interested in airing the authority question and having Commissioner Shively's input. Number 020 SENATOR FRANK asked if DNR's hearings were addressing the same issues as AOGCC. MR. BOYD responded that some of their issues are undoubtedly the same, and they have built on the commission's hearing and went off in a different direction, incorporating some of the same things. He also clarified that unitization is not part of their current hearing, instead it focuses more on the side of the NGLs and MI. However, when the commission does have a hearing on unitization, DNR may become involved or have a separate hearing. Number 050 SENATOR LEMAN voiced his concern that there appears to be a duplication of effort which means a duplication of a lot of money and time for those who are participating. He asked if it really makes sense to have a duplication of effort and if there is a need to streamline. MR. BOYD agreed that there was some duplication and when dealing with this kind of issue there is some repetition. DNR did incorporate the AOGCC testimony into their hearing. Number 065 SENATOR PEARCE asked if Mr. Boyd would do a walk through from a lease sale, exploration, and announcement of a discovery, and then what happens in what order. MR. BOYD explained there is a lease sale and they occur in 3 mile by 3 mile blocks, with a number of companies bidding on all these tracts. When the bidding is done, there is a number of leases and the companies get together with the state and make a decision that it would be in the best interest of everybody to unitize it. In other words, to take the interest and decide what's under all these leases. Then as to positions of lease ownership, to divide this up into a unit that has a position of ownership. Instead of spending individual resources and developing each individual well, it makes sense to pool the resources, drill common wells and share the difference based on ownership. Those decisions are made through unit agreements and negotiation. The department has discussions with the unit owners as to what the production from each of the individual pieces of the unit will be. Number 125 SENATOR PEARCE asked if when the companies bring to DNR a unitization agreement to produce a particular pool, does DNR have the ability to say that a company, such as BP, should own 35 percent instead of 40 percent. MR. BOYD responded it is more to the ownership of how much oil is under the particular tract, not so much who owns what. He also acknowledged that there can't be production until there is a signed unitization agreement. There also must be an operating agreement signed by the operator and DNR. Number 155 SENATOR LEMAN thanked Mr. Boyd for appearing before the committee and stated the next item on the agenda would be an overview of work sessions that have been held during the interim on various issues of interest to the committee. ANNETTE KREITZER, staff to the Senate Resources Committee, gave brief background information on the gathering of information contained in the Best Interest Finding and Permitting Report. She stressed that the report is her interpretation of the anecdotal comments of those who were interviewed and those who attended the work sessions. The purpose of the report is to bring the permitting issue and the areawide best interest finding issue to the committee's attention. She noted that there are two slightly different viewpoints at this time, and there may be more as the issue of a best interest finding is discussed further. Ms. Kreitzer pointed out that several bills passed recently by the legislature, such as SB 238 and SB 308, began to deal with the oil and gas lease sale process, the hearings that go on, the coastal zone process. However, there is some concern that the hearing process adopted in SB 238 has been lengthening the permitting process with no real gain or real value added to the process. There may not be the value in the addition of that hearing process because the companies are having to address the same facts over and over, and that is a factor of having the same land up for lease over and over again, and she believes that is why this best interest finding idea has come to the forefront. In checking with Jack Chenoweth, legislative counsel, he stated there were no prohibitions, but he said it depends on what the final idea would like if it were to come before the committee for consideration. Ms. Kreitzer also noted that Jim Eason, a consultant to the Resources Committee last session, mentioned a bifurcated best interest finding process as another option to consider. Number 260 SENATOR PEARCE requested that Frank Rue comment on a reference made in the report to a question posed by Fish and Game to DNR relating to isostatic rebound as a source of geologic instability, which was a concern contained in the preliminary findings for the Yakataga sale. FRANK RUE, Commissioner, Department of Fish & Game, testifying via the teleconference network from Juneau, responded that it was not the most significant concern they had. In the situation of the Bering Glacier retreating at approximately 100 feet a day and where there is very active glaciation, isostatic rebound is a factor in earthquakes in other parts of the world. The question was easily dispensed with by DNR who said the rate of rebound is very slow. DNR has got information on how rapidly the land is rebounding, and they were able to deal with the question very simply, he said. Whether it is a good example of the kind of question they should raise or not, he thinks it is worth looking at. He added that DNR dealt with the question and it did not become a major point of contention. Number 300 ANNETTE KREITZER, in clarifying the reference made to the isostatic rebound question in the report, said that is not one big thing that is a problem in the permitting process or best interest finding process, it is a lot of small things. She said it may not be a typical question that Department of Fish and Game employees ask, but it adds to the costs of all these processes that the companies have to go through. Continuing with the report and the best interest finding process, Ms. Kreitzer said she noted there was some discussion about whether a five-year oil and gas lease sale at this point in the state's history is too long a period of time. She corrected a mischaracterization in the report - at least one small company who faxed her said that they still feel that five years is too long. Addressing the permitting issue, Ms. Kreitzer said there was discussion during the work sessions on how important permitting is in factors of decisions about investing in Alaska. There are questions about the ability of government departments to be efficient in permitting matters. Instead of phoning or faxing for additional information, letters are sent to permittees resulting in additional time delays. There is also concern that there needs to be good interaction between state and federal governments in the issuance of permits. Memorandums of Understanding to facilitate interaction between state and federal agencies did exist at one time and they may need to be updated. There is concern that a lot more days are being added on to the permitting process because of the stopping the clock to answer questions asked in letters. There is concern that there isn't comment from agencies until the last day for review. There was consensus that the Alaska Coastal Management program works pretty well because of its consensus nature. It was felt that it was helpful that it forces the other agencies to follow a deadline. There was consensus that inexperienced staff, plus reorganization at DEC may be hampering the Air Quality Permitting program. There was some concern that the Coastal Zone standards could either be tightened or that some of those activities could be added to the "B" List to expedite the permitting. The final issue of concern was shared costs. Departments, because of budgetary concerns, will enter into agreements with companies to expedite permits. Ms. Kreitzer said she tagged it onto the report as something that is happening and may be something the committee would want to look at further. Number 470 SENATOR LEMAN stated the committee would move on to the next item on the agenda which was areawide best interest findings. DAVID SUTTER, Land Manager, ARCO Alaska, informed the committee that the presentation he was making before the committee was almost identical to the presentation he made to Oil & Gas Policy Council approximately four weeks ago. Mr. Sutter said one of the problems with exploration and with the leasing program is that there hasn't been a lease sale in almost two years. Secondly, the lease sales that are scheduled are broken up with one scheduled for this year and the next one not for another two years. This means waiting until two sales occur before being able to lease a prospect. Also, there is the economic factor, and they would not want to go out and spend the kind of money it takes to drill on the North Slope if they knew they were going to eventually own only half of the prospect. He said it would be better for the company to just wait and get the entire prospect leased up before they invest money to drill. As a result, the company goes and leases in other parts of the world. Mr. Sutter outlined the following recommendations made to the Oil & Gas Policy Council which include: identifying core areas in the state of Alaska that are already established as far as oil and gas producing areas; DNR conduct an areawide best interest finding for these areas initially; update the best interest finding at least every five years; the core areas would be offered for lease on an annual basis; and delete the acreage in the core areas that had objections. TAPE 95-62, SIDE A Number 015 SENATOR FRANK commented that he would be interested, at some future time, for the committee to have a briefing on what the state has under lease, how many leases are under production or part of a unit under production, and the status of all the leases. He said he's under the impression that there are many, many leases that aren't being produced, etc., and he wonders why. MR. SUTTER responded that one of the concessions ARCO has talked about is that the lease terms could be shortened by going to an areawide lease sale. That would force the oil companies to get out there and drill or do something before the primary term expires. SENATOR FRANK asked if the bonus bid issue was a good idea versus some other system that doesn't require that kind of up-front expenditure. MR. SUTTER answered that he would not change the current system, which is the sealed bonus bid, because he thinks it is the best one going in trying to maximize revenues for the state of Alaska. He suggested shortening the lease term before worrying about changing the bonus system. Number 050 SENATOR LEMAN said it was the committee's express interest two years ago to get more exploration going sooner rather than later, and to identify things that could be done and begin a discussion on that. Mr. SUTTER reiterated that the recommendation to shorten the lease term is conditioned upon having an areawide lease sale. He cautioned that just shortening the term, but staying with the current program is going to scare even more people out of the state. Number 070 SENATOR FRANK asked what the sense was in DNR having leases within a prospect held at two different times. MR. SUTTER responded that a lot of it is the way the industry has nominated it, a lot of it is based on what becomes available at the time it's offered. Also, a lot of it has do with just the manpower DNR needs to be able to do the best interest finding for that lease, as well as being able to clear the title on it. He also pointed out that it is the industry's responsibility in dealing with DNR to convey what they are interested in and let them know what level of interest they have. He acknowledged that in the past they probably haven't been very good at doing that. Number 175 MR. SUTTER also spoke to two leases that were issued in Kuparuk: one issued prior to the field discovery and one that was issued about four years. He noted there were 10 pages of stipulations added to one lease four years ago, and he believes the place for the stipulations is in regulations so that they apply to all leases, not just individual tracts. SENATOR PEARCE questioned how that kind of system could work, as well as making it conform with coastal zone management. She said it would require constantly changing the regs to come up with whatever the latest request is. SENATOR HALFORD agreed that there are probably too many stipulations, but he said in an ideal world they are probably a lot fairer than added regulations after the fact which change the rules. SENATOR LEMAN questioned how long it would take to go through the regulation process in a nonemergency situation. KEN BOYD responded that it would take anywhere from six to eight months or longer. SENATOR PEARCE asked how DNR gets comments from the oil companies on stipulations that are part of a lease sale plan. KEN BOYD responded that it is a continuing operation of talk and conversation, but, formally, it is through the finding process where they are developing what mitigating measures are going to be included in the lease sale and there is the opportunity to comment. Number 245 In his final comments MR. SUTTER said the recommendation from ARCO is that not only is an areawide best interest finding needed, but it should go one step further with areawide leasing. He said his recommendation is to not only give DNR the flexibility to do their job, but to give them the appropriations to do so. Number 275 SENATOR HALFORD agreed that DNR should have flexibility to do their job, but he pointed out there are two kinds of flexibility. One flexibility that some people are concerned with is the flexibility for different interpretations after the fact. He thinks the kind of things that do the most good in terms of change are things that are applied universally to all of the competitors, that encourage the competitors to fight it out to see who wins, not the things that are done after the fact for one or the other competitor. Concluding, MR. SUTTER stressed that DNR is short on staffing and an areawide leasing program is going to tax their staff considerably. Number 340 KEN BOYD noted that Commissioner Shively is interested in getting the lands leased as fast as possible, but still with the responsibility that we have for that ownership and to mitigate properly. The thing that slows leasing down is the finding, and the passage of SB 308 lengthened the process by requiring a preliminary finding. He added that DNR believes that at least areawide findings are something that can probably work. In response to Senator Frank's request earlier in the meeting that the committee be briefed on the status of current leases, upcoming lease sales, etc., KEN BOYD outlined the following: Sale 80: This is the Shaviovik sale. The finding came out one week ago, and the sale will be held on December 5. Sale 79: It was scheduled to held in October, however, Commissioner Shively has not yet decided when he wants to issue that finding and when to hold that sale. Sale 85 A: It is a reoffering sale in the Cook Inlet scheduled for November 29. It will go to a preliminary finding early next year. The public will have 60 days to comment on the finding once it is created. A number of acres have been added back in the Caribou Hills area at the request of SIRI and Union Texas Petroleum. However, there is still opposition because the local people are concerned about damage to their aquifer from oil and gas development, and there are discussions going on in the area to resolve that issue. Mr. Boyd also noted a large North Slope sale is scheduled for 1997. Number 565 SENATOR PEARCE asked for a clarification on a complaint from persons in Cordova to the Coastal Policy Council relating to Sale 79. DIANE MAYER, Director, Division of Governmental Coordination, acknowledged that several citizens petitioned the council regarding DNR's consistency determination for Lease Sale 79 and the council determined that those appeals didn't have standing under the law. One individual took that decision to court to see if the council erred in making that decision, and that is in court right now. TAPE 95-62, SIDE B Number 045 SENATOR PEARCE asked Mr. Boyd if the status of that suit has had any bearing on Commissioner Shiveley's indecision so far on Lease Sale 79. KEN BOYD responded that he didn't think so, but they have been tracking it as to whether it stops any part of the process, and so far, it has not. Number 055 SENATOR LEMAN stated the final item on the agenda was a presentation by Steve Porter of ARCO and Brad Penn of Marathon Oil on resource permitting. STEVE PORTER, Director, Exploration Permits Compliance, ARCO Alaska, said the goal of oil and gas development in Alaska is to identify those areas that the company wants to lease, that the public wants to lease, that the representative government wants to lease to create a lease sale process that is efficient, protects the public, protects the environment, and encourages the oil and gas industry through incentives. The oil and gas industry is not concerned with the standards that are placed before it in terms of compliance with those standards. It is not the standards that seem to be the problem, but, rather, the methodology on how the standards are applied to a specific application. He noted that the energy facility standards in statute give the state and the industry very specific support for how to go about developing a field. However, he pointed out that sometimes the process gets slowed down through the state's process, and sometimes there are situations where the owners can't agree on facility relationships. Sometimes the industry will be in conflict and when they can't resolve the conflict, they may move forward with a situation that is not in their best interest or in the state's best interest just because they can't resolve the conflict. Addressing exploration and process issues, Mr. Porter said from a coastal zone consistency standpoint and from an operations standpoint, the very first thing a company must do is to inform the public and the agencies what their plan is and to receive feedback from that. The public hearing process is a method of feedback and the identification of concerns, but the one thing that the process fails to do is that it is not a consensus building process; it is an advocacy type of a process. He suggested there has to be a different methodology for moving forward; there has to be some type of consensus building process. Once all of the feedback and all the analysis is received, at that point, a company makes a sound decision and they either move forward or don't. Speaking to the Coastal Policy Council and the Alaska Coastal Management program, Mr. Porter said it is a good program, but it is a complex process that creates enough uncertainty in the oil industry that it makes companies reticent to come to Alaska to spend their money. He suggested the industry would like to see a less complex process with certainty in that process. Number 210 SENATOR PEARCE said the federal act is the underlying act in the coastal zone process, and she asked if some state within the United States has done a better job in building this process. MR. PORTER responded that coastal zone management is having difficulty dealing with problems, so the question is if there is a better way to deal with conflict. Florida has created a mediator type of process where the two sides identify a mediator and the mediator sits down with the parties and helps them try to come to a consensus. If the parties can't come to a consensus, the mediator becomes the arbitrator of the decision. However, the Florida law does not become effective until October, so there is no experience with the process. Number 265 MR. PORTER said he has had concerns with the Coastal Policy Council because there has been a time where there has been a misunderstanding and mistrust of exactly what the Coastal Policy Council is supposed to do. He said if they waste thousands of dollars reviewing, analyzing and making a decision on every single petition that comes to them, and then, if every single petition still goes to court, they didn't help anything. The Coastal Policy Council became a waste of time; it became one more loop in the process without adding any value. He pointed out that the Coastal Zone Management Act is up for reauthorization this year, and he suggested there is the opportunity to try all kinds of things to see what works and, in essence, lead the nation in coastal management issues. SENATOR LEMAN commented that if the Coastal Zone Management Act is up for reauthorization, this is the time for the state and the industry to be involved and make some changes. MR. PORTER said he spends a lot of his time basically filing permits, and, if the complexity of the process could be minimized, they might have more time for the other. He said the federal law provides enough latitude to do a lot at the state level, and they haven't identified anything specific in the federal law that needs to be changed, so he thinks the focus should be on the state program. Number 350 MR. PORTER then outlined the various permits required for their Bufflehead Project: there is an AOGCC permit to drill, a BLM permit to drill; an oil spill plan that cost $20,000 to prepare; an environmental assessment for a permit for the right-of-way which cost $20,000 to prepare; the permit issued by the U.S. Fish and Wildlife Service which cost $5,000; the coastal resource clearance cost a couple of thousand dollars; and the air quality control permit which cost $3,500. Mr. Porter pointed out that the air quality control permit is about 16 hours worth of work for the agency that is taking about 40 hours to complete, and the oil and gas industry is being billed on an hourly basis. He said he thinks there are better ways to create an efficient operation that encourages efficiency and addresses some of the struggles the industry has with the overhead. He noted there has been talk of going to a fee basis, and he suggested going to a contractor basis also where the agency would choose a list of contractors that are reviewers for permits, and to let the oil industry choose the contractor. That brings the quality of the contracts up, it brings the quality of the work up and it brings the costs down. Number 500 SENATOR LEMAN, in speaking to the air quality program, said the Legislative Budget & Audit Committee has said it is premature to be auditing a program that is just getting started, but he will be discussing the issue with Commissioner Burton to make sure that DEC is not inappropriately charging or is being inconsistent in those charges. MR. PORTER pointed out that costs for the permitting process itself are probably in excess of $100,000 per well. As a recommendation on a way the process can change, MR. PORTER suggested developing a single plan of operations that actually has all the information for all the permits and is in chronological order and makes sense. Instead of producing 15 permits that all duplicate themselves on a lot of the information, he suggested having a plan of operations, but also keep all the regulations in place, keep all the environmental concerns in place and keep all the reviewers in place in terms of the agencies. SENATOR LEMAN agreed that those are the types of things that need to be looked at in finding a way to make the process easier for the reviewers and easier for the people applying for the permits. Returning to the Bufflehead project, MR. PORTER said it started in May 1994, and it is anticipated that they will start drilling the well this week. He attributed a lot of the problem in taking that length of time in getting to this point on the federal agencies, not the state agencies. He suggested getting the federal agencies to interact with the state's process and to get them to buy off on our time lines up front in order to give the industry some certainty about how to get the permits completed. He added that on the whole, the state agencies are more responsive and understanding to the industry's needs. TAPE 95-63, SIDE A Number 005 Concluding his presentation, MR. PORTER also suggested that one of the things that should be examined and should be encouraged is putting the permitting process on the Internet because a lot of the concern that comes from their remote districts is the 10 to 15-day turnaround time and this would help speed up the process. Number 065 BRAD PENN, representing Marathon Oil Co. in Anchorage, noted he is also chairman of AOGA's Land, Exploration & Operations Committee, and he stated AOGA is supportive of the areawide best interest finding. The specifics of lease terms and whether it's an entire areawide offering or specific areas have not yet been addressed by the committee. In addressing the permitting process, Mr. Penn said he thinks the process is good in intent to have DGC be the coordinating agency to go out and collect comments. However, he believes the problem is that their authority is just in regulation and not in statute. There is a 50- to 55-day time frame for projects for coastal zone consistency review, but the abuses of the system come when an agency will ask a valid question and the clock is stopped. He suggested that if DGC is going to be the coordinating agency, besides giving them tough people to enforce the regulation, give them some teeth in what they are enforcing as far as coordinating a response under the coastal zone consistency determination. Mr. Penn also spoke to performance standards. He said no matter whether you drill a well in the Kenai gas field or Clam Gulch or Beaver Creek, there is a certain set of standards that are similar for that well. He suggested one thing that might work is to move the approval of an exploratory well on to what is called the "B list," the general concurrence that that activity would be approved if they met these performance standards, and the only time it would be necessary to ask for another permit would be if they were going to exceed those standards for one reason or another. Number 145 SENATOR LEMAN said he thought there was a general permit to which you attach certain specifics. MR. PENN said what he was suggesting was that list be expanded to include something like exploratory wells, because right now just getting the minor things on the list has been a battle. Number 180 DIANE MAYER, Director, Division of Governmental Coordination, said she thought the presentations by the previous speakers of what's happening had been fairly accurate, and some of the suggestions they brought forward have merit. Ms. Mayer said the coastal program has a progression to it in that it does have a lot of complexity. The consistency process which was put into the program had the real single objective of trying to bring the agencies together with their permit authorities to look at a proposal at the same time. They established for Alaska, at least in coastal areas, a project-based review, which was a real leap forward to solve a lot of the problems of redundancy. In assessing the program, along with that design and now its implementation, there has been a lot of expectation with different parties about what they thought it was or how it should work. Also, some of the practices and processes put in place, while they were really innovative and made a big leap forward in their time, have become more formalized and actually part of the bureaucracy. There have been shifts largely because of the petition process and the appeal mechanism. She said they are looking at the program overall and doing an assessment of what is working, what isn't working, what needs to be updated, etc. Speaking to suggestions that have been made during the meeting, Ms. Mayer said she is completely open to suggestions and is willing to take a hard look the program and how it might be streamlined and made more effective. Ms. Mayer also pointed out that the whole program was initially authorized under the Federal Coastal Zone Management Act, and a lot of the problems they are struggling with are just legal or regulatory things in the state law, and they can do a lot by really fixing their program. She added that the feds essentially give the state an enormous amount of power and a considerable amount of money. For instance, right now, with a federal grant, DGC has a person onboard to basically work out and bring up to date their MOU package and make sure that their relationship and understanding with federal agencies is clear. Number 290 AL BOHN, Manager, Air Quality Permitting, Department of Environmental Conservation, said that division has undergone a reorganization and there are now two layers of management that are gone in the permitting process, so the whole process has become more streamlined. Addressing Mr. Porter's concern that an air quality permit for the Bufflehead project, which he said should have taken the agency 16 hours instead of the 40 hours they were billed for, Mr. Bohn said he is now reviewing all timesheets, and, if this had crossed his desk, he would have investigated it much further, but he also pointed out that Mr. Porter had the opportunity to dispute some or all of the charges, so there was some recourse for him if he felt these charges were out of line. Mr. Bohn said he is aware of Mr. Penn's concern with the Kenai gas wells, and he offered to work with Mr. Penn on some other strategies to avoid another occurrence of any kind of a problem that he has. Since reorganization of the air quality division, Mr. Bohn said they have tightened up their procedures and streamlined them to a great effect. He has experienced staff averaging 7.2 years of industry experience. Their core group of nine people is currently servicing 238 permittees, and looking toward the implementation of the new permit program sometime in November after EPA approval, these same nine people will be servicing somewhere between 450 and 600 permittees. He said they have to establish streamlined procedures, and they will become more of an assembly line rather than a piece work shop that they were in the past, which will allow some economies in processing these applications in a timely fashion. Number 375 SENATOR LEMAN asked if there is a system in place now so that they can say with confidence that the charges for an air quality permit are going to be reasonable. MR. BOHN responded that it is not a documented system; each review is done on a case-by-case basis. With the numbers that were used when developing the original permit fees for the current operating permit program, the number of hours that they estimated for retainer purposes generally work out pretty close to the time it should actually take, give or take certain spins on things. He also acknowledged that he sets tough deadlines on issuing permits. Number 440 Responding to an inquiry from Senator Frank, MR. BOHN explained that there are nine people in the permitting group since the reorganization. In addition to the air quality permit group, there is also a compliance and develop group under the air quality maintenance section. SENATOR FRANK noted that at the time the air quality standards went into effect, the department requested approximately 43 new people, which the legislature resisted, and he asked how many were approved. MR. BOHN said there are currently 32 employees in the division. Number 500 FRANK RUE, Commissioner, Department of Fish & Game, stated he appreciates the efforts of both Mr. Porter and Mr. Penn to point out some of the positive things that can be done and things that can be avoided. Some of the ideas that have been floated during the meeting are things that they have been working on and will continue working on. He agreed that issues with the Coastal Policy Council need to be worked out, but he added that it is really an issue of the public and district having a voice in the process that agencies are already in. He also expressed his interest in discussing specific issues with either Mr. Penn or Mr. Porter because he does not want to be treating industries differently than he would the public. Number 565 In his closing comments before adjourning the meeting, SENATOR LEMAN thanked the participants and encouraged them to share highlights of the meeting with their colleagues, and he stressed that the committee is serious about wanting to make some of these changes that will make government friendlier, more efficient and will get things done at less cost. He then adjourned the meeting at approximately 2:00 p.m.