SENATE RESOURCES COMMITTEE April 22, 1996 3:55 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Rick Halford Senator Robin Taylor Senator Georgianna Lincoln MEMBERS ABSENT Senator Lyman Hoffman COMMITTEE CALENDAR CS FOR HOUSE BILL NO. 325(FIN) am "An Act relating to modification of royalty to encourage production from an oil pool containing heavy oil; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION HB 325 - No previous action to record. WITNESS REGISTER Representative Joe Green State Capitol Bldg. Juneau, Alaska 99801-1182 POSITION STATEMENT: Sponsor of HB 325. Ken Boyd, Director Division of Oil and Gas Department of Natural Resources 3601 C Street, Ste. 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Commented on HB 325. Bill Van Dyke Division of Oil and Gas Department of Natural Resources 3601 C Street, #1380 Anchorage, AK 99503-1380 POSITION STATEMENT: Commented on HB 325. Jon Tillinghast Simpson, Tillinghast, Sorensen & Lorensen One Sealaska Plaza, Suite 300 Juneau, AK 99801 Midland, TX 79710 POSITION STATEMENT: Supported HB 325. Rick Foppiano Oxy USA, Inc. P.O. Box 50250 Midland, TX 79710 POSITION STATEMENT: Supported HB 325. Mike Callaghan 1540 Medfra Anchorage, AK 99501 POSITION STATEMENT: Opposed HB 325. ACTION NARRATIVE TAPE 96-62, SIDE A Number 001 HB 325 NO. SLOPE HEAVY OIL ROYALTY MODIFICATION  CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:55 p.m. and announced HB 325 to be up for consideration. SENATOR PEARCE moved to adopt SCS CSHB 325(RES), Z version, dated 4/21/96. There were no objections and it was so ordered. REPRESENTATIVE GREEN said he supported the changes in the Senate CS. SENATOR LEMAN asked Representative Green if he minded clarifying the $15 per barrel charge being applied at the LACT meter. He replied no. KEN BOYD, Director, Division of Oil and Gas, said language on page 1, line 12 assumes that the charge is calculated at the LACT meter at Pump Station 1. SENATOR LEMAN asked if that's the case did he object to clarifying that in the bill. BILL VAN DYKE, Division of Oil and Gas, said their understanding was that the $15 dollars would be at the LACT meter for each of the individual pools and he thought some clarification might be worthwhile. Number 90 SENATOR PEARCE moved to adopt a conceptual amendment clarifying that issue. There were no objections and it was so ordered. Number 124 SENATOR LEMAN asked Mr. Boyd to explain why several points he brought up in a letter to him in opposition to HB 325 are some of the same points that had been raised in this committee regarding SB 318. The language he was concerned with is "It's inflexible. The relief is awarded without any showing of any economic necessity." MR. BOYD explained that Northstar is presented as a package that covers a lot of different things. Nobody has said the field is uneconomic; something is needed to move forward faster. He said in this bill he is asking for a complete analysis because he doesn't know if relief is needed or not. SENATOR LEMAN asked him to explain another comment from the letter that said HB 325 doesn't provide the State with any upside potential. That is the same criticism some have leveled at SB 318. MR. BOYD explained at Northstar it depends on what the future holds as to what the State receives. He considered it to be an analysis of a set of conditions that have an outcome depending on the future. SENATOR LEMAN asked him to clarify his position on the hiring of Alaskan residents. MR. BOYD said in the Northstar deal he thought the level of commitment to Alaska hire was taken a step farther than anything that's in current leases. Here there's no mention of it at all. JON TILLINGHAST, representing OXY USA, Inc., said they support SCSHB 325 which took care of a number of troubling issues including the problem of dealing with dual completions. MR. FOPPIANO, OXY USA, Inc., said he had nothing to add. Number 203 SENATOR FRANK said one issue he was concerned with was the cut off price. MR. FOPPIANO explained the intent of the $15 limitation was to deal with the reporting royalty and it was established to give some upside protection to the State in the event of a sustained run in oil prices. SENATOR FRANK said he was concerned that we were giving up too much in terms of setting the price too high. MR. TILLINGHAST said the economic analysis Oxy USA ran demonstrated that at today's projected oil prices, using the Department of Revenue's projection of future oil prices, the development of this field is going to be uneconomic. In the House they were asked what if oil prices increased above and beyond the expectations. MR. FOPPIANO continued explaining that prices fluctuate so much every year that a high value of $15 was set to accommodate the times when the price would be very low. Number 301 SENATOR LINCOLN asked them to comment on the fact that the bill doesn't mention Alaska hire. MR. TILLINGHAST replied that Oxy USA is not the operator of the unit and, therefore, they are not the ones to ask that question. He acknowledged that it is a serious issue. He said when the University of Alaska Anchorage did its economic impact analysis of the development of the field, it looked at track records for similar developments and concluded that upwards of 80 percent of the people that got the high paying long term jobs were going to be Alaskan residents. SENATOR LINCOLN asked if he would object to putting Alaska hire in the legislation. MR. TILLINGHAST said he didn't represent the operator and couldn't really answer that. It would have no affect on Oxy USA because they didn't hire. SENATOR FRANK said he was concerned about local hire, too. He didn't know how to address it. MR. TILLINGHAST said he thought it would be a shame to associate controversies with existing players with the "new blood" this bill would encourage to operate in Alaska. SENATOR FRANK noted that the severance tax on this field would be low or nothing. So he thought they really were talking about just jobs. MR. TILLINGHAST replied that would be true if you believe the field would be developed in the absence of this legislation. He thought the 15-years of failed efforts to develop heavy oil would suggest it wouldn't be. MIKE CALLAGHAN, Anchorage, said he hadn't seen any fields up there that aren't developable. One of the primary contingencies is the range with which Alyeska Pipeline Corporation charges to run the oil through the pipeline. This is a restriction on any other independents who want to come up here. MR. CALLAGHAN thought this was basically a give away and he said the legislature was supposed to be protecting the benefits for the people of Alaska. SENATOR FRANK asked what the term was on the royalty reduction. SENATOR LEMAN answered it was 2 percent for 1825 days. Number 424 SENATOR PEARCE moved to pass SCS CSHB 325(RES) from committee with individual recommendations and the appropriate fiscal notes. There were no objections and it was so ordered. SENATOR LEMAN adjourned the meeting at 4:25 p.m.