ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 28, 2012
3:32 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Lesil McGuire
Senator Hollis French
MEMBERS ABSENT
Senator Gary Stevens
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Senator John Coghill
COMMITTEE CALENDAR
SENATE BILL NO. 145
"An Act providing for a credit against the oil and gas
production tax for costs incurred in drilling certain oil or
natural gas exploration wells in the Nenana Basin."
- HEARD AND HELD
SENATE BILL NO. 215
"An Act requiring the Alaska Gasline Development Corporation to
construct a natural gas pipeline to deliver Cook Inlet natural
gas to Fairbanks and other communities between Cook Inlet and
Fairbanks that do not have access to a natural gas pipeline."
- SCHEDULED BUT NOT HEARD
SENATE BILL NO. 219
"An Act relating to the Alaska Land Act, including certain
lease, sale, and other disposal of state land and materials;
relating to production royalties from miners; relating to rights
to use state water; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 145
SHORT TITLE: OIL/GAS PRODUCTION TAX CREDITS: NENANA
SPONSOR(s): SENATOR(s) WAGONER, COGHILL
01/17/12 (S) PREFILE RELEASED 1/6/12
01/17/12 (S) READ THE FIRST TIME - REFERRALS
01/17/12 (S) RES, FIN
03/28/12 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 219
SHORT TITLE: DISPOSALS OF STATE RESOURCES
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/29/12 (S) READ THE FIRST TIME - REFERRALS
02/29/12 (S) RES, FIN
03/28/12 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MARGARET DOWLING, Staff
Senator Tom Wagoner
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Commented on SB 145 for the sponsor.
JAMES MERY, Senior Vice President
Lands and Natural Resources
Doyon, Limited
Fairbanks, AK
POSITION STATEMENT: Supported SB 145.
LANCE MILLER, Vice President
Resources
NANA Regional Corporation
Kotzebue, AK
POSITION STATEMENT: Supported SB 145.
ELIZABETH HENSLEY, Corporate and Public Policy Liaison
NANA Regional Corporation
Kotzebue, AK
POSITION STATEMENT: Supported SB 145.
ED FOGELS, Deputy Commissioner
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Presented SB 219 to the committee for the
administration.
WYN MENEFEE, Chief of Operations
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, AK
POSITION STATEMENT: Helped present SB 219 to the committee on
for the administration.
ACTION NARRATIVE
3:32:27 PM
CO-CHAIR TOM WAGONER called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators French, Stevens, McGuire, Co-Chair Paskvan
and Co-Chair Wagoner.
SB 145-OIL/GAS PRODUCTION TAX CREDITS: NENANA
3:32:41 PM
CO-CHAIR WAGONER announced consideration of SB 145.
CO-CHAIR PASKVAN moved to bring CSSB 145( ), version 27-
LS1078\I, before the committee for discussion purposes.
CO-CHAIR WAGONER objected for discussion purposes.
3:33:33 PM
SENATOR WIELECHOWSKI joined the committee.
3:33:40 PM
At ease from 3:33 to 3:34 p.m.
3:34:34 PM
CO-CHAIR WAGONER asked for the motion to be restated.
CO-CHAIR PASKVAN moved to bring CSSB 145( ), version 27-
LS1078\D, before the committee for purposes of discussion.
CO-CHAIR WAGONER objected for discussion purposes.
3:35:09 PM
MARGARET DOWLING, staff to Senator Tom Wagoner, said SB 145 is a
companion to HB 276, which has had six hearings in the House
Resource Committee and currently resides in House Finance. She
said SB 145 initially intended to provide tax credits that would
be meaningful enough to attract exploration in some of the
remote areas of the state identified by the Department of
Natural Resources (DNR) as potential for holding hydrocarbons.
The areas are so remote that it is hard to attract investors.
Another feature about these areas is that they are within an
approximate range of populated areas that are struggling with
fuel costs and unreliable resources. For example, Fairbanks
spent $660 million on space heat at about $4.20/gallon and has
an average kilowatt-hour of about 23 cents and it has been
struggling for many years to come into compliance with EPA air
quality standards. In Cooper Bay, the city administrator said
that people are pulling boards off buildings for heating
purposes.
CO-CHAIR WAGONER noted Senator Giessel and Senator Coghill in
the audience.
MS. DOWLING said that the Nenana Basin is just 50 miles north of
Fairbanks and has already had some exploration seismic and
drilling; it has a potential for gas and possibly oil. So after
extensive consultation with the Department of Revenue (DOR) and
the Department of Natural Resources (DNR) and other communities
interested in the concept, the bill was expanded to include
exploration drilling in other basins. That is what is in the CS,
which was also expanded to include seismic.
She said the original intent of the bill guided the
conversation: to serve Alaskans not only to increase production
for exports but also to promote exploration for oil and gas
resources in the frontier basins where there is a potential for
serving local and regional use.
3:39:20 PM
MS. DOWLING said they always kept the state's public policy in
mind to balance risk with the potential for some return for that
investment.
She said Version D includes the six geographical areas for
exploration identified by DNR as having potential for discovery
of hydrocarbons within proximity to existing communities. With
the addition of these areas it also increased the cost of the
bill. To address that they limited the number of credits and the
value; so, as the bill stands today there are four total wells
anywhere in those areas and no more than two wells in any one
area.
The tax credits are for 80 percent of the total exploration
expenditures for work performed or $22.5 million, whichever is
less. She pointed out that it's 15 percent more than is
currently available under existing statute. The total maximum
credit is $90 million. It only applies to work performed after
2012 and will expire in 2016 like other AS 43.55.025 credits.
The tax credit is not stackable with other credits either under
this section or AS 43.55.023.
To ensure the investment is warranted and projects are sound,
Ms. Dowling said some prequalification criteria by DNR were
built in - for instance: well location, proximity to a community
in need of energy resources, proximity to infrastructure and
technical aspects like whether there is seismic mapping or data
sufficient to identify a particular trap.
MS. DOWLING said to guarantee return on investment the state
concurred that more data would be a positive return. More
geophysical data will assist current and future explorers and
attract new investment and development to the state, which leads
to the potential of building infrastructure, and increasing
production, tax revenue and royalties. Therefore, seismic was
added because, in addition to data from exploration drilling,
seismic will yield additional information from some of the
unexplored remote areas. They allowed credits for a total of
four projects with no more than one seismic project in any one
of the areas and a 75 percent credit for total exploration
expenditures or $7.5 million, whichever is less. This is 10
percent more than existing statute. The total maximum potential
credit is $30 million. The seismic project has similar pre-
qualifications as the well drilling.
Because the focus was on getting more information for the state
and for public use, she said they added data on private land to
the existing requirement for all seismic and drilling
exploration data on state land be turned over to the state, but
in addition, if someone wants a credit on private land, they
must obtain written consent from the owner to disclose the data
to DNR. Additionally, the confidentiality period for seismic
changes from 10 years (in current statute) down to 2 years.
3:44:10 PM
MS. DOWLING said the final consideration in these conversations
was about what happens if an explorer is successful - and he's
in the middle of nowhere with very little infrastructure (for
instance) and would be subject to North Slope tax rates. So they
came up with a maximum seven-year, 4 percent credit on gross
production following commencement of commercial production.
After the seven years, the tax rate reverts back to existing
statute. This tax break doesn't apply to North Slope oil or gas,
not to royalty gas and oil, not to Cook Inlet gas or oil and not
to gas used in the state. The bill gives no breaks on royalty,
corporate income tax or property tax.
She said it does provide explorers willing to take the risk to
explore in these remote areas some predictability seven years
out. That will help them in getting financing for their
infrastructure and other costs associated with working in these
remote frontier areas.
SENATOR STEVENS said it seemed to him that it would be
advantageous to have all six areas explored and he was sorry to
hear it was reduced to four. Which four and wouldn't it be a
better idea to get all six?
MS. DOWLING replied that the original concept of the six areas
was proposed by DNR and in contemplating how many wells should
be allowed a credit the cost to the state became sizeable. It
was a public policy decision on the House side working with the
agencies to limit it to four.
SENATOR WIELECHOWSKI said he appreciated her work on this. He
asked if this credit is stackable with other deductions.
MS. DOWLING deferred to the Department of Revenue (DOR).
CO-CHAIR WAGONER said he would ask the department after other
presenters.
SENATOR WIELECHOWSKI said Senator Wagoner's jack up rig bill had
a provision that required a successful company to repay 50
percent of its credits and asked if this bill had a similar
provision.
MS. DOWLING replied that was part of the original bill, but it
became less attractive because depending on the value invested
it would put a company in the position of choosing between
existing credits and this credit based on speculation about the
future for production. It was decided to simplify and add just a
small percentage over what is available in the existing credits
to make the future a little more predictable.
SENATOR WIELECHOWSKI said he has no problem with this for local
needs, but he was concerned about protecting the state treasury
if there is a large find (which they all hope for) especially
for the seven years. The typical decline curve for an oil field
is that it peaks within the first couple years and then spikes
down dramatically.
MS. DOWLING responded that issue had been discussed and the
timeframe for extending the credit is a policy question for this
body to decide. They used seven years to provide predictability
to explorers so they could get financing in exchange for their
risk in exploring in remote areas. The sponsors of the bill were
looking for ways to provide more predictability to the
companies.
3:52:39 PM
CO-CHAIR WAGONER said this started out as a bill getting gas to
Fairbanks the fastest way possible. All of a sudden the need is
throughout the state and it's hard to argue against the other
needs. The bill matured and grew, but it has tight enough
controls that it won't get out of hand. He explained that the
Cook Inlet Stampede bill was crafted in the later part of a
session by rolling it into another bill and they didn't think
through the credits, because right now if a company drills to
the depth they have to to get those credits, they have to decide
on taking the 65 percent credit or the drilling credits for the
exploration - and that $25 million if they have producible gas
or oil all of a sudden becomes $12.5 million. He thought the 65
percent credit was more doable than drilling credits, because in
Cook Inlet they were trying to get more than one person to come
in with jack up rigs, and that was successful.
3:54:15 PM
JAMES MERY, Senior Vice President, Lands and Natural Resources,
Doyon, Limited, said he had worked with Doyon for a little over
30 years. He said that Doyon, Limited, is one of the Alaska
Native Claims Settlement Act regional corporations and is
residenced in Fairbanks; it has over 18,000 shareholders and is
the largest private landowner in Alaska owning over 12.5 million
acres. They have a number of operating businesses and employ
several thousand people here and "outside." Most of their
flagship organizations operate in the oil field and remote
services sector of Alaska businesses.
MR. MERY said he would give them a background on how the natural
resources segment of Doyon operates, because it feeds directly
into the importance of the two major pieces of the bill.
Basically, Doyon doesn't do anything with traditional lands, but
they have areas for development purposes in hard rock mining and
oil and gas. Their business model is like a junior mining
company; they are not a development company or producer. They
are an explorer; they generate ideas about not just their own
lands but about nearby state lands. Nenana is a good example of
that. They gather market and geological data and assemble it
into an acreage package. They acquire as much heritage data as
possible; some of it is in the public domain that they might
have to pay a lot of money for. Then they begin to explore doing
everything from surface studies to air and ground geophysics
such as seismic and gravity. Then they do some drilling for
hydrocarbons and hard minerals.
MR. MERY said Doyon is very different from most of the companies
that talk to the legislature. They are about as Alaskan as you
can get with many shareholders living here. Two of the
communities are close by the Nenana Basin, in particular, and
all over the Yukon Flats. These people need jobs and
opportunities. Doyon's home office is in Fairbanks and many of
their subsidiary offices are in Anchorage; many are successful
oil field services. They pay a lot of dividends to shareholders
and all that money stays in the state.
MR. MERY said he thought Doyon had more reasons to make these
areas work than other companies - meaning no disrespect. But
they can't do this on their own; they need help from the state,
which they have been getting via the credits that are truly
appreciated; but they need help from industry, too. Even on the
North Slope companies partner up to spread the risk; Doyon has
to do the same thing.
3:58:39 PM
He showed maps of the Interior basins that were relatively close
to some infrastructure, some relatively close to the TAPS (the
Nenana Basin is one). He said Doyon has an exploration license
with the state on almost 500,000 acres at Nenana and that
license expires this year. They have to take leases if they are
going to move forward and start paying rentals to the state -
which will happen later this year.
MR. MERY said they had been the operator of this project only
since 2010. They have other partners, a company in Denver called
Rampart, Arctic Slope Regional Corporation, Usibelli Coal
Mining, and Cedar Creek (from Minnesota), but they are the only
ones left exploring. Everyone else has lost interest in the
project and they are the only one (along with the state) that is
funding an 125 mile seismic program that is going on right now
on the northern Nenana Basin.
He said these basins, and Nenana in particular, have seen work
in the past. The big companies have been there as early as the
60s, but more recently in the 80s. Some work has been done on
oil (not gas), but these companies left when their business
models changed in the mid-80s when the price of oil crashed.
Doyon started there as a gas-for-Fairbanks project, but is not
there today because of the chaos in the natural gas markets in
Alaska, in particular, because of small lines versus big lines
issues. And Doyon thinks natural gas will be transported down to
Fairbanks in an LNG-type project by truck. That project does
"gut the economics" of a natural gas project at Nenana because
there just wouldn't be enough left after bringing it down by LNG
and moving it to the big industrial users.
Fortunately, when they drilled their well there a couple of
years ago, even though it wasn't commercial, Mr. Mery said they
saw a very active petroleum system and excellent oil source
rocks and that has encouraged them to "soldier on." He said
they expect to find gas there and hopefully find a way to put it
to some productive use.
4:01:57 PM
He said the Yukon Flats has three Nenana Basins with similar
geology. Some work was done by the major companies a few years
ago and Doyon picked it up and ran with it doing extensive
geochemical surveys in the light bed sediments. Light oil is
pervasive throughout in micro-seeps and shows a lot of promise.
But they are at a point where they need help. They get a lot of
push back - not on the geology so much as what happens if they
find something and because of the lack of infrastructure and the
high cost of entry into Alaska. So, the two pieces of this bill
address a lot of this market push back with a boost to the tax
rate on the exploration side for a limited period of time.
CO-CHAIR PASKVAN asked what would lead him to conclude it's
better to go with the structure under SB 145 at 80 percent
versus the current system at 65 percent.
MR. MERY answered through Doyon's own experiences with costs
both in drilling and in seismic they have figured it would be
far more beneficial than the .025 credits, but not farther away
from the grid.
CO-CHAIR PASKVAN asked because Doyon is so close to roads
already in Nenana if 65 percent would be better for that region.
MR. MERY replied it's possible, but not absolutely.
CO-CHAIR PASKVAN asked what this structure does for a company
like Doyon on the back end.
MR. MERY replied that it's not what it does for them so much as
that it helps them find other companies outside that aren't here
and bring them up. New entrants have the perception of
complexity and progressivity and they get scared. Even people
who understand what they are getting into will have to hire
lawyers and accountants for a month or two to figure out what
their tax will be. The flat rate is simple and easy to
understand for a company's critical period of capital recovery.
He said they are not targeting huge companies, but the
"wildcatters."
4:08:39 PM
LANCE MILLER, Vice President, Resources, NANA Regional
Corporation, Kotzebue, said their specific area of interest is
the Kotzebue Basin and part of the Selawik Basin. It is a Cook
Inlet-size basin, about 380 miles by 80 miles, much of it going
off-shore into the Chukchi Sea, but their focus is onshore. He
said Doyon had been pioneering the way looking for investors,
but NANA's story has been mainly minerals from that region.
He said in 2010, according to Export Council Alaska data, 25
percent of the exports from Alaska were due to Red Dog zinc
alone. On an average year about 23 ships take ore to smelters in
Canada, Europe and Asia. "So, we actually do export from the
region and have that capability."
SENATOR STEVENS asked if the exports were in volume or dollar
value.
MR. MILLER replied in dollar value.
SENATOR WIELECHOWSKI asked if that excluded oil.
MR. MILLER replied yes. The NANA Basin had two stratigraphic
wells drilled in 1974 about 60 miles apart. In those days a lot
of the majors would actually just drill the wells to look at the
stratigraphy rather than try to hit the hot prospects, because
they have the longer term view and do more research than an
independent might. There are about 1500 miles of 2-D seismic
work. Since receiving data in the mid-90s, NANA has been
compiling it and has an agreement with a petroleum independent
out of California to market it.
He said in the early 2000s they went to all the majors and
better known companies and while people know it geologically,
it's overshadowed by Prudhoe and Cook Inlet. So, it really is a
new game: for minerals it's the juniors and for oil and gas it's
the independents that might take the risk on some of the
challenging basins.
4:13:04 PM
MR. MILLER said their work has identified about nine significant
geologic targets for hydrocarbon accumulation, basically
structural and stratigraphic traps.
CO-CHAIR PASKVAN asked if he is talking oil, gas or both.
MR. MILLER said that's a good question; it's often viewed as a
gas basin, but a lot of the recent work shows potential for oil.
They won't know until they drill, but the hydrocarbon system
could lend itself to oil as well.
4:14:07 PM
CO-CHAIR PASKVAN asked what he would do if he found significant
gas. How do you market it? Where does it go?
MR. MILLER answered first they hope for a discovery of
significance. But it would go to the local markets: villages
like Kotzebue and the Red Dog. They have been working with a
company for exporting LNG to Asia that is paying a higher price
for natural gas the US is. All are possibilities and it depends
on the size.
CO-CHAIR PASKVAN said when they talk about export potential they
always hear about ports and asked what their capacity is.
MR. MILLER answered that everything has been looked at from Red
Dog to Cape Blossom to Nome to a further south pipeline. The
shipping season at Red Dog is July to late-October basically
depending on insurance for ice shipping.
SENATOR WIELECHOWSKI said he assumed most of the gas would go to
Red Dog because it uses an enormous amount of power.
MR. MILLER replied about 15 - 20 megawatts.
SENATOR WIELECHOWSKI asked what would happen if they find oil.
MR. MILLER replied that would be a great game changer and it's
not that far to get over to TAPS. But he emphasized it would be
purely wildcat prospectivity. Incidentally, he said the term
"wildcat" came from early 1900s in Texas and guys took a flyer
out away from the known fields; and people just said they are
just going out where the wild cats roam.
4:17:39 PM
SENATOR STEVENS remembered Standard Oil was in the Port Moller
area in 1912 and asked if there has been any exploration
development in this area.
MR. MILLER replied that the two red dots represented SoCal or
Chevron wells from 1974. One went down to 8400 ft. and one to
about 6300 ft. and they were looking at the geology and not
targeting high prospectivity targets. This is when one of the
first deals was done between an Alaska Native Corporation and an
oil company in Alaska.
He wanted to mention that the frontier basins are getting more
attention now from explorers and in the past they had been
overshadowed by the North Slope in terms of size and
infrastructure in that it has a road and you can get things.
4:19:46 PM
A rig located in their area would be close to tide water, but
the rig would probably be captured there for a year. The
Kotzebue Basin has geologic risks, which is why some of these
incentives are helpful. The incentives on the front end and the
simple tax rate on the back end would really help attract the
needed risk capital. With the remoteness of the state, projects
often necessitate being large. So, a worst case of success might
be where you find gas and there is enough for local use but not
enough to make it economic.
4:21:22 PM
ELIZABETH HENSLEY, Corporate and Public Policy Liaison, NANA
Regional Corporation, related that this bill is a priority for
NANA and the Northwest Arctic leadership team, which consists of
NANA, the Northwest Arctic Borough, the Northwest Arctic Borough
school District and Maniilak Association (provides health care
throughout the region).
She said "The Cost of Energy in Northwest Alaska" said that the
average cost of one gallon of gas is $7.92 and Kobuk pays the
highest rate at $10.46 per gallon. Buckland pays the lowest at
just $6.25 per gallon. The average price for a kilowatt hour of
diesel generated electricity is $.68; the residents at Shungnak
pay the highest at $.92 per kilowatt hour and Kotzebue residents
pay the lowest at $.41 kilowatt. She heard that people in Juneau
pay $.11 1/2 per kilowatt. She said the average per capita
income in northwestern Alaska is $21,000 per year, which is
$10,000 below the rest of the state according to the 2010
census, and 20 percent of the population is living below the
poverty level. Yet residents in Northwest Alaska are paying
really high costs for energy. If this bill passes, it would be
very helpful in incenting exploration for oil and gas in the
region, which could help offset the really high cost of energy
for citizens who need to heat their homes and businesses as well
as for other development projects in the region.
SENATOR WIELECHOWSKI asked if she would support an amendment
that allows for this to apply to gas and oil used for local
needs as opposed to export.
MS. HENSLEY said she would have to talk about that with her
leadership and asked what his concern is with exports.
SENATOR WIELECHOWSKI replied the bill originally started out as
a way to supply low cost energy to local communities, which he
supports, but it has expanded greatly. His concern is protecting
the state's treasury and, if there is a big find of a couple of
billion barrels of oil, exporting while ensuring local needs are
met.
MS. HENSLEY replied that she would be interested in discussing
that, but NANA supports the bill as written at this time.
CO-CHAIR WAGONER said he would hold SB 145 in committee.
SB 219-DISPOSALS OF STATE RESOURCES
4:25:53 PM
CO-CHAIR WAGONER announced SB 219 [Rules by request of the
Governor] to be up for consideration.
4:26:09 PM
ED FOGELS, Deputy Commissioner, Department of Natural Resources
(DNR), asked that the DNR chief of operations join him.
4:26:23 PM
WYN MENEFEE, Chief of Operations, Division of Mining, Land and
Water, Department of Natural Resources (DNR), introduced
himself.
MR. FOGELS said he would give some broader background to where
this bill came from and then would turn it over to Mr. Menefee
to go into the details. He said the governor asked all state
agencies to take a look at their permitting processes to see if
they could be made more efficient. They worked with five
principle focuses.
CO-CHAIR PASKVAN moved to bring SB 219, version A, before the
committee for purposes of discussion.
CO-CHAIR WAGONER objected for discussion purposes.
4:28:23 PM
MR. FOGELS said this bill is about streamlining the individual
permits that each agency issues; enhancing coordination amongst
all the state agencies and the state and federal agencies;
gathering public input, which they have doing over the last six
to eight months; looking for ways to better for collaboration
with federal permitting agencies that are key to getting any
projected permitted these days; and getting the jump on new
activities that they don't have good permitting expertise on
like shale oil, underground coal gasification, geothermal, wind
et cetera.
He said SB 219 makes individual agencies' permitting processes
work together better. The Division of Mining, Land and Water at
this time last year had a fairly significant backlog of about
2500 permits and authorizations and the legislature gave them
additional resources to work on those. With those resources came
the promise that money and people alone may not be solution; it
would come with the fundamental way of doing business and that
is what the division has been working on for the last year. A
new director, Brent Goodrum, has an eye toward organizational
efficiency and the backlog has been knocked down by about 21
percent already this year.
MR. FOGELS said one of the major things they have been doing
within the division is looking at the statutes that guide the
permitting and it has come up with significant ways to make them
work better for Alaskans. SB 219 doesn't make earth shattering
changes, but rather small changes that cumulatively will have a
big impact on how they do business. It will make some
authorizations go quicker and free up resources within the
division so more staff can be devoted to the permitting work at
hand. As a result the permitting system will run a lot smoother
and faster.
4:32:10 PM
MR. MENEFEE said when they talk about land leases it's for
things like lodges, commercial facilities and fish processing
plants not oil and gas. A provision in statute has a threshold
of when they can go "negotiated" versus "competitive" and
negotiated leases is a shorter process; you can negotiate
directly with the individual without competition. Since 1984 the
threshold for a direct negotiation is a $5,000 lease and for a
period less than 10 years. They are asking for an increase up to
$10,000 and he said that would affect just a couple of leases a
year.
More substantially, Mr. Menefee said they would like to get more
competitive category leases under negotiated leases, because
right now they have to spend an extra 30 days and publish an
auction brochure for the competitive category and that is
charged to the applicant. It's just extra time and money that
shouldn't be expended if no one is competing for it. They would
like to find out if anybody is interested through their public
notice process on disposals of interest decisions and if nobody
is, they would like to go straight to the negotiated category.
These issues were in sections 5 and 6 of the bill.
SENATOR WIELECHOWSKI asked him to describe the process for a
lease renewal (section 6).
MR. MENEFEE replied that leases can be a maximum of 55 years
long, although often they are 25 to 30 years and a lease renewal
must go through the full best interest process again. The
revision in the bill would give the department the discretion to
renew it. That means the process would be shortened and it would
be an administrative decision rather than the full preliminary
and final finding. It would still get public notice and have an
appeal option. The department would still see if there is
competitive interest, but once that has been ascertained and if
the lessee is in good standing the lease could be renegotiated.
It just shaves time off.
CO-CHAIR PASKVAN asked what percentage of the state's leases is
for 55 years.
MR. MENEFEE answered not many; some of the leases done in the
60s and 70s are 55-year leases and they are just starting to
come up. It doesn't mandate that you have to renew for the full
term, you just can't exceed the initial term. They have found
there are enough changes going on in land that they feel much
more comfortable with a 25 to 30 year lease depending on what is
being built.
SENATOR STEVENS asked how many leases would be affected.
MR. MENEFEE replied the division processes about 10 leases a
year and gets applications for about 14 to 20 a year (that's
where the backlog comes from). He couldn't predict the amount of
leases that would actually hit the renewal, because it depends
on whether people are still doing what they started out doing
and how many want to continue. But about five leases a year
could move from the competitive to direct negotiated category.
CO-CHAIR PASKVAN asked what type of operation is going in a 55-
year lease.
4:42:00 PM
MR. MENEFEE said he didn't have an exact example, but lodges
were done with longer lease terms in earlier times.
SENATOR FRENCH asked if Alyeska Ski Resort leases its land from
the state.
MR. MENEFEE replied Alyeska is a recreational development lease
through the state; there is only one recreational facility under
that statute and it is Alyeska. Examples of some other ones are
a Princess Lodge, fish processing plants, large docks like
Juneau's Jacobson Dock as well as submerged lands and uplands
where larger development is being put in.
CO-CHAIR PASKVAN asked the total number of leases and the ranges
of operations one might see.
MR. MENEFEE replied that a large scale lease would be a gas
processing plant that was completely separate; for instance the
proposed Dead Horse LNG processing plant to Fairbanks Natural
Gas or for a smaller project a guide service putting in
something more than a just a camp like a structure with
foundation for a mess hall that will last longer than five
years.
4:45:33 PM
CO-CHAIR WAGONER asked for list of lease samples, large to
small.
4:45:53 PM
MR. MENEFEE said he would certainly get those for him and moved
to sections 10, 11, 14 15 that separate timber sales from
material sales. Statutes were intertwined and a little bit
confusing; so they left the timber sale statutes (sections 10
and 11) the same, but pulled out all the material sale parts and
put them into sections 14 and 15.
Changes were made to the process of material sales that save
time and money. Typically, when someone applies for a new site
it will take 130 - 160 days. If somebody wants to come into the
same area, they are still going to have to go through the same
process; so they are proposing creating a material site disposal
area of about 15 acres. The point is that the material will be
exhausted and subsequent sales would not be publicly noticed or
have new decisions. You would just write the contracts for them.
They do 30-50 material sales a year and this would save a lot of
time and some costs.
The same materials section also deals with a couple of other
changes that have cost savings for the applicant dealing with
appraisals. He explained that these areas sell for appraised
fair market value and an appraisal actually has to be done to
get that. Those run about $5,000 per appraisal. They want to use
the representative regional sales price which they have
developed by comparing the property to private markets to find
out what the cost of in situ material is and if someone wants to
challenge that and do their own appraisal, they are welcome to
do that, too.
MR. MENEFEE said they also added language about the low
appraised fair market value sales for material that is in the
state's interest to get out of a river, for instance, where
excess material is causing flooding that the state would have to
spend money on preparing roads, bridges and emergency response,
like in Seward where the river bed is higher than the
surrounding land.
4:50:09 PM
He said point 4 of the briefing paper was about temporary water
use authorizations in section 21 of the bill. The department
currently believes it has the authority under current statute to
issue a temporary water use authorization for a period up to
five years. If a business continues to need that same water
source, they can issue another one for another five years after
that. This makes it clearer in statute that they really can,
because there have been some water right challenges. Temporary
water use authorizations are used by industry all over Alaska
and are revocable, he said, but a water right stays with the
land forever.
4:51:27 PM
CO-CHAIR PASKVAN said point 1 of the briefing paper says that
change doesn't apply to oil and gas leases and asked if point 4
temporary water use authorizations are used on the North Slope
as compared to water rights.
MR. MENEFEE clarified that oil and gas leases have a separate
authorization, but people use the temporary water use
authorizations for getting water from lakes, streams and
sometimes chipped ice to make ice roads going out on the North
Slope. Some actually get water rights if they have a well that
is going to be producing for a long time.
CO-CHAIR PASKVAN asked if the state has a developing problem
with water interests on the North Slope either through a water
use authorization or a water right.
MR. MENEFEE replied that this bill isn't about water shortages,
just about the process of doing a second authorization. And yes,
some areas on the North Slope have less water available
especially in the foothills. If you build an ice road there, you
will have to haul water from a further distance which is more
expensive.
CO-CHAIR PASKVAN said the temporary water use authorizations are
for five years and he didn't want to create a system that
excludes independents or the "new kids on the block."
4:54:28 PM
MR. MENEFEE replied that the department takes other uses into
account when it reviews the temporary water use authorizations.
Also, they are revocable and modifiable.
SENATOR FRENCH commented that they do hundreds of these.
MR. MENEFEE replied that was correct.
SENATOR FRENCH asked if there is any limit to the number of
times that a temporary water use authorization can be renewed.
MR. MENEFEE replied no; each time you reach the five-year cycle
he would have to re-review other uses before issuing it again.
He would take into account if the company was a "good actor" and
abiding by the terms of its permit.
SENATOR FRENCH asked if each authorization is noticed.
MR. MENEFEE replied that it's agency noticed but not publicly
noticed; he added that statute does not require public notice.
SENATOR FRENCH asked if there is no public comment or right of
appeal.
MR. MENEFEE replied yes there is the right of appeal. They were
recently challenged on it and the court upheld going without
public notice on these. Some people have asked how they would
know they have a right of appeal if it's not noticed and that's
a catch-22 situation.
SENATOR FRENCH said it's hard to imagine the circumstances under
which they would be aware of the decision.
MR. MENEFEE replied that temporary water use authorizations
rarely come by themselves. If it's on state land it has some
other authorization from the state going. For instance, Golden
Valley is going to do a wind energy project at Eva Creek; they
are going to need a water authorization to keep the dust down on
the road as they build it. That is all noticed.
4:57:50 PM
SENATOR FRENCH said he was thinking of the shale oil development
explosion on the North Slope and many companies could be
competing for what is fairly scarce ground water available year-
round. He asked how many times an authorization gets renewed
before it becomes a permanent water right.
MR. MENEFEE replied, "There is no more permanent water right."
If someone is going to invest in shale oil in an area where they
know there is limited water, it's probably in their best
interest to get a water right immediately versus a temporary
water use authorization, because that would exclude all others
that come subsequently.
SENATOR FRENCH said he guessed that would be a far more exacting
procedure.
MR. MENEFEE agreed.
SENATOR WIELECHOWSKI asked the standard of review on appeal if
someone has a temporary water use permit and the commissioner
decides he wants to grant a new one and someone says, "Hey, what
about me?"
MR. MENEFEE replied statutes and regulations guide the appeal
process.
SENATOR WIELECHOWSKI asked the standard of review by the court
or the reviewing entity.
MR. MENEFEE answered the reviewing entity is actually the
commissioner of the reviews under appeal. Once he makes a
decision to uphold the decision the staff made or not, at that
point an individual has 30 days to appeal to Superior Court.
SENATOR WIELECHOWSKI said he was concerned that someone gets the
temporary water use authorization, there's no public process for
renewing it and the commissioner just decides to renew it; then
there is an appeal. If it is about abuse of discretion it's
virtually impossible to overturn. So you essentially turn the
temporary water use authorization into a de facto permanent
water right.
5:00:50 PM
CO-CHAIR PASKVAN said he was reminded of an AOGCC hearing within
the last year that investigated Pioneer's difficulty in getting
water from ConocoPhillips. Was that because there was a limited
access to water or a water rights issue? He wanted to know if
the state is facing a water shortage on the North Slope and if
so, they need to know what permitting processes or interests the
system provides.
MR. MENEFEE replied there is no general water shortage on the
North Slope and he would get the details of the Alaska Oil and
Gas Conservation Commission (AOGCC) hearing.
CO-CHAIR WAGONER said once they start fracing with water, the
practice is recycling the same water; so there isn't that big of
a demand except initially.
5:02:27 PM
MR. MENEFEE discussed the sealed bid procedure in sections 1-4
and 7-9. He said the Department of Law helped discover a lot of
inconsistency about public auctions and sealed bids and they
tried to make them consistent so it's clear they can use cry
option or sealed bid if they choose.
Point 6 in sections 18 and 19 are the public notice requirements
for when they do public disposals of interest (38.05.945 public
noticing). It spells out the choices and who they have to
notify: things like statewide distribution newspapers and local
newspapers and posting in a conspicuous place locally. The one
part they are de-emphasizing is the posting of legal notices in
the newspapers that refer back to the public notice website by
phasing it out over five years. The issue is that the applicant
has to pay for all of this and a typical ad costs $300 to $900.
Point 7 deals with mining royalty in section 12. They found that
miners who are only making $10,000 in gross income in a year
don't pay royalty, because they can deduct their rental rate and
the cost of extracting the material; and because mining royalty
is paid off of net income, they don't end up paying any. They
found the threshold is right around $10,000 or about 6 oz. of
gold, not a lot of production. So they are saying save the paper
work and audit and just exempt them. The idea is to do the
exemption for the areas where the state is not getting revenue
anyway.
SENATOR FRENCH asked if this superseded Senator Wagoner's bill
on small gravel pit operators.
MR. MENEFEE replied this measure is specifically aimed toward
mining royalty on locatable minerals like gems, gold, diamonds,
platinum and silver.
SENATOR FRENCH asked the definition of small operations.
MR. MENEFEE replied it's essentially a value of $10,000 or less,
but the reason they didn't put that figure in is because the
prices of materials change so much that it wouldn't make sense.
The value would have to be addressed by regulation.
SENATOR FRENCH said that's on the gross.
MR. MENEFEE agreed.
5:06:42 PM
The next issue this bill addresses is it allows mining royalty
to be filed on a fiscal year basis rather than the calendar
year. Minors already have to file their federal income tax in a
fiscal year and having to switch over to the calendar year for
filing royalty is an accounting challenge.
5:07:44 PM
MR. MENEFEE said point 9, section 13 in the bill, talks about
submerged mining leases and Nome that has a gold rush going on
is the only one with them. Current law says when it comes to the
end of a lease (10-20 years), if somebody is still producing
minerals in paying quantities, they get one-year extensions. But
knowing you have only one year of authorization is not good
business sense. So, if they are still producing in paying
quantities and making royalty revenue payments to the state, and
they have sufficient land to continue their operations, the
department can make a judgmental call how far out to issue
another lease and that can't exceed the terms of the initial
lease.
MR. MENEFEE said these changes were small, but incrementally and
cumulatively they would make a difference in time and money for
both the state and the applicant; they would also help in
reducing the backlog.
CO-CHAIR WAGONER said, "Whatever we can to do to decrease that
backlog and keep it from building again, we're interested in."
Finding no further questions, he thanked them for presenting the
bill to the committee.
[SB 219 was held in committee.]
5:10:23 PM
CO-CHAIR WAGONER adjourned the Senate Resources Standing
Committee meeting at 5:10 p.m.