Legislature(2003 - 2004)

05/16/2003 01:49 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 28                                                                                                             
     An Act relating to adjustments to royalty reserved to                                                                      
     the state to encourage otherwise uneconomic production                                                                     
     of oil and gas; and providing for an effective date.                                                                       
REPRESENTATIVE VIC KOHRING explained  that HB 28 would take a                                                                   
royalty  adjustment  system  that is  an  understandable  and                                                                   
usable  adjustment method  for  fields that  might  otherwise                                                                   
prove to  be uneconomic.   It would  provide a usable  system                                                                   
for reduction  of royalties belonging  to Alaska so  that the                                                                   
State could encourage  production of oil and  gas fields that                                                                   
might be  marginal or  not economically  feasible if  it were                                                                   
not for such reductions.                                                                                                        
The bill  is not  new, but  it sets  forth an  understandable                                                                   
modification  formula; protecting  the  public's interest  in                                                                   
such  proceedings and  maintaining  the  public's ability  to                                                                   
comment on  the preliminary  findings and determination  made                                                                   
by the  Commissioner.   The Department  of Natural  Resources                                                                   
Commissioner would  provide the tools necessary  to negotiate                                                                   
with the drilling  companies for both oil and  gas production                                                                   
to determine if  they are financially viable.   If the fields                                                                   
are  not  economically  viable, the  legislation  would  take                                                                   
action to  decide what the  royalty reduction would  be based                                                                   
on the economics of that field.                                                                                                 
Representative  Kohring pointed out  that the State's  normal                                                                   
share is established  at 12.5%, but could run as  high as 20%                                                                   
depending upon the field.  A royalty  reduction allowed under                                                                   
HB 28 would depend on changes  in oil prices, field recovery,                                                                   
production rate  and operating costs.   The rate could  be as                                                                   
low as 3%.                                                                                                                      
Representative Kohring  stressed that the  Commissioner would                                                                   
need to  establish that the  field was economically  situated                                                                   
before  it would  be  granted.   The determination  would  be                                                                   
based  upon  a detailed  analysis,  professional  evaluation.                                                                   
The  evaluation could  be  done either  internally  or by  an                                                                   
outside  company   that  has   expertise  in  that   type  of                                                                   
evaluation.   The State would  be reimbursed the cost  of the                                                                   
evaluation.   The  amount would  be capped  at $150  thousand                                                                   
Representative  Kerttula MOVED  to ADOPT  Amendment #1,  #23-                                                                   
LS0177\V.2, Chenoweth,  5/15/03.   (Copy on File).   Co-Chair                                                                   
Williams OBJECTED.                                                                                                              
Representative  Kerttula  noted that  in  the last  Committee                                                                   
hearing,  there  had been  a  deletion  of the  section  that                                                                   
allows   legislators    to   receive   signed    confidential                                                                   
information.    The information  is  critical  in order  that                                                                   
legislators  can look at  certain records.   It is  something                                                                   
that  has  been  done  for  over   25-years.    The  proposed                                                                   
amendment would  "un-delete" that proposed  section, allowing                                                                   
access to confidential information.   She understood that the                                                                   
sponsor supported the change.                                                                                                   
REPRESENTATIVE   NORM  ROKEBERG   agreed,  noting   that  the                                                                   
original presumption  on that deletion  was that it  would be                                                                   
standard   procedure   under   executive   privilege.      He                                                                   
acknowledged that  the language  needs to be re-entered  into                                                                   
the legislation.                                                                                                                
There being NO OBJECTION, Amendment #1 was adopted.                                                                             
Representative  Kerttula MOVED  to ADOPT  Amendment #2,  #23-                                                                   
LS0177\V.3, Chenoweth,  5/15/03.   (Copy on File).   Co-Chair                                                                   
Williams OBJECTED.                                                                                                              
Representative Kerttula  pointed out that the  sponsor had no                                                                   
objection  with  the  grammatical  changes  proposed  by  the                                                                   
language  of   the  amendment.     There  being   NO  further                                                                   
OBJECTION, Amendment #2 was adopted.                                                                                            
Representative  Kerttula MOVED  to ADOPT  Amendment #3,  #23-                                                                   
LS0177\V.1, Chenoweth,  5/15/03.  (Copy on File).    Co-Chair                                                                   
Williams OBJECTED.                                                                                                              
Representative  Rokeberg requested  that a  simple change  be                                                                   
made to the amendment.                                                                                                          
Representative  Kerttula  read  the language  recommended  by                                                                   
Representative  Rokeberg to be  added to the amendment,  Line                                                                   
12,  after "approval"  inserting "shall  not be  unreasonably                                                                   
withheld by", and deleting "of".                                                                                                
Representative  Rokeberg reiterated  that  as amended,  there                                                                   
would  be no  objection to  inserting that  language.   There                                                                   
being  NO further  OBJECTION,  Amendment  #3  as amended  was                                                                   
Co-Chair   Harris  referenced   the  fiscal  note   analysis,                                                                   
pointing out  that the Division of  Oil and Gas had  not been                                                                   
complimentary.    He  asked  if  the  Administration  was  in                                                                   
support of the proposed legislation.                                                                                            
MARK  MEYERS,   (TESTIFIED  VIA  TELECONFERENCE),   DIRECTOR,                                                                   
DIVISION  OF OIL AND  GAS, DEPARTMENT  OF NATURAL  RESOURCES,                                                                   
ANCHORAGE,  noted that  the Administration  does support  the                                                                   
bill.   The  Division believes  that the  bill would  clarify                                                                   
problems  that  have  been  identified  with  the  bill  with                                                                   
previous  royalty  reduction   statutes.    The  fiscal  note                                                                   
adequately reflects the changes  recommended in the bill with                                                                   
the  royalty  reductions.   The  fiscal  note  was  carefully                                                                   
thought out.   The Division is comfortable with  the proposed                                                                   
version of the legislation.                                                                                                     
Co-Chair  Harris pointed  out  that the  analysis  identifies                                                                   
problems  with   hydrocarbon  cost  allocation   for  royalty                                                                   
relief.   The proposed  legislation would  open the  door for                                                                   
every oil and gas  reservoir in the State to  be eligible for                                                                   
a royalty  reduction.  He acknowledged  that it would  not be                                                                   
possible to accurately predict  what the fiscal impact of the                                                                   
legislation will be and could be a negative impact.                                                                             
Mr. Meyers admitted  that in an earlier version  of the bill,                                                                   
those problems  were present.   Since  that time, the  fiscal                                                                   
note applies to  the current version; all concerns  have been                                                                   
properly addressed.  The earlier  version did not address the                                                                   
previous history of the statute.                                                                                                
Representative  Whitaker asked what  would be the  advantages                                                                   
and risks to the State through the proposed legislation.                                                                        
Mr. Meyer explained  that there would be no  additional risks                                                                   
to the State.  [Testimony inaudible].                                                                                           
He added that the bill would allow  for a lot of flexibility.                                                                   
The Commissioner will be able  to adjust as the conditions in                                                                   
the  market  place  change.    It  is  important  that  there                                                                   
continues to be legislative oversight.                                                                                          
Vice-Chair Meyer  asked if the  legislation was  intended for                                                                   
only the  Cook Inlet area or  would it apply statewide.   Mr.                                                                   
Meyer  confirmed that  it  will apply  statewide  and in  any                                                                   
place the State receives royalty  on State lands.  Vice-Chair                                                                   
Meyer stated  for the record that  he "might have  a conflict                                                                   
of interest" regarding the legislation.                                                                                         
Representative Foster MOVED to  report CSSSHB 28 (FIN) out of                                                                   
Committee  with  individual  recommendations   and  with  the                                                                   
accompanying new  fiscal note.  There being  NO OBJECTION, it                                                                   
was so ordered.                                                                                                                 
CSSSHB  28 (FIN) was  reported  out of Committee  with  a "no                                                                   
recommendation" and with a new  fiscal note by the Department                                                                   
of Natural Resources.                                                                                                           

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