Legislature(2003 - 2004)

02/20/2003 04:29 PM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 28-OIL & GAS ROYALTY MODIFICATION                                                                                          
                                                                                                                                
Number 0020                                                                                                                     
                                                                                                                                
CHAIR  KOHRING announced  that the  committee would  hear SPONSOR                                                               
SUBSTITUTE  FOR   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."                                                                                                         
                                                                                                                                
CHAIR KOHRING,  joint sponsor along with  Representative Rokeberg                                                               
of  SSHB 28,  informed members  of the  intention to  explain the                                                               
bill but  not move it  from committee  that day.   Describing the                                                               
bill as "royalty  adjustment legislation," he said  the intent is                                                               
to modify  a 1995 law  that reduced royalties on  marginal fields                                                               
in order to  spur development of uneconomical fields.   There are                                                               
several fairly sizable changes.                                                                                                 
                                                                                                                                
CHAIR KOHRING  explained that  SSHB 28  would give  discretion to                                                               
the commissioner of the Department  of Natural Resources (DNR) to                                                               
make  decisions with  regard to  royalty  reductions on  marginal                                                               
fields, in  order to expedite  the process; now, by  contrast, [a                                                               
proposed modification] goes  to the commissioner and  then to the                                                               
governor for  final consideration.   The bill also  clarifies and                                                               
simplifies procedures  relating to royalty reduction;  he offered                                                               
to provide details later.                                                                                                       
                                                                                                                                
CHAIR KOHRING indicated that under  consideration is removal of a                                                               
sunset  deadline of  July 1,  2015, for  companies that  would be                                                               
able to approach  the department to be  granted [a modification].                                                               
[Subsection (j)(1)(A), beginning on page  1, line 1, removes that                                                               
deadline.]                                                                                                                      
                                                                                                                                
CHAIR KOHRING  also pointed out  that whereas statute  now refers                                                               
to marginal  oil fields, [the  bill's sponsors] also  are looking                                                               
at  having it  apply  to  portions of  oil  fields  [which is  in                                                               
SSHB 28].   Chair  Kohring expressed  the desire  to be  a little                                                               
more specific  with this  legislation, and  to have  the industry                                                               
work  with  the bill's  sponsors  to  identify specific  portions                                                               
within the oil fields.                                                                                                          
                                                                                                                                
Number 0262                                                                                                                     
                                                                                                                                
CHAIR KOHRING  explained that the  bill is intended  to jumpstart                                                               
activity  by  allowing  companies  to come  to  DNR  and  present                                                               
findings  that  they have  uneconomical  fields,  which won't  be                                                               
developed without some royalty reduction.   It doesn't change the                                                               
public hearing  process, which had  been a concern  with previous                                                               
legislation.   He called  attention to  DNR's fiscal  note [which                                                               
says that  adding the language  "portion of field or  pool" could                                                               
result  in a  negative  fiscal impact  to the  state.]   He  also                                                               
likened this  to the  debate involving Agrium  a couple  of weeks                                                               
ago  [on HB  57], since  the  desire is  to  give a  break to  an                                                               
industry with the intent of allowing it to grow and develop.                                                                    
                                                                                                                                
Number 0392                                                                                                                     
                                                                                                                                
CHAIR  KOHRING highlighted  the big  question for  the committee:                                                               
where  to draw  the  line on  how much  [the  state treasury]  is                                                               
giving  up  through royalty  reduction  in  exchange for  further                                                               
development of the industry that  will help generate jobs and get                                                               
more  dollars flowing  in the  economy.   He concluded  by saying                                                               
this  looks  at  accomplishing  the  same  goal  as  HB  69,  the                                                               
"permitting streamlining bill" [sponsored  by him]:  to encourage                                                               
more drilling activity in the  industry, although with SSHB 28 it                                                               
is for oil, not gas.  He invited Bonnie Robson to comment.                                                                      
                                                                                                                                
Number 0462                                                                                                                     
                                                                                                                                
BONNIE  ROBSON,   Deputy  Director,   Division  of  Oil   &  Gas,                                                               
Department of Natural Resources,  noted that Mark Myers, director                                                               
of the  division, wasn't  available that day  and thus  she would                                                               
speak instead.   Addressing why  the ability to  reduce royalties                                                               
is a valuable tool, she told members:                                                                                           
                                                                                                                                
     Quite simply  put, royalty reduction can  make economic                                                                    
     oil  and gas  production  that would  otherwise not  be                                                                    
     economic.  It can extend field  life for a field in its                                                                    
     sunset years, and it can  bring into production a field                                                                    
     that  would   otherwise  be  on  hold   pending  better                                                                    
     economics or better technology.                                                                                            
                                                                                                                                
     I'd  like to  work  with an  example  today of  royalty                                                                    
     reduction and how  it can bring these  benefits.  First                                                                    
     of  all, I  think we  need to  assume an  oil price  of                                                                    
     $16.00.   And  we choose  that because  companies often                                                                    
     run  their  economics  and   make  their  decisions  on                                                                    
     whether to  continue production  from a  field -  or to                                                                    
     develop a  new field -  based on an assumed  oil price,                                                                    
     rather  than the  actual or  current or  average annual                                                                    
     price of  oil.   And $16.00  ... is  in the  range they                                                                    
     frequently use.                                                                                                            
                                                                                                                                
     But  royalties  are not  paid  to  the state  based  on                                                                    
     $16.00, and so  the royalty reduction is  not on $16.00                                                                    
     per se, but it's on the  netback value of the oil.  And                                                                    
     if  you  work  with  a  $16.00  oil  price,  you  would                                                                    
     typically have for, say, Prudhoe  Bay oil, on the order                                                                    
     of $6.00 in reductions:   about a dollar for either the                                                                    
     cost  of  NGL  [natural gas  liquid]  manufacturing  or                                                                    
     field costs, where allowable;  another $1.50 for marine                                                                    
     transportation; and about  $3.50 for TAPS [Trans-Alaska                                                                    
     Pipeline System] tariff or pipeline transportation.                                                                        
                                                                                                                                
     These  deductions total  $6.00,  and  so royalties  are                                                                    
     paid  not on  the basis  of  $16.00, but  $10.00.   And                                                                    
     while  royalties  can  be  at  12-1/2  percent,  16-2/3                                                                    
     percent,  or 20  percent, they  most frequently  are at                                                                    
     12-1/2  percent of  the  netback value,  so  that on  a                                                                    
     $10.00 netback,  royalties would  be paid at  $1.25 per                                                                    
     barrel.                                                                                                                    
                                                                                                                                
Number 0668                                                                                                                     
                                                                                                                                
MS. ROBSON continued:                                                                                                           
                                                                                                                                
     And under  the existing  law, royalties can  be reduced                                                                    
     from the 12-1/2 percent to  5 percent if an application                                                                    
     for  royalty reduction  is approved,  meaning that  the                                                                    
     royalty take or the state's  take could be reduced from                                                                    
     the  $1.25 in  our hypothetical  situation to  $.50 per                                                                    
     barrel.   This would  improve a company's  economics by                                                                    
     $.75 per  barrel.   And that  $.75 per  barrel matters:                                                                    
     it  effectively raises  the assumed  price  of the  oil                                                                    
     from $16.00 to $16.75, and  helps make the project more                                                                    
     economic  when  compared   to  the  other  alternatives                                                                    
     available to oil and gas companies.                                                                                        
                                                                                                                                
     While this difference that the  state can make - on the                                                                    
     order  of $.75  per  barrel in  our  hypothetical -  is                                                                    
     dwarfed  by  price  volatility,  companies  nonetheless                                                                    
     make their investment decisions  based on their assumed                                                                    
     price of oil,  and not on actual prices of  oil.  So if                                                                    
     the  goal of  the  state  is to,  in  fact, change  the                                                                    
     behavior  of companies  and  to  cause investment  that                                                                    
     would not  otherwise occur, and  they're going  to work                                                                    
     off an  assumed price  of $16.00  per barrel,  the $.75                                                                    
     royalty  reduction  may  induce investment  or  prolong                                                                    
     field life even where $30.00 oil prices do not.                                                                            
                                                                                                                                
Number 0804                                                                                                                     
                                                                                                                                
MS. ROBSON, addressing SSHB 28 specifically, continued:                                                                         
                                                                                                                                
     The  changes proposed  by the  sponsors to  HB 28  do a                                                                    
     number  of  things  that ...  have  already  been  well                                                                    
     described  by  the chairman.    It's  made the  statute                                                                    
     plain English;  it simplifies language  in a  number of                                                                    
     instances,  even where  the substance  is not  changed.                                                                    
     But  it  does  change  the substance  in  a  number  of                                                                    
     regards.   To  a certain  extent, it  certainly reduces                                                                    
     the  paperwork  that  goes   with  an  application  for                                                                    
     royalty  reduction.   It also  reduces the  paper flow,                                                                    
     and  it eliminates  the  requirement  of ...  personal,                                                                    
     [nondelegable] involvement ... by the governor.                                                                            
                                                                                                                                
     But  we think  that some  may view  the most  important                                                                    
     aspect of  the proposed change to  the legislation [as]                                                                    
     what  it does  to the  current subsection  (j)(3)(C)(i)                                                                    
     [of  AS 38.05.180].   And  while there's  some argument                                                                    
     about  how   that  subsection  would   be  interpreted,                                                                    
     basically it requires that the  state, when it receives                                                                    
     an  application for  royalty  reduction, evaluate  that                                                                    
     application in  light of  projected future  oil prices.                                                                    
     And while  it allows for  a royalty reduction  at lower                                                                    
     oil  prices, it  requires  an increase  in the  royalty                                                                    
     rate  at higher  oil  prices  - that  is,  it makes  it                                                                    
     mandatory.                                                                                                                 
                                                                                                                                
Number 0924                                                                                                                     
                                                                                                                                
MS. ROBSON continued:                                                                                                           
                                                                                                                                
     So if  we go back  to our assumed hypothetical  that we                                                                    
     were  talking about,  if  at ...  an  assumed price  of                                                                    
     $16.00 a company makes a  showing that a project is not                                                                    
     quite economic - and that,  in fact, ... royalty relief                                                                    
     on  the  order  of  $.75 per  barrel  would  make  that                                                                    
     project economic - the state  can drop the royalty rate                                                                    
     down  to,  say,  5  percent, and  accord  the  $.75  of                                                                    
     relief.  ...  [Mandated] in  return  is  that when  oil                                                                    
     prices  are higher  - say,  above $17.00  per barrel  -                                                                    
     that  the royalty  rate not  only would  be at  ... the                                                                    
     contract  rate of  ... 12-1/2  percent,  but be  higher                                                                    
     than that  rate, so  that the  state, if  future prices                                                                    
     are  as projected  at the  time  of analysis,  actually                                                                    
     recovers more than would otherwise  be the case, absent                                                                    
     the application for royalty modification.                                                                                  
                                                                                                                                
     To restate  that, basically it says  to somebody coming                                                                    
     in the door and looking  for royalty relief that ... if                                                                    
     price projections are accurate,  your royalty burden is                                                                    
     actually  going  to  increase.   And  one  of  ...  the                                                                    
     aspects  of the  proposed  amendment is  that while  it                                                                    
     still  allows for  a sliding-scale  royalty -  that is,                                                                    
     lower  royalty  rates  at low  oil  prices  and  higher                                                                    
     royalty rates at high oil  prices - it does not mandate                                                                    
     that  the state,  in its  assessment, conclude  that it                                                                    
     will be better  off per barrel in terms  of the royalty                                                                    
     take.                                                                                                                      
                                                                                                                                
     And  it also  allows the  commissioner to  exercise ...                                                                    
     discretion  in  terms of  what  the  state receives  in                                                                    
     return  for any  reduction in  royalty rates.   It  may                                                                    
     still  want to  take some  of  the upside,  but it  may                                                                    
     feel,  ...  instead  or in  addition,  that  some  work                                                                    
     commitment, some  obligation to drill  additional wells                                                                    
     or  add  additional   gas-handling  capacity  within  a                                                                    
     limited  period of  time, [is]  reasonable in  exchange                                                                    
     for  providing the  low-price  protection, the  royalty                                                                    
     relief at the lower prices.                                                                                                
                                                                                                                                
MS. ROBSON noted  that the bill also removes the  sunset date and                                                               
express   language  allowing   the  disclosure   of  confidential                                                               
information to the legislature.                                                                                                 
                                                                                                                                
Number 1109                                                                                                                     
                                                                                                                                
MS. ROBSON pointed  out that one aspect may be  troubling to some                                                               
parties:  extension of royalty  relief - currently available on a                                                               
field  or pool  - to  portions of  fields or  pools.   Fields and                                                               
pools aren't  the same.  A  pool is an individual  reservoir like                                                               
the main reservoir at Prudhoe Bay  - Sadlerochit - or one of many                                                               
other  reservoirs there  like the  Lisburne, the  Point McIntyre,                                                               
the Niakuk, the West Beach, and so  forth.  Each is its own pool;                                                               
typically, they  aren't in "hydrocarbon communication"  with each                                                               
other,  are  at different  depths,  and  may have  different  oil                                                               
characteristics.      In   contrast,   a  field   is   a   larger                                                               
conglomeration.  For example, all  the pools or reservoirs at the                                                               
Prudhoe  Bay Unit  may be  considered  a single  field; the  same                                                               
concept  is true  at the  Kuparuk  River Unit.   Ms. Robson  told                                                               
members:                                                                                                                        
                                                                                                                                
     We  think  that  the  current  statute  allows  royalty                                                                    
     reduction for a  field or pool.  And if  you consider a                                                                    
     pool a  portion of  a field,  then the  current statute                                                                    
     also  allows  royalty  reduction  for a  portion  of  a                                                                    
     field.  What  it does not go on to  do is allow royalty                                                                    
     reduction for a  portion of ... a pool.   And there are                                                                    
     some  troubling aspects  to allowing  royalty reduction                                                                    
     for a portion of a pool.                                                                                                   
                                                                                                                                
MS.  ROBSON suggested  thinking  of a  pool as  a  sponge or  mud                                                               
puddle, and  then allocating water -  from the sponge when  it is                                                               
squeezed, or the  mud puddle when it is drained  - to portions of                                                               
the  pool,  either  the  perimeter  or  the  center.    She  also                                                               
mentioned the  cost of draining  the puddle or sponge,  and asked                                                               
members to  imagine allocating the  cost to either  the perimeter                                                               
or the  center.  It  creates many complications in  processing an                                                               
application  for  royalty  reduction,   she  pointed  out,  which                                                               
includes the allocation of costs and production.                                                                                
                                                                                                                                
Number 1306                                                                                                                     
                                                                                                                                
MS. ROBSON continued, providing an example:                                                                                     
                                                                                                                                
     Right now  at Prudhoe  Bay there  are over  one hundred                                                                    
     leases in the unit, and  every lease, save one, bears a                                                                    
     royalty rate of  12-1/2 percent.  And so  when it comes                                                                    
     to the  administration of leases for  royalty purposes,                                                                    
     at  present we  don't need  to know  whether oil  comes                                                                    
     from  the center  of any  individual  reservoir ...  or                                                                    
     whether it  comes from the perimeter;  the royalty rate                                                                    
     is,  and  remains,  12-1/2  percent,  and  any  royalty                                                                    
     relief accorded  for an entire pool  or reservoir would                                                                    
     extend to that pool or reservoir.                                                                                          
                                                                                                                                
     If there is an extension  of royalty relief to portions                                                                    
     of pools, then the division  has to get in the business                                                                    
     of  allocating hydrocarbon  production  to portions  of                                                                    
     pools.    It also  has  to  get  into the  business  of                                                                    
     allocating the cost of the  production from those pools                                                                    
     to the various parts of the pool.                                                                                          
                                                                                                                                
Number 1377                                                                                                                     
                                                                                                                                
MS.  ROBSON  explained  another  complication:    every  pool  or                                                               
reservoir in Alaska  - currently, to her  recollection, there are                                                               
some  55  or 56  participating  areas  or  pools -  would  become                                                               
eligible for royalty relief at  some stage; there always would be                                                               
the last  barrel, or last  thousand or hundred  thousand barrels,                                                               
that one  could claim as  marginal.   She suggested it  would put                                                               
the  division in  the business  of having  to entertain  royalty-                                                               
reduction  applications for  every single  pool and  reservoir in                                                               
Alaska at some point in time.  She told members:                                                                                
                                                                                                                                
     Since   leases  and   royalties  are   governed  by   a                                                                    
     competitive bidding process, if  we are, in fact, going                                                                    
     to extend  benefits to every  pool and  every reservoir                                                                    
     in the state at some point  in time, we may not want to                                                                    
     do it  through the process of  applications for royalty                                                                    
     reduction that must  be adjudicated one by  one, but by                                                                    
     some  more  wholesale change  in  the  laws of  Alaska.                                                                    
     That addition of  portions of pools, then,  is a matter                                                                    
     of some concern to the division.                                                                                           
                                                                                                                                
Number 1452                                                                                                                     
                                                                                                                                
MS.  ROBSON   addressed  three  other   areas  in   the  proposed                                                               
legislation that may  be problematic or may just "be  a matter of                                                               
excessive worrying."  First, the  current statute provides for an                                                               
independent contractor to  be retained by the  state for purposes                                                               
of  evaluating any  application for  royalty reduction,  and that                                                               
independent  contractor is  to be  paid for  by the  application.                                                               
She explained:                                                                                                                  
                                                                                                                                
     We  think the  initial  intent  behind that  particular                                                                    
     provision was  not only  to assure  that the  state had                                                                    
     the   necessary   expertise    ...   to   evaluate   an                                                                    
     application, but  also to see  that the  applicant paid                                                                    
     the  cost  of processing  the  application.   It's  ...                                                                    
     unclear from the proposed amendment  whether or not the                                                                    
     state or  the applicant  would be  the one  entitled to                                                                    
     pick  the  independent  contractor under  the  proposed                                                                    
     changes  to the  legislation.   There  is some  concern                                                                    
     that  if   the  applicant   is  allowed  to   pick  the                                                                    
     contractor, and anyone  who is able to do  the math can                                                                    
     be on  the list  of eligible  contractors, that  we put                                                                    
     the  applicant  in the  position  of  being able  to  -                                                                    
     through  the  process  of selecting  the  contractor  -                                                                    
     essentially guarantee the results  it is looking for on                                                                    
     the application.                                                                                                           
                                                                                                                                
     We  don't  think that's  the  sponsor's  intent.   But,                                                                    
     certainly,   the   language    allows   that   possible                                                                    
     interpretation, and there is  some argument for staying                                                                    
     with  ... the  existing  statutory  language that  does                                                                    
     allow the  state to  choose an  independent contractor,                                                                    
     paid for  by the applicant, for  purposes of evaluating                                                                    
     the  application for  royalty reduction.   Again,  that                                                                    
     may be excessive worrying on  the part of the division,                                                                    
     but  it  is a  matter  that  you  may want  to  discuss                                                                    
     further.                                                                                                                   
                                                                                                                                
Number 1591                                                                                                                     
                                                                                                                                
MS. ROBSON discussed a second  area of possible concern, in terms                                                               
of implementation.   The existing language  allows the department                                                               
to   collect   information  it   deems   necessary   to  make   a                                                               
determination on an application  for royalty reduction.  However,                                                               
the proposed bill says only  information "reasonably available to                                                               
the  applicant"  is  to  be   considered  by  the  department  in                                                               
evaluating the application.  She explained:                                                                                     
                                                                                                                                
     Unfortunately,   it's  possible   that  on   any  given                                                                    
     application  there may  be  some  information that  the                                                                    
     department  considers necessary  but an  applicant says                                                                    
     is  not  reasonably available  to  the  applicant.   So                                                                    
     there is  an invitation to  a dispute over what  is and                                                                    
     is not reasonably available to the applicant.                                                                              
                                                                                                                                
     Also, the  department can be  in a  difficult situation                                                                    
     because if  it does not  have the information  it feels                                                                    
     is  necessary  to  process  an  application,  ...  it's                                                                    
     unclear   whether  the   application  should   then  be                                                                    
     granted,   despite   the  department's   inability   to                                                                    
     conclude the  application is in  its best  interest, or                                                                    
     whether  the   application  gets  denied   because  the                                                                    
     department cannot  conclude whether the  application is                                                                    
     in  the state's  best  interest.   And,  unfortunately,                                                                    
     that  could   result  in  a  denial   of  an  otherwise                                                                    
     meritorious application, and we  don't think that's the                                                                    
     intent  of  the  sponsors.     We  think  the  existing                                                                    
     language in the  statute may work.  But,  again, we may                                                                    
     be "worrying" this issue a little too much.                                                                                
                                                                                                                                
Number 1693                                                                                                                     
                                                                                                                                
MS. ROBSON  addressed the third  possible concern.   Offering the                                                               
belief that the bill has done  a very good job of simplifying and                                                               
cleaning up the  language, she noted that it  has removed express                                                               
language that talks about the  department's ability to "condition                                                               
royalty relief and to require  that assignments of royalty relief                                                               
be approved by the department."  She explained:                                                                                 
                                                                                                                                
     We think  that, even  with the language  as it  is, the                                                                    
     department would  retain those rights.   The department                                                                    
     has historically interpreted its  right to either grant                                                                    
     or  deny an  application  as the  right  to grant  that                                                                    
     application with conditions, rather  than deny it.  And                                                                    
     we would  assume that the department  would continue to                                                                    
     have those  rights even under  the modified  or amended                                                                    
     language.     If  that  is   not  the  intent   of  the                                                                    
     legislature,  then ...  you might  want to  ... clarify                                                                    
     that for us.   But that was a question  that we had, at                                                                    
     least with regard to the proposed language.                                                                                
                                                                                                                                
Number 1753                                                                                                                     
                                                                                                                                
MS.  ROBSON concluded  by saying  the division  supports SSHB  28                                                               
with [three]  possible amendments:   1)  delete the  reference to                                                               
portions of pools; 2) if  thought necessary, provide "some return                                                               
to  the  original  language  on  DNR's  ability  to  obtain  data                                                               
necessary to  evaluate the application";  and 3) have  DNR retain                                                               
its  current  ability  to choose  an  independent  contractor  to                                                               
evaluate  the application.   She  added that,  on the  whole, the                                                               
division believes  this is  a very  good effort  to clean  up the                                                               
current statute  and provide an  incentive for the  production of                                                               
fields not yet  in production, as well as to  prolong the life of                                                               
fields that otherwise would be at their natural end.                                                                            
                                                                                                                                
Number 1811                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  thanked Ms.  Robson and the  Division of                                                               
Oil  &   Gas  for   working  with   the  sponsors   and  offering                                                               
constructive  comments and  criticisms.   Explaining the  reasons                                                               
for  introducing  the  legislation,  he began  by  offering  some                                                               
history.  As chair of the  House Special Committee on Oil and Gas                                                               
when  he and  Representative Kohring  first were  elected to  the                                                               
19th  legislature,   he  recalled   that  Governor   Knowles  had                                                               
introduced  HB  207, considered  "the  keystone  of his  economic                                                               
policy" with  regard to  the petroleum  industry.   The committee                                                               
held more than  15 hours' worth of hearings to  develop the bill.                                                               
When the bill  reached the Senate Finance  Committee, however, it                                                               
was  changed in  such a  way that  it became  a stumbling  block,                                                               
because it "accepted the concept  of a concessionary modification                                                               
as  an incentive  on the  one hand,  but it  statutorily required                                                               
that the state ultimately get a payback."                                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG   agreed  with   Ms.  Robson   that  the                                                               
"(j)(3)(C)"  language  on page  3  [of  SSHB  28] took  away  the                                                               
commissioner's  ability  to  create  a  royalty  reduction  on  a                                                               
sliding-scale basis that takes into  account the various elements                                                               
of production costs, oil prices, and so forth.                                                                                  
                                                                                                                                
Number 1981                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG pointed out that  when he'd had that bill                                                               
in committee,  he'd been careful  to develop a  bifurcated track:                                                               
one for existing fields and one for new fields.  He explained:                                                                  
                                                                                                                                
     The governor's bill  at the time was  really related to                                                                    
     newer  fields, and  I  had a  great  concern about  the                                                                    
     existing fields of the Cook  Inlet area, in particular,                                                                    
     and then  some of  the older fields  in the  state that                                                                    
     may  well deserve  and have  some incentive  justified.                                                                    
     And  particularly in  the older  fields,  this type  of                                                                    
     language doesn't  work. ... One  size doesn't  fit all,                                                                    
     because I  think you need  to look at  each particular,                                                                    
     different  application  [for]  fields   or  pool  as  a                                                                    
     separate  entity, and  take those  matrix of  different                                                                    
     issues  together to  make  ... that  decision.   So  to                                                                    
     require  that  a  field  pay  back  something  that  it                                                                    
     doesn't  make downstream,  and put  that in  statute, I                                                                    
     thought was a mistake.                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  noted  that  there had  been  only  two                                                               
applications,  to  his  recollection,  neither of  which  led  to                                                               
production.   Therefore,  the  bill  hasn't been  used  - to  his                                                               
belief because  it wasn't  really workable.   Thus he  has always                                                               
wanted  to  fix  it,  he  said, since  it  was  the  first  major                                                               
legislation he'd  worked on.   Suggesting SSHB  28 fits  with the                                                               
current  administration's   desire  for  increased   income  from                                                               
natural resources, he  said it is designed to extend  the life of                                                               
fields or potentially  assist in the development of  a field that                                                               
would not otherwise  be developed.  "And that was  the context in                                                               
which we had discussed this bill earlier," he added.                                                                            
                                                                                                                                
Number 2103                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  pointed out that this  is loosely called                                                               
"180(j) of  our oil and gas  statutes."  He said  there have been                                                               
provisions  for royalty  incentives  for many  years;  HB 207  of                                                               
eight years  ago changed the statute,  and the intent of  SSHB 28                                                               
is  to tweak  it again  to make  sure it's  workable, because  it                                                               
hasn't worked  or made the state  one penny.  He  also noted that                                                               
there had been a previous  application - from Conoco Oil Company,                                                               
relating to Milne  Point - during the  Hickel Administration that                                                               
Representative  Rokeberg  said  he'd  studied  in  great  detail.                                                               
Saying he was "somewhat astonished  by the ultimate findings," he                                                               
told members:                                                                                                                   
                                                                                                                                
     It gave credence  to the idea that  the commissioner of                                                                    
     natural  resources, given  the proper  tools and  given                                                                    
     the   proper    statutory   authority,    with   proper                                                                    
     safeguards,  should have  the discretion  to make  that                                                                    
     decision,   because,   lo   and  behold,   the   Hickel                                                                    
     Administration, with a  commissioner that came directly                                                                    
     out of  the "oil patch,"  turned down Conoco,  and that                                                                    
     gentleman  ...  is  sitting   in  our  audience  today,                                                                    
     [former] Commissioner Harold Heinze.   And I studied in                                                                    
     depth ... his work.                                                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG  indicated part of the  endeavor with the                                                               
previous  HB   207  was  to  give   the  commissioner  additional                                                               
authority, on  one hand, but to  have safeguards in terms  of the                                                               
commissioner's best  interest findings.   However, the  number of                                                               
safeguards  was  overkill  and added  complexity,  he  suggested,                                                               
including  the  Senate's  putting  the governor  into  the  loop,                                                               
because  the  commissioner of  natural  resources  works for  the                                                               
administration in power at the  time.  He voiced frustration that                                                               
there is  a perfectly  good concept that  could be  applicable to                                                               
some development in  the state, but that it  hasn't been workable                                                               
because of certain provisions.                                                                                                  
                                                                                                                                
REPRESENTATIVE  ROKEBERG  suggested  that oil  companies  may  be                                                               
reluctant to testify  on [SSHB 28] because of fear  of looking as                                                               
though they  are seeking a  handout.  He therefore  proposed that                                                               
this is not  a handout but a helping hand,  and the invitation is                                                               
for  the  companies  to  bring   forward  applications  that  are                                                               
meritorious.  Each  application will be judged on  its merits, he                                                               
said.                                                                                                                           
                                                                                                                                
Number 2317                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG addressed  the first  point made  by Ms.                                                               
Robson.  Recalling that it was  debated heavily in the House last                                                               
time, he explained that with regard  to extending it to a portion                                                               
of a  pool, his  concern was about  "step-outs" or  certain areas                                                               
that  look marginal  and might  be  considered part  of the  pool                                                               
because  of geology,  for  example.   Saying  it  is an  arguable                                                               
point, he  asked committee  members to  look at  it further.   He                                                               
added, "I'll give [the Division of  Oil & Gas] the benefit of the                                                               
doubt here  if they can  prove ...  otherwise, and we  can remove                                                               
that."                                                                                                                          
                                                                                                                                
Number 2377                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  addressed a second point  by Ms. Robson,                                                               
regarding the independent contractor.   He indicated this area of                                                               
the [previous] bill was developed  in the House Special Committee                                                               
on  Oil  and  Gas at  the  time,  in  order  to have  "some  real                                                               
expertise available both  to the commissioner and  to the company                                                               
involved that mandated that an  outside consultant be brought in,                                                               
somebody who  could crunch  numbers and  had a  reputation within                                                               
the industry  to assist  in the analysis  and development  of the                                                               
best  interest  finding."   He  offered  that  at issue  are  the                                                               
changes [in  the previous  legislation] in  the Senate,  which to                                                               
his belief [probably occurred] because  the Division of Oil & Gas                                                               
had wanted them.                                                                                                                
                                                                                                                                
Number 2404                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG explained that  [SSHB 28] defaults to the                                                               
older concept of who picks the consultant.   It is from a list of                                                               
qualified   consultants  provided   by   the  commissioner,   but                                                               
ultimately selected by the applicant.  He added:                                                                                
                                                                                                                                
     The very  simple reason is, the  applicant's paying for                                                                    
     it.  ... I  always took  offense  at the  idea that  an                                                                    
     applicant would  have to pay for  a consultant selected                                                                    
     by  the  commissioner. ...  Ms.  Robson  brings up  the                                                                    
     point  that,  well, it  may  appear  or may  swing  the                                                                    
     guarantee of  outcome to a particular  contractor.  But                                                                    
     I  believe  by  having  the  commissioner  develop  the                                                                    
     shortlist   of   reputable   consultants  -   and   the                                                                    
     reputation of that consultant  should speak for itself,                                                                    
     and there's relatively limited  amounts of those people                                                                    
     that could  undertake that ...  in the whole  nation, I                                                                    
     think,  or  worldwide -  ...  that  should be  adequate                                                                    
     comfort  for the  commissioner.   And  the  fact is,  a                                                                    
     rather large  sum of money  I would expect to  ... have                                                                    
     to be paid by ...  the petroleum company bringing forth                                                                    
     the  application.   And  they're  paying  for it;  they                                                                    
     ought to get the final say. ...                                                                                            
                                                                                                                                
     It's kind  of a philosophical  thing, where ...  I kind                                                                    
     of  take offense  that the  government's going  to tell                                                                    
     you that  ... you have  to hire somebody and  then pick                                                                    
     them for you, and then you've  got to pay for it. ... I                                                                    
     think  it's something  that needs  further debate,  and                                                                    
     I'm certainly open to that particular debate.                                                                              
                                                                                                                                
Number 2514                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  addressed a third area  discussed by Ms.                                                               
Robson, relating  to page  4, line 28  [of SSHB  28], "reasonably                                                           
available  to  the applicant".    He  recalled that  that  phrase                                                           
stemmed from testimony  eight years ago.  There were  a number of                                                               
transfers  of properties,  particularly in  the Cook  Inlet area,                                                               
from one  company to  another; there also  had been  testimony by                                                               
Union  Oil Company  of California  (Unocal)  and by  some of  the                                                               
successors  in interest  to  those  transactions that  geological                                                               
data didn't necessarily  come with the purchase of  some of those                                                               
platforms  out in  the  inlet.   The  reason  for the  provision,                                                               
therefore, was to [avoid] an  extra requirement of providing data                                                               
that someone didn't even have.                                                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG said while  he appreciates the division's                                                               
concern that this  may be some sort of an  "out," he believes the                                                               
commissioner  would have  sufficient  latitude  or authority,  if                                                               
lacking adequate data,  to deny the application.   He mentioned a                                                               
desire for  assurance if  an applicant could  make a  good enough                                                               
case that  the data  was reasonably  available if  that applicant                                                               
didn't even  have it.   He characterized  it as  a "successor-in-                                                               
interest-type argument."   He also indicated the  addition of the                                                               
words may  and only [on  line 26]  might alleviate problems.   He                                                       
continued:                                                                                                                      
                                                                                                                                
     It  seems to  me  that the  consultancy  and the  other                                                                    
     information and data that would  have to be part of the                                                                    
     application  obviously  would  have  to  be  sufficient                                                                    
     enough  to  convince  the  commissioner  to  grant  the                                                                    
     relief.  And  if they didn't make their  case, ... they                                                                    
     wouldn't  get it.  ... We  shouldn't make  it mandatory                                                                    
     that  they  get  this data,  because  the  commissioner                                                                    
     could overdemand  and never make  a determination.   So                                                                    
     that's kind of the rationale behind that one.                                                                              
                                                                                                                                
Number 2643                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  referred  to Ms.  Robson's  mention  of                                                               
possible  concern  about  assignment [of  royalty  interest];  he                                                               
suggested the need  to look at that and iron  it out.  Suggesting                                                               
that  all  the issues  can  be  resolved,  he again  thanked  the                                                               
Division  of  Oil  &  Gas for  stepping  forward  in  fundamental                                                               
support of  the bill, and  said he  looked forward to  working to                                                               
resolve the concerns.                                                                                                           
                                                                                                                                
Number 2671                                                                                                                     
                                                                                                                                
CHAIR KOHRING,  crediting Representative  Rokeberg with  the work                                                               
on the  bill, said he was  looking forward to fine-tuning  it and                                                               
advancing it  to the next stage.   He thanked Ms.  Robson for her                                                               
thorough  analysis and  constructive criticism,  noting that  the                                                               
view  of  the administration  is  generally  positive toward  the                                                               
legislation.  [SSHB 28 was held over.]                                                                                          

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