Legislature(2003 - 2004)

03/11/2003 03:23 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 0049                                                                                                                     
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  with  Representative Rokeberg  of                                                               
SSHB 28, noted  that substantial testimony had been  heard at the                                                               
hearing [on February 20, 2003].                                                                                                 
Number 0093                                                                                                                     
CHAIR KOHRING offered a recap, noting  that the intent of SSHB 28                                                               
is to spur development of marginal  oil fields and to establish a                                                               
more  understandable  and  usable royalty-adjustment  method  for                                                               
fields  that might  otherwise prove  uneconomical.   It clarifies                                                               
and simplifies the 1995 legislation  that established the current                                                               
royalty-reduction method,  especially with regard to  the role of                                                               
the commissioner  of the Department  of Natural  Resources (DNR),                                                               
who,  under  the  bill,  will be  given  greater  flexibility  to                                                               
negotiate  deals that  are more  financially viable  for drilling                                                               
and  exploration   companies.     Existing  law  is   simply  too                                                               
burdensome  and  costly  for industry,  he  suggested,  and  thus                                                               
discourages  the filing  of drilling  applications; as  a result,                                                               
oil is  left in the ground  that otherwise could be  extracted to                                                               
add to the state's economic  base.  Essentially, the bill extends                                                               
the life of existing, uneconomical fields.                                                                                      
Number 0229                                                                                                                     
CHAIR KOHRING continued with his  recap, offering his belief that                                                               
[SSHB   28]  protects   the   public   interest  by   maintaining                                                               
individuals' ability  to comment  on preliminary findings  of the                                                               
commissioner;  it also  maintains  the legislature's  involvement                                                               
through  the Joint  Committee on  Legislative  Budget and  Audit,                                                               
which  holds meetings  year-round.   Chair Kohring  asserted that                                                               
the public process isn't compromised by  this bill.  He also said                                                               
Alaska  needs  to remain  competitive  in  the global  market  by                                                               
encouraging development  of its oil  and gas resources,  and that                                                               
he believes  this legislation  moves [the  state] closer  to that                                                               
goal.   He added  that the  bill is  basically intended  to jump-                                                               
start drilling activity.                                                                                                        
Number 0288                                                                                                                     
CHAIR  KOHRING turned  attention  to the  fiscal  note [from  the                                                               
Division of Oil  & Gas] for more than $30  million.  He suggested                                                               
representatives from the  division could address it.   He offered                                                               
his  belief,  however,  that  the bill  has  essentially  a  zero                                                               
[fiscal impact],  because without  development of  these marginal                                                               
fields,  there  won't  be  oil royalties  going  into  the  state                                                               
treasury.   Suggesting  it's another  way  of looking  at it,  he                                                               
added, "In  my mind,  the note  reflects an  amount of  money the                                                               
state wouldn't get if this bill simply didn't become law."                                                                      
Number 0379                                                                                                                     
CHAIR  KOHRING moved  to adopt  [Conceptual]  Amendment 1,  which                                                               
read [original punctuation provided]:                                                                                           
      Delete all references to:  or portion of a field or                                                                   
REPRESENTATIVE CHENAULT objected for discussion purposes.                                                                       
Number 0440                                                                                                                     
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources,  told  members  that  the  division  and  DNR                                                               
support Conceptual Amendment  1.  Calling attention  to the scale                                                               
in  terms of  size, he  pointed out  the inherent  flexibility in                                                               
using "field or  pool" in customizing royalty relief.   Pools are                                                               
individual,  separated  reservoirs,   whereas  a  field  commonly                                                               
consists of multiple  pools.  In this legislation,  the state can                                                               
grant  royalty  relief  for  a  field  producing  through  common                                                               
facilities - multiple  different reservoirs - and  have a royalty                                                               
reduction  on an  individual  reservoir.   That  gives  a lot  of                                                               
flexibility,  since  it  isn't   for  the  entire  infrastructure                                                               
related to [production]  in that field, but can be  tailored to a                                                               
heavy-oil zone or a gas pool,  for example, if it's separate from                                                               
the main oil reservoir.                                                                                                         
Number 0537                                                                                                                     
MR. MYERS explained that going to  [a portion of a field or pool,                                                               
as  proposed  in SSHB  28],  brings  up multiple  problems,  both                                                               
administratively  and,  to his  belief,  in  [terms] of  purpose.                                                               
Using an analogy of  an oil field as a flying  saucer with a thin                                                               
edge, he  explained that  the thicker  part -  the middle  of the                                                               
field - will be developed first,  since it is the only economical                                                               
area to  develop:  it has  the thickest accumulation of  oil, and                                                               
the wells  have the highest rates  of return and flow  rates.  As                                                               
the  field  life  continues -  with  more  infrastructure  built,                                                               
including drilling pads - thinner  and thinner parts of the field                                                               
become economical.                                                                                                              
MR.  MYERS continued,  noting that  the natural  evolution is  to                                                               
produce  the  thickest, best,  most  economical  part first,  and                                                               
later  on  to  produce  the  thinner edges  of  the  field.    He                                                               
expressed  concern, therefore,  that  at some  point  in time  an                                                               
operator could  claim that  only the "thickest  part of  the pie"                                                               
was economical, and  thus request royalty relief  for the thinner                                                               
Number 0631                                                                                                                     
MR. MYERS told members:                                                                                                         
     Historically, what  we've seen is, on  the North Slope,                                                                    
     Prudhoe  Bay, originally,  the economic  limit was  100                                                                    
     feet of oil thickness, of oil  column or net pay.  That                                                                    
     is now  down to about  10 feet.   So both as  the field                                                                    
     production moved on and also  as technology changed, it                                                                    
     became  more  and  more  economic,  through  a  natural                                                                    
     evolution  of the  oil field,  to  produce the  thinner                                                                    
     edges.  So ... by  using "parts of fields," an operator                                                                    
     could always claim a royalty  relief at any given point                                                                    
     for part of  the field:  a small,  isolated fault block                                                                    
     within  the field  that might  have  thinner "pay"  on,                                                                    
     certainly, the fringe parts of the field.                                                                                  
MR. MYERS  offered that  at some  point in  the field  life, only                                                               
uneconomical  oil will  be left;  that  is when  an incentive  is                                                               
desired.   Reiterating  that the  fine scale  of "[portion]  of a                                                               
field or pool" is problematic  from both an administrative and an                                                               
"intent" standpoint, he  added, "I could even see  cases where it                                                               
might lead  to improper reservoir management,  where you actually                                                               
don't  produce the  core part  of  the field  first, or  maximize                                                               
production, because  you're ...  producing those areas  where you                                                               
get a  royalty reduction."   From  an operational  standpoint, he                                                               
suggested, it doesn't make sense.                                                                                               
MR. MYERS  pointed out another  problem with the  language [being                                                               
deleted  by Conceptual  Amendment 1]:   early  in the  life of  a                                                               
field, there isn't  the data necessary about the  fringe areas to                                                               
determine whether  they are economically  viable.  As a  field is                                                               
developed,  however, more  and more  information is  obtained, he                                                               
said, "moving  out to these  peripheral areas of the  field; then                                                               
you can quantify the value of that."                                                                                            
Number 0772                                                                                                                     
REPRESENTATIVE  KERTTULA indicated  technological advances  start                                                               
to make areas  economically viable that weren't  previously.  She                                                               
asked Mr.  Myers what the  state would  have lost in  revenues if                                                               
economic  incentives had  been granted  when [the  economic limit                                                               
for oil] was 100 feet, rather than the 10 feet it is currently.                                                                 
MR. MYERS replied:                                                                                                              
     The only  example that  I know  of on  a royalty-relief                                                                    
     case  where you  could have  tested that  was at  Milne                                                                    
     Point,  ... prior  to ConocoPhillips,  when Conoco  was                                                                    
     originally  operating the  field  [in]  the 1980s,  and                                                                    
     they  applied for  royalty relief,  I  think, in  [the]                                                                    
     '89-to-'90   timeframe.      The   state   denied   the                                                                    
     application, but  the analysis showed that  if it would                                                                    
     have  been  granted,  it  would  have  cost  the  state                                                                    
     between $64 [million]  and $120 million.   But that was                                                                    
     at Conoco's  20,000-barrel-per-day rate  of production.                                                                    
     Currently,  the field  produces  nearly 50,000  barrels                                                                    
     per day, without that royalty relief.                                                                                      
     So, in this  case, we could quantify  about 128 million                                                                    
     [dollars].   But,  in reality,  what we  got was  a new                                                                    
     operator with additional capital  to spend in the field                                                                    
     that has really  done a good job of developing  it.  So                                                                    
     ... that is  sort of the upside risk early  in the life                                                                    
     of ...  the field, is  in the $100  million-plus range.                                                                    
     Later  in  the   life  of  fields,  near   the  end  of                                                                    
     production life, there's much  better data to quantify,                                                                    
     the  risks are  significantly  lower,  and the  dollars                                                                    
     involved ... can be significantly lower.                                                                                   
Number 0886                                                                                                                     
REPRESENTATIVE KERTTULA  asked whether the bill  is structured so                                                               
this  determination is  only made  at the  end of  the life  of a                                                               
field, or  whether something  may happen at  the beginning.   She                                                               
noted that  page 1 places  some sidebars with regard  to economic                                                               
MR. MYERS responded:                                                                                                            
     I think  ... there is a  risk early in the  life of the                                                                    
     field,  because  ...  you have  uncertainty  about  the                                                                    
     actual   recoverable    reserves,   the    changes   in                                                                    
     technology, future oil prices.   On the other hand, the                                                                    
     bill  allows  the   flexibility  to  condition  royalty                                                                    
     relief, so  that when conditions [change]  there can be                                                                    
     payback  ...   if  it's   deemed  appropriate   in  the                                                                    
     mechanism, or the royalty relief  can end.  So the bill                                                                    
     does allow ... a lot  of flexibility and discretion [to                                                                    
     the] DNR commissioner  to customize it.   And I believe                                                                    
     that was  Representative Rokeberg's intent,  there, ...                                                                    
     to  give those  tools for  flexibility so  it could  be                                                                    
     managed in such a way ... to minimize the risk.                                                                            
     But there is risk early in  the life of the field.  You                                                                    
     simply ...  don't have the  data to know; on  the other                                                                    
     hand, you  risk the field,  in some  cases - and  I can                                                                    
     use  a  Badami-type-field  example, where  even  though                                                                    
     you're relatively  early in the  life of the  field, it                                                                    
     doesn't   have   very   good  economics,   i.e.,   have                                                                    
     sufficiency  of   data  to   know  that  it's   a  very                                                                    
     challenged field.   So there  are cases at all  ends of                                                                    
     the spectrum.  ... This is  not an easy thing.   That's                                                                    
     why it  takes a lot  of detailed analysis.   That's why                                                                    
     the data requirements are here in the bill.                                                                                
Number 1016                                                                                                                     
REPRESENTATIVE ROKEBERG,  joint sponsor  of SSHB 28,  referred to                                                               
discussion at  the previous hearing  about the judgment  of then-                                                               
Commissioner   Harold  Heinze   in   denying   the  Milne   Point                                                               
application from  Conoco; he  asked Mr.  Myers whether  the state                                                               
would have  foregone substantial  income [if the  application had                                                               
been approved], and requested details.                                                                                          
MR. MYERS answered that  it was for the heavy oil  as well as the                                                               
Kuparuk River formation, the main  producing reservoir; it wasn't                                                               
limited  to  heavy   oil.    Indicating  DNR   had  reviewed  the                                                               
substantial technical data that was  provided, he said Conoco did                                                               
a good  job, had identified a  lot of additional reserves  in the                                                               
field, and  had actually  pioneered some  of the  heavy-oil work.                                                               
However,  Conoco  determined  that its  internal  economics  were                                                               
"more challenged,"  particular in relation to  the higher tariffs                                                               
the company  was paying TAPS  [the Trans-Alaska  Pipeline System]                                                               
and the Kuparuk pipeline.  He added:                                                                                            
     When ...  the state reviewed that  application, ... the                                                                    
     data  showed what  the state  thought was  a reasonable                                                                    
     rate  of return  for the  [operator]  at the  time.   I                                                                    
     think  the  operator saw  a  better  economic fit  with                                                                    
     trading that for  some property in the  Gulf of Mexico;                                                                    
     BP  saw  a good  economic  fit.    But  as far  as  the                                                                    
     reserves and  the technology, BP has  done an excellent                                                                    
     job  in  developing  the  field.    The  potential  was                                                                    
     clearly recognized  by Conoco, which had  [itself] done                                                                    
     a good technological job in looking at those reserves.                                                                     
Number 1157                                                                                                                     
REPRESENTATIVE  ROKEBERG remarked  that Mr.  Myers had  refreshed                                                               
his memory.   He asked whether  the true reason for  the original                                                               
application [for  royalty modification] was that  Conoco wasn't a                                                               
participant in TAPS and therefore  would have had to "pay through                                                               
the nose" compared with TAPS participants.                                                                                      
MR. MYERS replied:                                                                                                              
     It  certainly   hurt  their  economics,   although  the                                                                    
     state's analysis,  and the determination,  wasn't based                                                                    
     on  all those  economics;  it was  based on  [Conoco's]                                                                    
     confidential,  internal  economics.  ...  I  think  the                                                                    
     public-interest  decision  by Commissioner  Heinze  was                                                                    
     also  based   on  [the  assumption  that]   ...  little                                                                    
     behavior modification  was going to occur  with Conoco.                                                                    
     They  weren't  going   to  ...  incrementally  increase                                                                    
     production in  the field,  even though  they identified                                                                    
     the reserves, by any significant amount.                                                                                   
     So  ...  one  of  the things,  I  think,  with  royalty                                                                    
     reduction:   if  you give  the royalty  reduction, will                                                                    
     the field  produce longer?   And  we knew  the reserves                                                                    
     were  there.   So,  would  it  enhance the  production?                                                                    
     Would  ...  investment  pour  back   in  the  field  to                                                                    
     increase and create a  win-win situation, a symmetrical                                                                    
     situation  where we  gave up  royalty  relief and  then                                                                    
     received  additional revenue?   Conoco's  case on  that                                                                    
     was pretty poor, in that it  was business as usual.  It                                                                    
     was clear,  even though the  amount of dollars  for the                                                                    
     royalty  reduction  were  substantial,  [that]  it  was                                                                    
     still  less than  $10 million  per  year, which  wasn't                                                                    
     sufficient  money  to allow  them  to  invest ...  more                                                                    
     capital for enhanced oil recovery,  which is one of the                                                                    
     limitations, I truly think, the  state has, again, with                                                                    
     our royalty share being a [small] percentage of that.                                                                      
Number 1292                                                                                                                     
MR. MYERS continued:                                                                                                            
     The relief can help,  and it particularly helps against                                                                    
     the  operating cost  standard.   But against  the total                                                                    
     investment  in the  field  - which  at  that time,  the                                                                    
     royalty  reduction had  to  be used  against  - it  was                                                                    
     relatively  small, a  small incremental  change to  the                                                                    
     company that  couldn't change the  behavior.   But even                                                                    
     with all  that said, the economic  analysis showed that                                                                    
     they made a  reasonable rate of return,  in the state's                                                                    
     interpretation.   And  that's why  the application  was                                                                    
Number 1320                                                                                                                     
REPRESENTATIVE  ROKEBERG  offered  his  belief  that  Conoco  had                                                               
swapped  interests with  BP,  which had  a  better position  with                                                               
regard to tariffs, and left Alaska  because of an inability to do                                                               
business here.   He said  it doesn't speak  to this bill,  but to                                                               
access with regard to infrastructure,  for example.  He suggested                                                               
[ConocoPhillips Alaska]  is back  only because  of "international                                                               
corporate deal making."                                                                                                         
Number 1438                                                                                                                     
REPRESENTATIVE  McGUIRE  mentioned  a concern  expressed  at  the                                                               
previous hearing  [by Representative Rokeberg] about  the concept                                                               
beginning on page 2, line 5  - which refers to delineation to the                                                               
satisfaction of  the commissioner  - with  regard to  whether the                                                               
commissioner might  "overdemand for  a delineation  about fields"                                                               
and  then never  make a  decision.   She asked  if that  had been                                                               
Number 1545                                                                                                                     
CHAIR KOHRING asked  Mr. Myers whether he had  any concerns about                                                               
that provision.                                                                                                                 
MR. MYERS replied:                                                                                                              
     No, I  don't.  I  think, actually,  the sufficiency-of-                                                                    
     data  standard's  important  here  early,  particularly                                                                    
     because   that  results   ...   in  potential   royalty                                                                    
     reduction early in the life of  the field.  So you need                                                                    
     to  have an  idea  of  the size  of  the reserves,  the                                                                    
     economics, the  production.   And we need  to ...  do a                                                                    
     "due diligence" to be reasonably  ... confident that we                                                                    
     can  either  agree  with  their   numbers  or  do  some                                                                    
     independent  assessment of  that.   So ...  it's always                                                                    
     going to be  a judgment as to the  sufficiency of data,                                                                    
     and it's  a professional  judgment.   But ...  early in                                                                    
     the life of  the field you're going to have  a lot less                                                                    
     data to work with.                                                                                                         
     I think  the bill  has ... a  real positive  aspect [in                                                                    
     that]  it allows  you to  customize the  relief ...  to                                                                    
     deal with  some of those  uncertainty issues.   But you                                                                    
     still  fundamentally  need  to ...  know  whether  your                                                                    
     field  is 200  million barrels  or 400  million barrels                                                                    
     recoverable,   the  gravity   of  the   oil,  ...   the                                                                    
     producibility,  the net  cost for  producing that  oil.                                                                    
     So  ...  there   is  definitely  a  sufficiency-of-data                                                                    
     standard  [and] that  any  prudent  operator will  have                                                                    
     that  data if  they've sanctioned  the project  and ...                                                                    
     are going ahead with development  of that project.  So,                                                                    
     ... again, I  think it's sort of ...  self-policing.  I                                                                    
     guarantee   you,  the   companies   can't  make   those                                                                    
     decisions  ...  on  skinny   data.    They're  spending                                                                    
     hundreds of  millions or billions of  dollars, and they                                                                    
     will have ... that sufficiency of data.                                                                                    
Number 1646                                                                                                                     
REPRESENTATIVE  McGUIRE, again  referring to  her notes  from the                                                               
previous  hearing, mentioned  a concern  about the  appearance or                                                               
reality  of  a  guaranteed  result  in picking  from  a  list  of                                                               
qualified consultants.                                                                                                          
REPRESENTATIVE  ROKEBERG  requested   that  attention  return  to                                                               
Conceptual Amendment 1.                                                                                                         
REPRESENTATIVE CHENAULT removed his objection.                                                                                  
Number 1722                                                                                                                     
CHAIR KOHRING  asked whether there  was any further  objection to                                                               
adopting Conceptual  Amendment 1.   There being no  objection, it                                                               
was so ordered.                                                                                                                 
CHAIR   KOHRING   suggested    that   Representative   Rokeberg's                                                               
Amendment 2 should address Representative McGuire's concerns.                                                                   
Number 1736                                                                                                                     
REPRESENTATIVE ROKEBERG  moved to adopt Amendment  2, labeled 23-                                                               
LS0177\D.3, Chenoweth, 3/11/03, which read:                                                                                     
     Page 5, line 20, following "data;":                                                                                        
          Insert "the commissioner may require use of the                                                                   
     services   of   an   independent  contractor   if   the                                                                
     commissioner  determines that  the  estimated costs  of                                                                
     the contractor's  services do not exceed  10 percent of                                                                
     the  estimated value  of the  royalty reduction  to the                                                                
     lessee  or lessees  making application  for it,  except                                                                
     that the  commissioner may require use  of the services                                                                
     when  the  estimated costs  of  the  services equal  or                                                                
     exceed  10  percent  of  the  estimated  value  of  the                                                                
     royalty reduction with the applicant's agreement; if,                                                                  
        under this paragraph, the commissioner requires                                                                     
     payment for the services of an independent contractor,                                                                 
CHAIR KOHRING objected for discussion purposes.                                                                                 
Number 1759                                                                                                                     
REPRESENTATIVE ROKEBERG said this is  in the same area brought up                                                               
by  Representative McGuire.    He  pointed out  that  there is  a                                                               
difference in the view  of the Division of Oil &  Gas and his own                                                               
view  of the  bill.   He explained,  "They've requested  that the                                                               
commissioner have  the right  here to make  the selection  of the                                                               
REPRESENTATIVE ROKEBERG told members  that Amendment 2 really has                                                               
to do with use of the  services of an independent contractor.  He                                                               
offered for the  record a three-page letter from  Kevin Tabler of                                                               
Union  Oil Company  of California  (Unocal) dated  March 7,  2003                                                               
[which also contained testimony by  Unocal submitted on March 16,                                                               
1995, to the House Special Committee  on Oil and Gas and on April                                                               
28, 1995, to the Senate  Resources Standing Committee with regard                                                               
to HB 207].                                                                                                                     
REPRESENTATIVE ROKEBERG  told members  the issue  is that  if the                                                               
commissioner  had  full sway  to  select  the contractor  and  to                                                               
determine the  relevant scope of  work, [the  commissioner] could                                                               
ask the  contractor to spend  more money than the  royalty relief                                                               
would  be worth.   He  suggested  that might  have happened  with                                                               
regard to the only application he  was aware of under HB 207, the                                                               
current law.   Referring to  Mr. Tabler's  letter, Representative                                                               
Rokeberg  said  the  consultant  cost  something  like  $250,000,                                                               
whereas the total benefit to Unocal  was only about $600,000.  He                                                               
suggested a 5-to-1 ratio might  be worthwhile, and mentioned high                                                               
hurdle rates because  of the higher level of risk.   He suggested                                                               
taking great care when drafting the  statutes to try to make them                                                               
reflect the real world.                                                                                                         
Number 1950                                                                                                                     
REPRESENTATIVE  ROKEBERG noted  that  Amendment  2 restricts  the                                                               
cost  of these  contracts, and  that the  commissioner can  still                                                               
determine the relevant scope of work  to be performed.  He asked:                                                               
if the relevant scope to  be demanded by the commissioner exceeds                                                               
a valuation and there is  no cost-benefit ratio here, why proceed                                                               
with the application?   He said the 10 percent  admittedly is "an                                                               
estimate of  a reasonable  number," and  that although  he wasn't                                                               
"wed to  that number," it has  been recommended.  He  called it a                                                               
commonsense addition,  suggesting that there could  be a scenario                                                               
wherein  a commissioner  demands that  "you study  this thing  to                                                               
death" and it costs more than it is worth.                                                                                      
REPRESENTATIVE ROKEBERG  requested feedback  from [Mr.  Myers] on                                                               
Amendment  2 and  the relevant  section  of the  bill, but  again                                                               
referred to Mr. Tabler's letter,  page 2 in particular, about why                                                               
Mr. Tabler believed this to be necessary.                                                                                       
Number 2060                                                                                                                     
MR. MYERS responded:                                                                                                            
     I believe  this amendment creates an  on-off switch ...                                                                    
     of whether or not the  state can hire a contractor, not                                                                    
     the  expenses the  contractors can  [incur].   In other                                                                    
     words, I don't believe,  under this amendment, we could                                                                    
     actually  hire them  unless we've  demonstrated the  10                                                                    
     percent, which  you won't know  until you've  hired the                                                                    
     contractor.  So  ... I believe that  ... probably isn't                                                                    
     the  intent,  but, again,  I  don't  see that  as  very                                                                    
     workable in the sense it  wouldn't allow us to hire the                                                                    
     contractor at all.                                                                                                         
     I'm sympathetic to  the concern that the  costs, with a                                                                    
     contractor, ...  can be quite  expensive. ...  I'd like                                                                    
     to note,  though, that  on the  Unocal case,  the state                                                                    
     did  not  hire a  contractor,  so  Mr. Tabler  must  be                                                                    
     referring to  internal costs [incurred] ...  by Unocal.                                                                    
     Again, we had no contractor on board for that.                                                                             
REPRESENTATIVES McGUIRE  and ROKEBERG  referred to the  fact that                                                               
Mr.  Tabler's  letter  says  Unocal  hired  its  own  consultant,                                                               
Gaffney Cline.                                                                                                                  
Number 2116                                                                                                                     
MR. MYERS  said that  was for  [Unocal's] internal  analysis, not                                                               
for  reimbursable expenses  to the  department.   "So, again,  we                                                               
handled  that case  internally," he  said.   He  added that  it's                                                               
likely,  for a  field late  in  its life,  that [the  department]                                                               
would have  sufficient data and  the costs in the  contract would                                                               
be  less.   On a  larger field  early in  its life,  however, the                                                               
amount  of  analysis inevitably  would  be  a  lot more  and  the                                                               
potential  [royalty] reduction  would be  more.   He  said he  is                                                               
sympathetic  to  Representative   Rokeberg's  concern  that  [the                                                               
state] not  charge too much  or do extensive analysis  that isn't                                                               
necessary, and has some sympathy  for the applicants if the costs                                                               
are  large  for  a  contractor.   If  a  royalty  structure  were                                                               
designed with a payback or  shut-off mechanism, however, it would                                                               
be  price-dependent,  and estimating  10  percent  of the  relief                                                               
wouldn't be an easy task, either.                                                                                               
MR. MYERS  reiterated his two  concerns.   First, this sets  up a                                                               
situation  whereby  [the  department]  isn't allowed  to  hire  a                                                               
contractor unless  it either demonstrates  or estimates  that the                                                               
costs don't exceed  10 percent.  And, second, it  will be hard in                                                               
some  cases,  depending  on  how the  relief  is  structured,  to                                                               
actually quantify  the value of  that relief, because of  using a                                                               
sliding-scale  mechanism,  a   price-sensitive  mechanism,  or  a                                                               
payback - all of which could be used under this.                                                                                
Number 2198                                                                                                                     
REPRESENTATIVE ROKEBERG responded that  he didn't entirely agree.                                                               
He said he'd seen  no evidence that the Division of  Oil & Gas is                                                               
reluctant to  create fiscal notes  with estimates with  regard to                                                               
potential oil revenues  lost; he cited [this year's] HB  57 as an                                                               
example.  He disagreed with  the characterization that this is an                                                               
on-off switch, unless  the desire is to use it  as a mechanism to                                                               
foil the attempt of the applicant.                                                                                              
REPRESENTATIVE ROKEBERG offered his  belief that the language [in                                                               
Amendment 2] is  sufficient to provide flexibility,  and that the                                                               
10  percent could  be  exceeded if  the  applicant gave  consent.                                                               
Noting that he'd worked  on it for a couple of  weeks, he said it                                                               
seemed easier to  try to set some quantifiable  standard based on                                                               
preliminary  estimates of  what could  happen.   He added,  "This                                                               
could be  really problematic  because the  bill does  provide for                                                               
this  to  an  undeveloped  field."    Suggesting  that  the  word                                                               
"estimates"  is  clear  statutorily,  he offered  to  modify  the                                                               
language  if  it  could  include  the  concept  of  "cost-benefit                                                               
analysis of  value engineering."   He  cautioned that  great harm                                                               
could result if two parties  in a semi-adversarial situation were                                                               
saying who  could be used as  consultants, what lists were  to be                                                               
chosen  from, and  so forth;  he suggested  that is  a collateral                                                               
issue about which there has been past disagreement.                                                                             
Number 2332                                                                                                                     
MR. MYERS replied:                                                                                                              
     If I  have an  ... initial application  for this  and I                                                                    
     know I'm going  to need a consultant,  I'm ... probably                                                                    
     going to hire the consultant  on an hourly basis, based                                                                    
     on  how much  analysis he's  going to  be doing.   This                                                                    
     says that I have to know  what these costs are going to                                                                    
     be  ... ahead  of  time,  prior to  it,  and have  done                                                                    
     enough  analysis to  know what  the  royalty relief  is                                                                    
     going  to  be   worth,  all  of  which   ...  would  be                                                                    
     preconditions  for   my  authority  ...  to   hire  the                                                                    
     contractor or to get a contract with him.                                                                                  
     So I'm  stuck in the  case of  ... thinking, "How  do I                                                                    
     possibly, going into [an]  application, know what data,                                                                    
     (a),  is available  to me  through the  applicant, and,                                                                    
     (b), what sort of analysis  I'm going to need, and what                                                                    
     that analysis  is going  to cost me."   In  addition, I                                                                    
     don't  know what  the royalty  relief  is, because  I'm                                                                    
     first  seeing  this application  cold,  with  a lot  of                                                                    
     So,  under this  scenario  I'd have  to  work the  data                                                                    
     internally,  extensively, [to  the]  point  that I  was                                                                    
     comfortable  enough  that  ...  the  10-percent  number                                                                    
     would work,  and then  I could  hire the  consultant to                                                                    
     work  on those  particular problems.   That's  going to                                                                    
     cause a  lot of internal  analysis, a lot of  delay ...                                                                    
     in the work on the application.                                                                                            
MR.  MYERS   offered  to   work  with   Representative  Rokeberg,                                                               
reiterating that  he understood  and sympathized with  the intent                                                               
from the  applicants' standpoint of wanting  certainty that [DNR]                                                               
won't use  this as a  mechanism to deny  it; Mr. Myers  said that                                                               
clearly isn't the intent.                                                                                                       
Number 2409                                                                                                                     
REPRESENTATIVE KERTTULA  asked how  many times this  actually has                                                               
been a problem  that [DNR] has asked for [a  consultant] and been                                                               
told it would be too expensive.                                                                                                 
MR. MYERS  indicated that the  times when DNR went  through these                                                               
analyses, it never hired an  independent assessment.  He said, "I                                                               
do note, the Conoco case took a  long time to do internally."  He                                                               
reiterated that  if there is  a lot of data  late in the  life of                                                               
the field,  this is not a  difficult problem.  Early  in the life                                                               
of  the  field,  however,  engineering  analysis  and  technical,                                                               
upfront analysis must be done.  It really will vary, he added.                                                                  
Number 2449                                                                                                                     
REPRESENTATIVE  ROKEBERG replied  to  Representative Kerttula  by                                                               
referring  to [AS  38.05.180(j)]  and saying  the provision  that                                                               
required the independent consultant was  added in 1995 by HB 207;                                                               
thus the commissioner  [of DNR] under the  Conoco scenario didn't                                                               
have this mandate.   He suggested that any  hiring of consultants                                                               
is "probably  discretionary as to  the commissioner on  any other                                                               
type of circumstance,"  but said only the  Conoco application, to                                                               
his knowledge, has  done this in eight years.   He added, "That's                                                               
why we're doing this bill.   The statute doesn't work now.  We're                                                               
trying to clean  it up so it's  workable and so it  can have some                                                               
impact  and effect  on our  oil and  gas production  here in  the                                                               
REPRESENTATIVE  ROKEBERG indicated  he  could  envision what  Mr.                                                               
Myers was  thinking, although he  didn't entirely agree.   He did                                                               
agree that  in a new field,  in particular, or where  there isn't                                                               
sufficient data,  it can be  extremely difficult to make  some of                                                               
these  estimates,  even with  regard  to  the amount  of  royalty                                                               
reduction.  He suggested that both  [he and Mr. Myers] agree with                                                               
the need for  some sideboards with regard  to "value engineering"                                                               
and how to accomplish that.                                                                                                     
Number 2541                                                                                                                     
REPRESENTATIVE ROKEBERG  requested, rather than holding  the bill                                                               
further,  that  the committee  accept  Amendment  2 in  order  to                                                               
introduce the  concept into the  bill, but with the  proviso that                                                               
he'd work  with Chair Kohring  and the Division  of Oil &  Gas to                                                               
try to make it workable.                                                                                                        
MR. MYERS offered technical support.                                                                                            
Number 2583                                                                                                                     
REPRESENTATIVE KERTTULA objected, stating  her preference for not                                                               
including Amendment  2, which could  be added on the  House floor                                                               
if necessary.                                                                                                                   
CHAIR KOHRING withdrew his own objection.                                                                                       
A  roll call  vote was  taken.   Representatives Rokeberg,  Fate,                                                               
McGuire,   and   Kohring  voted   in   favor   of  Amendment   2.                                                               
Representatives   Crawford  and   Kerttula   voted  against   it.                                                               
Representative  Chenault was  absent  for the  vote.   Therefore,                                                               
Amendment 2 was adopted by a vote of 4-2.                                                                                       
The committee took an at-ease from 4:02 p.m. to 4:03 p.m.                                                                       
Number 2624                                                                                                                     
REPRESENTATIVE  ROKEBERG  referred  to Mr.  Tabler's  letter  and                                                               
conversations  with Ken  Boyd, Mr.  Myers' counterpoint  when the                                                               
original legislation  came before the House  Special Committee on                                                               
Oil and  Gas eight years  ago.  With  regard to paragraph  (6) on                                                               
page 5  of SSHB  28, Representative Rokeberg  said it  reads that                                                               
the applicant pays for the  services of an independent contractor                                                               
selected from  a list  of qualified  consultants provided  by the                                                               
commissioner.   In  existing law,  by contrast,  the commissioner                                                               
selects the consultant  and the applicant has to pay  for it.  He                                                               
offered his belief,  from past conversations, that  Mr. Myers and                                                               
his staff were in disagreement  [with Representative Rokeberg] on                                                               
this point.                                                                                                                     
REPRESENTATIVE  ROKEBERG said  he would  "stick by  this position                                                               
because it's  been reconfirmed  by the  testimony, in  talking to                                                               
various people  ... in  the industry that  have ...  gone through                                                               
the  situation,  where  I think  that  ultimately  the  companies                                                               
paying for the  contractor - who's going to be  working under the                                                               
direction  of the  commissioner -  should  be the  one to  select                                                               
whoever they're  going to be  paying for."   Calling it  a "basic                                                               
axiom  of  business,"  he also  offered  his  understanding  that                                                               
relatively few companies would even qualify [for the list].                                                                     
REPRESENTATIVE ROKEBERG  noted that proposed language  on page 5,                                                               
lines 20-21, of  SSHB 28 [which immediately  follows the language                                                               
inserted  by   Amendment  2],   says,  "the   commissioner  shall                                                           
determine the relevant  scope of the work to be  performed by the                                                           
contractor".    He   pointed  out  that  [DNR]   would  use  this                                                           
information  to evaluate  the application.    He said  he saw  no                                                               
reason  to change  this, but  acknowledged that  Mr. Myers  might                                                               
feel otherwise.                                                                                                                 
Number 2776                                                                                                                     
REPRESENTATIVE CRAWFORD  said it  seems this  will be  a somewhat                                                               
adversarial   relationship  between   the   contractor  and   the                                                               
applicant,  and  that  the most  qualified  contractor  that  the                                                               
[commissioner]  chooses might  be unacceptable  to the  applicant                                                               
because of being too tough an  adversary.  He asked the reasoning                                                               
behind allowing the applicant to choose who the adversary is.                                                                   
REPRESENTATIVE  ROKEBERG replied  that it  is supposed  to be  an                                                               
independent  consultant -  a gatherer  of technical  data and  an                                                               
analyst.    He suggested  an  adversarial  relationship, if  any,                                                               
would   be   between   the  commissioner   and   the   applicant.                                                               
Characterizing  this  as a  "pretty  small  business sphere,"  he                                                               
remarked that if  the commissioner told him to  hire a particular                                                               
person  that  he'd  had  a   bad  experience  with,  he  wouldn't                                                               
appreciate it.   He offered  that the  commissioner has a  say in                                                               
the  selection  process  by providing  the  list;  the  applicant                                                               
selects  [from]  the list  and  pays  for [the  consultant];  the                                                               
commissioner then gets to use the consultant.                                                                                   
Number 2890                                                                                                                     
REPRESENTATIVE FATE  said it seems  that allowing  the contractor                                                               
to assume the selection and  to bypass the department removes the                                                               
responsibility   of   the   division  and   perhaps   even   some                                                               
responsibility   from  the   [Alaska  Oil   &  Gas   Conservation                                                               
Commission (AOGCC)]  when it comes  to production.  It  is placed                                                               
solely  in  the  hands  of  the  [applicant],  he  suggested,  by                                                               
allowing  that person  to select  the consultant  to do  the very                                                               
things specified in  the bill.  He asked whether  his reading was                                                               
Number 2955                                                                                                                     
REPRESENTATIVE ROKEBERG replied  that perhaps Representative Fate                                                               
was reading too  much into it, since he didn't  believe AOGCC had                                                               
anything to  do with it.   He said it  is an application  made by                                                               
the lessee to  the commissioner of DNR.  He  added, "Frankly, the                                                               
testimony I have is that the  people in the industry believe that                                                               
... the  commissioner and [the Division  of Oil & Gas]  should be                                                               
able  to do  this  in-house.   They  don't even  need  to hire  a                                                               
contractor."   He pointed out that  "may" is in the  language; it                                                               
is discretionary,  therefore, driven by whether  the commissioner                                                               
believes there is a need for an independent consultant.                                                                         
TAPE 03-14, SIDE B                                                                                                            
Number 2974                                                                                                                     
REPRESENTATIVE  ROKEBERG said  the applicant  pays for  it, under                                                               
the current statute  or the bill.  The question  is who makes the                                                               
shortlist and who gets to make  the decision.  He clarified, "I'm                                                               
saying that the applicant should  make the final decision because                                                               
he's paying for it."  He asked that Mr. Myers address the issue.                                                                
The committee took an at-ease at 4:11 p.m. that lasted a few                                                                    
Number 2913                                                                                                                     
MR. MYERS told members:                                                                                                         
     We can live with ...  the amended version.  Again, it's                                                                    
     not ideal, but  we understand Representative Rokeberg's                                                                    
     concerns, and it's  workable.  I will say  that we have                                                                    
     a  ... fairly  small  consulting  community in  Alaska.                                                                    
     It's one thing  to consider, that most of  the work for                                                                    
     that   consulting   community   will  come   from   the                                                                    
     producers, of  various sorts.   So contractors  have to                                                                    
     be careful  ... when they  work for us that  they don't                                                                    
     hurt their other business opportunities out there.                                                                         
     So, the more [autonomy]  we have to select contractors,                                                                    
     the better.   Again,  we would  be looking  for someone                                                                    
     who's    objective,   someone    that   can    maintain                                                                    
     confidentiality, above  all, because  that's absolutely                                                                    
     critical. ...  We very seldom  bring in  contractors on                                                                    
     detailed  technical  evaluations.   ...  One  thing  is                                                                    
     funding, but the  second thing is the  ... concern over                                                                    
     confidentiality of data.  You  are allowing them to see                                                                    
     some  very  sensitive  data,  both   from  a  sense  of                                                                    
     technical   information,  but   also  from   commercial                                                                    
     economic   information   on  an   individual   company:                                                                    
     information on  their rates  of return,  information on                                                                    
     the profitability of the field,  et cetera.  So this is                                                                    
     a very,  very sensitive analysis.   And to  that point,                                                                    
     we can understand the companies'  concern, but it's our                                                                    
     concern as well.  There's  a liability for showing them                                                                    
     that data and allowing them to use that data.                                                                              
Number 2851                                                                                                                     
MR. MYERS continued:                                                                                                            
     The   quality  of   ...   consultants  varies   widely,                                                                    
     depending on  their experience,  their background.   So                                                                    
     all we want  is to get ... a  good, unbiased, qualified                                                                    
     person  - ...  or  people or  firm -  in  there.   And,                                                                    
     again,  one of  the issues  is, that's  a pretty  short                                                                    
     list in Alaska.   I'm not trying to  defame anyone, but                                                                    
     [this is]  very specific, narrow,  technical expertise,                                                                    
     and there's only a limited  market.  So we have limited                                                                    
     folks in-state.  ... So chances are,  our shortlist and                                                                    
     a producer's  shortlist would be very  similar, but not                                                                    
     And, I  think. the  compatibility for  us to  work with                                                                    
       folks - it's [nice] to know that ... they are high-                                                                      
     quality [and  that] I won't  be spending all  our staff                                                                    
     time bringing someone up to  speed in terms of training                                                                    
     them  to  get  them  to  the  point  they  can  do  the                                                                    
     analysis,  and then  that we  can  trust them,  forward                                                                    
     looking.  So, ... again,  from a selfish standpoint, we                                                                    
     like  to maintain  the flexibility.   But  I understand                                                                    
     Representative  Rokeberg's concern,  and  ... we  could                                                                    
     work with it.                                                                                                              
Number 2800                                                                                                                     
REPRESENTATIVE  KERTTULA  requested  confirmation that  the  idea                                                               
behind  the  contractor  is  someone   who  basically  takes  the                                                               
division's  place in  order  to provide  the  information so  the                                                               
commissioner can make a reasonable decision.                                                                                    
MR. MYERS responded:                                                                                                            
      The way I understand it is, ... it won't be a broad-                                                                      
     based, do-everything  kind of  consultant, necessarily.                                                                    
     It  may  be ...  specific  aspects.    There may  be  a                                                                    
     question  on recoverability  of the  reservoir, reserve                                                                    
     estimates, in  which case you  might bring  a reservoir                                                                    
     engineer in.  It may be  an economic run, in which case                                                                    
     you might want to bring ...  an economics firm in to do                                                                    
     it. ...  There's seldom  "one size fits  all."   If so,                                                                    
     ...  if we  hire one  of these  all-encompassing firms,                                                                    
     typically,  the  cost will  be  very  expensive to  the                                                                    
     applicant, and that's  ... not the intent  here at all.                                                                    
     So  we'll  probably  narrow the  focus,  when  we  hire                                                                    
     consultants, to  specific issues  where either  our in-                                                                    
     house expertise is not available  in a timely manner or                                                                    
     ... it's specific issues where  it doesn't exist.  So I                                                                    
     see   it  as   augmenting,  ...   not  replacing,   the                                                                    
     division's analysis.                                                                                                       
Number 2728                                                                                                                     
REPRESENTATIVE McGUIRE  said she'd struggled with  this issue and                                                               
supports  Representative Rokeberg's  position.    She offered  an                                                               
analogy from her  childhood:  when two kids fight  over pieces of                                                               
pie,  the parents  can resolve  it by  having one  child cut  the                                                               
pieces  and  the  other  choose  which piece  he  or  she  wants.                                                               
Returning to  the bill, she  said this gives each  an opportunity                                                               
to enter  into the equation when  both have a lot  at stake, both                                                               
from a proprietary point of view  and from the desire to have the                                                               
results be good.                                                                                                                
REPRESENTATIVE  McGUIRE  said  she'd  originally  been  concerned                                                               
about it,  but likes  how broad  and general  it is:   a  list is                                                               
chosen, but  there aren't limits  on how  many or where  they are                                                               
chosen  from,  for  example.    She  suggested  this  gives  [the                                                               
commissioner  of DNR]  a great  amount  of power  because of  the                                                               
unlikelihood  of putting  someone on  the list  without believing                                                               
the  person would  protect  confidentiality  requirements and  so                                                               
forth.  She  also said she'd been concerned  about the appearance                                                               
of impropriety;  given how much  discretion there is  in creating                                                               
the list, however, Representative  McGuire said she believes that                                                               
giving [the  applicant] the opportunity to  pick [the contractor]                                                               
-  since  the  applicant  is  ultimately paying  the  bill  -  is                                                               
probably a fair tradeoff.                                                                                                       
Number 2649                                                                                                                     
REPRESENTATIVE  CRAWFORD expressed  concern about  the timing  of                                                               
the "pick"  because it seems  there could be too  much allegiance                                                               
[by the  contractor] to the  applicant who made the  final choice                                                               
from the list that was put forward.   He offered that it would be                                                               
fairer  if  the applicant  put  together  the shortlist  and  the                                                               
commissioner selected the final contractor.                                                                                     
REPRESENTATIVE ROKEBERG said that's  what current law says, which                                                               
he doesn't like.                                                                                                                
Number 2604                                                                                                                     
REPRESENTATIVE CRAWFORD remarked,  "I think that our  job here is                                                               
to make sure that the state's  interests are best protected.  And                                                               
...  I   believe  that  if   we  change   it  to  the   way  that                                                               
Representative Rokeberg  wants to,  that ... the  pendulum swings                                                               
towards the side of the applicant."                                                                                             
REPRESENTATIVE   ROKEBERG   acknowledged   that   this   can   be                                                               
contentious, with the applicant on  one side and the commissioner                                                               
and  the  state  on  the  other.   Noting  that  the  independent                                                               
contractor  is  intended  to provide  an  independent  voice,  he                                                               
agreed with  Representative Crawford about the  question of bias.                                                               
He suggested, however,  that the state should be able  to do this                                                               
in-house, and  only use an  independent contractor  for something                                                               
highly technical, if  staff is tied up elsewhere, or  if there is                                                               
"a  failure by  DNR to  be able  to meet  its requirements."   He                                                               
asked  why  an  applicant  should be  penalized  by  "giving  the                                                               
default  benefit   to  the  commissioner   rather  than   to  the                                                               
applicant, when the commissioner should  have done the job in the                                                               
first place and ... it's going to cost the guy money."                                                                          
Number 2507                                                                                                                     
REPRESENTATIVE   CRAWFORD,  noting   that  this   is  an   honest                                                               
disagreement,  surmised  that the  reason  for  using an  outside                                                               
contractor was  to enhance  or speed up  the process  because the                                                               
Division  of  Oil  &  Gas,  from   what  he  has  been  told,  is                                                               
shorthanded.    This  slows  the  process  because  the  division                                                               
doesn't  have enough  staff to  handle these,  he suggested.   He                                                               
again expressed  concern that it  could tend to bias  the outside                                                               
contractor who  was chosen by  the applicant.  He  reiterated his                                                               
belief  that  the outside  contractor  should  be chosen  by  the                                                               
state, which is doing the hiring.   "This is for the state's side                                                               
of the argument," he added.                                                                                                     
Number 2452                                                                                                                     
REPRESENTATIVE  KERTTULA remarked,  "They're  asking  for a  huge                                                               
break in some cases. ... It's to  their benefit to be able to get                                                               
someone that  the commissioner feels  confident of, and  it's the                                                               
state's  responsibility."    She said  Representative  Crawford's                                                               
point  was   well  taken.  She   asked  Mr.  Myers   whether  the                                                               
administration supports the bill.                                                                                               
MR. MYERS said  that to his knowledge,  the administration hadn't                                                               
taken a position on the bill.                                                                                                   
REPRESENTATIVE  KERTTULA asked  what  the  positions of  previous                                                               
administrations have been on similar legislation.                                                                               
MR. MYERS  responded, "I think  it's been recognized  by previous                                                               
administrations  that we  needed  an effective  royalty-reduction                                                               
bill as  a tool."  He  indicated the division was  only providing                                                               
technical support on the current legislation.                                                                                   
CHAIR  KOHRING  pointed out  that  the  original legislation  was                                                               
signed into law by then-Governor Knowles.                                                                                       
REPRESENTATIVE ROKEBERG said  HB 207 in 1995  was the centerpiece                                                               
of  the  entire  Knowles  Administration,  but  that  the  Senate                                                               
Finance Committee "screwed it up."                                                                                              
Number 2335                                                                                                                     
REPRESENTATIVE KERTTULA  referred to  the analysis  on page  2 of                                                               
the division's  fiscal note, which says  HB 28 opens the  door to                                                               
the  possibility  that  every  oil  or  gas  reservoir  would  be                                                               
eligible.  She asked whether that stands.                                                                                       
MR. MYERS specified that with  [Amendment 1, deleting "or portion                                                               
of a field  or pool"] it wouldn't stand.   He added the following                                                               
with regard to independent contractors:                                                                                         
     Our goal is not to  have [an] independent contractor as                                                                    
     an  advocate for  a state  position.   It's  to do  the                                                                    
     technical  analysis.   Again, the  state's not  opposed                                                                    
     ... to  royalty reduction.   We just want to  make sure                                                                    
     it  meets the  statutory requirements  and we  give the                                                                    
     commissioner  the  ability to  do  the  analysis.   So,                                                                    
     again, ...  we're not hiring  a law firm to  advocate a                                                                    
     position  for us.   We're  [hiring] technical  experts.                                                                    
     We're just trying to get  "the best" to verify the data                                                                    
     and to do the proper  analysis.  That determination has                                                                    
     to be  made by  the commissioner; it  won't be  made by                                                                    
     the contractor.                                                                                                            
Number 2271                                                                                                                     
REPRESENTATIVE CHENAULT moved to report  SSHB 28 [as amended] out                                                               
of   committee   with    individual   recommendations   and   the                                                               
accompanying  fiscal   note(s).     There  being   no  objection,                                                               
CSSSHB 28(O&G) was  reported from the House  Special Committee on                                                               
Oil and Gas.                                                                                                                    

Document Name Date/Time Subjects