Legislature(2003 - 2004)

03/18/2004 03:25 PM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 531-CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                              
                                                                                                                                
[Contains discussion of HB 395 and SB 312, the companion bill]                                                                  
                                                                                                                                
Number 0060                                                                                                                     
                                                                                                                                
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE BILL NO.  531, "An Act relating to  natural gas exploration                                                               
and  development and  to nonconventional  gas,  and amending  the                                                               
section under  which shallow  natural gas  leases may  be issued;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
Number 0105                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA advised  members  that  she'd wanted  to                                                               
offer an amendment regarding notice  prior to leasing, but hadn't                                                               
had time  to talk to the  division.  Thus she'd  continue to work                                                               
with  the  sponsor  and  the   division,  and  would  prepare  an                                                               
amendment for the House Resources Standing Committee.                                                                           
                                                                                                                                
CHAIR   KOHRING  emphasized   the  need   to  ensure   that  good                                                               
legislation   leaves  this   committee  that   all  members   are                                                               
comfortable with.  He said he saw no  need to rush it, and if the                                                               
decision is made to hold  the bill to address various amendments,                                                               
that would be acceptable to him.   He acknowledged the arrival of                                                               
Representative Rokeberg.                                                                                                        
                                                                                                                                
Number 0293                                                                                                                     
                                                                                                                                
REPRESENTATIVE BEVERLY MASEK, Alaska  State Legislature, spoke as                                                               
co-chair of  the House Resources  Standing Committee,  sponsor of                                                               
HB 531.   Indicating some  amendments would be offered  that day,                                                               
she expressed  hope that  once they're  addressed, the  bill will                                                               
move forward.   She said time is of the  essence; suggested there                                                               
will be  impacts relating to other  resource-development projects                                                               
statewide; mentioned  creating a more sustainable  atmosphere for                                                               
businesses; noted that the Department  of Natural Resources (DNR)                                                               
had conducted  workshops in the Matanuska-Susitna  area and would                                                               
come  out with  a preliminary  report; said  the bill  highlights                                                               
areas  of concern  by  the  public; and  told  members she  hopes                                                               
they'll "compromise with all the  amendments and support for this                                                               
bill" and pass it out as soon as possible.                                                                                      
                                                                                                                                
CHAIR KOHRING  asked why this bill  would be better than  HB 395,                                                               
for example.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MASEK   replied  that  it   eliminates  over-the-                                                               
counter,  "first   come,  first   served"  shallow   gas  leases,                                                               
replacing those  with areawide  leasing or  exploration licenses.                                                               
It requires a best interest finding  (BIF) before any oil and gas                                                               
leasing  or exploration  licensing occurs.   This  will give  DNR                                                               
control of what land is leased, avoiding unnecessary surface-                                                                   
owner  conflicts.   Noting that  best interest  [findings] are  a                                                               
time-tested public  process, she  said this  also creates  a gas-                                                               
only  section  of  areawide  leasing  and  exploration  licensing                                                               
identified in a BIF by DNR.                                                                                                     
                                                                                                                                
REPRESENTATIVE MASEK continued,  saying it differentiates between                                                               
conventional and  nonconventional gas resources for  the purposes                                                               
of lease  rentals; defines  conventional and  nonconventional gas                                                               
development,  and  treats  each  distinctively;  recognizes  that                                                               
lease  rights shouldn't  be determined  by  depth criteria  only;                                                               
enhances   production   opportunities;   encourages   exploration                                                               
licenses  with  a  BIF  as   a  method  for  nonconventional  gas                                                               
exploration  outside of  the areawide  leasing  program in  rural                                                               
Alaska;   makes  leasing   and   regulatory   criteria  fit   the                                                               
appropriate activity; and ensures  a competitive process, thereby                                                               
maximizing the state's best interests.                                                                                          
                                                                                                                                
Number 0536                                                                                                                     
                                                                                                                                
CHAIR  KOHRING expressed  concern about  whether a  BIF could  be                                                               
used  as  a tool  one  way  or  another, depending  on  political                                                               
considerations, philosophies, and so forth.                                                                                     
                                                                                                                                
REPRESENTATIVE MASEK deferred to Mr. Myers.                                                                                     
                                                                                                                                
Number 0615                                                                                                                     
                                                                                                                                
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural Resources, offered his  experience through four different                                                               
administrations, Republican, Democratic,  and Independent, giving                                                               
his overall  perspective that because  the state is  so dependent                                                               
on  oil  and gas  leasing  as  a key  part  of  the economy,  all                                                               
administrations  have been  supportive.   In  his experience,  he                                                               
said, the BIF  has been truly a management tool,  not a political                                                               
tool.    It  does  provide additional  public  notice,  with  the                                                               
balancing  test  being  the  state's   public  interest.    Given                                                               
everything, he  said, it's  a successful,  proven tool  no matter                                                               
what the philosophy  of the administration is,  because Alaska is                                                               
an oil and gas state by nature.                                                                                                 
                                                                                                                                
CHAIR KOHRING acknowledged perhaps  he shouldn't have suggested a                                                               
BIF  could be  used for  political reasons,  and proposed  that a                                                               
better  way  of  stating  it   might  have  been  that  based  on                                                               
philosophical  grounds,  a  BIF  could  be  produced  that  would                                                               
reflect a philosophy less inclined  to encourage development.  He                                                               
thanked Mr. Myers for his thoughts.                                                                                             
                                                                                                                                
Number 0769                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA brought attention  to perhaps 20 years of                                                               
case law defining the process.   "It's a pretty solid one at this                                                               
point," she remarked.                                                                                                           
                                                                                                                                
MR.  MYERS  concurred, noting  that  the  statutes have  changed,                                                               
perfecting the process, over those 20 years as well.                                                                            
                                                                                                                                
CHAIR KOHRING pointed out that  HB 531 has an identical companion                                                               
bill [SB 312]  and again suggested there isn't  an immediate need                                                               
to  move  this  forward.   Stating  his  understanding  that  the                                                               
industry isn't very  amenable to this legislation  and prefers HB
395,  he  asked  whether   [Representative  Masek]  had  received                                                               
feedback from  the industry.   He explained  that he wants  a law                                                               
that will result  in development in the future,  one the industry                                                               
looks  upon  as reasonable  and  that  encourages investment  and                                                               
development.                                                                                                                    
                                                                                                                                
Number 0913                                                                                                                     
                                                                                                                                
REPRESENTATIVE MASEK answered, "They  have been involved with it,                                                               
yes."   In further response,  she said as  far as she  knows, the                                                               
Alaska Oil  and Gas Association  (AOGA) supports it, as  does the                                                               
administration.                                                                                                                 
                                                                                                                                
CHAIR KOHRING asked about individual  companies such as explorers                                                               
and developers, the independents.                                                                                               
                                                                                                                                
REPRESENTATIVE MASEK said she didn't know.                                                                                      
                                                                                                                                
Number 0941                                                                                                                     
                                                                                                                                
CHAIR KOHRING,  in response  to Representative  Heinze, explained                                                               
that  he'd heard  objections to  this  legislation from  "several                                                               
players in the industry."                                                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG   added  that  he'd  recently   been  in                                                               
communication with a number of people  who have an interest or to                                                               
some degree have participated in  the current shallow gas leasing                                                               
program;  they'd voiced  concerns  about this  legislation as  it                                                               
relates to  the current program  and activities,  particularly in                                                               
rural  Alaska.     Representative  Rokeberg  said   he  has  some                                                               
reservations relating  to activities  underway; to  the intention                                                               
of the original bill to establish  the program; and to impacts on                                                               
future  exploration for  shallow  gas or  nonconventional gas  in                                                               
rural areas, especially.                                                                                                        
                                                                                                                                
REPRESENTATIVE   ROKEBERG   surmised    that   because   of   the                                                               
"incendiary"  nature  of  this   legislation,  people  have  some                                                               
reluctance  to   voice  concerns   openly.    He   suggested  the                                                               
legislature needs to  take a hard look at this  in the context of                                                               
completely deleting the  shallow gas program in  rural Alaska and                                                               
seeing  whether  the   exploration-licensing  aspect  will  truly                                                               
accomplish  the legislature's  policy objective  in making  lands                                                               
available under the leasing programs.                                                                                           
                                                                                                                                
REPRESENTATIVE  ROKEBERG mentioned  concern  of  people from  the                                                               
Red Dog Mine  "shale area."   He also  said he'd met  with people                                                               
from Usibelli  Coal [Mine, Inc.] who'd  expressed concern because                                                               
they'd  used  the "self-initiated  shallow  gas  program" to  let                                                               
certain  properties  in their  vicinity  and  had voiced  concern                                                               
about  "the  deletion of  the  prohibition  of top  leasing  over                                                               
existing coal leases, which is  deleted in this particular bill."                                                               
He also  mentioned "the prospect  ... by the 'Holitna  LLC Corp.'                                                               
that's  working  in the  Donlin  Creek  area,"  saying it  is  an                                                               
enormous potential  hard-rock mining area where  electrical power                                                               
is  needed  but perhaps  cost-prohibitive  if  it requires  long-                                                               
distance  transmission lines;  thus there  is a  need to  produce                                                               
low-cost energy  on the  site, which may  be provided  by shallow                                                               
gas prospects.                                                                                                                  
                                                                                                                                
Number 1203                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  noted that one intention  of the shallow                                                               
gas  bill  was to  provide  a  low-cost  energy source  to  rural                                                               
Alaska.   He  cautioned against  throwing the  baby out  with the                                                               
bathwater.    Acknowledging  that   issues  relating  to  surface                                                               
[ownership] in semi-urban and urban places like the Matanuska-                                                                  
Susitna area  and Homer may  not be  served best by  the original                                                               
shallow  gas  program,  Representative  Rokeberg  suggested  "the                                                               
perfect world"  would be to  amend this bill to  allow rural-type                                                               
shallow gas activities  that don't have to go all  the way to the                                                               
exploration licensing, which would require a BIF.                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG  said one  factor, to  his understanding,                                                               
is that applying for an  exploration license "basically puts that                                                               
property that the  applicant would nominate, if you  will, on the                                                               
block, and  then it  has to  be competitively bid."   He  said he                                                               
doesn't necessarily  mind that,  because it maximizes  the return                                                               
to  the State  of Alaska.    However, he  said, it  seems to  run                                                               
counter to the  idea of opening up low-cost power  and a resource                                                               
in some areas of Alaska, because of the requirement for a BIF.                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG cited  the Fort Yukon example  again.  He                                                               
went on  to say that if  something like this were  done, however,                                                               
it would require sideboards to  make sure public notification and                                                               
those  processes are  carried out  differently  from those  found                                                               
inadequate under  the current  shallow gas  leasing program.   At                                                               
the time  of the  original legislation,  he said,  the assumption                                                               
was that  "the default provisions"  were in the  conventional oil                                                               
and gas regulations,  which, he opined, are some  of the toughest                                                               
and most  stringently controlled, environmentally, in  the world.                                                               
Thus  it hadn't  been believed  there was  a problem  with actual                                                               
production and so  forth.  However, it was found  that the public                                                               
wasn't properly informed, for example.                                                                                          
                                                                                                                                
Number 1439                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked Mr. Myers whether  bifurcating the                                                               
current program had been looked  at, in particular, maintaining a                                                               
shallow  gas  program in  rural  Alaska  and then  specifying  in                                                               
statute  those   areas  applicable  to  areawide   leasing.    He                                                               
mentioned  possibilities  such  as expanding  the  boundaries  of                                                               
existing  areas  that are  under  areawide  leasing or  excluding                                                               
larger   population  centers   statutorily.     Again  mentioning                                                               
sideboards if  there is shallow  gas leasing in rural  Alaska, he                                                               
asked Mr. Myers for feedback.                                                                                                   
                                                                                                                                
Number 1589                                                                                                                     
                                                                                                                                
REPRESENTATIVE KOHRING  said he shared  Representative Rokeberg's                                                               
thoughts on this  and has wondered whether the  program should be                                                               
scrapped, perhaps  an overreaction  to concerns expressed  in the                                                               
Matanuska-Susitna and other  areas this last year.   He mentioned                                                               
perhaps accomplishing  the objectives through less  radical means                                                               
and using [HB]  395 as a vehicle, since it  addresses issues such                                                               
as public notice.   He said he needs a  greater justification, to                                                               
raise  his comfort  level, before  supporting the  legislation in                                                               
its current form.  He called upon Mr. Myers.                                                                                    
                                                                                                                                
Number 1653                                                                                                                     
                                                                                                                                
MR.  MYERS replied  that he  appreciates members'  concerns about                                                               
energy development  in rural  Alaska, a  critical element  of the                                                               
state's  energy  picture that  he  understood  to have  been  the                                                               
intent of  the legislature  in passing  the original  shallow gas                                                               
leasing program.   Saying he'd  spent many nights  thinking about                                                               
how to produce  energy in rural areas where  the economics aren't                                                               
as good as  they are closer to the infrastructure,  near a higher                                                               
population  base,  Mr.  Myers also  mentioned  listening  to  the                                                               
public's concerns  about notice and  the balancing test  used for                                                               
issuing leases, which [the public] doesn't believe is balanced.                                                                 
                                                                                                                                
MR. MYERS  pointed out that if  the shallow gas program  in rural                                                               
Alaska is amended  to provide adequate notice  and more balancing                                                               
in the  testing, the end  result is  similar to the  current BIF.                                                               
He  observed  that  people  are upset  not  about  public  notice                                                               
itself, but their  lack of ability to change  or impact decisions                                                               
made by the  department - that the balancing test  hasn't had any                                                               
meaning in the  process.  He said notifying  people that there'll                                                               
be leasing on their lands  despite their objections gets the same                                                               
result.                                                                                                                         
                                                                                                                                
Number 1762                                                                                                                     
                                                                                                                                
MR. MYERS  said the  BIF process  uses "that  different balancing                                                               
test,"  has worked,  and is  court-tested.   He  told members  he                                                               
believes the result is that  "you end up with an over-the-counter                                                               
program, I  think, once  you amend it  into something  that looks                                                               
like  a best  interest finding  for every  over-the-counter lease                                                               
application ... in rural Alaska."                                                                                               
                                                                                                                                
MR. MYERS  observed that historically  the program has  been used                                                               
"credibly  by  the folks  at  the  Red  Dog  Mine, I  think  very                                                               
credibly  in  the Holitna  area  in  the applications,  and  very                                                               
credibly in the Cantwell-Healy area."   However, it has been used                                                               
by speculators elsewhere  who apply for leases;  [the state] does                                                               
the  title  work,  and  then the  applicant  doesn't  accept  the                                                               
leases.  He  added, "We have, by far, the  highest rejection rate                                                               
on accepted leases  in this program."  Cautioning  that the over-                                                               
the-counter nature of the program would  mean the state must do a                                                               
BIF  or its  equivalent  on every  single  [lease], he  remarked,                                                               
"Quite honestly, administratively we're not equipped to do it."                                                                 
                                                                                                                                
Number 1820                                                                                                                     
                                                                                                                                
MR. MYERS explained  that he believes exploration  licensing is a                                                               
better  tool.    He  acknowledged disagreement  by  some  of  the                                                               
miners,  but said  the  industry,  including Evergreen  Resources                                                               
("Evergreen")  and  AOGA,  have  supported this  approach.    The                                                               
competitive nature of  the program provides more  dollars for the                                                               
state.   A work  commitment is bid  on competitively;  if someone                                                               
wants to  spend $500,000 in  an area  but another wants  to spend                                                               
twice that,  the larger amount  will get  the work done,  and the                                                               
gas will be discovered and produced that much more quickly.                                                                     
                                                                                                                                
MR. MYERS  opined that serious  applicants will bid  a reasonable                                                               
work commitment;  that's dollars  going into  the ground,  not to                                                               
the state treasury.  The application  fee of $1 per acre stays in                                                               
place,  and the  license  term  usually is  7 to  10  years.   He                                                               
explained that  shallow gas leases have  been problematic because                                                               
of  the depth  restrictions; many  prospects extend  beyond 3,000                                                               
feet.    Furthermore, the  two-year  timeframe  is inadequate  to                                                               
permit, explore for, and develop  gas resources.  Although it was                                                               
a  credible  attempt, Mr.  Myers  said  the program  failed  with                                                               
respect to the lease terms, the depth, and the public process.                                                                  
                                                                                                                                
Number 1903                                                                                                                     
                                                                                                                                
MR.  MYERS  continued,  saying exploration  licensing  costs  the                                                               
applicant less "in  dollars of today"; provides  a longer period;                                                               
involves exclusive  rights over  a larger  area, if  applied for;                                                               
has a public  best-interest-finding process up front;  and has an                                                               
exclusive right  to convert to  leases at an  established royalty                                                               
rate.  If  [a company] uses gas-only  leasing and nonconventional                                                               
gas  terms and  if it  converts to  leases, it  will end  up with                                                               
exactly the same  terms it would have under  shallow gas leasing,                                                               
but it will have all the  rights and will have obtained the lease                                                               
through a  process that  will withstand  appeal processes  and be                                                               
publicly acceptable.                                                                                                            
                                                                                                                                
MR. MYERS  returned briefly  to the  idea of  an over-the-counter                                                               
program,  emphasizing  that  [DNR]   could  never  administer  it                                                               
without a significant  increase in staff, a  request he indicated                                                               
the  department wasn't  prepared to  ask for.   Again  addressing                                                               
exploration licensing,  he said  the planning,  organization, and                                                               
ability  of  applicants  to solicit  the  license  provides  them                                                               
flexibility.  Pointing out that  there wasn't competition for the                                                               
four  exploration  licenses  DNR  has  given  out  or  the  fifth                                                               
[application],  he  said  a single  applicant  has  received  the                                                               
license with  a negotiated work  commitment.  He remarked,  "So I                                                               
think it's unfounded that there's  a lot of competitive risk, but                                                               
there is a substantial commitment to  do work ... and explore the                                                               
acreage, which is, I think, in the intent of the program."                                                                      
                                                                                                                                
MR.  MYERS summarized  that  he believes  licensing  is a  better                                                               
vehicle,  provides better  value to  the applicant,  and provides                                                               
the upfront processes; he surmised  that this is why the majority                                                               
of the industry  is willing to accept it.   Noting that people in                                                               
the  "Usibelli area"  are concerned,  however, he  explained that                                                               
the shallow gas  leasing program, if someone owned  a coal lease,                                                               
prohibited  that person  from  getting a  shallow  gas lease;  it                                                               
prohibited getting an exploration license over the area.                                                                        
                                                                                                                                
MR.  MYERS  remarked,  "Thus that  person's  mineral  rights  are                                                               
actually not protected.   They really have  exclusive rights with                                                               
respect  to one  program.   If  someone [has]  a  coal lease  and                                                               
someone else  applied for  an exploration  license ...  over that                                                               
coal  lease, we  would  have  granted that  license  for all  gas                                                               
rights  on that  lease."   He added,  "They're only  protected if                                                               
someone tops off a shallow gas  lease, on top of that coal lease,                                                               
not a conventional lease or an exploration license."                                                                            
                                                                                                                                
Number 2025                                                                                                                     
                                                                                                                                
MR.  MYERS reported  that there'd  been similar  staff discussion                                                               
internally about how  far to go to  amend this and how  to end up                                                               
with something  both manageable [for  DNR] and acceptable  to the                                                               
public.  The  approach arrived at was that licensing  is a better                                                               
deal for  rural Alaska.   He mentioned  the desire to  have those                                                               
same terms  with respect  to lower rentals  and the  6.25 percent                                                               
royalty for  noncompeting gas, saying this  could be accomplished                                                               
through a showing to the commissioner or the director.                                                                          
                                                                                                                                
MR. MYERS noted that when  geological analyses are done of basins                                                               
with potential for coal bed  methane for villages or mines, there                                                               
are perhaps  only half a  dozen places  where the state  owns the                                                               
subsurface  estate   in  proximity  to  villages   or  reasonable                                                               
proximity to a  mine, and where this program  might be effective.                                                               
He suggested it wouldn't be  unreasonable to accomplish licensing                                                               
[for those].                                                                                                                    
                                                                                                                                
Number 2091                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HEINZE requested  clarification about  Mr. Myers'                                                               
statement  that  someone's  rights  wouldn't  be  protected  with                                                               
respect to top filing.                                                                                                          
                                                                                                                                
MR. MYERS explained  that under the shallow  gas leasing program,                                                               
if someone had a coal lease  on state land, only the lessee could                                                               
apply  for  the shallow  gas  lease  rights under  that  program.                                                               
Someone [else] who  applied for an exploration  license under the                                                               
same area,  however, would be  allowed to get the  license, which                                                               
would  provide  exclusive  rights  to   all  gas  on  the  lease.                                                               
Although  the coal  lessee  was protected  in  the program  under                                                               
"177"  for  someone  top  filing on  a  lease  for  limited-depth                                                               
rights, [that lessee] wouldn't be  included in the license, which                                                               
is for all depth rights.                                                                                                        
                                                                                                                                
MR.  MYERS pointed  out that  areas in  Cook Inlet,  for example,                                                               
have  traditional gas-only  leases and  coal leases  as well;  it                                                               
hasn't  really been  a problem,  but is  a reasonable  concern if                                                               
coal  seams are  shallow in  the area  where the  miner wants  to                                                               
mine,  since  there  might  be  a surface  conflict.    The  same                                                               
conflict could occur under  exploration licensing, however, under                                                               
the current program.                                                                                                            
                                                                                                                                
MR. MYERS  surmised that concerns  relating to  mining operations                                                               
are that  [those mining  companies] may want  to exploit  the gas                                                               
resources  in the  future under  the shallow  gas program;  under                                                               
current law, if they applied for  a shallow gas lease, they'd get                                                               
an exclusive  right to apply  and thus someone else  couldn't top                                                               
file on the coal lease.   Under exploration licensing, though, at                                                               
any point in  time someone could come in and  apply for a license                                                               
over the  top of  the coal  leases, which  would provide  an "all                                                               
depths right" to all the gas, regardless of the coal lease.                                                                     
                                                                                                                                
Number 2211                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG said it seems  reasonable, as a matter of                                                               
public policy,  that any state  leaseholder for  coal exploration                                                               
rights should  be protected  for shallow  gas exploration  on the                                                               
same property,  because there'd be subsurface  conflicts if there                                                               
could be top leasing under  conventional or exploration licensing                                                               
[as described  by Mr.  Myers] over  an existing  coal lease.   He                                                               
asked whether it's correct that  currently someone "could exploit                                                               
shallow gas" under conventional and exploration licensing.                                                                      
                                                                                                                                
MR. MYERS  affirmed that.   He explained  that under  Alaska law,                                                               
the gas belongs  to the oil and gas lessee,  not the coal lessee,                                                               
with an  exception:  if  someone mining  the coal lease  needs to                                                               
remove gas because  it's a hazard, that person can  take the gas.                                                               
He said, "There's  no royalty cost to the state.   You could take                                                               
the gas  and you could  burn it, or  you ... could  actually sell                                                               
it.   That's incidental to  your mining operation and  for safety                                                               
purposes."   If it's for  any other purposes, however,  that coal                                                               
lessee has  no rights to  that gas.   It actually belongs  to the                                                               
oil and gas lessee, or to the state.                                                                                            
                                                                                                                                
Number 2292                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  he  doesn't know  what depth  coal                                                               
leases go to,  but reiterated that it seems logical,  if there is                                                               
a coal  lease, that  anywhere there are  coal deposits  should be                                                               
reserved or restricted  in terms of exploration for  gas in order                                                               
to prevent conflicts  between coal mining and  gas mining, unless                                                               
the lessee is  one and the same.   He added, "That's  what we did                                                               
with  the  shallow  gas,  by prohibiting  anyone  else  from  top                                                               
leasing unless they  owned the coal.  It seems  to me that should                                                               
also be applicable to any other kind of lessee."                                                                                
                                                                                                                                
MR. MYERS  addressed access to the  surface estate if there  is a                                                               
conflict  with subsurface  access.   Noting that  someone with  a                                                               
coal lease  in place  generally has a  preferential right  to use                                                               
the  surface, he  explained, "Both  parties are  allowed, but  if                                                               
there's a conflict,  it goes to the  coal mine.  So  I think that                                                               
really  their surface  rights  are protected  if  the coal  lease                                                               
existed prior to  the oil and gas lease."   He reiterated that if                                                               
it's  an issue  of actually  producing  the gas,  then [the  coal                                                               
lessee], by Alaska law, doesn't have the right to the gas.                                                                      
                                                                                                                                
Number 2366                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG posed a  situation involving a coal lease                                                               
"where the miner hadn't got to  that area yet, and then you could                                                               
punch  ...  a  coal  bed   methane  drill  stem  down  there  and                                                               
production  equipment, and  you'd  be there,  and  then the  coal                                                               
miner would want to come along  ... and mine that, and then you'd                                                               
be in the  way."  Suggesting this is just  asking for a conflict,                                                               
he inquired:  Wouldn't it be  a wise policy of the legislature to                                                               
prohibit dual-leasing subsurface estates for different minerals?                                                                
                                                                                                                                
MR. MYERS highlighted  the need to look at the  resource in terms                                                               
of the state's maximizing its economic  value.  It depends on the                                                               
area; in Cook Inlet, for  example, gas probably has significantly                                                               
more value.  He offered his  understanding that there is no depth                                                               
limitation  on  coal  leases, but  said  [for  economic  reasons]                                                               
mining occurs only  the first few hundred below the  surface.  If                                                               
the gas lessee removed the gas  from the coal, he noted, it would                                                               
eliminate a hazard for the miner.                                                                                               
                                                                                                                                
MR.  MYERS said  the only  exception probably  would be  conflict                                                               
with  the  surface-pad placement  of  the  gas wells  or  surface                                                               
facilities.  He related his  understanding that if the coal lease                                                               
was  there first,  (indisc.) the  state.   He added  that only  a                                                               
small  percentage of  coal leases  are  actually being  produced.                                                               
They  last a  long  time and  are  sitting there,  nonproductive.                                                               
That would block any oil and gas development in an area.                                                                        
                                                                                                                                
Number 2451                                                                                                                     
                                                                                                                                
REPRESENTATIVE HEINZE asked why the  rest of the committee hasn't                                                               
heard  the  concerns reported  by  the  two Representatives,  and                                                               
wasn't brought in on the discussions.                                                                                           
                                                                                                                                
CHAIR KOHRING  replied that [the  concerned parties] had  come to                                                               
him personally to talk about the legislation.                                                                                   
                                                                                                                                
REPRESENTATIVE HEINZE said she could  understand that, since he's                                                               
the chair.                                                                                                                      
                                                                                                                                
CHAIR KOHRING  offered to invite  them to come forth  publicly to                                                               
the committee,  which he  suggested would be  prudent.   "All I'm                                                               
hearing  is that  there is  not any  support out  there for  this                                                               
legislation from industry," he remarked.                                                                                        
                                                                                                                                
REPRESENTATIVE  ROKEBERG  brought  attention to  testimony  [from                                                               
Representative Masek] that AOGA and Evergreen support this.                                                                     
                                                                                                                                
CHAIR KOHRING clarified that he  was referring to "independents."                                                               
Four had come to  him and said they'd rather not  see the bill go                                                               
through and, at most, would  prefer [HB] 395, he reported.  Chair                                                               
Kohring  also   said  he  wondered   whether  the   objective  of                                                               
addressing  the  public's  concerns about  notice,  input,  water                                                               
protection, property  rights, and local-control matters  could be                                                               
clarified  in statute,  rather than  changed, since  the previous                                                               
year's HB  69 "didn't greatly  affect that issue."   Thus perhaps                                                               
those points  could be addressed  in a piece of  legislation less                                                               
dramatic than this.                                                                                                             
                                                                                                                                
Number 2560                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG noted  that  HB 395  cleans up  discrete                                                               
issues in the  current program, whereas [HB  531] is prospective;                                                               
he suggested there is validity to  having two separate bills.  As                                                               
for the original intent of the  shallow gas program, he said he's                                                               
"happy  in  the  main"  that  rural areas  are  looking  to  take                                                               
advantage of  it.  Unfortunately,  there has been  controversy in                                                               
more populated  areas.  He said  he doesn't see it  as unintended                                                               
consequences; rather,  it relates to  a "totality of  things" for                                                               
which he wouldn't assign blame.   He maintained that the original                                                               
concept  is valid,  and  said  it's up  to  [the legislature]  to                                                               
adjust it, to  ensure the public is protected and  has a level of                                                               
comfort with  it.  He  emphasized the desire to  provide low-cost                                                               
energy throughout the state.                                                                                                    
                                                                                                                                
Number 2652                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked Mr. Myers  whether there is  a way                                                               
to amend the legislation to  prohibit exploration for shallow gas                                                               
or  nonconventional gas  within  a  depth limit  if  there is  an                                                               
existing   coal   lease,   and   then   allow   exploration   for                                                               
conventional, deeper gas.                                                                                                       
                                                                                                                                
MR.  MYERS replied  that  he  thinks it  possible  to argue,  but                                                               
believes  it's  unlikely,  for  instance,  to  have  shallow  gas                                                               
leasing much below  1,000 feet under the  surface.  Acknowledging                                                               
he isn't  a miner,  Mr. Myers  said he doesn't  know of  cases of                                                               
conventional  mining  much  below  200 feet  under  the  surface,                                                               
because of economics;  he suggested it probably would  be fine to                                                               
preclude  the  "very shallow  part"  of  a  section in  terms  of                                                               
limiting the rights  in those areas.  He noted  it touches on how                                                               
that  gas gets  produced, however.   The  miner doesn't  have the                                                               
right to  produce the gas;  it sits there,  with no one  having a                                                               
mineral right  to it, other than  the state.  He  surmised that a                                                               
coal miner could produce it, but only for safety reasons.                                                                       
                                                                                                                                
Number 2730                                                                                                                     
                                                                                                                                
MR.  MYERS,  in  response  to   a  question  from  Representative                                                               
Rokeberg, agreed that with a  shallow gas program [a coal lessee]                                                               
could apply for a shallow gas lease over the [coal] lease.                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG observed,  "Not if we pass  this bill, is                                                               
the trouble in the future."                                                                                                     
                                                                                                                                
MR.  MYERS concurred,  but noted  that any  applications received                                                               
before  the   end  of   the  year   would  be   considered  valid                                                               
applications.   He  said in  most  cases where  the coal  lessees                                                               
already have  leases or have  applied for them  - such as  in the                                                               
Holitna area, as well as the  Usibelli mine area, where there has                                                               
been application  in adjoining  areas, but  not exactly  over the                                                               
coal  leases, and  the Red  Dog Mine  area -  those leases  would                                                               
remain  intact.   "So, realistically,  you're  talking about  the                                                               
Fort Yukon area,  those few areas over ...  actual, existing coal                                                               
leases, which would  be eligible for a license if  they wanted to                                                               
apply over them," he noted.                                                                                                     
                                                                                                                                
MR. MYERS  again suggested this can  be administered successfully                                                               
through  exploration licensing.   Licensing  does require  a work                                                               
effort,  whereas shallow  gas leasing  does not,  but he  said he                                                               
believes  it's in  the  state's  interest for  a  licensee to  be                                                               
committed  to actually  doing something  with  the lease,  rather                                                               
than  taking  it  for  speculative reasons  or  just  to  prevent                                                               
something from  happening.  Mentioning  "a concern of  the $5,000                                                               
payment,"  he said  people could  buy  leases for  lots of  other                                                               
reasons.                                                                                                                        
                                                                                                                                
MR. MYERS said  one unintended consequence of the  program was an                                                               
incredible amount of  speculation in shallow gas  leases, some in                                                               
environmentally  sensitive areas,  some in  populated areas,  and                                                               
some perhaps  to prevent someone  else from doing something.   He                                                               
remarked,  "We have  a problem  there  with the  over-the-counter                                                               
nature of the chief cost of the lease with no work commitment."                                                                 
                                                                                                                                
Number 2815                                                                                                                     
                                                                                                                                
MR. MYERS  said he guessed  his recommendation would be  that the                                                               
current shallow gas program, even  in rural Alaska, be changed to                                                               
deal with  public noticing and  probably the balancing  test, and                                                               
to try to  limit the rampant speculation that  has occurred along                                                               
with legitimate  applications.  He added,  "Plus it has to  do, I                                                               
think,  with  the limited  depth  and  the  short period  of  the                                                               
lease."                                                                                                                         
                                                                                                                                
Number 2835                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  how  Mr.   Myers  characterizes                                                               
"rampant  speculation"  and  how  many people  have  applied  for                                                               
leases.                                                                                                                         
                                                                                                                                
MR. MYERS indicated he was obtaining  a list, and said there were                                                               
25 or 26  individuals.  At one time, there  were 480,000 acres or                                                               
so  under  application,  to  his  belief;  about  half  of  those                                                               
applications were for leases that  weren't accepted.  Noting that                                                               
it was  for that program, he  said currently the number  is zero.                                                               
In  further  response, he  clarified  that  more than  half  were                                                               
approved;  after the  state  did the  title  work, however,  they                                                               
refused to take the leases.                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  questioned  using the  phrase  "rampant                                                               
speculation" for a dozen people.                                                                                                
                                                                                                                                
CHAIR KOHRING agreed.                                                                                                           
                                                                                                                                
Number 2896                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HOLM asked  whether the  shallow gas  program has                                                               
been an  appropriate way  to allow a  lower threshold  of leasing                                                               
for developing this natural gas or coal bed methane.                                                                            
                                                                                                                                
MR. MYERS  replied yes, saying  it made lands available  in rural                                                               
areas where there were traditional  gas-only sales, for instance.                                                               
In addition, the applicant-driven nature  was positive in the Red                                                               
Dog Mine  area in  particular, and possibly  at Holitna;  he also                                                               
mentioned the Usibelli area.  He  said in those cases he believed                                                               
it helped to stimulate economic progress.                                                                                       
                                                                                                                                
MR. MYERS pointed  out that, to date, the only  drilling he knows                                                               
of on shallow gas leases has  been a couple of core holes drilled                                                               
this winter  by Evergreen; other  than that, there hasn't  been a                                                               
single well drilled  in the years of the program.   That's not to                                                               
say they're  not making good  progress in the fractured  shale up                                                               
by the  Red Dog Mine,  at Holitna, and  in the Usibelli  area, he                                                               
added.   He  also  opined  that it  was  an  element in  bringing                                                               
Evergreen to the [Matanuska-Susitna area]  in the first place; he                                                               
mentioned the relatively low cost.                                                                                              
                                                                                                                                
MR. MYERS  observed that  as companies have  looked at  using the                                                               
program  from  a  practical   standpoint,  however,  they've  had                                                               
problems.    For  instance,  the 3,000-foot  depth  was  a  major                                                               
problem for just  about everybody looking to use it.   That's why                                                               
an amendment  was made a few  years ago, although [HB]  395 takes                                                               
it back to a solid depth floor,  for example.  He noted there's a                                                               
lot of potential for fractured shale below 3,000 feet.                                                                          
                                                                                                                                
TAPE 04-11, SIDE B                                                                                                            
Number 3003                                                                                                                     
                                                                                                                                
MR.  MYERS mentioned  having  major  difficulty with  unitization                                                               
issues  when looking  at combining  different  shallow gas  lease                                                               
rights with different  depth criteria.  Expressing  hope that the                                                               
production stage  will be reached,  Mr. Myers said when  he looks                                                               
at  the  practical management  of  the  program, there  are  real                                                               
problems  because of  the depth  criteria.   The over-the-counter                                                               
nature makes it  difficult to try to accelerate  development in a                                                               
short period of  time, and doesn't give the  applicant much time.                                                               
All in all, Mr. Myers said,  he doesn't think it's very efficient                                                               
or effective for  an oil and gas program.   He added, "We've also                                                               
looked  ... over  the  rest of  the country  and  found no  other                                                               
programs like  it."   He said he  thinks it  was well-intentioned                                                               
and  helped  stimulate  initial   activity,  but  in  the  longer                                                               
analysis isn't a practical program.                                                                                             
                                                                                                                                
Number 2960                                                                                                                     
                                                                                                                                
REPRESENTATIVE HOLM  asked what  would happen to  existing leases                                                               
if HB 531 abolishes [the program].                                                                                              
                                                                                                                                
MR. MYERS  answered that if the  leases are explored on  in their                                                               
primary term  or if  there is  progress toward  development, they                                                               
can  be extended  another three  years, based  on the  director's                                                               
discretion.  If something is  discovered in the first three years                                                               
and  there is  a  determination that  the well  can  pay for  its                                                               
operating costs, basically, [the lessee]  is entitled to keep the                                                               
lease and there's  no time period for its expiration.   Mr. Myers                                                               
continued:                                                                                                                      
                                                                                                                                
     If they also are making  good progress and they want to                                                                    
     form  an   oil  and  gas  unit   with  multiple  leases                                                                    
     together, they'll  come to us  and request a  unit. ...                                                                    
     And more than  likely, if their plan  of development or                                                                    
     exploration  is reasonable,  we'll unitize  the acreage                                                                    
     together, and  it could be  together with state  or ...                                                                    
     other leases,  like in the  Red Dog area  it's expected                                                                    
     to be  joint state-NANA [Regional  Corporation] leases.                                                                    
     Then they would hold those  leases as long as they were                                                                    
     actively  pursuing   development  under  the   plan  of                                                                    
     development,   or  exploration   under   the  plan   of                                                                    
     exploration.                                                                                                               
                                                                                                                                
     And then,  once they go  into production, the  area ...                                                                    
     that's  productive  will  be put  in  what's  called  a                                                                    
     participating area.  And as  long as they're producing,                                                                    
     that area's  held, basically, forever.   And that's the                                                                    
     same progress as  on a conventional oil  and gas lease.                                                                    
     ...  The same  procedural  parts of  going into  normal                                                                    
     production are there. ... The  problem is their limited                                                                    
     depth rights and  the limited amount of  time they have                                                                    
     to get  to that stage  of exploration ... that  makes a                                                                    
     unit viable.                                                                                                               
                                                                                                                                
Number 2874                                                                                                                     
                                                                                                                                
REPRESENTATIVE PAUL  SEATON, Alaska State  Legislature, mentioned                                                               
the  correlative rights  problem and  complications of  trying to                                                               
figure  out  who would  own  gas  at  various  depths.   He  said                                                               
[HB 531] tries to  get around that by having a  gas-only lease at                                                               
any depth.                                                                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG  pointed out that there  can be different                                                               
leases  at different  depths,  and  that in  the  Lower 48 it  is                                                               
common practice  to have a  clause in  a lease that  provides for                                                               
the  ability to  "underlease."   He asked  Mr. Myers  to comment,                                                               
offering his belief that deep  gas won't be trapped under shallow                                                               
gas, even in Alaska.                                                                                                            
                                                                                                                                
MR. MYERS  shared his experience with  segregated mineral rights,                                                               
noting that  he'd worked in  Louisiana, where it  wasn't uncommon                                                               
to see  different rights;  however, those  related to  a geologic                                                               
formation, not a fixed depth below the surface.                                                                                 
                                                                                                                                
REPRESENTATIVE ROKEBERG  remarked that he'd just  "signed one" in                                                               
Oklahoma that had a depth clause.                                                                                               
                                                                                                                                
MR. MYERS surmised the depth  is probably "subsea" or some other,                                                               
better method of doing depth.   In Oklahoma, he said, there isn't                                                               
a lot of difference in some of the flatter areas.                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG  related his belief  that there is  a big                                                               
difference in the geological formations "at depth down there."                                                                  
                                                                                                                                
Number 2737                                                                                                                     
                                                                                                                                
MR. MYERS responded:                                                                                                            
                                                                                                                                
     In my  mind, it  is ... very  problematic, particularly                                                                    
     in the  areas where  we have surface  relief.   And the                                                                    
     surface  relief ...  reflects the  geology  below.   So                                                                    
     your coal  seam could be  flat in the  subsurface; your                                                                    
     surface could be undulating.   So that 3,000-foot-depth                                                                    
     ... owner  could go in  and out of the  same formation,                                                                    
     even though  at depth  it's flat,  just because  of the                                                                    
     difference the surface elevation has.                                                                                      
                                                                                                                                
     So the  way ... the  program works, I think,  really is                                                                    
     problematic for correlative rights  issues.  Because of                                                                    
     that reason,  when we do  an exploration  license area,                                                                    
     if there's shallow gas leases  in the area, we actually                                                                    
     do not  allow the deeper  rights to be  leased, because                                                                    
     we do  think it's going  to lead to  correlative rights                                                                    
     problems.                                                                                                                  
                                                                                                                                
     If  it was  ... through  a geologic  formation or  some                                                                    
     other mechanism, other test,  other than surface depth,                                                                    
     we ... probably  would be able to sort  through some of                                                                    
     those rights.  But ...  the way the leases are written,                                                                    
     ...  I don't  think  we really  can, technically,  just                                                                    
     because,  again, the  geological  surface you're  using                                                                    
     doesn't  reflect, very  often,  the geology  underneath                                                                    
     the surface at 3,000 feet.                                                                                                 
                                                                                                                                
Number 2682                                                                                                                     
                                                                                                                                
MR.  MYERS  explained that  if  the  seismic  data is  poor,  for                                                               
example, it leads to a  correlative-rights argument about whether                                                               
the gas  below belongs to  the lessee above or  below.  A  lot of                                                               
this has  been avoided in  Alaska by  having "depth rights."   He                                                               
suggested  it is  one of  the more  positive attributes.   Noting                                                               
that  he'd sat  in hearings  of conservation  commissions in  the                                                               
Lower 48,  he said  the value of  the resource,  particularly for                                                               
conventional gas, is "really worth the fight."  He continued:                                                                   
                                                                                                                                
     So, what happens  is, ... we've decided  not to license                                                                    
     underneath it.  If there's  a conventional lease in the                                                                    
     area,  ... you  can't do  a  shallow gas  lease; so  we                                                                    
     don't  have that  conflict  in  our conventional  lease                                                                    
     areas.  It's  only where a license would  overlay ... a                                                                    
     shallow gas lease.                                                                                                         
                                                                                                                                
     So I guess my recommendation  would be, if you're going                                                                    
     to keep  the shallow  gas lease,  at minimum,  give all                                                                    
     depth rights to the shallow gas lease.                                                                                     
                                                                                                                                
Number 2634                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked whether it  is a matter of statute,                                                               
regulation,  or  policy  to prohibit  depth  rights  below  other                                                               
leases.                                                                                                                         
                                                                                                                                
MR. MYERS  specified it's a  matter of policy that  [DNR] doesn't                                                               
issue an exploration license over a shallow gas lease.                                                                          
                                                                                                                                
REPRESENTATIVE ROKEBERG said it's a  good way to avoid arguments,                                                               
but questioned  whether it's  good public  policy.   He suggested                                                               
it's  germane if  the state  maintains  any kind  of shallow  gas                                                               
program.  He  cited the situation in Homer as  an example of what                                                               
might  arise from  having a  statutory depth  level and  going in                                                               
"hot pursuit" of  a formation that might start at  3,000 feet and                                                               
go deeper.  He said this problem needs to be addressed.                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG  then remarked  to Mr. Myers,  "You might                                                               
be able  to win  me over  if ... you  can talk  me into  having a                                                               
short-form  BIF   for  unconventional   gas."     Recalling  that                                                               
Mr. Myers  had  testified  it  might cost  $250,000  for  a  BIF,                                                               
Representative Rokeberg characterized a BIF  as "a study to lease                                                               
a few acres out in the Bush somewhere  so we can pump some gas in                                                               
the town."   Thus he asked whether there is  a way to accommodate                                                               
that and still  meet the demands of the public  and the balancing                                                               
test without reinventing the wheel  every time or spending a huge                                                               
amount of money on a BIF.                                                                                                       
                                                                                                                                
Number 2542                                                                                                                     
                                                                                                                                
MR. MYERS replied  that he'd thought about it quite  a bit.  Part                                                               
of the  reason BIFs have  been so  expensive is that  typically a                                                               
license is  for 500,000  acres; most people  go for  the maximum.                                                               
If the area  were smaller, the finding would be  easier, and thus                                                               
he surmised  the cost would be  less.  Mr. Myers  reiterated that                                                               
he  doesn't believe  there are  many  areas in  Alaska where  the                                                               
state owns  the subsurface  and it  is economically  suitable for                                                               
nonconventional gas - only half a dozen communities.                                                                            
                                                                                                                                
MR. MYERS  mentioned looking at  the geology carefully.   Many of                                                               
those areas would have underlying  conventional gas, he noted, so                                                               
a license would  actually be a better approach.   For example, he                                                               
said he'd argued that Holitna  has probably a better conventional                                                               
gas  play  than  a  coal  bed  methane  play.    Mentioning  it's                                                               
applicant-driven, Mr. Myers said  if he were an "explorationist,"                                                               
though, he'd  rather have a license  in that area in  order to go                                                               
to  deeper  depths  and  lock  up  a  lot  of  that  basin.    He                                                               
elaborated:                                                                                                                     
                                                                                                                                
     They're going  to really have  a problem if  they can't                                                                    
     show  the gas  at  3,000 feet's  connected down  below,                                                                    
     because they'll  basically have to come  back and apply                                                                    
     for  a license  over their  same area  in order  to get                                                                    
     those deeper  rights.   So they'll  now have  a shallow                                                                    
     gas  lease  and  a  license   over  the  area,  from  a                                                                    
     practical  standpoint.   If  they  do  produce the  gas                                                                    
     that's  deeper  that's  not part  of  the  field,  then                                                                    
     they'll owe the state 100  percent royalty on that gas,                                                                    
     and I  have no  way to transfer  the mineral  rights to                                                                    
     them.                                                                                                                      
                                                                                                                                
MR. MYERS concluded  by saying if someone wants  10,000 or 20,000                                                               
acres, he believes the BIF  will be reasonably cheaper because of                                                               
the limited  scope.  Given the  limited number of areas  where he                                                               
actually thinks this will be  applied and screening out folks who                                                               
can't put together money to go  ahead and drill, he suggested the                                                               
opportunity will  be limited to  those who  are out there  now in                                                               
the areas  mentioned previously, as  well as perhaps some  in the                                                               
Fort Yukon area or a few others.                                                                                                
                                                                                                                                
Number 2395                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG mentioned Copper  Center and Bristol Bay.                                                               
He remarked that he hopes there are more than half a dozen.                                                                     
                                                                                                                                
MR. MYERS  noted that when  viewing the state's land  position in                                                               
those areas,  two things must be  looked at:  the  geology of the                                                               
coal and the associated population base.                                                                                        
                                                                                                                                
Number 2374                                                                                                                     
                                                                                                                                
REPRESENTATIVE HEINZE  asked what a  BIF would cost for  a 5,000-                                                               
acre lease in rural Alaska.                                                                                                     
                                                                                                                                
MR. MYERS  pointed out that  there is  a minimum of  10,000 acres                                                               
under current exploration licensing.                                                                                            
                                                                                                                                
REPRESENTATIVE HEINZE asked about 10,000 acres, then.                                                                           
                                                                                                                                
MR. MYERS suggested a scenario with a gas-only lease.                                                                           
                                                                                                                                
REPRESENTATIVE HEINZE requested information for all scenarios.                                                                  
                                                                                                                                
MR.  MYERS offered  a rough  estimate, including  staff time,  of                                                               
$50,000  to  $100,000.    He  added,  "I  will  say,  though,  in                                                               
developing the  stipulations and mitigation measures  and holding                                                               
the public meetings that we do  now, our costs aren't a whole lot                                                               
less in issuing ... shallow gas  leases in places like Holitna or                                                               
Usibelli; that's been our experience."   He mentioned the need to                                                               
fly people  out there and  take time to do  it, in order  to find                                                               
any local acceptance through the process at all.                                                                                
                                                                                                                                
MR. MYERS  clarified that the  state pays  for the BIF.   Someone                                                               
with a  10,000-acre license  would pay $10,000  to the  state and                                                               
would have  to guarantee  a work  commitment satisfactory  to the                                                               
state,  including geological  fieldwork  or drilling  a few  core                                                               
holes, for example.   The company then would get  a 7- to 10-year                                                               
commitment to  hold that acreage  and the  right to convert  to a                                                               
conventional   or  gas-only   lease,   depending   on  what   was                                                               
negotiated, for another  period of probably 10  years "where they                                                               
just pay a rental, ... no upfront bonus."                                                                                       
                                                                                                                                
Number 2238                                                                                                                     
                                                                                                                                
CHAIR  KOHRING brought  attention  to a  letter  from the  Alaska                                                               
Miners Association,  Inc. [dated  March 13,  2004 from  Steven C.                                                               
Borell, executive  director], which says eliminating  the program                                                               
isn't prudent  at this point and  that passing the bill  would be                                                               
throwing  the  baby  out  with  the  bathwater.    Chair  Kohring                                                               
highlighted points  from the letter including  elimination of the                                                               
right  of  self-initiation,  which   will  effectively  lock  out                                                               
individual prospectors  and gas developers from  participating in                                                               
business; concern  that the  BIF may  take 18  months or  more to                                                               
conclude; and concern about  eliminating incentive for individual                                                               
entrepreneurs.   Chair  Kohring again  opined that  the committee                                                               
should pass  legislation that  the industry  is amenable  to, and                                                               
that   laws  should   help  accomplish   the  goal   of  resource                                                               
development.                                                                                                                    
                                                                                                                                
Number 2164                                                                                                                     
                                                                                                                                
REPRESENTATIVE   ROKEBERG  said   he   appreciates  the   miners'                                                               
concerns,  but  miners  typically  don't   drill  for  gas.    He                                                               
suggested the time period of six  years is relatively short for a                                                               
new  type  of  project.    He  asked  Mr.  Myers  whether  paying                                                               
quantities must be under production to extend beyond six years.                                                                 
                                                                                                                                
MR.  MYERS answered  that the  state  standards are  that a  well                                                               
would be  drilled and  would have operating  costs less  than the                                                               
value of  the gas produced;  this allows holding the  lease under                                                               
the  "paying quantity"  standard.   It isn't  that production  is                                                               
required; rather, a test must  demonstrate gas at a certain rate.                                                               
Unitization is the  other way to do this and  is commonly done in                                                               
the last year  of a term.   Mr. Myers pointed out  that there are                                                               
30-some  units  in  Alaska  now for  conventional  oil  and  gas,                                                               
mentioned a $5,000  fee and the need to show  a logical course of                                                               
progression  toward  development,  and  said he  thinks  it's  an                                                               
appropriate statutory process for shallow gas leases as well.                                                                   
                                                                                                                                
Number 2017                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  whether current  leases could  be                                                               
extended if  paying quantities  were found, even  in the  Red Dog                                                               
area.                                                                                                                           
                                                                                                                                
MR. MYERS explained the three  instances in which a leasehold can                                                               
be extended.   First, at the [director's]  discretion, the three-                                                               
year period  can be extended  another three years; that  has been                                                               
done in the Red Dog area,  where multiple core holes were drilled                                                               
on  adjoining   NANA  [Regional  Corporation]  land,   with  good                                                               
progress  toward exploring  "the  appropriate  interval that  was                                                               
effective on the state land as  well."  Second, "if you drill and                                                               
you  maintain  quantities," it  is  mandatory  that the  director                                                               
extend the lease; it's on a  lease-by-lease basis.  And third, if                                                               
progress toward  development is being  made, an oil and  gas unit                                                               
can be formed through combining multiple leases.                                                                                
                                                                                                                                
MR.  MYERS said  virtually  all  production in  the  state is  in                                                               
units.   The state looks  at the unit's  size and shape  and then                                                               
negotiates a plan of exploration  and development.  He explained,                                                               
"They hold  that acreage for that  period of time, and  then once                                                               
they  actually   get  production,  they  hold   the  area  that's                                                               
productive until they stop producing."   He added, "Those are all                                                               
necessary because  no one produces all  their gas out of  a lease                                                               
in the primary term."                                                                                                           
                                                                                                                                
Number 1916                                                                                                                     
                                                                                                                                
REPRESENTATIVE HEINZE returned  attention to the BIF.   She asked                                                               
whether "little guys get left along the wayside timeline-wise."                                                                 
                                                                                                                                
MR.  MYERS answered  that  [the state]  tries  to prioritize  and                                                               
juggle the workload.   He indicated some things  are scheduled on                                                               
a  routine basis  such as  areawide  leases, looked  at every  10                                                               
years  but  also  when  there  are  significant  changes  to  the                                                               
findings.    He  cited  Bristol  Bay  as  an  example  where  the                                                               
timeframe  will be  less than  a year  for a  nearly 500,000-acre                                                               
license  in a  brand-new  area  where there  hadn't  been a  best                                                               
interest finding.                                                                                                               
                                                                                                                                
MR.  MYERS mentioned  the Susitna  area  and said  it depends  on                                                               
environmental sensitivities  and how the agencies  respond to the                                                               
findings.   With  the streamlined  internal  state processes,  he                                                               
reported, things are going more  quickly and being decided better                                                               
at the  staff level.   Regarding shallow gas leases,  however, he                                                               
pointed out that stipulations and  mitigation measures still must                                                               
be put in; thus shallow gas  leases aren't a whole lot cheaper to                                                               
issue.   The initial ones  didn't involve public  meetings, which                                                               
was  one point  of contention  and  led to  the current  process.                                                               
Looking forward, Mr. Myers said,  he sees a process that probably                                                               
will  cost  nearly as  much  for  the  shallow gas  leases,  just                                                               
without  producing  a large  document,  in  order to  get  public                                                               
acceptance and deal with the realities of the program.                                                                          
                                                                                                                                
Number 1737                                                                                                                     
                                                                                                                                
REPRESENTATIVE HEINZE  again expressed concern about  "the little                                                               
guy, the 10,000-acre guy" being put at the bottom of the list.                                                                  
                                                                                                                                
MR. MYERS  replied, "In reality,  they are now because,  again, I                                                               
have to  look at  timing of issuing  areawide leases  where we're                                                               
deferring thousands or hundreds of  thousands of dollars of money                                                               
if we don't get  the leases out."  He said  the priority has been                                                               
getting the  conventional leases out  as quickly as  possible and                                                               
then  getting  the  exploration licenses  out;  the  shallow  gas                                                               
leases  have   been  the  slower   process.     Furthermore,  now                                                               
recognized is  that a lot of  the timing issues for  a BIF relate                                                               
to  the  public  process,   including  public  notification,  the                                                               
preliminary finding, and then going to a final BIF.                                                                             
                                                                                                                                
MR. MYERS  said, realistically, the timeline  cannot be shortened                                                               
to much  less than 8 to  12 months no matter  what, because there                                                               
are  interim periods  of public  notice  and [opportunities  for]                                                               
public comment  provided for  statutorily.   He pointed  out that                                                               
the time  was shortened for  shallow gas leasing, but  because of                                                               
all  the work  required behind  the scenes,  the costs  weren't a                                                               
whole lot  different except for  those relating to not  having to                                                               
fly folks out  to the public meetings, "which we're  having to do                                                               
now because of the public outcry."                                                                                              
                                                                                                                                
Number 1608                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  how  many   different  areawide                                                               
leasing programs there  are, and when their  expiration dates are                                                               
for the purposes of having to redo the BIFs.                                                                                    
                                                                                                                                
MR. MYERS deferred to Jim Hansen, leasing manager.                                                                              
                                                                                                                                
Number 1570                                                                                                                     
                                                                                                                                
JAMES HANSEN,  Title/Lease Administrator, Division of  Oil & Gas,                                                               
Department of Natural Resources,  answered that the 10-year North                                                               
Slope finding was  done in 1998, and the ones  for Cook Inlet and                                                               
Beaufort Sea were  done in 1999.  In order  to stagger these out,                                                               
the scheduling will  be Cook Inlet in 2007, North  Slope in 2008,                                                               
and  Beaufort  Sea  in  2009.    In  addition,  the  North  Slope                                                               
foothills is scheduled  in 2011, and for Bristol  Bay the license                                                               
is scheduled in 2004 and the lease sale in 2005.                                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG remarked  that hopefully  this bill,  if                                                               
passed, will require more BIFs.                                                                                                 
                                                                                                                                
Number 1465                                                                                                                     
                                                                                                                                
SETH LITTLE,  Alaska Center for the  Environment (ACE), explained                                                               
that ACE  is a "homegrown  environmental organization"  with more                                                               
than 7,000  dues-paying members across  the state.  He  said this                                                               
companion bill to  SB 312 is a good step  in a long-term solution                                                               
to fix the current problems  with coal bed methane development by                                                               
attempting  to  find a  balance  between  industry interests  and                                                               
public  residents.   Noting that  a BIF  is needed  for coal  bed                                                               
methane development,  he said  he's happy  to see  it as  part of                                                               
this bill  such that socioeconomic  and environmental  impacts of                                                               
development will be  considered just as for  conventional oil and                                                               
gas development.                                                                                                                
                                                                                                                                
MR.  LITTLE pointed  out  that  the bill  lacks  a mechanism  for                                                               
leases already  issued in the Matanuska-Susitna  and Homer areas,                                                               
however; thus it helps for  future leases without fixing problems                                                               
faced  today.    He  also expressed  support  for  the  "previous                                                               
notice" that  Representative Kerttula was working  on, and agreed                                                               
landowners  should  be given  notice  prior  to when  leases  are                                                               
issued on their land.  Referring  to DNR's efforts to include the                                                               
public, he  suggested that  needs to be  a component  for shallow                                                               
gas leases, and said he believes the BIF is a way to do it.                                                                     
                                                                                                                                
Number 1279                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  noted that Representative Seaton  had an                                                               
amendment to offer.                                                                                                             
                                                                                                                                
CHAIR  KOHRING  related  his  understanding  that  Representative                                                               
Kerttula had an  amendment she was still working on  as well.  He                                                               
suggested it could be brought up at a later meeting.                                                                            
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  he  thought the  bill should  move                                                               
along, though he had some reservations.                                                                                         
                                                                                                                                
Number 1221                                                                                                                     
                                                                                                                                
CHAIR  KOHRING announced  that he  had a  variety of  reasons for                                                               
wanting to hold  the bill for now.   He said there  wasn't a high                                                               
comfort level  among several committee members,  according to his                                                               
private conversations.  He added:                                                                                               
                                                                                                                                
     I just keep  getting more and more  feedback from those                                                                    
     in the industry  who say this is not a  good bill.  And                                                                    
     with  all due  respect  to the  Alaska  Center for  the                                                                    
     Environment,  Mr. Little,  and this  is not  derogatory                                                                    
     toward  their  organization, but  they  seem  to be  in                                                                    
     support of the bill; the  industry is against the bill.                                                                    
     So that  might be saying  something to those of  us who                                                                    
     are more inclined to support  a more proactive approach                                                                    
     toward gas development.                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  questioned  that  the  entire  industry                                                               
opposes this.                                                                                                                   
                                                                                                                                
CHAIR KOHRING  replied that he hadn't  heard of anybody who  is a                                                               
player in the business who has said, "Yes, we like this bill."                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG asked whether AOGA supports it.                                                                         
                                                                                                                                
REPRESENTATIVE MASEK answered in the affirmative.                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG suggested that's a  large part of the oil                                                               
and gas industry.   He said he didn't know  whether Evergreen had                                                               
weighed in,  and surmised  they were trying  to "keep  their head                                                               
down."                                                                                                                          
                                                                                                                                
CHAIR KOHRING answered in the  affirmative, saying he'd talked to                                                               
them.                                                                                                                           
                                                                                                                                
REPRESENTATIVE  ROKEBERG  suggested   any  objections  should  be                                                               
stated publicly.                                                                                                                
                                                                                                                                
CHAIR KOHRING acknowledged that point.                                                                                          
                                                                                                                                
Number 1083                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON  asked whether  there were  questions about                                                               
Amendment  1, labeled  23-LS1818\D.2,  Chenoweth, 3/17/04,  which                                                               
read:                                                                                                                           
                                                                                                                                
     Page 21, following line 10:                                                                                                
          Insert a new bill section to read:                                                                                    
        "* Sec. 27.  AS 38.05.177(d) is amended to read:                                                                      
          (d)  A lease                                                                                                          
               (1)  shall be automatically extended if and                                                                  
     for so  long thereafter  as gas  is produced  in paying                                                                    
     quantities from  the lease and the  lessee continues to                                                                    
     meet  all requirements  of  the lease;  a  [. A]  lease                                                                
     issued under this section covering  land on which there                                                                    
     is  a   well  capable   of  producing  gas   in  paying                                                                    
     quantities does not expire because  the lessee fails to                                                                    
     produce  gas unless  the lessee  is allowed  reasonable                                                                    
     time to  place the  well on a  producing status;  if [.                                                                
     IF] drilling  has commenced on  the expiration  date of                                                                    
     the primary  term of  the lease  and is  continued with                                                                    
     reasonable  diligence,  including  such  operations  as                                                                    
     redrilling, sidetracking,  or other means  necessary to                                                                    
     reach  the originally  proposed  bottom hole  location,                                                                    
     the  lease is  extended for  one year  and for  so long                                                                    
     thereafter as  gas is produced in  paying quantities; a                                                                
     [.   A]  gas lease  issued under  this section  that is                                                                    
     subject  to  termination  by  reason  of  cessation  of                                                                    
     production does not terminate if,  within 90 days after                                                                    
     production ceases or a longer  period determined at the                                                                    
     discretion  of  the  director,  reworking  or  drilling                                                                    
     operations are  commenced on the  land under  lease and                                                                    
     are  thereafter  conducted  with  reasonable  diligence                                                                    
     during the period of nonproduction;                                                                                    
               (2)  issued under former (c) of this section                                                                 
     before  January 1,   2004,  may  be  extended   at  the                                                                
     discretion  of the  director; a  lease may  be extended                                                                
     under   this  paragraph   [.      IN  ADDITION,]   upon                                                                
     application by  the lessee; [,]  the director  may once                                                                
     extend  the  [A]  lease  [ISSUED   UNDER  (c)  OF  THIS                                                                
     SECTION] for a period of  not more than three years; in                                                                
     exercising  discretion to  extend  a  lease under  this                                                                
     paragraph,  the  director  may  not  extend  the  lease                                                                
     unless the director considers                                                                                          
               (A)  the extent of the shallow natural gas                                                                   
     exploration  activity already  conducted  on the  lease                                                                
     and on adjacent areas;                                                                                                 
               (B)  the probability that further shallow                                                                    
     natural  gas exploration  activity  will  occur on  the                                                                
     lease and will lead  to shallow natural gas development                                                                
     and production; and                                                                                                    
               (C)  whether extension of the lease's                                                                        
     primary  term will  accelerate the  eventual production                                                                
     of shallow natural gas from the lease."                                                                                
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 44, line 21:                                                                                                          
          Delete "38.05.177(d),"                                                                                                
                                                                                                                                
     Page 44, line 27, following "AS 38.05.177(a)":                                                                             
          Insert ", (d)(1),"                                                                                                    
                                                                                                                                
     Page 44, line 28:                                                                                                          
          Delete "secs. 26 and 27"                                                                                              
          Insert "secs. 26 - 28"                                                                                                
                                                                                                                                
     Page 44, lines 29 - 30:                                                                                                    
          Delete "AS 38.05.177(b) - (h)"                                                                                        
          Insert "AS 38.05.177(b), (c), (e) - (h)"                                                                              
                                                                                                                                
     Page 44, line 30:                                                                                                          
          Delete "sec. 56"                                                                                                      
          Insert "sec. 57"                                                                                                      
                                                                                                                                
Number 1055                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON,  in response  to Chair  Kohring, clarified                                                               
that this amendment gives discretion  to the director of Division                                                               
of Oil &  Gas, and specifies conditions under  which the director                                                               
may  issue a  three-year extension  on shallow  natural gas.   It                                                               
eliminates  the possibility  of  a "takings  claim" being  issued                                                               
against  the  state,  he  said,  adding that  it  has  all  three                                                               
conditions that  the director had talked  about, including paying                                                               
quantities and  whether there is  work going forward.   Those are                                                               
the  conditions   under  which  the  lease   would  be  extended;                                                               
otherwise, there wouldn't be speculative holding.                                                                               
                                                                                                                                
Number 0989                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD  requested  that  Representative  Seaton                                                               
speak  further  on  Amendment  1.     As  far  as  Representative                                                               
Kerttula's amendment, he  noted that she'd said she  could put it                                                               
forward    in   the    House   Resources    Standing   Committee.                                                               
Representative Crawford said  he'd like to see the  bill move and                                                               
characterized it as a good step.                                                                                                
                                                                                                                                
CHAIR  KOHRING  commended   Representative  Seaton's  efforts  in                                                               
responding to  constituents in Homer,  and said he  himself takes                                                               
this  matter seriously.    He noted  that  after Amendment 1  was                                                               
addressed, the  bill would be  held to  look at other  issues and                                                               
solicit additional input from folks in the industry.                                                                            
                                                                                                                                
REPRESENTATIVE HEINZE  expressed concern  that some  members were                                                               
absent [although there was still a quorum].                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  requested  that Mr.  Myers  comment  on                                                               
Amendment 1.                                                                                                                    
                                                                                                                                
Number 0825                                                                                                                     
                                                                                                                                
MR. MYERS said  DNR would support the  amendment, which basically                                                               
defines the  discretion of the  director.  He explained  that the                                                               
director  has  discretion under  shallow  gas  leasing to  extend                                                               
leases up to  an additional three years, but  how that discretion                                                               
is to be used  hasn't been defined.  Amendment 1  defines it in a                                                               
reasonable way, using  criteria of the type  the department uses,                                                               
such  as making  solid progress  toward exploration  development.                                                               
Mr. Myers  said the  amendment is  well written,  reasonable, and                                                               
follows "logical practice."  He  said he doesn't believe it would                                                               
take  away  from  the  lessee's   rights,  but  further  explains                                                               
legislative intent with regard to the director's discretion.                                                                    
                                                                                                                                
Number 0742                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD   moved  to  adopt  Amendment   1  [text                                                               
provided previously].                                                                                                           
                                                                                                                                
REPRESENTATIVE SEATON,  in response to Chair  Kohring, noted that                                                               
[Mr. Myers] had said it would work with the current processes.                                                                  
                                                                                                                                
Number 0695                                                                                                                     
                                                                                                                                
CHAIR KOHRING asked  whether there was any  objection to adopting                                                               
Amendment 1.  There being no objection, it was so ordered.                                                                      
                                                                                                                                
CHAIR KOHRING thanked Mr. Myers for  his analyses.  He noted that                                                               
there'd be a  new proposed committee substitute (CS)  at the next                                                               
bill hearing.  [HB 531 was held over.]                                                                                          

Document Name Date/Time Subjects