Legislature(2003 - 2004)

04/01/2004 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                                                                              
CHAIR KOHRING  announced that the  final 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 0870                                                                                                                     
REPRESENTATIVE  ROKEBERG  moved  to  adopt  Version  23-LS1818\Q,                                                               
Chenoweth, 3/31/04, as  a work draft.  There  being no objection,                                                               
Version Q was before the committee.                                                                                             
Number 0903                                                                                                                     
ERIC MUSSER,  Staff to Representative  Vic Kohring,  Alaska State                                                               
Legislature, explained  that Version  Q largely  incorporates the                                                               
state's existing  shallow gas leasing  program into  the areawide                                                               
oil and gas program.   During the last hearing, several questions                                                               
were raised, and he said  modifications have been made to address                                                               
some of those concerns.                                                                                                         
MR.  MUSSER advised  members that  throughout the  bill the  term                                                               
"shallow  gas"  is replaced  with  "nonconventional  gas"; it  is                                                               
defined in  statute as well.   Section  4, page 6, line  18, adds                                                               
new authority to  the Alaska Oil and  Gas Conservation Commission                                                               
(AOGCC) to regulate  the production of gas  separately from water                                                               
sources, and  to regulate the  disposal of waste  from activities                                                               
related to  drilling.  [Section  6] page  8, line 5,  retains the                                                               
state's  "overriding   interest  authority"  as  it   relates  to                                                               
nonconventional drilling  activities.   And Section 26,  page 20,                                                               
retains the  existing nonconventional  leasing program  for rural                                                               
Alaska; he said he'd explain how that is delineated shortly.                                                                    
CHAIR  KOHRING  added  that  the  aforementioned  is  to  address                                                               
Representative Rokeberg's concerns expressed  at the last hearing                                                               
about the  "bifurcation issue."   Calling it a good  thing, Chair                                                               
Kohring  said it  "enables us  to accomplish  the objective  that                                                               
Representative  Masek is  seeking  to do,  but  it separates  out                                                               
rural Alaska so  that we can continue with  the initial objective                                                               
in '96 with that legislation  to acquire cheap energy sources for                                                               
rural areas of Alaska."                                                                                                         
Number 1129                                                                                                                     
MR.  MUSSER continued  with Version  Q.   He said  Sections 27-34                                                               
bring back  and retain  the existing  "'nonconventional' language                                                               
that  would  have  been  repealed,"   incorporating  all  of  the                                                               
existing program  into the conventional  oil and  gas exploration                                                               
program.   Page  25, lines  14-27, puts  the responsibility  on a                                                               
lessee who is  unable to negotiate a  reasonable access agreement                                                               
with  a property  owner "to  both  compensate them  not only  for                                                               
actual damages  that may incur,  but reasonable  compensation for                                                               
the loss of  use of the property."  Furthermore,  it requires the                                                               
department to  provide notice and  an opportunity to be  heard by                                                               
an affected  party prior to setting  a bond amount and  issuing a                                                               
lease for nonconventional activities.                                                                                           
MR. MUSSER explained that Section  36 [page 25, line 28] requires                                                               
the  department  to advise  and  assist  municipalities that  are                                                               
seeking to  adopt ordinances and  regulations to  regulate within                                                               
their  boundaries  some activities  that  may  exist relating  to                                                               
nonconventional activities.   And [Section 49]  page 41, line 26,                                                               
bifurcates the program; this applies  only to the Municipality of                                                               
Anchorage,  the Kenai  Peninsula  Borough, the  Matanuska-Susitna                                                               
Borough,  and the  Fairbanks North  Star Borough,  shifting those                                                               
into the  conventional gas  program and  taking them  outside the                                                               
existing nonconventional  leasing program.   It  retains existing                                                               
statutes, but only as they apply outside of those boundaries.                                                                   
Number 1325                                                                                                                     
REPRESENTATIVE  HOLM  asked  whether  anyone had  talked  to  the                                                               
Fairbanks North Star Borough about this.                                                                                        
MR. MUSSER  replied no,  although both the  city and  borough had                                                               
been sent a fax at about 9:30 a.m.                                                                                              
REPRESENTATIVE HOLM  emphasized the need  to hear from  those who                                                               
will be  affected, noting  that there are  7,400 square  miles in                                                               
the borough, with a small city in area.                                                                                         
MR.  MUSSER indicated  agreement,  saying this  bifurcation is  a                                                               
policy call and  that there hadn't yet been  debate about whether                                                               
the boundaries should be set narrowly or broadly in scope.                                                                      
REPRESENTATIVE  ROKEBERG  remarked,  "We could  just  delete  the                                                               
[Fairbanks] North  Star Borough  from it and  put them  under the                                                               
shallow gas program.  Think about it."                                                                                          
REPRESENTATIVE  HOLM replied  that  he'd thought  about  it.   He                                                               
agreed  [this bifurcation]  appears the  right thing  to do,  but                                                               
reiterated the  need to discuss  such things with the  people who                                                               
would be affected.                                                                                                              
MR. MUSSER remarked that it was a good question.                                                                                
Number 1491                                                                                                                     
MR. MUSSER turned  attention to written amendments  that began at                                                               
the  bottom of  the first  page  of a  two-page document  labeled                                                               
"CSHB-531,  LS1818\Q."    He  offered  Amendment  1,  which  read                                                               
[original punctuation provided]:                                                                                                
      Page 25, Line 28.  Section 36.  Delete Section 36.                                                                        
MR. MUSSER, noting  that Section 36 requires  the commissioner to                                                               
advise  and  assist municipalities  as  to  local ordinances  and                                                               
regulations  that may  apply, explained  the reason  for deleting                                                               
this section:   those concerns would be addressed  by placing the                                                               
state's  larger municipalities  and  boroughs  under the  state's                                                               
conventional  oil and  gas exploration  program through  the best                                                               
interest finding process.                                                                                                       
Number 1558                                                                                                                     
REPRESENTATIVE   ROKEBERG  returned   attention   to  the   "area                                                               
situation."   He  recalled recently  hearing a  presentation from                                                               
British Columbia's Minister of Energy,  who'd said there might be                                                               
10  billion  barrels  of  oil  offshore  there.    Representative                                                               
Rokeberg  expressed some  skepticism about  the amount,  but said                                                               
northern British Columbia does have  gas.  He asked whether there                                                               
had been exploration for coal  and/or gas in Southeastern Alaska;                                                               
he suggested perhaps expanding the  scope within the legislation.                                                               
In addition, he questioned having  the Lake and Peninsula Borough                                                               
included when an areawide lease is going forward there.                                                                         
CHAIR  KOHRING  brought  attention  back  to  Amendment  1.    He                                                               
requested confirmation  that [Section  26] is  redundant language                                                               
that doesn't  need to be  there as  a result of  modifications in                                                               
[Version Q].                                                                                                                    
MR. MUSSER affirmed that.                                                                                                       
Number 1780                                                                                                                     
REPRESENTATIVE KERTTULA  declared she may have  a conflict, since                                                               
she has seen  a map that may place property  owned by her parents                                                               
in the Matanuska-Susitna area into the leasing areas.                                                                           
REPRESENTATIVE ROKEBERG declared he is member of a limited                                                                      
liability corporation that owns property in the Matanuska-                                                                      
Susitna area and in the Municipality of Anchorage.                                                                              
REPRESENTATIVE HOLM declared he owns lots of property in the                                                                    
Fairbanks North Star Borough.                                                                                                   
Number 1853                                                                                                                     
REPRESENTATIVE ROKEBERG moved to adopt Amendment 1 [text                                                                        
provided previously].  There being no objection, it was so                                                                      
Number 1870                                                                                                                     
MR. MUSSER offered Amendment 2, also found in the document                                                                      
labeled "CSHB-531, LS1818\Q," which read [original punctuation                                                                  
provided but some formatting changed]:                                                                                          
     Add.  Sec. 48.  AS 38.05.180(n).                                                                                           
     AS 38.05.180(n) is amended to read:                                                                                        
          (n) The commissioner may establish by regulation                                                                      
     that after a  well has been plugged  and abandoned, the                                                                    
     rental  rate which  was in  effect during  the year  of                                                                    
     abandonment  is maintained  for  the  remainder of  the                                                                    
     term.    Rental is  payable  in  advance and  continues                                                                    
     until income  to the state  from royalty or  net profit                                                                    
     share  exceeds  rental income  to  the  state for  that                                                                    
     year.  Under this section,                                                                                               
          (1) [OIL AND GAS] leases for oil and gas or for                                                                   
     gas  only shall  provide for  payment to  the state  of                                                                  
     rental on the following basis:                                                                                             
          (A)  [(1)] for the first year, $1.00 per acre;                                                                        
          (B)  [(2)] for the second year, $1.50 per acre;                                                                       
          (C)  [(3)] for the third year, $2.00 per acre;                                                                        
          (D)  [(4)] for the fourth year, $2.50 per acre;                                                                       
          (E) [(5)] for the fifth and following years,                                                                          
     $3.00 per acre;                                                                                                          
          (2) if the lessee under a gas only lease                                                                            
     demonstrates  to the  commissioner  that the  potential                                                                  
     resources  underlying  the  lease area  are  reasonably                                                                  
     estimated to  be only  nonconventional gas,  the rental                                                                  
     payment is  $1.00 per acre  until the lease  expires or                                                                  
     paying  quantities  of  conventional  oil  or  gas  are                                                                  
     discovered underlying the lease.                                                                                         
     Renumber  sections accordingly.   This  amendment would                                                                    
     return language  to the  bill that  needs to  be there.                                                                    
     It was  inadvertently omitted  during revisions  to the                                                                    
     current version.                                                                                                           
MR. MUSSER  explained that the foregoing  language, inadvertently                                                               
omitted in drafting, sets out  the base lease rate established by                                                               
the commissioner  for "spud  wells."  That  would be  inserted on                                                               
page 41, line 8, [following] Section 47.                                                                                        
Number 1912                                                                                                                     
REPRESENTATIVE  ROKEBERG   moved  to  adopt  Amendment   2  [text                                                               
provided  previously].   There  being  no  objection, it  was  so                                                               
Number 1969                                                                                                                     
MR.  MUSSER  began discussion  of  Conceptual  Amendment 3.    He                                                               
explained that  someone was on  teleconference from  AOGCC, which                                                               
had requested  the amendment.   He referred  to page 43,  line 31                                                               
[Section  53],  the  new  definition in  Version  Q  that  amends                                                               
AS 38.05.965 by adding a new paragraph (25) to read:                                                                            
     "nonconventional  gas" means  coal  bed methane,  shale                                                                    
     containing gas, or gas hydrates.                                                                                           
MR. MUSSER  related his  interpretation of  what AOGCC  wants, as                                                               
     "nonconventional  gas"  means  coal  bed  methane,  gas                                                                    
     contained in shale from gas hydrates.                                                                                      
CHAIR KOHRING called on Mr. Norman and Mr. Seamount of AOGCC.                                                                   
Number 2091                                                                                                                     
JOHN  K. NORMAN,  Commissioner, Alaska  Oil and  Gas Conservation                                                               
Commission,  noted   that  also  on  teleconference   was  senior                                                               
geologist Bob Crandall.  Calling  this fine-tuning with regard to                                                               
the  definition, he  said Conceptual  Amendment 3  would be  such                                                               
that the language would read:                                                                                                   
     "nonconventional  gas"  means  coal  bed  methane,  gas                                                                    
     contained in shale, or gas from gas hydrates.                                                                              
CHAIR  KOHRING  asked  whether  the  following  was  the  correct                                                               
wording for Conceptual Amendment 3:                                                                                             
     "nonconventional  gas"  means  coal  bed  methane,  gas                                                                    
     contained in shale for gas from gas hydrates.                                                                              
MR. NORMAN answered in the affirmative.                                                                                         
Number 2173                                                                                                                     
REPRESENTATIVE McGUIRE  moved to adopt Conceptual  Amendment 3 as                                                               
stated.  There being no objection, it was so ordered.                                                                           
CHAIR  KOHRING invited  Mr. Norman  and Mr.  Seamount to  address                                                               
Version Q.  He asked that  they speak closer to the microphone in                                                               
order to help the sound quality.                                                                                                
Number 2227                                                                                                                     
MR. NORMAN  referred to new  language in Section 4,  beginning on                                                               
page  6, and  said AOGCC  has reviewed  this and  believes it  is                                                               
workable, can be  administered, and can be overseen.   Turning to                                                               
page 8, Section 6, he said:                                                                                                     
     With the recognition  that this is already in  law as a                                                                    
     result  of  last  year,  I'd raise  a  question  as  to                                                                    
     whether this properly belongs  within Title 31, because                                                                    
     it relates  to the  commissioner of  natural resources'                                                                    
     making  certain determinations.    And  it did  overlap                                                                    
     with Section 36 on page  25, where the commissioner was                                                                    
     also   advised  to   assist  municipalities.     As   I                                                                    
     understand, ...  Amendment 1 addressed that.   But this                                                                    
     ... leaves  this section  here.  And  I just  raise the                                                                    
     question about whether that's the  proper place for it,                                                                    
     because  there's no  role for  the Alaska  Oil and  Gas                                                                    
     Conservation Commission  here, and yet within  Title 31                                                                    
     that   carves   out   our   powers   and   duties   and                                                                    
MR.  NORMAN  addressed  Section  7, page  8,  which  would  amend                                                               
AS 31.05.170 by adding a new paragraph (16) to read:                                                                            
     "nonconventional   gas"  has   the  meaning   given  in                                                                    
     AS 38.05.965.                                                                                                              
MR. NORMAN,  noting that the  definition in  Title 31 is  tied to                                                               
the definition in  Title 38, just discussed  and amended, pointed                                                               
out that  within nonconventional gas  there is a  category called                                                               
"tight gas".  He explained:                                                                                                     
     That's where a reservoir  has very low permeability and                                                                    
     the gas  won't flow without some  extraordinary efforts                                                                    
     being made.   And I just point that out  here, as we're                                                                    
     focused  on  the  definition  of  nonconventional  gas,                                                                    
     because  this definition  goes back  to  Section 53  on                                                                    
     page 43,  where the  definition appears.   And  then we                                                                    
     talked about coal bed methane,  gas contained in shale,                                                                    
     and  gas from  gas hydrates.    And there  is a  fourth                                                                    
     category  that,   in  the   general  parlance   of  the                                                                    
     industry, is ... thought  also as being nonconventional                                                                    
     gas, and that's "tight gas."                                                                                               
     And I don't  know that we have an opinion  at all as to                                                                    
     whether you  should incorporate that, but  thought that                                                                    
     we would  want to at  least bring it to  your attention                                                                    
     so that if  you do exclude it, which it  is here, you'd                                                                    
     know that  you are  excluding it from  what's generally                                                                    
     understood to be nonconventional gas.                                                                                      
[Mr. Seamount informed members that he had nothing to add.]                                                                     
MR.  NORMAN,  in  response  to Chair  Kohring,  said,  "From  the                                                               
perspective  of   what  the  AOGCC   needs  to  be   prepared  to                                                               
administer, we're comfortable with the legislation."                                                                            
Number 2463                                                                                                                     
REPRESENTATIVE HOLM asked what would  happen under the bill if he                                                               
owned a coal lease as well as gas underneath that.                                                                              
Number 2475                                                                                                                     
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural Resources (DNR), answered:                                                                                              
     If you own a  coal lease, you do not own  the gas.  You                                                                    
     only own  the gas  if you  need to  vent it  for safety                                                                    
     issues  with the  mining; then  you have  to tie  it to                                                                    
     actually produce  the gas, rather  than to vent  it ...                                                                    
     and then  use it for local  use or to sell  it. ... The                                                                    
     gas  in that  coal belongs  to the  oil and  gas lessee                                                                    
     unless the  coal is actively  being mined and  ... it's                                                                    
     proven to be a hazard.                                                                                                     
REPRESENTATIVE HOLM  asked what  would happen if  he owned  a gas                                                               
lease  underneath and  in  conjunction with  a  coal bed  methane                                                               
MR. MYERS replied that someone who  has a shallow gas lease under                                                               
current law would have the right  to all gas within 3,000 feet of                                                               
the surface  and, in some  cases, deeper,  if part of  the field,                                                               
depending on the lease.  He  added that with this bill, if passed                                                               
as is, for  nonconventional gas and the new leases  that would be                                                               
granted, "you would  own the rights to all of  the gas within any                                                               
coal  on  your  lease,  regardless of  depth  and  regardless  of                                                               
whether you mined  them or not."  He noted,  however, that such a                                                               
person wouldn't own the rights to conventional gas.                                                                             
REPRESENTATIVE  HOLM  asked  whether, if  conventional  gas  were                                                               
found underneath a  coal lease, none of it would  be owned by the                                                               
coal lessee unless a conventional gas lease had been purchased.                                                                 
MR. MYERS  affirmed that.   Under  this bill,  he said,  a person                                                               
could  have either  a gas-only  lease or  an exploration  license                                                               
that could  be converted  to a conventional  lease.   Under those                                                               
two  circumstances, the  person  would own  the  gas that  wasn't                                                               
associated with coal  or hydrates, or gas  contained in fractured                                                               
Number 2580                                                                                                                     
CHAIR KOHRING  said he'd like to  hear from the co-chairs  of the                                                               
House Resources Standing Committee,  sponsor of this legislation,                                                               
about  Representative Holm's  concerns and  whether they'd  heard                                                               
from the  areas to be  most affected.   He said what  [Version Q]                                                               
was intended  to accomplish basically relates  to the bifurcation                                                               
issue.     However,  he  expressed  concern   with  the  original                                                               
legislation in  terms of  placing the urban  areas, as  noted, in                                                               
the areawide  leasing program  and hence  making them  subject to                                                               
the  best  interest  findings;  he  opined  that  this  would  be                                                               
counterproductive to developing shallow gas resources.                                                                          
AN  UNIDENTIFIED  SPEAKER said  from  the  audience, "We  weren't                                                               
aware  you  put  that  in  the bill,  Mr.  Chairman,  until  this                                                               
CHAIR  KOHRING said  he was  talking about  part of  the original                                                               
bill that  remains in Version Q  and how it affects  areas of the                                                               
state  including  Fairbanks,   Anchorage,  the  Matanuska-Susitna                                                               
Borough, and so forth.                                                                                                          
MR.  MUSSER added  that  the legislation  would  turn the  entire                                                               
state  back  under  the  conventional  oil  and  gas  exploration                                                               
program.  By bifurcating it this  way and only putting the larger                                                               
urban centers into  the program, he said there are  two things to                                                               
consider.   Since  enactment of  the existing  shallow gas  bill,                                                               
there had  been no activity until  the last couple of  years.  By                                                               
returning  those  urban  centers  to  the  areawide  program,  he                                                               
suggested, nothing  will be gained  or lost with regard  to those                                                               
affected boroughs and municipalities up to this point.                                                                          
Number 2723                                                                                                                     
REPRESENTATIVE  HOLM noted  that he'd  received a  letter from  a                                                               
coal company  which relates the  belief that, under  current law,                                                               
the underlying,  existing coal  leases would be  at risk  if this                                                               
new program were  put in place, and that the  current shallow gas                                                               
leasing  program, authored  in 1996,  was intended  to allow  the                                                               
coal lessee the sole right to that gas.                                                                                         
MR. MUSSER responded  that he, too, had  seen that correspondence                                                               
"and  addressed it."    Saying the  key is  the  shallow gas,  he                                                               
added, "If  they have  obtained under the  existing permit  ... a                                                               
nonconventional  gas permit,  they have  the rights  ... to  that                                                               
shallow  gas under  the existing  program.   They  don't lose  it                                                               
under the existing program if they have a lease."                                                                               
REPRESENTATIVE HOLM  said he  wanted to make  it clear  that this                                                               
legislation doesn't change that.                                                                                                
MR.  MUSSER  replied,  "No,  sir,  not for  those  that  hold  an                                                               
existing lease."                                                                                                                
CHAIR KOHRING  referred to concerns brought  up by Representative                                                               
McGuire during  a hearing on  HB 395.   He asked where  she stood                                                               
with the current legislation.                                                                                                   
REPRESENTATIVE McGUIRE  surmised that further work  would be done                                                               
in  other   committees  of  referral,   but  said   she  believed                                                               
everything looked good [in this  legislation], and that it's what                                                               
she was envisioning.                                                                                                            
Number 2842                                                                                                                     
MR. MUSSER turned  attention to Amendment 4,  the third amendment                                                               
in  the two-page  document  labeled  "CSHB-531, LS1818\Q,"  which                                                               
read [original punctuation and capitalization provided]:                                                                        
         Page 22, line 1 and 3.  change the work [sic]                                                                          
      nonconventional to "gas only".  This is a conforming                                                                      
     language change.                                                                                                           
MR.  MUSSER explained  that this  change was  pointed out  by the                                                               
Division of Oil & Gas.                                                                                                          
MR.  MYERS  clarified that  he  no  longer  wished to  have  that                                                               
change;  after further  analysis  of the  bill,  he believed  the                                                               
current   language  was   correct.     He  explained   that  he'd                                                               
misunderstood,  thinking  there  was a  separate  nonconventional                                                               
lease type in Version Q.                                                                                                        
MR.  MYERS  brought  attention  to  the  fact  that  Section  35,                                                               
subsection (3)(B)  [page 25], provides for  compensation if there                                                               
is loss  of surface use  or enjoyment.   [Not on tape,  but taken                                                               
from the  Gavel to  Gavel Alaska recording  on the  Internet, was                                                               
that current state law only allows for damages.]                                                                                
TAPE 04-12, SIDE B                                                                                                            
Number 2950                                                                                                                     
MR. MYERS observed that this would be an additional right.                                                                      
MR. NORMAN remarked that there  are obvious policy considerations                                                               
from a  land-management standpoint, which are  within the purview                                                               
of  the legislature  and Mr.  Myers.   From the  standpoint of  a                                                               
regulatory agency, however, he said  [AOGCC] believes the bill is                                                               
Number 2899                                                                                                                     
REPRESENTATIVE  McGUIRE moved  to  report CSHB  531 [Version  23-                                                               
LS1818\Q, Chenoweth, 3/31/04], as  amended, out of committee with                                                               
individual  recommendations  and  the  accompanying  zero  fiscal                                                               
notes.   There  being no  objection, CSHB  531(O&G) was  reported                                                               
from the House Special Committee on Oil and Gas.                                                                                

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