Legislature(2003 - 2004)

05/07/2003 08:10 AM House RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 198-ROYALTY REDUCTION ON CERTAIN OIL                                                                                       
CHAIR FATE  announced that the  first order of business  would be                                                               
SPONSOR SUBSTITUTE FOR HOUSE BILL  NO. 198, "An Act providing for                                                               
a reduction  of royalty on  certain oil produced from  Cook Inlet                                                               
submerged land."  [Before the committee was CSSSHB 198(O&G).]                                                                   
Number 0089                                                                                                                     
REPRESENTATIVE  VIC KOHRING,  Alaska State  Legislature, sponsor,                                                               
explained that  this bill  is intended  to help  prevent offshore                                                               
oil  platforms  in  Cook  Inlet  from  shutting  down.    Rapidly                                                               
reaching  the end  of their  economic lives,  the platforms  were                                                               
built  mostly  in  the  1960s;  two of  the  thirteen  rigs  have                                                               
suspended  production because  they  no longer  break  even.   He                                                               
offered his belief that it isn't  in the state's best interest to                                                               
abandon these  fields, because of  the negative  economic effects                                                               
that would occur mostly on the Kenai Peninsula.                                                                                 
REPRESENTATIVE KOHRING  noted that  the bill reduces  the royalty                                                               
rate  paid  to the  state,  on  a  sliding  scale.   Two  primary                                                               
categories encompass  two different groups of  offshore platforms                                                               
that will benefit  from this legislation:   Dolly, Grayling, King                                                               
Salmon,  Steelhead  [and  Monopod],  which are  wells  with  high                                                               
overhead; and Granite Point, Anna,  Bruce, Baker, Dillon, [XTO.A,                                                               
and XTO.C],  which have lower  operating costs.  He  told members                                                               
that without  this bill, the  state eventually will  receive zero                                                               
in royalty  income because  there will be  no production  and the                                                               
state will  be receiving 12.5  percent of nothing.   With passage                                                               
of the bill,  however, the state can receive  between 5.5 percent                                                               
and 12.5 percent of something,  since it encourages owners of the                                                               
platforms to continue with production.                                                                                          
Number 0365                                                                                                                     
REPRESENTATIVE  KOHRING  called  attention  to  the  fiscal  note                                                               
[prepared by Mark Myers of the  Division of Oil & Gas, Department                                                               
of  Natural Resources  (DNR)].   Representative Kohring  said the                                                               
estimated $600,000 is  a relatively modest amount  that the state                                                               
would lose because production isn't  high for the rigs; Mr. Myers                                                               
could address  that and details  about the  sliding-scale system.                                                               
Representative Kohring  said the trade-off for  the $600,000 lost                                                               
from the  state treasury will  be hundreds of jobs  involved with                                                               
running these  oil rigs; millions  of dollars spent on  goods and                                                               
services,  mostly on  the Kenai  Peninsula;  and continuation  of                                                               
property-tax  revenues to  local governments  there that  provide                                                               
for roads, schools, and public safety.                                                                                          
REPRESENTATIVE KOHRING highlighted  the expensive infrastructure.                                                               
If  the lives  of  the  platforms can  be  extended through  this                                                               
legislation, the  owners may be  able to use  that infrastructure                                                               
to  further  develop  the  [oil]   fields  by  using  directional                                                               
drilling   techniques.     Instead   of   shutting  down,   being                                                               
mothballed, and eventually being towed  away, these rigs could be                                                               
kept  in place  as a  base  for future  drilling.   He closed  by                                                               
offering his belief that the legislation is relatively urgent.                                                                  
Number 0573                                                                                                                     
GARY  CARLSON, Senior  Vice  President,  Forest Oil  Corporation,                                                               
noting that  he has been  a major investor  in Cook Inlet  in the                                                               
past five years, told members:                                                                                                  
     My   testimony  on   this  bill   will  focus   on  the                                                                    
     maintenance  of  critical   and  scarce  infrastructure                                                                    
     associated  with  the mature  oil  fields  in the  Cook                                                                    
     Inlet.    The   platforms,  associated  pipelines,  and                                                                    
     related onshore facilities  ... represent irreplaceable                                                                    
     infrastructure  which may  facilitate the  exploration,                                                                    
     discovery,  and  development  of  as  yet  undiscovered                                                                    
     reserves if  their useful lives  can be extended.   Any                                                                    
     delay  in   abandoning  and  decommissioning   of  this                                                                    
     infrastructure  will   provide  opportunities   to  the                                                                    
     industry   to  develop   smaller-scale   oil  and   gas                                                                    
     prospects  that  won't  stand   the  economics  if  new                                                                    
     infrastructure needed to be developed.                                                                                     
     As  mature fields  approach  their  economic life,  the                                                                    
     operators  need to  get creative  and manage  ... costs                                                                    
     carefully,  ... including  managing  their vendors  and                                                                    
     their contractors  to share  in these  efforts.   And I                                                                    
     believe it is  appropriate for the state to  step in as                                                                    
     a partner also.  This bill  would provide a way for the                                                                    
     state to make a difference.                                                                                                
     Keeping the  current Cook  Inlet oil  fields on  line a                                                                    
     few more  years will maintain good  jobs, provide local                                                                    
     taxes,   and   [provide]   the   possibility   of   new                                                                    
     development.     And   it  could   easily  exceed   the                                                                    
     anticipated   future   shortfall  in   state   revenues                                                                    
     resulting from  the reduced state  royalty.  I  want to                                                                    
     commend  the  bill  sponsors   and  the  Department  of                                                                    
     Natural  Resources for  their  foresight in  supporting                                                                    
     this bill.                                                                                                                 
Number 0722                                                                                                                     
REPRESENTATIVE HEINZE  said she thinks  this is a good  bill, but                                                               
inquired  about  the  14  months'   extension  and  the  economic                                                               
feasibility for companies that keep these platforms going.                                                                      
MR. CARLSON answered  that the length of time to  keep a platform                                                               
producing, depending upon the decline  rates and who analyzes the                                                               
data, could  be one to  three years.   Knowing the  royalty rates                                                               
would help  a company plan,  keep the facilities on  line another                                                               
year or two, and stay above the  red line.  He suggested that the                                                               
operators  of the  platforms can  plan  the decommissioning  much                                                               
better [if the bill passes], which should delay shutting down.                                                                  
Number 0842                                                                                                                     
CHAIR FATE  asked whether the  cost of maintaining  the platforms                                                               
after  their useful  production  life will  offset revenues  made                                                               
before they are  shut down, especially if  those platforms aren't                                                               
utilized in the near future.                                                                                                    
MR. CARLSON explained that the  cost of shutting in the platforms                                                               
without abandoning  them will be tremendously  different for each                                                               
facility.  He offered his belief  that some have been operated in                                                               
the red for a  short time prior to being shut  in because of that                                                               
cost.   Once  they've been  decommissioned to  where they  can be                                                               
left intact without abandoning them,  the cost of maintaining the                                                               
platforms is relatively low.                                                                                                    
CHAIR FATE  suggested that even if  the cost is low,  paying that                                                               
cost  over   10  years,  for  example,   without  [operating  the                                                               
platform] will  begin to erode the  profit made in the  14 months                                                               
it was kept alive.  He asked  whether it would be worth it, other                                                               
than extending jobs and the local economy for those 14 months.                                                                  
MR. CARLSON answered:                                                                                                           
     It's  difficult to  say  if  that's the  case.   And  I                                                                    
     appreciate  the   question  ...  that  the   amount  of                                                                    
     additional revenue  that would come to  the operator as                                                                    
     a result  of this could be  marginal at best.   I think                                                                    
     it's the spirit of what the  state is trying to do here                                                                    
     ... that's critical.   And as ... [an]  operator in the                                                                    
     inlet that ... is looking  at exploring for new oil and                                                                    
     gas, the  fact that that  facility - even if  it's been                                                                    
     shut  in two  or three  years  - ...  [is] there,  it's                                                                    
     possible for  us to bring  the field on and  maybe pipe                                                                    
     the oil to this idle platform.   And at that point, ...                                                                    
     the value of  that facility comes back  to the operator                                                                    
     or,  if not  the  operator, somebody  that's out  there                                                                    
     like Forest  Oil [Corporation], where we  would pay for                                                                    
     access  ...  to the  infrastructure.    So there's  ...                                                                    
     those unknowns  out there that  I think offer  more ...                                                                    
     opportunities   than  the   actual   savings,  ...   in                                                                    
     equivalent of  ... the 750-barrel-a-day  platforms, ...                                                                    
     [a] savings of roughly 50 barrels a day.                                                                                   
Number 1063                                                                                                                     
CHAIR FATE asked whether those  platforms, even if shut in, might                                                               
help  facilitate   smaller  fields  or  exploration   around  the                                                               
vicinity; he mentioned possible lateral drilling.                                                                               
MR. CARLSON answered in the affirmative.                                                                                        
The committee took an at-ease from 8:25 a.m. to 8:27 a.m.                                                                       
Number 1142                                                                                                                     
REPRESENTATIVE HEINZE  moved to  report [CSSSHB 198(O&G)]  out of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal  notes.   There being  no objection,  CSSSHB 198(O&G)  was                                                               
reported from the House Special Committee on Oil and Gas.                                                                       
HB 28-OIL & GAS ROYALTY MODIFICATION                                                                                          
[Contains discussion of SSHB 198]                                                                                               
Number 1170                                                                                                                     
CHAIR FATE  announced that  the next order  of business  would be                                                               
SPONSOR SUBSTITUTE  FOR HOUSE  BILL NO. 28,  "An Act  relating to                                                               
adjustments  to  royalty  reserved  to  the  state  to  encourage                                                               
otherwise  uneconomic production  of oil  and gas;  and providing                                                               
for   an  effective   date."     [The  bill   was  sponsored   by                                                               
Representatives Kohring  and Rokeberg.  Before  the committee was                                                               
CSSSHB 28(O&G);  in   packets  was   a  new   proposed  committee                                                               
substitute (CS), Version U.]                                                                                                    
Number 1196                                                                                                                     
REPRESENTATIVE VIC KOHRING, Alaska  State Legislature, one of the                                                               
sponsors, noted  that he  chairs the  House Special  Committee on                                                               
Oil and  Gas.  He explained  that SSHB 28 is  an "incentive bill"                                                               
that  provides  for  royalty  reduction.     The  intent  of  the                                                               
legislation  is  to  spur  development  in  what  are  considered                                                               
marginal fields, which  are prospective fields where  there is no                                                               
facility that  is drilling  already; where  there is  an existing                                                               
facility producing oil  that may be close  to being uneconomical;                                                               
or where  the facility is  mothballed and shut in,  not producing                                                               
because  the lease  owners feel  they  aren't making  money.   He                                                               
specified that the  intent is to provide a royalty  break for oil                                                               
and gas for marginal fields anywhere in Alaska.                                                                                 
CHAIR FATE  requested a  motion to adopt  the proposed  CS before                                                               
Representative Kohring continued.                                                                                               
Number 1290                                                                                                                     
REPRESENTATIVE LYNN moved  to adopt the proposed  CS, Version 23-                                                               
LS0177\U, Chenoweth,  4/30/03, as  a work  draft.   [No objection                                                               
was stated, and Version U was treated as adopted.]                                                                              
The committee  took an  at-ease from  8:28 a.m.  to 8:31  a.m. to                                                               
distribute copies of Version U.                                                                                                 
REPRESENTATIVE LYNN  announced that  he needed  to go  to another                                                               
meeting, but was generally in support of this bill.                                                                             
The committee took a brief at-ease.                                                                                             
Number 1491                                                                                                                     
REPRESENTATIVE KOHRING continued, advising  members that he would                                                               
incorporate  Version U  during his  presentation.   He said  1995                                                               
legislation had enacted the  current royalty-reduction system for                                                               
these marginal  fields, but clarification and  simplification are                                                               
needed.  The intent is  to create a more understandable, flexible                                                               
royalty-adjustment method  that is  more simplified  with respect                                                               
to  the procedure  and paperwork,  and to  give authority  to the                                                               
Department  of  Natural  Resources  (DNR)  commissioner  to  make                                                               
decisions   relating   to   royalty   reduction,   to   encourage                                                               
development  of these  marginal  fields.   Hence  this gives  the                                                               
[DNR]  commissioner  the tools  to  negotiate  with drilling  and                                                               
exploration  companies  to  make  both  oil  and  gas  production                                                               
financially viable.   He  explained, "We  feel that  the existing                                                               
law  is simply  too burdensome  and costly  for the  industry and                                                               
thus discourages filing of drilling applications."                                                                              
REPRESENTATIVE KOHRING reminded members  that the state's royalty                                                               
share  usually is  12.5  percent,  but sometimes  as  high as  20                                                               
percent,  depending  on  the  field.    Royalty  reduction  under                                                               
SSHB 28  will depend  on changes  in oil  prices, fuel  recovery,                                                               
production  rates  and  volumes, and  development  and  operating                                                               
costs.   He said the  new rate will be  set at the  discretion of                                                               
the commissioner,  who will  evaluate each  project independently                                                               
and then decide the  rate; it could be as low  as about 3 percent                                                               
and perhaps as high as 12.5 percent.                                                                                            
Number 1661                                                                                                                     
REPRESENTATIVE KOHRING emphasized a  key part of the legislation:                                                               
the  decision  by the  commissioner  as  to  whether a  field  is                                                               
profitable will be based on  an evaluation done either internally                                                               
by  DNR's  Division  of  Oil  & Gas  or  through  an  independent                                                               
contract, if the  applicant wants to expedite the  process and so                                                               
chooses.  Criteria regarding whether  the fields are economically                                                               
viable  include the  hydrocarbon potential  and costs  associated                                                               
with  drilling [and]  production.   The commissioner  will decide                                                               
whether it's  justifiable to  grant a  royalty reduction  and, if                                                               
so, at  what rate.  If  the study shows the  field as uneconomic,                                                               
then  the commissioner  can structure  a royalty  rate that  will                                                               
improve the field's profitability.                                                                                              
REPRESENTATIVE  KOHRING informed  members that  the standards  of                                                               
the  contract  and  who  [the  contractor]  will  be  are  to  be                                                               
determined by DNR.  Although  he'd heard there are few [potential                                                               
contractors],  he expressed  confidence that  they are  competent                                                               
and qualified, and said he'd  discussed this with Division of Oil                                                               
& Gas  personnel.  If  the evaluation is done  internally, unless                                                               
there are unusual  circumstances, there won't be any  cost to the                                                               
applicant that would have to be  reimbursed to the state.  But if                                                               
it's  done through  an independent  contract, the  applicant must                                                               
pay the state a reimbursement fee not to exceed $150,000.                                                                       
REPRESENTATIVE KOHRING  explained that if the  commissioner hires                                                               
an independent contractor,  the current royalty-reduction statute                                                               
exempts the  hiring process from  the state's  normal competitive                                                               
bidding  process.     This  provides  the   applicant  with  some                                                               
certainty about who  will do the professional  evaluation, and it                                                               
will expedite the commissioner's decision.   He asserted that the                                                               
public  process is  protected with  this legislation  because the                                                               
public   has  access   and  the   ability  to   comment  on   the                                                               
commissioner's  preliminary  findings.     Furthermore,  SSHB  28                                                               
retains legislative  involvement through  the Joint  Committee on                                                               
Legislative Budget and Audit, which  meets year-round and through                                                               
which  detailed audits  can be  requested  to examine  individual                                                               
applications and royalty adjustments that are granted.                                                                          
REPRESENTATIVE KOHRING offered his  expectation that SSHB 28 will                                                               
result in  more oil being  produced and  not left in  the ground.                                                               
He said  he believes  Alaska needs to  remain competitive  in the                                                               
global  market by  encouraging development  of oil  and gas,  and                                                               
that this  legislation moves the state  closer to that goal.   He                                                               
noted   that  Representative   Rokeberg  had   sponsored  similar                                                               
legislation in the past and was the impetus behind SSHB 28.                                                                     
Number 1893                                                                                                                     
CHAIR FATE asked about provisions for increasing the royalty if                                                                 
improvements in technology make a field less marginal and more                                                                  
REPRESENTATIVE KOHRING deferred to Mr. Myers.                                                                                   
Number 1939                                                                                                                     
MARK MYERS, Director, Division of Oil & Gas, Department of                                                                      
Natural Resources, responded:                                                                                                   
     The bill  ... gives the commissioner  broad latitude to                                                                    
     structure the  royalty reduction and actually  have the                                                                    
     choice, under this bill, to  either try, on the upside,                                                                    
     to  recover   some  of   the  ...   royalty  reduction,                                                                    
     structuring it that way, or not  to.  And it depends on                                                                    
     the individual  circumstances.  So the  bottom line is,                                                                    
     the commissioner  can structure the royalty,  if prices                                                                    
     go up and  the field's more economic, to  recover it or                                                                    
     to  change and  raise the  royalty back  up to  what it                                                                    
     was, which are ... likely mechanisms. ...                                                                                  
     It's hard  to individualize ... the  specific mechanism                                                                    
     because ... royalty reduction under  this bill can come                                                                    
     under fields that [have] just  been delineated, and you                                                                    
     don't  have a  lot of  geologic information  yet -  you                                                                    
     have  enough to  know  that it's  developable, but  you                                                                    
     don't  fully have  the wells  drilled; you  don't fully                                                                    
     have  an understanding  of the  size and  shape of  the                                                                    
     accumulation.   So  in  that [case]  ...  you'd have  a                                                                    
     rough  idea, but  not real  accurate numbers.   And  in                                                                    
     that  case, it  takes a  lot  more scrutiny  to do  the                                                                    
     analysis and  you would want  to condition  the royalty                                                                    
     with a lot more upside protection.                                                                                         
     Conversely, very late  in the life of  the field you'll                                                                    
     have a lot  of data, you'll have lots  of wells, you'll                                                                    
     have good  seismic data, you'll have  a good production                                                                    
     history  and [know  the]  decline of  the  field.   And                                                                    
     you'll be able ... to be  a lot more precise ... on the                                                                    
     royalty production.   You may not need  as many caveats                                                                    
     to protect the upside.                                                                                                     
     So  it  all depends  on  ...  the individual  data  set                                                                    
     available [for] the field, the  economics of the field,                                                                    
     the oil  price, obviously.  So  ... there are a  lot of                                                                    
     abilities  in  this  bill   to  customize  the  royalty                                                                    
     reduction and protect the state ... on the upside.                                                                         
Number 2029                                                                                                                     
REPRESENTATIVE NORMAN ROKEBERG, Alaska  State Legislature, one of                                                               
the sponsors,  agreed with Mr.  Myers, noting that page  2, lines                                                               
24-28,  [paragraph] (3),  is the  key  to this  legislation.   He                                                               
pointed out that  the sliding scale is a key  element of the bill                                                               
and read from the paragraph, which states:                                                                                      
          (3)  shall provide for an increase or decrease or                                                                 
     other modification  of the state's  royalty share  by a                                                                
     sliding scale royalty or other  mechanism that shall be                                                                
     based on  a change in the  price of oil or  gas and may                                                                
     also   be  based   on other relevant factors  such as a                                                                
     change   in     production  rate,   projected  ultimate                                                                
     recovery, development costs, and operating costs                                                                       
REPRESENTATIVE ROKEBERG  said there is  an upside that  should be                                                               
anticipated under  any kind of  agreement entered into;  that was                                                               
the fundamental basis of the 1995 changes proposed in HB 207.                                                                   
Number 2111                                                                                                                     
REPRESENTATIVE GUTTENBERG  asked whether  Mr. Myers had  said the                                                               
royalty  reduction could  be  given before  the  field went  into                                                               
production or before the geological structure was understood.                                                                   
MR. MYERS directed attention to  page 2, line 5, sub-subparagraph                                                               
(i),  which  talks  about  a field  that  has  been  sufficiently                                                               
delineated  to the  satisfaction of  the commissioner.   He  said                                                               
there must  be some "reasonable  geologic information,"  but that                                                               
for a  field not  yet in  production there is  a higher  level of                                                               
uncertainty.    There will  be  test  data, but  not  necessarily                                                               
representative of the entire field.  He elaborated:                                                                             
     So  there's a  substantial amount  of uncertainty,  but                                                                    
     you do believe you have  captured the range of possible                                                                    
     oil and  gas that's in the  field.  But ...  as you get                                                                    
     more data, the range of  uncertainty decreases.  So the                                                                    
     commissioner  has  to  make  a  decision  without  [its                                                                    
     being] sufficiently  delineated, and ... that's  a real                                                                    
     important  ... issue.    He's not  going  to know  he's                                                                    
     right  or  not  -  that's  why  the  conditioning  that                                                                    
     Representative  Rokeberg  talks  about in  these  early                                                                    
     stages  are important;  that's why  the ability  of the                                                                    
     state  to   get  an  outside  consultant   to  look  at                                                                    
     engineering data as well becomes really critical.                                                                          
     So  ... in  those  cases where  you  have a  reasonable                                                                    
     amount  of  information  but  not   a  huge  amount  of                                                                    
     certainty, you  really want  to be  careful on  how you                                                                    
     condition  it  to  capture  the  upside  again  ...  as                                                                    
     development of the field goes.   Typically, oil and gas                                                                    
     fields increase in  their ultimate recoverable reserves                                                                    
     due to changes  in technology ... and  due to capturing                                                                    
     the upside.   That's ...  historically, if you  look at                                                                    
     all  our major  fields,  with the  exception of  fields                                                                    
     like Badami, in which case  ... there was more downside                                                                    
     than upside.                                                                                                               
     So,  generally,  the  upside's  larger  than  initially                                                                    
     calculated, and the  state needs to be  keenly aware of                                                                    
     that  when they  model it.    That's not  to say  there                                                                    
     aren't other cases where it  goes the other way, or the                                                                    
     uncertainty.  So  I guess [the] long and  short is, the                                                                    
     applications under that  section, under "delineated but                                                                    
     not   yet   in   production  field,"   are   the   most                                                                    
     challenging,  ...  'cause  you have  less  information.                                                                    
     But  you   can  still   do  it,  particularly   if  you                                                                    
     condition,  as  Representative Rokeberg  suggested,  in                                                                    
     the other section.                                                                                                         
Number 2259                                                                                                                     
REPRESENTATIVE  GUTTENBERG asked,  in that  scenario, whether  it                                                               
would be  prudent for developers  to say,  at a certain  point in                                                               
their exploration, that  they would stop looking  and didn't have                                                               
enough data, in order to get the royalty reduction.                                                                             
MR. MYERS responded  that, first, it's been  learned from royalty                                                               
reduction  in  other  scenarios   that  other  factors  involving                                                               
profitability  of  the  field   generally  outweigh  the  royalty                                                               
reduction; external factors such as  fluctuations in the price of                                                               
oil and  uncertainty about the  size of the reservoir  dominate a                                                               
company's  discussions in  terms of  whether or  not to  develop.                                                               
Thus  he opined  that  only  development at  the  margins can  be                                                               
affected in most cases.                                                                                                         
MR. MYERS said,  second, there is definitely some  risk, which is                                                               
why it needs to be structured.  He explained:                                                                                   
     We independently review the data.   We have the seismic                                                                    
     data; we look at the well  data.  Will an applicant try                                                                    
     to leverage  this?   Possibly.   But, again,  you would                                                                    
     condition  such  a   royalty  reduction  as  production                                                                    
     increases  or as  reserve base  increases  or as  price                                                                    
     changes - a  sliding scale.  So we  would capture that.                                                                    
     And probably, in many of  these cases, ... we would ask                                                                    
     for an  increase in royalty  to offset any  decrease in                                                                    
     royalty earlier on, again, to  balance that.  So it's a                                                                    
     delicate balance.                                                                                                          
     You  have  to  be  very  diligent  to  ...  do  a  good                                                                    
     technical evaluation to protect  the interest.  There's                                                                    
     clearly  a desire  by  the operator  to  pay as  little                                                                    
     royalty as possible; that's ...  only nature.  We are a                                                                    
     cost ... to  the structure.  It's our job,  in terms of                                                                    
     our technical  analysis, to make  sure we get  our fair                                                                    
     share, and  that if we do  structure a deal that  we do                                                                    
     recover any royalty [relief] that  was granted that was                                                                    
     not appropriate. ...                                                                                                       
Number 2385                                                                                                                     
MR.  MYERS said  the other  big factor  that no  one controls  is                                                               
price, a  big [determinant]  in how the  evaluation is  done with                                                               
regard to  whether royalty  reduction is  justified economically.                                                               
Noting  that generally  most mechanisms  under royalty  reduction                                                               
would take price into consideration, he said:                                                                                   
     I guess where this is  useful, in cases where the field                                                                    
     size  is  "on the  bubble"  in  terms of  whether  it's                                                                    
     economic  or  not and  the  price  is depressed  for  a                                                                    
     while,  this   would  provide  ...  a   little  bit  of                                                                    
     certainty ... that they might  be able to go ahead with                                                                    
     development and  improve their economics  slightly. ...                                                                    
     That's the kind of issues ... we play with here.                                                                           
     This is  very difficult,  ... very  tough stuff  to do.                                                                    
     It  takes really  detailed analysis;  we don't  take it                                                                    
     lightly.   And  ... the  history  of this  is, we  have                                                                    
     denied applications under this  when we haven't seen it                                                                    
     as  appropriate or  in the  public interest,  under the                                                                    
     previous [AS 38.05.]180(j) and (p).                                                                                        
Number 2440                                                                                                                     
REPRESENTATIVE   HEINZE  offered   her  understanding   that  the                                                               
commissioner  is  bound  by  law  to  act  in  the  state's  best                                                               
interests and has the  right to set the royalty at  the time of a                                                               
lease sale.   She  asked whether the  commissioner can  reduce it                                                               
only through this bill.                                                                                                         
MR. MYERS  said that's  correct, but  there are  other conditions                                                               
under which royalty  might be reduced.  For  example, some fields                                                               
in  Cook Inlet  are  affected by  [SSHB] 198,  heard during  this                                                               
meeting;  there  are  other  mechanisms,   but  those  are  site-                                                               
specific.  With  regard to SSHB 28, he said  it truly is designed                                                               
to  be customized  royalty relief  for each  field, based  on its                                                               
individual economic criteria.                                                                                                   
REPRESENTATIVE  ROKEBERG pointed  out that  this is  statewide in                                                               
application, whereas  most of the  other bills  have specifically                                                               
targeted  a particular  basin, area,  or circumstance.   He  said                                                               
this portion of  the statute is the  central, historic, long-term                                                               
statutory  authority for  any modification,  and  that the  other                                                               
bills are additions to it.                                                                                                      
Number 2530                                                                                                                     
CHAIR  FATE surmised  that  SSHB 28  will  induce exploration  in                                                               
areas that  are marginal or  where little data has  been obtained                                                               
from previous  exploration, even though the  geology may indicate                                                               
a high  potential.   He opined  that the  ability to  recapture a                                                               
previously reduced  royalty if a field  becomes highly productive                                                               
bodes well  for this legislation.   He suggested this might  be a                                                               
good device for the Nenana basin in his own region, for example.                                                                
Number 2577                                                                                                                     
REPRESENTATIVE GUTTENBERG  asked whether  this bill  is universal                                                               
enough to cover all oil and gas situations in the state.                                                                        
REPRESENTATIVE ROKEBERG replied that he  wouldn't go so far as to                                                               
say that.  He characterized this  as the root or foundation, with                                                               
general applicability,  but offered his belief  that there should                                                               
be other, targeted types of programs.   He cited [SSHB 198] as an                                                               
example that  deals with the  actual production equipment  and is                                                               
unique  to Cook  Inlet and  its declining  production in  certain                                                               
older fields.  He indicated SSHB 28  is intended to look at older                                                               
fields, but could  have general applicability as  an incentive to                                                               
drill.  He explained that the  language passed in 1995 had become                                                               
unworkable and that the intention is to straighten that out.                                                                    
CHAIR FATE announced that he was closing public testimony.                                                                      
Number 2741                                                                                                                     
CHAIR FATE  drew attention to  Amendment 1, which  read [original                                                               
punctuation provided]:                                                                                                          
     Insert new section after (6):                                                                                              
     (7)   may,  with the  mutual consent  of the  lessee or                                                                
     lessees  making application  for the  royalty reduction                                                                
     under  (1)(B) or  (1)(C)  of  this subsection,  request                                                                
     payment for the services  of an independent contractor,                                                                
     selected  from  a  list  of  qualified  consultants  to                                                                
     evaluate    hydrocarbon     development,    production,                                                                
     transportation,  and economics  by the  commissioner to                                                                
     assist the  commissioner in evaluating  the application                                                                
     and  financial  and  technical  data;  if,  under  this                                                                
     paragraph,  the commissioner  requires payment  for the                                                                
     services of  an independent contractor, the  total cost                                                                
     of the services  that may be paid for by  the lessee or                                                                
     lessees may  not exceed $150,000 for  each application,                                                                
     and  the  commissioner  shall  determine  the  relevant                                                                
     scope of  the work to  be performed by  the contractor;                                                                
     selection  of  an  independent  contractor  under  this                                                                
     paragraph is not subject to AS 36.30;                                                                                  
REPRESENTATIVE ROKEBERG  noted that it  goes on page 5,  line 24,                                                               
and also should say "renumber accordingly".                                                                                     
Number 2821                                                                                                                     
REPRESENTATIVE GUTTENBERG moved to adopt Amendment 1.                                                                           
CHAIR FATE asked whether there was an objection.                                                                                
REPRESENTATIVE GUTTENBERG said just  for discussion purposes.  He                                                               
asked  whether anything  covers  a conflict  of  interest for  an                                                               
independent  contractor  for  this  evaluation,  who  would  most                                                               
likely  have ties  to the  industry  or considerable  contractual                                                               
relationships with such entities.                                                                                               
Number 2863                                                                                                                     
REPRESENTATIVE  ROKEBERG agreed  that  the number  of firms  with                                                               
this expertise  is limited.   He  said the issue  of who  gets to                                                               
select whom had been an  arm-wrestling match of sorts between him                                                               
and the  division for a  prior draft of  the bill, and  that he'd                                                               
deferred to  the division  "to give  them a  little more  sway in                                                               
terms  of  the  selection  of  who was  going  to  be  doing  it,                                                               
notwithstanding  the  fact  that  the applicant  still  pays  the                                                               
MR. MYERS added:                                                                                                                
     We want  to be sure  that the qualified  consultant ...                                                                    
     isn't biased.  Generally, they  work for a large number                                                                    
     of folks in the  industry because there's ... certainly                                                                    
     not  enough   government  work   up  here   to  support                                                                    
     contractors.   And  you clearly  want  a qualified  one                                                                    
     that  has  good experience  with  the  industry.   That                                                                    
     said,  ...   we've  worked  with   contractors  before;                                                                    
     they've  been   good.     We  have   a  confidentiality                                                                    
     agreement,  obviously,  with  them, and  we've  seen  a                                                                    
     pretty good professional relationship.                                                                                     
     The other  thing is,  the decision  will still  made by                                                                    
     the commissioner.  ... This isn't "we  just farmed this                                                                    
     ...  analysis   out."    We  will   ask  them  specific                                                                    
     questions, evaluate,  and maybe  ask a question  on the                                                                    
     seismic on  the upside.   It may  be a question  on the                                                                    
     cost  of   facility  construction  and   auditing,  ...                                                                    
     looking at what data:  "Take  a look; give us an expert                                                                    
     opinion  on   the  financial  data  submitted   by  the                                                                    
     So, generally, when we use  a contractor - and we never                                                                    
     have for  a royalty reduction, but  it's anticipated we                                                                    
     would  be   using  one  -  we   would  target  specific                                                                    
     questions and their specific qualifications.                                                                               
TAPE 03-37, SIDE B                                                                                                            
Number 2965                                                                                                                     
MR.  MYERS mentioned  unbiased information  and the  intention to                                                               
"trust  but verify."   He  also offered  his experience  that the                                                               
high-quality  contractors  have  been  able  to  compartmentalize                                                               
their  work "between  folks" and  are ethical.   He  concluded by                                                               
saying he thinks the system  is workable, and emphasized that the                                                               
commissioner has the  say in the selection  process, although the                                                               
applicant has a partial say as well.  He added:                                                                                 
     I  think  in most  cases  we  probably won't  hire  [an                                                                    
     independent contractor].  It's  primarily in two cases.                                                                    
     One, the workload  is so high that  we physically can't                                                                    
     ... do  the work in  a timely manner, so  the applicant                                                                    
     may ... want  to hire somebody to help us  with some of                                                                    
     the analysis.                                                                                                              
     Secondly, in  the case of  the delineated cases  ... we                                                                    
     talked about,  there is a  tremendous amount  of upside                                                                    
     work  to do  in order  to craft  something or  to fully                                                                    
     understand the  economics of the  field to the  best we                                                                    
     can with  a limited data set.   At that point,  ... you                                                                    
     can't   rely   on  production   forecasts,   production                                                                    
     history; you've  got to  look at the  "what ifs."   The                                                                    
     scenarios become  very broad ...  early in the  life of                                                                    
     the field, [for example] ...  the price of oil you have                                                                    
     to  forecast or  risk over  a  long period  of time  in                                                                    
     order  to  craft  something.     So  there  is  just  a                                                                    
     tremendous amount  of work in  the early ... life  of a                                                                    
     field.  To that case, we  would be targeting them to do                                                                    
     a  bunch  of the  modeling,  probably,  for us.    But,                                                                    
     again,  ultimately,  that  modeling would  have  to  be                                                                    
     compiled  and  looked  at  heavily  by  our  commercial                                                                    
MR. MYERS deferred to Kevin Banks for further comment.                                                                          
Number 2878                                                                                                                     
KEVIN  BANKS,  Division  of  Oil &  Gas,  Department  of  Natural                                                               
Resources,   indicated   Amendment   1    is   a   companion   to                                                               
paragraph (6), wherein if the  commissioner decides an evaluation                                                               
is needed, he/she  can require that an  independent contractor be                                                               
hired and  paid for by  the applicant, up  to $150,000.   He said                                                               
[paragraph  (7),  proposed  by  Amendment 1]  would  provide  the                                                               
option "to  have an  independent contractor  hired and,  with the                                                               
consent of  the applicant, have  the applicant contribute  to ...                                                               
paying for it."   Mr. Banks related the  experience that in-house                                                               
evaluations take a  lot of time away from regular  work, and said                                                               
he believes  the ability to  hire an independent  contractor will                                                               
"serve the process" and expedite the applicant's application.                                                                   
Number 2817                                                                                                                     
REPRESENTATIVE   KERTTULA   asked   for   verification   of   her                                                               
understanding that under previous  bill versions the commissioner                                                               
could  require  the payment,  whereas  this  would change  it  so                                                               
payment could be requested with mutual consent.                                                                                 
MR. MYERS answered:                                                                                                             
     Under the  cases where the  royalty reduction is  for a                                                                    
     field   already   in   production   and   for   shut-in                                                                    
     production, it'd  have to be  mutual agreement.   For a                                                                    
     case where  it's delineated but not  yet in production,                                                                    
     the commissioner  has the sole  discretion.   That was,                                                                    
     again, I  think, part of this  arm-wrestling match that                                                                    
     Representative Rokeberg referred to.   And we looked at                                                                    
     it  practically,  and  ...  in  these  later  cases  we                                                                    
     believe we  have sufficient  technical expertise  to do                                                                    
     the work. ...                                                                                                              
     I think there was some  concern by AOGA [Alaska Oil and                                                                    
     Gas  Association] and  some other  folks  of the  cost,                                                                    
     potentially, that  could be incurred  there.   We tried                                                                    
     to  assure them  that  we're not  likely  to have  high                                                                    
     costs  on those  types  of applications.   They  wanted                                                                    
     assurance  that they  would have  some say  ... in  the                                                                    
     application.  So  we balanced [it], to say  that "if we                                                                    
     both agree to it."  So  ... it seemed like a reasonable                                                                    
     compromise,  recognizing  that  in  cases  of  royalty-                                                                    
     reduction requests previously under  those two types of                                                                    
     royalty reduction, we have not  ... used an independent                                                                    
Number 2729                                                                                                                     
REPRESENTATIVE KERTTULA requested clarification  on the two types                                                               
of royalty reduction he'd mentioned.                                                                                            
MR. MYERS specified that the three  cases are on page 2, lines 5-                                                               
12.  The "sufficiently delineated"  case has the most uncertainty                                                               
in all aspects:  clearly, there is  a lot of work and modeling to                                                               
be done, and  no production in those fields.   The second case is                                                               
that  oil   or  gas   production  for   the  field   wouldn't  be                                                               
economically feasible:   there  has been  production for  a while                                                               
but  the economics  are  no longer  sufficient  and the  operator                                                               
wants to  "shut in."  Royalty  reduction might extend that.   The                                                               
third case is when it has already  been shut in and the desire is                                                               
to bring it back on line.    There is a lot more data involved in                                                               
those decisions.   He said it is sort of  like the discussion for                                                               
[SSHB  198], where  the  production decline  can  be tracked  and                                                               
there are  delineated reservoirs.   It  still would  be a  lot of                                                               
work, but there would be a  better data set and less uncertainty.                                                               
Thus  the department  would have  reasonable confidence  of being                                                               
able to  do it without  the independent contractor,  although the                                                               
contractor would clearly speed up the process.                                                                                  
REPRESENTATIVE ROKEBERG  noted that  (1)(A), starting on  page 1,                                                               
line 13, is  new fields; (1)(B), starting on page  2, line 13, is                                                               
existing  fields; and  (1)(C), starting  on page  2, line  18, is                                                               
shut-in  fields.     He   said  that's   why  there   are  slight                                                               
distinctions about different types of conditions.                                                                               
Number 2629                                                                                                                     
REPRESENTATIVE GUTTENBERG removed his objection.                                                                                
CHAIR  FATE  announced  that  there was  no  objection  and  that                                                               
Amendment 1 was adopted.                                                                                                        
REPRESENTATIVE  KERTTULA  referred  to  the top  of  page  5  and                                                               
expressed  concern  about  taking   out  the  sections  regarding                                                               
confidentiality   and   producing    the   information   to   the                                                               
legislature.  She  said she doesn't care  whether the legislature                                                               
approves it  or not,  but asked whether  there are  other avenues                                                               
for   legislators  to   get  this   information   if  they   sign                                                               
confidentiality agreements.                                                                                                     
MR. MYERS  deferred to Mr.  Banks, but said [the  Joint Committee                                                               
on Legislative  Budget and Audit]  has a  role in the  review, if                                                               
REPRESENTATIVE  ROKEBERG  brought attention  to  page  7, line  5                                                               
[paragraph (8)].                                                                                                                
REPRESENTATIVE KERTTULA  acknowledged that,  but said  she wanted                                                               
certainty   that  legislators,   if  they   sign  confidentiality                                                               
agreements, can somehow get access to the information.                                                                          
Number 2550                                                                                                                     
MR. BANKS referred to the  language pointed out by Representative                                                               
Rokeberg on page 7, and said  he believes there are other avenues                                                               
available,  "with a  specific  confidentiality  waiver, that  the                                                               
legislature  can see  the information  that's  been presented  to                                                               
us."   He added,  "My concern  only is that  in striking  out the                                                               
section on page  5, that there might be some  kind of legislative                                                               
intent to  erase that, but  ... I don't  know the answer  to that                                                               
REPRESENTATIVE  KERTTULA  surmised  that  it  was  Representative                                                               
Rokeberg's intention not  to wipe out the  legislature's right to                                                               
receive confidential  information, but  only to remove  the [role                                                               
of the Joint Committee on Legislative Budget and Audit].                                                                        
REPRESENTATIVE  ROKEBERG said  that's  correct.   Noting that  in                                                               
1995 it became much too cumbersome,  he referred to the review by                                                               
the  [Joint Committee  on Legislative  Budget and  Audit] and  to                                                               
page  7, line  18  [paragraph (9)].   He  said  the findings  and                                                               
[determination] still are specifically  directed by statute to be                                                               
delivered  to  the  legislature  for  review.    He  offered  his                                                               
experience,  specifically relating  to the  Northstar case,  that                                                               
whoever   chairs  that   particular  committee   can  request   a                                                               
confidential   executive   session    if   the   information   is                                                               
proprietary, if there  is a need to  go to that extent.   He said                                                               
the legislative purview is still very  much a part of this [under                                                               
Version  U],  but isn't  as  cumbersome  as  it was  before  with                                                               
respect to the governor and so forth.                                                                                           
Number 2420                                                                                                                     
REPRESENTATIVE KERTTULA emphasized that  she wants to be positive                                                               
that  the legislature  isn't giving  up  any right  of access  to                                                               
confidential  information.   She said  she knows  that isn't  the                                                               
intent, but she would double check  with Mr. Banks later and then                                                               
clear it up  with the [sponsors].  She clarified  that she had no                                                               
problem with the intent to streamline the approval system.                                                                      
REPRESENTATIVE ROKEBERG  referred to  page 7, lines  12-17, which                                                               
deleted language [in paragraph (8)] and which read:                                                                             
     [IF,  UNDER (6)(B)  OF THIS  SUBSECTION, THE  FINANCIAL                                                                    
     AND  TECHNICAL DATA  MUST BE  KEPT CONFIDENTIAL  AT THE                                                                    
     REQUEST OF  A LESSEE OR LESSEES  MAKING APPLICATION FOR                                                                    
     THE ROYALTY  MODIFICATION, THE COMMISSIONER  MAY APPEAR                                                                    
     BEFORE THE COMMITTEE IN EXECUTIVE SESSION;]                                                                                
He  said,  "I  think  that's  just  assumed.  ...  Deleting  that                                                               
particular section doesn't mean it can't be done."                                                                              
REPRESENTATIVE  KERTTULA again  acknowledged  the intention,  but                                                               
reiterated that  she would talk to  Mr. Banks and then  return to                                                               
the sponsors.                                                                                                                   
Number 2358                                                                                                                     
REPRESENTATIVE KERTTULA referred to page  4, line 15, noting that                                                               
it  removes a  line that  says  the royalty  modification is  not                                                               
assignable   [without  the   prior   written   approval  of   the                                                               
commissioner].   She  asked  whether  the bill  allows  it to  be                                                               
assignable   without   the   prior  written   approval   of   the                                                               
commissioner or not.                                                                                                            
MR. MYERS  replied that he  believes removing that  language does                                                               
do that.                                                                                                                        
REPRESENTATIVE KERTTULA asked what Mr. Myers thinks about that.                                                                 
MR. MYERS said he thinks one  of the important things is that the                                                               
commissioner  really look  at  the  issue and  the  value of  the                                                               
assignability as part  of the royalty reduction, and  that it not                                                               
be assignable if the commissioner thinks it's inappropriate.                                                                    
Number 2316                                                                                                                     
REPRESENTATIVE  ROKEBERG explained  that it  had been  removed at                                                               
his request  because he believed  it would cloud or  restrict the                                                               
alienability of any leasehold assets a company might have.                                                                      
REPRESENTATIVE  KERTTULA said  she  wasn't sure  she agreed,  but                                                               
could deal with that issue later.                                                                                               
Number 2281                                                                                                                     
REPRESENTATIVE HEINZE  moved to  report CS  for SSHB  28, Version                                                               
23-LS0177\U,  Chenoweth, 4/30/03,  as amended,  out of  committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.   There being  no objection,  CSSSHB 28(RES)  was reported                                                               
from the House Resources Standing Committee.                                                                                    

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