Legislature(2003 - 2004)

04/14/2004 01:40 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 531-CONVENTIONAL & NONCONVENTIONAL GAS LEASES                                                                              
[Also contains discussion of HB 69]                                                                                             
Number 0049                                                                                                                     
CO-CHAIR MASEK announced  that the first 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 0080                                                                                                                     
ELEANOR  WOLFE, Staff  to  Representative  Beverly Masek,  Alaska                                                               
State Legislature,  presented HB 531 on  behalf of Representative                                                               
Masek,  Co-Chair,  House   Resources  Standing  Committee,  which                                                               
sponsored HB 531, and answered questions from the members.                                                                      
Number 0100                                                                                                                     
CO-CHAIR  DAHLSTROM   moved  to  adopt  CSHB   531,  23-LS1818\U,                                                               
Chenoweth,  4/12/04, as  the working  document.   There being  no                                                               
objection, CSHB 531, version U, was before the committee.                                                                       
MS. WOLFE read the sponsor statement as follows:                                                                                
     The intent of original shallow gas leasing legislation                                                                     
       in 1995, HB 394, was to expand development of our                                                                        
     state's marketable  natural gas  resources, as  well as                                                                    
     to  promote  private-sector employment,  generate  less                                                                    
     expensive   energy  alternatives   for  rural   Alaskan                                                                    
     consumers,   and   enhance    local   tax   bases   for                                                                    
     municipalities.   Shallow gas legislation  was inspired                                                                    
     by the need to tailor  the particular economies of this                                                                    
     resource     opportunity     to    available     market                                                                    
     opportunities.   This type of  gas extraction  does not                                                                    
     conform to the same  economies of scale as conventional                                                                    
     deep-hole oil and gas drilling.                                                                                            
     Original legislation  provided for leasing on  a first-                                                                    
     come,  first-served basis  so that  development of  the                                                                    
     resource in areas away from  the energy grid could take                                                                    
     place.    With a  well-known  shortage  of natural  gas                                                                    
     development  opportunities  in  South  Central  Alaska,                                                                    
     prospects of leasing on-shore fields  in the Cook Inlet                                                                    
     Basin   became  very   attractive.     Two   unintended                                                                    
     consequences  of  this  sudden  interest  materialized.                                                                    
     One it  sparked leasing  of the  state-owned subsurface                                                                    
     mineral  estate  in  uneconomic   areas,  and  two,  it                                                                    
     encouraged leasing  in areas where  divergent interests                                                                    
     between   gas   development   and   established   local                                                                    
     residential   and   business   activities   came   into                                                                    
     Without  HB 531,  a subsequent  gas development  entity                                                                    
     could  immediately  lease   land  relinquished  by  the                                                                    
     original  lessee.    In addition,  land  not  currently                                                                    
     leased  remains  subject  to  current  over-the-counter                                                                    
     standards.   This bill  initiates a  permanent solution                                                                    
     to  these problems.   It  has been  brought forward  in                                                                    
     response to  strong citizen interest in  the Mat-Su and                                                                    
     on the Kenai Peninsula,  with input from several public                                                                    
     meetings  held at  one time  or another  by the  Alaska                                                                    
     Department of  Natural Resources (DNR), and  the Senate                                                                    
     Resources Committee.                                                                                                       
MS. WOLFE said that the highlights of the legislation are as                                                                    
     Eliminates  over-the-counter,  first-come,  first-serve                                                                    
     shallow  gas  leases  and replaces  it  with  area-wide                                                                    
     leasing or exploration licensing.                                                                                          
     Requires  a best-interest  finding before  any oil  and                                                                    
     gas leasing  or exploration licensing.   This will give                                                                    
     DNR   control  of   what  land   is  leased,   avoiding                                                                    
     unnecessary  surface-owner  conflicts.    Best-interest                                                                    
     finds are a time-tested public process.                                                                                    
     Creates  a gas-only  section of  area-wide leasing  and                                                                    
     exploration  licensing  identified in  a  best-interest                                                                    
     finding by DNR.                                                                                                            
     Differentiates  conventional  and non-conventional  gas                                                                    
     resources for the purposes of lease rentals.                                                                               
     Defines    conventional   and    non-conventional   gas                                                                    
     development,  and treats  each distinctly.   Recognizes                                                                    
     that lease rights  should not be determined  by a depth                                                                    
     criteria only.  Enhances production opportunities.                                                                         
     Encourages  exploration licenses  with a  best-interest                                                                    
     finding   as  the   method  for   non-conventional  gas                                                                    
     exploration outside  of the area-wide leasing  in rural                                                                    
     Makes   leasing  and   regulatory   criteria  fit   the                                                                    
     appropriate activity.                                                                                                      
     Ensures competitive  processes, thereby  maximizing the                                                                    
     state's interests.                                                                                                         
Number 0386                                                                                                                     
MS. WOLFE  said she would be  happy to answer any  questions, but                                                               
suggested that  technical questions be  directed to staff  of the                                                               
Division of Oil and Gas.                                                                                                        
Number 0420                                                                                                                     
REPRESENTATIVE  LYNN  asked  how  the  best-interest  finding  is                                                               
different than what is currently in place.                                                                                      
MS. WOLFE replied that no  best-interest finding currently exists                                                               
for the shallow  gas program; it is simply a  lease program.  Ms.                                                               
Wolfe  commented that  there have  been some  concerns about  the                                                               
hydro fracturing  and the  aquifers.  She  told the  members that                                                               
she retrieved a  report [Study of Potential  Impacts of Hydraulic                                                             
Fracturing of  Coal bed Methane  Wells on Underground  Sources of                                                             
Drinking Water, EPA  816-D-02-006, dated August 2002]  off of the                                                             
Internet from the Environmental  Protection Agency (EPA) that has                                                               
determined that there  is no damage to water  aquifers from hydro                                                               
fracturing.    There  were  a  number  of  complaints  that  were                                                               
investigated and it  was found that the  complaints were baseless                                                               
and there was  no need for further  investigation, she explained.                                                               
Ms. Wolfe suggested that this report may put some minds at ease.                                                                
Number 0510                                                                                                                     
REPRESENTATIVE  KERTTULA questioned  if there  was still  concern                                                               
about the  fluids used, but not  the activity itself.   She asked                                                               
if there was any distinction made on this issue.                                                                                
MS. WOLFE  clarified that  the fluids were  addressed by  the EPA                                                               
report.   She explained  that it is  maintained that  while there                                                               
are problem  fluids used in  hydro fracturing, once the  water is                                                               
pumped out  of the  well a  low pressure  area exists.   Anything                                                               
could  be  sucked  into  it  and  will not  go  out  of  it,  she                                                               
explained.    Ms. Wolfe  pointed  out  that  there have  been  no                                                               
difficulties with this in Colorado, Montana, or Wyoming.                                                                        
REPRESENTATIVE  KERTTULA commented  that she  will talk  with Ms.                                                               
Wolfe more about this issue later.                                                                                              
Number 0600                                                                                                                     
REPRESENTATIVE  GATTO said  it is  his understanding  that diesel                                                               
fuel is  being used,  which is  considered a  hazardous material.                                                               
However, when considering the volume  of water that is pumped the                                                               
amount  of  hazardous material  left  behind  would be  virtually                                                               
immeasurable.  He commented that he believes that makes sense.                                                                  
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural Resources,  testified on  HB 531 and  answered questions.                                                               
He told  the members that  it is  his understanding that  the EPA                                                               
draft report,  not final  report, found  no examples  where hydro                                                               
fracturing  had caused  problems with  the aquifers.   Mr.  Myers                                                               
commented that  he believes  the statements  that have  been made                                                               
are pretty  accurate.   While there  are a  couple of  risks, the                                                               
mechanics  of  it have  not  shown  it  to  be problematic.    He                                                               
clarified  that diesel  fuel is  not used  with coal  bed methane                                                               
Number 0790                                                                                                                     
REPRESENTATIVE GUTTENBERG asked what [is  used in] the process of                                                               
hydro fracturing.  Is it an impact hammer or drill.                                                                             
Number 0842                                                                                                                     
MR.  MYERS responded  that the  process  is usually  one where  a                                                               
liquid is pumped down under high  pressure.  He explained that it                                                               
is actually  the pressure that  drives the drives  the fracturing                                                               
of the rock.   The purpose is to fracture the coal  and make it a                                                               
more  permeable pathway  to move  the gas  out of  the coal.   In                                                               
order  to  commercially  produce  coal by  methane  a  couple  of                                                               
elements  are  necessary.    One  element is  that  coal  with  a                                                               
sufficient quantity of gas must be  present; and two, the gas has                                                               
to have a pathway to get out of  the coal, Mr. Myers said.  There                                                               
have to  be interconnected  pathways, and  hydro fracturing  is a                                                               
method  of stimulating  the  removal  of gas  from  the coal,  he                                                               
Number 0882                                                                                                                     
REPRESENTATIVE STEPOVICH  asked what  the differences are  in the                                                               
criteria for gas exploration leasing as opposed to oil leasing.                                                                 
MR.  MYERS commented  that  this  eliminates an  over-the-counter                                                               
profit  and replaces  it with  two different  processes.   One is                                                               
areawide leasing  which provides competitive processes  for lands                                                               
in a specific  area that have been approved  by the best-interest                                                               
finding.  That  is a competitive process that comes  up every ten                                                               
years.  He explained that the  advantage of that program over the                                                               
over-the-counter  shallow gas  program  is the  biggest thing  is                                                               
defining  its  self with  more  public  process and  a  different                                                               
balancing test  on where  it is  appropriate to  lease.   It also                                                               
allows DNR to  say that certain areas are beyond  limits that are                                                               
[The quality  of the recording  for the remaining  testimony from                                                               
Mr. Myers  on HB 531 is  of poor quality due  to background noise                                                               
in the room.]                                                                                                                   
MR. MYERS continued his testimony as follows:                                                                                   
     The other way  to (indisc.) licensing has  been used in                                                                    
     areas  where we  do  not use  the conventional  leasing                                                                    
     program.    That is  a  program  which recognizes  that                                                                    
     economics are  different in rural  areas Alaska  and in                                                                    
     frontier  bases  where  you   do  not  have  sufficient                                                                    
     information  to really  hold an  areawide  sale or  the                                                                    
     potential isn't  there (indisc.) ... It  is a worldwide                                                                    
     method used, it  is a variation on  a worldwide method.                                                                    
     (indisc.)  large amount  of land  it asks  for anywhere                                                                    
     between   10,000  and   500,000  acres   to  a   single                                                                    
     applicant.     Other   people   can  submit   competing                                                                    
     (indisc.)  so it  is and  can (indisc.)  in fact  it is                                                                    
     applicant driven.   Or  the state can  open an  area up                                                                    
     for it.   But it allows then for  (indisc.) process for                                                                    
     the state  to issue exclusive rights  to explore lands.                                                                    
     You  don't pay  a bonus  bid like  (indisc.) you  pay a                                                                    
     one-dollar fee per  acre.  So if you had  a 20,000 acre                                                                    
     site, say  out in  the (indisc.)  or whatever  then you                                                                    
     might  pay  $20,000 and  then  you  negotiate the  work                                                                    
     permit.  Then  you (indisc.) "X" amount  of dollars for                                                                    
     the  right  to  explore  here.     So  the  state  gets                                                                    
     (indisc.)  per acre,  the applicant  the  for that  fee                                                                    
     gets (indisc.) hold typically for  five or ten years on                                                                    
     a license  and has an  exclusive right to  explore, but                                                                    
     they  have to  spend  the money  they  committed to  on                                                                    
     exploration.   So  (indisc.)  licenses  that have  been                                                                    
     issued have  been fairly large and  have been (indisc.)                                                                    
     acre limit  and are typically then  commitment to spend                                                                    
     a few million  dollars in actual exploration  work.  If                                                                    
     the selections were  smaller, on the order  of a couple                                                                    
     of coal  bed methane leases,  we would expect  that the                                                                    
     (indisc.) would be  much smaller than that  in terms of                                                                    
     dollars.   But that guarantees  that the person  who is                                                                    
     speculating  is  actually  going  to do  some  work  or                                                                    
     partner with  someone else who  is going to do  work on                                                                    
     the  sites evaluated.   Then  after  they finish  their                                                                    
     evaluation  and  spend the  X  amount  of dollars  they                                                                    
     committed,    they   have    a    right   to    convert                                                                    
     noncompetitively to a lease.                                                                                               
Number 1128                                                                                                                     
     One of the things that  this bill does is it recognizes                                                                    
     that nonconventional gas does  not necessarily have the                                                                    
     same  economics that  conventional gas  or conventional                                                                    
     oil does.  So a lot  of the efforts are showing that it                                                                    
     is nonconventional  in nature  and that it  will result                                                                    
     in the  (indisc.) and allow  them to have  (indisc.) to                                                                    
     12.5   percent  royalty   (indisc.)  if   the  gas   is                                                                    
     noncompeting oil  and gas.   That puts  it on  the same                                                                    
     economic footing as if you  had gotten a noncompetitive                                                                    
     shallow  gas lease.   The  program recognizes  that the                                                                    
     role  after  licensing  is  better  because  it  brings                                                                    
     interest while we talk  about (indisc. paper shuffling)                                                                    
     process.   You can  include the right  to explore  in a                                                                    
     substantial  area  if  you  desire  and  then  you  can                                                                    
     convert to a lease in  very reasonable terms.  We think                                                                    
     it is  a better way  to do nonconventional  gas leasing                                                                    
     in rural Alaska.   In large part  because the applicant                                                                    
     has more  (indisc.) rights (indisc. noise  in room) and                                                                    
     then the economic terms are  actually more favorable to                                                                    
     the applicant because the (indisc.)  to occur.  So that                                                                    
     is why  really we prefer  licensing in the  rural areas                                                                    
     and then  (indisc.) agency (indisc.)  program.   I know                                                                    
     this  is   long  winded  and  hopefully   that  may  be                                                                    
REPRESENTATIVE STEPOVICH  commented that he is  worried about the                                                               
local,  generational Alaskan  being included  in the  speculative                                                               
process that major  {companies enjoy].  He said  he believes that                                                               
this bill puts the it back  where an individual would have to put                                                               
up  millions of  dollars in  improving the  land.   He asked  Mr.                                                               
Myers to comment on that.                                                                                                       
Number 1339                                                                                                                     
MR. MYERS replied that  he can respond to that.   There are a lot                                                               
of folks that are purchasing  leases in the competitive sale that                                                               
are primarily  locally driven.   They can  be very  successful in                                                               
buying leases, but  it can be very competitive so  that the state                                                               
gets the best dollar for the  value.  Typically the leases are $5                                                               
minimum bid and often the typical  fee will be between $5 and $10                                                               
per acre.  A lot of Alaskans  are very successful and have made a                                                               
lot  of money  reselling  the  leases.   A  net  profit is  still                                                               
allowed  in  this  process,  he  said.   He  explained  that  the                                                               
exploration license realistically in  a rural energy type project                                                               
what we  have seen is  the interest  has been by  the individuals                                                               
that really want  to get the energy or that  is being underfunded                                                               
by the  (indisc.) ...   For  example, the Red  Dog Mine  area the                                                               
interest in the  Healy area, the interest in  the (indisc.) area,                                                               
they are  all folks that are  doing it because they  believe they                                                               
can either make  money doing it, or they are  directly related to                                                               
(indisc.  coughing)  ...    So   I  think  it  does  provide  the                                                               
opportunity.   It doesn't  create a  great market  for resellers.                                                               
But we  do have cases where  people have picked up  a license and                                                               
the first thing they do after they  get the license is go out and                                                               
look for partners.   I have seen it both ways.   So people who do                                                               
not have  the money are  willing to buy  a license and  then find                                                               
partners who do.   I do think the program  will work successfully                                                               
and he  does think  there is  plenty of  room in  the way  we are                                                               
doing competitive  bidding ... (indisc. paper  shuffling) minimum                                                               
bid of $5 per acre that  allows for local Alaskans to be involved                                                               
in the process and there is a history of that.                                                                                  
CO-CHAIR MASEK asked why miners  would object to the provision of                                                               
this  bill.   She asked  for  Mr. Myers  to comment  on ways  the                                                               
miners can protect their interests with respect to HB 531.                                                                      
Number 1413                                                                                                                     
MR. MYERS replied  that the miners perspective they  want to make                                                               
sure they  have the first shot  at having access to  the gas that                                                               
might be  contained within  the surrounding  gas and  coal leases                                                               
(indisc. paper  shuffling and coughing)   Another divider  is the                                                               
Red  Dog mine  which is  really looked  at as  a separate  energy                                                               
source.  Two  cases, coal miners who have active  coal leases and                                                               
folks that are mining that need  local energy.  He explained that                                                               
the gas  does not belong  to (indisc.)  lease, it does  goes with                                                               
coal lease.  It  stays with the state until issued  in an oil and                                                               
gas lease,  he said.   The old  shallow leasing program  had some                                                               
exclusivity with respect  to the issuance of shallow  gases.  For                                                               
example, if you owned the coal  lease, no one else could apply or                                                               
get the  shallow gas lease.   At the same time  nothing precluded                                                               
someone from getting an exploration  license over that exact same                                                               
acreage  and they  are not  guaranteed  that they  would get  the                                                               
license unless they did  the work on it.  In  reality what we see                                                               
the person likely to get the  benefit again is the coal miner who                                                               
is actually  mining the coal  near it  (indisc.).  They  are very                                                               
concerned  about  the  conflict  there, are  better  off  with  a                                                               
license, and  better off with a  best interest finding.   That is                                                               
their  concern  that  right  now  (indisc.  paper  shuffling  and                                                               
coughing) to  get that lease.   What they do not  realize is that                                                               
at any time that right can be taken away (indisc.) ... .                                                                        
Number 1521                                                                                                                     
REPRESENTATIVE KERTTULA asked  if he was saying that  in the "old                                                               
way" if  an individual owned  the coal lease an  individual could                                                               
get the exclusive right to get the gas.                                                                                         
MR.  MYERS replied  that under  the current  shallow gas  leasing                                                               
program there  is language  that requires  that if  an individual                                                               
holds a coal  lease the state couldn't issue a  shallow gas lease                                                               
unless the  applicant was the  same individual who held  the coal                                                               
lease.  So  it gave exclusive rights to the  coal leaseholder, he                                                               
clarified.   There are  lots of  other areas  in the  state, Cook                                                               
Inlet   for  example,   where  there   are  coal   leases  making                                                               
conventional oil and gas (indisc.).                                                                                             
REPRESENTATIVE KERTTULA  said that  there was an  exclusive right                                                               
under the current program.                                                                                                      
Number 1616                                                                                                                     
MR. MYERS replied yes, but only  for the shallow gas lease.  They                                                               
do not  have exclusive rights  on an exploration license  for the                                                               
same land.   Another person could come in and  get a license over                                                               
that same  coal lease, and that  person would own all  the gas in                                                               
the lease, he explained.                                                                                                        
REPRESENTATIVE KERTTULA  asked for further clarification.   If an                                                               
individual  can  get  an  exploration license,  how  is  it  that                                                               
licensee cannot lease the gas.                                                                                                  
MR. MYERS  responded that we would  lease the gas.   He explained                                                               
that  by  creating  the  two different  programs  over  the  same                                                               
ground, a conflict situation has  been created.  Administratively                                                               
the department has (indisc.) two  licenses for shallow gas leases                                                               
when one exists on the area.   The license rights are greater and                                                               
more valuable because they address  all depths and have a greater                                                               
life  span, he  commented.    What has  been  created  is a  high                                                               
quality program  and a  low quality  program that  conflicts with                                                               
each other,  he summarized.  There  could be a shallow  gas lease                                                               
to a 3,000-foot [depth] and  an exploration license over the top,                                                               
he reiterated.                                                                                                                  
Number 1708                                                                                                                     
CO-CHAIR MASEK asked how [shallow  gas lease holders] can protect                                                               
their interests under this bill.                                                                                                
MR. MYERS replied that it can  be done in several different ways.                                                               
The easiest way  is to apply for an exploration  license.  In the                                                               
case where an  individual had existing shallow gas  leases and if                                                               
he/she is  making progress toward  development and  producing the                                                               
gas  would  allow  the  individual   to  hold  those  leases,  he                                                               
explained.     He  summarized  that  those   individuals  holding                                                               
existing leases are grandfathered in  and have those rights.  All                                                               
they  have to  do  is drill  a  well.   Nothing  will exclude  an                                                               
individual  for applying  for an  exploration  license if  he/she                                                               
holds the  lease on the  land.   He posed a  hypothetical example                                                               
where  a coal  mine  held five  or six  shallow  gas leases  now,                                                               
(indisc.) they  could apply  for a license  for the  entire area,                                                               
and  then  when  the  license is  granted  could  relinquish  the                                                               
shallow gas leases.  (indisc. paper shuffling)                                                                                  
CO-CHAIR MASEK  commented that in a  letter to the editor  it has                                                               
been stated  that leases could  be bought  back by the  state for                                                               
approximately $200,000 to $300,000.   She asked Mr. Myers if that                                                               
is a true statement.                                                                                                            
Number 1854                                                                                                                     
MR. MYERS  replied that would be  determined by how the  buy back                                                               
was structured.   If that  is the amount  of money that  was paid                                                               
for the  leases that would  be a true  statement.  The  bill also                                                               
allows  for compensation  for  the  amount of  work  done on  the                                                               
leases.   For example, in  the Matanuska-Susitna  valley millions                                                               
of dollars have  been spent.  (indisc. paper shuffling)   If that                                                               
was  not  adequate  the  state could  reclaim  the  leases  under                                                               
eminent domain which  means that just compensation  would be paid                                                               
for the lease,  he said.  There  is a series of  evaluations or a                                                               
standard methodology which is used  to determine the value of the                                                               
lease.   He summarized  that he  could not  say what  the numbers                                                               
would  be but  it could  be quite  substantial under  the eminent                                                               
domain claim.                                                                                                                   
Number 2089                                                                                                                     
MERLIN THOMPSON  testified on HB 531.   He told the  members that                                                               
he  has not  been able  to get  a copy  of the  latest CS  so his                                                               
comments  are based  upon  an older  version of  CSHB  531.   Mr.                                                               
Thompson said that he opposes  the (indisc.) of the best interest                                                               
finding  (BIF).   He  urged the  members to  add  a provision  to                                                               
repeal  the  local over  ride  provision  of  HB  69, and  add  a                                                               
provision  (indisc.) moratorium  over  the  reissuance of  leases                                                               
that  are  on  non-producing  wells.     Mr.  Thompson  told  the                                                               
committee  that he  had a  meeting  with the  AOGCC recently  and                                                               
found  that the  commission  does  not oppose  the  use of  toxic                                                               
extracting fluids.   He  commented that  he would  like to  see a                                                               
mail notice  provision and a  bill of  rights added to  the bill.                                                               
Mr. Thompson  said he supports a  buy back provision, but  is not                                                               
sure about the eminent domain provision.   There needs to be some                                                               
sort of  mechanism in the bill  which provides for the  buy back,                                                               
he reiterated.                                                                                                                  
CO-CHAIR  MASEK  asked Mr.  Thompson  if  he  is located  near  a                                                               
legislative information office (LIO).                                                                                           
MR. THOMPSON responded that he was  at the LIO earlier today, but                                                               
the offices  are under  construction and it  was not  possible to                                                               
get a room.   The new version  of HB 531 was just  coming off the                                                               
fax when he was  there, but he said he left  because he feared he                                                               
would miss the meeting.                                                                                                         
CO-CHAIR MASEK stated  that this is the first hearing  of HB 531,                                                               
and last week there was a meeting  on HB 395.  She announced that                                                               
the  two bills  will  be sent  to a  subcommittee  where all  the                                                               
changes will  be made.   Co-Chair Masek appointed members  of the                                                               
subcommittee;  Co-Chair   Dahlstrom  will  serve  as   chair  and                                                               
Representatives  Stepovich and  Kerttula  will also  serve.   The                                                               
subcommittee will  bring back new  versions of both bills  to the                                                               
committee.  There will be  adequate time for review and testimony                                                               
then, she added.                                                                                                                
Number 2273                                                                                                                     
ROBIN  McLEAN, Sutton  Community  Council, testified  on HB  531.                                                               
She asked  if she understands  correctly that  interested parties                                                               
will be able to testify in front of the subcommittee.                                                                           
CO-CHAIR  MASEK  replied   that  is  up  to  the   chair  of  the                                                               
[subcommittee].   In response  to Co-Chair  Dahlstrom's response,                                                               
Co-Chair Masek told Ms. McLean that  she would be able to testify                                                               
before the subcommittee.                                                                                                        
MS.  McLEAN reiterated  her comments  during  an earlier  meeting                                                               
[April  7, 2004]  on  HB 395.    She told  the  members that  she                                                               
believes  that the  most  important elements  to  be included  in                                                               
these bills is  the mail notification to property  owners and the                                                               
owners' bill  of rights.   She  said she is  opposed to  the best                                                               
interest  finding because  it makes  citizens who  live in  rural                                                               
areas  of the  state second-class  citizens.   Ms. McLean  shared                                                               
that she  was at a  meeting in Healy a  month ago and  found that                                                               
the  people there  are just  as concerned  about their  homes and                                                               
water wells as those who  live in Matanuska-Susitna Borough.  She                                                               
stated  that these  people  want the  same  protections as  other                                                               
citizens in the state.                                                                                                          
MS. McLEAN told the members  that she very much favors provisions                                                               
that would  repeal the (indisc.) of  HB 69 from last  year.  That                                                               
is  a very  repugnant provision  to many  people, she  commented.                                                               
She  said we  (indisc.) provisions  from Representative  Seaton's                                                               
bill, HB  364, which would  put a  moratorium on (indisc.).   She                                                               
said she supports the prohibition  of the use of toxic fracturing                                                               
fluids.    Ms.  McLean  said that  during  the  Senate  Resources                                                               
Standing Committee meeting the commissioner  [of DNR] stated that                                                               
the use of  these fluids is fine; however, she  urged the members                                                               
to amend  any bill that  allows for  the use of  toxic fracturing                                                               
fluids.   She went on  to say that she  believes the buy  back is                                                               
fair and  right.  It is  important that all people  have the same                                                               
fair treatment from the government, Ms. McLean summarized.                                                                      
ROBERT  CRANDALL,   Petroleum  Geologist,  Alaska  Oil   and  Gas                                                               
Conservation Commission  (AOGCC), answered  questions on  HB 531.                                                               
He told the committee he does  not have testimony to present, but                                                               
is available to answer questions.                                                                                               
REPRESENTATIVE KERTTULA asked if  Mr. Crandall heard the previous                                                               
testifier  say that  AOGCC stated  in  a senate  hearing that  it                                                               
would  not be  opposed  to the  restriction  of toxic  fracturing                                                               
fluids.  She asked if he would comment on that statement.                                                                       
MR. CRANDALL said AOGCC would  not agree with the term "nontoxic"                                                               
because he believes  a better term for the  restrictions would be                                                               
on "nondiesel."   He explained that  some of the components  of a                                                               
fracturing fluid  are, for example, potassium  chloride which can                                                               
be used as table salt in  certain cases.  The concentration of it                                                               
in  the fluid  could  be  considered toxic,  he  commented.   Mr.                                                               
Crandall  reiterated that  AOGCC does  not believe  toxic is  the                                                               
appropriate term.                                                                                                               
Number 2595                                                                                                                     
JEFF ARNDT, Friends of the Mat-Su,  testified on HB 531.  He told                                                               
the members  that he is  representing a group called  the Friends                                                               
of the Mat-Su which has about  350 members.  He explained that he                                                               
is handling  coal bed methane issues.   Mr. Arndt shared  that he                                                               
is in  complete agreement with Ms.  McLean and Mr. Thompson.   He                                                               
said  he believes  that  by  providing an  exclusion  zone it  is                                                               
creating this  two-tiered system to  please the citizens  in this                                                               
area, but  it is then  allowing the trashing  of the rest  of the                                                               
state.   Friends of the  Mat-Su believe  the rules should  be the                                                               
same everywhere  and that there should  be stringent regulations.                                                               
There should  be a best interest  finding no matter where  it is,                                                               
he added.                                                                                                                       
MR. ARNDT commented  that he believes Mr. Myers  testimony made a                                                               
very strong case  for the buy back provision.   He commented that                                                               
the state basically  gave the resources away at $1  per acre.  In                                                               
looking around the Southwest United  States he could not find any                                                               
lease that sold for  less than $2 per acre.   He told the members                                                               
that he does not agree with  the supposition the that state would                                                               
have to pay the price of the  value of the resources in a buyback                                                               
before  the industry  has even  stated what  they want.   If  the                                                               
buyback is for  the value of the resource, then  the state should                                                               
be taxing the industry on the value of the resource, he said.                                                                   
MR. ARNDT told  the members that he had a  talk with Tony Knowles                                                               
about this issue.  Mr. Knowles said  it is a bunch of baloney and                                                               
questioned why  the lessees  should get any  more than  they paid                                                               
for  the leases,  plus the  costs for  any activities  they have.                                                               
Right now that is practically nothing,  he added.  Mr. Arndt said                                                               
it  is waste  of time,  money, and  brainpower in  discussing how                                                               
much money the buyback will be.                                                                                                 
MR.  ARNDT commented  on toxic  fluids and  said that  it is  his                                                               
opinion that anything that would be  put in and could come out at                                                               
any time and destroy  any form of life is toxic.   This is a bad,                                                               
secretive  system.   Make the  system  as simple  as possible  by                                                               
saying  only water  can be  used, he  urged.   Mr. Arndt  said he                                                               
believes that AOGCC  does not look out for the  people of Alaska;                                                               
it is looking out for industry.                                                                                                 
CO-CHAIR MASEK  asked Mr.  Arndt to restrict  his comments  to HB
MR. ARNDT said in the future he  would like to have more than one                                                               
hour  to  review  new  versions  of bills  because  it  makes  it                                                               
difficult to address specific points.                                                                                           
CO-CHAIR MASEK  commented that there  have been many  versions of                                                               
this  critical legislation.   She  added that  the best  interest                                                               
finding is no longer in HB 531.                                                                                                 
Number 2819                                                                                                                     
MARY  BARRETT  testified  on  HB  531.   She  said  she  is  very                                                               
concerned that the state can  still override local ordinance such                                                               
as  HB 69.   If  local governments  want stricter  regulations to                                                               
protect  the  quality  of  life   of  a  particular  area,  local                                                               
governments'  wishes should  take precedence.   Ms.  Barrett said                                                               
she is  also concerned that there  is no ban on  toxic fracturing                                                               
fluids.   If it  is not  widely used in  the industry  then there                                                               
should be no  problem with ban fracturing fluids.   She commented                                                               
that  she agrees  with a  previous suggestion  offered that  just                                                               
water  should be  used  as  a fracturing  fluid.    She told  the                                                               
members that  she remembers  when the Clean  Air and  Clean Water                                                               
Acts were passed in  the 1970s.  A common thing  that was said is                                                               
"dilution is  not the solution  to pollution."  Ms.  Barrett went                                                               
on to  say that she  is still concerned  that there is  no direct                                                               
notice  being  given  to  landowners that  their  land  is  being                                                               
leased.    She  said  she  believes there  are  still  a  lot  of                                                               
landowners who are  unaware of the fact that their  land has been                                                               
leased.  It is difficult to  obtain maps of leased areas which is                                                               
another  reason  why  landowners need  direct  notification,  she                                                               
commented.   Ms. Barrett  went on  to say  that she  believes the                                                               
buyback  of coal  bed methane  (CBM) leases  are important.   Ms.                                                               
Barrett questioned  why these leases  were sold for a  dollar per                                                               
acre if there  are high potential earnings.   She also questioned                                                               
why the taxes are so low if the there is such a high value.                                                                     
Number 2908                                                                                                                     
REPRESENTATIVE GUTTENBERG asked Ms.  Barrett if she could suggest                                                               
a way to provide adequate notification.                                                                                         
MS. BARRETT responded that a certified  letter in the mail with a                                                               
map showing what areas are leased.                                                                                              
Number 2936                                                                                                                     
MIKE McCARTHY, Kachemak Bay  Property Owner's Alliance, testified                                                               
on HB  531.   He told  the members that  he represents  more than                                                               
1,000 members of the Kachemak  Bay Property Owner's Alliance.  He                                                               
shared that he is a Homer resident and a retired geologist.                                                                     
TAPE 04-20, SIDE B                                                                                                            
MR. McCARTHY  told the members  that Jack  Chenoweth, Legislative                                                               
Legal and Research Services, testified  that there was nothing in                                                               
the ten  points of the bill  of rights that could  not be amended                                                               
in the lawful language and placed  in statute form this year.  He                                                               
read a  portion of a letter  that was written by  a local realtor                                                               
as follows:                                                                                                                     
     I  am   writing  this  letter  to   express  my  recent                                                                    
     professional  experience  in  regard to  the  coal  bed                                                                    
     methane lease issue.   Because of the  leases that were                                                                    
     activated  without proper  public notice  or input  and                                                                    
     the ensuing controversy the markets  for raw land in my                                                                    
     opinion  have  been  compromised.   I  have  personally                                                                    
     experienced a solid buyer, that  is an investor who has                                                                    
     purchased property through me  in the past, who decided                                                                    
     to  forget several  purchases when  he  found out  they                                                                    
     were in  an area where  the subsurface rights  had been                                                                    
     leased.   I  also have  clients who  purchased property                                                                    
     through  me last  summer, call  me,  and express  grave                                                                    
     concern and alarm because they  had just found out that                                                                    
     property  that they  had purchased  off East  (indisc.)                                                                    
     Road  was part  of  the lease.    They had  anticipated                                                                    
     moving their young  family to this property  to enjoy a                                                                    
     quiet  rural   lifestyle  not  available  to   them  in                                                                    
     southern  Massachusetts.     They  are  now  discussing                                                                    
     changing  their  plans   and  selling  their  property.                                                                    
     However, the  threat now  of not  being able  to resell                                                                    
     and recoup  their losses is  very real, since  more and                                                                    
     more  buyers   are  refusing  to   purchase  properties                                                                    
     affected by  these leases.   In my  opinion this  was a                                                                    
     very  ill advised  decision made  within  the state  of                                                                    
     Alaska bureaucracy  and it  is impacting  me personally                                                                    
     and my ability to do  business as well as impacting the                                                                    
     property  values  and the  ability  of  owners to  sell                                                                    
     their property.                                                                                                            
Number 2882                                                                                                                     
MR. McCARTHY commented that he would skip a few paragraphs in                                                                   
the letter and continued to read the letter as follows:                                                                         
     The Homer  leases have impacted  owners in  32 separate                                                                    
     states who  were never  notified by  the state,  but in                                                                    
     turn  were  notified  by   the  Kachemak  Bay  Property                                                                    
     Owner's  Alliance at  our own  expense and  time.   The                                                                    
     accessed value  of these  1,029 properties  amounted to                                                                    
     $66,432,700,  and  for  that the  state  received,  for                                                                    
     22,000 acres,  a total of  $28,000.  That seems  like a                                                                    
     very  poor  cost  benefit  ratio  especially  when  you                                                                    
     consider  that director  Mark Myers  testified earlier,                                                                    
     last month  I believe,  that approximately half  of all                                                                    
     royalty  would be  used to  administer CBM  development                                                                    
     and at  present there  are not sufficient  personnel on                                                                    
     staff to  do that job.   This again does not  take into                                                                    
     account  the  property  values that  would  impact  the                                                                    
     borough  property tax  intake  which  would be  several                                                                    
     million dollars.  Again, a  far larger amount than what                                                                    
     it's going  to generate  in terms of  royalty.   We are                                                                    
     not   unrealistic  in   our   concern  for   improperly                                                                    
     regulated   CBM   development.     We   have   obtained                                                                    
     resolutions  from  the  City of  Homer  dated  12/1/03,                                                                    
     resolution   03-0147,  and   another  resolution   from                                                                    
     Kachemak City, resolution number 2003-1280.                                                                                
Number 2799                                                                                                                     
CO-CHAIR MASEK interrupted Mr. McCarthy and explained that there                                                                
are others who wish to testify.  She asked if he would submit                                                                   
any written testimony to the committee.                                                                                         
MR. McCARTHY continued:                                                                                                         
     Kachemak City  passed a similar resolution,  as did the                                                                    
     Kenai Peninsula Borough,  which is extremely impressive                                                                    
     if you  consider the  percent of  tax base,  et cetera,                                                                    
     that the  Kenai Peninsula  Borough has involved  in oil                                                                    
     and gas.   They passed that on 12/16/03.   A resolution                                                                    
     to place a moratorium on  CBM development and also call                                                                    
     attention  to improper  public notice  by which  it was                                                                    
MR. McCARTHY  said he would like  to end his testimony  by saying                                                               
he believes  there needs to be  a moratorium on coal  bed methane                                                               
development  in  the state  until  regulations  are in  place  to                                                               
properly proceed.                                                                                                               
Number 2728                                                                                                                     
KEN BOYD,  Chairman, Lands Exploration and  Operations Committee,                                                               
Alaska Oil  and Gas Association  (AOGA), testified on HB  531 and                                                               
answered questions  from the members.   He told the  members that                                                               
AOGA is a  private non-profit trade organization  whose 19 member                                                               
companies represent  the majority of  the oil and  gas operations                                                               
in the state.  He commented that  he just got a copy of version U                                                               
of  the bill  a little  earlier this  afternoon and  prefaced his                                                               
comments  by saying  that  AOGA is  very much  in  favor of  this                                                               
MR. BOYD told the members that  he has a problem with language on                                                               
page 40, line[s] 8 [and 9], which reads as follows:                                                                             
     (3)  for a  nonconventional  gas lease,  if  a bond  is                                                                    
     sought under AS 38.05.130, ...                                                                                             
MR. BOYD  explained that this  language was largely  removed from                                                               
version  S  of the  bill,  but  seems  to  have reappeared.    He                                                               
commented  that there  has to  be a  bond before  a lease  can be                                                               
issued.   Mr. Boyd referred to  page 40, line [10  and] 11, which                                                               
reads as follows:                                                                                                               
     (A) before the  amount of the surety bond  to be posted                                                                    
     is determined by the director,  require, as a condition                                                                    
     for issuing the lease, ...                                                                                                 
MR. BOYD  pointed to additional  language on page 40,  lines [17]                                                               
through 19 as follows:                                                                                                          
     (B)  in addition  to the  coverage  for actual  damages                                                                    
     required  by  that  section,  provide  for  payment  of                                                                    
     reasonable compensation  to the  owner for any  loss by                                                                    
     the  owner of  the  owner's use  and  enjoyment of  the                                                                    
MR.  BOYD  told the  committee  that  terms such  as  "reasonable                                                               
compensation" and  "use and enjoyment"  are undefined terms.   He                                                               
said that  other than these  sections AOGA can support  the bill.                                                               
Mr. Boyd  stated that AOGA  is on  record as supporting  the best                                                               
interest  finding  for  oil  and   gas  leasing  and  exploration                                                               
licensing  which is  contained in  HB 531.   Alaska  Oil and  Gas                                                               
Association believes  there are  adequate safeguards  for shallow                                                               
gas leasing under  existing law, but also believes  that a higher                                                               
level of public policy is  achieved by adopting the best interest                                                               
finding approach.   A best  interest finding  is used in  all oil                                                               
and gas  programs in Alaska and  works well for both  the members                                                               
of the  public and  the private companies  that are  investing in                                                               
Alaska, he stated.  The  best interest finding process allows the                                                               
state  to incorporate  all  public input  into  a single  legally                                                               
defensible  document   that  will  address  all   concerns  in  a                                                               
comprehensive manner, Mr. Boyd summarized.   The existing shallow                                                               
gas-leasing program was crafted  with bipartisan support during a                                                               
democratic  administration.   This  support  was justified  since                                                               
this program  has the potential  to provide new sources  of clean                                                               
efficient energy to  the state as well as provide  jobs and taxes                                                               
for local  economies, he  said.   He told  the members  that AOGA                                                               
hopes that  further discussion of  these issue will  facilitate a                                                               
better  understanding of  the  environmental  and property  right                                                               
protections  already in  place and  the  historical successes  in                                                               
state  development.   Mr.  Boyd said  the  Department of  Natural                                                               
Resources  has  conducted  extensive  workshops  and  discussions                                                               
related to  CBM shallow gas development  in the Matanuska-Susitna                                                               
Number 2567                                                                                                                     
CO-CHAIR MASEK  welcomed Marilyn Crockett  who is present  in the                                                               
audience listening to testimony.                                                                                                
CO-CHAIR  MASEK reiterated  that HB  531  will be  assigned to  a                                                               
subcommittee.   That ends  public testimony on  the bill  for the                                                               
day, she said.                                                                                                                  
REPRESENTATIVE KERTTULA stated  for the record that  she may have                                                               
a conflict of interest in HB  531 because her family owns land in                                                               
the  Matanuska-Susitna valley.    She said  it  appears that  one                                                               
piece of land is in a leased area.                                                                                              

Document Name Date/Time Subjects