Legislature(2003 - 2004)
05/05/2004 09:04 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE CS FOR CS FOR HOUSE BILL NO. 531(RES) "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." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, offered by the House Resources Committee, "[is] having to do with conventional and nonconventional gas leases." MARK MEYERS, Director, Division of Oil and Gas, Department of Natural Resources, testified that this bill focuses on the issues of shallow gas leasing and the regulatory framework for the production of coal bed methane. ELEANOR WOLF, staff to Representative Beverly Masek, referred to the sponsor statement titled "S CS CS HB 531 (RES) - Conventional/Non-Conventional Gas Leases" [copy on file.] She informed that she was available for questions. Mr. Meyers explained that this bill repeals the existing over-the- counter shallow gas-leasing program, and replaces it with the current exploration licensing and conventional competitive leasing programs. The competitive leasing program would require a best interest finding, essentially an environmental impact statement, and would necessitate extensive public notices and consideration of public input and the public interest. These requirements would be met prior to handling the lease sale and issuing the license. He continued to testify the following. In addition, this bill also includes some additional ground water protection regulation involving the activity of producing nonconventional gas, particularly coal bed methane. It requires the AOGCC (Alaska Oil and Gas Conservation Commission) to regulate hydraulic fracturing, disposal wastes, the reinjection of produced waters, and prohibits the protection of gas from aquifers that serve as a source of water for human consumption or agricultural purposes unless it can be demonstrated that it won't adversely affect the aquifer. These groundwater protections are very significant and they are one of the areas of contention in the lower 48 [states] with coal bed methane production. There are some major protections here in this section. The bill also limits the discretion of the DNR (Department of Natural Resources) Commissioner to existing shallow gas leases. It specifies the terms under which that discretion can be used. It gives the Commissioner the discretion to issue either oil and gas or a gas only lease. And the gas only lease, if it can be demonstrated by the lessee that it is nonconventional gas only, can get more favorable lease terms: the rentals is one dollar per acre, and if that gas does not compete with other gas on the market it can be 6.25-percent. So it contains those favorable terms that were in the shallow gas leasing for oil energy fundamentally. It [this bill] repeals the provisions of HB 69, which allowed the Commissioner to override local zoning authority. It gives a one-time opportunity for pending lease applications. Under the programs we have about 200,000 acres or so of pending lease applications. It takes those applications and gives the applicant a one-time chance to convert those to a non- competitive exploration license with a best interest finding in front of it. And I think that is important again; there is a lot of concern over those pending applications. We believe that we can do that expediently, and to that is the DNR fiscal note is so that we can simultaneously run at least three best interest findings in addition to the ones we are doing in the Bristol Bay area to be able to get those licenses out as quickly as possible. The bill also requires the Department of Natural Resources Commissioner to establish set backs and noise mitigation measures for compressor stations. It also requires the operator to acquire base line water test data prior to production or production testing. Again, one of the issues is that once you have that baseline data then you will be able to know whether there is any affect. We think with these oil protectionists it is highly unlikely the water system will be affected, but AOGCC will have the authority to require that base line testing. In fact, [AOGCC] will be required to have that testing before they [the lessees] drill the production wells [a requirement which is] again dealing with one of the major concerns we have seen with coal bed methane. Finally [this bill] specifies the bonding requirements for the gas only leases. So, Mr. Chairman, this bill covers both the future leasing for coal bed methane and nonconventional gas. I think it provides a good framework for leasing in rural Alaska as well. And it puts the best interest finding process back in front of the leasing, and then it provides this overall regulatory framework, which again has been a desire of the folks, the concern of the folks out in the Mat-Su valley, and the Homer area and other areas. And I think it does it in a way that balances the interests of the industry and interests of the State in seeing a production occur. And [this bill] provides that additional level of environmental protection that the public wants. So I think it is a well-balanced bill that does a lot of different things. Co-Chair Wilken asked if this bill would effectively lift the moratorium currently in place. Mr. Meyers replied that the Department of Natural Resources is awaiting the final stages of the public process in the Mat-Su valley. Five public meetings have been held, and the recommendations have been gathered. The Department is accepting public comments on the draft finding guidelines and proposed regulations until May 21, 2004. The moratorium would lift after the public process is completed. The moratorium affects production drilling in the Mat-Su valley; however, the drilling of core holes and other evaluation work is not affected and has been able to continue. This bill would effectively lift the moratorium on the pending leases because those leases would not be issued. Instead, the pending leases could be converted to a license. Co-Chair Green referenced an earlier discussion with Mr. Meyers, and certain concerns he expressed regarding State-owned land. She referenced information prepared by the Department asking if the statement "own any State leases" refers to Mr. Meyer's earlier concerns. Mr. Meyers responded that the two subjects are related. The program is confusing in that the regulatory environment is regulated by the type of lease rather than by activity. In the Mat-Su valley there are areas with conventional state leases, shallow gas leases, Mental Health Trust leases, private leases, and potentially federal leases. Regulating only certain leases and not others does not promote the creation of a cohesive regulatory environment. The various leases are under the authority of different agencies such as the Alaska Oil and Gas Conservation Commission and the Department of Environmental Conservation, which do have the wide authority to affect all of the leases. The attempt is being made to use a scientifically based pattern rather than a leasing based pattern in establishing a cohesive regulatory framework. Senator Bunde noted this bill repeals the provision that allowed the Commissioner of the Department of Natural Resources to overrule the authority of local zoning ordinances. He assumed that the original provision was adopted in HB 69 "for good reason". He asked if local zoning ordinances would be able to overrule the State's access to subsurface rights. Mr. Meyers responded that the repeal is very relevant to the Mat-Su Borough, and potentially to the Kenai Peninsula Borough. The Department supports the State's standards. Technical guidance would be provided to the boroughs as they established standards. The Department is optimistic that a set of standards would be produced that would be acceptable to both the State and to municipal governments. The State maintains the constitutional right to produce resources, and, as a result, if the local zoning ordinances are unreasonable, the State's authority ultimately supersedes the authority of the municipalities and boroughs. HB 69 would not change the balance between the State and the municipalities, but would shift the constitutional authority of the State to the Commissioner of the Department of Natural Resources. The State has proven successful in working alongside municipalities such as the North Slope and Kenai Boroughs. In certain situations, local zoning ordinances are appropriate to regulate activities such as the placement of facilities. Senator Bunde informed that it is unlawful to hinder a property owner from accessing their property. SFC 04 # 108, Side B 05:23 PM Senator Bunde asked if a borough were to exclude its territory from commercial gas development, whether the State would be able to gain access to the land through a court ruling. Mr. Meyers affirmed. AT EASE 5:24 PM / 5:25 PM Amendment #1: This amendment deletes the language of AS 38.05.180(ff)(3) in Section 41 on page 40, lines 6 - 12 of the committee substitute. The deleted language reads as follows. (3) for a nonconventional gas lease, if a bond is sought under AS 38.05.130, before the amount of the surety bond to be posted is determined by the director, require, as a condition for issuing the lease, that the director, after notice and an opportunity to be heard, determine that, to exercise rights under the reservation as set out in AS 38.05.125 and the lease, the lessee has no other reasonable means of entry than access and entry upon the land of the owner; the lessee has the burden of demonstrating compliance with the requirement of this paragraph; This amendment also amends the language in subsection (gg) following line 17 and inserts new language to read as follows. No language in this subsection is deleted. (gg) For an activity or operation related to the extraction of coal bed methane, (1) for which the department by regulation requires submission and approval of a plan of operations before activities or operations may be undertaken, the director shall, as a condition for determining a bond requested under AS 38.05.130, after notice and an opportunity to be heard, review the plan of operations to determine if use of the owner's land is reasonable necessary to extract the coal bed methane; a bond determined under AS 38.05.130 and this paragraph may, at the discretion of the director, be imposed against a statewide bond that has been posted by the person initiating the request for determination of the bond if the statewide bond remains in effect, and an additional bond is not required; (2) Co-Chair Green moved for adoption. Co-Chair Wilken objected for an explanation. Co-Chair Green deferred to Mr. Meyers. Mr. Meyers explained that this technical amendment relates to bonding authority and is necessary because the original language was included in the wrong section of the original version of the bill. The intent is that the bonding language generally applies to leases, whereas the original language only applied the bonding provisions specifically to a nonconventional lease. Co-Chair Wilken removed his objection and the amendment was ADOPTED. Senator Bunde asked the cost of the implementation of this legislation to the State in future revenues. Mr. Meyers responded that this legislation would improve future revenues in the long term. The over-the-counter shallow gas leases were not significantly valuable nor desirable in the terms of actual production, considering the limited depth of drilling, the three-year lifespan of the lease, and the lack of a best interest finding and balancing test, all of which resulted in speculation. Leases were purchased in areas not ideal for oil and gas development. More money was spent administering the leases than was earned in value for them. Legitimate applicants faced public opposition because public input was hindered through the over-the- counter lease process. In areas where competitive leasing sales would occur under this legislation, competitive bidding would bring in more revenue than the current over-the-counter fee. Both the State and the lessees would receive more net profit under this legislation. The implementation would require increased expenditures in the short term to accelerate the required findings, but the benefits of an up-front public process would prove valuable in the long term. Senator Olson asked the type of protection the State would receive in the event that a lease buy back was required. Mr. Meyers answered that if the buy back is based on the amount spent for exploration, the buy back cost is correspondingly large. However, if the eminent domain status is used to purchase the lease, the cost is based on just compensation, which consists of a projected value of the potential resource. Buy back would be very expensive, in certain cases tens of millions of dollars or more. Senator Olson restated his earlier question. Mr. Meyers answered that this bill does not contain buyback provisions. The competitive lease program would ensure that the public has greater acceptance of the development projects, and if the public were content, the State would not need to buy back leases. Senator Olson commented that he is in support of tax credits and other incentives to encourage shallow gas development in rural areas where energy is expensive. He would pursue such a proposal during the next legislative session. Co-Chair Green offered a motion to report SCS CS HB 531 (RES) as amended from Committee with individual recommendations and accompanying fiscal notes. There was no objection and SCS CS HB 531 (FIN) MOVED from Committee with fiscal note #1 for $252,600 from the Department of Natural Resources and fiscal note #3 for $20,000 from the Department of Administration.