Legislature(2003 - 2004)

05/05/2004 09:04 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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.                                                                                                                 
                                                                                                                                

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