Legislature(2003 - 2004)

05/04/2004 03:42 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
      CSSSHB 364(O&G)-NATURAL GAS LEASES NEAR KACHEMAK BAY                                                                  
CHAIR GARY STEVENS announced the  first order of business to come                                                               
before the committee to be CSSSHB 364(O&G).                                                                                     
REPRESENTATIVE PAUL  SEATON, sponsor, explained that  the bill is                                                               
designed to contain  the shallow natural gas leases  in the Homer                                                               
area to  their original three  year term and places  a moratorium                                                               
on reissue  of those leases.  It does  not in any  way compromise                                                               
future leases for conventional gas in the Homer area.                                                                           
To understand why this bill is  necessary, a brief history of the                                                               
shallow natural gas  leases is in order, he said.  He referred to                                                               
maps of the area and explained the following:                                                                                   
     In  1976 the  State  of Alaska  bought  back leases  in                                                                    
     Katchemak Bay and the uplands  of this area. Now, there                                                                    
     were no  wells in these  uplands, but the area  that is                                                                    
     described in  this bill is  the upland areas  that were                                                                    
     in the original buyback in 1976.                                                                                           
     In  1996 the  State  of Alaska  came  forward with  the                                                                    
     shallow  natural  gas program  which  was  an over  the                                                                    
     counter sale,  not a competitive bid.  The main benefit                                                                    
     of the  program is  that the leases  are cheap  and the                                                                    
     incentive was to allow rural  areas to have an easy way                                                                    
     to  get  gas  with  small  rigs -  that  could  be  not                                                                    
     requiring the big deep rigs  for conventional gas - and                                                                    
     make it cheap for rural areas to develop energy.                                                                           
     In  1999 the  State  of Alaska  formed  the Cook  Inlet                                                                    
     Area-wide  Lease  Sale   Program  and  it  specifically                                                                    
     excluded  this area,  this lower  portion  of the  Cook                                                                    
     Inlet  Basin from  that area-wide  lease sale  program.                                                                    
     And ironically  it's this exclusion of  the Homer bench                                                                    
     area  from  the area-wide  lease  sale,  which made  it                                                                    
     vulnerable  or available  for the  shallow natural  gas                                                                    
     In June of  2003 leases were granted  to Lapp Resources                                                                    
     who had  applied for those.  And it's  interesting when                                                                    
     you   look  at   those  leases   -  again,   they  were                                                                    
     noncompetitive leases,  just over  the counter.  It was                                                                    
     only  $500 per  nine square  miles. There  was no  best                                                                    
     interest finding required. And  a best interest finding                                                                    
     of course is  where you have a balancing  act where you                                                                    
     have comments and the state balances.                                                                                      
     In the  1996 shallow  natural gas lease  program, there                                                                    
     was  a general  finding that  said, "It's  in the  best                                                                    
     interest of the state  to develop shallow natural gas."                                                                    
     Period,  wherever  it was  -    so that  precluded  the                                                                    
     necessity  for  an  individual specific  best  interest                                                                    
     finding,  which  is  what  has led  to  most  of  these                                                                    
     There  was effectively  no  notification  of the  local                                                                    
     area  that these  leases  were going  to  be issued  or                                                                    
     applications  because we  have  two  newspapers in  the                                                                    
     Homer area.  The Homer Tribune  and the Homer  News and                                                                    
     it  was published  in  neither of  those.  There was  a                                                                    
     publication in  the Peninsula Clarion, which  is on the                                                                    
     north end  of the Kenai  Peninsula and is read  by very                                                                    
     few people on the southern Kenai.                                                                                          
     The way  this works  is that  the criteria  for issuing                                                                    
     the leases  are if the Department  of Natural Resources                                                                    
     can see any benefit to gas  to the local areas then the                                                                    
     leases have  to be  issued. So  comments that  could be                                                                    
     received  couldn't  be  considered anyway.  And  that's                                                                    
     another fault  of the program  because if  people bring                                                                    
     up positives  and negatives, none of  the negatives can                                                                    
     be  weighed  in  whether  they're going  to  issue  the                                                                    
     leases for  the shallow natural gas  program. It's only                                                                    
     if there is  any benefit to gas to the  local area then                                                                    
     the  leases would  have  to be  issued.  And they  were                                                                    
     issued at  the time and  there were not then  and there                                                                    
     still are  no operational regulations in  place for how                                                                    
     the shallow natural  gas wells have to  be - procedures                                                                    
     have to be conducted.                                                                                                      
     The goal  of this  sponsor substitute  is to  allow the                                                                    
     current leases in the Homer  area not to be extended or                                                                    
     reissued and to  exclude the lands of  the Homer bench,                                                                    
     which  is shown  up here  - a  highly populated  area -                                                                    
     from  future  leasing  under the  shallow  natural  gas                                                                    
     program, which  again is the non-competitive,  over the                                                                    
     counter lease program.                                                                                                     
     But again,  this bill  in no way  keeps the  state from                                                                    
     forming a new area-wide  lease sale, expanding the Cook                                                                    
     Inlet area area-wide  lease sale or issuing  oil or gas                                                                    
     leases for  this area. It  is only a moratorium  on the                                                                    
     issuance or re-issuance of shallow natural gas leases.                                                                     
     The sectional  analysis of the  bill is that  the first                                                                    
     section just  excludes the area  of Katchemak  Bay from                                                                    
     leasing under the shallow natural gas program.                                                                             
     Section 2  is the  main guts  of the  bill and  what it                                                                    
     does,   it  lays   out   discretionary  provisions   or                                                                    
     conditions  so that  the director  of Oil  and Gas  has                                                                    
     criteria under which to reissue leases.                                                                                    
     Now  the  Division  of  Oil   and  Gas  supports  these                                                                    
     recommendations.  Currently  what  would happen  is  if                                                                    
     their three  year lease runs  out, it almost has  to be                                                                    
     an automatic  extension because if the  director of Oil                                                                    
     and  Gas  doesn't  extend  the  leases,  the  State  is                                                                    
     exposed   to  a   takings  claim   for  arbitrary   and                                                                    
     capricious  decisions by  the director  of Oil  and Gas                                                                    
     because the Legislature has not  set out the conditions                                                                    
     under which  they should be  reissued, extended  or not                                                                    
     Section 3  of the  bill modifies or  amends the  law to                                                                    
     prohibit  the   issuance  or  re-issuance   of  shallow                                                                    
     natural gas  leases before the  date and if  the leases                                                                    
     terminate.  In other  words, if  somebody goes  through                                                                    
     here and does not perform  on the leases, does not have                                                                    
     paying  quantities of  gas, has  no plan  in place  for                                                                    
     investing  in the  leases, then  this  would mean  that                                                                    
     those would  terminate and would not  be re-issued. And                                                                    
     it  also covers  a  breach of  contract  in which  they                                                                    
     would be  let -they would  revert to the state  or they                                                                    
     would be canceled and not re-issued.                                                                                       
     Section 4 is just the immediate effective date.                                                                            
     I would like  to note one other thing and  that is this                                                                    
     has a  zero fiscal  note. It requires  no buy  back. It                                                                    
     requires  no purchase.  It does  have an  indeterminate                                                                    
     note on  the potential loss  of revenue, but  there are                                                                    
     two things  to consider. One  is that as long  as these                                                                    
     shallow  natural gas  leases  are in  place, the  State                                                                    
     cannot go in  and do an oil and gas  lease. And there's                                                                    
     good  potential  for  conventional gas  in  this  area.                                                                    
     However,  you have  what is  called correlative  rights                                                                    
     problems.  Because   under  the  shallow   natural  gas                                                                    
     program you  can drill  down to 3,000  feet and  if you                                                                    
     can geologically  demonstrate that you found  gas above                                                                    
     3,000 feet and that same  structure goes down to lower,                                                                    
     deeper reservoirs, you  can follow that gas  on down to                                                                    
     the  lower  deeper  reservoirs.  However  if  it's  not                                                                    
     contiguous or continuous with the  upper gas, then that                                                                    
     lower  gas is  trapped and  you cannot  access it.  And                                                                    
     that's  where the  value  is to  the  State. Now  these                                                                    
     would  probably be  thought of  as highly  sought after                                                                    
     leases in a competitive  bid situation because the area                                                                    
     just north  of this area is  a high gas area.  In fact,                                                                    
     [pointing  to  a map]  these  cross  hatches are  state                                                                    
     leases  that   are  in  here.   All  this   other  area                                                                    
     interspersed are  subsurface rights  that are  owned by                                                                    
     private    individuals.    They   were    pre-statehood                                                                    
     homesteads so  those rights are privately  owned. {Blue                                                                    
     portions  on  the  map] These  blue  sections  are  all                                                                    
     privately  owned subsurface.  These cross  hatches here                                                                    
     some are under the school  and the hospital. Up here is                                                                    
     the  area,  which  is  the  watershed  for  the  city's                                                                    
     reservoir. North of  this line, right up  here, this is                                                                    
     the  North  Star  Field,  which   is  just  going  into                                                                    
     production  now.  There's  a   contract  to  bring  the                                                                    
     pipeline  over to  service Homer.  There's  oil or  gas                                                                    
     drilling out here. Unocal has  just gone to unitization                                                                    
     up here.  So this area is  in the Cook Inlet  Basin gas                                                                    
     field,  but  having  this  area  leased  under  shallow                                                                    
     natural gas -  the department has said  that they would                                                                    
     never  - as  long as  there's just  3,000 foot  leases,                                                                    
     they would never consider doing  an all gas lease a gas                                                                    
     and  oil   lease  below  that  because   of  the  legal                                                                    
     complications it would entail.                                                                                             
     So the other thing about the  fiscal note is that it is                                                                    
     indeterminate however,  as you'll notice in  Section 2,                                                                    
     the conditions  of non-extension  of the lease  is that                                                                    
     the   department   has   determined   that   there   is                                                                    
     practically no  chance that  extending the  leases will                                                                    
     lead to  gas production. So basically  there's not much                                                                    
     indeterminate  because to  not extend  the leases  they                                                                    
     have  to make  the determination  that extending  them,                                                                    
     there won't be any drilling  - or any production. We're                                                                    
     not losing any  royalties at all if we're  not going to                                                                    
     produce gas on them.                                                                                                       
REPRESENTATIVE  SEATON  noted  there   were  resolutions  in  the                                                               
packets  from  Kachemak  City, Homer,  and  the  Kenai  Peninsula                                                               
Borough. All are in favor of the bill.                                                                                          
CHAIR GARY  STEVENS asked when  the leases were awarded  and when                                                               
they are up.                                                                                                                    
REPRESENTATIVE  SEATON said  that under  the shallow  natural gas                                                               
program, the  leases have a three  year duration and they  may be                                                               
extended for an  additional three years. The leases  in the Homer                                                               
area were issued  in June 2003 so there are  about two years left                                                               
on the leases.  Currently there is no application  for a drilling                                                               
permit  and  no  publicly  issued plans  for  going  forward  and                                                               
drilling. Lapp Resources has made  an agreement giving Unocal the                                                               
right to be  a producer if they  want to explore six  of the nine                                                               
square mile leases.                                                                                                             
Either conventional gas  or coal bed methane  could be developed.                                                               
The latter is  gas taken from a  coal seam, but there's  a lot of                                                               
water   produced  with   this   method  and   dealing  with   the                                                               
contaminated water  is problematic. Unocal isn't  in the business                                                               
of doing coal bed methane; they tried  it in the past and got out                                                               
of the  business. They were  looking at the possibility  of doing                                                               
conventional  gas -  being able  to find  some of  that that  was                                                               
above the  3,000 foot  and they could  show geologically  that it                                                               
went to six or eight  thousand feet and develop that conventional                                                               
gas using  the shallow  gas program. That  was never  intended by                                                               
the  authors  of the  shallow  natural  gas  program and  so  our                                                               
indications are that Unocal is not  planning on trying to do deep                                                               
conventional  gas  under the  shallow  natural  gas program,  but                                                               
there  is no  assurance  of  that. That's  part  of the  problem;                                                               
people  don't know  what will  happen  in their  front yard  next                                                               
week, he  said. This  bill would remove  that uncertainty  in two                                                               
more years.                                                                                                                     
SENATOR COWDERY  asked whether  the blue area  on the  map showed                                                               
homestead land with  subsurface rights and whether  anyone in the                                                               
private sector had leased their land.                                                                                           
REPRESENTATIVE SEATON clarified that  the blue areas were private                                                               
and the crosshatch  blue had subsurface rights, and  there was no                                                               
record of  any private sector  lease. In  fact there has  been no                                                               
exploration  or seismic  work in  this area  specific to  shallow                                                               
natural gas.                                                                                                                    
SENATOR COWDERY asked whether natural  gas is used for heating in                                                               
that area.                                                                                                                      
REPRESENTATIVE SEATON  told him  oil is used  for the  most part,                                                               
but  there is  an established  gas  field at  the North-fork  and                                                               
there  are plans  for another  well. Once  that is  accomplished,                                                               
there  is an  agreement to  put a  pipeline in  to Anchor  Point,                                                               
which would  ultimately supply the  Kenai Peninsula  with natural                                                               
SENATOR COWDERY asked how many companies have bid on the leases.                                                                
REPRESENTATIVE  SEATON  advised  there  was  no  bidding  process                                                               
because the  leases were over-the-counter sales,  which are first                                                               
come first served.                                                                                                              
SENATOR COWDERY asked how many sales were involved.                                                                             
REPRESENTATIVE  SEATON  said Lapp  Resources  put  $500 down  and                                                               
bought eight  tracts each  of which is  nine square  miles. About                                                               
half of the  area is state subsurface rights and  half is private                                                               
subsurface rights.                                                                                                              
CHAIR GARY STEVENS clarified for  the record that the amount paid                                                               
for the leases was just a few thousand dollars.                                                                                 
REPRESENTATIVE SEATON agreed.                                                                                                   
SENATOR COWDERY  asked whether there  was any investment  to date                                                               
in the leases.                                                                                                                  
REPRESENTATIVE  SEATON  said,  "There   has  been  absolutely  no                                                               
investment made in the leases." He  added that Dave Lappi of Lapp                                                               
Resources has  participated in  discussions regarding  this issue                                                               
but they haven't  invested money. They have,  however, worked out                                                               
an agreement with Unocal for six of the leases.                                                                                 
CHAIR  GARY  STEVENS  remarked  that  consistent  throughout  the                                                               
discussions  is  the  point that  the  notification  process  was                                                               
inadequate. Local people simply were  not aware that these leases                                                               
were going to occur.                                                                                                            
REPRESENTATIVE  SEATON said  that's  true, but  it wouldn't  have                                                               
mattered anyway  because under the  terms of the  Shallow Natural                                                               
1996  Gas  Act, negative  comments  may  not be  considered.  The                                                               
director of DNR is charged with  looking at whether an area might                                                               
benefit  in   any  way  whatsoever   from  shallow   natural  gas                                                               
development  in an  area.  "That's  one of  the  things that  the                                                               
Division of  Oil and Gas  does not  like about this  program," he                                                               
said. They put out a notification,  but their hands are tied with                                                               
regard to doing anything other than issuing the leases.                                                                         
CHAIR  GARY  STEVENS pointed  out  that  the  City of  Homer  was                                                               
concerned that leases were let  under their water supply and some                                                               
tidal areas.                                                                                                                    
REPRESENTATIVE SEATON  agreed and explained that  Homer relies on                                                               
one water source  that is outside the city. The  borough gave the                                                               
city extra-territorial  powers on  the watershed  surrounding the                                                               
reservoir but  now, under  the shallow  natural gas  program, the                                                               
entire area has been leased.                                                                                                    
SENATOR STEDMAN asked whether people  that have subsurface rights                                                               
could drill a well and hook up their house.                                                                                     
REPRESENTATIVE  SEATON replied  that is  possible, there  are few                                                               
regulations  on  someone  who  owns  both  the  surface  and  the                                                               
subsurface rights for doing shallow natural gas.                                                                                
SENATOR STEDMAN  questioned whether it  a cost factor  that keeps                                                               
these people from drilling their own wells.                                                                                     
REPRESENTATIVE SEATON thought that was probably the case.                                                                       
SENATOR  COWDERY  asked  for  an   explanation  of  exactly  what                                                               
subsurface means  and questioned whether  it's six inches  or six                                                               
feet from the surface.                                                                                                          
REPRESENTATIVE SEATON said he didn't  really have the answer, but                                                               
he  thought that  if you're  extracting anything  such as  gravel                                                               
that's all part of the  subsurface mineral estate. He wasn't sure                                                               
about a basement  for example, but he did know  you didn't need a                                                               
state permit to put in a basement.                                                                                              
SENATOR COWDERY  asked whether the leaseholder  could do anything                                                               
without the permission of the property owner.                                                                                   
REPRESENTATIVE SEATON  said the  existing law requires  a surface                                                               
use agreement and  the surface owner must  give reasonable access                                                               
to the  holder of the subsurface  rights. If no agreement  can be                                                               
reached,  then the  leaseholder may  post a  bond through  DNR to                                                               
cover  potential  damages  and   go  forward.  There  is  pending                                                               
legislation to change that, but that's the way it is currently.                                                                 
CHAIR GARY STEVENS added that is  one of the many concerns people                                                               
have. They  really don't have  control over what could  happen on                                                               
their property.                                                                                                                 
REPRESENTATIVE SEATON said that's correct.  HB 69 changed the law                                                               
a  bit   and  allows  administrative   override  by   the  deputy                                                               
commissioner of  DNR of any  local ordinances that  would attempt                                                               
to restrict  shallow natural  gas. Proposed  legislation attempts                                                               
to correct that but as it is, it certainly feeds people's fears.                                                                
SENATOR COWDERY  remarked that the  gas fields can be  very large                                                               
and he  wondered how  you keep  track of  which property  the gas                                                               
might be under.                                                                                                                 
REPRESENTATIVE SEATON said  the Division of Oil and  Gas works on                                                               
this problem  all the  time and  in Homer  it would  be difficult                                                               
because  there is  so  much private  land  interspersed with  the                                                               
state land. Areas  are unitized in terms of how  far a particular                                                               
gas field  reaches. Then everyone within  a unit has a  period of                                                               
time to join  the unit, but if  they do that then  they just lose                                                               
their gas. When a unit is  formed the landowners in that unit get                                                               
a portioned share of the royalties  of the gas that's produced in                                                               
that unit. But, he said,                                                                                                        
     To make  our understanding  clear. The  way the  law is                                                                    
     now, if  you have the  occupied land and there  is five                                                                    
     acres unoccupied right next to  you, if the gas company                                                                    
     would decide to  put it on your land,  there is nothing                                                                    
     you can do  about that. You can disagree  with that and                                                                    
     then it  goes to DNR for  a posting of a  bond and that                                                                    
     bond has  nothing to  do with  your wishes  or desires.                                                                    
     That  bond  is strictly  related  to  what damage  they                                                                    
     would cause  in their  drilling operations and  what it                                                                    
     would take  - $8,500  $10,000 -  to repair  that damage                                                                    
     when they leave.  And that would be  the only recourse.                                                                    
     And that's one  of the things that the  other bills are                                                                    
     trying  to clean  up. Is  so  that they  would have  to                                                                    
     demonstrate  that  they couldn't  go  to  one of  these                                                                    
     other parcels of  land around you. Now  granted I don't                                                                    
     want to  mean that  the gas  companies that  we've been                                                                    
     dealing with  would want to  inflame the  situation any                                                                    
     more  by doing  that, hopefully  they would  go to  the                                                                    
     other  parcels of  land that  were  unoccupied or  that                                                                    
     would like  to have  a surface  use agreement,  but the                                                                    
     current law doesn't require them  to do that. The other                                                                    
     shallow  natural  gas  bills that  are  coming  forward                                                                    
     through HB  395, which is  in Resources,  would require                                                                    
     them  to  demonstrate  that they  needed  to  use  your                                                                    
     particular  piece of  land where  they  could get  that                                                                    
4:10 p.m.                                                                                                                     
CHAIR GARY STEVENS  remarked that if it was  determined that your                                                               
property  was  the only  one  that  could be  drilled,  potential                                                               
impacts might be  that roads would be constructed,  a drill might                                                               
be placed  on your property, a  generating plant put in  to power                                                               
the drilling, and above ground  piping could be installed. It all                                                               
adds up to quite an impact on the local property owner.                                                                         
REPRESENTATIVE  SEATON  said  the  companies  are  interested  in                                                               
working out problems,  but legally that could  happen. The burden                                                               
of cooperation legally falls on the surface owner.                                                                              
MIKE McCARTHY,  Homer resident and retired  registered geologist,                                                               
testified  via  teleconference to  say  that  he represents  over                                                               
1,220 members  of the Kachemak  Bay Property Owners  Alliance. He                                                               
stated the following:                                                                                                           
     Currently  the  coal  bed methane  leases  here  impact                                                                    
     22,000  acres,  which  includes  Homer's  Bridge  Creek                                                                    
     watershed, an elementary school,  three churches, and a                                                                    
     portion  of  the  designated critical  wetland  habitat                                                                    
     area. We, the 1,200  members have expended thousands of                                                                    
     volunteer  hours to  get the  City of  Homer, Katchemak                                                                    
     City   and  the   Kenai  Peninsula   Borough  to   pass                                                                    
     resolutions  supporting  a  moratorium  and  a  buyback                                                                    
     proposal for the coal bed  methane leases in this area.                                                                    
     This bill presently before you  is not going to fix all                                                                    
     the ills of  the current CBM statute, but  it's a solid                                                                    
     start  and   it  shows  government   responsiveness  to                                                                    
     Alaska's  citizens.  I  would   like  to  applaud  both                                                                    
     yourself and Representative Seaton  for your efforts on                                                                    
     our behalf.                                                                                                                
MR. McCARTHY  then read a  letter from a Homer  Realtor outlining                                                               
the decidedly negative impact that  the coal bed methane issue is                                                               
having on the area wide real  estate market. [A copy may be found                                                               
in the bill file.]                                                                                                              
He pointed out that there  are 1,084 properties that are impacted                                                               
and they're worth $66.4 million  in assessed value yet the leases                                                               
were acquired for just $28,000.                                                                                                 
SENATOR COWDERY  asked whether he  was aware that  property deeds                                                               
and title insurance  for property that's sold in  Alaska say that                                                               
the property owner does not have subsurface rights.                                                                             
MR. McCARTHY agreed,  but the situation here is that  a number of                                                               
property owners didn't know that  a subsurface lease had been let                                                               
and if they'd known they wouldn't have purchased the property.                                                                  
SENATOR  COWDERY  again  asked for  information  regarding  where                                                               
subsurface rights begin.                                                                                                        
MR. McCARTHY said he didn't have that information.                                                                              
REPRESENTATIVE  SEATON advised  that property  owners that  dig a                                                               
water well  must apply  for water  rights from  the State  if you                                                               
want the property right on that water.                                                                                          
CHAIR GARY STEVENS  noted that the Resource  Committee would hear                                                               
the bill next and he wanted the bill to move if at all possible.                                                                
SENATOR COWDERY  motioned to report CSSSHB  364(O&G) and attached                                                               
fiscal notes  from committee with individual  recommendations. He                                                               
asked for unanimous consent. There  being no objection, it was so                                                               

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