|
Amended version of net profit share bill clears House Resources
Kristen Nelson Petroleum News
A bill sponsored by Gov. Mike Dunleavy to provide the commissioner of the Department of Natural Resources authority to modify the profit share percentage in net profit share leases was amended and passed out of the House Resources Committee March 22. The companion bill in the Senate has been heard twice and is still in Senate Resources.
Both bills have referrals to Finance. House Bill 81 had not been scheduled for a hearing in House Finance when this issue of Petroleum News went to press; no additional hearings had been scheduled for Senate Bill 61.
There are 26 net profit share leases in existence, Division of Oil and Gas Commercial Manager Jhonny Mesa told House Resources in testimony March 5, all of which are in existing units and all issued in the late 1970s and early 1980s.
Northstar previously had net profit share leases but those were modified to sliding scale royalty in 1996, a modification ratified by the Legislature and upheld by the Alaska Supreme Court in 1998.
Without the statutory authority proposed in HB 81 and SB 61, any modifications to net profit share leases requires an act of the Legislature.
Summary of HB 81 In a summary of HB 81 for House Resources, DNR said it “would insert NPSLs into DNR’s existing statutory authority to modify royalty rates,” allowing DNR to modify net profit share leases “under the same circumstances in which DNR may modify royalty rates for existing leases.”
The department said NPSL modifications may assist in extending the life of fields that otherwise would become uneconomic or require additional capital investment to remain in production and would allow DNR “flexibility to choose between NPSL or royalty modifications when it may be advantageous to preserve royalties over net profit shares, or to increase net profit shares to craft ‘payback’ scenarios.”
Royalty modifications The DNR commissioner has statutory authority modify oil and gas lease royalties to make new production economic, extend production in existing fields or return suspended fields to production. Applicants are required to demonstrate that a proposal would not be economic without royalty relief.
There have been eight applications for royalty modification since 1995. Three applications were withdrawn; two were denied; and three were granted, although the modification of one of those three was rescinded as the applicant did not go ahead with the project.
DNR evaluates the proposal and the commissioner must make a finding that the decision to modify royalty is in the best interest of the state.
There is a required public comment period on the preliminary finding and DNR is required to offer to appear before the Legislative Budget and Audit Committee to provide that committee an opportunity to review the commissioner’s finding.
Bill as proposed The bill inserts net profit share modification into the existing statutes governing royalty modification and adds a new reason for such a change to be considered.
By statute royalty modification is allowed for production from an oil or gas field which “has been sufficiently delineated to the satisfaction of the commissioner” but has not been in production and would not otherwise be economically feasible.
(This section is modified in the bills to insert the word commercial before production, ensuring that testing of a field would not preclude it from consideration for modification.)
Alternatively, modification could be allowed to prolong the economic life of a field or pool as production costs increase or the price of oil or gas decreases, making production no longer feasible.
The third existing reason is “to reestablish production of shut-in oil or gas that would not otherwise be economically feasible.”
In addition to adding net profit share lease modifications, the bill also adds a fourth reason - prolonging the economic life of an oil or gas field “which, without additional capital expenditures” would not continue to be economic.
HB 81 was amended in House Resources, disallowing royalty modification under this new category extending the economic life of a field and requiring, for a net share profit modification to extend field life that the lessee or lessees must “make the capital expenditures necessary for production to be economically feasible” and that the commissioner determine that those capital expenditures “are sufficient to maximize production from the field or pool.”
Subsurface leasing issue A second DNR-related governor’s bill, SB 62 and HB 82, would allow DNR’s Division of Oil and Gas to offer gas-only subsurface leases, with no surface access, in a restricted area offshore Cook Inlet adjacent to onshore natural gas development by Hilcorp Alaska at Seaview.
The bill was heard in Senate Resources March 10 (see story in March 14 issue of Petroleum News). It also has a referral to Senate Finance.
The companion bill, House Bill 82, has referrals to the House Special Committee on Fisheries and to House Resources. It has not yet been scheduled in Fisheries.
- KRISTEN NELSON
| 