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Industry, legislators disagree with Alaska Oil and Gas Conservation Commission hire regulations Forcenergy, Senate Pres. Drue Pearce, former Rep. Mark Hodgins tell commission proposed regulations are in conflict with intent of Legislature when it passed HB 380 Kristen Nelson PNA News Editor
As the Alaska Oil and Gas Conservation Commission moved to adopt regulations to implement House Bill 380 — which reduces royalties for six Cook Inlet fields not currently producing — industry and legislators contended that regulations were not necessary and that those proposed contravened the intent of the Legislature.
The bill, adopted in 1998, provides that the commission “shall accept written plans submitted by lessees,” hold a public hearing within 45 days and “grant approval of the plan if the plan contains a voluntary agreement by the lessee to use its best efforts to employ residents of this state, consistent with law, and to contract with firms in this state for work in connection with the development of the field, including the fabrication and installation of required facilities, whenever feasible.”
The legislation grants a reduction in the state’s royalty to 5 percent for the first 25 million barrels of oil and the first 35 billion cubic feet of gas produced in the 10 years following the beginning of production. To be eligible for the royalty reduction, production for sale must begin from the field by Jan. 1, 2004.
Eligible Cook Inlet sedimentary basin fields named in the legislation include six fields that were discovered before Jan. 1, 1988, and were undeveloped or shut in from at least Jan. 1, 1988, through Dec. 31, 1997: Falls Creek, Nicolai Creek, North Fork, Point Starichkof, Redoubt Shoal and West Foreland.
Decision matrix required The regulations would give the commission the authority to reject incomplete plans.
To be complete, a plan must include “a quantitative decision matrix to justify any decision to employ a person other than a resident of the state or to contract with a firm other than a firm in this state for work in connection with the development of the field.” The matrix would include: qualifications of employment applications and firms; costs; availability of residents and firms in the state; experience of employment applicants and firms; productivity issues; and management issues.
A matrix would be required for: reservoir evaluation and depletion analysis; engineering and design; fabrication of production and support facilities; construction of production and support facilities; installation of production and support facilities; operation and maintenance of production and support facilities; drilling and workover of wells; service and support; production operations; metering operations; transportation of oil and gas off the property; abandonment and site clearance.
Forcenergy says no regulations required Gary Carlson, vice president of Forcenergy Inc. for Alaska, told the commission at a July 21 hearing that Forcenergy believes the language of the statute is so clear that no regulations are required. Forcenergy also believes, he said, that the proposed regulations go beyond the statute — especially with the requirement for a quantitative matrix. Forcenergy is the operator at the Redoubt Shoal field and thus would be a beneficiary of the legislation.
Carlson said he had been involved with the legislation in the House and Senate last year and that in discussions on local hire, a major concern of legislators was how to include a preference for use of Alaska labor and firms without having the statute challenged constitutionally and without making firms subject to frivolous lawsuits. The conclusion of legislators, he said, was that to withstand constitutional challenges, local hire must be voluntary.
The proposed regulations, he said, turn the voluntary plan of the statute into a mandatory requirement, which in addition to constitutional challenges could also subject companies to suits by firms not selected for work.
No hoop jumping Mark Hodgins, who was chairman of the House Special Committee on Oil and Gas when the legislation was passed, told the commission that he had presented the bill in every committee on both the House and Senate sides of the Legislature.
The Legislature understood, he said, that constitutionally it couldn’t include a local hire provision in the legislation. The idea of having a company turn in a plan and require a public hearing was a mechanism, he said, that legislators thought would keep companies responsible. Having a company present a plan publicly, he said, would get public exposure for the voluntary plan — with the hope that public opinion would enforce local hire, since there was no way to enforce it through statute.
We tried, Hodgins said, to make it as easy as possible to resurrect those fields without forcing companies to jump through a lot of hoops.
Local hire an issue in the Senate The commission heard by letter from Senate Pres. Drue Pearce, who had sponsored a Senate version of the bill. During House discussions, Pearce said, “the focus was on the underlying policy of whether it was appropriate to provide an incentive to encourage the development of previously discovered, but undeveloped Cook Inlet oil and gas fields, and, if so, how to protect and advance the state’s interests. The legislative record reflects considerable discussion of how to protect the state’s upside potential, leading ultimately to amendments to identify the six specific fields potentially eligible for royalty reduction and to establish caps in the quantities of both oil and gas eligible for royalty reduction. While the bill was under consideration by the House, no amendments to address local hire or in-state contracting concerns were proposed.”
Sen. Rick Halford proposed amendments in the Senate, Pearce said, which required inclusion in plans of “provisions for the lessee to use all reasonable efforts to obtain from a manufacturer in this state the reasonably necessary materials for the construction of facilities used to produce oil or gas…” and said, as a condition of approval of the plan, that in “in determining whether a lessee has used all reasonable efforts” the following would be considered: relative cost of materials in proportion to the benefits to manufacturers in this state; and health, safety and environmental conditions and requirements to ensure maintenance of the lessee’s operational standards.
Constitutionality concerns Discussions of the proposed amendments, Pearce said, identified several problems, including concerns regarding third-party challenges as a result of discretion to grant or deny approval of a plan and “concerns that prescribing specific local hire or contracting standards would invite constitutionality challenges.”
Because of those concerns, Pearce said, the language now in the statute was adopted, making it “explicit that the AOGCC has no discretion in approving a plan, provided a lessee chooses to submit one, and it ‘contains a voluntary agreement by the lessee to use its best efforts to employ residents of this state….’.”
“Thus,” Pearce said, “based upon my personal involvement throughout the Legislature’s review and passage of this legislation ... there is no evidence in the record to suggest that the Legislature intended to leave to the AOGCC’s discretion the determination of what constitutes a lessee’s ‘best efforts’, what is or is not ‘feasible’ or what constitutes ‘development’…”
Pearce also told the commission that she believes it has gone “well beyond both legislative intent and your agency’s authority in attempting to legislate through regulation such requirements” as the inclusion of a quantitative matrix to justify any decision to hire a non-Alaska resident or a non-Alaska firm.
Halford requested regulations There was no testimony at the July 21 hearing in favor of the regulations, but the commission had received a letter in December from Sen. Halford concerning House Bill 380.
“During the consideration of HB 380 and the corresponding Senate bill,” Halford told then commission Chairman David Johnston in the Dec. 18 letter, “the Legislature added specific language to ensure that any company seeking a royalty reduction be required to maximize Alaska hire, construction, fabrication and contracting.
“The Alaska Oil and Gas Conservation Commission,” Halford said, “is the entity which must review and approve planned efforts to employ Alaskans and use Alaskan contractors and fabricators.”
Halford asked if the commission had received any royalty reduction plans “or developed regulations for their review?
“Have you developed,” he asked, “a system to require those seeking royalty reduction to prove that specific component construction in Alaska is unfeasible?”
“House Bill 380 provides a unique incentive for Cook Inlet development,” Halford said. “I hope the commission is working to ensure that instate benefits in jobs, fabrication, construction and contracting are commensurate with the royalty savings allowed.”
Matter left open At the conclusion of testimony at the July 21 hearing, commission Chairman Robert Christenson said that because one of the commission’s members was absent, the commission would continue with discussions of the regulations at a later date.
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