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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2018

Vol. 23, No.12 Week of March 25, 2018

DNR wants protective order authority

Backlog of audits prompts department to ask Legislature for help in dealing with confidential issues arising from royalty disputes

Kristen Nelson

Petroleum News

The Alaska Department of Natural Resources has a backlog of royalty audit disputes awaiting agreement on sharing of confidential data and is asking an authority, similar to that which the Department of Revenue has, for the commissioner to issue protective orders.

The companion bills, House Bill 330 and Senate Bill 175, were referred to the Judiciary and Resources committees in the two bodies; in the House the bill has moved through, and been amended, in both committees, and as Petroleum News went to press HB 330 was in the Rules Committee. A first hearing was scheduled on SB 175 in Senate Judiciary for March 21.

In his transmittal letter Gov. Bill Walker said the department had a “long-standing dilemma” in handling oil and gas sales price information, which is confidential under Alaska law.

The governor said that “impedes the department’s ability to effectively audit and enforce royalty payments when multiple companies working the same lease negotiate different prices.” Sales contracts provided to DNR by one party cannot be shared due to confidentiality, and DNR “faces administrative obstacles in finalizing the royalty audits.”

Multiple owners, different contracts

Ed King, special assistant to the DNR commissioner, told House Judiciary that a section within the Division of Oil and Gas performs audits to make sure the state is receiving its due share based on lease agreements.

Where there are multiple owners the division looks at different contracts and calculates the average of the three highest payments. King said the problem is that the division can’t provide contracts to the company being audited because of confidentiality.

The issue relates to royalty in value: When producers sell the oil and pay the state for its royalty share.

There are seven royalty audits pending in the commissioner’s office, some $39 million, he said, because in recent years some leaseholders have objected to disclosure to other leaseholders.

King said DNR believes it has the authority to share the contracts, but if there was objection and a court ruled against DNR, it would carry criminal consequences for the person revealing that confidential data. What is being requested, he said, is explicit permission to reveal that information in the context of an audit or an appeal.

He said three departments already have the right to issue protective orders and courts issue them when confidential data arises. They are a common tool used by courts, arbitrators and other agencies, King said.

By providing information under protective order the ability to use the information would be limited and the authority would be discretionary, with the commissioner issuing orders only when necessary to deal with appeals.

Issues

The original bill was general and Usibelli Coal Mine objected, concerned that if an anti-coal mining group were to appeal one of the company’s permits it could get confidential financial information on the company.

House Judiciary wanted to have input from industry, and Michael Hurley, director of government relations for ConocoPhillips in Alaska, responded to questions. He told House Judiciary that giving DNR authority to provide protective orders would be helpful. He said it is ConocoPhillips’ goal to pay royalties when they are due because DNR has an 11 percent interest rate which accrues on unpaid royalties. Protective orders would be a tool for DNR to be able to share data from other producers, so an average price can be calculated and paid as accurately as possible.

He said there was concern about the broad nature of the authority in the original version of the bill, which could include geological and geophysical information, which is very confidential for companies within a competitive business. Hurley said there were instances when a court has intervened and information has been provided, but he said the process envisioned in the bill would be simpler and wouldn’t require taking a dispute to court, which would allow payment in a timely fashion.

House Judiciary amended the bill to limit disclosures to oil and gas. King said that would address Usibelli’s concerns. A further amendment limited disclosures to royalty or net profit share audits or appeals, removing the issue of disputes based on geological or geophysical data. King said with that change DNR would have to go to court to get a protective order for geological or geophysical information.

In House Resources

Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, testified when the bill came up in House Resources. She said the House Judiciary schedule came up so quickly that AOGA members didn’t have a chance to fully analyze the bill while it was in that committee.

Moriarty said AOGA would like to see royalty settlement agreements exempted because those are contractual. She also said those with access to information should be limited to those directly involved in royalty audits or appeals.

The bill was amended in House Resources to limit those with access to “legal counsel, consultants, employees, officers, or agents of a party” and also to specify that the protective order would only “allow a person to access the information under this sub-paragraph if it is necessary for the person to know the information in connection with the royalty or net profit share audit or appeal” and limit “use of the information to matters related to the royalty or net profit share audit or appeal.”






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