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Bill would push industry to increase oil production

Richard Mauer

JUNEAU -- If the governor's effort to lower oil taxes is a carrot to induce producers to put more oil into the trans-Alaska pipeline, the Senate opened hearings last week on a cattle prod of a bill designed to jolt industry toward the same goal.

Sen. Bill Wielechowski, sponsor of Senate Bill 209, said he's tired of hearing that the North Slope oil companies won't invest in greater oil production in Alaska unless their taxes are reduced.

Wielechowski, an Anchorage Democrat who is vice chairman of the Senate Resource Committee, said producers are already required to produce oil under the terms of their state leases as long as it's profitable to do so. And state and outside experts who have testified in the Senate this year, along with reports from the oil companies themselves and calculations made from economic data, show that production, where it occurs on state leases, is highly profitable.

Production would also be profitable on many nonproducing leases under the current tax structure without the cuts sought by Gov. Sean Parnell and written into a bill passed by the House last year, Wielechowski said.

His bill would force the state Department of Natural Resources to regularly investigate each oil or gas lease to ensure that the leaseholder was advancing toward production, and to report to the Legislature which leases were out of compliance. For new leases, the bill would also require a bidder to submit a detailed and enforceable plan for exploration, development and production before its application could be accepted.

The law would require the commissioner of natural resources to impose penalties on companies that fail to perform, including terminating their leases.

"It's a pro-development bill, it's a bill that simply seeks to get more oil in the pipeline," Wielechowski said.

Anchorage attorney Craig Richards, an oil-and-gas tax-law expert at the same firm as 2010 gubernatorial candidate and in-state pipeline advocate Bill Walker, testified Friday at the measure's first hearing that Wielechowski's bill was a good idea.

"The state should not be trying to address declining oil production solely through the rubric of tax incentives," he told the Senate Resource Committee by teleconference call from Anchorage.

"First, the state should be focused on removing competitive barriers to entry to independent producers on the North Slope. And second, in the step that this bill takes, is the state should disallow warehousing, speculation and nondevelopment in producing leases when the operator has an expectation of profit. Some of the ways that it can do that, like in SB 209, are to mandate economic analysis of nonproducing (oil) pools and gas that haven't been developed on a periodic basis by DNR, that's available to the public, so that we're sure that DNR is making sure economic opportunities are being developed," Richards said.

He suggested that the bill be amended to add a marketing requirement to state leases.

"I think the thing that would break the logjam on North Slope gas more than any other item would be if the state mandated, on an annual basis, detailed reports of all efforts made demonstrating that the Prudhoe Bay lessees have acted with due diligence to find a market for that resource," Richards said. "Not in generics, but literally a detailed description of every conversation they've had and every conversation they intend to have with any potential market participant, including, for instances, Japanese buyers in the Asian market."

Parnell's administration hasn't yet weighed in on Wielechowski's bill, which was introduced last month with Sen. Hollis French, D-Anchorage, as co-sponsor. The administration has been invited to testify next week. Elizabeth Bluemink, a spokeswoman for the Department of Natural Resources, said Friday a response was being drafted.

"I'm sure they're not going to like it," Wielechowski conceded in an interview after the committee hearing.

Wielechowski said he has been thinking about the leaseholders' "duty to produce" for years and has talked about it with every attorney general and resource commissioner who has come into his office.

"This is a huge issue," he said. "Let's have the discussion on cutting taxes, but to cut taxes to incentivize companies to do what their leases already require them to do? That's not good public policy," he said.

In presenting the bill to the Resources Committee, Wielechowski's aide, Michelle Sydeman, said the measure had its roots in the "maximum use" doctrine of the natural resources development section of the state constitution, Article VIII.

"SB 209 was developed in response to concerns that some oil companies are winning exclusive leases of petroleum-rich state lands, then sitting on those leases, effectively warehousing Alaska's resources while investing elsewhere," Sydeman said.

She cited the example of Point Thomson, Exxon's gas and oil-rich field on the North Slope. The field has stood undeveloped for decades and is now the subject of a pending court decision on whether the state should get its land back to lease to someone else. The state and Exxon are attempting to negotiate a settlement of the dispute.

The intent of Senate Bill 209 "is to ensure that we don't have any more Point Thomsons," Sydeman said.

Reach Richard Mauer at rmauer@ adn.com or (907) 500-7388.


By RICHARD MAUER
Anchorage Daily News