The Alaska Production and Exploration Incentive Act of 2023 (“APE” Act)
Submitted for Pre-Filing in the 33rd Alaska State Legislature by Representative Tom McKay, District 15
Introduction
Alaska is currently graded very poorly when compared to other states, provinces and countries regarding its ability to attract exploration investment in its oil and gas industry. Both Gaffney Cline and the Fraser Institute rank Alaska near the bottom of all oil producing governments in the U.S. and Canada. This is surprising since a vast majority of Alaska’s general fund revenue annually is derived from oil production. In addition, the nation’s national security is at risk with the lack of investment and production decline which is currently ongoing and relentless in the Last Frontier, with government officials talking about the problem, but not taking any real action to correct it.
If enacted into law, this act would create a new business environment in Alaska, a business climate intended to correct this problem and set the stage for dramatically increased activity in the oil and gas sector. This increased activity and investment would create much needed production revenue for the State, as well as hundreds if not thousands of new high paying, long term career jobs for the current generation, as well as future generations. It would also increase competition in the Alaska private sector, as well as build up the contractors, equipment and materials available in the State’s oil and gas industry, which are currently extremely and dangerously limited.
Alaska’s current fiscal and legal oil and gas policy is structured toward major companies who can withstand the high capital cost of doing business in the State. It is extremely disadvantageous for smaller businesses who wish to explore and invest in oil and gas ventures in Alaska. In direct discussions with investors, it has been revealed that Alaska’s oil and gas regulatory agencies can be unfair, biased, and unreasonable. Most importantly, investors have no right to appeal rulings from these agencies to independent courts and tribunals. Thus, investors are denied the right of due process.
I offer the following measures to transform our oil and gas regulatory climate and create the conditions for dramatic growth in Alaska’s private sector:
Measure 1: Make All State-Owned Seismic Data Available Online for Free
Small exploration firms need to study our state-owned seismic data in order to search for oil and gas prospects that others have over-looked. The data is doing no good on the shelf unless it is being used. This measure must be implemented immediately to be effective. The state will facilitate the release of more technical data (especially seismic) to a publicly available database so that new companies can conduct exploration studies (important to small and mid-sized companies trying to enter – compared to North Sea & Australia). The State shall provide a more comprehensive and user-friendly website with easy access to all data.
Make it law that all oil and gas related Alaska agencies add a monthly or quarterly meeting that will be scheduled and open both virtual and in person to all Alaska oil and gas lease owners and oil and gas companies, to meet with all oil and gas-related agencies to gather recommendations, information and presentations to be recorded and published in an excellent summary to the Legislature of what the suggestions and recommendations had been given and what changes the agency agreed to, to support and cause implementation.
Measure 2: Reduce Oil and Gas Lease and New Well Bonding Costs in All Areas by 90%
Alaska has never had an Operator in the private sector who created an environmental problem and did not pay for the corrective action. The biggest environmental damage from upstream oil and gas activity has been caused by the Federal Government in the NPRA and other areas of the North Slope. Smaller firms want to invest in Alaska, but the high bonding costs serve as an economic barrier to entry.
Measure 3: Reduce All New Oil and Gas Lease Rental Costs by 75%
Again, Alaska must be more attractive to invest the substantial funds needed to explore and drill new wells. The risk of oil and gas exploration and production is at times enormous, and Alaska must be flexible and understand that to have a flourishing private sector, reduced government costs and barriers are essential. Lease rental costs should be constant year to year, and not escalate in the latter years of the lease. In addition to this, all outstanding tax rebates from the past must be settled. This is still remembered by the financial institutions and has created significant distrust in the system.
Measure 4: Reinstate Trial De Novo to Provide Due Process in Challenges to Agency Decisions
Reinstitute AS 31.05.080 (B) which allows for oil and gas investors to appeal rulings by the various Alaska Government Agencies dealing with oil and gas issues. Such appeals would then be allowed before independent courts and tribunals, thus giving investors their due process rights to appeal. The current system allows appeal only to the agency or entity issuing the denial in the first place. This is patently unfair and must be corrected.
Reinstate the wording of former AS 31.05.080 ( b.) to all agency regulations, and add this to every Alaska Agency that deals with the oil and gas business (b) " A person who has applied for reconsideration and is dissatisfied with the disposition of the application for reconsideration may appeal to the Superior Court. The questions reviewed on appeal are limited to the questions presented to the commission by the application for reconsideration."
Measure 5: Re-structure the 470 Fund So That These Funds Would Cover Bonding Costs
The 470 Fund was established as a result of the Exxon Valdez Oil Spill to provide funds to clean up major oil spills in Alaska and it contains approximately $50 million USD. The 470 Fund has never been used to clean up a large oil spill related to upstream Alaska oil operations, as any such spills are paid for by the Operators involved. Recall that the Exxon Spill was a transportation related accident and had nothing to do with Alaska’s exemplary upstream exploration and production operations. The 470 Fund could be used as a substitute account to cover the reduced bonding costs addressed in Measure 2 above.
The plan is to have a law that Converts the 5 cents to 10 cents per barrel oil fee to the existing 470 oil spill contingency fund that currently contains $50 million dollars; this will provide for a Self-Insured oil and gas State under this one fund that covers all other Bonds and more then protects the State.
Measure 6: Reorganize the Oil Spill Contingency Plan Process Into One General Plan
For years now, each exploration well in Alaska has been required to draft a massive Oil Spill Contingency Plan (commonly called “C-Plan”) at great cost to every Operator desiring to drill a well looking for oil and gas. The two main provinces for oil and gas in Alaska are the North Slope and Cook Inlet. These massive C-Plans are mostly redundant from well to well in each Province. It is recommended that there could be one uniform, generally accepted C-Plan for each Province, with some minor edits for the specific well being considered. It is not necessary to write a new, massive C-Plan from scratch for every well, when the general conditions are basically the same. This would save smaller firms great time and cost.
Measure 5 allows for this fee to pay for the DEC to be the holder of the C-Plan, and contract with Alaska Clean Seas, Chadux and others to be the First Responders in case of an emergency. The new C-Plan is to call DEC, and let them be the prepared first responders, and oil and gas workers are allowed to do their job safely with the State fully protected.
Measure 7: Require ADEC To Measure Air Quality Not Just Model It
ADEC Air Quality Permits (AQP’s) are a disaster for oil and gas Operators desiring to conduct business in Alaska. The stipulations in the AQP’s are extremely onerous and unrealistic. This area of government must be investigated and made much more flexible to attract more oil and gas investment in Alaska. The models used to define air quality in the area of operation are far too conservative and do not represent a realistic picture of the actual dispersion of combusted gases and other discharges. Actual measurement should be substituted for computer-based modeling by personnel who are completely removed from the project and have no idea what the operation entails. Specific examples can be provided.
Measure 8: The AOGCC Must Not Be Directly Involved In The Engineering And Operation Of Oil And Gas Wells
Over time, the Alaska Oil and Gas Conservation Commission (AOGCC, under the Commerce Department) has become much more involved in directing Operators how to design, drill and produce the wells they are investing in. This has clearly become government over-reach and is beyond what the AOGCC’s mission is supposed to be. It also opens the State of Alaska up to legal exposure if the Commission instructs an Operator how to drill and complete an oil and gas well. If a problem occurs due to their direction, it is then the legal responsibility of AOGCC. This situation is out of balance and must be corrected. Specific examples can be provided.
Measure 9: Reduce Project Cycle Time Between Initial Investment to First Oil Production
The State of Alaska must do everything possible to reduce this cycle time. Investors waiting 10-20 years to recoup their investment is a great disincentive. Make it law that one of the oil and gas agencies performs an annual survey or study that makes a finding of how long it takes each project from first exploration well to first oil production.
Measure 10: Direct Oil and Gas Regulatory Agencies to Avoid Duplication and Inter-Agency Turf Wars
Recommend consolidation of all state agencies in Alaska responsible for oil and gas operations under one set of elected Commissioners so that unity, cooperation and avoidance of duplication and turf wars results. Perform a study comparing Alaska to the Texas Railroad Commission where several oil and gas agencies are merged under one agency that elects qualified oil and gas professionals with proven skill sets and/or hold a degree related to the oil and gas exploration and production industry such as geology, geophysics, petroleum engineering, etc.
Measure 11: Reduce Environmental Restrictions Clearly Designed to Impede Oil and Gas Activities
Example: most recent polar bear regulations with a 15-mile setback from the Coastline on the North Slope. Incentivize remote expensive exploration efforts to search for more oil and gas reserves. The Alaska State Constitution mandates that the State’s natural resources be developed for the maximum benefit of all residents, and thus the State must resist and fight those who would want to leave such resources undeveloped, which benefits no residents.
Measure 12: Be Like QATAR – export LNG Directly Off Point Thomson and Make Billions of Dollars
The technology now exists whereby ice breaking LNG tankers can operate in the arctic. Russia now exports LNG from its northern coast year-round. Alaska can do the same. Qatar earns billions of dollars exporting LNG, Alaska can and should do the same for Japan, Korea, and other east Asian developed nations relatively close by, nations desiring a stable and secure source of gas for their sustainable economies for decades to come. By monetizing our North Slope trapped gas assets, this creates exploration and production incentives and opportunities for natural gas wells in addition to the oil wells already operating.
Closing
The State has limited time to prevent production decline (average 6% per annum) and keep TAPS operating. It needs to be creative in encouraging more exploration and production and the associated revenue it will bring in – not a short-term fix/mentality of lease bonuses and escalating rentals. Increased production in the future will better help to resolve the fiscal gap which now requires use of Permanent Fund earnings to support high government spending. The exploration opportunities exist – but the oil and gas industry operates within a very competitive global business environment for exploration funding. Alaska is an expensive operating arena even with royalty relief. The situation is urgent and action must be taken as soon as possible.
Respectfully submitted and proposed by
Representative Tom McKay
Alaska State Legislature
33rd Legislature
House District 15
Bayshore / Campbell Lake / Sand Lake
(907) 350-9544 cell