Legislature(1995 - 1996)
04/17/1996 04:10 PM Senate RES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSHB 325(FIN) am No. Slope Heavy Oil Royalty Modification
CHAIRMAN LEMAN announced CSHB 325(FIN) am to be up for
consideration.
ED BAIN, OXY USA, explained that Oxy has an 8.8 percent interest in
the Milne Point Unit. They were one of the original owners and
have participated in the commercial development since it was
initiated about 12 years ago. He said the shallow well oil sands
were not economic to develop and current production occurs only
from the Green Area Tract 14, about 3,000 barrels per day for 21
wells. They support the Oil and Gas Policy Council's recognition
that an incentive is needed for heavy oil and, therefore, support
HB 325.
SENATOR FRANK asked Mr. Bain to explain some of the company's costs
that were exhibited to the committee on an overhead projector.
MR. BAIN said that he thought HB 325 went too far with the two
percent floor that was added to the holiday. He provided other
scenarios like 450 barrels per day with a two percent royalty which
would add one year of royalty reduction to HB 325. A total of
three percent royalty for a period of eight years would be required
to get to the same level of profitability for a $4 million
investment.
Number 147
SENATOR FRANK asked what exactly made heavy oil more expensive to
produce. MR. BAIN replied that the biggest hurdle is the up-front
cash flow rates. They also produced at a low rate. He illustrated
that a North Slope well might bring in typically 5,000 barrels a
day, but the very best heavy oil wells produce less that 600
barrels per day. They expect a 40 year life with heavy oil and
they get about 1/2 the recovery compared to lighter oils.
SENATOR PEARCE asked if they paid a penalty on the quality bank for
the pipeline. MR. BAIN replied that it's a poor crude and their
tariff cost is higher. They currently have a $6 deduct going to
the West Coast market.
Number 299
SENATOR FRANK asked how the Schrader Bluff accumulation related to
West Sak. MR. BAIN replied that the two sand groups they produce
are basically West Sak sands.
MR. BAIN explained that the next figure shows the progression of
time with ARCO's first West Sak pilot well done where they spent
over $100 per barrel trying to get heavy oil to work. They spent
about $10 per barrel when Conoco was the operator and the analysis
he is showing them for a typical well is about $3 per barrel. The
reason it's much cheaper is because they are doing further
development from existing pads.
Number 351
CHAIRMAN LEMAN asked him to explain the difference between $2.90
and the $1.80 that was represented last week by BP. MR. BAIN
replied that their difference is based on cost demonstrated to date
and BP's involved more speculative goal type of costs and a
projected business plan. He said that their operating expenses
would be about the same level as the capital expenses, about $2.80
or $2.90 per barrel.
MR. BAIN said the last figure was a synopsis of the University of
Alaska study done to assess the fiscal impact of significant heavy
oil development such as full or partial development of the Milne
Point Unit's heavy oil. He said essentially there would be the
creation of 322 nine-year jobs associated with the capital phase,
which would a drilling of 20 to 40 over a nine-year period of time,
and then the creation of 122 41-year jobs, basically careers.
Although this is not a royalty for jobs bill, there are a lot of
jobs associated with this level of expenditure over this period of
time.
Number 401
SENATOR LINCOLN asked how he defined "Alaska resident."
MR. JON TILLINGHAST, Milne Point Unit Attorney, explained the term
was from the UAA of study and they didn't give a definition of
Alaska resident. He thought it meant long-term resident, because
the jobs were so long-term.
SENATOR LINCOLN said she would be interested to compare what their
company projects with resident and non-resident employees. MR.
TILLINGHAST replied that the UAA report broke down the number of
jobs that would go to residents and non-residents based on their
analysis and experience. The jobs listed on the chart are only the
jobs projected by UAA. There would be additional jobs going to
non-residents and the UAA's conclusions were that of the total
jobs, 75 - 80 percent would be filled by Alaska residents.
Number 428
MR. TILLINGHAST added that they feel the 15 percent hurdle rate was
within the realm of industry standard when they presented it to the
Oil and Gas Policy Council. Arthur D. Little did a report for them
that mentioned several times that to encourage new projects you
need to get over 15 percent to get most oil companies to look at
it. Also, in reference to Senator Frank's earlier question about
what made heavy oil more expensive to produce, he said that low
production rates and high transportation costs were mentioned, but
added that some of the attributes which make heavy oil particularly
on the North Slope difficult to produce is that it lifts slowly
because it is heavy and it needs artificial lift to pump from the
beginning and also the oil is entrained in sand. Gravel packs need
to be installed to separate the sand from the oil. These get
clogged and need to be replaced. Another thing is that because the
oil is so shallow the oil is very cold and heat tapes are needed to
keep the oil warm enough.
SENATOR FRANK asked what he thought was the most expensive
producing field was. MR. TILLINGHAST replied that he didn't know
and thought BP could give him an answer, but he cautioned against
giving an across-the-board comparison, because of each unit's
unique features.
MR. TILLINGHAST said he had an amendment which clarifies the intent
of the royalty which is if you take advantage of the oil relief
granted by this bill, you can't apply for a royalty over the next
20-years for the heavy oil well you have already gotten relief for
under this legislation.
REPRESENTATIVE GREEN commented that he hadn't seen the amendment.
CHAIRMAN LEMAN asked him to review it and give them his opinion.
CHAIRMAN LEMAN announced they would set CSHB 325(FIN) am aside and
deal with some other issues.
Number 290
CHAIRMAN LEMAN announced CSHB 325(FIN) am to be back up for
consideration.
MR. TILLINGHAST explained that Oxy thought there were a number of
criteria that are important for an effective incentive. One is
that it is sufficient to materially impact project economics. The
second thing is that it should be an up-front incentive because
they are trying to encourage new capital investment.
Other states have found that royalty holidays and severance tax
holidays are the most effective way of encouraging new investment
as opposed to having a reduced royalty over the life of the field
which is more effective if you are trying to reduce somebodies
operating costs over the long run.
The virtue of the "purple option" is that the three percent royalty
is about 25 percent of Oxy's lease royalties. Therefore, if it's
the legislature's desire to assure that the Permanent Fund's
constitutional share of royalties continue to go into it, it gives
the legislature the ability to do that.
CHAIRMAN LEMAN asked on page 1, line 15, at what point it was
intended that the $15 price be measured. MR. TILLINGHAST answered
at the well-head lack meter.
CHAIRMAN LEMAN asked on page 2, line 22, why a two-year period was
selected for the production records instead of using the same
period the State has for its audit rights for taxes and royalties.
MR. TILLINGHAST replied that they ought to be consistent whatever
they are. He said the issue came up in the House and they couldn't
find out what the audit period was for royalty records in
generally.
CHAIRMAN LEMAN asked on page 3, line 8, if the 450 should be
changed to 500. MR. TILLINGHAST said that was correct and he added
there was another correction needed on page 2, line 3 in the
definition of "actual initial drilling", but the subparagraph only
refers to "initial drilling." "Actual" should be deleted, he said.
Number 205
REPRESENTATIVE GREEN said he had no problem with their first
proposed amendment.
CHAIRMAN LEMAN asked on page 3, line 9, what happens if oil with
the higher gravity is blended with lower gravity oil to produce a
blend that is higher than the low gravity oil, but lower than the
20 degrees API cutoff in the bill. MR. TILLINGHAST replied that
wouldn't be a problem at Schrader Bluff because there are no dual
completions. REPRESENTATIVE GREEN answered that they are really
talking about a very small area.
MR. TILLINGHAST added that an up-front incentive is superior from
the State's perspective because heavy oil fields have a very slow
decline rate and an up-front incentive will net the State more
royalties than a similar incentive spread out over the life of the
field.
TOM NEISWANDER , Milne Point Commercial Manager, BP Exploration,
said this is a resource they have known about for a very long time.
It is undeveloped despite three tries. They have developed 15
million barrels out of that 26 billion that are in-place. The
reason for that is that heavy oil reserve is uneconomic. Their
bottom line on development costs is $2.75 per barrel. Add that to
the other typical characteristics of this project and that makes it
uneconomic.
TAPE 96-58, SIDE A
Number 001
MR. NEISWANDER said that the industry needs to continue to work at
bringing its costs down and increasing the initial production rates
of those wells. He said it takes spending money to figure out how
to do these things. He thought the State should encourage those
types of initiatives and HB 325 is a simple, clear tool to help
them do that.
CHAIRMAN LEMAN apologized for interrupting, but said there were
other time constraints and he thanked him for his testimony. He
said they would prepare a Resources SCS to HB 325 and set it aside.
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