Legislature(2011 - 2012)HOUSE FINANCE 519
03/16/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB166 | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 166 | TELECONFERENCED | |
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
2:30:34 PM
DANIEL SEAMOUNT, GEOLOGY COMMISSIONER, CHAIR, ALASKA OIL
AND GAS CONSERVATION COMMISSION, (AOGCC), introduced a
chart titled "Approved Permits to Drill for Each Year (1996
- 2010) Statewide: Oil, Gas and Alternative Energy Wells
and Wellbores" (Page 17 of a PowerPoint presentation
titled: "Alaska Oil and Gas Conservation Commission
(AOGCC)"). The chart showed the number of approved permits
for all oil, gas, and alternative energy wells that had
been drilled in the state. The cost of oil appeared in a
green line that overlaid the chart and the permit scale
ranged from 0 to 400. With the exception of 1999 and 2000,
there were slightly under 250 permits issued per year. He
highlighted a correlation between the dip in oil prices in
1998 and 1999 and the lowest number of wells drilled in the
past 20 years; however, with recent high oil prices there
could have been an inverse correlation. He was not certain
about the reason related to the decrease in the number of
permits that were issued around 2004 and 2005, but AOGCC
planned to look at the compiled total footage drilled to
determine whether the oil wells were more complex and took
more time.
Mr. Seamount addressed Page 18 related to wells drilled on
the North Slope: "Approved Permits to Drill for Each Year
(1996 - 2010) North Slope: Oil-Related Wells and
Wellbores." He explained that the chart looked very similar
to the one on Page 17 because the North Slope was "king"
when it came to the number of oil wells drilled and very
few wells had been drilled in other locations including
Cook Inlet. He discussed the actual work done by actual
investors: "Alaska Oil and Gas Conservation Commission"
(Page 19). He explained that the charts looked very similar
to the numbers for permits to drill on Page 17 because
operators tended to follow through on their plans in
Alaska. He noted that this was not the case in other areas
such as the Rocky Mountains where a significant number of
permits issued were never used. He discussed that Mr.
Davies, Petroleum Economist, AOGCC, had developed the pie
chart: "Alaska 2010 Wells and Wellbores" (Page 20). The
chart showed that there had been total of 183 wells drilled
in 2010 and did not account for wells drilled by operators
who were still in the process of submitting their
completion reports. Out of 183 wells drilled the Arctic
Slope accounted for 125 producer wells, 39 service wells,
and 4 exploration wells. The remaining wells were located
in Cook Inlet and other areas of the state.
2:36:37 PM
Mr. Seamount pointed to a chart that showed oil, gas, and
alternative energy exploration wells drilled: "Exploratory
Wells and Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010)" (Page 21). The chart looked similar
to the ones shown on Pages 17 and 18 that were related to
permits to drill. There was low exploration and price in
1999 and 2000. In 2010 the number of wells drilled exceeded
the number of permits (shown on the far right-hand side of
the page) because many of the applications for permits to
drill had been submitted in 2009. He remarked that out of
the 15 exploration wells drilled in 2010 only 7 were oil or
gas exploration.
Representative Gara indicated that that the numbers
discussed by Mr. Seamount did not match the numbers on Page
21. Mr. Seamount clarified that there had been 15 wells
drilled in 2010 by 9 operators.
Representative Gara wondered whether 2011 was the year that
only one exploratory well was drilled. Mr. Seamount replied
in the affirmative. He communicated that 2011 would be an
abysmal year for exploration.
Mr. Seamount discussed Page 22: "Exploratory Wells and
Wellbores Statewide: Completed, Suspended or Abandoned
(1996-2010)," that related only to oil and gas. There was
low exploration and price in 1999 and 2000, but there was
an inverse correlation between exploration and price that
began in 2005. He examined development and service wells on
Page 23: "Development and Service Wells/Wellbores
Statewide: Completed, Suspended or Abandoned (1996-2010)."
The chart did not include exploration wells and was similar
to the total wells drilled because of the small number of
exploration wells. ConocoPhillips (shown in red) and BP
(shown in green) made up the largest percentage of the
development and service wells depicted on the graph. A
handful of newer producers including Pioneer, ENI, and
Savant accounted for most of the remaining percentage
beginning around 2008. There had been a dip in the number
of wells drilled beginning in 2004 and 2005, but it had
remained relatively level through 2010.
2:40:08 PM
Representative Costello asked for a breakout of the
completed, suspended, or abandoned wells that were listed
on Page 23. Mr. Seamount replied that he would provide the
information to the committee. He added that very few of the
wells shown had been abandoned and that the majority were
actively producing oil or injecting fluids to keep the
reservoir pressure up.
Representative Costello wondered whether Mr. Seamount
supported a claim made in another committee that the legacy
companies did not take into account taxes or the price of
oil in their data represented on the chart. Mr. Seamount
responded that he did not have enough information to answer
the question and that he was not privy to that company
detail.
Co-Chair Stoltze provided a baseball analogy in reference
to the difficulty he had experienced in following all of
the information on the production and operation wells.
Representative Guttenberg wondered whether there was a rule
of thumb regarding the allowable lag time between the
submittal of a development plan and the installation of a
well. Mr. Seamount replied that it was highly variable
depending upon how desirable a project was to a company's
management team. He reflected on one prospect in Wyoming
that had taken nine years to be drilled.
Representative Guttenberg remarked that the variables were
incalculable, for instance a company could be highly
interested in a project and then discover that there were
no rigs available. Mr. Seamount replied that there were
numerous variables that could delay a project, including
economic, government, litigation, and more.
Representative Guttenberg had heard of circumstances in
which a company had interest in drilling a well but it was
unable to do so because access to a rig was not possible
until the following season when an ice road could be built.
Mr. Seamount agreed. He observed that the logistics in
Alaska were more challenging than those in the Lower 48.
2:44:26 PM
Representative Gara wondered why Page 22 showed that there
were five exploratory well developers but did not indicate
the number of wells. Mr. Seamount explained that the scale
shown on the left (x-axis) of the chart related to the
number of wells drilled.
Representative Gara asked about the difference between
Pages 21 and 22. Mr. Seamount responded that Page 21
included oil, gas, and alternative energy and Page 22 only
included oil and gas.
Representative Gara wondered whether Page 14 only included
information about the North Slope. Mr. Seamount replied
that Page 14 related to statewide oil and gas exploratory
well permits, excluding alternative energy.
Representative Gara asked whether there was a page that
showed exploratory well permits for the North Slope only.
Mr. Seamount responded that he would provide a chart with
the data to committee members.
Representative Gara believed that the focus of the debate
on ACES [Alaska's Clear and Equitable Share] centered on
the North Slope and not on other areas of the state. Mr.
Seamount answered that information was included later in
the presentation about the wells that had been drilled on
the North Slope.
Representative Gara queried whether the suspended and
abandoned wells were drilled during the year they were
presented on Pages 21 and 22 or whether they had been
drilled in prior years. Mr. Seamount replied that the wells
were drilled in the year in which they appeared on the
chart. He expounded that wells in close proximity to
infrastructure were completed and those that were farther
away were not.
2:48:37 PM
Representative Wilson wondered whether there was a review
process to determine why wells were suspended or abandoned
to ensure that the appropriate tax credits were applied.
Mr. Seamount replied that there were four petroleum
engineers that monitored the situation closely and that
approval for a company to abandon a project was required.
He elaborated that it was necessary for a company to have a
good reason for abandoning one area to drill in another and
that an extensive review took place.
Representative Wilson wondered whether the information on
abandoned wells was public. She noted that it would be
helpful for her to know why the wells were abandoned. Mr.
Seamount remarked that he could provide the committee with
the information. He added that there was a two-year
confidentiality rule on exploration wells but the rule did
not apply to development wells.
Co-Chair Thomas wondered whether there were inactive wells
that might be activated once a tax system that was more
desirable for oil companies was implemented in the state.
Mr. Seamount was not aware of anyone using the particular
strategy. He noted that there were quite a few areas in the
state that were capable of production but were not
currently under production due to various issues related to
infrastructure or government.
Co-Chair Thomas asked whether the issue was related to
state or federal permitting. Mr. Seamount responded that he
was not aware of any situation in which state government
was inhibiting production.
2:52:10 PM
Representative Gara observed that oil companies had also
stopped production by prohibiting access to others. He
cited an example in which Conoco had prevented a company
from gaining access to land by denying it the ability to
cross land owned by Conoco. Mr. Seamount was not aware of
the particular situation.
Representative Costello asked whether a company could slow
the rate of production on an active well. Mr. Seamount
replied that a company could slow the wells when gas ratios
became too high and for a variety of other technical
reasons.
Representative Costello wondered whether there were other
reasons for slowing a well. Mr. Seamount could not think of
any other economic or additional reasons.
Mr. Seamount discussed that Page 24 titled "Development and
Service Wells/Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010) by BP Exploration (Alaska), Inc," was
similar to Page 22 and 23 but only included BP Exploration
Alaska. He relayed that 99 percent of the wells were in
Prudhoe Bay, Milne Point, and Point McKenzie and were all
in the North Slope. Page 25 titled "Development and Service
Wells/Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010) by ConocoPhillips Alaska, Inc.,"
related only to ConocoPhillips Alaska, Inc. He reported
that the majority of the company's development and service
wells were located in Kuparuk and Colville River.
Additionally, the company did not take much risk, but their
activity had been fairly constant over the years.
Mr. Seamount directed attention to Page 26 titled:
"Completed, Suspended and Abandoned Oil and Support Wells
and Wellbores - North Slope Only 1996-2010." The wells were
broken out by type, the oil producers were shown in green,
the oil injectors were shown in blue, and waste ejector
wells were indicated in black. He highlighted that the same
trends that were present on the previous slides applied to
Page 26 as well. He discussed a bar chart on Page 27 titled
"Alaska's Active Drilling and Workover Rigs for Each
Quarter (2005-2010)," that related to statewide oil, gas,
and alternative energy. The light green portion of the bars
represented drilling rigs and the dark green portion
represented workover rigs. He delineated that there were 15
or more active drilling and workover rigs per quarter from
2005 to the fourth quarter of 2008; but there was a sharp
decline in 2009 through 2010. The price of oil that was
relatively high was represented as a dark green line and,
with the exception of 2006 showed no correlation with the
active rigs.
2:57:13 PM
Representative Gara wondered whether the dip in the price
of oil in 2009 explained the lower number of active rigs
one and a half years later given that plans to drill were
done two years in advance. Mr. Seamount supposed that was a
possibility.
Representative Gara asked whether the chart included
directional drilling rigs or whether the smaller rigs in
2009 and 2010 were rigs that drilled horizontally. He had
heard that the number of rigs had declined as directional
drilling had increased. Mr. Seamount responded that most
rigs were extended reach and that the majority were
horizontal.
Representative Gara wondered how long it had been the case
that most rigs were extended reach and horizontal. Mr.
Seamount believed it had been since 1999 or 2000.
Mr. Seamount addressed Page 28: "Alaska's Active Drilling
Rigs for Each Quarter (2005-2010)." He explained that
drilling rigs were often swapped out to do workovers. He
noted the correlation between the number of workover rigs
and the cost of oil on Page 29: "Alaska's Active Workover
Rigs for Each Quarter (2005-2010)." He reported that many
of the workover rigs had been switched over from drilling
rigs and that the payoff would be quicker because workover
rigs were less expensive.
Representative Hawker asked for clarification that Page 28
included oil, gas, and alternative energy statewide. Mr.
Seamount replied in the affirmative. He noted that 2010 was
the only year on the page that included alternative energy
rigs and that it would be necessary to subtract three from
that year to obtain oil and gas rigs only.
Representative Hawker wondered whether alternative energy
wells were drilled prior to 2010 as a result of the
extraordinary number of permits that were issued to the
Department of the Interior in 2008. Mr. Seamount believed
that the Department of Energy had drilled nine wells in the
previous two years.
Representative Hawker asked whether the chart on Page 28
included the alternative energy wells in 2008 and 2009. Mr.
Seamount responded that coalbed methane was not considered
an alternative energy.
3:03:07 PM
Representative Costello asked about an earlier statement
that workover rigs tended to follow the price of oil more
closely because they were more cost effective for the oil
companies. Mr. Seamount responded that he had interpreted
the data that way.
Representative Costello wondered why there was an exception
in the fourth quarter of 2009. She asked whether there was
another factor at play during that time. Mr. Seamount was
not aware of another factor at play.
Mr. Seamount moved on to Page 30: "Well Workover Activities
for Each Year (North Slope Only) 2003-2010." Workovers had
reached a significant number of over 400 per year since
2003. A high of 582 had been reached in 2008 when oil price
had been at its peak. He detailed that 500 workovers out of
3000 development wells in Alaska was a significant
percentage.
Representative Guttenberg wondered what constituted a
workover. Mr. Seamount replied that typically a workover or
drilling rig was set directly over the well and that the
wellbore was drilled and modified to increase production or
to fix a leak, etc.
Representative Guttenberg remarked that it took a lot to
move a rig and that 500 times in one season was
significant. Mr. Seamount believed that it was expensive.
Representative Gara asked about the difference between
workover rigs and development rigs. Mr. Seamount explained
that a development well involved drilling a new hole in the
ground, whereas a workover did not.
Representative Gara asked whether rigs had been moved 558
times in 2010 to perform workovers. Mr. Seamount replied
that sometimes a series of workovers was done on the same
wellbore; however, a high number of moves were represented
in the number.
3:07:07 PM
Representative Gara wondered where well workover activity
and expense fit within the goal to maintain and enhance oil
production. He asked whether the higher number of well
workovers in 2010 compared to those conducted in 2007 was
indicative of an attempt to enhance or stabilize oil
production. He discussed that development wells and
exploration wells were used to locate oil.
Co-Chair Stoltze remarked that the committee would be able
to discuss some of the issues in the presentation with
other presenters as well.
Mr. Seamount responded that a significant portion of well
workover activity was aimed at production increase or
maintenance.
Representative Doogan asked for clarification regarding the
number of wells that were represented on Page 29. Mr.
Seamount responded that they were average numbers for the
quarter. When a rig only worked for two months out of a
quarter the number was represented as a fraction.
Representative Doogan wondered whether "four and a
fraction" rigs were used during the third quarter of 2010.
Mr. Seamount replied that one of the rigs may not have been
active for the entire quarter and was therefore represented
as a fraction.
3:11:01 PM
Mr. Seamount discussed the baseline of 200,000 barrels of
oil produced per day that was represented on Page 32:
"Alaska's Average Daily Oil and NGL Production Rate." He
did not know about the significance of the number but
believed that it was very low. He explained that at 200,000
barrels per day that Alaska's production level would be
below that of North Dakota; however, the probability was
not high given that Alaska had shale oil as well. He
detailed that Page 33: "Alaska's Average Daily Oil and NGL
Production Rate," represented a six percent production
decline that AOGCC estimated would take place without any
new development or production. At the six percent decline
rate the state would see production of 200,000 barrels per
day by 2030. Page 34 represented the same information but
included a scenario in which a new Alpine sized field came
online in 2018(shown in yellow). With the discovery of a
new field the time it took to reach the level of 200,000
barrels per day would extend to 2033. A chart on Page 35
also showed the same information but included the
hypothetical discovery of another Northstar in 2018 (shown
in bright blue). The chart indicated that regular
production would begin in 2024 and that a drop to 200,000
barrels per day would be delayed until 2035.
Co-Chair Thomas wondered whether there was public
information on the results of a drilling operation that had
occurred in Yakutat years earlier. Mr. Seamount responded
that the information was public, but due to the length of
time that had passed the records may not be complete.
Co-Chair Thomas discussed that the first oil produced in
Alaska had been in a small village named Katalla that was
later designated as a wilderness site by former President
Roosevelt. He surmised that it should be possible to drill
diagonally offshore to gain access to the oil that still
bubbled out of the ground in the village. Mr. Seamount
believed that with new technology, production from shale,
and with over 20 basins in Alaska, there was a very bright
future for oil and gas development in the state.
Co-Chair Stoltze wondered whether ethanol was still popular
in North Dakota and other areas. Mr. Seamount opined that
North Dakota may have forgotten about ethanol given their
current focus on shale oil.
Representative Gara wondered how much shale oil would be
included in the pipeline when it was produced in the
future. Mr. Seamount believed that shale oil had a lot of
potential and recommended that he speak with Paul Decker
and Kevin Banks at the Division of Oil and Gas [Department
of Natural Resources].
Representative Gara wondered how much it would cost to
build a processing facility for a field that produced
30,000 barrels per day. He had heard others recommend the
idea of providing a processing facility credit to monetize
smaller fields. He thought that without a processing
sharing agreement that a small oil field could not
currently justify building its own processing facility. Mr.
Seamount did not have an estimate. He noted that he would
provide the committee with the name of one of the smaller
oil companies that had built its own facility for a
"little" field that produced 200 million barrels per day.
3:18:38 PM
Vice-chair Fairclough wondered whether potential
redundancies between state and federal regulations were
reviewed. She believed that North Dakota had the advantage
of drilling on private property versus federal or state
land. Mr. Seamount replied that state regulations were
slightly more stringent than federal and that they were
fairly streamlined.
Vice-chair Fairclough wondered whether there were any
suggestions related to increasing federal government
drilling compliance in the state. She had received several
non-flattering photos of federal drilling operations in
Alaska from AOGCC Commissioner Cathy Foerster. Mr. Seamount
replied that AOGCC had spoken with Senators Mark Begich and
Lisa Murkowski and with John Katz [staff to Governor
Parnell] at the recent Energy Council meeting in Washington
D.C. The local Department of Interior office in Anchorage
was not able to ask for the money and had recently been
notified of the AOGCC's intent to push for federal funding
to take care of the problem wells that existed. He
recommended that others encourage federal Interior
Secretary Ken Salazar to provide more funds to fix the
wells in an orderly way. He believed that that $200 million
would be a good start.
Representative Hawker wondered whether Mr. Seamount agreed
with the Department of Revenue (DOR) production estimates
that indicated 90 percent of all estimated future onshore
North Slope production would come from Alaska's existing
legacy fields. Mr. Seamount believed the forecast was very
conservative and that the discovery of another large oil
field was still possible.
Representative Hawker wondered how probable it was that
another onshore development existed. Mr. Seamount believed
that another field existed, but it might not be discovered.
Representative Hawker asked whether Mr. Seamount believed
that the DOR estimate was incorrect and that another
massive development of unfound oil would occur. Mr.
Seamount opined that DOR had to be conservative and that it
was not possible to bank on the discovery of another
Prudhoe Bay in the near future. He believed that another
field did exist but did not know that it would be found.
Representative Hawker wondered about the viability of the
projections by venture capital company Great Bear. The
company had never drilled a well, but was making plans to
create a program that would develop 200 wells per year.
3:25:40 PM
Mr. Seamount replied that similar operations were currently
underway in locations such as North Dakota and although the
logistics in Alaska were more difficult, there was a
possibility that it would be feasible in the state.
Representative Hawker asked whether there were enough rigs
available to develop 200 wells per year. Mr. Seamount
answered that there were not and that the company would
have to bring rigs in.
Representative Hawker asked about the validity of previous
testimony provided by AOGCC commissioners that a lack in
facility access on the North Slope had never resulted in
the failure to produce a barrel of oil. He agreed with
earlier testimony regarding the importance of the
Department of Interior, Bureau of Land Management well
compliance situation. Mr. Seamount believed that testimony
made by other AOGCC commissioners was accurate. He
clarified that twelve years earlier AOGCC had assumed that
access to North Slope exploration would have been too
expensive and therefore, had not asked for access.
Co-Chair Thomas wondered how to access shale oil. He had
heard that large oil companies did not work with shale oil
and that it would take smaller independent companies to
access the large amount of shale oil that Alaska had to
offer. Mr. Seamount replied that historically the smaller
companies were the originators of exploration for things
like coalbed methane and shale gas. He relayed that big
companies tended to follow later.
Co-Chair Thomas asked for a definition of shale oil. Mr.
Seamount explained that conventional oil flowed easily and
had high permeability, whereas shale oil was located in
very tight rock similar to cement and it was necessary to
drill and break the shale into fractures to allow the oil
that was trapped in the mud layers to flow out.
3:29:48 PM
Co-Chair Stoltze hoped that DOR Commissioner Butcher would
help to fill in the gaps regarding the economic issues. He
appreciated the depth of the presentation.
Vice-chair Fairclough noted that DOR had provided two
packets dated March 15, 2011, in response to committee
member questions (copy on file).
Co-Chair Stoltze thanked Mr. Seamount for his time and
testimony.
HB 110 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB166NEW FN LEG 030711 fiscal note.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB166 CS WORKDRAFT 27LSO492X.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB 166 Comparison version I to X.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB110 DOR-Response 1 to HFIN 02-18-2011.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 110 |
| HB110 DOR Response2HFIN 03-14-2011.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 110 |