Legislature(2011 - 2012)HOUSE FINANCE 519

03/16/2011 08:00 AM FINANCE


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08:07:04 AM Start
08:08:45 AM HB110
10:00:11 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
+ Presentations: TELECONFERENCED
- Production Forecasts by Dept. of Revenue
- "Drilling, Well Permits, Exploration vs.
Maintenance vs. Production Wells - What the
Numbers are Telling Us About the Industry," by
Dan Seamount, Chairman, Alaska Oil & Gas
Conservation Commission
+ Bills Previously Heard/Scheduled 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."                                                                                      
                                                                                                                                
8:08:45 AM                                                                                                                    
                                                                                                                                
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,                                                                             
initiated the PowerPoint presentation: "Fall 2010 Oil                                                                           
Production Forecast."                                                                                                           
                                                                                                                                
Commissioner Butcher began with Slide 2: "Three Categories                                                                      
for Forecasted Production."                                                                                                     
                                                                                                                                
   1. Currently Producing- Includes base production and                                                                       
     enhanced  recovery production  from  in rate  enhancing                                                                    
     activities     (perforations,    stimulations,     well                                                                    
     workovers, gas and water injection support).                                                                               
                                                                                                                                
   2. Currently under Development- New projects that are                                                                      
     currently funded  or awaiting project sanction  in near                                                                    
     future.                                                                                                                    
                                                                                                                                
8:12:03 AM                                                                                                                    
                                                                                                                                
Commissioner Butcher discussed Slide 3: "Three Categories                                                                       
of Forecasted Production.                                                                                                       
                                                                                                                                
   3.  Currently  under  Evaluation-   Includes  technically                                                                  
   viable projects  in the  stage  where engineering,  cost,                                                                    
   risk and  reward are  being actively  evaluated. Unfunded                                                                    
   but are considered to have a high chance of being brought                                                                    
   to fruition.                                                                                                                 
                                                                                                                                
8:12:52 AM                                                                                                                    
                                                                                                                                
Commissioner Butcher discussed Slide 4: "Factors that                                                                           
Affect Production Forecasting."                                                                                                 
                                                                                                                                
   1. GEOLOGY                                                                                                                 
        · Rock type and formation characteristics                                                                               
        · Depth, thickness, pressure                                                                                            
        · Oil and gas characteristics (oil gravity,                                                                             
          viscosity, water content, etc.)                                                                                       
   2. DEVELOPMENT PLAN                                                                                                        
        · Well density and development rate                                                                                     
        · Well bore size and completion technique                                                                               
        · Artificial lift and enhanced oil recovery                                                                             
        · Facilities and surface operations                                                                                     
   3. COMMERCIAL                                                                                                              
        · Project economics                                                                                                     
        · Oil price and market conditions                                                                                       
        · Government Policy: access, regulation, taxation                                                                       
   4. PRODUCTION PROFILE                                                                                                      
        · History, stage of depletion                                                                                           
        · Use production profile to extrapolate trends                                                                          
   5. TIMING!                                                                                                                 
                                                                                                                                
Commissioner Butcher discussed Slide 5: "North Slope                                                                            
Production Decline."                                                                                                            
                                                                                                                                
     FY 1988: production peak -> 2.01 million barrels per                                                                       
     day (bpd).                                                                                                                 
                                                                                                                                
     FY 2010: production -> 644,000 bpd, a 68% decline                                                                          
     since peak.                                                                                                                
                                                                                                                                
     FY 1988 to date: production decline rate ~ 5% per                                                                          
     year, on average.                                                                                                          
                                                                                                                                
     Over the last 10 years, production decline rate ~ 4.2                                                                      
     % per year, on average.                                                                                                    
                                                                                                                                
     We expect the decline rate to flatten out to 3.2 % per                                                                     
     year, on average, through FY 2030.                                                                                         
                                                                                                                                
                                                                                                                                
8:14:54 AM                                                                                                                    
                                                                                                                                
Commissioner  Butcher detailed  the graph  on Slide  6: "ANS                                                                    
Production  History and  Forecast."  The  slide depicts  the                                                                    
forecast from 1977 with the  sharp increase to approximately                                                                    
2 million  barrels in 1988.  He pointed out  the precipitous                                                                    
decline  through  the 1990s.  The  largest  producer is  the                                                                    
Prudhoe Bay field illustrated in yellow.                                                                                        
                                                                                                                                
8:15:43 AM                                                                                                                    
                                                                                                                                
Commissioner  Butcher  discussed  Slide 7:  "Forecasted  ANS                                                                    
Production  FY  2010-2020. He  noted  that  the area  shaded                                                                    
light gray indicates fields  that are "currently producing."                                                                    
The area  continues to  decline over the  next ten  years at                                                                    
the  same slope  seen  in  the last  ten  years. The  "under                                                                    
development" portion  is shown  in darker grey  while "under                                                                    
evaluation"  is  illustrated  in   black  and  is  the  most                                                                    
speculative of the three.                                                                                                       
                                                                                                                                
8:16:53 AM                                                                                                                    
                                                                                                                                
Commissioner  Butcher  discussed  Slide  8:  "Conclusion  on                                                                    
Production."                                                                                                                    
                                                                                                                                
    · Production forecasting requires consideration of each                                                                     
      project's geology, development plans, commerciality,                                                                      
      production profiles, decline curves and timing.                                                                           
    · Department uses extensive well and field specific data                                                                    
      acquired from producers, AOGCC, and DNR.                                                                                  
    · New field development is very important in mitigating                                                                     
      decline rates.                                                                                                            
                                                                                                                                
Vice-chair  Fairclough asked  if  geologists  expect a  high                                                                    
probability of oil in the  fields. She asked for the opinion                                                                    
of the  department. She referred  to North  Slope production                                                                    
decline illustrated in Slide 5  and the statement "We expect                                                                    
the decline rate to flatten  to approximately 3.2% per year,                                                                    
on average  through FY 2030.  She wondered about  the number                                                                    
of barrels that are anticipated  to flow through the line in                                                                    
2030. Commissioner  Butcher deferred  the question  to Frank                                                                    
Molli.                                                                                                                          
                                                                                                                                
FRANK MOLLI,  PRODUCTION FORECAST CONSULTANT,  DEPARTMENT OF                                                                    
REVENUE,  responded that  the  estimated production  through                                                                    
the pipeline in the year 2030  is 328,000 barrels of oil per                                                                    
day.                                                                                                                            
                                                                                                                                
Vice-chair Fairclough  asked for  an estimated price  of oil                                                                    
in   2030.   Commissioner   Butcher   responded   that   the                                                                    
department's estimates extend through 2020 only.                                                                                
                                                                                                                                
Co-Chair  Stoltze  asked  for a  projection  of  oil  prices                                                                    
needed  to cover  the budget  growth. Mr.  Molli offered  to                                                                    
provide the answer.                                                                                                             
                                                                                                                                
8:20:11 AM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough  agreed  that the  throughput  time's                                                                    
price  must be  anticipated  for  the price  of  oil in  the                                                                    
future.                                                                                                                         
                                                                                                                                
Representative   Guttenberg   asked   about   variables   or                                                                    
scenarios for a development plan.                                                                                               
                                                                                                                                
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES responded  that a plan  of development is  used to                                                                    
describe the  commitment made  by the  lessees to  develop a                                                                    
unit. A  unit is  comprised of a  collection of  leases that                                                                    
contain common  interest in the  oil pool that  lies beneath                                                                    
them. The plan of development  describes the pool and how it                                                                    
will be developed and the  timing for development. The plans                                                                    
are submitted  to the Department of  Natural Resources (DNR)                                                                    
when the unit is  formed under the department's regulations.                                                                    
When  the unit  is  formed on  non-state land,  particularly                                                                    
federal  land,  a different  process  is  utilized with  the                                                                    
Bureau of Land Management (BLM).                                                                                                
                                                                                                                                
Representative  Guttenberg  asked if  influential  variables                                                                    
are  viewed  when  a  development   plan  is  submitted.  He                                                                    
wondered  about potential  permitting problems,  unnecessary                                                                    
delays and potential mitigation of the issues.                                                                                  
                                                                                                                                
Mr.  Balash  responded that  the  Division  of Oil  and  Gas                                                                    
contains a unit  with a specific manager.  The manager works                                                                    
with the  unit operator. The department  elicits feedback to                                                                    
improve   the   understanding   of   progress   within   the                                                                    
reservoirs.  He imagined  that some  units  are simpler,  as                                                                    
they  are small  with a  single owner.  The larger  and more                                                                    
complex  the   reservoir  the   more  effort   required  for                                                                    
development of  the field. The specific  plans developed are                                                                    
communicated between  the individual  unit managers  and the                                                                    
operator.                                                                                                                       
                                                                                                                                
8:24:49 AM                                                                                                                    
                                                                                                                                
Representative Guttenberg asked about  the change in the tax                                                                    
structure  to incentivize  development. He  asked about  the                                                                    
development  plan.  He wondered  about  a  forecast for  the                                                                    
potential  change. Permitting  often presents  an issue.  He                                                                    
asked  if other  issues  exist. Has  industry behavior  been                                                                    
modified by a certain action in the past?                                                                                       
                                                                                                                                
Commissioner Butcher stated  an example of the  heavy oil in                                                                    
Ugnu. The  economics of the  oil are  complex as it  is very                                                                    
expensive to produce the oil.  Fields that are not currently                                                                    
developed are affected by HB  110. The economics of the bill                                                                    
would  allow  companies to  view  areas  of production  that                                                                    
would  not  have  been  considered  under  the  current  tax                                                                    
structure.                                                                                                                      
                                                                                                                                
8:27:03 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked about  the Economic  Limit Factor                                                                    
(ELF) system allowed  for a zero percent tax  unless a field                                                                    
was large and productive. He asked  why a low tax rate would                                                                    
work now when it was ineffective  in the past. He added that                                                                    
the  North Slope  had a  historic price  of $18  to $20  per                                                                    
barrel through 2002, which  increased substantially by 2006.                                                                    
He wondered  why the outcome  would be different now  if the                                                                    
past indicated that  a high price of oil coupled  with a low                                                                    
tax  rate  did  not  incentivize  exploration.  Commissioner                                                                    
Butcher responded  that despite  the increase in  oil prices                                                                    
in 2006,  the forecasted price  of oil is much  greater. The                                                                    
level of  industry expertise with  the advent  of horizontal                                                                    
drilling  makes  exploration  formerly  difficult  in  2006,                                                                    
possible. He  added that  the industry  must testify  with a                                                                    
compelling case that HB 110 will result in change.                                                                             
                                                                                                                                
8:30:53 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze   commented  that   a  meeting   with  the                                                                    
producers is planned.                                                                                                           
                                                                                                                                
Representative Gara commented on  newer fields that are more                                                                    
difficult to develop. Newer fields  require a smaller profit                                                                    
margin. The  current system accounts for  the smaller profit                                                                    
margin,  as the  tax  rate is  only on  profits  and $30  of                                                                    
profit  must  be  made before  progressivity  kicks  in.  He                                                                    
pointed out that  to make $30 of profit on  a field with $50                                                                    
lifting costs; progressivity  will kick in at  a much higher                                                                    
price.  Commissioner Butcher  agreed,  but  stated that  the                                                                    
view presented is  for the entire life of  the field, making                                                                    
it less  likely for industry  to seek development  under the                                                                    
current tax regime. Tax credits  are of great benefit on the                                                                    
front end,  but the  tax structure plays  a larger  role for                                                                    
the long term.                                                                                                                  
                                                                                                                                
Representative Gara  pointed out that the  charts illustrate                                                                    
that the tax rate will not  kick in until well over $100 per                                                                    
barrel.   Commissioner  Butcher   replied   that  the   more                                                                    
expensive the  field, the  higher the price  of oil  must be                                                                    
for progressivity to kick in.                                                                                                   
                                                                                                                                
8:33:18 AM                                                                                                                    
                                                                                                                                
Representative  Doogan   asked  about  Point   Thompson.  He                                                                    
understood that the department had  taken Point Thompson off                                                                    
the list because  of the legal dispute  between the producer                                                                    
and  the   state.  Commissioner  Butcher  stated   that  the                                                                    
forecast is  two decades  out. He  suggested that  Mr. Molli                                                                    
provide the history.                                                                                                            
                                                                                                                                
Mr.  Molli   stated  that   Point  Thompson   expects  minor                                                                    
production in 2015  regardless of whether or not  a gas line                                                                    
is constructed.  The Point Thompson production  was included                                                                    
in   the  "under   evaluation"  category,   which  is   more                                                                    
speculative  than   the  "currently  producing"   or  "under                                                                    
development" categories.                                                                                                        
                                                                                                                                
Representative  Doogan  asked  if the  production  in  Point                                                                    
Thompson  was  imminent  prior to  the  dispute.  Mr.  Molli                                                                    
responded that  he provided the  fall forecast  beginning in                                                                    
2009. He was unsure about the years prior.                                                                                      
                                                                                                                                
8:35:44 AM                                                                                                                    
                                                                                                                                
Representative Wilson asked if  past forecasts were reviewed                                                                    
prior  to  making  future  forecasts.  Commissioner  Butcher                                                                    
responded that  the department is  aware of  past forecasts,                                                                    
but  the awareness  does not  affect  future forecasts.  The                                                                    
department's  past forecasts  have  been optimistic.  Delays                                                                    
are imminent leading forecasts to appear optimistic.                                                                            
                                                                                                                                
Representative  Wilson   requested  documentation  regarding                                                                    
past  production  forecast  accuracy.  Commissioner  Butcher                                                                    
offered  to   provide  the  requested  information   to  the                                                                    
committee.                                                                                                                      
                                                                                                                                
BRUCE TANGEMAN,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE                                                                    
informed  that  he  had  delivered  responses  to  questions                                                                    
including  examples of  projections versus  actuals included                                                                    
in the committee packet.                                                                                                        
                                                                                                                                
Representative  Hawker  acknowledged  that  forecasting  was                                                                    
historically  optimistic. He  pointed  out  that some  areas                                                                    
slated for  exploration contain issues  that are  beyond the                                                                    
control  of the  legislature. The  federal policy  currently                                                                    
prevents   some   development.   He   wondered   about   the                                                                    
rationalization  about  the  probability of  the  degree  of                                                                    
optimism  in the  current projections.  Mr. Molli  responded                                                                    
that   the  "under   evaluation"  layer   proves  the   most                                                                    
uncertain.                                                                                                                      
                                                                                                                                
8:40:28 AM                                                                                                                    
                                                                                                                                
Mr. Molli  noted that  Umiat was discovered  in 1946  by the                                                                    
Navy and  has 12 wells  drilled into the  reservoir. Several                                                                    
wells are productive. The current  operator plans to explore                                                                    
further leading  to a high  probability that the  field will                                                                    
produce  further. He  expressed uncertainty  regarding Point                                                                    
Thompson. Each project had its range of certainty.                                                                              
                                                                                                                                
Representative  Hawker agreed  about the  substantial degree                                                                    
of  uncertainty  in  the foreword  projection.  He  saw  the                                                                    
forecast  as optimistic.  He  pointed out  Slide  4 and  the                                                                    
factors  affecting production  forecasting.  He opined  that                                                                    
one  missing  factor  was the  fundamental  premise  of  the                                                                    
availability   of   capital.   Unlimited   availability   of                                                                    
investment capital leads  to vastly different circumstances.                                                                    
He  stated that  the point  had  not been  addressed to  his                                                                    
knowledge.  He  wondered  if  the   degree  of  capital  was                                                                    
considered in the forecasting process.                                                                                          
                                                                                                                                
8:43:28 AM                                                                                                                    
                                                                                                                                
Mr.   Molli  answered   that  he   did   not  consider   the                                                                    
availability of capital when  forecasting oil production. He                                                                    
imagined that the consideration was made by the operators.                                                                      
                                                                                                                                
Representative   Joule   requested  additional   information                                                                    
regarding  an  effective tax  rate.  He  requested a  global                                                                    
picture  regarding   incentives.  He  asked  how   much  the                                                                    
economic  downfall impacted  investment decisions  regarding                                                                    
resources.                                                                                                                      
                                                                                                                                
8:47:06 AM                                                                                                                    
                                                                                                                                
Commissioner  Butcher responded  that he  would provide  the                                                                    
committee  with an  effective tax  rate slide  that accounts                                                                    
for  the  credits.  He  was sure  that  the  industry  would                                                                    
provide  further  insight.  He  pointed  out  that  Alaska's                                                                    
exploratory  wells continue  to drop,  while exploration  in                                                                    
other states is rising.                                                                                                         
                                                                                                                                
Representative  Costello  questioned  the  accuracy  of  the                                                                    
forecast. She informed  that her staff had  done research on                                                                    
the  topic of  accuracy.  Her staff  calculated the  average                                                                    
error rates  and applied  them to  the future.  The findings                                                                    
illustrate  that  in  2019, 343,000  barrels  per  day  were                                                                    
calculated compared  to the  forecasted 551,000  barrels per                                                                    
day.                                                                                                                            
                                                                                                                                
Representative Costello asked about  the 3.2 percent decline                                                                    
and  the  reason  for  the  flattening  curve.  Commissioner                                                                    
Butcher offered to provide the  committee with the requested                                                                    
information  in  graph  form  to  offer  a  history  of  the                                                                    
forecast's accuracy.  He asked Mr. Molli  to provide insight                                                                    
regarding future production.                                                                                                    
                                                                                                                                
8:50:32 AM                                                                                                                    
                                                                                                                                
Mr.  Molli  stated  that new  production  will  result  from                                                                    
Nikiachuk  whose  peak  is  anticipated  by  2014  or  2015.                                                                    
Liberty is  another new field formerly  anticipated to begin                                                                    
in 2012, but since delayed. Alpine West was also delayed.                                                                       
                                                                                                                                
Representative    Costello   appreciated    the   department                                                                    
providing the committee with the information.                                                                                   
                                                                                                                                
8:52:31 AM                                                                                                                    
                                                                                                                                
AT EASE                                                                                                                         
                                                                                                                                
8:58:51 AM                                                                                                                    
                                                                                                                                
RECONVENED                                                                                                                      
                                                                                                                                
DAN  SEAMOUNT,  COMMISSION  CHAIRMAN,  ALASKA  OIL  AND  GAS                                                                    
CONSERVATION  COMMISSION,  introduced himself.  He  reported                                                                    
serving  with the  industry in  exploration for  Marathon in                                                                    
off-shore California.  He noted  that Mr. Davies  is online.                                                                    
He  began his  PowerPoint presentation  "Alaska Oil  and Gas                                                                    
Conservation Commission (AOGCC) (copy on file).                                                                                 
                                                                                                                                
9:01:09 AM                                                                                                                    
                                                                                                                                
Mr.  Seamount  began  with  Slide 2:  "Alaska  Oil  and  Gas                                                                    
Conservation Commission."                                                                                                       
                                                                                                                                
    · AOGCC Mission                                                                                                             
    · Charts and Statistics                                                                                                     
         1. Historical O & G Activity                                                                                           
         2. Drilling Permits (the Plan)                                                                                         
         3. Drilled Wells and Well Work (the Actual Work)                                                                       
    · The Future                                                                                                                
                                                                                                                                
9:03:53 AM                                                                                                                    
                                                                                                                                
Mr.  Seamount  discussed  Slide   3:  "Alaska  Oil  and  Gas                                                                    
Conservation Commission (AOGCC)"                                                                                                
                                                                                                                                
     Quasi-judicial State regulatory agency                                                                                     
          -Oversight for underground oil and gas operations                                                                     
             · Private and public lands in Alaska                                                                               
             · Exercises police power of the state                                                                              
     Regulate drilling and production for oil, gas and                                                                          
     geothermal resources.                                                                                                      
                                                                                                                                
Mr. Seamount detailed Slide 4: "AOGCC Mission."                                                                                 
                                                                                                                                
        · Prevent waste of energy resources (Oil, Gas,                                                                          
          Geothermal)                                                                                                           
        · Promote greater ultimate energy resource recovery                                                                     
        · Protect underground fresh water from damage                                                                           
          caused by oil, gas, and geothermal operations                                                                         
        · Protect human safety                                                                                                  
        · Protect correlative rights                                                                                            
                                                                                                                                
9:05:49 AM                                                                                                                    
                                                                                                                                
Mr. Seamount discussed Slide 5: AOGCC Jurisdiction."                                                                            
                                                                                                                                
   · Oil and gas resource development                                                                                           
   · Geothermal resource development                                                                                            
   · Underground storage of natural gas                                                                                         
   · Metering accuracy for custody transfer                                                                                     
                                                                                                                                
Mr.   Seamount   discussed   Slide  6:   "Types   of   AOGCC                                                                    
Permits/Decisions."                                                                                                             
                                                                                                                                
   · Drilling- 2300+ last 10 years                                                                                              
   · Wellwork- 4000+ last 10 years                                                                                              
   · Underground Injection (EOR, Waste disposal, Gas                                                                            
     Storage)- 46 last 10 years                                                                                                 
   · Special     development     considerations     (dispute                                                                    
     adjudication, gas flaring, safety equipment, and                                                                           
     others)-67 last 10 years                                                                                                   
                                                                                                                                
Representative Doogan asked about the term "well work."                                                                         
                                                                                                                                
9:07:36 AM                                                                                                                    
                                                                                                                                
Mr. Seamount  offered to address  the question later  in the                                                                    
presentation.                                                                                                                   
                                                                                                                                
Mr.  Seamount  discussed  drilling  and well  work  and  the                                                                    
statistics involved in both.                                                                                                    
                                                                                                                                
Mr. Seamount joked about the nature of statistics.                                                                              
                                                                                                                                
9:09:52 AM                                                                                                                    
                                                                                                                                
Mr. Seamount  discussed Slide  7: "Development  Timeline for                                                                    
North Slope  Oil Fields." He  explained that three  types of                                                                    
wells  exist: exploration  wells,  oil  producer wells,  and                                                                    
service wells.  Service wells are the  enhanced oil recovery                                                                    
wells,  which inject  fluids  or gasses  into  the pools  to                                                                    
allow  recovery of  the  resource. He  pointed  out that  29                                                                    
percent of the field wells are service wells.                                                                                   
                                                                                                                                
9:11:08 AM                                                                                                                    
                                                                                                                                
Representative  Gara commented  on  statistics showing  that                                                                    
exploration wells are declining  while development wells are                                                                    
increasing.  He  asked  if  a   development  well  seeks  to                                                                    
maintain production  or increase production of  a field. Mr.                                                                    
Seamount  answered  both;  development  wells  maintain  and                                                                    
increase production.  He added that well  work includes work                                                                    
done  on  existing  wells  to repair  them  or  to  increase                                                                    
production.                                                                                                                     
                                                                                                                                
Representative Gara stated that  the mentioned chart was one                                                                    
year behind.  He wondered why  companies are  investing more                                                                    
money  in  development  wells than  exploration  wells.  Mr.                                                                    
Seamount replied that the requested  trends and data will be                                                                    
discussed later  in the discussion.  He could  not speculate                                                                    
on  the  industry's  decisions.   His  experience  was  that                                                                    
exploration was a result of  oil price, although he admitted                                                                    
that did not correlate in Alaska.                                                                                               
                                                                                                                                
9:13:47 AM                                                                                                                    
                                                                                                                                
Representative  Hawker appreciated  Slide 7.  He interpreted                                                                    
that   the   chart   illustrated  approximately   20   major                                                                    
developments  initiated  during  the Economic  Limit  Factor                                                                    
(ELF) tax structure. Mr. Seamount concurred.                                                                                    
                                                                                                                                
9:15:09 AM                                                                                                                    
                                                                                                                                
Mr. Seamount  added that the  chart illustrates  the lengthy                                                                    
time that  elapses between discovery and  actual production.                                                                    
Economics,  permitting  agencies,  and  litigation  can  all                                                                    
delay the process.                                                                                                              
                                                                                                                                
9:15:56 AM                                                                                                                    
                                                                                                                                
Representative   Joule  injected   that  the   Coastal  Zone                                                                    
Management was also a player in the thriving industry.                                                                          
                                                                                                                                
Representative  Hawker   pointed  out   that  none   of  the                                                                    
mentioned 20 plus developments existed offshore.                                                                                
                                                                                                                                
Representative  Doogan  commented  on  the  three  types  of                                                                    
activity charted on  Slide 7. He asked  about the difference                                                                    
between  the  discovery,  limited  regular  production,  and                                                                    
regular production  categories. Mr. Seamount  responded that                                                                    
limited production includes well testing.                                                                                       
                                                                                                                                
Representative  Doogan understood  that many  of the  listed                                                                    
wells lacked  the limited production category.  Mr. Seamount                                                                    
agreed. He  stated that when the  infrastructure is present,                                                                    
then   the   limited    regular   production   category   is                                                                    
unnecessary.                                                                                                                    
                                                                                                                                
9:18:33 AM                                                                                                                    
                                                                                                                                
Mr.  Seamount stated  that  the chart  was  compiled by  Mr.                                                                    
Davies.                                                                                                                         
                                                                                                                                
Mr.  Seamount  introduced  Slide  8:  "Alaska  Oil  and  Gas                                                                    
Conservation Commission."                                                                                                       
                                                                                                                                
   · AOGCC Mission                                                                                                              
   · Charts and Statistics                                                                                                      
        1. Historical O & G Activity                                                                                            
        2. Drilling Permits (the Plan)                                                                                          
        3. Drilled Wells and Well Work (the Actual Work)                                                                        
   · The Future                                                                                                                 
                                                                                                                                
Mr.  Seamount moved  on  to  Slide 9:  "Alaska  Oil and  Gas                                                                    
Activity."  The graph  illustrates his  agency's involvement                                                                    
in  Alaska  since  1957.  He  stated  that  the  blue  curve                                                                    
illustrates drilling permits processed  by AOGCC. He noted a                                                                    
drop  in the  curve  around  1968 as  a  result of  industry                                                                    
leaving Cook Inlet for the  newly discovered Prudhoe Bay. He                                                                    
believed that  Cook Inlet continued  to hold  vast potential                                                                    
and has been sorely neglected since 1968.                                                                                       
                                                                                                                                
Mr. Seamount pointed out the  next great increase during the                                                                    
development  of  Prudhoe  Bay   and  Kuparuk.  The  activity                                                                    
diminished in the  mid 2000s. He added that  the green curve                                                                    
on the chart includes the  number of active wells. An active                                                                    
well  is  any  well  that  the  inspector  must  deal  with.                                                                    
Finally,   the  purple   curve  indicates   the  number   of                                                                    
reservoirs overseen  and the plans of  development that have                                                                    
been approved.                                                                                                                  
                                                                                                                                
9:21:45 AM                                                                                                                    
                                                                                                                                
Representative Gara expressed confusion  about the chart. He                                                                    
asked  if  the  blue  dots signify  wells  or  permits.  Mr.                                                                    
Seamount stated  that the blue  dots are  permits processed.                                                                    
The number of permits processed  is similar to the number of                                                                    
wells  drilled   and  provides  an  accurate   indicator  of                                                                    
activity.                                                                                                                       
                                                                                                                                
Representative   Gara  asked   if  drilling   wells  are   a                                                                    
combination   of  exploration   wells,  service   wells  and                                                                    
development  wells. Mr.  Seamount  responded  yes. He  added                                                                    
that the  alternate energy wells  in the form  of geothermal                                                                    
and underground coal gasification are also included.                                                                            
                                                                                                                                
Representative  Gara  noted  that   in  2010,  roughly  2500                                                                    
drilling wells existed. He asked  if development and service                                                                    
wells  were  plentiful.  Mr.  Seamount  responded  that  the                                                                    
number  of well  permits is  170, but  the number  of active                                                                    
wells is 4500.                                                                                                                  
                                                                                                                                
Representative  Gara pointed  out that  the chart  indicates                                                                    
approximately 170 wells in 2010.   Mr. Seamount replied that                                                                    
the number of  active wells is greater than  4500. An active                                                                    
well  is  any  well  dealt with  by  inspectors;  these  may                                                                    
include  wells  that  are  not   producing.  The  number  of                                                                    
producing wells is greater than 2000.                                                                                           
                                                                                                                                
9:25:05 AM                                                                                                                    
                                                                                                                                
Representative Doogan  commented on  the number  of permits.                                                                    
He  supposed  that  until  1984,  production  increased.  He                                                                    
commented on the  sharp decline in permits  in 1985. Another                                                                    
rise  is illustrated  lasting until  1999 where  yet another                                                                    
sharp decline is shown. He asked  to know the reason for the                                                                    
declines.  Mr.   Seamount  stated  that  1999   provided  an                                                                    
anomaly.  He  did not  have  an  explanation for  the  sharp                                                                    
decline. He  thought the question  might be better  asked of                                                                    
industry. Representative Doogan asked  again about 1985. Mr.                                                                    
Seamount supposed that the major  development of Prudhoe Bay                                                                    
and Kuparuk had declined.                                                                                                       
                                                                                                                                
Mr. Seamount detailed Slide 10:  "Alaska's Average daily Oil                                                                    
and  NGL  Production  Rate."  He  stated  that  Commissioner                                                                    
Butcher had  provided great detail  about the  slide earlier                                                                    
in today's  presentation. He noted  the decline  in Alaska's                                                                    
production  shown   between  2000   and  2003  due   to  the                                                                    
development of  the Alpine and Northstar  fields. Alpine was                                                                    
the largest  field discovered  in the  United States  at the                                                                    
time. He understood that two  or three additional areas have                                                                    
been discovered, but have yet to be developed.                                                                                  
                                                                                                                                
9:28:19 AM                                                                                                                    
                                                                                                                                
Representative Edgmon asked  about developing technology and                                                                    
horizontal drilling.  He wondered  whether an  existing well                                                                    
that  utilizes the  horizontal drilling  technique would  be                                                                    
considered   a   development   well.   He   wondered   about                                                                    
identifying the trends on the  chart regarding the advent of                                                                    
horizontal  drilling and  its effect  on  active wells.  Mr.                                                                    
Seamount responded  that extended lateral drilling  has been                                                                    
used in  Alaska since the  early 2000s. The  wells employing                                                                    
lateral  drilling  are  considered  development  wells.  The                                                                    
technology of  horizontal drilling has improved  greatly and                                                                    
could open up additional resources.                                                                                             
                                                                                                                                
Representative   Edgmon   stated   that   he   was   seeking                                                                    
correlations between  the advent of horizontal  drilling and                                                                    
the data  provided on Slide  9. Mr. Seamount stated  that he                                                                    
was in the process of speculating that correlation.                                                                             
                                                                                                                                
9:31:09 AM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough asked if  a correlation might be drawn                                                                    
between the flattening of the blue  line in 1999 on Slide 10                                                                    
and the  discovery on  Slide 11.  She wondered  if explorers                                                                    
were  in the  middle of  processing instead  of drilling  or                                                                    
bringing  the  production  online. Mr.  Seamount  liked  the                                                                    
observation,  and admitted  that he  had not  considered the                                                                    
idea.                                                                                                                           
                                                                                                                                
Representative  Gara wondered  if the  advent of  horizontal                                                                    
drilling would lead to the  expectation of a lower number of                                                                    
wells  since  each well  reaches  further.  Fewer wells  are                                                                    
required to  obtain a  certain amount  of oil.  Mr. Seamount                                                                    
stated that Representative  Gara's observation was partially                                                                    
correct.  He   added  that  one  might   encounter  reserves                                                                    
otherwise unseen.                                                                                                               
                                                                                                                                
Representative Gara asked if the  Liberty field was affected                                                                    
by a  federal decision regarding drilling  pad construction.                                                                    
He asked if  Mr. Seamount had confidence  in the progression                                                                    
of the field.  Mr. Seamount did not know the answers.                                                                           
                                                                                                                                
9:33:43 AM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough  asked a  question about the  graph on                                                                    
Slide 9. She wondered if  the blue dots signify permits, and                                                                    
the  green triangles  indicate  active  wells. Mr.  Seamount                                                                    
agreed  that  the  green  triangles  indicate  active  wells                                                                    
requiring   inspection.   The   wells  indicated   are   not                                                                    
necessarily producing wells.                                                                                                    
                                                                                                                                
Representative Guttenberg asked if  one well is drilled with                                                                    
five different  horizontal directions, is it  considered one                                                                    
or five  wells. Mr. Seamount  replied five with  one surface                                                                    
hole.                                                                                                                           
                                                                                                                                
9:35:56 AM                                                                                                                    
                                                                                                                                
Mr. Seamount  continued with Slide 11:  "North Slope Average                                                                    
Daily Oil and  NGL Production Rate." He  offered very little                                                                    
commentary  since Commissioner  Butcher addressed  the slide                                                                    
earlier.                                                                                                                        
                                                                                                                                
Mr.  Seamount  discussed  Slide  12:  "Alaska  Oil  and  Gas                                                                    
Conservation Commission."                                                                                                       
                                                                                                                                
   · AOGCC Mission                                                                                                              
   · Charts and Statistics                                                                                                      
        1. Historical O & G Activity                                                                                            
        2. Drilling Permits                                                                                                     
                                                                                                                                
Mr. Seamount  discussed Slide 13: "Exploratory  Well Permits                                                                    
(1996-2010)."  He mentioned  the  various participants  with                                                                    
approved permits. He noted the  trends in exploration wells.                                                                    
He highlighted  2010 where the majority  of exploratory well                                                                    
permits were  for alternate  energy permits  for underground                                                                    
coal gasification and geothermal.                                                                                               
                                                                                                                                
Mr.  Seamount   highlighted  Slide  14:   "Exploratory  Well                                                                    
Permits (1996-2010)  Statewide: Oil and Gas."  He noted that                                                                    
without  the  alternative  energy  permits  in  2010  see  a                                                                    
drastic drop with only three exploration permits submitted.                                                                     
                                                                                                                                
Co-Chair Stoltze asked  if the permits led to  the source of                                                                    
the one well discussed  in committee. Mr. Seamount clarified                                                                    
that the  chart indicates  permits applied for  versus wells                                                                    
drawn.  He understood  that one  exploration  well would  be                                                                    
drilled this  year. Co-Chair Stoltze  wished to  amplify Mr.                                                                    
Seamount's statement as exploration  wells are the source of                                                                    
much committee debate.                                                                                                          
                                                                                                                                
9:39:31 AM                                                                                                                    
                                                                                                                                
Representative  Doogan believed  the  chart illustrated  two                                                                    
well permits issued in 2010,  neither by the major producers                                                                    
on the North  Slope. Mr. Seamount agreed  and indicated that                                                                    
the next slide would illustrate exploratory well permits.                                                                       
                                                                                                                                
Mr. Seamount  turned to Slide 15:  "Exploratory Well Permits                                                                    
(1996-2010) Statewide:  Oil and Gas." The  chart illustrates                                                                    
the  wells  drilled by  the  four  large companies  (Unocal,                                                                    
Marathon, ConocoPhillips,  and British Petroleum).  He added                                                                    
that zero permits were received  in 2010 from the four major                                                                    
producers.  The  drop  off  began   in  2005  and  decreased                                                                    
steadily to zero in 2010.                                                                                                       
                                                                                                                                
Mr. Seamount  discussed Slide 16: "Exploratory  Well Permits                                                                    
(1996-2010) Statewide:  Oil and Gas." The  slide removed the                                                                    
four  major   producers  and  shows  what   other  potential                                                                    
investors  planned  for Alaska.  The  drop-off  by the  four                                                                    
majors in 2002 was made up by newcomers for awhile.                                                                             
                                                                                                                                
9:41:35 AM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough  queried Slides  15 and 16.  She asked                                                                    
about the price related to  the big producers being drawn to                                                                    
other markets with  a higher rate of  return. She questioned                                                                    
the availability  of drilling  rigs on  the North  Slope and                                                                    
when the  particular overlay  could be  expected so  that it                                                                    
could be seen  whether the situation was  constrained by the                                                                    
ability to  access drilling rigs.  Finally, she  wondered if                                                                    
permits were  not being  issued (like  at Pt.  Thompson) and                                                                    
whether  that might  affect  the  situation. She  understood                                                                    
that  ACES  regulations  were  not  significantly  addressed                                                                    
until the current year.                                                                                                         
                                                                                                                                
Mr. Seamount  responded that he  did not know the  answer to                                                                    
the  questions. He  thought the  operators could  answer. He                                                                    
stated that  the slides indicated  an oil price  curve; back                                                                    
in the  1990s, the price  of oil was  $20 per barrel  and in                                                                    
2008 it  was $130 per  barrel. The  price today at  close to                                                                    
$100 was  still high. The  numbers could be  superimposed on                                                                    
the curves; he  did not see any correlation  with oil price.                                                                    
He noted that in the past,  oil price was "king" and powered                                                                    
the decision  to drill  wells. The impact  did not  seem the                                                                    
same in Alaska.                                                                                                                 
                                                                                                                                
9:44:04 AM                                                                                                                    
                                                                                                                                
Representative Costello  recalled a Forbes  magazine article                                                                    
which listed Alaska's North Slope as  one of the top ten oil                                                                    
provinces  of the  future. She  asked  about the  difference                                                                    
between the  article and today's presentation.  Mr. Seamount                                                                    
asked Representative Costello to clarify her question.                                                                          
                                                                                                                                
Representative Costello  clarified that  she was  unsure why                                                                    
the interest in  Alaska was waning when,  from a geologist's                                                                    
point of view a viable  resource exists. Mr. Seamount stated                                                                    
that as a  geologist who has worked  throughout the country,                                                                    
he  found  the  North  Slope had  the  greatest  hydrocarbon                                                                    
potential.  He recalled  ten years  ago when  investment was                                                                    
limited  because  of the  high  cost  of doing  business  in                                                                    
Alaska.  He  added  that infrastructure  costs  limited  the                                                                    
interest as well.                                                                                                               
                                                                                                                                
9:46:23 AM                                                                                                                    
                                                                                                                                
Representative   Edgmon   asked   about   requirements   for                                                                    
production  of  data   regarding  geothermal  potential.  He                                                                    
wondered  if the  data  was easy  to  produce. Mr.  Seamount                                                                    
stated  that  he  will  require  production  data  from  the                                                                    
alternate energy exploration.                                                                                                   
                                                                                                                                
Representative Edgmon  stated that  the requirement  did not                                                                    
exist in the past. Mr. Seamount concurred.                                                                                      
                                                                                                                                
9:47:37 AM                                                                                                                    
                                                                                                                                
Representative  Gara expressed  concern  regarding a  policy                                                                    
change using only one year  of data. He commented that years                                                                    
of little  exploration were documented  in the chart  as far                                                                    
back as 1996. He wondered  why so few exploration wells were                                                                    
drilled in those years. Mr. Seamount did not know.                                                                              
                                                                                                                                
Representative  Gara asked  why only  two exploration  wells                                                                    
were slated for 2010.                                                                                                           
                                                                                                                                
Representative Hawker clarified that  the number of approved                                                                    
permits  is  listed on  the  left  side  of the  graph.  Mr.                                                                    
Seamount agreed and noted three  permits in 2010 and four in                                                                    
1999.                                                                                                                           
                                                                                                                                
Representative  Gara recalled  that  Mr. Seamount  expressed                                                                    
confusion regarding the  low number of permits  in both 2010                                                                    
and 1999. Mr. Seamount concurred.                                                                                               
                                                                                                                                
Representative Gara  commented on the high  price of lifting                                                                    
oil on the North Slope. He  wondered if the high price along                                                                    
with   the  high   cost  of   infrastructure  were   ongoing                                                                    
deterrents.  Mr. Seamount did not know.                                                                                         
                                                                                                                                
9:50:54 AM                                                                                                                    
                                                                                                                                
Representative Doogan  asked about  off shore  interest. Mr.                                                                    
Seamount  responded  that  areas greater  than  three  miles                                                                    
offshore are considered federal waters.                                                                                         
                                                                                                                                
Representative  Doogan  understood  that  an  evaluation  of                                                                    
prospectivity based  on the likelihood of  finding oil might                                                                    
lead to offshore drilling.                                                                                                      
                                                                                                                                
Mr.  Seamount responded  that over  twenty  basins exist  in                                                                    
Alaska  with the  potential for  oil  and gas  and only  two                                                                    
produced so  far. He added  that a couple of  onshore places                                                                    
have  proven oil  and gas,  the  National Petrochemical  and                                                                    
Refiners  Association (NPRA)  and  Arctic National  Wildlife                                                                    
Refuge (ANWR).                                                                                                                  
                                                                                                                                
Representative Doogan  commented that  Conoco is  very close                                                                    
to a potential offshore site.                                                                                                   
                                                                                                                                
Vice-chair  Fairclough  wondered  about the  producer's  ten                                                                    
year plans. She supposed  that decisions about resources may                                                                    
be  shifting. She  wondered if  companies adopt  profiles on                                                                    
the decade as the census occurs  every ten year. In 1999 and                                                                    
2000 the big producers made management decisions.                                                                               
                                                                                                                                
9:54:09 AM                                                                                                                    
                                                                                                                                
Representative  Guttenberg commented  on  Slide  16 and  the                                                                    
green shaded  for the Department  of Interior.  Mr. Seamount                                                                    
responded  that the  Department  of the  Interior drilled  a                                                                    
number of  coal bed  methane exploration  wells in  the past                                                                    
few  years for  a geological  survey evaluating  North Slope                                                                    
and Aleutian potential.                                                                                                         
                                                                                                                                
Co-Chair Thomas wondered why HB  110 incentivizes the majors                                                                    
as  opposed   to  the  independents.  He   opined  that  the                                                                    
independent companies ought to be incentivized.                                                                                 
                                                                                                                                
9:55:52 AM                                                                                                                    
                                                                                                                                
Representative  Hawker  enjoyed  the  chart  illustrated  on                                                                    
Slide 14 along with the  stories that it tells. He mentioned                                                                    
the highs  and lows  of oil prices  illustrated. He  noted a                                                                    
precipitous decline in  oil prices in 1998  and 1999 leading                                                                    
to  economic crisis  in Alaska.  He wondered  if exploratory                                                                    
drilling  helped  to extend  the  life  of the  Trans-Alaska                                                                    
Pipeline System through the  actual successful completion of                                                                    
wells on the North Slope.                                                                                                       
                                                                                                                                
10:00:11 AM                                                                                                                   
                                                                                                                                
Mr. Seamount expressed concern about the slow pace of                                                                           
exploration.                                                                                                                    
                                                                                                                                
HB 110 was HEARD and HELD in Committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
AOGCC HFIN Presentation031711.pdf HFIN 3/16/2011 8:00:00 AM
HB 110
HB11011 03 16 HFIN Production Forecast (FM) [Read-Only].pdf HFIN 3/16/2011 8:00:00 AM
HB 110
HB1101
HB110 AOGCC Replacement_Slide_9.pdf HFIN 3/16/2011 8:00:00 AM
HB 110