Legislature(2011 - 2012)BUTROVICH 205

03/28/2011 03:30 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Bills Previously Heard/Scheduled
Heard & Held
Question/Answers by Departments/Agencies:
Heard & Held
-- Includes Public Comment --
Moved CSHJR 19(RES) Out of Committee
-- Includes Public Comment --
        SB  85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                     
3:40:48 PM                                                                                                                    
CO-CHAIR  WAGONER  announced  the  consideration of  SB  85,  and                                                               
stated that he was maintaining his objection to version E.                                                                      
3:41:25 PM                                                                                                                    
CATHY  FORESTER, Commissioner,  Alaska Oil  and Gas  Conservation                                                               
Commission  (AOGCC), said  she would  respond  to questions  that                                                               
were submitted earlier. As to  whether the AOGCC could accept the                                                               
current  definition  of  "sustained  production,"  she  said  the                                                               
answer was yes.  As to how they feel about  using the term "pool"                                                               
as  the defining  mechanism for  a new  discovery, she  said they                                                               
don't feel  at all good  about that.  She related that  the AOGCC                                                               
asked  the Interstate  Oil and  Gas Compact  Commission to  query                                                               
other  states and  the two  that responded  warned against  using                                                               
"pool" because a development has  to be well underway before it's                                                               
possible  to ascertain  whether there  is more  than one  pool or                                                               
just  one  blanket  pool.  To  incentivize  more  than  just  one                                                               
operator to explore  and develop, the suggestion was  to use some                                                               
other than means to define a  new discovery, but nobody offered a                                                               
good alternative.                                                                                                               
CO-CHAIR WAGONER  asked if the  AOGCC talked to anybody  in North                                                               
MS. FORESTER replied the states  that responded were South Dakota                                                               
and Indiana.                                                                                                                    
CO-CHAIR  WAGONER reported  that someone  from North  Dakota told                                                               
him  their  defining  mechanism  for  a  new  discovery  was  two                                                               
sections of land.                                                                                                               
MS.  FORESTER responded  that AOGCC  supports using  a reasonable                                                               
unit of land,  and couldn't give a better answer  than that until                                                               
there was some production and a fair number of wells.                                                                           
SENATOR WIELECHOWSKI  noted that Great Bear  testified there were                                                               
multiple strata,  and asked if  she foresaw  difficulties arising                                                               
if a lease had three different strata of oil formations.                                                                        
MS. FORESTER explained  that each stratum should be  viewed as an                                                               
individual  pool,  because  they wouldn't  have  connectivity  or                                                               
CO-CHAIR  WAGONER   added  that   North  Dakota   addresses  that                                                               
situation the same way. The only  difference he found was that if                                                               
the  oil  is  on  two different  levels  within  the  two-section                                                               
boundary, there would be six wells instead of three.                                                                            
MS. FORESTER reiterated that each stratum would be a pool.                                                                      
SENATOR WIELECHOWSKI  asked if one well  could theoretically deal                                                               
with three pools.                                                                                                               
MS. FORESTER answered  yes, but an AOGCC permit  to co-mingle the                                                               
pools would  be necessary. Co-mingling  would require  proof that                                                               
the recovery wouldn't create waste;  the production would have to                                                               
be  as  good  as  or  better  than  if  each  pool  was  produced                                                               
SENATOR WIELECHOWSKI  referenced page 3, lines  16-18, that talks                                                               
about qualified development expenditures,  and asked if operating                                                               
expense  (opex) might  be included  in that  type of  exploration                                                               
MS.  FORESTER  answered it  was  the  committee's prerogative  to                                                               
define things  in the  bill, but in  general operating  costs are                                                               
the costs of producing. Operating  costs typically begin once the                                                               
well starts  to operate,  and includes  things like  performing a                                                               
workover to fix  broken wells, paying an operator  to turn valves                                                               
and feeding  people who  work in  the camp. The  costs up  to the                                                               
point that  production begins would  be allocated  to exploration                                                               
and development.                                                                                                                
CO-CHAIR  PASKVAN asked  hypothetically how  many wells  could be                                                               
drilled in 365 days at the Bakken Shale Oil Field.                                                                              
MS.  FORESTER replied  she didn't  have  enough familiarity  with                                                               
that operation to give an answer.                                                                                               
CO-CHAIR PASKVAN asked where he could get an answer.                                                                            
MS.  FORESTER offered  to ask  the  question of  Lynn Helms,  her                                                               
counterpart at IOGCC.                                                                                                           
3:49:23 PM                                                                                                                    
CO-CHAIR PASKVAN clarified that he  wanted to know how many wells                                                               
each  of  20 drill  rigs  could  drill  in  one year's  time.  He                                                               
explained that  that was  where they  would define  the qualified                                                               
development  expenditure  as to  whether  or  not production  was                                                               
going on.                                                                                                                       
SENATOR WIELECHOWSKI asked if it  presented a challenge to define                                                               
heavy oil in a pool.                                                                                                            
MS. FORESTER  replied there are  two groups of heavy  and viscous                                                               
oil.  One is  the West  Sak/Schrader Bluff,  which varies  in oil                                                               
viscosity from very  viscous and hard to produce  to less viscous                                                               
and  easier to  produce. The  less viscous  oil is  already being                                                               
developed. The other very viscous heavy  oil is found in the Ugnu                                                               
and a very small  area is currently under pilot to  see if it can                                                               
be produced.  A lot of both  the West Sak/Schrader Bluff  and the                                                               
Ugnu  are  not  developable  with  current  technology,  and  the                                                               
defining mechanism  for those  separate blanket  reservoirs would                                                               
be on viscosity,  not new pool. The low viscosity  oil is already                                                               
under production,  and the high viscosity  hard-to-get oil should                                                               
be incentivized.                                                                                                                
3:51:52 PM                                                                                                                    
SENATOR STEVENS joined the committee.                                                                                           
SENATOR  WIELECHOWSKI  asked  if  she  foresaw  any  problems  in                                                               
defining a pool of heavy oil.                                                                                                   
MS. FORESTER  replied the  West Sak/Schrader  Bluff and  the Ugnu                                                               
are each individual big pools  by the AOGCC's definition. And for                                                               
the sake  of what  the committee  is trying  to do,  the standard                                                               
definition  of  "pool"  doesn't  work.   She  said  it  works  in                                                               
conventional  reservoirs, but  not in  unconventional reservoirs.                                                               
Viscous oil, shale oil and gas  and probably coal bed methane are                                                               
SENATOR   WIELECHOWSKI   asked   her   to   describe   "sustained                                                               
MS. FORESTER replied  the definition says production  goes into a                                                               
sale  and doesn't  include testing,  evaluation  and pilots.  The                                                               
Ugnu is called a pilot, but once  it gets into a pipeline it's on                                                               
SENATOR  WIELECHOWSKI recapped  that  sustained production  means                                                               
when it goes in a pipeline.                                                                                                     
MS. FORESTER replied  that's the definition in  the statutes, and                                                               
the  AOGCC  has no  difficulty  understanding  and applying  that                                                               
3:55:25 PM                                                                                                                    
CO-CHAIR PASKVAN asked, in a shale  oil field, how long it takes,                                                               
on average, from the start of drilling to first production.                                                                     
MS.  FORESTER replied  she would  ask Lynn  Helms that  question,                                                               
because neither  she nor Mr.  Seamount had experience  with shale                                                               
oil or gas development.                                                                                                         
CO-CHAIR WAGONER asked if on the  first well it would be the well                                                               
itself, a pipeline,  a treatment plant and an  agreement to enter                                                               
the TAPS.                                                                                                                       
MS. FORESTER agreed.                                                                                                            
SENATOR WIELECHOWSKI referenced  an AOGCC chart and  asked if she                                                               
could explain the variations in  time for bringing on North Slope                                                               
oil fields. Kuparuk River Melt Water  took a year and one-half to                                                               
bring to regular production,  whereas Coleville River/Nanook took                                                               
six and  one-half years  and Nokia Chuck  at Schrader  Bluff took                                                               
six and three-fourth years.                                                                                                     
MS.   FORESTER   replied  one   thing   was   proximity  to   the                                                               
infrastructure  and   another  was  having  all   the  commercial                                                               
agreements  in   place.  Any  problems  with   either  will  slow                                                               
3:58:19 PM                                                                                                                    
SENATOR STEDMAN asked about the  status of AOGCC's data gathering                                                               
task regarding how may well feet were drilled.                                                                                  
MS. FORESTER replied it was  just about finished and Mr. Seamount                                                               
would deliver it the next time he was in Juneau.                                                                                
SENATOR STEDMAN expressed a desire  for the committee to hear the                                                               
MS. FORESTER confirmed that AOGCC  would deliver the presentation                                                               
at the committee's convenience.                                                                                                 
CO-CHAIR WAGONER  thanked Ms.  Forester and  asked if  there were                                                               
questions for Mr. Banks.                                                                                                        
3:59:53 PM                                                                                                                    
CO-CHAIR PASKVAN  asked Mr. Banks  how long  it takes in  a shale                                                               
oil field from the start of drilling to sustained production.                                                                   
KEVIN BANKS,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural Resources  (DNR), replied a  company doing work  in North                                                               
Dakota said that  the actual drilling can go  fairly quickly, but                                                               
that the  fracking process can  cause a slowdown, because  only a                                                               
certain  number  of frac  crews  are  available. He  opined  that                                                               
Commissioner Forester  should be able  to provide a  good average                                                               
estimate based on information from the folks in North Dakota.                                                                   
He  said  he  wanted  to   confirm  agreement  with  Commissioner                                                               
Forester's comments  on viscosity  and heavy oil.  It's difficult                                                               
to know  what type of oil  will be produced until  exploration is                                                               
well  underway,  but  how  credit  is  awarded  under  SB  85  is                                                               
certainly  the  single  most important  variable  in  identifying                                                               
heavy oil in Alaska. Division  staff has been challenged to think                                                               
about things  like depth of  drilling and productivity of  a well                                                               
as the defining  mechanism for heavy oil, but every  one of those                                                               
things  falls  short  of  simply identifying  heavy  oil  by  its                                                               
SENATOR FRENCH  asked how much  it costs to drill  an exploration                                                               
oil well on the North Slope.                                                                                                    
MR. BANKS  replied the numbers  go all  over the map.  Wells that                                                               
were  drilled in  the  southwestern  part of  the  NPR-A cost  in                                                               
excess of  $70-80 million, whereas  wells drilled at  Pt. Thomson                                                               
were probably closer to $100  million. In Alaska, shale wells may                                                               
cost  $20-25 million  depending  on the  distance  from the  Haul                                                               
Road.  He noted  that  information from  an earlier  presentation                                                               
indicated that  the average cost for  a well in North  Dakota was                                                               
$6.1 million.                                                                                                                   
SENATOR FRENCH asked if those were exploration wells.                                                                           
MR. BANKS answered no, those  were shale wells. He estimated that                                                               
a North  Slope exploration well that  was close to the  Haul Road                                                               
would cost about $25-30 million.                                                                                                
SENATOR FRENCH asked what would  be considered a healthy level of                                                               
exploration wells drilled  every year, and noted  that since 2003                                                               
the number was about 10 wells per year.                                                                                         
MR. BANKS answered "the more the merrier."                                                                                      
SENATOR  FRENCH  questioned  whether   the  focus  should  be  on                                                               
encouraging more  exploration wells  or on the  development costs                                                               
to bring a pool of oil to production.                                                                                           
MR. BANKS  responded that  Alaska is  challenged with  high costs                                                               
and remoteness,  and the state has  very few levers to  pull that                                                               
would have an effect on cost.                                                                                                   
SENATOR FRENCH asked  what percent of the cost  of an exploration                                                               
well is state subsidized through credits under ACES.                                                                            
MR. BANKS  replied it would depend  on how far the  well was from                                                               
existing infrastructure,  but it could  be the 40  percent direct                                                               
exploration credit plus  the net operating losses.  He offered to                                                               
follow up with a more exact answer.                                                                                             
SENATOR FRENCH expressed  concern that the bill  was unclear with                                                               
regard to  what it  would cost  the state.  He suggested  that an                                                               
alternative  would be  for the  state to  annually appropriate  a                                                               
sizeable amount of money to  stimulate 10 exploration wells. Once                                                               
the   money  was   gone  that   would  be   it  until   the  next                                                               
4:08:22 PM                                                                                                                    
CO-CHAIR WAGONER  asked how to  define an exploratory  shale well                                                               
as opposed  to a production  well, and  the number of  wells that                                                               
had been drilled through the shale structures.                                                                                  
MR. BANKS offered  to follow up with an exact  number, but it was                                                               
very few. To  define a shale prospect for the  purposes of SB 85,                                                               
he suggested  using area rather  than the normal definition  of a                                                               
pool,  because the  credit may  not be  available to  anyone else                                                               
once the  once development  and production  started on  the first                                                               
set of wells.                                                                                                                   
4:11:28 PM                                                                                                                    
]BRUCE  TANGEMAN,  Deputy  Commissioner,  Department  of  Revenue                                                               
(DOR), introduced himself.{                                                                                                     
CO-CHAIR WAGONER  asked if  the committee  had any  questions for                                                               
Mr. Tangeman.                                                                                                                   
SENATOR FRENCH asked  what percent of the cost  of an exploration                                                               
well is state-subsidized through credits under ACES.                                                                            
MR.  TANGEMAN replied  that for  the exploration  stage companies                                                               
would be eligible  for up to a 40 percent  exploration credit and                                                               
a  25  percent net  operating  loss  credit  for  a total  of  65                                                               
CO-CHAIR WAGONER observed that the  Great Bear properties had the                                                               
advantage  of proximity  to the  pipeline, which  would make  the                                                               
price relatively low for the first well to go into production.                                                                  
SENATOR   STEDMAN  referenced   Senator  French's   question  and                                                               
clarified that the  65 percent would be contributed  by the state                                                               
and federal  government and the  remaining 35 percent  would come                                                               
from  industry.   He  expressed  a   desire  to  hear   from  the                                                               
administration or  the consultants with  regard to where  else in                                                               
the world that magnitude of credit was available.                                                                               
CO-CHAIR  WAGONER said  his understanding  of SB  85 was  that it                                                               
addresses credit for production; it does not cover exploration.                                                                 
MR.  TANGEMAN  said  DOR's  reading  of  the  bill  was  that  it                                                               
incentivizes development;  the expenses  that go into  that stage                                                               
would  be  credited  against  a  tax  liability  once  production                                                               
SENATOR FRENCH  asked if cost ever  precluded development because                                                               
his sense was that once a pool  of oil is found, there's money to                                                               
develop it. The  hard part is finding the oil  in the first place                                                               
and that's where the analysis has to take place.                                                                                
4:16:27 PM                                                                                                                    
MR. TANGEMAN suggested he ask DNR that question.                                                                                
SENATOR  FRENCH said  Armstrong or  some other  company that  was                                                               
actively exploring  could say they'd  found oil but  couldn't get                                                               
the  money  to  build  a  production facility  to  get  it  to  a                                                               
MR.  TANGEMAN offered  his  understanding that  FEX  was in  that                                                               
position; they  found oil and  eventually gave their  leases back                                                               
to the state.                                                                                                                   
SENATOR FRENCH said he'd look into that.                                                                                        
SENATOR  WIELECHOWSKI asked,  under current  law, if  DOR or  DNR                                                               
audited qualified capital expenditures.                                                                                         
MR.   TANGEMAN  replied   DOR   audits   the  qualified   capital                                                               
SENATOR WIELECHOWSKI  recalled that Gaffney Kline  testified that                                                               
there was  a worry about gold  plating if credits were  more than                                                               
40 percent.  He asked  if the  administration had  concerns about                                                               
giving 100 percent for capital  expenditures and there being gold                                                               
MR.  TANGEMAN  replied  DOR's  concern  with SB  85  was  how  it                                                               
interacts with  the current tax  credit structure.  Initially the                                                               
bill said  a company  could take either  the existing  tax credit                                                               
structure or the one proposed under  SB 85. Now the bill says the                                                               
current tax credit  structure would stay in place  so the company                                                               
would have to  carry the costs during the  development stage, but                                                               
they  could  be  100  percent reimbursed  during  the  production                                                               
stage. DOR's  concern with  the current  language is  making sure                                                               
that qualified reimbursement is capped at 100 percent.                                                                          
CO-CHAIR   PASKVAN   asked  if   he   agreed   with  Mr.   Bank's                                                               
interpretation of  the current version  of SB 85: that  the first                                                               
shale oil  well may be  the only one  that would qualify  for the                                                               
MR.  TANGEMAN replied  he would  defer to  Director Banks  on the                                                               
technical aspects, but that was one  of the issues related to the                                                               
definition of a pool, and when  the clock starts and stops in the                                                               
development stage.                                                                                                              
CO-CHAIR WAGONER  recognized that  Representative Bob  Herron had                                                               
joined the meeting.                                                                                                             
CO-CHAIR WAGONER thanked the participants  and announced he would                                                               
hold SB 85 in committee.                                                                                                        

Document Name Date/Time Subjects
CSHJR 19 sponsor statement.pdf SRES 3/28/2011 3:30:00 PM
HJR 19
HJR 19 - EDT and RES Changes (for Senate Resources).pdf SRES 3/28/2011 3:30:00 PM
HJR 19
HJR 19 - Leg Research Report (revises 3.11.11).pdf SRES 3/28/2011 3:30:00 PM
HJR 19
HJR 19 - Senate Resources Hearing Request.pdf SRES 3/28/2011 3:30:00 PM
HJR 19
HJR 19 - Zero Fiscal Note.pdf SRES 3/28/2011 3:30:00 PM
HJR 19
HJR019C.PDF SRES 3/28/2011 3:30:00 PM
HJR 19
SCR 9_Sponsor Statement.pdf SRES 3/28/2011 3:30:00 PM
SCR 9_Version A.pdf SRES 3/28/2011 3:30:00 PM
SCR 9_Supporting Documents_Juneau AC Letter.pdf SRES 3/28/2011 3:30:00 PM
SCR 9_Supporting Documents_Map.pdf SRES 3/28/2011 3:30:00 PM
SCR 9_Supporting Documents_McDowell Taku Report ExSumm.pdf SRES 3/28/2011 3:30:00 PM
SCR 9_Supporting Documents_News Articles.pdf SRES 3/28/2011 3:30:00 PM