Legislature(2011 - 2012)HOUSE FINANCE 519
03/16/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB166 | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 166 | TELECONFERENCED | |
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 16, 2011
1:39 p.m.
1:39:31 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:39 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman
ALSO PRESENT
Representative Mike Chenault, Sponsor; Representative Mike
Hawker; Representative Alan Austerman; Senator Cathy
Giessel; James Armstrong, Staff for Representative Bill
Stoltze; Sharon Kelly, Staff, Representative Mike Chenault;
Daniel Seamount, Geology Commissioner, Chair, Alaska Oil
and Gas Conservation Commission.
SUMMARY
HB 166 STATE AGENCY PERFORMANCE AUDITS
CS HB 166(FIN) was REPORTED out of committee with
a "do pass" recommendation and with new fiscal
notes from the Office of the Governor and the
Legislature.
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 166
"An Act relating to performance reviews and audits of
executive branch agencies, the University of Alaska,
and the Alaska Court System; and providing for an
effective date."
1:41:34 PM
Vice-chair Fairclough MOVED to ADOPT workdraft CS HB 166
(FIN) (27-LS0492\X, Kirsch, 3/14/11) as a working document
in front of the committee.
Hearing no objection it was so ordered.
[NOTE: The bill version used can be located on BASIS under
the Documents section and is titled: "HB 166 Comparison
version I to X.pdf"]
JAMES ARMSTRONG, STAFF FOR REPRESENTATIVE BILL STOLTZE,
discussed that Sharon Kelly, Staff to Representative Mike
Chenault had been the lead staff on the legislation. He
noted that there had been a meeting on March 3, 2011 that
included Representative Hawker, staff from the Office of
Management and Budget, and other offices. He thanked Lisa
Kirch in Legislative Legal for her hard work on the CS and
all of the workdrafts that came before it. He relayed that
the committee was in possession of the workdraft, the
comparison, and new fiscal note. He added that the agencies
had been reordered and bracketed in the legislation.
REPRESENTATIVE MIKE CHENAULT, SPONSOR, thanked the
committee for hearing the bill. During the March 3rd
meeting approximately 20 issues had been reviewed and the
current CS was based on the consensus of the work team. He
asked his staff to discuss the changes of the bill.
SHARON KELLY, STAFF, REPRESENTATIVE MIKE CHENAULT,
highlighted several of the major items in the CS. She
discussed that the review team would operate under the
Legislative Audit Division instead of the Budget and Audit
Committee. She explained that the order of department
reviews had been changed slightly to group "like"
departments together. Additionally, the Budget and Audit
Committee had the authority to accelerate audits and at the
request of the review team the legislature and the Office
of the Governor were added to the list. Lastly, the timing
of the process was changed slightly to accommodate the
legislative process and the review process would sunset
after the first round of reviews to ensure that the
legislature's desired results were accomplished.
Co-Chair Thomas asked why the legislation would have a
sunset versus a continuous review. Ms. Kelly responded that
Legislative Audit had requested the sunset to make certain
that the process was working correctly.
Representative Doogan asked whether it was possible to
speed the process up to receive reviews sooner than 10 or
11 years out. Ms. Kelly responded that it was a ten-year
cycle but that the Budget and Audit Committee could choose
to accelerate the process if they wished.
Representative Doogan wondered whether the entire process
could be accelerated. Ms. Kelly replied in the affirmative.
Representative Doogan was concerned about the length of
time it would take to complete the process given that
institutional knowledge within the legislature could be
lost during the ten-year period.
Co-Chair Stoltze suspected that it could be a dynamic that
was in the purview. He noted that there were routine eight-
year audits and that some boards, commissions, and agencies
had experienced the problem.
Vice-chair Fairclough remarked that it was possible to
include more money in the fiscal note in order to advance a
project. She believed that the proposed CS would allow the
legislature to look at the numbers in the first few years
to determine what could be accomplished with the allocated
funds. She noted that the legislature could revisit the
fiscal note at anytime to advance things to a more rapid
pace. She supported the ten-year outlook and the ability to
learn from the first departments that would go through the
process.
Representative Hawker relayed that the work team had
discussed at length whether the ten-year review cycle was
frequent enough. The solution incorporated in the bill on
Page 3, Lines 15-17 included language that would
specifically provide the legislature the statutory
authority to conduct reviews prior to the ten-year date at
the discretion of the Legislative Budget and Audit
Committee.
Co-Chair Stoltze remarked that the agencies could not be
eliminated through the sunset provision.
Representative Edgmon voiced his support of the
legislation. He asked whether the bill would help the
process regarding the scrutiny of agency budgets and
provide a better understanding of division activities and
court duties. Ms. Kelly responded in the affirmative. She
relayed that as part of the requirements Legislative
Finance and Legislative Audit would provide the review team
and finance subcommittees with an in depth report of issues
that had arisen during the process.
Representative Edgmon wondered how the timing of the
process worked with the governor's budget that was released
annually on December 15 and with the legislative session
that began January. Ms. Kelly replied that beginning in
2012 Legislative Audit would receive information from
departments throughout the year and that the audit would
then go to the Budget and Audit Committee about the same
time that the governor's budget was released every
December. The departments would continue to have
approximately one month to respond and the information
would then be available for the finance subcommittees when
their work began every January.
Representative Guttenberg referred to Page 3, Lines 14-17.
He was concerned about how to handle multiagency
relationships with programs, such as the Departments of
Law, Public Safety, Corrections, and the Court System that
were interrelated in the work that they did. He wondered
whether there was a way that the integration of a justice
system could work in the process. Ms. Kelly replied in the
affirmative. She referred to Page 3, Lines 11-13 and
explained that overlapping services between departments
would be recognized as Legislative Audit developed the
scope of the audit that would be approved by the Budget and
Audit Committee. She stated that it could be more
appropriate for the justice system integration to occur in
2013, while issues related to other departments could be
addressed at the time of the Budget and Audit Committee
review.
Representative Guttenberg wondered how the logistics of the
process would take place. He discussed that the new process
would have significant legislative authority; however, the
final product would have to come before the legislature for
approval. He noted that the bill would allow Legislative
Audit to rewrite missions and measures and wondered whether
a new section of expertise would be required given that an
understanding of exactly what programs were supposed to
accomplish would be necessary. Ms. Kelly responded that the
missions and measures language was the result of a request
by a member of the review team. She believed that
Legislative Audit would look at the missions and measures
to determine whether they appropriately measured work
conducted by state agencies on behalf of the Alaskan
public. She added that the committee would have the ability
to recommend any changes that it would see fit.
Representative Wilson wanted to make certain the reports
would be available to the public. She cited language on
Page 3, Lines 8-10, that read "performance review reports
are confidential unless the report has been approved…" Ms.
Kelly replied the reports would become public. She noted
that Page 3, Section 2 referred to work that would be
completed prior to its transmittal to Legislative Audit.
Currently and continuing forward the information was
confidential during the month-long process and the Budget
and Audit Committee would release the report following the
designated period. She read from the legislation that "one
week before the first day of the regular session of the
legislature in the year following the review [year set out
in AS 44.66.020(a)], the review team shall provide to the
chairs or cochairs of the [senate and house finance]
committees a final report…"(Page 6, Lines 15-18).
Representative Gara wondered about the general fund budget
for the University of Alaska. Ms. Kelly responded that it
was approximately $360 million.
Representative Gara was concerned that the bill included
language that would allow department budget reductions of
at least ten percent when inefficiencies were identified;
however, he agreed with the general concept of the bill, an
external review, and the goal to identify duplicate efforts
and inefficiencies. He believed the ten percent figure was
arbitrary and relayed that it would be his preference to
receive a report that cited inefficiencies, provided
solutions, and recommended ways to save money. He opined
that in some circumstances it could decimate an agency to
take ten percent. He expressed that the figure would equate
to $110 million to $120 million for the Department of
Education and Early Development's (DOEED) budget and that
the significant reduction would only reduce the
effectiveness of the state's education system. He added
that he might introduce an amendment on the House floor
that would change the language for DOEED. Ms. Kelly
responded that it was not mandatory that the legislature
accept the ten percent reduction. She explained that the
sponsor had looked at the "Texas sunset bill" and that the
Texas budget committee was recommending a fifteen percent
cut. Although the bill aimed at a ten percent cut to reduce
inefficiencies, it did not intend agencies to cut ten
percent across the board. She remarked that the legislature
may decide to invest in the infrastructure to increase
savings in the future.
Representative Gara reiterated concern that the bill
required departments to find inefficiencies, duplications,
and things not authorized by statute that equaled at least
ten percent of the budget. He understood that the
legislature had the ultimate appropriation authority;
however, he believed that the standards outlined in the
bill may not exist. He explained that some agencies may cut
fifteen percent and others could be forced to cut ten
percent from areas outside of the bill's standards.
Representative Chenault remarked that without the inclusion
of a set percentage a department may profess that it was
not able to make any cuts. He communicated that the state
was fortunate that it did not have to currently require
cuts of a set percentage; however, that could change in the
future due to issues that were out of its control. He
believed that allowing the departments to review their own
programs to determine the inefficiencies and select areas
that could handle budget reductions would be better than
arbitrary cuts made by the legislature in the future.
Representative Gara believed that their view points on the
bill were not very far apart and that the legislature would
not be required to accept the budget cut recommendations.
He reiterated his concern that a reduction of $110 million
to the DOEED would do nothing but hurt the quality of
education provided to Alaskans.
Representative Chenault agreed; however, he noted that in
order to have the legislative "buy-in" to the budget
process, it was also necessary to have a department "buy-
in."
2:02:58 PM
Vice-chair Fairclough appreciated the ten percent language
and would support it on the House floor. She remarked
during the review of the DOEED and University of Alaska
budgets those involved had worked to make the agencies
aware that oil production was declining, but the increased
oil price had camouflaged the decline for the general
public. Two years earlier she had a conversation with the
University of Alaska President Mark Hamilton who had
reported that 100 new programs had been implemented and 3
had been eliminated in the last decade. She delineated that
the 100 new programs did not necessarily have full
classrooms, but that agencies were leaving them on the
books. She opined that for transparency purposes it was
important to have a prioritization of services and programs
to benefit Alaskans. She explained that the legislature had
worked to communicate to the university for the past six
years that budget cuts may occur in the event of an oil
production decline.
Representative Doogan asked whether there had been
consideration to the idea of ranking the activities and
programs of each agency from most important to least
important. He wondered whether a ranking process in the
audit would help to address the likelihood that priorities
would change over time. Ms. Kelly replied that AS
37.07.050(a)(13) required departments to prioritize every
agency underneath their jurisdiction (Page 7). She
discussed that Representative Hawker's office had located
one of the prioritization lists from 2004 and had
recommended that the language be included in the
legislation.
2:06:12 PM
Co-Chair Stoltze asked whether there were any comments
regarding the fiscal note.
Representative Doogan MOVED a conceptual amendment to shift
the sections that dealt with the legislature and the
governor to the top of the list and to have reviews
conducted for the two agencies every two years.
Vice-chair Fairclough OBJECTED.
Representative Doogan believed that it would be more
effective to begin the review process with the legislature.
He explained that he was not attached to the idea of
conducting the review every two years and that every four
years was another option. He thought that conducting the
review every ten years would not satisfy the people of
Alaska and would not help to road test what would be done
with the budgets.
Co-Chair Stoltze had no objection, but wondered how the
mechanics of the amendment would work.
Vice-chair Fairclough relayed that there had been prior
discussions regarding the order in which the departments
were listed. She was happy to have the legislature go
through the review process at a much earlier year; however,
she believed that until the first audit was conducted there
was no way to know what resources would be required from
the legislative divisions, what administrative resources
would be necessary to support the departments as they went
through the review process, and how much the governor's
budget would be affected.
Representative Hawker was concerned about moving forward
with a conceptual amendment that had not been deliberated
and discussed with those who would be administrating the
audits. He relayed that there were specific reasons to
begin with a single agency and that resources would need to
be put into place and policies and procedures would need to
be established. He remarked that the items could be
accommodated under the amendment; however, it would be
necessary to have the precise language in front of the
committee in order to evaluate exactly what the impact
would be. He added that even though the legislature and the
governor were included in the ten-year rotation, there was
a provision in the bill that would allow the legislature to
accelerate the review schedule at any time.
Representative Edgmon believed that the current department
order should be maintained because oil production was
declining and the intent of HB 166 was to create
efficiencies, prioritization, and to focus on savings. He
opined that in the event of a major decline in oil revenue
a self audit of the legislature and the governor's office
could occur very quickly.
Representative Guttenberg was supportive of the bill but
believed that the legislature should show other agencies
that it was willing to go through the review process first
which would help to eliminate resistance from state
employees. He expressed that other agencies would be able
to see that the legislature was not treated differently and
that problems detected in the initial review process would
be modified and improved prior to audits of other agencies.
Representative Wilson wondered about the possibility of
moving only the legislature to the top of list. She wanted
to make the general public aware that the legislature
believed in the idea and was willing to put itself through
the process first. She was very supportive of the
legislation and believed that agencies, such as DOEED
needed to take a close look at their programs to increase
efficiencies.
Co-Chair Stoltze asked Representative Doogan to restate the
conceptual amendment.
Representative Doogan replied that the proposed amendment
was to move the legislature and the governor to the top of
the list and to require a review for the two groups every
two years.
2:17:24 PM
Representative Gara believed that the amendment maintained
the bill and would add public confidence. He expounded that
the Department of Health and Social Services and DOEED
would be very large audits given the size of each
department and that comparatively it would be easy to
include the legislature, the governor's office, and the
Department of Corrections (DOC) in the first year of the
review given their small size.
Representative Hawker wondered about the intent to "move
[the legislature and the governor's office] to the top of
the list." He asked whether the intent would be to have the
two agencies share the top of the list with DOC or to
appropriately adjust DOC and the remaining agencies to
later years.
Representative Doogan clarified that the intent was for the
legislature and the governor's office to be included in
addition to DOC.
Representative Hawker advised that the committee solicit
the counsel of the audit administrators in regards to the
impact of moving from one to three agencies in the first
year. He explained that the first year was specifically
limited to one agency to account for time to hire
personnel, and outside contracts.
Co-Chair Stoltze opposed the current amendment, but
believed that there was potential to accomplish the goal
with further deliberation on the House floor.
Representative Doogan WITHDREW the conceptual amendment. He
supported the legislation, but would reintroduce a similar
version of the amendment on the House floor.
Co-Chair Stoltze believed that a compromise could be
reached through discussion outside of the committee.
2:22:13 PM
Vice-chair Fairclough hoped that any amendment would be
discussed with the affected bodies as recommended by
Representative Hawker.
Vice-chair Fairclough MOVED to report CS HB 166(FIN) out of
committee with individual recommendations and the
accompanying fiscal notes.
CS HB 166(FIN) was REPORTED out of committee with a "do
pass" recommendation and with new fiscal notes from the
Office of the Governor and the Legislature.
2:23:02 PM
AT EASE
2:30:21 PM
RECONVENED
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
2:30:34 PM
DANIEL SEAMOUNT, GEOLOGY COMMISSIONER, CHAIR, ALASKA OIL
AND GAS CONSERVATION COMMISSION, (AOGCC), introduced a
chart titled "Approved Permits to Drill for Each Year (1996
- 2010) Statewide: Oil, Gas and Alternative Energy Wells
and Wellbores" (Page 17 of a PowerPoint presentation
titled: "Alaska Oil and Gas Conservation Commission
(AOGCC)"). The chart showed the number of approved permits
for all oil, gas, and alternative energy wells that had
been drilled in the state. The cost of oil appeared in a
green line that overlaid the chart and the permit scale
ranged from 0 to 400. With the exception of 1999 and 2000,
there were slightly under 250 permits issued per year. He
highlighted a correlation between the dip in oil prices in
1998 and 1999 and the lowest number of wells drilled in the
past 20 years; however, with recent high oil prices there
could have been an inverse correlation. He was not certain
about the reason related to the decrease in the number of
permits that were issued around 2004 and 2005, but AOGCC
planned to look at the compiled total footage drilled to
determine whether the oil wells were more complex and took
more time.
Mr. Seamount addressed Page 18 related to wells drilled on
the North Slope: "Approved Permits to Drill for Each Year
(1996 - 2010) North Slope: Oil-Related Wells and
Wellbores." He explained that the chart looked very similar
to the one on Page 17 because the North Slope was "king"
when it came to the number of oil wells drilled and very
few wells had been drilled in other locations including
Cook Inlet. He discussed the actual work done by actual
investors: "Alaska Oil and Gas Conservation Commission"
(Page 19). He explained that the charts looked very similar
to the numbers for permits to drill on Page 17 because
operators tended to follow through on their plans in
Alaska. He noted that this was not the case in other areas
such as the Rocky Mountains where a significant number of
permits issued were never used. He discussed that Mr.
Davies, Petroleum Economist, AOGCC, had developed the pie
chart: "Alaska 2010 Wells and Wellbores" (Page 20). The
chart showed that there had been total of 183 wells drilled
in 2010 and did not account for wells drilled by operators
who were still in the process of submitting their
completion reports. Out of 183 wells drilled the Arctic
Slope accounted for 125 producer wells, 39 service wells,
and 4 exploration wells. The remaining wells were located
in Cook Inlet and other areas of the state.
2:36:37 PM
Mr. Seamount pointed to a chart that showed oil, gas, and
alternative energy exploration wells drilled: "Exploratory
Wells and Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010)" (Page 21). The chart looked similar
to the ones shown on Pages 17 and 18 that were related to
permits to drill. There was low exploration and price in
1999 and 2000. In 2010 the number of wells drilled exceeded
the number of permits (shown on the far right-hand side of
the page) because many of the applications for permits to
drill had been submitted in 2009. He remarked that out of
the 15 exploration wells drilled in 2010 only 7 were oil or
gas exploration.
Representative Gara indicated that that the numbers
discussed by Mr. Seamount did not match the numbers on Page
21. Mr. Seamount clarified that there had been 15 wells
drilled in 2010 by 9 operators.
Representative Gara wondered whether 2011 was the year that
only one exploratory well was drilled. Mr. Seamount replied
in the affirmative. He communicated that 2011 would be an
abysmal year for exploration.
Mr. Seamount discussed Page 22: "Exploratory Wells and
Wellbores Statewide: Completed, Suspended or Abandoned
(1996-2010)," that related only to oil and gas. There was
low exploration and price in 1999 and 2000, but there was
an inverse correlation between exploration and price that
began in 2005. He examined development and service wells on
Page 23: "Development and Service Wells/Wellbores
Statewide: Completed, Suspended or Abandoned (1996-2010)."
The chart did not include exploration wells and was similar
to the total wells drilled because of the small number of
exploration wells. ConocoPhillips (shown in red) and BP
(shown in green) made up the largest percentage of the
development and service wells depicted on the graph. A
handful of newer producers including Pioneer, ENI, and
Savant accounted for most of the remaining percentage
beginning around 2008. There had been a dip in the number
of wells drilled beginning in 2004 and 2005, but it had
remained relatively level through 2010.
2:40:08 PM
Representative Costello asked for a breakout of the
completed, suspended, or abandoned wells that were listed
on Page 23. Mr. Seamount replied that he would provide the
information to the committee. He added that very few of the
wells shown had been abandoned and that the majority were
actively producing oil or injecting fluids to keep the
reservoir pressure up.
Representative Costello wondered whether Mr. Seamount
supported a claim made in another committee that the legacy
companies did not take into account taxes or the price of
oil in their data represented on the chart. Mr. Seamount
responded that he did not have enough information to answer
the question and that he was not privy to that company
detail.
Co-Chair Stoltze provided a baseball analogy in reference
to the difficulty he had experienced in following all of
the information on the production and operation wells.
Representative Guttenberg wondered whether there was a rule
of thumb regarding the allowable lag time between the
submittal of a development plan and the installation of a
well. Mr. Seamount replied that it was highly variable
depending upon how desirable a project was to a company's
management team. He reflected on one prospect in Wyoming
that had taken nine years to be drilled.
Representative Guttenberg remarked that the variables were
incalculable, for instance a company could be highly
interested in a project and then discover that there were
no rigs available. Mr. Seamount replied that there were
numerous variables that could delay a project, including
economic, government, litigation, and more.
Representative Guttenberg had heard of circumstances in
which a company had interest in drilling a well but it was
unable to do so because access to a rig was not possible
until the following season when an ice road could be built.
Mr. Seamount agreed. He observed that the logistics in
Alaska were more challenging than those in the Lower 48.
2:44:26 PM
Representative Gara wondered why Page 22 showed that there
were five exploratory well developers but did not indicate
the number of wells. Mr. Seamount explained that the scale
shown on the left (x-axis) of the chart related to the
number of wells drilled.
Representative Gara asked about the difference between
Pages 21 and 22. Mr. Seamount responded that Page 21
included oil, gas, and alternative energy and Page 22 only
included oil and gas.
Representative Gara wondered whether Page 14 only included
information about the North Slope. Mr. Seamount replied
that Page 14 related to statewide oil and gas exploratory
well permits, excluding alternative energy.
Representative Gara asked whether there was a page that
showed exploratory well permits for the North Slope only.
Mr. Seamount responded that he would provide a chart with
the data to committee members.
Representative Gara believed that the focus of the debate
on ACES [Alaska's Clear and Equitable Share] centered on
the North Slope and not on other areas of the state. Mr.
Seamount answered that information was included later in
the presentation about the wells that had been drilled on
the North Slope.
Representative Gara queried whether the suspended and
abandoned wells were drilled during the year they were
presented on Pages 21 and 22 or whether they had been
drilled in prior years. Mr. Seamount replied that the wells
were drilled in the year in which they appeared on the
chart. He expounded that wells in close proximity to
infrastructure were completed and those that were farther
away were not.
2:48:37 PM
Representative Wilson wondered whether there was a review
process to determine why wells were suspended or abandoned
to ensure that the appropriate tax credits were applied.
Mr. Seamount replied that there were four petroleum
engineers that monitored the situation closely and that
approval for a company to abandon a project was required.
He elaborated that it was necessary for a company to have a
good reason for abandoning one area to drill in another and
that an extensive review took place.
Representative Wilson wondered whether the information on
abandoned wells was public. She noted that it would be
helpful for her to know why the wells were abandoned. Mr.
Seamount remarked that he could provide the committee with
the information. He added that there was a two-year
confidentiality rule on exploration wells but the rule did
not apply to development wells.
Co-Chair Thomas wondered whether there were inactive wells
that might be activated once a tax system that was more
desirable for oil companies was implemented in the state.
Mr. Seamount was not aware of anyone using the particular
strategy. He noted that there were quite a few areas in the
state that were capable of production but were not
currently under production due to various issues related to
infrastructure or government.
Co-Chair Thomas asked whether the issue was related to
state or federal permitting. Mr. Seamount responded that he
was not aware of any situation in which state government
was inhibiting production.
2:52:10 PM
Representative Gara observed that oil companies had also
stopped production by prohibiting access to others. He
cited an example in which Conoco had prevented a company
from gaining access to land by denying it the ability to
cross land owned by Conoco. Mr. Seamount was not aware of
the particular situation.
Representative Costello asked whether a company could slow
the rate of production on an active well. Mr. Seamount
replied that a company could slow the wells when gas ratios
became too high and for a variety of other technical
reasons.
Representative Costello wondered whether there were other
reasons for slowing a well. Mr. Seamount could not think of
any other economic or additional reasons.
Mr. Seamount discussed that Page 24 titled "Development and
Service Wells/Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010) by BP Exploration (Alaska), Inc," was
similar to Page 22 and 23 but only included BP Exploration
Alaska. He relayed that 99 percent of the wells were in
Prudhoe Bay, Milne Point, and Point McKenzie and were all
in the North Slope. Page 25 titled "Development and Service
Wells/Wellbores Statewide: Completed, Suspended or
Abandoned (1996-2010) by ConocoPhillips Alaska, Inc.,"
related only to ConocoPhillips Alaska, Inc. He reported
that the majority of the company's development and service
wells were located in Kuparuk and Colville River.
Additionally, the company did not take much risk, but their
activity had been fairly constant over the years.
Mr. Seamount directed attention to Page 26 titled:
"Completed, Suspended and Abandoned Oil and Support Wells
and Wellbores - North Slope Only 1996-2010." The wells were
broken out by type, the oil producers were shown in green,
the oil injectors were shown in blue, and waste ejector
wells were indicated in black. He highlighted that the same
trends that were present on the previous slides applied to
Page 26 as well. He discussed a bar chart on Page 27 titled
"Alaska's Active Drilling and Workover Rigs for Each
Quarter (2005-2010)," that related to statewide oil, gas,
and alternative energy. The light green portion of the bars
represented drilling rigs and the dark green portion
represented workover rigs. He delineated that there were 15
or more active drilling and workover rigs per quarter from
2005 to the fourth quarter of 2008; but there was a sharp
decline in 2009 through 2010. The price of oil that was
relatively high was represented as a dark green line and,
with the exception of 2006 showed no correlation with the
active rigs.
2:57:13 PM
Representative Gara wondered whether the dip in the price
of oil in 2009 explained the lower number of active rigs
one and a half years later given that plans to drill were
done two years in advance. Mr. Seamount supposed that was a
possibility.
Representative Gara asked whether the chart included
directional drilling rigs or whether the smaller rigs in
2009 and 2010 were rigs that drilled horizontally. He had
heard that the number of rigs had declined as directional
drilling had increased. Mr. Seamount responded that most
rigs were extended reach and that the majority were
horizontal.
Representative Gara wondered how long it had been the case
that most rigs were extended reach and horizontal. Mr.
Seamount believed it had been since 1999 or 2000.
Mr. Seamount addressed Page 28: "Alaska's Active Drilling
Rigs for Each Quarter (2005-2010)." He explained that
drilling rigs were often swapped out to do workovers. He
noted the correlation between the number of workover rigs
and the cost of oil on Page 29: "Alaska's Active Workover
Rigs for Each Quarter (2005-2010)." He reported that many
of the workover rigs had been switched over from drilling
rigs and that the payoff would be quicker because workover
rigs were less expensive.
Representative Hawker asked for clarification that Page 28
included oil, gas, and alternative energy statewide. Mr.
Seamount replied in the affirmative. He noted that 2010 was
the only year on the page that included alternative energy
rigs and that it would be necessary to subtract three from
that year to obtain oil and gas rigs only.
Representative Hawker wondered whether alternative energy
wells were drilled prior to 2010 as a result of the
extraordinary number of permits that were issued to the
Department of the Interior in 2008. Mr. Seamount believed
that the Department of Energy had drilled nine wells in the
previous two years.
Representative Hawker asked whether the chart on Page 28
included the alternative energy wells in 2008 and 2009. Mr.
Seamount responded that coalbed methane was not considered
an alternative energy.
3:03:07 PM
Representative Costello asked about an earlier statement
that workover rigs tended to follow the price of oil more
closely because they were more cost effective for the oil
companies. Mr. Seamount responded that he had interpreted
the data that way.
Representative Costello wondered why there was an exception
in the fourth quarter of 2009. She asked whether there was
another factor at play during that time. Mr. Seamount was
not aware of another factor at play.
Mr. Seamount moved on to Page 30: "Well Workover Activities
for Each Year (North Slope Only) 2003-2010." Workovers had
reached a significant number of over 400 per year since
2003. A high of 582 had been reached in 2008 when oil price
had been at its peak. He detailed that 500 workovers out of
3000 development wells in Alaska was a significant
percentage.
Representative Guttenberg wondered what constituted a
workover. Mr. Seamount replied that typically a workover or
drilling rig was set directly over the well and that the
wellbore was drilled and modified to increase production or
to fix a leak, etc.
Representative Guttenberg remarked that it took a lot to
move a rig and that 500 times in one season was
significant. Mr. Seamount believed that it was expensive.
Representative Gara asked about the difference between
workover rigs and development rigs. Mr. Seamount explained
that a development well involved drilling a new hole in the
ground, whereas a workover did not.
Representative Gara asked whether rigs had been moved 558
times in 2010 to perform workovers. Mr. Seamount replied
that sometimes a series of workovers was done on the same
wellbore; however, a high number of moves were represented
in the number.
3:07:07 PM
Representative Gara wondered where well workover activity
and expense fit within the goal to maintain and enhance oil
production. He asked whether the higher number of well
workovers in 2010 compared to those conducted in 2007 was
indicative of an attempt to enhance or stabilize oil
production. He discussed that development wells and
exploration wells were used to locate oil.
Co-Chair Stoltze remarked that the committee would be able
to discuss some of the issues in the presentation with
other presenters as well.
Mr. Seamount responded that a significant portion of well
workover activity was aimed at production increase or
maintenance.
Representative Doogan asked for clarification regarding the
number of wells that were represented on Page 29. Mr.
Seamount responded that they were average numbers for the
quarter. When a rig only worked for two months out of a
quarter the number was represented as a fraction.
Representative Doogan wondered whether "four and a
fraction" rigs were used during the third quarter of 2010.
Mr. Seamount replied that one of the rigs may not have been
active for the entire quarter and was therefore represented
as a fraction.
3:11:01 PM
Mr. Seamount discussed the baseline of 200,000 barrels of
oil produced per day that was represented on Page 32:
"Alaska's Average Daily Oil and NGL Production Rate." He
did not know about the significance of the number but
believed that it was very low. He explained that at 200,000
barrels per day that Alaska's production level would be
below that of North Dakota; however, the probability was
not high given that Alaska had shale oil as well. He
detailed that Page 33: "Alaska's Average Daily Oil and NGL
Production Rate," represented a six percent production
decline that AOGCC estimated would take place without any
new development or production. At the six percent decline
rate the state would see production of 200,000 barrels per
day by 2030. Page 34 represented the same information but
included a scenario in which a new Alpine sized field came
online in 2018(shown in yellow). With the discovery of a
new field the time it took to reach the level of 200,000
barrels per day would extend to 2033. A chart on Page 35
also showed the same information but included the
hypothetical discovery of another Northstar in 2018 (shown
in bright blue). The chart indicated that regular
production would begin in 2024 and that a drop to 200,000
barrels per day would be delayed until 2035.
Co-Chair Thomas wondered whether there was public
information on the results of a drilling operation that had
occurred in Yakutat years earlier. Mr. Seamount responded
that the information was public, but due to the length of
time that had passed the records may not be complete.
Co-Chair Thomas discussed that the first oil produced in
Alaska had been in a small village named Katalla that was
later designated as a wilderness site by former President
Roosevelt. He surmised that it should be possible to drill
diagonally offshore to gain access to the oil that still
bubbled out of the ground in the village. Mr. Seamount
believed that with new technology, production from shale,
and with over 20 basins in Alaska, there was a very bright
future for oil and gas development in the state.
Co-Chair Stoltze wondered whether ethanol was still popular
in North Dakota and other areas. Mr. Seamount opined that
North Dakota may have forgotten about ethanol given their
current focus on shale oil.
Representative Gara wondered how much shale oil would be
included in the pipeline when it was produced in the
future. Mr. Seamount believed that shale oil had a lot of
potential and recommended that he speak with Paul Decker
and Kevin Banks at the Division of Oil and Gas [Department
of Natural Resources].
Representative Gara wondered how much it would cost to
build a processing facility for a field that produced
30,000 barrels per day. He had heard others recommend the
idea of providing a processing facility credit to monetize
smaller fields. He thought that without a processing
sharing agreement that a small oil field could not
currently justify building its own processing facility. Mr.
Seamount did not have an estimate. He noted that he would
provide the committee with the name of one of the smaller
oil companies that had built its own facility for a
"little" field that produced 200 million barrels per day.
3:18:38 PM
Vice-chair Fairclough wondered whether potential
redundancies between state and federal regulations were
reviewed. She believed that North Dakota had the advantage
of drilling on private property versus federal or state
land. Mr. Seamount replied that state regulations were
slightly more stringent than federal and that they were
fairly streamlined.
Vice-chair Fairclough wondered whether there were any
suggestions related to increasing federal government
drilling compliance in the state. She had received several
non-flattering photos of federal drilling operations in
Alaska from AOGCC Commissioner Cathy Foerster. Mr. Seamount
replied that AOGCC had spoken with Senators Mark Begich and
Lisa Murkowski and with John Katz [staff to Governor
Parnell] at the recent Energy Council meeting in Washington
D.C. The local Department of Interior office in Anchorage
was not able to ask for the money and had recently been
notified of the AOGCC's intent to push for federal funding
to take care of the problem wells that existed. He
recommended that others encourage federal Interior
Secretary Ken Salazar to provide more funds to fix the
wells in an orderly way. He believed that that $200 million
would be a good start.
Representative Hawker wondered whether Mr. Seamount agreed
with the Department of Revenue (DOR) production estimates
that indicated 90 percent of all estimated future onshore
North Slope production would come from Alaska's existing
legacy fields. Mr. Seamount believed the forecast was very
conservative and that the discovery of another large oil
field was still possible.
Representative Hawker wondered how probable it was that
another onshore development existed. Mr. Seamount believed
that another field existed, but it might not be discovered.
Representative Hawker asked whether Mr. Seamount believed
that the DOR estimate was incorrect and that another
massive development of unfound oil would occur. Mr.
Seamount opined that DOR had to be conservative and that it
was not possible to bank on the discovery of another
Prudhoe Bay in the near future. He believed that another
field did exist but did not know that it would be found.
Representative Hawker wondered about the viability of the
projections by venture capital company Great Bear. The
company had never drilled a well, but was making plans to
create a program that would develop 200 wells per year.
3:25:40 PM
Mr. Seamount replied that similar operations were currently
underway in locations such as North Dakota and although the
logistics in Alaska were more difficult, there was a
possibility that it would be feasible in the state.
Representative Hawker asked whether there were enough rigs
available to develop 200 wells per year. Mr. Seamount
answered that there were not and that the company would
have to bring rigs in.
Representative Hawker asked about the validity of previous
testimony provided by AOGCC commissioners that a lack in
facility access on the North Slope had never resulted in
the failure to produce a barrel of oil. He agreed with
earlier testimony regarding the importance of the
Department of Interior, Bureau of Land Management well
compliance situation. Mr. Seamount believed that testimony
made by other AOGCC commissioners was accurate. He
clarified that twelve years earlier AOGCC had assumed that
access to North Slope exploration would have been too
expensive and therefore, had not asked for access.
Co-Chair Thomas wondered how to access shale oil. He had
heard that large oil companies did not work with shale oil
and that it would take smaller independent companies to
access the large amount of shale oil that Alaska had to
offer. Mr. Seamount replied that historically the smaller
companies were the originators of exploration for things
like coalbed methane and shale gas. He relayed that big
companies tended to follow later.
Co-Chair Thomas asked for a definition of shale oil. Mr.
Seamount explained that conventional oil flowed easily and
had high permeability, whereas shale oil was located in
very tight rock similar to cement and it was necessary to
drill and break the shale into fractures to allow the oil
that was trapped in the mud layers to flow out.
3:29:48 PM
Co-Chair Stoltze hoped that DOR Commissioner Butcher would
help to fill in the gaps regarding the economic issues. He
appreciated the depth of the presentation.
Vice-chair Fairclough noted that DOR had provided two
packets dated March 15, 2011, in response to committee
member questions (copy on file).
Co-Chair Stoltze thanked Mr. Seamount for his time and
testimony.
HB 110 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:32:32 PM
The meeting was adjourned at 3:32 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB166NEW FN LEG 030711 fiscal note.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB166 CS WORKDRAFT 27LSO492X.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB 166 Comparison version I to X.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 166 |
| HB110 DOR-Response 1 to HFIN 02-18-2011.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 110 |
| HB110 DOR Response2HFIN 03-14-2011.pdf |
HFIN 3/16/2011 1:30:00 PM |
HB 110 |