Legislature(2023 - 2024)ADAMS 519
04/04/2024 10:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Cook Inlet Oil and Gas by the Department of Natural Resources | |
| HB257 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 257 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 4, 2024
10:09 a.m.
10:09:24 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 10:09 a.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
Representative DeLena Johnson, Co-Chair
Representative Sara Hannan
ALSO PRESENT
John Boyle, Commissioner, Department of Natural Resources;
John Crowther, Deputy Commissioner, Department of Natural
Resources; Derek Nottingham, Director, Division of Oil &
Gas, Department of Natural Resources; Representative Tom
McKay, Sponsor; Trevor Jepsen, Staff, Representative Tom
McKay.
PRESENT VIA TELECONFERENCE
Melanie Werdon, Director, Division of Geological and
Geophysical Surveys, Department of Natural Resources.
SUMMARY
HB 257 COOK INLET SEISMIC DATA
HB 257 was HEARD and HELD in committee for
further consideration.
PRESENTATION: COOK INLET OIL AND GAS BY THE DEPARTMENT OF
NATURAL RESOURCES
Co-Chair Foster reviewed the meeting agenda. He stated that
the committee would focus on energy bills in the coming
meetings.
^PRESENTATION: COOK INLET OIL AND GAS BY THE DEPARTMENT OF
NATURAL RESOURCES
10:11:23 AM
Co-Chair Foster reported that there was a future
possibility of supply issues in Cook Inlet related to oil
and gas and its effect on the grid. He asked the Department
of Natural Resources (DNR) commissioner to categorize the
three types of energy bills that were introduced.
JOHN BOYLE, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
answered that one type of energy legislation pertained to
storage capacity for natural gas in Cook Inlet. He
elaborated that another was economic incentives, which were
a key driver of energy policy. He offered that DNR's
projections showed that demand would outstrip supply in the
near future in Cook Inlet. There was still very significant
natural gas and oil resources in Cook Inlet; it was a very
mature basin and had been in operation for close to 60
years. Many of the established fields were experiencing
normal decline curves for mature fields. In addition to
currently producing fields, there were significant
resources still available on state lands and waters and in
federal areas of Cook Inlet. He explained that the current
issue for oil and gas producers was to be able to
consistently and predictably offer firm contracts. The
companies currently able to produce "firm" gas had already
contracted out for the gas. Other companies that may be
sitting on resources were struggling with delivering gas
for various reasons like financing.
10:16:06 AM
Commissioner Boyle continued that DNR had levers
available to "help improve the economic landscape for
development in Cook Inlet. The department believed it was
important to first focus on getting state resources to
market" versus importing natural gas, which was an option
being explored by utilities. He remarked that setting up
the infrastructure to support the import of liquid natural
gas (LNG) would take a significant amount of time. The
department believed that getting gas more quickly to market
could be helped by making some tweaks to the financial
structure and help incentivize more gas development sooner
than other options. He pointed out that the focus was
getting sufficient gas to meet short-term supply and demand
as well as in the long term. He relayed that the Railbelt
experienced a similar Cook Inlet shortage situation roughly
10 or more years prior that created brownout drills in the
area. The legislature responded with the Cook Inlet
Recovery Act and Hilcorp began producing in the area, which
resulted in an ample surplus. The goal was to buy the state
enough time to have sufficient production and buy time to
bridge between the next things such as hydro, wind, solar,
and other methods to provide power to the Railbelt going
forward. It was necessary to look at the entire system
holistically. He believed that by focusing on economic
factors DNR hoped to accomplish more production. He pointed
out that oil production in Cook Inlet was also important to
the state because it was used locally in refineries to
produce fuel for the region's use. The state could not
monetize resources that were not developed in Cook Inlet
and the state would be leaving value on the table in terms
of severance taxes, royalties, etc. His goal was to help
find the "right levers to pull" to increase supply and
monetize available resources in Cook Inlet while
concurrently "putting the pieces of what comes next in
solving the state's energy puzzle.
10:21:07 AM
Co-Chair Edgmon considered the energy picture moving
forward and felt that a "portfolio approach" was necessary.
He was considering the portfolio of Alaska's energy supply
going forward and the levers the legislature had to affect
the larger picture. He believed that the approach had to be
broken down into several categories: Cook Inlet natural
gas, the regulatory aspect, the Carbon Bill, and the issue
of renewables a portfolio approach. He wondered what the
governor's approach was. He viewed that an interplay of
bills was necessary. He advocated for a green bank bill to
pass in the current session. He asked the commissioner for
clarity regarding the administration's approach.
Commissioner Boyle agreed that the solution would involve
looking at a portfolio of energy options for the state. He
acknowledged that there were a lot of bills, including a
suite of Cook Inlet bills; some were governor sponsored and
others were member sponsored. They all had different
approaches in terms of incentives, storage, etc. In
addition, he believed that Carbon Capture Utilization And
Storage (CCUS) would be involved due to the state's
abundance of coal and the feasibly of permitting a coal
fired plant and and not run afoul of any environmental
targets set by the current administration. He was a firm
believer that there was a tremendous amount of geothermal
resources in Alaska with federal funding available to
delineate the state's geothermal resources. He noted that
there was a number of bills that dealt with renewable
energy and the state's leasing structure, which needed
updating and bills related to the transmission line. He
thought that all of the bills fit together and addressed
different important pieces that needed to come together for
a portfolio of options.
10:26:17 AM
Co-Chair Edgmon thanked Co-Chair Foster for the opportunity
to ask about the larger picture regarding the issue.
Co-Chair Foster stated there were about 12 energy bills in
committees. He wanted to categorize the bills into their
specific "buckets." He summarized that there were bills
pertaining to Cook Inlet, transmission, renewables, and
storage.
Representative Ortiz referenced the commissioner's
statement they were looking at potential tweaks to
incentivize increased production in Cook Inlet. He asked
what the opportunity cost of the incentives would be.
10:28:40 AM
Commissioner Boyle responded that it depended on the type
of incentive. There were bills that contemplated
incentivizing new production. Under that scenario, the
state was not giving away anything because the oil was not
forecasted to be produced. He deduced that incentives built
around new production was not lost revenue or came at a
cost to the state and might actually present a revenue
option for the state. Conversely, there were bills that
looked to broaden incentives to existing and new
production, which would result in tradeoffs and less
revenue collected. He felt that the level of confidence
that the changes would incentivize companies to increase
production should be evaluated in those scenarios and
whether it encouraged companies to squeeze more out of
existing fields. He asserted that it was a question the
department looked forward to examining with the
legislature. He posed one question as whether the risk of
foregoing revenues worked to solve the next moves on the
energy horizon. He concluded that there were tradeoffs
that " warranted robust and wholesome discussion."
10:31:39 AM
Representative Ortiz asked about a different type of
tradeoff. He guessed that there was an advantage to
importing natural gas. He asked if the state could be
outcompeted by importing gas. He wondered what it was about
the market that did not make local natural gas competitive
on its own without incentives. Commissioner Boyle responded
that the Cook Inlet basin was a challenging area to operate
in. The projects were generally smaller in size and if a
surplus was produced, sales were constrained by the
dynamics of the local market. He indicated that surplus gas
was no longer exported to Japan as it had been, and the
Agrium facility had closed. The economics of the projects
could be more economically challenging. He concluded that
different constraints existed in the Cook Inlet market
versus choosing to invest in a project in west Texas or
another natural gas basin.
10:34:38 AM
Representative Stapp asked if Commissioner Boyle had read
the Cook Inlet Natural Gas Production Study from 2011
Cook Inlet Natural Gas Production Cost Study" by
Department of Natural Resources, Division of Oil and Gas,
June 2011]. Commissioner Boyle had not reviewed it
sufficiently to study it. Representative Stapp stated that
it had been conducted by the Department of Natural
Resources (DNR). He reported that it had two conclusions
and read from the study:
Given currently available information (and assumptions
made in this study), absent any exploration success
the Cook Inlet basin is capable given sufficient
continued investments of supplying the regional
natural gas needs until 2018-2020 at a price below
that of currently contemplated alternatives (Figure
13). However, failure to make appropriate investments
in lockstep with demand requirements will necessitate
alternative sources of natural gas to be made
available sooner. Therefore, transition to alternative
sources of natural gas may begin to occur before the
2018-2020 timeframe as part of a comprehensive supply
and risk management plan.
Representative Stapp cited the recommended comprehensive
supply and risk management plan and asked if DNR ever
developed one. He maintained that the current members of
the department were not the first to identify the issue.
JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, answered that he did not know whether the
department ever published the plan under the name
referenced by study. However, DNR had produced updated
studies. He indicated that the studies demonstrated that
reserves continued to be produced and consumed, the market
continued to mature and there was some level of reserve
replacement associated with development progress and
limited exploration. He viewed the successive studies as
the continued monitoring of the risk. He delineated that
the most recent study showed supply limiting in the 2026 to
2028 time frame; the risk predicted in 2011 was here.
Therefore, the department was acting by alerting the
legislature of the risk via current legislation and the
presentation.
10:37:49 AM
Co-Chair Foster asked the department to begin the
presentation.
DEREK NOTTINGHAM, DIRECTOR, DIVISION OF OIL & GAS,
DEPARTMENT OF NATURAL RESOURCES, provided a PowerPoint
presentation titled "Cook Inlet Oil and Gas," dated April
4, 2024 (copy on file). He began on slide 2 titled "Why is
Cook Inlet Gas Important?"
Natural Gas Utilities
• Enstar serves over 440,000 people in over 25
communities throughout Southcentral Alaska
• Interior Gas Utility (IGU) serves over 2,400 people
Electric Utilities
• Chugach Electric serves over 302,000 people
in Anchorage, Whittier, Girdwood, and Fairbanks
• Matanuska Electric (MEA) serves over 180,000
people in the Mat-Su Borough and Chugach and
Eagle River
• Homer Electric serves nearly 36,000 people
10:39:11 AM
Mr. Nottingham turned to slide 3 titled "Cook Inlet
Overview:"
Cook Inlet is a large, mature oil and gas basin
• Has produced over 1.4 billion barrels of oil and 12
trillion cubic feet of gas
• 26 producing fields operated by 8 different
companies
• There are over 200 oil and gas leases in Cook inlet
Gas production has been declining since 1990
• Peak gas production in 1990 was over 850,000
thousand cubic feet per day
• Current production is just over 200,000 thousand
cubic feet per day Cook Inlet gas provides heat and
electricity to 70%
of Alaskans
10:40:04 AM
Mr. Nottingham moved to slide 4 titled "Cook Inlet
Geology:"
Two Sources of Gas In Cook Inlet Basin
1. Biogenic gas from coals
2. Oil migrated from source rocks, creating associated
gas
Mr. Nottingham pointed to the map on the left and explained
that it depicted the sedimentation that had been deposited
overtime in the basin between the Alaska Range on the west
side of the inlet and the Kenai Peninsula and Chugach
Mountains to the east. The black outline on the map
reflected the Cook Inlet boundary where the state leases
were located and with the oil and gas fields demarcated
that were developed over time. He highlighted the graphic
of the stratigraphic column on the right. He briefly
described the formation of gas in Cook Inlet over time.
10:41:47 AM
Mr. Nottingham advanced to slide 5 titled "Cook Inlet
Exploration and Development: Undiscovered Resources
• Undiscovered, Technically Recoverable Oil &
Gas (U.S. Geological Survey 2011):
• Mean conventional oil: 599 million barrels of
oil
• Mean conventional gas: 13.7 trillion cubic feet
• Mean unconventional gas: 5.3 trillion cubic
feet
• Undiscovered, Technically Recoverable Gas:
• 1.2 trillion cubic feet additional mean
resource assessed in the federal Southern Cook
Inlet Outer Continental Shelf area (Bureau of
Ocean Energy Management 2011)
• Technically vs. Commercially Recoverable:
• Some gas will be too expensive to be produced
or will be inaccessible because of surface
restrictions
Mr. Nottingham pointed to the map on the left of the slide
depicting the area studied and noted that it bordered north
of Talkeetna to south of Homer and was significantly larger
than the current state Cook Inlet boundary. He underlined
that technically recoverable meant that existing means and
recovery mechanisms made the resources possible to produce
but it did not necessarily mean they were commercially able
to be produced.
10:43:33 AM
Mr. Nottingham addressed Cook Inlet Leases on slide 6:
Cook Inlet Areawide Statistics (State Lands) 3.3
million total acres
• ~0.3 million acres held by production in Units (9%)
• ~0.15 million acres reside in Hilcorp operated Units
(4.5%) 3.0 million acres unleased or leased in
"primary term"
• ~0.05 million acres are held by Hilcorp in primary
term (1.5%)
• ~0.05 million acres are held by other entities in
primary term (1.5%)
2.9 million acres remain unleased (88%)
Mr. Nottingham identified the map on the right of the slide
that portrayed Cook Inlet state lease ownership shaded in
colors. The purple areas were owned by Hilcorp, the tan
areas were owned by Furie, with the remaining owned by
Amaroq Resources, BlueCrest Energy, and others. He
emphasized that there was 2.9 million acres remaining
unleased in the area (almost 90 percent).
10:44:40 AM
Mr. Nottingham advanced to slide 7 and continued to discuss
Cook Inlet Leases.
What is a State of Alaska Oil and Gas Lease?
• A lease is a tract of land designated for oil
and gas exploration
• Leases are offered at lease sales or through
exploration licenses
• Primary lease terms are between five and ten
years
• Commercial production extends the lease beyond
the primary term
What is an Oil and Gas Unit?
• Leases are combined to form a unit for the
protection of all parties
• Facilitates joint development, conserves
natural resources, and avoids waste
• Unit agreement is developed between the lessees
and the State
• Requires the development of a plan of
development/exploration (POD/POE) along with
other reporting requirements
• Requires the operator to act as a prudent
operator while developing the unit.
10:46:18 AM
Mr. Nottingham spoke to easing Restrictions" on slide 8:
• Not all land is available for leasing
• Some land may be leased but have restrictions on how
the land may be used, such as no surface-entry or
surface access only during seasonal windows
• Alaska Mental Health Trust Authority and University
of Alaska may lease their land for oil and gas
• Federal lands, such as national parks, forests, or
wildlife refuges, are generally unavailable for oil
and gas development
Mr. Nottingham cited the map depicted on the right of the
slide illustrating prohibited leasing in red, surface
restrictions due to seasonal aspects, and limitations on
the development of the land for oil and gas purposes in
yellow.
10:47:14 AM
Mr. Nottingham presented the graph reflecting Cook Inlet
Production History" on slide 9. He explained that oil and
gas were both in significant decline. Oil production
beginning in the late 1950's peaked at over 200 thousand
barrels per day (bpd) in 1970. Gas production peaked in
1990 at 850 million cubic feet per day (Mscf/d). He
delineated that water was flowing into the wells and
breaking through causing oil production to decline. The
pressure was depleting in some gas reservoirs as gas was
declining. Currently, gas production was 200 (Mscf/d).
Co-Chair Edgmon observed that the slide noted thousand
cubic feet per day. Mr. Nottingham apologized and corrected
the error.
10:49:08 AM
Representative Stapp observed a small production spike in
gas production in 2012 and 2013. He thought it was likely
the result of a state subsidy that was implemented at the
time. He asked how much the state spent on incentivizing
that amount of oil and how much was it.
Mr. Crowther answered that he did not have the information
on hand regarding the credit program and would have to work
with the Department of Revenue to provide an answer.
Representative Stapp asked about the production delta
represented by the small bump. Mr. Nottingham did not know
the specific amount, but he estimated it was 30 million to
50 million cubic feet per day (cfd). He thought that the
actual amount would be very significant relative to the
current level of production.
10:51:08 AM
Mr. Nottingham turned to slide 10 showing current "Cook
Inlet Production by Field. He elaborated that the chart
showed the production by field and operators. He noted that
the columns on the right showed the 2023 Gas Production and
2023 Oil Production averaged over the year. Hilcorp was the
dominant operator at 90 percent of production and owning
roughly 80 percent of the production. In addition, they
produced about 7,000 (bpd) of oil out of the overall 9,000
(bpd). He pointed out that all of the production from Cook
Inlet came from unitized land representing about 300,000
acres of the 3.3 million acres within the Cook Inlet
boundary.
10:52:52 AM
Mr. Nottingham advanced to slide 11 titled "Gas Storage:"
What is gas storage?
• Gas can be stored by re-injecting it in
subsurface reservoirs and re- producing when it
is needed, although it comes with costs and
operational demands.
• Gas is used within a year to mitigate the fact
that demand is much higher in the winter than the
summer, but it is best to produce from fields at
a relatively steady rate. Production over the
summer months can be "saved up" for cold winter
days.
• Storage is critical, as peak winter demand
already requires more gas than is deliverable
from producing reservoirs.
• Gas storage can also be used across multiple
years.
Cook Inlet has four active gas storage pools:
• CINGSA Established in 2011, gas storage
capacity 18 bcf, operated by CINGSA (an RCA
regulated utility)
• Kenai Gas Pool 6 Established in 2006, gas
storage capacity 50 bcf, operated by Hilcorp
• Pretty Creek Established in 2005, gas storage
capacity 3 bcf, operated by Hilcorp
• Swanson River (Federal) Established in 2001,
gas storage capacity 3.4 bcf, operated by Hilcorp
Mr. Nottingham stressed that gas storage was a buffer to
manage peak demand periods.
10:55:00 AM
Mr. Nottingham moved to slide 12 titled "Cook Inlet Gas
Demand:
Kenai LNG Plant
• Nikiski liquified natural gas (LNG) facility is
operated by Trans-Foreland Pipeline Co. LLC
which is a subsidiary of Marathon Petroleum
• Last exported LNG was 2015
• Department of Energy (DOE) authorization for
exporting LNG expired in 2018
• Dec. 2020 Federal Energy Regulatory Commission
(FERC) approved LNG imports to this facility at
an annual capacity up to 1.8 billion cubic feet
(bcf) per year
Nutrien Fertilizer Plant
• Second largest ammonia/urea plant in U.S.
• Shut down and mothballed in 2007, however
Nutrien maintains permits and remains interested
in reopening the plant
• Gas prices relative to Lower 48 makes economics
difficult
• Potential source for blue hydrogen/blue ammonia
Mr. Nottingham indicated the demand for Cook Inlet gas was
currently left with utility uses and oil and gas field
operations such as; injection for enhanced oil recovery and
fuel gas uses near the inlet. The current total demand was
around 70 bcf per day.
10:56:10 AM
Mr. Nottingham addressed the graph on slide 13 titled
Forecast Proved Developed & Proved Undeveloped He
delineated that the ability for Cook Inlet operators to
deliver contracted gas appeared to be waning notably in the
2027 and 2028 time frame. He added that the blue bars
reflected existing proven wells and the orange bars
reflected undeveloped wells. The department projected
roughly 15 wells were drilled per day largely by Hilcorp.
10:57:43 AM
Representative Stapp observed that the blue demand bar on
slide 13 was above everything that the state expected to be
produced even in the current year. Mr. Nottingham answered
that it was close, and utilities would say it was too close
for comfort. He added that the ability to make up for a
shortfall was limited to one operator: Hilcorp.
Representative Josephson asked what a not firm contract
was. Mr. Crowther answered that contracts for a supply of
gas was focused on the production and delivery of gas to a
consumer that was typically a utility. The contract
included a variety of terms like price, duration, and
volume, etc. One key term was "firmness" that meant
utilities preferred contracts where a supplier had to
deliver the gas or pay a penalty. For various reasons,
producers may desire to offer non-firm contracts." The
producer agreed to deliver a given volume of gas but if it
failed to do so there was not a penalty. He summarized that
the firmness related to how obligated the producer was to
deliver the gas.
11:00:10 AM
Mr. Nottingham turned to slide 14 titled "2023 Development
Well Activity
Well Activity (as of end of calendar year 2023):
• 17 gas development wells were drilled and completed
during calendar year 2023:
• North Cook Inlet Unit x3
• Lewis River Unit x1
• North Trading Bay Unit x1
• Swanson River Unit x3
• Beluga River Unit x5
• Lewis River Unit x1
• Ninilchik Unit x3
• 1 development well actively being drilled in Kenai
Unit
• 1 development well drilling permit was approved for
Beluga River Unit
Production
Major field contributors to Cook Inlet gas
production (through November 2023):
• Ninilchik ~21.8%
• North Cook Inlet ~18.8%
• Beluga River ~18.5%
• All other gas fields represent less
than 10% each
The above percentages are based on
gas volumes for sale and discount gas
produced from storage as well as gas
reinjected for enhanced oil recovery
(EOR) purposes.
Mr. Nottingham relayed that the main point of the slide was
that there was a very active drilling program in Cook Inlet
and all the wells were drilled by Hilcorp. He added that
all the wells were developed wells that were known and
discovered versus exploration wells.
11:01:09 AM
Mr. Nottingham turned to slide 15 titled "Cook Inlet 2023
Lease Sale Results:"
New, competitive lease terms offered:
• Net profit share as the bid variable
• Fixed per-acre cash bonus
• No royaltypercentage of net profits owed to
the State after recovering capital investments
and operating costs to bring production online
Six tracts received bids
• Three from Hilcorp Alaska LLC
Three from Hex LLC
Net profit share rate bids: 5.7% 11%
Cash bonus revenue: About $600,000
Acres receiving bids: About 15,000 acres
Mr. Nottingham elaborated that very few exploration wells
were being drilled in Cook Inlet. Therefore, DNR offered
more competitive lease terms rather than the traditional
fixed royalty of 12.5 percent. The state took its share of
the profits and not off of the gross revenue like a fixed
royalty rate. He indicated that no one from the outside
was interested in the first round of bids and he
characterized the results as meager The department was
evaluating its options in terms of offering another round
of net profits share.
Representative Josephson asked if the Net Profit Share
option on slide 15 could be done administratively without
requesting royalty relief from the legislature. Mr.
Nottingham responded affirmatively and added that DNR had
the authority via AS 38.05.180(f).
Mr. Crowther interjected that current statutes allowed the
commissioner to designate the royalty and net profit share
terms on new leases as they were offered. However, DNR
could not modify the existing wholesale royalty structure.
Representative Stapp asked how many operators bid on the
net profit share leases. Mr. Nottingham answered that two
companies bid: Hilcorp and Hex. Representative Stapp asked
how many leases were offered.
11:04:57 AM
Mr. Nottingham did not know the number off hand. He guessed
that there were multiple hundreds of leases. Representative
Stapp estimated that 500 leases were available and 6 out of
500 were bid on, totaling approximately one percent. Mr.
Crowther answered that there were about 15,000 acres leased
and approximately 2.9 million acres unleased in the basin.
The basin with the current leases was approximately 300,000
acres. The department received bids on 15,000 acres out of
about 3.3 million acres representing a very small
percentage of available acres.
11:06:10 AM
Mr. Nottingham reviewed slide 16 titled "Existing Oil And
Gas Royalty Statutes
New Leases No Production
AS38.05.180(f)(3)Prescriptions on commercial
terms for DNR's oil and gas leases
Minimum royalty rate at 12.5%
Options for sliding-scale royalty rates or
net profit sharing
AS 38.05.180(f)(4)(5) Five percent royalty rate
on initial production under limited circumstances
180(f)(4) Cook Inlet Discovery Royalty
• 1996 SB 112
• Only used once
180(f)(5) New production granted 5%
royalty for 10 years
• 1998 HB 380
• Applied to only six known fields at the
time of legislation
• Four fields qualified
Existing Leases - Mature Production
AS 38.05.180(f)(6) Reduced royalty rates on oil
for some offshore fields under limited conditions
2003 SB 185
• Effective, more successful at prolonging
production than predicted
• Only applies to offshore oil fields
• Doesn't apply to all offshore oil fields
AS 38.05.180(j) Royalty modification by DNR
Commissioner
• Expanded in 1995 by HB 207
• May modify royalty for unproduced pools (5%),
mature pools (3%), or shut-in pools that are
uneconomic (3%)
• High bar and lengthy process
11:08:37 AM
Mr. Nottingham concluded the presentation on slide 17
titled "Action is Needed":
• Alaskans need access to reliable, affordable energy
• Nearly 70% of Alaskans use Cook Inlet natural gas for
heating, energy, and electricity generation
• Cook Inlet gas supplies are forecasted to drop below
demand in coming years unless new sources are brought
online
• There are several significant known natural gas fields
in Cook Inlet that are not seeing development under
the status quo
• Policies and actions to support future development
need to be taken today
• More competitive development terms will increase total
recovery and utilization of
• Alaska's natural resources, which otherwise may not be
developed or generate revenue for the State
• Alaska should use all the local natural gas resources
available as we work on long-term energy solutions for
the Railbelt
Co-Chair Foster thanked the department for the
presentation.
11:10:33 AM
Representative Stapp asked about gas storage. He asked if
DNR thought there was currently sufficient gas storage in
the Cook Inlet. Mr. Nottingham answered that there was
currently sufficient storage for what was needed. He
thought that the storage facilities that were not currently
open to third parties could work out a commercial agreement
to allow third party storage.
11:11:41 AM
AT EASE
11:18:07 AM
RECONVENED
HOUSE BILL NO. 257
"An Act requiring the Department of Natural Resources
to make Cook Inlet seismic survey data available to
certain persons; and providing for an effective date."
11:18:56 AM
REPRESENTATIVE TOM MCKAY, SPONSOR, thanked the committee
for hearing the bill. He read the sponsor statement (copy
on file):
As Alaska State Legislators, we are all committed to
unlocking the vast potential of Cook Inlet for gas
exploration and drilling. One way we can do this is by
attempting to broaden access to state-owned seismic
survey data. This legislation aims to enhance data
access, allowing a wider range of experts and industry
players to explore the geological intricacies of Cook
Inlet. By making seismic data more accessible, we hope
to stimulate interest and investment from new players
in the energy sector. Our goal is to enhance energy
security, support economic development, and ensure the
sustainable management of Alaska's natural resources.
This bill represents a pivotal step toward realizing
the untapped potential of Cook Inlet, encouraging
innovation, and fostering a competitive energy market.
11:20:25 AM
Representative McKay relayed that he had been approached by
small independent oil and gas operators seeking access to
state seismic data in Cook Inlet. The data would be
reviewed by seismic consultants and could potentially
result in projects in the Cook Inlet. He believed that it
was one step the state could take to encourage exploration
activity. He asked his staff to provide a PowerPoint
presentation.
TREVOR JEPSEN, STAFF, REPRESENTATIVE TOM MCKAY, provided a
PowerPoint presentation titled "HB 257 Cook Inlet Seismic
Data Access." He began on slide 2 titled "Seismic Data:
Overview:"
Extremely important tool in the oil and gas
Industry.
Using sound waves, geological structures can
be mapped.
Seismic programs can cost anywhere from a
few million to hundreds of millions of dollars;
depends on magnitude of the area of inquiry.
Mr. Jepsen read from a prepared statement. He expounded
that seismic data was used on both land and sea.
11:22:52 AM
Mr. Jepsen turned to slide 3 titled "Seismic Data
Acquisition
• Seismic Surveying: This process involves sending
shock waves into the ground, which then bounce back to
the surface where they are recorded by sensors known
as geophones.
• Data Recording and Analysis: The reflected waves are
captured by the geophones and converted into seismic
data.
Mr. Jepsen explained that the shock waves were generated by
small, controlled explosions.
11:23:26 AM
Mr. Jepsen discussed slide 4 titled "Seismic Imaging: 2D,
3D, & 4D." He elaborated that the photos on the slide
portrayed what the data looked like. He added that 4D
[dimensional space] seismic data tracked the change and
migration of fluid volumes and reservoirs over time but was
used for already producing reservoirs. He noted that 3D
provided a better picture but was more expensive than 2D.
11:24:01 AM
Mr. Jepsen reviewed slide 5 titled "Why HB 257?":
Requires the Department of Natural Resources to
distribute state-owned seismic data to "qualified
persons" at no charge
Predicted gas shortages in the near-future due to
decreased Cook Inlet gas production poses a potential
existential threat to South Central
Despite state-owned seismic data being offered at a
fraction of cost for acquisition, still serves as a
barrier for exploration companies
Mr. Jepsen indicated that the state received very little
revenue from selling Cook Inlet seismic data to the
industry. He reiterated that the goal of the legislation
was to get more industry professionals to view the data to
attract more smaller and medium sized operators. The state
currently sold the data at a fraction of the cost to
produce it. However, he felt that it still served as a
barrier to some companies accessing the area. He pointed to
the graph on the right side of the chart by the Department
of Natural Resources that portrayed the Cook inlet Gas
Production Curve. The graph showed a decline in meeting the
production goal of 70(BCF) by 2027. He reported that
eventually exporting LNG was likely resulting in higher
costs for rate payers.
11:25:57 AM
Mr. Jepsen turned to slide 6 titled "Seismic Tax Credits:"
• Oil and Gas companies eligible for Geological and
Geophysical Exploration tax credits under AS
43.55.023(a)(2)
• Must comply with AS 43.55.025(f)(2)
• Ownership of seismic data is relinquished to state
after 10 years following the survey completion date
Mr. Jepsen related that the third bullet point was relevant
to HB 257. The bill eliminated the 10 year requirement to
qualified persons but not for other data that had not met
the 10 year requirement.
11:27:02 AM
Mr. Jepsen moved to slide 7 titled "How Valuable is the
State-Owned Seismic Data?
• Perceived value of state-owned seismic data varies
• Important distinction: Cook Inlet vs. Alaska North
Slope
• Less than 3% of total revenue for state-owned
seismic data is brought in from Cook Inlet Seismic
Data
Mr. Jepsen pointed to the pie chart and chart on the right
side of the slide that showed 94 percent of total seismic
data sales was from the North Slope region.
11:27:48 AM
Mr. Jepsen turned to slide 8 titled "Cook Inlet Seismic
Sales Summary
• HB 257 brings forward a "value-add" question for the
legislature
• HB 257 doesn't pretend to be a silver bullet to spur
Cook Inlet interest, but instead is one of many
changes we can make to incentivize new activities and
investment
Mr. Jepsen pointed to the pie chart and chart on the side
and communicated that the academic and government sectors
purchased most of the seismic data with industry purchasing
roughly $27 thousand worth of data from 2018 to 2023. He
deemed that the legislation presented a trade-off decision
for the legislature: The small amount in sales revenue
versus potential interest in Cook Inlet. He concluded that
the legislation was one piece of a larger plan to
incentivize Cook Inlet gas production.
Co-Chair Foster relayed that the fiscal note had estimated
the loss of revenue of $35,000. He wondered how much the
cost of producing the data was versus about how much the
state received on the dollar to sell it. Mr. Jepsen
responded that it was roughly 1 percent of the total cost
of producing it. He deferred to DNR for a detailed answer.
11:30:53 AM
Representative Galvin reported that she did not find any
supporting documents from industry in the bill packet. She
asked for "examples of who would be supportive" of the
legislation. Mr. Jepsen answered that the sponsor did not
have a list or letters from industry. He mentioned that
Representative McKay engaged in discussions with industry.
11:31:47 AM
Representative McKay interjected that he only had anecdotal
information from industry people that he interacted with
frequently who had recommended the action. He had heard
that it could open up some oil and gas industry prospects.
He offered to provide some personal testimony if needed.
Representative Galvin deduced that the gist of the DNR
presentation the committee just received was to get
"current" Cook Inlet industry "players" incentivized. She
wondered whether the bill would help that "group of folks."
Representative McKay believed the bill could help
incentivize interest with a bank of data free of charge.
Mr. Jepsen interjected that there was very little interest
in Cook Inlet lease sales even with adjusted lease terms.
He also hoped to attract newcomers with the data.
11:34:15 AM
Representative Josephson recalled a meeting with the prior
administration and commissioner of DNR regarding an issue
over data. He was unable to remember the issue or details.
He pondered whether the sponsor should get DNR's opinion.
Representative McKay was unable to envision what the topic
might have been. Representative Josephson recalled that it
was about seismic data.
Mr. Jepsen believed it was most likely the North Slope and
would follow up.
Co-Chair Foster welcomed Juneau students to the committee
room.
Co-Chair Edgmon thought that seismic data in Cook Inlet was
3-D and not 2-D.
Representative McKay answered that it could be both or
either. He added that 3-D data was newer, was currently
used more prevalently, and was a substantial improvement in
what scientists could evaluate. Co-Chair Edgmon wondered if
the seismic data in Arctic National Wildlife Refuge (ANWR)
was in 2D. Representative McKay replied in the affirmative.
11:37:55 AM
Co-Chair Edgmon asked how much of the 3.2 million acres in
the Cook Inlet boundary was conducive to seismic data
gathering. Representative McKay answered that seismic data
gathering required a substantial amount of permitting and
was highly regulated. He did not know off hand how much
land was open for seismic data.
11:39:15 AM
Representative Coulombe asked who qualified persons were
and who made the determination. Mr. Jepsen responded that
Section 2 of the bill included the definition of qualified
person. He read the following:
"qualified person" means an accredited domestic
research institution, a person actively exploring for,
developing, or producing oil, gas, or minerals in the
state, or another person to whom the provision of
seismic survey and other geophysical data would serve
the best interests of the state as determined by the
department.
Representative Cronk thanked the bill sponsor and staff for
the bill. He appreciated the idea and believed that if it
brought in one more company it was worth it.
Representative McKay relayed that the bill kept with the
state's constitutional requirement to responsibly
developing its natural resources.
Co-Chair Foster asked the department if it had any
comments.
MELANIE WERDON, DIRECTOR, DIVISION OF GEOLOGICAL AND
GEOPHYSICAL SURVEYS, DEPARTMENT OF NATURAL RESOURCES (via
teleconference), replied that she was available for
questions.
Co-Chair Foster thanked the students for joining the
committee. He was happy to visit with them after the
meeting.
Co-Chair Foster thanked the presenters.
HB 257 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the schedule for the following
meeting.
ADJOURNMENT
11:43:35 AM
The meeting was adjourned at 11:43 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 257 - Presentation ver B 3.31.24.pdf |
HFIN 4/4/2024 10:00:00 AM |
HB 257 |
| HB 257 - Sponsor Statement ver B 3.31.24.pdf |
HFIN 4/4/2024 10:00:00 AM |
HB 257 |
| HB 257 - Sectional Analysis ver B 3.31.24.pdf |
HFIN 4/4/2024 10:00:00 AM |
HB 257 |
| HB 257 - DNR-DGGS Cook Inlet Seismic Sales Summary and Sesimic Data Costs - 2018 to 2023.pdf |
HFIN 4/4/2024 10:00:00 AM |
HB 257 |
| HB 257 - DNR-DGGS Seismic Sales by Sector and Region - 2018 to 2023.pdf |
HFIN 4/4/2024 10:00:00 AM |
HB 257 |
| HFIN DNR Cook Inlet Oil & Gas Presentation 040424 (2).pdf |
HFIN 4/4/2024 10:00:00 AM |