Legislature(1995 - 1996)

11/14/1995 02:15 PM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                            
                       November 14, 1995                                       
                           2:15 p.m.                                           
                                                                               
                                                                               
 MEMBERS PRESENT                                                               
                                                                               
 Representative Norman Rokeberg, Chair                                         
 Representative Scott Ogan, Vice Chair                                         
 Representative Gary Davis                                                     
 Representative Bill Williams                                                  
 Representative Tom Brice                                                      
 Representative Bettye Davis                                                   
                                                                               
 MEMBERS ABSENT                                                                
                                                                               
 Representative David Finkelstein                                              
                                                                               
 COMMITTEE CALENDAR                                                            
                                                                               
 HOUSE BILL NO. 325                                                            
 * "An Act authorizing suspension of payment of a portion of the               
 royalty due the state for initial production of heavy oil from                
 wells on the Arctic Slope."                                                   
                                                                               
      - HEARD AND HELD                                                         
                                                                               
 (* First public hearing)                                                      
                                                                               
 PREVIOUS ACTION                                                               
                                                                               
 BILL:  HB 325                                                               
 SHORT TITLE: ROYALTY SUSPENSION: N. SLOPE HEAVY OIL                           
 SPONSOR(S): REPRESENTATIVE(S) GREEN                                           
                                                                               
 JRN-DATE     JRN-PG            ACTION                                         
 04/28/95      1633    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 04/28/95      1633    (H)   OIL & GAS, RESOURCES, FINANCE                     
 10/17/95              (H)   O&G AT 01:00 PM ANCHORAGE LIO                     
 10/17/95              (H)   MINUTE(O&G)                                       
 11/14/95              (H)   O&G AT 02:00 PM ANCHORAGE LIO                     
                                                                               
 WITNESS REGISTER                                                              
                                                                               
 REPRESENTATIVE JOE GREEN                                                      
 Alaska State Legislature                                                      
 State Capitol, Room 24                                                        
 Juneau, AK  99801                                                             
 Telephone: (907) 465-4931                                                     
 POSITION STATEMENT:  Sponsor of HB 325                                        
                                                                               
 BRUCE POLICKY, Manager                                                        
 Milne Point                                                                   
 BP Exploration (Alaska) Incorporated                                          
 900 East Benson Boulevard                                                     
 Anchorage, Alaska  99519                                                      
 Telephone: (907) 564-5232                                                     
 POSITION STATEMENT: Commented on HB 325                                       
                                                                               
 JON TILLINGHAST, Attorney                                                     
 OXY USA, Incorporated                                                         
 One Sealaska Plaza, Suite 300                                                 
 Juneau, Alaska  99801                                                         
 Telephone: (907) 586-1400                                                     
 POSITION STATEMENT: Commented on HB 325                                       
                                                                               
 ED BEHM, Heavy Oil Team Leader                                                
 Milne Point Unit                                                              
 OXY USA, Incorporated                                                         
 P.O. Box 50150                                                                
 Midland, Texas  79710                                                         
 Telephone: (915) 685-5673                                                     
 POSITION STATEMENT: Commented on HB 325                                       
                                                                               
 GEORGE R. FINDLING, Manager                                                   
 Government and Public Relations                                               
 ARCO Alaska, Incorporated                                                     
 P.O. Box 100360                                                               
 Anchorage, Alaska 99510                                                       
 POSITION STATEMENT: Commented on HB 325                                       
                                                                               
 ACTION NARRATIVE                                                              
                                                                               
 TAPE 95-19, SIDE A                                                            
 Number 000                                                                    
                                                                               
 The House Oil & Gas Special Committee was called to order by                  
 Chairman Norman Rokeberg at 2:15 p.m.  Members present at the call            
 to order were Representatives Rokeberg, Ogan, G. Davis, Williams,             
 Brice, and B. Davis.  This meeting was teleconferenced to                     
 Ketchikan, Fairbanks, Juneau, Matanuska-Susitna, and Anchorage.               
                                                                               
 CHAIRMAN ROKEBERG announced that the agenda was HB 325, which                 
 authorizes suspension of payment of a portion of royalty due to the           
 state for initial production of heavy oils from wells on the Arctic           
 Slope.                                                                        
 HB 325 - ROYALTY SUSPENSION: N. SLOPE HEAVY OIL                             
                                                                               
 Number 023                                                                    
                                                                               
 REPRESENTATIVE JOE GREEN, sponsor of HB 325, read his sponsor                 
 statement into the record:                                                    
                                                                               
 "HB 325 allows the producers of heavy oil to forgo the payment of             
 royalty to the state on the first 500 barrels of heavy oil produced           
 each day, for a period of five years.  The heavy oils considered in           
 this bill is a thick, tar-like, very viscous hydrocarbon that is              
 more difficult to produce than the lighter, more conventional oil             
 and gas that we had in Prudhoe and in the Cook Inlet.  The purpose            
 of suspending the royalty is to encourage the lessees of heavy oil            
 deposits to do field research and hopefully develop the maximum               
 amount of recoverable oil in a timely manner.                                 
                                                                               
 HB 325 requires no application, the suspension that we are talking            
 about is automatic.  In order to receive the suspension the                   
 producer must simply submit documentation to the Department of                
 Natural Resources (DNR) certifying that the oil produced meets the            
 definition of "heavy oil" and that is clearly the reference in the            
 bill, it is a federal determination, 20 gravities or less, 20                 
 degrees API or less, and the operator would monitor the production            
 rate to satisfy the requirements that are contained in the bill.              
                                                                               
 HB 325 sends a message, we believe, to potential investors world-             
 wide that the Nineteenth Alaska Legislature supports the                      
 development of heavy oil.                                                     
                                                                               
 Number 070                                                                    
                                                                               
 BRUCE POLICKY, Manager, Milne Point, BP Exploration (Alaska)                  
 Incorporated, (BP), was the next to testify.  He gave a brief                 
 overview of his responsibilities, parts of which were indiscernible           
 due to coughing and the recorded voice level.  He said it was his             
 intention to discuss heavy oil development, primarily, within the             
 Milne Point Unit.  He would include a brief history, what was done            
 last year, this year, and what the Milne Point owners are looking             
 at as potential development.                                                  
                                                                               
 MR. POLICKY passed around a handout and pointed out a map of the              
 North Slope showing the location of various operating units.  He              
 said the ownership is 91 percent BP and 9 percent OXY                         
 USA, Incorporated (OXY).  He mentioned that OXY is the only                   
 original owner in Milne Point left.  Currently, production for the            
 Milne Point Unit runs around 25,000 barrels of oil per day.  Three            
 thousand five hundred barrels of this oil comes from the Schrader             
 Bluff Reservoir which has heavy oil accumulation.  Schrader Bluff             
 extends over a large area.  Mr. Policky stated that the Schrader              
 Bluff Reservoir had 20 billion barrels of oil in place with                   
 gravities of 10 to 20 degrees API.  For a point of reference, API             
 gravity refers to the density of oil, 10 degrees would be the same            
 weight as water, although the viscosities are very different.  He             
 added that the Schrader Bluff Reservoir, within the Milne Point               
 Unit, occurs at a depth of about 4,000 feet.  The reservoir                   
 temperature is 80 to 90 degrees Fahrenheit on sediment that was               
 laid down 75 million years ago.                                               
                                                                               
 MR. POLICKY again pointed to the handout and asked everyone to look           
 at a close-up map of the Milne Point Unit.  He said it showed the             
 Schrader Bluff accumulation system from an aerial view.  The map              
 showed three different regions of Schrader Bluff. The first region            
 was a small development representing 10 percent of the total area             
 and is known as Tract 14.  He then pointed out another area of the            
 map, and said that these were various developments in progress.               
 Milne Point owners had taken over these projects beginning in                 
 January of 1994, with most of the development occurring in 1995.              
 The last area of the map Mr. Policky covered represented potential            
 future development of a large area with a reservoir of two billion            
 barrels of oil roughly  10 percent of the heavy oil potential,                
 spread out between Milne Point and the Kuparuk River Unit.  That              
 potential development would occur within the next two years and, if           
 it proves to be commercially successful, would continue for ten               
 years.                                                                        
                                                                               
 MR. POLICKY said that the first development was attempted at Milne            
 Point by Congress in 1991 in the Tract 14 area.  In that                      
 development, six producers and five injectors were drilled.  The              
 project had a low average, initial well rate and high costs both in           
 capital and operating expenses.  Development stopped in 1991, but             
 the process resulted in several technical hurdles.  He cited the              
 use of artificial lip methods, electrical submergible pumps,                  
 methods to control the fan production from the consolidated sand              
 were identified, ways to keep the wells from freezing up during               
 production were developed, and a water flood was started.                     
                                                                               
 MR. POLICKY again referred to the handout, which showed the                   
 production plot of Tract 14, with the top curve showing oil rate in           
 barrels of oil per day from the entire field and the bottom curve             
 showing the number of wells that are on production at any given               
 time.  The graph showed the project peaking around 3,500 barrels of           
 oil per day in late 1991, and going into decline until production             
 ended in 1993.  Mr. Policky said this decline was due to lack of              
 follow-up development by the Milne Point owners at that time.  He             
 added that the peak rate in 1991 came from 12 to 15 wells, whereas            
 a typical Prudhoe Bay well may produce 3,500 barrels of oil from              
 one well.  Currently, the range of gravities that are being                   
 produced range from 14 degrees to 19 degrees API.                             
                                                                               
 Number 140                                                                    
                                                                               
 MR. POLICKY showed some oil examples, a 14 degree API from Milne              
 Point, a 23 degree API from Kuparuk, and a 35 degree API from the             
 Sak River Reservoir which is located within Milne Point.  He said             
 the higher the temperature of the oil, the lower the viscosity.  He           
 said Kuparuk oil was about 106 degrees, the Schrader Bluff heavy              
 oil was around 80 to 90 degrees, and Sak River oil around 200                 
 degrees.                                                                      
                                                                               
 Number 153                                                                    
 MR. POLICKY began discussing the future plans of BP, saying that              
 the 1995 objective was to determine the liability of a larger scope           
 development depending on the ability to successfully compete for              
 investment capital.  He stated that failure in this area would                
 delay the proposed 1998 development.  This program would                      
 incorporate 300 or more wells with production rates approaching               
 60,000 barrels of oil per day beginning in the next ten years.  He            
 referred to the handout listing the 1995 BP objectives, including             
 improving the cost performance ratio of the Schrader Bluff                    
 development, reducing operating capital expenses while increasing             
 production rate, and reducing the amount of uncertainty.  BP has              
 spent between $13 million and $15 million on the Schrader Bluff               
 development.  The costs for drilling have been from $1 million to             
 $12 million.  To keep wells on line, $2 million has been spent in             
 operating expenses and about $1 million on facility and reservoir             
 technical studies.                                                            
                                                                               
 Number 180                                                                    
                                                                               
 MR. POLICKY said that no new wells have been drilled and BP is                
 uncertain of how they will preform in the future, but it appears              
 that drilling and completion costs have been reduced.  He added               
 that the costs were at such a level that production levels, and               
 development incentives would determine the feasibility of further             
 development.                                                                  
                                                                               
 MR. POLICKY referred to the next page of the handout, which showed            
 the technological side of development, and pointed out the                    
 improvement of the completion site at Milne Point.  Completion was            
 defined as the things done to the well after its drilled, to get it           
 to preform to the desired production and keep your operating                  
 expenses low.  He went into detail regarding these completion                 
 technologies such as the artificial lip, and the use of a heat                
 trace.  Mr. Policky pointed to the next page of the handout and               
 reiterated what events need to occur for large scale field                    
 development to come on line including cost reduction in operating             
 or capital expense, coupled with development incentives, and                  
 increased production.                                                         
                                                                               
 Number 221                                                                    
                                                                               
 MR. POLICKY said that HB 325 would not only be a development                  
 incentive, but would also increase production.  He estimated that             
 the total potential was between 200 million to 800 million barrels.           
 BP has $4 million in their 1996 operating budget for technical                
 studies, but doesn't have any drilling capital.  He stated that he            
 could not definitively state that, if incentives were or not                  
 available, development would occur.  He cautioned that a delay in             
 development, within the North Slope, puts ultimate recovery at                
 risk.  He added that lower production amounts would make the                  
 project less economically viable and cited examples where this had            
 happened within the North Slope.                                              
 Number 266                                                                    
                                                                               
 REPRESENTATIVE BETTYE DAVIS asked for clarification of the word               
 "short" in the context of "short time to produce."                            
                                                                               
 Number 276                                                                    
                                                                               
 MR. POLICKY said this time was measured in months and stated that             
 because the infrastructure was already in place it would reduce the           
 amount of time needed.  He felt that at Schrader Bluff it would               
 take approximately 6 to 12 months to begin production.                        
                                                                               
 Number 289                                                                    
                                                                               
 CHAIRMAN ROKEBERG asked for information regarding the technology              
 transfer items from a historical perspective to the technology that           
 is currently being developed.                                                 
                                                                               
 Number 296                                                                    
                                                                               
 MR. POLICKY stated that the use of technology is based around                 
 completion efficiencies.  One of these methods was first developed            
 in the Gulf of Mexico and is called fracturing technology.  Propane           
 is injected into the wells to stimulate a high rate of production.            
 Gravel packs are also installed and sand is placed behind the                 
 screen to control solids production from occurring later.  Mr.                
 Policky added that this technology could be used in the Sak River             
 and the Kuparuk Unit.  He also mentioned that the submersible pumps           
 run lives have increased from a few minutes to four years.  Changes           
 in run materials, how to keep the wells from freezing up, and how             
 to control Amp production have lead to the increased run lives.  On           
 a reservoir recovery basis there is some potential enhancement of             
 oil recoveries through a variety of methods.  One of the methods is           
 a gas injection system which was developed in Prudhoe Bay.  The               
 heat trace system is another method.  It places a band of heat tape           
 across the layers of permafrost to prevent freezing,  maintaining             
 working temperatures of 60 degrees Fahrenheit at a cost of $80,000.           
                                                                               
                                                                               
 Number 327                                                                    
                                                                               
 CHAIRMAN ROKEBERG asked Mr. Policky to compare temperatures and               
 difficulties that you face in Milne Point to those in Prudhoe Bay.            
                                                                               
 Number 329                                                                    
                                                                               
 MR. POLICKY said the temperatures can range from 60 degrees to as             
 high as 195 degrees Fahrenheit when it came out of the ground.  He            
 added that, without heating the oil, the temperature is about 25 to           
 30 degrees Fahrenheit.                                                        
                                                                               
 Number 337                                                                    
 CHAIRMAN ROKEBERG asked if there was both water flooding and gas              
 injection going on in Milne Point and how much gas is in the gas              
 gap in the whole west side formation.                                         
                                                                               
 Number 340                                                                    
                                                                               
 MR. POLICKY said that there isn't a gas gun in the Schrader Bluff             
 area and he didn't believe that there is one within the west side.            
 BP re-injects or produces gas in the Kuparuk Reservoir.  He added             
 that BP is water flooding about half of the Schrader Bluff                    
 accumulation.  One of the areas that BP is studying is when and if            
 you need a water flood.  So far it appears that a water flood is              
 beneficial and it is believed that injecting gas would also be                
 beneficial.                                                                   
                                                                               
 Number 355                                                                    
                                                                               
 CHAIRMAN ROKEBERG mentioned that this is the only area in the state           
 where pumps are being used because oil flows naturally.                       
                                                                               
 Number 360                                                                    
                                                                               
 MR. POLICKY stated that he was not aware of any other commercial              
 pump applications on the North Slope, but said he did not know                
 about Cook Inlet.                                                             
                                                                               
 CHAIRMAN ROKEBERG questioned if the expense of lifting this heavy             
 oil, added to the cost investment which makes it a more difficult             
 investment decision.                                                          
                                                                               
 MR. POLICKY said he believes that BP has selected the most cost               
 effective lifting mechanism for these types of production                     
 characteristics.                                                              
                                                                               
 Number 368                                                                    
                                                                               
 REPRESENTATIVE BRICE questioned the average life of a well.                   
                                                                               
 MR. POLICKY said a well, with a production rate of 300 to 400                 
 barrels a day dropping down to approximately 200 barrels per day              
 after the first year,  it would have an average life of 20 years.             
                                                                               
 Number 385                                                                    
                                                                               
 CHAIRMAN ROKEBERG said that the royalty relief grant in HB 325                
 would be 12.5 percent, more or less, depending on which lease would           
 be affected.  He cited a calculation of an oil well producing 300             
 barrels per day, sustained on a 30 day basis, would be about                  
 $12,000 in revenue relief granted per month.  Chairman Rokeberg               
 asked, in economic terms, what kind of impact would this royalty              
 relief have and would the state receive any other money such as               
 severance taxes as a result of foregoing these revenues.                      
 Number 395                                                                    
                                                                               
 MR. POLICKY answered that the significance of the royalty holiday             
 depends on how close an oil company is to making a commercially               
 viable project.  He cited factors such as average drilling costs,             
 facility costs, coupled with what type of production rate you would           
 need on a loan, and how much improvement you would need to make in            
 order to make a project commercially viable.   He added that                  
 royalty reduction had the same effect as increasing production out            
 of the well.  In numbers, it is felt that to make this project                
 commercially viable, 400 to 500 barrels of oil per day would be               
 needed, coupled with half the drilling costs experienced in the               
 past.  In the past, 350 barrels of oil per day were averaged.  If             
 BP can achieve 450 barrels of oil per day, in addition to the                 
 royalty reduction, then it would meet the 500 barrels per day rate            
 and be commercially viable.                                                   
                                                                               
 Number 425                                                                    
                                                                               
 CHAIRMAN ROKEBERG reiterated that these are marginal oil wells and            
 pools of oil, and suggested that the state should work in                     
 partnership with companies to cover their amount of investment.  He           
 added that it was a test bed technology chance for the amount of              
 money the state would forgo in this area.                                     
                                                                               
 Number 440                                                                    
                                                                               
 MR. POLICKY added that the resource is highly variable and the                
 challenges change as you go to different parts of the field.  He              
 said that incentives would lead to development that wouldn't occur            
 otherwise.  He added that there would be secondary benefits such as           
 money being spent on construction of housing modules.  He said he             
 didn't believe that Schrader Bluff, in regards to the ELF factor,             
 would fall out of the severance tax area.  He added, that any time            
 you increase your use of the pipeline system, there is directional            
 reduction in tariffs that are paid and in corporate taxes if you              
 are making a profit.                                                          
                                                                               
 Number 471                                                                    
                                                                               
 REPRESENTATIVE B. DAVIS asked why five years was given as a time              
 line.                                                                         
                                                                               
 REPRESENTATIVE GREEN said, as opposed to an investment by the                 
 state, an investor time-rates his money, and this creates an in-              
 house economic barrier.  This barrier means that if you don't                 
 recover your money within five years, you have lost the opportunity           
 for other investments.  He said most companies won't think of                 
 investing in anything that wouldn't recover their investment until            
 after the five year mark.                                                     
                                                                               
 Number 501                                                                    
 REPRESENTATIVE B. DAVIS asked Mr. Policky if that five year time              
 line was seen as reasonable to oil companies.                                 
                                                                               
 Number 504                                                                    
                                                                               
 MR. POLICKY stated that five years would be the upper time frame BP           
 would normally build.  He added that BP has projects all over years           
 because of the problem of capital allocation.  He said the shorter            
 the royalty suspension time period the less the significance of the           
 incentive.                                                                    
                                                                               
 REPRESENTATIVE GREEN interjected that the time frame might be                 
 different if the incentive was directed at the Prudhoe Bay, because           
 the rates of oil production are so much higher.                               
                                                                               
 REPRESENTATIVE B. DAVIS asked how much money would be lost due to             
 this incentive.                                                               
                                                                               
 Number 541                                                                    
                                                                               
 REPRESENTATIVE GREEN said that the state could be losing whatever             
 production rate the oil companies are losing below 500 barrels per            
 day.  If they produce 499 barrels of oil per day for five years,              
 the state would be giving up one-eighth of the royalty.  He                   
 mentioned that without this incentive it would be unlikely that               
 there would be any royalty because of the heavy costs associated              
 with the production of heavy oil.                                             
                                                                               
 REPRESENTATIVE B. DAVIS asked if more money would potentially be              
 available if oil companies were to stay there and produce.                    
                                                                               
 Number 566                                                                    
                                                                               
 MR. POLICKY said he didn't have numbers on the overall economic               
 outlook.  He said he felt it was an opportunity to test the                   
 potentials of the region and establish commercial techniques and              
 approaches which can be expanded into other regions.                          
                                                                               
 Number 584                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS said that HB 325 provides an incentive for            
 five years creating production possibilities, after which you have            
 the royalty on whatever is produced.                                          
                                                                               
 REPRESENTATIVE GREEN said that the amount of oil recovered after              
 five years, at full royalty, would be worth more to the state than            
 the discounted royalty.                                                       
                                                                               
 Number 600                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS pointed out that HB 325 concerns the entire           
 Arctic Slope not just Milne Point or Schrader Bluff, and asked what           
 the possibilities were for producing heavy oil elsewhere.                     
                                                                               
 Number 612                                                                    
                                                                               
 MR. POLICKY said that possibilities have already been studied in              
 the Kuparuk River Unit and stated that same difficulties exist                
 there as they do at Milne Point.                                              
                                                                               
 REPRESENTATIVE GREEN said that to his knowledge, Kuparuk River and            
 Milne Point were the only two regions in the state that were                  
 capable of producing heavy oil.                                               
                                                                               
 CHAIRMAN ROKEBERG said that the production and technical problems             
 would revolve around those pools of oil that may be discovered                
 because they are heavy gravity oil.  It was explained that the                
 definition in the bill was based on a federal statutory code that             
 is readily understandable and definable.                                      
                                                                               
 TAPE 95-19, SIDE B                                                            
 Number 000                                                                    
                                                                               
 JON TILLINGHAST, Attorney, Milne Point Unit, OXY USA, Incorporated,           
 and BP Exploration (Alaska), Incorporated, was next to testify.  He           
 referred to a hand out, presented to the Oil and Gas Policy Council           
 on June 29, 1995, which indicated that Alaska's fiscal system does            
 not encourage the development of marginal fields.  Mr. Tillinghast            
 said, in Alaska, no differentiation is given between oil fields,              
 which inevitably favors the bigger oil wells.  He added that both             
 the Executive and the Legislative Branches are beginning to                   
 recognize that three things need to happen.  Those things include             
 relying on the smaller, marginal reserves that are located on the             
 North Slope, the second thing is the need for OXY and BP to work              
 together to solve the economic problems associated with those                 
 marginal oil wells, and the last thing is that Alaska needs to                
 reevaluate their oil and gas policy.                                          
                                                                               
 Number 024                                                                    
                                                                               
 MR. TILLINGHAST said that Alaska needs to increase the number of              
 oil companies.  He said that the heavy oil reserves in the North              
 Slope are the largest, proven reserves in the country.  He added              
 that the state has not previously included the Schrader Bluff                 
 resources in the Department of Natural Resources (DNR) production             
 forecast or in the Department of Revenue (DOR) forecast.  He said             
 that the state of Alaska has begun the process to attract new oil             
 companies.                                                                    
                                                                               
 Number 047                                                                    
                                                                               
 ED BEHM, Heavy Oil Team Leader, Milne Point Unit, OXY USA,                    
 Incorporated, who is responsible for making investment decisions              
 regarding heavy oil development, was next to testify.  He gave some           
 background of OXY stating that they are an independent company, one           
 of the top ten in oil revenues, produce 60,000 barrels of oil per             
 day domestically, and have heavy oil operations in California.  He            
 then reiterated information that Mr. Policky had mentioned                    
 regarding the expected oil output, and the economic disadvantages             
 of heavy oil.                                                                 
                                                                               
 Number 068                                                                    
                                                                               
 MR. BEHM said the best heavy oil deposits are in the Milne Point              
 Unit.  Those deposits have a 20 to 22 gravity and get progressively           
 heavier towards the Kuparuk River Unit.  Mr. Behm referred to a               
 page in the handout labeled, "Unlocking the Heavy Oil Potential on            
 Alaska's North Slope," pointing out maps of the area with various             
 oil developments.  He discussed a previous pilot project where                
 several methods of obtaining the oil resources were tested, with              
 the exception of gas injection.  When water flooding was tested,              
 OXY had water breakthroughs adding sand to the oil which added to             
 the operating expenses.  The  determination of the pilot was that             
 flat, long-lived production was the best served by a time frame               
 royalty incentive.                                                            
                                                                               
 Number 137                                                                    
                                                                               
 MR. BEHM pointed to a graph on the handout and said that low cost             
 fracturing technology appeared to be promising.  He then referred             
 to a completion diagram from the handout, and said that the shallow           
 wells cost about as much as a deep well.  The cost averages about             
 $2.4 million per well to drill with a tariff of $5.60 per barrel.             
                                                                               
 Number 152                                                                    
                                                                               
 REPRESENTATIVE BRICE asked if Milne Point relies on pipeline income           
 versus (indiscernible).                                                       
                                                                               
 MR. BEHM said that "if it is an expense to unit or field or                   
 pipeline it is the same, then it is pipeline income" and pointed              
 out that this is the only infrastructure within the state of                  
 Alaska.                                                                       
                                                                               
 MR. BEHM gave a Tract 14 summary.  OXY spent $126 million on 22               
 wells between 1991 and 1994.  The wells averaged 275 barrels of oil           
 per day at a cost of $9.30 per barrel which is not cost effective             
 by North Slope standards.  Some cost savings were achieved through            
 new technology, and OXY is looking towards BP's fracturing                    
 technology.  He added that exotic technologies used in warmer                 
 climates would not be economically advantageous on the North Slope.           
 Mr. Behm mentioned that the hurdle rate, that OXY and the A. D.               
 Little Report calculated in independent research, was 15 percent              
 for heavy oil investment in Alaska.  He stated that OXY had used              
 the 1995 Spring DOR Sources Book in the determining the figures.              
                                                                               
 Number 209                                                                    
                                                                               
 MR. BEHM said that if you build oil wells on a subsidized basis               
 then the investment is 13 percent with a payback in 6 1/2 years.              
 He said that an estimated $300,000 are lost per well.  He referred            
 to a chart in the handout listing the key factors for incentives              
 including some quotes from the AD Little Study.  These factors                
 included specificity, relevancy, certainty, immediacy within the              
 current window of opportunity, credibility, sufficiency and                   
 necessity.  Turning the next page of the handout he referred to it            
 and mentioned aspects of HB 325 including the suspension of royalty           
 payments for each new well for the first five years and first 500             
 barrels of oil per day.  He stated that HB 325 was a simple,                  
 automatic process and applicable only to those companies drilling             
 the heavy oil.                                                                
                                                                               
 Number 237                                                                    
                                                                               
 MR. BEHM referred to the next page of the handout listing seven               
 states that have suspension incentives that have worked.  He                  
 specified Texas stating that they have a ten year suspension                  
 incentive which had resulted in a 400 percent increase in the                 
 number of wells, receiving a $4 billion increase in gas amounts and           
 $240 million in sales revenue and created 104,000 employment years            
 which generated $12 million revenue in sales tax.                             
                                                                               
 Number 262                                                                    
                                                                               
 MR. BEHM said that the five year suspension of royalties under HB
 325, means that the oil company investment will take 5.4 years                
 instead of 6.5 years to recoup.  He mentioned another scenario that           
 if you were to create a 5 percent royalty suspension for the                  
 lifetime of the well, it would reduce state revenue because of the            
 potential of increased royalties due to higher prices of oil.                 
                                                                               
 Number 295                                                                    
                                                                               
 MR. BEHM referred to the curve Mr. Policky had presented and said             
 that OXY had a similar set of numbers.  He pointed to the handout             
 listed as "Full Development of Heavy Oil at Milne Point Above and             
 Beyond Existing Schrader Bluff" and said the numbers listed were              
 350 oil wells over a ten year period, spending $1.2 billion in                
 capital with 300 million barrels of oil produced and a peak                   
 production rate of 60,000 barrels of oil per day.  The potential              
 royalties for the state of Alaska would be $60 million in the                 
 future, not including the possible investment loan income.  If HB
 325 were enacted and heavy oil development occurred, the state                
 would get $329 million based on the economics of the OXY unit plus            
 the long range forecast of those wells and the new technologies               
 that will be developed.                                                       
                                                                               
 Number 302                                                                    
 MR. BEHM pointed to the last page of the handout and said,                    
 according to these figures, the state of Alaska will be earning               
 money on these early wells when the oil companies will still be               
 recouping their capital investment.                                           
                                                                               
 Number 318                                                                    
                                                                               
 MR. TILLINGHAST explained that the five year, 500 barrel numbers              
 have independent justifications.  He said that 500 barrels is a               
 good definition of a marginal field in the North Slope and five               
 years is the pay off period for investors.                                    
                                                                               
 MR. TILLINGHAST said that OXY has restrictions on its ability to              
 apply for discretionary relief to DNR as a result of a settlement             
 agreement, therefore OXY would not be eligible for relief under HB
 207.  He added that HB 207 requires a five percent minimum royalty            
 and doesn't fit some of the criteria.  He mentioned such as                   
 immediacy and certainty.  He said that the heavy oil problem has a            
 specific and focused fix.                                                     
                                                                               
 Number 349                                                                    
                                                                               
                                                                               
 CHAIRMAN ROKEBERG asked for more information on the settlement                
 agreement between OXY and DNR.                                                
                                                                               
 Number 359                                                                    
                                                                               
 MR. TILLINGHAST said the agreement restricts OXY's ability to apply           
 for a royalty reduction.  He added that there would be an issue as            
 to whether when the law changed significantly, as it did with HB
 207, whether that would be covered in the application made to HB
 207.  He said his client assumes that HB 207 would restrict them              
 from doing that and would not go through a discretionary royalty              
 reduction again because of the time and expense that it cost OXY.             
                                                                               
 Number 388                                                                    
                                                                               
 REPRESENTATIVE OGAN addressed criticism from the public that the              
 oil companies would develop these fields anyway with or without a             
 royalty suspension.                                                           
                                                                               
 Number 401                                                                    
                                                                               
 MR. TILLINGHAST responded that there is no risk free decision about           
 whether or not heavy oil extraction would occur in the North Slope            
 without a royalty suspension.  He said the A. D. Little Report                
 mentioned concerns about putting the development of heavy oil                 
 resources on hold.  The report states that at some point in the               
 twentieth century the TransAlaskan Pipeline capacity is going to              
 decline, raising per barrel tariffs so that any new marginal                  
 production in the North Slope would not be economically sound.  He            
 added that the pipeline might also close for lack of capacity.                
                                                                               
 Number 434                                                                    
                                                                               
 MR. TILLINGHAST questioned that if heavy oil production was                   
 profitable, why weren't oil companies already producing it.                   
                                                                               
 MR. BEHM added that the suspension of royalty payments is a good              
 way of increasing production of heavy oils.                                   
                                                                               
 Number 455                                                                    
                                                                               
 CHAIRMAN ROKEBERG asked if the 9 percent of Occidental would be               
 applicable to OXY not with standing the settlement.                           
                                                                               
 MR. TILLINGHAST said that all the settlement does is prohibit the             
 discretionary application process.                                            
                                                                               
 Number 470                                                                    
                                                                               
 GEORGE R. FINDLING, Manager, Government and Public Relations,                 
 ARCO Alaska, Incorporated was next to testify.  He read his                   
 statement into the record:                                                    
                                                                               
 "Mr. Chairman, for the record, my name is George Findling, I am the           
 Manager of Government Relations for ARCO Alaska, Incorporated.  I             
 have resided in Alaska for 11 years.                                          
                                                                               
 Thank you for the opportunity to testify on HB 325.  To summarize,            
 while the provisions of HB 325 would create significant value in a            
 West Sak development effort by ARCO and while there is a real merit           
 for Alaska to incentivize heavy oil development, we can not say at            
 this time that the provisions of HB-325 will create enough value to           
 move the West Sak accumulation from unattractive to attractive for            
 development.  Further, it is not clear to us at this time, that the           
 provisions of HB-325 would be the most efficient in stimulating the           
 West Sak, the heavy oil accumulation which lies above the Kuparuk             
 horizon,  I would like to elaborate briefly on these points.                  
                                                                               
 ARCO is working to bring West Sak oil into production.  In the mid-           
 1980's, our field work demonstrated a technique that could be used            
 to complete wells and produce oil at modest rates.  Despite these             
 advances, the West Sak accumulation is currently not competitive              
 for investment dollars when compared to other world wide                      
 opportunities.  Numerous, closely spaced wells and lack of facility           
 capacity make capital costs relatively high.  Low well rates, high            
 operating costs and uncertain overall recovery rates raise the                
 ongoing cost structure of the bulk of West Sak to unacceptably high           
 levels.                                                                       
                                                                               
 Since the West Sak reservoir quality, indicated mainly by seam                
 thickness, varies over the field, we would expect to develop first            
 in the best areas, then move to the lesser areas of reservoir                 
 quality.  In this scenario, you can envisage that production slowly           
 builds up over time as the field development expands to new areas             
 and cost reduction techniques are refined.  Now, remember, the                
 `best' West Sak is not as good in terms of current cost structure             
 as the `worst' Kuparuk which is the underlying accumulation.  So              
 one key to West Sak is to make its cost structure effective enough            
 to compete for facility usage against Kuparuk and other resources.            
                                                                               
 ARCO is trying to find ways to reduce this cost structure and make            
 a significant amount of West Sak cost competitive.  We are                    
 currently doing a strategic and technical `rethink' which we hope             
 will lead to new, and innovative development approaches.  In                  
 essence, we hope that a limited field program in 1996 and 1997 will           
 be the first step in a phased commercialization which will include            
 incremental improvements in technology and operating costs.  The              
 details of this program are not yet developed, but I can say that             
 we will be trying to find ways to reduce our cost structure                   
 substantially at each step so that development can proceed to the             
 next step.                                                                    
                                                                               
 Our current view is that we need to work through at least this 1996           
 program to specifically know when royalty modifications will be               
 needed to make the then next phase of development attractive for              
 investment.                                                                   
                                                                               
 Our hypothetical analyses to date show that royalty reductions can            
 provide major improvements in the economics of a marginal heavy oil           
 field.  A royalty holiday, one form of which is contained in HB
 325, deserves consideration.  Another approach which should be                
 considered is a general reduction in royalty rate over field life.            
                                                                               
 To summarize, whether some type of royalty reduction is sufficient            
 to make the then next phase of the West Sak field attractive for              
 investment is problematic at this time; but it will likely be                 
 better quantified after our 1996 program.                                     
                                                                               
 Mr. Chairman, thank you for the opportunity to testify and I would            
 be happy to take your questions."                                             
                                                                               
 Number 542                                                                    
                                                                               
 CHAIRMAN ROKEBERG asked if ARCO had a formal position on HB 325.              
                                                                               
 MR. FINDLING said that ARCO is interested in advancing incentives             
 that would make a marginal project attractive to investors.  He               
 said that he could not say that HB 325 would have that effect.                
                                                                               
 Number 571                                                                    
                                                                               
 CHAIRMAN ROKEBERG said then it appeared that HB 325 might not                 
 provide enough of an incentive.                                               
 MR. FINDLING said that without addressing the state royalty part of           
 it, the whole project cost structure is out of line and not                   
 attractive for investment.  He said that the state needs to get               
 that cost structure down in order to move ahead.  He said that ARCO           
 looked at the development of these heavy oil deposits with zero               
 royalty paid and still found it unattractive to investment.  He               
 said that the key is to reduce costs in the operating area.                   
                                                                               
 TAPE 95-20, SIDE A                                                            
 Number 000                                                                    
                                                                               
 CHAIRMAN ROKEBERG said he wanted to adopt the committee substitute            
 and hold it over for further testimony and additional hearings                
 during the session.                                                           
                                                                               
 REPRESENTATIVE  OGAN requested point of order as to whether or not            
 committees could adopt a committee substitute during the interim.             
                                                                               
 REPRESENTATIVE G. DAVIS moved to adopt the proposed committee                 
 substitute for HB 325 version 122/x/k, including the proposed                 
 amendment.  Hearing no objections, the House Special Committee on             
 Oil and Gas adopted the committee substitute pending a review of              
 the rules on what a committee can do with a bill during the                   
 interim.                                                                      
                                                                               
 Number 023                                                                    
                                                                               
 REPRESENTATIVE G. DAVIS asked Representative Green if the                     
 Administration had been provided a copy of HB 325.                            
                                                                               
 REPRESENTATIVE GREEN said he that the Governor is aware of the bill           
 and is in favor of it to his knowledge.  He said his understanding            
 is that the Governor likes the bill, but doesn't want to get ahead            
 of the Oil and Gas Policy Council.  If HB 325 becomes a                       
 recommendation of that council, then the Governor would be in favor           
 of it.                                                                        
                                                                               
 Number 035                                                                    
                                                                               
 CHAIRMAN ROKEBERG said the Administration and the (indiscernible)             
 were invited to be at this meeting, but were unable to attend.  He            
 added that there were a number of leases on Cook Inlet that went up           
 for sale today.  The state will earn $987,000 on this sale, if the            
 bids are accepted.  He that 25 tracts were bid on out of a number             
 of 100.  He said there was only one significant bid of $390,000 was           
 offered.  The balance of the bids ranged in the amount of eight               
 dollars an acre.  He said that six different companies won bids in            
 the sale which included ARCO, Norcom, UNICAL, Union Texas, Stewart            
 Petroleum.                                                                    
                                                                               
 CHAIRMAN ROKEBERG said that the committee will be meeting on                  
 December 18, 1995, for a work session.  In the morning, the                   
 committee will take up bonding requirements and removal of other              
 impediments and obstacles to small, independent oil and gas                   
 producers in the state.  In the afternoon, of December 18, 1995,              
 there will be another work session focusing on areawide leasing               
 and best interest finding legislation.                                        
                                                                               
 CHAIRMAN ROKEBERG stated that the next public hearing of HB 325               
 will occur in the early portion of January.                                   
 ADJOURNMENT                                                                   
                                                                               
 There being no further business to come before the committee,                 
 Chairman Rokeberg adjourned the meeting at 3:50 p.m.                          
                                                                               

Document Name Date/Time Subjects