Legislature(2005 - 2006)CAPITOL 124

01/17/2006 05:00 PM House OIL & GAS


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05:07:44 PM Start
05:07:57 PM Overview from Department of Natural Resources - Division of Oil & Gas
06:10:10 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview from Department of Natural TELECONFERENCED
Resources - Division of Oil and Gas
Bill Van Dyke, Director
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                        January 17, 2006                                                                                        
                           5:07 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Lesil McGuire                                                                                                    
Representative Norman Rokeberg                                                                                                  
Representative Ralph Samuels                                                                                                    
Representative Nancy Dahlstrom                                                                                                  
Representative Berta Gardner                                                                                                    
Representative David Guttenberg                                                                                                 
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Vic Kohring, Chair                                                                                               
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Representative Kurt Olson                                                                                                       
Representative Jim Holm                                                                                                         
Representative Mike Kelly                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW FROM DEPARTMENT OF NATURAL RESOURCES - DIVISION OF OIL                                                                 
& GAS                                                                                                                           
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BILL VAN DYKE, Acting Director                                                                                                  
Division of Oil & Gas (DOG)                                                                                                     
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented an overview from the Division of                                                                  
Oil & Gas, Department of Natural Resources.                                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
REPRESENTATIVE RALPH  SAMUELS, acting as Chair,  called the House                                                             
Special Committee on Oil and Gas  meeting to order at 5:07:44 PM.                                                             
Representatives   McGuire,  Samuels,   Dahlstrom,  Gardner,   and                                                               
Guttenberg were  present at  the call  to order.   Representative                                                               
Rokeberg  arrived  as the  meeting  was  in  progress.   Also  in                                                               
attendance were Representatives Olson, Holm, and Kelly.                                                                         
                                                                                                                                
^OVERVIEW FROM DEPARTMENT OF NATURAL  RESOURCES - DIVISION OF OIL                                                             
& GAS                                                                                                                         
                                                                                                                                
5:07:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS   announced  that  the  first   order  of                                                               
business would  be an overview  from the  Division of Oil  & Gas,                                                               
Department of Natural Resources.                                                                                                
                                                                                                                                
5:08:32 PM                                                                                                                    
                                                                                                                                
BILL  VAN DYKE,  Acting Director,  Division of  Oil &  Gas (DOG),                                                               
Department of  Natural Resources  (DNR), announced that  he would                                                               
be  referring  to  the  handout  entitled  "Alaska  Oil  and  Gas                                                               
Activities".     Slide  2,  the  state   revenue  pie,  displayed                                                               
petroleum  revenue sources  for the  fiscal year  (FY) 2005.   He                                                               
stated that  for FY 2005, the  non-petroleum unrestricted revenue                                                               
was  11  percent.   Royalties,  bonuses,  rents, and  settlements                                                               
totaled $1.9 [million].  Royalties  to the Permanent Fund totaled                                                               
nearly 500  million dollars.   Referring to slide 3,  fiscal year                                                               
oil and gas revenue from  state lands for fiscal years 1990-2005,                                                               
he explained that  FY 2005 is the highest because  of the rise in                                                               
commodity  prices.   The  state is  still  benefiting from  those                                                               
commodity prices this FY [2006].                                                                                                
                                                                                                                                
5:10:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG,  referring  to  slide  3,  asked  for                                                               
clarification  of  the  monetary  amounts  of  the  oil  and  gas                                                               
settlements.                                                                                                                    
                                                                                                                                
5:11:10 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE answered, "A  couple million dollars, primarily from                                                               
royalty audits  and settlements,"  adding that it's  nothing like                                                               
the early 1990s, when there were major royalty settlements.                                                                     
                                                                                                                                
5:11:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS inquired as to  whether it was possible to                                                               
get a similar graph that accounts for inflation.                                                                                
                                                                                                                                
5:11:45 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE  confirmed that the DOG would be  able to convert it                                                               
to whatever "dollars" the committee  requests.  For example, 1990                                                               
"dollars."                                                                                                                      
                                                                                                                                
5:12:12 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to  slide 4, described  the organization                                                               
"links" of  the DOG.   The  division takes  a "team  approach" in                                                               
accomplishing their mission, and  also utilizes the Department of                                                               
Law (DOL) and the Division  of Geological and Geophysical Surveys                                                               
(DGGS).                                                                                                                         
                                                                                                                                
5:12:51 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE,  referring to slide 5, described some  of the DOG's                                                               
continuing projects,  which range  from the sciences,  to audits,                                                               
to accounting,  to commercial  land, as  well as  to recruitment.                                                               
Currently in the oil and  gas industry, hiring is competitive and                                                               
the state has lost employees to other oil and gas companies.                                                                    
                                                                                                                                
5:13:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG,  referring to the continuing  project of                                                               
crafting  new, 10-year  best interest  findings  for the  state's                                                               
lease  sales, beginning  in 2007,  asked if  2007 was  the tenure                                                               
date for the areawide leasing program.                                                                                          
                                                                                                                                
5:14:05 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE  confirmed  that   through  the  areawide  leasing                                                               
program, the DOG  is able to do a "best  interest" finding, which                                                               
can last up to 10 years.  It  is refreshed each year, but the DOG                                                               
doesn't have to go through the  entire finding process again.  He                                                               
informed  the  committee  that the  10-year  "sunset  dates"  are                                                               
starting to "roll up", beginning in 2007.                                                                                       
                                                                                                                                
5:14:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  requested that Mr. Van  Dyke discuss the                                                               
status of the governor's change  in the production tax last year.                                                               
He also  asked whether  there are  ongoing negotiations  with the                                                               
various companies.                                                                                                              
                                                                                                                                
5:14:45 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE asked if  Representative Rokeberg was  referring to                                                               
the "aggregation at Prudhoe Bay."                                                                                               
                                                                                                                                
5:14:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG added  that  the  economic limit  factor                                                               
(ELF)  for  the production  tax  applicability  to the  satellite                                                               
field was changed.                                                                                                              
                                                                                                                                
5:15:01 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE  informed Representative  Rokeberg that  he is  not                                                               
involved in the  negotiation.  He then  offered his understanding                                                               
that some  appeals have been  filed in the Department  of Revenue                                                               
(DOR).                                                                                                                          
                                                                                                                                
5:15:19 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE,  referring to slide 6, informed  the committee that                                                               
with the upcoming gaseline and  the increase in workload, the DOG                                                               
received some supplemental  funding about a year and  a half ago.                                                               
The money runs out at the end of  this fiscal year.  If the state                                                               
doesn't  get the  money replenished,  and the  DOG is  asking for                                                               
general fund money  to replace what is now  supplemental, the DOG                                                               
will lose about  13 people, which is about 15  percent of the DOG                                                               
staff.  He opined,  "Now's not the time to take  a 15 percent cut                                                               
in oil and gas activity."                                                                                                       
                                                                                                                                
5:16:08 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE,  referring  to   slides  7  and  8  and  division                                                               
highlights, said that in calendar  year 2005, the state collected                                                               
over   $2  billion   in   rents,   royalties,  and   settlements.                                                               
Currently,  there  are approximately  1,200  active  oil and  gas                                                               
leases,  covering approximately  4 million  acres and  generating                                                               
approximately $6 million  in rental income.   Audits focus mainly                                                               
on transportation costs, most of  which are marine transportation                                                               
costs,  compared   to  pipeline  transportation  costs.     Audit                                                               
employees also deal with the net  profit share leases.  The state                                                               
has an active  royalty settlement "re-open" process,  as a result                                                               
of the  royalty settlement agreements  the state entered  into in                                                               
the 1990s and  this process allows either party  to re-open parts                                                               
of the deal when [oil and  gas] conditions change.  He added that                                                               
this process works well for both sides.                                                                                         
                                                                                                                                
5:18:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  referred  to  ongoing  arbitration,  and                                                               
commented, "I  assume that we  haven't received any of  the [$]26                                                               
million yet."                                                                                                                   
                                                                                                                                
5:18:42 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE informed the committee  that it will take a total of                                                               
three to  four years to  complete the [arbitration] process.   He                                                               
explained that  the state has already  won the first part  of the                                                               
arbitration process regarding destination  value for the oil, and                                                               
that  the  second part,  as  yet  unresolved pertains  to  marine                                                               
transportation.   The  state  has made  an  offer and  similarly,                                                               
ExxonMobil  has  made an  offer.    Whoever wins,  transportation                                                               
costs are  going to  rise, which means  the state's  revenue will                                                               
decrease.                                                                                                                       
                                                                                                                                
5:19:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  inquired  about the  $997  million  from                                                               
royalty in-kind (RIK) sales and whether it was sold in-state.                                                                   
                                                                                                                                
5:19:41 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE responded  that it  was all  sold locally  to Flint                                                               
Hills.   Currently the  state doesn't have  an oil  contract with                                                               
Tesoro Alaska  Company, or  with any other  oil purchasers.   The                                                               
unit staff is "real busy" as  a result of the new entrants coming                                                               
in.  He  stated that leases change hands  as companies interested                                                               
in one  area decide  to sell out  and purchase  leases elsewhere.                                                               
There  are  over 1,000  assignments  of  interest annually.    In                                                               
regard to  royalty accounting, the  state has more  pools online,                                                               
more  production  for more  pools,  more  players, more  "working                                                               
interest" owners, and over 20,000 royalty transactions per year.                                                                
                                                                                                                                
5:21:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG asked where  the production reports are                                                               
generated.                                                                                                                      
                                                                                                                                
5:21:23 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE  informed  the  committee that  most  of the  DOG's                                                               
reports come  from the  sales meters  and from  there the  oil is                                                               
allocated  back  to  the  individual leases.    The  volumes  are                                                               
recorded at  the Lease Automated Custody  Transfer (LACT) meters,                                                               
and the operator reports the volumes.   He stated that the owners                                                               
of the  leases pay the  royalty, not  the operator of  the field.                                                               
He reported  that the  state's lease sale  program is  "alive and                                                               
well", and  that the  DOG has five  sales per year.   There  is a                                                               
sale scheduled  for March  1st, with the  sale terms  having been                                                               
announced last week.                                                                                                            
                                                                                                                                
5:22:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG inquired  as  to whether  the state  has                                                               
changed any of the terms for the new North Slope areawide sale.                                                                 
                                                                                                                                
5:22:39 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE confirmed that  the state did; the  state shortened                                                               
some of  the primary  terms in  some areas, but  not in  the most                                                               
remote  areas.   For  some  of the  areas  closer  in, the  state                                                               
shortened  the primary  term for  the lease  from seven  years to                                                               
five  years.   In addition,  in some  of those  areas, the  state                                                               
increased the  royalty from 12.5  percent to 16.66 percent.   The                                                               
shorter lease term  recognizes that there is  better access today                                                               
than there was  in the past, thus it's easier  to begin drilling.                                                               
The  royalty  increase  is  a  reflection  of  today's  commodity                                                               
prices.  He opined that the commodity prices will remain.                                                                       
                                                                                                                                
5:23:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked if the DOG  analyzed the potential                                                               
impacts of the adjustments on development.                                                                                      
                                                                                                                                
5:23:36 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE informed the committee  that the DOG has  done some                                                               
analysis,  particularly   on  relatively  smaller  pools.     The                                                               
analysis looked at the changes  in commodity prices, which is the                                                               
"real driver".   He opined  that the rates  set by the  state are                                                               
"very  reasonable",  and  considerably  lower,  as  are  Alaska's                                                               
primary lease terms.                                                                                                            
                                                                                                                                
5:25:04 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE stated that  the DOG's resource evaluation staff has                                                               
conducted  a lot  of work  for the  Alaska Peninsula  lease sale,                                                               
including distributing information  to new entrants.   The DOG is                                                               
continuing to  do the same for  the North Slope sale.   He stated                                                               
that the more information the  DOG generates on their website and                                                               
in public  reports, the more  interest there  will be in  the oil                                                               
and gas  leasing program.  The  DOG issued its first  gas storage                                                               
lease  in  the  Cook  Inlet  area a  couple  of  months  ago  and                                                               
currently has  another lease  being processed.   The  gas storage                                                               
lease  industry is  critical to  meeting the  gas demand  in Cook                                                               
Inlet in the winter.                                                                                                            
                                                                                                                                
5:27:05 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE, referring to  slide 9, explained royalty settlement                                                               
"re-openers" as  an arbitration process.   Two sides are  able to                                                               
agree on a change to  a royalty settlement agreement voluntarily,                                                               
but if they aren't able to  come to an agreement, they enter into                                                               
an arbitration.   He added, "That's  where we are right  now with                                                               
ExxonMobil."                                                                                                                    
                                                                                                                                
5:27:57 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to  slide 10, described  the incremental                                                               
North  Slope oil  production.   He said  that the  "big pools"  -                                                               
Prudhoe Bay,  Kuparuk, Endicott - are  in decline.  A  lot of the                                                               
state's  new production  is  going to  come  from smaller,  newer                                                               
pools,  expansions from  the older  pools, infield  drilling, and                                                               
viscous oil pools.                                                                                                              
                                                                                                                                
5:28:54 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to  slide 11 and historic  and projected                                                               
oil production  from 1976-2002, stated that  the production trend                                                               
on the  North Slope  is most  likely in  a slow,  steady decline.                                                               
Unless, however, a  major field is discovered,  which would still                                                               
require  a  lot of  new  development,  wells, and  investment  in                                                               
projects.                                                                                                                       
                                                                                                                                
5:29:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  inquired  as   to  how  far  out  the                                                               
production curve  would continue, and  if it would  continue down                                                               
to the "bottom" or "level out."                                                                                                 
                                                                                                                                
5:30:22 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE explained that  it would depend on numerous factors,                                                               
two being the price  of oil and the cost to  transport the oil to                                                               
the  "market."   As  long  as  the Trans-Alaska  Pipeline  System                                                               
(TAPS) tariff  remains reasonable, and the  marine transportation                                                               
costs  don't skyrocket,  there's  no reason  that  the TAPS  rate                                                               
can't  decrease  substantially  from  where  it  is  today.    In                                                               
addition, there's no  reason that tankers can't  continue to take                                                               
oil to  the west  coast.   He said that  operating costs  need to                                                               
stay in  line on  the North  Slope.   As long  as money  is being                                                               
generated  on the  North Slope  at that  wellhead, companies  are                                                               
going   to  continue   to  produce   oil;   with  the   strategic                                                               
reconfiguration  of  the  TAPS  tariff,   companies  will  be  in                                                               
business on the North Slope for a long time to come.                                                                            
                                                                                                                                
5:32:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  inquired as  to whether  the DOR  made a                                                               
presentation to  the House  Finance Committee.   He  asked, "What                                                               
were  the  production  figures  for  the  upcoming  years?"    In                                                               
addition, Representative  Rokeberg asked Mr.  Van Dyke if  he had                                                               
any input [in that presentation].                                                                                               
                                                                                                                                
5:32:27 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE confirmed that the  DOG worked with the  DOR to put                                                               
together  the volume  forecast, which  is included  in the  DOR's                                                               
source book.                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE,  in  response to  questions  from  Representative                                                               
Rokeberg,  said  that the  volume  forecast  is  in the  FY  2007                                                               
budget.   He  opined that  the figures  are "pretty  reasonable",                                                               
with approximately 850 million of barrels per day.                                                                              
                                                                                                                                
5:33:23 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE,  referring to slide 12 and oil  and gas incentives,                                                               
explained  the  various  ways   to  approach  royalty  reduction.                                                               
There's  currently  a  preliminary decision  for  Pioneer  Unit's                                                               
project, Oooguruk on  the North Slope, which is  offshore west of                                                               
Kuparuk.     The  DOG  is   currently  taking  comments   on  the                                                               
preliminary  decision.   It  would be  the  first formal  royalty                                                               
modification under  AS 38.05.180(j) for  a field that has  yet to                                                               
produce.   He said that there's  also a program in  Cook Inlet, a                                                               
more mechanical program, which is  based on production rates from                                                               
platforms.    The  royalty  mechanically  "stair-steps"  down  as                                                               
production  from the  platforms  decline below  a certain  level.                                                               
The  numbers are  where they  need  to be  in order  to keep  the                                                               
platforms alive.                                                                                                                
                                                                                                                                
MR.  VAN  DYKE explained  that  while  royalty reduction  is  one                                                               
incentive, there  are also a couple  exploration incentive credit                                                               
programs.   Under "AS 41 credits",  when a company applies  for a                                                               
credit and earns the credit, its  well data becomes public in two                                                               
years.   A company can't hold  the data confidential, and  on the                                                               
seismic, geophysical side, the commissioner  has the authority to                                                               
show the geophysical  data to other parties  interested in seeing                                                               
it.  As  a result, companies are hesitant to  use the exploration                                                               
incentive  credit under  the "AS  41 program,"  which sunsets  in                                                               
2007.   He  said  that the  state also  has  a discovery  royalty                                                               
program in Cook Inlet that is "alive and well."                                                                                 
                                                                                                                                
5:36:16 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE,  referring  to  slide 13,  stated  that  the  tax                                                               
incentive program  is "where the  action is these days",  both in                                                               
Cook Inlet  and on the  North Slope.   The tax  incentive program                                                               
sunsets in 2007.   He opined that the program  is "working well",                                                               
noting that the sunset was extended  for areas south of the North                                                               
Slope, but  not for the North  Slope.  He informed  the committee                                                               
that there are companies that  have exploration plans beyond 2007                                                               
that would  like to see the  program continued.  There  have been                                                               
credits of about $14 million granted thus far.                                                                                  
                                                                                                                                
5:38:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS, referring  to slide  12, asked  what the                                                               
state is  getting out of the  deal if it  is paying for up  to 25                                                               
percent of the drilling costs.                                                                                                  
                                                                                                                                
5:38:41 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE  explained that  if the  production tax  is "zeroed                                                               
out", the  state would still  be entitled to property  taxes, and                                                               
local boroughs  may or may not  get "first dibs" on  the property                                                               
tax revenue.  The  state would get the income tax  as well as the                                                               
revenue sharing on  the royalty.  For example,  with the National                                                               
Petroleum Reserve-Alaska  (NPR-A), the state receives  50 percent                                                               
revenue sharing  on the  royalty, whereas  on most  other federal                                                               
lands, the state receives 90 percent revenue sharing.                                                                           
                                                                                                                                
5:39:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  stated that there  seems to be  an issue                                                               
about how much the state realizes,  from a 50 percent position in                                                               
NPR-A,  from  federally generated  royalties.    The North  Slope                                                               
Borough has an impact statement  to the "tune of" [$]5.8 million,                                                               
and  the amount  available  is [$'4.5  million;  the North  Slope                                                               
Borough has  been impacted to  a greater degree, and  any revenue                                                               
for this calendar year is "zero" to the State of Alaska.                                                                        
                                                                                                                                
5:40:20 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE  said that he wouldn't  disagree with Representative                                                               
Rokeberg's  "accounting".   The other  benefit for  the incentive                                                               
program, and  one of  the primary reasons  it was  instituted, is                                                               
that if the DNR grants a credit  under "AS 41", the state is able                                                               
to see the information from a  "well on federal land", or a "well                                                               
on  private  land"  standpoint.    It's part  of  the  trade  for                                                               
granting the incentive credit; the  state wouldn't see either the                                                               
data the geophysical data or the well data otherwise.                                                                           
                                                                                                                                
5:41:16 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE, in response  to Representative Rokeberg's question,                                                               
clarified that AS 38.05.180 has been  "on the books for a good 15                                                               
years" and  that the tax  incentives listed  on slide 13  are the                                                               
more recently adopted credits.                                                                                                  
                                                                                                                                
5:42:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  if  the "frontier"  area  is  10                                                               
miles.                                                                                                                          
                                                                                                                                
5:42:11 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE clarified,  "20 miles,  20 and  40."   Referring to                                                               
slide 14,  he opined that  the State  of Alaska areawide  oil and                                                               
gas lease sales program is "doing  well."  The state has the same                                                               
five competitive  lease sales  every year.   The DOG  delayed the                                                               
North  Slope and  Beaufort Sea  sale  from October  to March  1st                                                               
because it wanted to have the  Alaska Peninsula sale by itself in                                                               
attempt to  highlight the sale  and garner more interest.   Also,                                                               
the  state is  currently trying  to decide  whether to  keep that                                                               
schedule.   He opined that the  size of the leases  and the terms                                                               
seem  to  work "okay."    By  law, the  primary  term  has to  be                                                               
somewhere   between   five   and   ten  years,   but   it's   the                                                               
commissioner's  call.   The commissioner  also  sets the  royalty                                                               
rate, with the minimum rate being 12.5 percent.                                                                                 
                                                                                                                                
5:43:59 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to  slide 15, discussed  the competitive                                                               
lease sale areas  and their sizes in comparison  to other states.                                                               
For example, part  of the North Slope basin is  about the size of                                                               
Kansas,  and the  Cook  Inlet  basin is  about  the  size of  New                                                               
Jersey.                                                                                                                         
                                                                                                                                
5:44:43 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE,  referred to slide 16, which he  said displayed the                                                               
Alaska  Peninsula lease  sale.   In  terms of  oil  and gas,  the                                                               
Alaska Peninsula  is a  remote area.   There is  no recent/modern                                                               
seismic  information, so  it's  "high risk"  from  a geology  and                                                               
geophysics standpoint.   He said that the state needs  to work on                                                               
generating more information for potential bidders.                                                                              
                                                                                                                                
5:45:56 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to  slide 17, described  the exploration                                                               
licensing program.   The program is for areas  where there aren't                                                               
competitive oil  and gas  lease sales.   One  can't apply  for an                                                               
exploration license on  the North Slope around Prudhoe  Bay or in                                                               
the middle of  Cook Inlet.  He said that  there's a program where                                                               
one  can apply  for an  area up  to 500,000  acres.   It's not  a                                                               
competitive   lease-type  process,   rather  one   bids  a   work                                                               
commitment, which is  how much money one is going  to spend to do                                                               
fieldwork,  collect seismic  information, and  drill wells.   One                                                               
has an exclusive right for the  license area.  There is a license                                                               
area near Nenana and licenses in the upper Susitna area.                                                                        
                                                                                                                                
5:47:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG,  in regard to the  Nenana Basin, asked                                                               
what's scheduled to occur this winter.                                                                                          
                                                                                                                                
5:47:16 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE  answered that Andex Resources LLC is  trying to get                                                               
financing  together   to  get  a   well  drilled.     Forest  Oil                                                               
Corporation  in  the  Susitna area  is  "shooting  seismic"  this                                                               
winter.   He said that there  was a license area  near Glennallen                                                               
and a  well was drilled.   An aspect of  the program is  that one                                                               
can convert  part or  all of one's  license area  to conventional                                                               
oil and  gas leases, and the  license holders in that  area chose                                                               
to convert  part of  their license area  to conventional  oil and                                                               
gas leases.   The DOG  has two  proposed licenses for  which it's                                                               
currently working on best interest  findings - one near Healy and                                                               
one near Holitna.   For the licensing program, the  DOG has to do                                                               
a  site-specific  best  interest   finding  for  each  individual                                                               
license application.                                                                                                            
                                                                                                                                
5:49:11 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE, referred to slide  18 regarding North Slope oil and                                                               
gas  activities and  discoveries.   He  said that  in the  legacy                                                               
field, there's certainly a lot of "well work" occurring.                                                                        
                                                                                                                                
5:50:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if there have  been any requests                                                               
for leases in the Umiat area.                                                                                                   
                                                                                                                                
5:50:50 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE confirmed that  there are  a "few" leases  on state                                                               
land in  the Umiat  area.   It's right in  between the  NPR-A and                                                               
state  lands boundary.   The  Arctic Slope  region also  has some                                                               
mineral rights  in that area,  and there's a company  that's been                                                               
promoting  that area  for the  last couple  of years;  so there's                                                               
some  leases in  that  area.   In the  legacy  fields -  Kuparuk,                                                               
Prudhoe  Bay,  and  Endicott  -  there is  a  lot  of  well  work                                                               
occurring right  now, especially with the  high commodity prices.                                                               
In addition, there  are a lot of expansions in  the newer fields.                                                               
In regard to exploration, he  mentioned that there aren't as many                                                               
wells being drilled as the state  would like to see, and that the                                                               
new entrants on the North Slope  have done "pretty well" the last                                                               
couple of years.                                                                                                                
                                                                                                                                
5:52:36 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE,  referring to slide 19 and  North Slope development                                                               
activities, stated  that there  is well  work and  development of                                                               
some of the viscous oil reservoirs  in Prudhoe Bay.  With respect                                                               
to  Pioneer Unit  and Kerr-McGee,  he said  that if  they do  get                                                               
their projects  sanctioned, there  will be  two new  operators on                                                               
the North Slope.                                                                                                                
                                                                                                                                
5:53:24 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to slide  20 and Cook Inlet  oil and gas                                                               
activities  and discoveries,  stated  that in  regard to  natural                                                               
gas, the  gas business is  "good" in Cook Inlet;  gas exploration                                                               
is  continuing and  there  are  quite a  few  companies that  are                                                               
active.  For  the most part, there  is on-shore activity/on-shore                                                               
exploration.   In regard to oil,  Mr. Van Dyke is  "a little more                                                               
worried" because  there is  limited oil  exploration.   There are                                                               
only one  [or 2]  wells targeting  oil prospects  on-shore; there                                                               
are oil  prospects off-shore,  but they  require a  "jack-up rig"                                                               
that comes from  outside to explore in Cook Inlet,  and that is a                                                               
costly process.   He added,  "It costs about  as much to  bring a                                                               
rig into Cook Inlet and then to  return it as it does to actually                                                               
go out and drill the well,"  and commented that production of oil                                                               
in Cook Inlet is declining.                                                                                                     
                                                                                                                                
5:55:14 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring  to slide  21, listed  some of  the more                                                               
recent  wells on  the  North Slope,  in Cook  Inlet,  and in  the                                                               
Copper River  Basin.  On  the North Slope, Kerr-McGee  was active                                                               
last year  as was  Pioneer Unit,  but both  were partners  in the                                                               
wells, not the operators.   ConocoPhillips is still "very active"                                                               
on the North Slope, more towards the west and towards NPR-A.                                                                    
                                                                                                                                
5:56:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SAMUELS  requested   a   list   by  company   of                                                               
exploration  wells drilled  in the  past 10  years, on  the North                                                               
Slope.                                                                                                                          
                                                                                                                                
5:56:23 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE  confirmed  that  he would  provide  that  to  the                                                               
committee.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG suggested  that  Mr. Van  Dyke create  a                                                               
similar list regarding Cook Inlet.                                                                                              
                                                                                                                                
5:56:49 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE,  referring to  slide 22,  discussed the  number of                                                               
exploration wells per  year.  The DOG has been  working on making                                                               
information  readily  available  for  the  public,  in  order  to                                                               
increase the number of exploration wells per year.                                                                              
                                                                                                                                
5:57:53 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE, referring to slide  23, listed the recent new units                                                               
on the North Slope:   Whiskey Gulch-Brooks Range, Rock Flour-ENI,                                                               
Jacob's  Ladder-Anadarko, Cronus-ConocoPhillips,  and NE  Storms-                                                               
Pioneer Unit.                                                                                                                   
                                                                                                                                
5:58:18 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE,  in  response to  a  question from  Representative                                                               
Rokeberg, informed the  committee that Brooks Range  is a company                                                               
that  Ken  Thompson, a  former  ARCO  president is  involved  in.                                                               
Referring to slide 24, regarding  units, participating areas, and                                                               
unit actions  per year, Mr. Van  Dyke stated that there  has been                                                               
an  increase  in  unit  actions  per   year.    As  oil  and  gas                                                               
development  expands  in  Alaska,  the  demand  for  timely  unit                                                               
decisions and evaluations by the division continues to increase.                                                                
                                                                                                                                
5:59:36 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE, referring to slide  25, an excerpt from  the DOG's                                                               
budget, explained  the division's contribution to  the mission of                                                               
the DNR.                                                                                                                        
                                                                                                                                
6:00:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG,  stating that  he  was  looking at  the                                                               
"recent new  units", asked whether  there's a level  of discovery                                                               
before unitizing.                                                                                                               
                                                                                                                                
6:00:55 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE confirmed  that there are  no discoveries  in those                                                               
units to  date, and informed  the committee that one  can unitize                                                               
ahead of a discovery.                                                                                                           
                                                                                                                                
6:01:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  announced  that Dan  Seamount  from  the                                                               
Alaska Oil and Gas Conservation  Commission (AOGCC) was online if                                                               
anyone had any questions to ask him.                                                                                            
                                                                                                                                
6:01:21 PM                                                                                                                    
                                                                                                                                
MR.  VAN DYKE,  referring to  slide one  of the  handout entitled                                                               
"Oil and Gas  Permitting", said that one needs a  permit from the                                                               
DOG  if one  is operating  on a  state lease.   In  addition, one                                                               
needs a  "plan of operations" approval  from the DOG, as  well as                                                               
approvals from other state, federal,  and/or local agencies.  The                                                               
number of permits required is  dependent on the location, habitat                                                               
impacted, animals/species  present, operation  time of  year, and                                                               
the  scope of  the  project.   The  DOG  also issues  geophysical                                                               
exploration   permits  and   miscellaneous   land  use   permits.                                                               
However,  one  doesn't need  an  oil  and  gas lease  to  collect                                                               
seismic information,  and an oil  and gas lease doesn't  give one                                                               
exclusive use of the surface.                                                                                                   
                                                                                                                                
6:03:15 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE,  referring  to  slide  two,  explained  that  the                                                               
division has  a public comment  period, and that  if one is  in a                                                               
coastal zone,  a public comment  period is also  available during                                                               
the  coastal  consistency  review.    Not  every  application  is                                                               
treated  the same,  but  they  all receive  some  form of  public                                                               
notice.  When  the DOG's authorizations are  issued, they include                                                               
some sort  of mitigation  measures.  The  DOG's leases  have some                                                               
stipulations  and mitigation  measures,  while  the permits  have                                                               
additional  stipulations and  mitigation measures.   Furthermore,                                                               
the DOG requires bonding for activities on state land.                                                                          
                                                                                                                                
6:04:08 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE,  referring  to   slide  number  3,  informed  the                                                               
committee that  the DOG's permitting  application process  is not                                                               
"new  age".     The  division  has  testing   of  on-line  permit                                                               
applications scheduled, and is hoping  to have them online within                                                               
the next year.                                                                                                                  
                                                                                                                                
6:04:32 PM                                                                                                                    
                                                                                                                                
MR.  VAN  DYKE, referring  to  slide  four,  listed some  of  the                                                               
permits that may be required by  entities other than the DOG.  He                                                               
said that it  would be difficult to write  general permits and/or                                                               
areawide  permits, because  they're so  location-specific and  so                                                               
project-specific.    However,  there   are  general  permits  for                                                               
exploration, ice roads, and seismic surveys.                                                                                    
                                                                                                                                
6:07:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG expressed his  concern about the changing                                                               
of the annual lease sale dates.                                                                                                 
                                                                                                                                
MR. VAN DYKE  stated that the issue is  currently being discussed                                                               
with the commissioner.                                                                                                          
                                                                                                                                
REPRESENTATIVE ROKEBERG asked  if the DOG has  talked to industry                                                               
representatives to see what their concerns would be.                                                                            
                                                                                                                                
6:08:41 PM                                                                                                                    
                                                                                                                                
MR. VAN  DYKE stated that  the division  is aware that  the North                                                               
Slope  and Cook  Inlet  sales are  currently  the premier  sales,                                                               
adding  "Alaska Peninsula hopefully will one day be there too."                                                                 
                                                                                                                                
REPRESENTATIVE ROKEBERG commented  that the DOG has  been good at                                                               
nominating land in the past.                                                                                                    
                                                                                                                                
6:09:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KURT OLSON, Alaska State Legislature, asked if                                                                   
there has been any movement on Point Thompson.                                                                                  
                                                                                                                                
6:09:20 PM                                                                                                                    
                                                                                                                                
MR. VAN DYKE acknowledged that Point Thompson is one of key                                                                     
fields involved in the gasline negotiation, but the timeline has                                                                
been delayed until May 2006.                                                                                                    
                                                                                                                                
6:10:10 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Oil and Gas meeting was adjourned at 6:10                                                                  
p.m.                                                                                                                            

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