Legislature(2007 - 2008)CAPITOL 124
01/25/2007 05:00 PM House OIL & GAS
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
January 25, 2007
5:03 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Vic Kohring, Chair
OTHER LEGISLATORS PRESENT
Representative Lindsey Holmes
Representative Anna Fairclough
Representative Bob Buch
COMMITTEE CALENDAR
PRESENTATION: DIVISION OF OIL AND GAS
-HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
KEVIN BANKS, Acting Director
Central Office
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Gave the presentation on the Division of
Oil & Gas.
BOB SWENSON, Director
Central Office
Geological & Geophysical Surveys (DGGS)
Department of Natural Resources (DNR)
Fairbanks, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on the Division of Oil & Gas.
ACTION NARRATIVE
VICE CHAIR KURT OLSON, acting as Chair, called the House Special
Committee on Oil & Gas meeting to order at 5:03:32 PM.
Representatives Olson, Samuels, Ramras, Doogan, and Kawasaki
were present at the call to order. Representative Dahlstrom
arrived as the meeting was in progress. Representatives Holmes,
Fairclough, and Buch were also in attendance.
^Presentation: Division of Oil and Gas
VICE CHAIR OLSON announced that the only order of business would
be the presentation by the Division of Oil & Gas.
5:04:37 PM
KEVIN BANKS, Acting Director, Central Office, Division of Oil &
Gas, Department of Natural Resources (DNR), after noting the
information available in member's packets, explained that the
Division of Oil & Gas is instructed by the Alaska State
Constitution to develop resources for the maximum benefit of all
Alaskans. The division will do the following: encourage
exploration and development of Alaska's oil and gas resources;
maximize revenue from oil and gas production; and maximize the
benefits of development and production which can lead to jobs,
new industry, and expansion of commercial and service
businesses. However, he continued, sometimes these purposes
conflict as efforts to maximum revenue may be seen to discourage
development because the division is pressing for revenue over
and above the incentives the industry would like. The benefits
of jobs and of industrial and economic growth must be balanced
against what the state can offer to change the revenue stream.
MR. BANKS pointed out that Alaska is the fourth largest oil
producer in the state and has a very important role in the North
American energy market; 25 percent of domestic production and
10-12 percent of the U.S. consumption of oil comes from Alaska,
and Alaska's reserves represent an enormous percentage of
undeveloped domestic reserves. The division is the manager of
these resources. Other organizations in North America in a
similar position are: Minerals Management Service [an agency of
the U.S. Department of the Interior] and the Canadian
government. For that reason the division needs to manage
Alaska's lands proactively, with responsibility, and with a
focus on maximizing the benefits for all Alaskans.
MR. BANKS referred to the state's revenue for 2006 (FY06),
totaling $2.4 billion from the land resources, with about $600
million going to the permanent fund and $1.8 billion contributed
to the general fund (GF); taxes totaled $1.9 billion for the
same period. He pointed out the Department of Revenue (DOR) has
forecasted that for next year tax revenues will total $2.8
billion as a result of the production profits tax (PPT), adding
that the estimation of revenue from production taxes now
includes variables such as: tax credits, industry expenditures,
and the response of new development from incentives.
MR. BANKS stated the division is responsible for "a somewhat
more predictable and perhaps less volatile stream of revenue."
Referring to page 5 of the packet, he reviewed the revenue
picture from royalties, rents, bonuses, and oil and gas
settlements, and noted that high prices have mitigated the
decline in production. In regard to the royalty in-kind (RIK)
program, Mr. Banks said about 60 percent of the royalty oil,
nearly 40 million barrels, was sold to Flint Hills Resources.
Historically, the sale of royalty oil was less and this means
the percentages are increasing as the flow of oil continues to
decline; therefore, meeting the requirements of the contract
with Flint Hills Resources will take a larger percentage of
royalty oil.
5:15:09 PM
MR. BANKS described the organization at the division as similar
to an oil and gas exploration and production company. He noted
that his staff have extensive experience in the industry and are
interested in working for his department because of the
challenges and career opportunities. Staff includes experienced
geologists, geophysicists, and other geotechnical scientists
with backgrounds in oil and gas exploration.
MR. BANKS explained that the leasing and permitting section of
the division raised almost $40 million in bonuses and is now
running land lease sales. Included in these leases are:
Beaufort Sea, North Slope Foothills, Cook Inlet, and Alaska
Peninsula Bristol Bay. Leases are offered on a routine basis.
The unit administration section begins work after the lease is
offered, when the division brings together lease owners to
encourage development of resources, protects the relative rights
of the owners, and encourages the economic and physical
development of resources. The Royalty Accounting section makes
sure that money is accounted for and deposited correctly, and
the Audit Section has been returned to the division so it can
conduct its own audits and catch up on the backlog of audits of
royalty revenues. Also, the royalty valuation mechanisms are
governed by royalty settlement agreements that are a consequence
of the North Slope royalty dispute with the Amerada Hess
Corporation. Bi-lateral agreements are held with each major
North Slope producer regarding calculation of royalty value, and
the Commercial Section works with the Audit Section to validate
those numbers and ensure that Alaska gets fair value for the
royalty. Mr. Banks described the Commercial Section as small,
and staffed with employees who are experienced in economics and
who have the intention to find commercial opportunities when
they arise.
Mr. BANKS spoke of issues on the table: the North Slope gas
pipeline, the Point Thompson Unit, the Petroleum Systems
Integrity Office, the ongoing audits, and the re-evaluation of
royalty value. Longer term issues are: the oil decline, access
to lands, and fostering development. The division must outreach
to new producers, make land available, manage leased land
effectively, and make sure leaseholders begin production of
resources. Lastly, [is the issue of] facility access. The
division will search for commercial solutions wherein
independent producers who need facilities can make fair and
equitable commercial deals with those who own facilities, and
develop oil fields in an efficient and cost-effective way.
5:24:18 PM
REPRESENTATIVE RAMRAS asked what kind of new activity from large
or small producers has been spurred by the PPT since the end of
June.
MR. BANKS said: "I think it is too soon to tell ... [there has
been] a real bump-up of activity in both the North Slope and in
the Cook Inlet, ... but I think that was more a consequence of
higher oil prices and also some limited supply of other
opportunities." He added that the division has analyzed PPT
with respect to royalty modification applications and the gas
line.
REPRESENTATIVE RAMRAS asked if the new development is by
ConocoPhillips Alaska Inc., and BP Exploration, or by the small
producers and independent drillers which PPT was meant to
attract.
MR. BANKS replied ConocoPhillips Alaska Inc., and BP Exploration
(Alaska) Inc., have roles in new development. However, much of
the new exploration activity on state land is by independents,
such as the Pioneer Natural Resources development of the
Oooguruk site.
5:27:24 PM
REPRESENTATIVE RAMRAS commented that Oooguruk is already a known
site and so he would like the division to provide the names of
new companies and outline activities that have been stimulated
since PPT was passed. He went on to say:
When we open up the envelope on March 31st, if the
right sum of money isn't there, does the division have
a plan immediately to introduce to the legislature ...
[that will] remedy the potential for big oil to have
gamed us through the PPT? .... Do we have an estimate
of the deferred maintenance for BP Exploration
(Alaska) Inc., not only to rehabilitate the inline
transmission lines up North, but also their global and
North American reputation?
5:29:03 PM
MR. BANKS referred to the situation which will occur on March
31, 2007, and said that the division is: "not working on a
potential solution to that problem. ... The Department of
Revenue will want to monitor what is going to be happening."
Mr. Banks concluded by saying the role of the division is to
make sure the royalty from the existing players is paid, and to
offer assistance to the Department of Revenue (DOR) regarding
how investment credits are spent. He said: "The full story of
PPT will be hard to tell."
VICE CHAIR OLSEN stated the DOR may be asked to assist in
answering questions about the impact of the PPT. He also asked
about activity in the Nenana Basin.
MR. BANKS said the exploration license for Nenana Basin was
offered to Andex Resources and there has been very little
activity; the division would like to further respond to this
question in writing.
5:32:10 PM
VICE CHAIR OLSON asked about the negative impact in Cook Inlet
as a result of the recent Regulatory Commission of Alaska (RCA)
decision.
MR. BANKS remarked that the division has been tasked by the
governor to examine the market for Cook Inlet gas. The market
has begun to coalesce with liquefied natural gas (LNG) exports,
and contracts expiring, so now there is demand for supplies of
gas. He opined that the historical prices for consumers in the
Cook Inlet were not high enough to bring in new gas supplies.
REPRESENTATIVE DOOGAN questioned why his gas bill has doubled
but is not [at] a high enough price to support new exploration.
MR. BANKS explained that the price to the consumer is the result
of historical contracts that have been indexed to oil. Because
the price of oil has risen in the past several years, the
increase is now being reflected in the contracts. Newer
contracts are driven by the price of gas in the Lower 48 as
measured by the Henry Hub pricing point in Louisiana, which
reflects what the market is for Gulf of Mexico gas. Reasonable
prices for gas with oil at $20.00 per barrel can now be seen.
If new supplies are set at a price commensurate to what the old
contracts are generating, for example, $7.50 per natural cubic
foot (NCF) for the consumer in Anchorage, then the price might
be enough. Although prices are low in the Rockies and Alberta,
there is a lot of development there. Something must change in
the new contracts to tie gas prices to something different. Mr.
Banks added, Cook Inlet gas was found in the search for oil, so
there was some logic in setting the price of gas to the price of
oil; now the price of gas must be set to the price of gas
elsewhere because the target is gas.
5:38:08 PM
BOB SWENSON, Director, Division of Geological & Geophysical
Surveys (DGGS), Department of Natural Resources (DNR), recalled
that two wells were drilled in the Nenana Basin in the 1980s
with some indication of hydrocarbons and limited seismic data,
and an exploration license was granted to Andex Resources with a
work commitment to shoot additional seismic data. The Basin is
geologically complex and the structures, the trap, that the
hydrocarbons are reservoired in are complex. Mr. Swenson opined
that after further seismic data was done, Andex Resources
decided not to drill the planned well and is still analyzing
data to determine if reserves are large enough to warrant a
well.
VICE CHAIR OLSON asked about the results from the two test wells
in the Red Dog Mine area.
5:40:55 PM
MR. SWENSON said he did not have information regarding the shale
gas wells from the mine, but will provide that information to
the committee. Mr. Swenson commented, regarding Cook Inlet,
that any given market is better with a continuous, rather than a
swing, demand. Producers want to produce continuously through
time; demand in the Basin in the wintertime is three times the
demand in the summertime, so it will spur exploration, but the
market is relatively limited.
REPRESENTATIVE RAMRAS referred again to the Nenana Basin and the
governor's direction to DNR to find energy and get it to the
communities that need it. Andex Resources also has leases in
the Gulf of Mexico and so is not very motivated to explore
Alaska. Representative Ramras asked:
What specific steps [is the division]... going to take
to energize Andex, ... to change the economy for
90,000 people in the interior of Alaska?
5:45:04 PM
MR. SWENSON stated that the DNR is looking for energy resources
across the state. The cost of diesel is causing problems for
all the villages and many communities. Work has been done
around the state to understand what sources are available, but
the compilation in any given area has not been done, so this
inventory will enable each area to understand the geologically
related resources, coal, geothermal energy, shallow natural gas,
coal bed methane (CBM), and renewable fuels. He stated DNR is
working with the Alaska Energy Authority (AEA) to get data and
also include [data from] the Division of Forestry regarding all
biomass; the plan is to end up with a map of the state with
layers of each resource-including wind, hydro, all the renewable
resources and coal-and including the economics of each resource.
MR. SWENSON referred back to the Nenana Basin, and noted there
is certain potential there and exploration licensing is a way to
spur exploration. There was very little money, but work
commitments were given, and after the work commitment is done,
the developer can pare down to a specific area and go to lease
on the smaller prospect. The first work commitment on the
Nenana Basin was satisfied and the next work commitment is a
well. Each company has baseline economics which are related to
the trillion cubic feet (TCF) range in a certain size of field.
For the future of the Nenana Basin, exploration licensing is a
good way to go. He further explained that the Andex Resources
seismic data is not available to the state, but the state can
gather additional data in order to understand the potential for
the Nenana Basin and then make that data public to attract
developers.
5:49:57 PM
REPRESENTATIVE RAMRAS stated that the economics of the Fairbanks
market will never justify interest, but the governor charged the
DNR and the legislature with providing energy to all of the
state. He further asked about a plan that will deliver gas to a
community 50 miles away from the Nenana Basin, and will further
support ENSTAR Natural Gas Company's interest in moving gas.
Andex Resources, an out-of state entity, has not acted.
REPRESENTATIVE SAMUELS asked how much how much of the proposed
$150 million [budget cut] will the division absorb.
5:53:13 PM
MR. SWENSON said he did not know the answer, but stated he did
know that Commissioner Rutherford has suggested that she is
interested in eliminating programs to cut the budget, but those
programs have not been identified.
MR. BANKS, in conclusion, introduced division staff.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 5:56
p.m.
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