Legislature(2005 - 2006)CAPITOL 120

04/11/2006 08:00 AM House OIL & GAS

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08:05:25 AM Start
08:05:33 AM HB498
12:40:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
(Approximately 11:30 AM Today)
Moved Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         April 11, 2006                                                                                         
                           8:05 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Vic Kohring, Chair                                                                                               
Representative Lesil McGuire                                                                                                    
Representative Norman Rokeberg                                                                                                  
Representative Ralph Samuels                                                                                                    
Representative Nancy Dahlstrom                                                                                                  
Representative David Guttenberg                                                                                                 
MEMBERS ABSENT                                                                                                                
Representative Berta Gardner                                                                                                    
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Jay Ramras                                                                                                       
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 498                                                                                                              
"An Act  authorizing tax  credits against  the production  tax on                                                               
oil  and  gas  for  qualified   expenditures  for  challenged  or                                                               
nonconventional  oil or  gas and  for qualified  expenditures for                                                               
nonconventional  or renewable  energy resources;  giving the  Act                                                               
contingent effect; and providing for an effective date."                                                                        
     - MOVED HB 498 OUT OF COMMITTEE                                                                                            
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 498                                                                                                                  
SHORT TITLE: TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                
SPONSOR(S): RULES                                                                                                               
04/03/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/03/06       (H)       O&G, RES, FIN                                                                                          
04/11/06       (H)       O&G AT 8:00 AM CAPITOL 120                                                                             
WITNESS REGISTER                                                                                                              
BRIAN R. WENZEL, Vice President                                                                                                 
Finance and Administration                                                                                                      
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in support of HB 498 and                                                                         
responded to questions.                                                                                                         
JEFFREY A. SPENCER, Supervisor                                                                                                  
Greater Kuparuk Area (GKA) Heavy Oil Development                                                                                
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During discussion of HB 498, indicated                                                                     
support, provided comments, and responded to questions.                                                                         
FRANK PASKVAN, Subsurface Team Lead                                                                                             
Western Prudhoe Bay                                                                                                             
(No address provided)                                                                                                           
POSITION STATEMENT:  Provided comments and responded to                                                                         
questions during discussion of HB 498.                                                                                          
SAM W. FRENCH, PE, Project Lead                                                                                                 
Lisburne field                                                                                                                  
"BP Exploration"                                                                                                                
(No address provided)                                                                                                           
POSITION STATEMENT:  Provided comments and responded to                                                                         
questions during discussion of HB 498.                                                                                          
SCOTT DIGERT, Subsurface Manager                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in support of HB 498.                                                                            
ROBERT B. HUNTER, Project Manager                                                                                               
Arctic Slope Regional Corporation (ASRC) Energy Services                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided comments and responded to a                                                                       
question during discussion of HB 498.                                                                                           
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During discussion of HB 498, expressed                                                                     
concerns and responded to questions.                                                                                            
BILL VAN DYKE, Acting Director                                                                                                  
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   During  discussion  of  HB 498,  expressed                                                               
concerns and responded to questions.                                                                                            
ACTION NARRATIVE                                                                                                              
CHAIR VIC KOHRING  called the House Special Committee  on Oil and                                                             
Gas meeting  to order  at 8:05:25  AM.   Representatives Kohring,                                                             
Rokeberg,  Samuels, and  Dahlstrom were  present at  the call  to                                                               
order.   Representatives  McGuire and  Guttenberg arrived  as the                                                               
meeting  was in  progress.   Representative  Ramras  was also  in                                                               
HB 498 - TAX CREDITS NONCONVENTIONAL OIL/GAS                                                                                  
[Includes brief mention of HB 488 and SB 305.]                                                                                  
8:05:33 AM                                                                                                                    
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE BILL NO.  498, "An Act authorizing tax  credits against the                                                               
production  tax on  oil and  gas for  qualified expenditures  for                                                               
challenged  or  nonconventional  oil  or gas  and  for  qualified                                                               
expenditures for  nonconventional or renewable  energy resources;                                                               
giving the Act contingent effect;  and providing for an effective                                                               
REPRESENTATIVE  ROKEBERG, speaking  as chair  of the  House Rules                                                               
Standing  Committee,   which  sponsored  HB  498,   relayed  that                                                               
although  the bill  is  designed  to mesh  with  HB  488 via  the                                                               
inclusion of a conditional effect  provision, it has been crafted                                                               
as  a free-standing  bill.   He indicated  that [the  tax credits                                                               
provided for  in Sections 1  and 2 of the  bill can no  longer be                                                               
claimed] after March 31, 2016; the  reason for this is that newer                                                               
technologies  might render  the  additional credits  unjustified.                                                               
House  Bill  498  provides  for  a  15  percent  tax  credit  for                                                               
production of  challenged or nonconventional  oil and gas,  and a                                                               
25  percent  tax  credit for  investment  in  alternative  energy                                                               
projects;  both of  these tax  credits would  be applied  against                                                               
petroleum production taxes.                                                                                                     
REPRESENTATIVE ROKEBERG  explained that proposed  AS 43.55.026(f)                                                               
defines the  qualified expenditures  to which  the aforementioned                                                               
15  percent  tax  credit  may  be applied  and  is  meant  to  be                                                               
consistent with  HB 488; proposed  AS 43.55.026(g)  outlines what                                                               
constitutes  challenged   or  nonconventional  oil  and   gas  as                                                               
     (g) In this section,                                                                                                       
          (1) "challenged oil or gas" means                                                                                     
               (A) oil that is produced from a reservoir                                                                        
     located, in whole  or in part, north of  68 degrees, 15                                                                    
     minutes North  latitude in  this state,  without regard                                                                    
     to its  API gravity  or depth, if  the oil  is produced                                                                    
                    (i) the Ugnu Formation or West Sak -                                                                        
     Schrader Bluff Formation; or                                                                                               
                    (ii)     a     formation     that     is                                                                    
     stratigraphically equivalent  to a  formation described                                                                    
     in (i) of this subparagraph;                                                                                               
               (B) oil that is produced from a reservoir                                                                        
     for which, as of January  1, 2006, one of the following                                                                    
     participating  areas  had  been formed:  the  Orion  or                                                                    
     Polaris  participating area  in the  Prudhoe Bay  Unit,                                                                    
     the West  Sak participating  area in the  Kuparuk River                                                                    
     Unit, or  the Schrader Bluff participating  area in the                                                                    
     Milne Point Unit;                                                                                                          
               (C) oil that has an API gravity of 25 or                                                                         
     less  produced from  a reservoir  or field  located, in                                                                    
     whole  or in  part,  north of  68  degrees, 15  minutes                                                                    
     North latitude  in this  state and  at a  true vertical                                                                    
     depth  as measured  from  sea level  of  5,500 feet  or                                                                    
               (D) oil that has an API gravity of 18 or                                                                         
     less,  regardless  of  depth or  location  within  this                                                                    
               (E) oil produced from a reservoir whose                                                                          
     reservoir rock is primarily made up of carbonates;                                                                         
               (F) oil produced through the application of                                                                      
     one   or  more   enhanced   oil  recovery   techniques,                                                                    
                    (i) steam injection;                                                                                        
                    (ii) microemulsion flooding;                                                                                
                    (iii) in situ combustion;                                                                                   
                    (iv) polymer-augmented water-flooding;                                                                      
                    (v) alkaline or caustic flooding;                                                                           
                    (vi)   immiscible   nonhydrocarbon   gas                                                                    
                    (vii) microbial;                                                                                            
                    (viii) low-salinity water flooding; or                                                                      
                    (ix) any other method not described in                                                                      
     (i) - (viii) of this  subparagraph that is certified by                                                                    
     the department to be a  qualified enhanced oil recovery                                                                    
     technique or  that is certified  by the Alaska  Oil and                                                                    
     Gas  Conservation  Commission   for  purposes  of  this                                                                    
               (G) oil requiring ultra-extended reach                                                                           
     drilling  where  the  total step-out  of  the  well  is                                                                    
     greater  than  25,000  feet  laterally  away  from  the                                                                    
     surface hole location;                                                                                                     
               (H) oil production not described in (A) -                                                                        
     (F) of this paragraph  that is inherently difficult and                                                                    
     expensive   to  produce   and  is   certified  by   the                                                                    
     department to be challenged oil; and                                                                                       
               (I) gas produced from or in association with                                                                     
     oil that is produced as described  in (A) - (H) of this                                                                    
          (2) "nonconventional gas" means                                                                                       
               (A) gas produced or recovered from or in                                                                         
     association with nonconventional oil;                                                                                      
               (B) gas produced or recovered from or in                                                                         
     association  with  hydrates formed  from  hydrocarbons,                                                                    
     including free gas trapped beneath gas hydrates;                                                                           
               (C) gas manufactured from the gasification                                                                       
     of coal;                                                                                                                   
               (D) tight gas produced from reservoirs with                                                                      
     average permeabilities less than 0.1 millidarcies; and                                                                     
               (E) gas not described in (A) - (D) of this                                                                       
     paragraph  that is  inherently difficult  and expensive                                                                    
     to produce  and is  certified by  the department  to be                                                                    
     nonconventional gas;                                                                                                       
          (3) "nonconventional oil" means:                                                                                      
               (A) oil produced or recovered from or                                                                            
     associated with tar sands;                                                                                                 
               (B) oil produced or recovered from or                                                                            
     associated with oil shale; and                                                                                             
               (C) oil production not described in (A) or                                                                       
     (B) of this paragraph  that is inherently difficult and                                                                    
     expensive   to  produce   and  is   certified  by   the                                                                    
     department to be nonconventional oil.                                                                                      
REPRESENTATIVE  ROKEBERG concluded  by offering  his belief  that                                                               
the enhanced  oil recovery (EOR) techniques  outlined in proposed                                                               
AS  43.55.026(g)(1)(F) are  all new,  cutting edge  technologies,                                                               
and  relaying  that  the  remaining  bill  sections  provide  for                                                               
transition   regarding    regulations   and    retroactivity   of                                                               
regulations, and for the aforementioned conditional effect.                                                                     
8:13:24 AM                                                                                                                    
REPRESENTATIVE  ROKEBERG, in  response to  a question,  indicated                                                               
that language in proposed AS  43.55.026(f) might present somewhat                                                               
of a problem.                                                                                                                   
REPRESENTATIVE  SAMUELS opined  that the  higher costs  for heavy                                                               
oil should  be incorporated without extra  credit because [those]                                                               
costs are going to be recovered before taxes are paid.                                                                          
REPRESENTATIVE ROKEBERG  offered his  understanding that  the tax                                                               
credits  have  a valuation  of  approximately  300 basis  points,                                                               
under the 15  percent tax credit, against the tax  rate itself on                                                               
a ratio of 5:1 at $60 per barrel.   He mentioned that he's had an                                                               
amendment drafted that would include  carbon dioxide injection as                                                               
one of the  listed EOR technologies because it's in  use now, and                                                               
that "some  of these costs are  going to be assumed  and credited                                                               
anyway."   Another portion of the  aforementioned amendment would                                                               
account  for  all the  oil  that  is lifted;  the  aforementioned                                                               
amendment  was  labeled  24-LS1817\F.1, Chenoweth,  4/10/06,  and                                                               
     Page 4, line 12, following "flooding;":                                                                                    
               "(ix)  carbon dioxide (CO) injection;"                                                                           
     Renumber the following sub-subparagraph accordingly.                                                                       
     Page 4, line 13:                                                                                                           
          Delete "(i) - (viii)"                                                                                                 
          Insert "(i) - (ix)"                                                                                                   
     Page 4, line 22, following "oil;"                                                                                          
               "(I)  all oil recovered from a separate and                                                                      
     distinct zone  or geological  horizon that  is produced                                                                    
     as described in  (A) - (H) of this  paragraph, but only                                                                    
     if the  average API  gravity of  the oil  produced from                                                                    
     that  zone or  geological horizon  does not  exceed the                                                                    
     API  gravity  limits  set  in   (C)  and  (D)  of  this                                                                    
     paragraph, as appropriate;"                                                                                                
     Reletter the following subparagraph accordingly.                                                                           
     Page 4, line 24:                                                                                                           
          Delete "(A) - (H)"                                                                                                    
          Insert "(A) - (I)"                                                                                                    
CHAIR KOHRING  asked whether there  is any overlap  or redundancy                                                               
between HB 498 and HB 488.                                                                                                      
REPRESENTATIVE  ROKEBERG  reiterated  that currently  HB  498  is                                                               
designed  to dovetail  with  HB 488.    However, the  legislature                                                               
could either pass HB 498 as  a stand-alone bill - by removing the                                                               
conditional effect clause - redesign  the tax credit slightly, or                                                               
use it  as an amendment  to [HB 488].   He indicated that  one of                                                               
the distinctions between HB 498 and  HB 488 is that HB 498 limits                                                               
the transfer of credits to only affiliates.                                                                                     
CHAIR  KOHRING  characterized  HB  498 as  another  way  for  the                                                               
industry to help offset taxes.                                                                                                  
8:20:14 AM                                                                                                                    
BRIAN  R. WENZEL,  Vice  President,  Finance and  Administration,                                                               
ConocoPhillips  Alaska,  Inc.  ("ConocoPhillips"),  testified  in                                                               
support  of HB  498 and  its conditional  effect clause,  adding,                                                               
however, that  HB 498  will not have  its intended  effect unless                                                               
the right balance in HB 488 is arrived at.                                                                                      
8:21:42 AM                                                                                                                    
JEFFREY A. SPENCER, Supervisor,  Greater Kuparuk Area (GKA) Heavy                                                               
Oil Development,  ConocoPhillips Alaska,  Inc., via  a PowerPoint                                                               
presentation, relayed that the North  Slope has very large, heavy                                                               
oil  resources,   as  well   as  currently-developed   light  oil                                                               
reservoirs.    The viscous  oil  resource  is contained  in  five                                                               
fields -  "West Sak  field, Milne  Point [Unit],  Orion, Polaris,                                                               
and  the shallower  horizon in  the Ugnu  ... [formation]"  - and                                                               
there are approximately 23-24 billion  barrels of heavy oil about                                                               
evenly split between "the West  Sak - or Schrader Bluff formation                                                               
- and  the shallower Ugnu  horizon."  Within  the ConocoPhillips-                                                               
operated Kuparuk  River Unit itself,  there are  approximately 16                                                               
billion  barrels of  oil  in place,  also  somewhat evenly  split                                                               
between the West Sak and Ugnu formations.                                                                                       
MR. SPENSER stated  that these viscous oil  resources are located                                                               
below   the   permafrost   in   the   shallow   reservoirs   from                                                               
approximately 3,000 to  4,500 feet; the shallow  depths and thick                                                               
permafrost result in low reservoir  temperatures and this in turn                                                               
results in high  viscosities, which makes the  oil very difficult                                                               
to produce and can result in  lower rates of recovery as compared                                                               
to light oil or gas.                                                                                                            
MR.  SPENCER  briefly  outlined the  GKA  heavy  oil  development                                                               
history and  the various  well designs that  are being  used, and                                                               
explained that all of the  North Slope heavy oil developments are                                                               
subject   to  certain   operating  conditions   -  harsh   arctic                                                               
conditions, minimal footprint,  limited contractor resources, and                                                               
pushing limits  of drilling technology; to  geologic complexity -                                                               
shallow depths and  permafrost issues, unconsolidated formations,                                                               
low  reservoir temperature,  and highly  faulted; and  to viscous                                                               
oil  properties  -  artificial lift  required,  fluid  separation                                                               
difficulties,  solids handling  and  disposal  issues, and  lower                                                               
quality  crude.   This translates  into higher  cost, lower  rate                                                               
wells, lower  overall recovery, and  lower price per barrel.   He                                                               
posited that if  it weren't for the rapid  advances in horizontal                                                               
drilling  and  multi-lateral  technologies  made  over  the  last                                                               
several years,  the vast  North Slope  heavy oil  resources would                                                               
likely remain fallow.                                                                                                           
MR. SPENCER,  in response to  questions, explained  that vertical                                                               
wells average 200-300 barrels of  oil per day, whereas horizontal                                                               
multi-lateral  wells average  1,500-2,000  barrels per  day.   He                                                               
added  that  well  costs  average  between  $8  million  and  $10                                                               
million.   In response to  further questions, he said  that light                                                               
oil would make higher oil  rates and have less producing problems                                                               
with solids production.                                                                                                         
MR. SPENSER,  returning to  his PowerPoint  presentation, relayed                                                               
that there  have been some expensive  lessons as [ConocoPhillips]                                                               
continues to push the technical  limits regarding drilling on the                                                               
North  Slope.    He  discussed a  typical  West  Sak  tri-lateral                                                               
producer with  horizontal laterals  from 4,500-8,500 feet  in the                                                               
D,  B, and  A sands.   In  the A  sands, ConocoPhillips  tends to                                                               
undulate  between the  upper and  lower sands  to try  to contact                                                               
more  reservoir   rock  and  increase   its  recovery   from  the                                                               
formation.  Furthermore, ConocoPhillips  changed the well types -                                                               
from  vertical to  multi-lateral -  the recovery  mechanisms, the                                                               
sand control, the well spacing, and drilling mud systems.                                                                       
8:30:45 AM                                                                                                                    
MR.  SPENCER,  referring  to PowerPoint  slides,  explained  that                                                               
ConocoPhillips  usually  has to  cross  multiple  faults and  yet                                                               
remain within  a tiny  window of the  reservoir rock,  from 20-50                                                               
feet, while reaching out to lengths  of nearly 13,000 feet from a                                                               
surface location.   Once  the wells  are drilled  and the  oil is                                                               
brought to  the surface - usually  by means of downhole  pumps or                                                               
other  artificial lift  methods -  other issues  remain regarding                                                               
production  of heavy  and  viscous  oils.   He  said that  higher                                                               
operating costs  are also  a result  of having  to use  more heat                                                               
and/or chemicals  to separate  the water  from the  entrained oil                                                               
from  Central Production  Facility (CPF)  1, where  the West  Sak                                                               
developments are taking  place.  Essentially, the  total cost for                                                               
heavy  oil is  double what  it is  for light  oil because  of the                                                               
requirement  for  artificial   lift,  the  additional  separation                                                               
problems, the handling of the solids, and waste disposal.                                                                       
CHAIR KOHRING,  returning to the  comparisons made on  an earlier                                                               
PowerPoint slide,  asked, "Are  these improvements  in technology                                                               
or are  you just simply  trying different techniques in  order to                                                               
increase production?"                                                                                                           
MR.  SPENCER  informed  the  committee that  there  was  a  rapid                                                               
advance  in  technology  between  1998  and  2004,  both  in  the                                                               
extended reach  drilling as well as  in multi-lateral technology;                                                               
for example,  ConocoPhillips was able  to go to  tri-laterals and                                                               
beyond.   In response  to another question,  he posited  that the                                                               
past   tax  credits   granted  by   the  legislature   have  been                                                               
instrumental  in   encouraging  that  technological   change  and                                                               
CHAIR KOHRING,  in response to  a question, indicated that  he is                                                               
pondering  how the  tax  credits  provided for  in  HB 498  might                                                               
affect  the future  development  of  heavy oil,  the  use of  new                                                               
technologies, and further advances in technology.                                                                               
8:34:07 AM                                                                                                                    
MR. SPENCER relayed  that in addition to  fluid separation, there                                                               
are also  solids production problems  related to  producing heavy                                                               
and  viscous oils  from shallow  unconsolidated  reservoirs.   He                                                               
further described the  viscous nature of the oil,  how it creates                                                               
a lot  of drag and  frictional forces  in the reservoir,  and how                                                               
that  tends to  pluck sand  grains  off from  the reservoir  thus                                                               
bringing them to  the surface.  He stated that  the solids in the                                                               
tanks generally have the consistency  of glacial mud or silt, and                                                               
are transported in  trucks to the grind and  inject facilities in                                                               
Prudhoe Bay.   This  increases the  operating costs,  relative to                                                               
light oil developments.  In  response to a question, he explained                                                               
that the photos  in the PowerPoint slide are of  solids after the                                                               
oil has been separated.                                                                                                         
MR.  SPENCER  relayed  that  another  problem  with  transporting                                                               
solids along with the fluids is  that it can greatly increase the                                                               
wear  on equipment,  particularly on  rotating equipment  such as                                                               
downhole pumps  and surface pumps.   He summarized that  with the                                                               
North Slope operating conditions,  the geologic complexities, and                                                               
the viscous  nature of the oil  leading to the high  costs, lower                                                               
rate  wells, lower  overall  recovery, and  the  lower price  per                                                               
barrel,  the development  of heavy  oil on  the [North]  Slope is                                                               
economically challenged.  He  mentioned that ConocoPhillips would                                                               
like to continue development of the  eastern West Sak area, and -                                                               
assuming a  stable fiscal environment  and pushing the  limits of                                                               
technology -  development in  the northeast  West Sak  area; this                                                               
series of developments could total  over $1 billion over the next                                                               
five to  seven years.  Beyond  that, to develop the  western West                                                               
Sak  and   the  Ugnu  resources  would   require  new  technology                                                               
applications   because    viscosity   and,    hence,   production                                                               
difficulty, is greater.                                                                                                         
8:37:49 AM                                                                                                                    
MR.  SPENCER  expressed  his hope  that  ConocoPhillips  and  its                                                               
partners   can  move   forward  with   these  projects   and  the                                                               
development of North  Slope heavy oil resources,  which are vast;                                                               
development of those resources is  key to minimizing Alaska North                                                               
Slope   production  decline.     In   conclusion,  he   remarked,                                                               
ConocoPhillips  supports   HB  498  and  believes   it  could  be                                                               
beneficial in accelerating investment.                                                                                          
MR. SPENCER,  in response to  questions, said that  typically the                                                               
wells  that are  producing in  the viscous  fields are  dedicated                                                               
viscous  oil wells;  that he  is  not sure  ConocoPhillips has  a                                                               
cutoff   regarding   acceptable   API   gravity;   that   thermal                                                               
stimulation is  used in Canada to  improve the ability of  oil to                                                               
flow;  and   that  dedicated  wells   are  used  for   heavy  oil                                                               
development; and that some EOR  techniques possibly could be used                                                               
within the West Sak reservoir itself.                                                                                           
MR.   WENZEL,  in   response  to   other  questions,   said  that                                                               
ConocoPhillips looks  at HB 498  as an incremental  incentive for                                                               
developing  both  the  heavy  oil   resource  and  the  necessary                                                               
technology,  though  the   still-evolving  PPT  legislation  will                                                               
provide additional recognition of  the higher costs of developing                                                               
"resources  like this";  HB 498  is intended  to incentivize  the                                                               
development of a number of new  technologies for the long term in                                                               
Alaska.    He added,  "I  don't  think  we  are looking  at  this                                                               
provision as the way to get gas for the pipeline necessarily."                                                                  
REPRESENTATIVE SAMUELS  expressed disfavor  with providing  a tax                                                               
credit for hydrate research.                                                                                                    
MR. WENZEL opined  that doing so would still be  good for Alaska.                                                               
In  response to  further questions,  he indicated  that there  is                                                               
support, among the  large producers and the  industry in general,                                                               
for the  balance proposed in  the original PPT  legislation, with                                                               
that balance being a foundation for HB 498.                                                                                     
8:49:25 AM                                                                                                                    
FRANK PASKVAN,  Subsurface Team Lead, Western  Prudhoe Bay, "BP",                                                               
relayed that  he would  be speaking  to the  provision of  HB 498                                                               
regarding  credits  for expenditures  for  challenged  oil as  it                                                               
pertains to viscous oil.  He  said that based on the knowledge he                                                               
gained from working on a number  of fields on the North Slope, he                                                               
believes that  the "challenged oil bill"  would materially impact                                                               
whether the  oil industry  will remain in  Alaska in  the future,                                                               
and  that viscous  oil  development  in Alaska  is  the next  big                                                               
development  target.    However,  it won't  be  easy,  he  added,                                                               
referring  to  the  economics  of  the  upcoming  Western  Region                                                               
Development project  in Western  Prudhoe Bay  that will  focus on                                                               
developing  viscous  oil  resources  that  lie  above  the  "main                                                               
Prudhoe accumulation."                                                                                                          
MR. PASKVAN characterized viscous oil  as a huge resource for the                                                               
state,  referred  to  a chart  illustrating  the  shallow  fields                                                               
challenged  by high  viscosity, and  described various  viscosity                                                               
ratings.    Shallower reservoirs  have  thicker  oil because  the                                                               
crude is  colder and has a  heavier API gravity, and  such fields                                                               
are  just starting  to  be developed  because  of investments  in                                                               
technology, and such  investments are really just  a step towards                                                               
really  high viscosity  targets -  even targets  with a  tar-like                                                               
MR. PASKVAN  relayed that the  bottom part of  the aforementioned                                                               
chart   characterizes  the   size  of   the  target   for  future                                                               
development, that being  about one half of the  known North Slope                                                               
oil  remaining;   however,  that  oil  is   "challenged  by  high                                                               
viscosity," and  requires drilling multi-lateral wells,  which is                                                               
costly in  terms of time  and money  even though such  wells make                                                               
less than the oil rate of  "a decent light oil producer."  That's                                                               
why BP needs  HB 498's incentives  Consider also  that one out of                                                               
every eight  barrels belongs to  Alaska.  He mentioned  that some                                                               
wells  have   low  production  rates  and   that  sometimes  more                                                               
injectors per producer must be  drilled, and relayed that viscous                                                               
oil development  is difficult because  of having to  separate oil                                                               
from  water at  lower temperatures.   The  various challenges  of                                                               
producing  viscous oil  result  in higher  operating  costs.   He                                                               
remarked that  BP would  like to  keep the  pipeline full  and is                                                               
encouraged by the introduction of HB 498.                                                                                       
MR. PASKVAN, in  response to questions, said that as  part of the                                                               
Western  Region Development  project,  BP is  spending over  $100                                                               
million in infrastructure modifications;  that there will also be                                                               
somewhat higher operating  costs, though he didn't  have an exact                                                               
figure per barrel;  that viscous oil is  separated into different                                                               
depths,  with  the shallower  fields  being  thicker; that  those                                                               
wells  being   drilled  are   specifically  targeted   to  "those                                                               
horizons"; and that  there shouldn't be too  much overlap between                                                               
light oil and heavy oil targets.                                                                                                
MR. PASKVAN, in  response to further questions,  relayed that the                                                               
lighter the  oil, the more associated  gas there is; that  HB 498                                                               
"clearly demarks the different bands";  that the API gravity is a                                                               
measurement  that can  be made  at the  surface very  accurately;                                                               
that the  data represented  in his  charts pertains  to reservoir                                                               
viscosity  as calculated  from  a sample  taken  downhole via  an                                                               
expensive sampling methodology but  which is difficult to acquire                                                               
on a  well-by-well basis; that  BP wouldn't recommend  any change                                                               
to the  bill regarding its terminology;  and that to date  BP has                                                               
not run into any viscous oil reservoir that also has light oil.                                                                 
MR. PASKVAN, in response to  other questions, said it is possible                                                               
that BP  could discover a  deeper heavy  oil that might  meet the                                                               
"18 API criteria",  but such would need  specific technologies to                                                               
develop; that an injector well is  used to inject water or gas in                                                               
order to  help coral the oil  and push it to  production; that BP                                                               
is  doing research  on  the potential  applicability  of CO2  for                                                               
viscous oil  reservoirs, though  it is  difficult to  say whether                                                               
such  will be  advantageous  to ultimate  recovery;  that in  the                                                               
Orion reservoir,  BP is using  immiscible injection gas  EOR from                                                               
the  "Prudhoe central  gas facility";  that each  reservoir is  a                                                               
separate formation  and so injectants  - of  any kind -  into one                                                               
reservoir won't  affect others; and that  polymer augmented water                                                               
flooding constitutes an area of research.                                                                                       
9:09:02 AM                                                                                                                    
SAM   W.  FRENCH,   PE,  Project   Lead,   Lisburne  field,   "BP                                                               
Exploration",  relayed  that the  Lisburne  field  has a  lot  of                                                               
potential in  a large resource space,  and that BP is  focused on                                                               
redevelopment of that  field in order to increase  recovery.  The                                                               
Lisburne reservoir is adjacent to  the Prudhoe Bay reservoir; the                                                               
top of the  Lisburne reservoir is about 100 feet  deeper than the                                                               
bottom of  the Prudhoe Bay  reservoir; the Lisburne  reservoir, a                                                               
fractured carbonate  reservoir, is  the only  producing carbonate                                                               
field  in  Alaska; and  the  majority  of  the other  fields  are                                                               
sandstone reservoirs.                                                                                                           
MR.  FRENCH explained  that carbonate  reservoirs throughout  the                                                               
world are  known to be some  of the most complex  reservoirs from                                                               
which to produce  oil and gas because the rock  is very dense and                                                               
thus it is difficult  to get oil to flow through  it.  What helps                                                               
BP  get commercial  production rates  at the  Lisburne field  are                                                               
drilling wells  that intersect the  fractures, which  have higher                                                               
permeability - the oil seeps  into those fractures and then moves                                                               
at a  higher rate to BP's  wells - but  the key is being  able to                                                               
locate  the reservoir's  fractures.   However,  not  only do  the                                                               
fractures vary throughout the  reservoir, the reservoir's quality                                                               
of rock  and permeability  varies significantly,  both vertically                                                               
and laterally.                                                                                                                  
MR. FRENCH posited that the  Lisburne field would qualify for the                                                               
tax credits  proposed by  HB 498, and  relayed that  the original                                                               
oil in place  (OOIP) in the zones that BP  is currently producing                                                               
from  is estimated  to  be  2 billion  barrels,  with a  recovery                                                               
factor  of  about 8  percent  based  on BP's  current  cumulative                                                               
production.   Without new technology,  BP probably  won't recover                                                               
significantly more  than that, even  though the  statistical mean                                                               
recovery factor  in oil carbonate  reservoirs worldwide  is about                                                               
36 percent.   A  key to  attaining that  global benchmark  is new                                                               
technology, and any  tax credits will help BP  get new technology                                                               
projects approved.   He  noted that  currently, BP  can't predict                                                               
the location  of the  fractures in the  Lisburne field,  and thus                                                               
there is  no guarantee that any  new wells drilled in  that field                                                               
will  be  successful;  furthermore,  with  conventional  drilling                                                               
technology, fractures are typically damaged by drilling fluids.                                                                 
9:16:04 AM                                                                                                                    
MR.  FRENCH  indicated  that  this  is  another  area  where  new                                                               
technology can help - both in  terms of prevention and fixing the                                                               
problem after it occurs -  because production rate depends on the                                                               
fractures.  He pointed out that  the Lisburne field is located in                                                               
a  high  cost  environment;  not  only does  it  have  the  costs                                                               
associated with all oil fields  in the arctic environment, but it                                                               
is also  deeper than many  other fields and  the rock is  so hard                                                               
that there is  a low rate of penetration while  drilling and that                                                               
too  increases costs.   The  potential for  recovering additional                                                               
oil  from the  Lisburne  field  lies in  the  application of  new                                                               
technology because  currently some of the  projects are marginal.                                                               
In conclusion, he  said that BP supports HB 498,  and believes it                                                               
will help the Lisburne field.                                                                                                   
MR.  FRENCH,   in  response  to   questions,  relayed   that  the                                                               
aforementioned fractures  are naturally occurring;  that attempts                                                               
to artificially  create fractures have not  been successful; that                                                               
conventional water flooding  has not been successful;  that BP is                                                               
studying  some other  options for  injecting water  such as  low-                                                               
salinity water flooding.                                                                                                        
MR. PASKVAN,  in response  to a question,  said that  the Liberty                                                               
field  is   a  sandstone  reservoir   similar  to   the  Endicott                                                               
9:20:43 AM                                                                                                                    
SCOTT DIGERT,  Subsurface Manager,  "BP", relayed that  the Milne                                                               
Point  field  has been  at  the  forefront  of BP's  viscous  oil                                                               
development  on the  North Slope,  and  that over  the past  four                                                               
years viscous  oil production has  been pushed as high  as 20,000                                                               
barrels  a day  -  approximately 40  [percent]  of Milne  Point's                                                               
total  production -  and  this has  been  accomplished via  heavy                                                               
investment  in new  drilling  technology  and facility  upgrades.                                                               
This investment has been enabled  by the current favorable fiscal                                                               
framework; BP  was also able to  take advantage of the  upturn in                                                               
oil  prices,  which  allowed  good returns  on  its  viscous  oil                                                               
development.   He indicated  that BP  is in support  of HB  498 -                                                               
which he hopes will encourage  ongoing viscous oil development to                                                               
the benefit  of both the  industry and  the citizens of  Alaska -                                                               
and intends to invest "for a 50-year future in Alaska."                                                                         
MR. DIGERT relayed that a key  element in that investment plan is                                                               
the Alaska gas  pipeline project; that project needs  to be built                                                               
on a strong and stable  foundation for BP's oil business, because                                                               
it is  that oil  business that  will provide  the bridge  to gas.                                                               
His company is  striving to maximize recovery  of its substantial                                                               
known oil resources  in Alaska, and should be  fully aligned with                                                               
the state  in seeking  to maximize  production.   Production from                                                               
BP's  fields is  steadily declining,  and in  order to  stabilize                                                               
that decline  steps must be taken  to bring on new  production of                                                               
the  viscous oil  reservoirs.    However, it  will  be costly  to                                                               
develop  those  reservoirs,  requiring  innovation,  advances  in                                                               
technology,  and  a  tolerance  for  increased  risk;  the  wells                                                               
required  are   complex  and  costly,  and   existing  production                                                               
facilities  require  substantial  retrofitting  to  handle  cold,                                                               
viscous oil.                                                                                                                    
MR. DIGERT spoke of the need  for Alaska to remain competitive in                                                               
the  global  marketplace [in  order  for  producers to]  continue                                                               
developing  the aforementioned  reserves,  and noted  that BP  is                                                               
developing Schrader Bluff  and West Sak reservoirs,  has mapped 5                                                               
billion to  10 billion barrels  of OOIP in those  reservoirs, and                                                               
hopes  to  recover up  to  20  percent of  the  oil  in the  best                                                               
performing areas.  To date,  however, BP has only recovered about                                                               
1  percent of  the  total available  and  that's after  investing                                                               
several hundred  million dollars,  so major  continued investment                                                               
will be needed as will  further technological advances.  The risk                                                               
of such must be balanced  by the opportunity to obtain attractive                                                               
returns; BP's viscous  oil business needs to be  robust enough to                                                               
survive a low-price  oil cycle, and be positioned  to thrive when                                                               
prices are  favorable.  House Bill  498 will help offset  some of                                                               
the tax burden, and is very welcome.                                                                                            
MR.  DIGERT characterized  the bill's  definitions of  challenged                                                               
and nonconventional oil  and gas as appropriate  and suitable for                                                               
encouraging further development.   He encouraged the committee to                                                               
pass HB  498 and seek its  inclusion in a broader  PPT package as                                                               
it  moves  forward.    In  conclusion he  said,  "I  remain  very                                                               
concerned  about  the  future investment  climate  in  Alaska;  I                                                               
strongly encourage  the legislature  to continue  to seek  a fair                                                               
and  balanced  tax  package   which  fundamentally  continues  to                                                               
attract   investment  [and]   provides   the  opportunities   for                                                               
innovation and developing our resources."                                                                                       
9:26:34 AM                                                                                                                    
ROBERT  B.   HUNTER,  Project  Manager,  Arctic   Slope  Regional                                                               
Corporation  (ASRC) Energy  Services, relayed  that for  the past                                                               
four  years he  has managed  a  joint U.S.  Department of  Energy                                                               
(DOE)  and  "BP"  cooperative  research   project  to  study  gas                                                               
hydrates on  the Alaska North  Slope.  This research  is designed                                                               
to determine the  resource potential of gas  hydrates; the Alaska                                                               
North  Slope  may provide  a  relatively  accessible and  natural                                                               
laboratory  to  help  determine   the  technical  feasibility  of                                                               
recovering  natural gas  from gas  hydrates  and associated  free                                                               
gas.   A gas hydrate  is a solid combination  of gas and  water -                                                               
called  a  clathrate  - that  occurs  within  distinct  pressure,                                                               
temperature, and  stability regions  within porous  and permeable                                                               
reservoirs; gas  hydrates can occur in  sufficient concentrations                                                               
to potentially  become a significant  resource if  the clathrates                                                               
can  be changed,  within  the reservoir,  into  liquid water  and                                                               
natural gas  components by  modifying the  pressure, temperature,                                                               
and/or the chemistry of the system.                                                                                             
MR. HUNTER  said that although  44-100 trillion cubic  feet (Tcf)                                                               
of in-place gas hydrates are estimated  to be on the Alaska North                                                               
Slope  by  the  United  States   Geological  Survey  (USGS),  the                                                               
potential recoverable  resource remains  unproven and  unknown at                                                               
present.     This  uncertainty  is  reflected   in  studies  from                                                               
reservoir modeling  that estimate that  0-12 Tcf of this  type of                                                               
gas  could potentially  be recovered  from  the 33  Tcf in  place                                                               
within the  Eileen Trend; additional  data is required  to narrow                                                               
this  uncertainty   and  learn  more   about  gas-hydrate-bearing                                                               
reservoir  properties,  and  BP  and  the  DOE  look  forward  to                                                               
continuing this gas hydrate research,  and have recently approved                                                               
drilling of  a dedicated North  Slope stratographic test  to that                                                               
end.    There  are  many remaining  technical  challenges  to  be                                                               
addressed   in  this   project  before   potential  gas   hydrate                                                               
productivity is better  understood, and although it  is too early                                                               
to  tell, this  research  may contribute  to determining  whether                                                               
this large, potential  gas resource might one day  become part of                                                               
the overall U.S. gas supply portfolio.                                                                                          
MR.  HUNTER,  in response  to  a  question, said  that  typically                                                               
reservoir units  contain both  hydrates and  free gas,  with free                                                               
gas  being at  or just  below  the gas  hydrate's stability  zone                                                               
depth, which  is commonly around  3,500 feet "in  the subsurface"                                                               
though it can be deeper.                                                                                                        
9:33:11 AM                                                                                                                    
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR),   relayed   that   the   division   has   concerns   about                                                               
administering HB 498,  which provides a [tax]  incentive in three                                                               
areas - certain  oils and areas, certain methods of  EOR, and the                                                               
development  or use  of  renewable  energy.   For  each of  these                                                               
categories, the  DOR thinks  it is very  important to  define the                                                               
time, the  place, and  the allowable  costs; that  is:   the time                                                               
when the  costs that will  be creditable are incurred,  the place                                                               
where the activities  that would be creditable  are taking place,                                                               
and what the  allowable costs are.  Some of  those points are not                                                               
as clear as  they could be.  For example,  are costs allowable if                                                               
a project is already underway on  the effective date of the bill?                                                               
Also,  in  terms  of  place,  research  and  development  of  new                                                               
technology  are  eligible  activities   even  if  they  occur  in                                                               
Venezuela,  for example,  and therefore  the bill  should clarify                                                               
exactly what is creditable.                                                                                                     
MS. WILSON said  it would also be helpful if  HB 498 were clearer                                                               
with  respect to  the  locations of  EOR  projects; for  example,                                                               
would BP's  "Liberty project,"  which is  located on  the federal                                                               
outer continental shelf but would  likely have surface facilities                                                               
on state  land, qualify for  the bill's  credit.  She  noted also                                                               
that some of  the EOR activities listed in the  bill appear to be                                                               
"piggybacked" off of federal rules,  which are very specific that                                                               
a project  needs to be  on federal land  or adjacent seabed.   In                                                               
terms of  allowable costs,  she said,  the division  is concerned                                                               
that HB  498 is not clear  regarding what types of  costs qualify                                                               
or the  scope of  those costs.   Furthermore,  the bill  uses the                                                               
term "qualified expenditure", but does  not define that term; and                                                               
so  although the  intent might  be to  mesh HB  498 with  the PPT                                                               
bill,  that   legislation  uses   the  term   "qualified  capital                                                               
expenditure", which  encompasses exploration  and items  that are                                                               
capitalized for federal purposes.                                                                                               
MS. WILSON said that if the  intention is to allow the same kinds                                                               
of costs  that the  federal government  allows for  EOR projects,                                                               
there are  some federal  costs which  are normally  expensed that                                                               
would  be subject  to the  federal EOR  credit; for  example, the                                                               
cost  of the  injectant is  expensed federally,  not capitalized,                                                               
and  so  would   not  fit  under  the   PPT  legislation's  term,                                                               
"qualified capital expenditure". She  encouraged the committee to                                                               
be very clear  about what kind of costs it  intends to be covered                                                               
under  HB  498.   Also,  in  the  area  of allowable  costs,  the                                                               
language on page  5, lines 17-18, that speaks  to the development                                                               
or use of renewable energy is  pretty broad.  She reiterated that                                                               
she  simply  wants  to  be   certain  regarding  what  costs  the                                                               
committee envisions as being qualifying.                                                                                        
9:40:32 AM                                                                                                                    
MS. WILSON posited  that the issue of cost  allocation also needs                                                               
to be addressed in the bill;  for example, cost allocation may be                                                               
necessary  when two  grades of  oil are  pulled up,  and for  any                                                               
jointly-owned facilities or shared operations.   In response to a                                                               
question, she indicated that in  requesting that the committee be                                                               
specific  regarding what  costs should  qualify, she  is pointing                                                               
out  that  she  is  not  sure what  the  intention  is  regarding                                                               
overhead,  adding that  although she  has not  thought through  a                                                               
specific allocation methodology, the  department would be willing                                                               
to assist the committee on that issue.                                                                                          
MS. WILSON  remarked that  defining challenged  oil as  having an                                                               
API gravity of  25 degrees or less for depths  of less than 5,500                                                               
feet  subsurface is  generous, and  suggested that  the committee                                                               
consider using  20 degrees as  the threshold instead.   Also, API                                                               
gravity is  not the ideal  parameter to  use, she opined;  a more                                                               
appropriate parameter  would be oil viscosity,  which is measured                                                               
in units  called centipoise (cP) and  refers to the ability  of a                                                               
liquid  to  flow.    Consider  that  some  so-called  heavy  oils                                                               
actually  have a  more favorable  viscosity and  flow as  well as                                                               
that  with  a  higher  API  due  to  gas  content  and  reservoir                                                               
temperature.    For  example,  some  of  the  Orion  and  Polaris                                                               
participating areas  are 5-10  cP, and  the Kuparuk  [River Unit]                                                               
formation  oil  has an  API  gravity  of  22-25  but also  has  a                                                               
favorable  viscosity.   Care must  also be  taken with  regard to                                                               
where and under what conditions  the API gravity and viscosity of                                                               
oil are  measured, because  different pressure,  temperature, and                                                               
gas-to-oil  ratio conditions  can give  different values  for API                                                               
gravity and viscosity, with temperature  being the more important                                                               
9:45:26 AM                                                                                                                    
MS. WILSON pointed  out that one of the  oil reservoirs described                                                               
under  the bill  as containing  challenged oil  is already  under                                                               
production  at Lisburne  and has  been since  1986; the  Lisburne                                                               
participating area was  approved by the Division of Oil  & Gas in                                                               
December 1986.   The  other possible  known reservoir  defined by                                                               
proposed AS  43.55.026(g)(1)(E) is  the Shublik  formation, which                                                               
is one  of the Permotriassic  reservoirs in the Prudhoe  Bay Unit                                                               
(PBU), and  the Permotriassic reservoirs  are the  main producing                                                               
reservoirs in the PBU and  are known as the initial participating                                                               
areas.    Some   of  the  projects  identified   in  proposed  AS                                                               
43.55.026(g)(1)(F) are  currently under valuation in  the PBU and                                                               
Duck  Island  Unit,  and  BP  has  already  performed  pilot/test                                                               
projects  involving  polymer-augmented  water-flooding  [at]  the                                                               
Brightwater project  at the Flow Station  2 area in the  PBU, and                                                               
low-salinity  water flooding  in the  PBU and  Duck Island  Unit.                                                               
Single-well tracer  tests in  these two  units have  yielded 8-20                                                               
percent recovery  improvements, and the Internal  Revenue Service                                                               
(IRS)  has  certified  low-salinity  water injection  as  an  EOR                                                               
process for federal investment tax credit.                                                                                      
MS. WILSON  referred to proposed AS  43.55.026(g)(1)(H), and said                                                               
that  the North  Slope  producers have  already drilled  extended                                                               
reach drilling  ("ERD") wells of  over 22,000 feet at  Niakuk and                                                               
Milne  Point; numerous  development projects  on the  North Slope                                                               
are  easily  designed  around  drilling  15,000-20,000  feet  and                                                               
beyond.   Such  drilling  may  be more  expensive  but it  allows                                                               
access to oil through centrally  located and more environmentally                                                               
friendly  locations.     She  pointed   out  that  many   of  the                                                               
aforementioned projects  already qualify  for the 15  federal EOR                                                               
credit and could potentially benefit  by a 35 percent federal tax                                                               
rate,  and  under both  this  bill  and  the PPT  legislation,  a                                                               
project could also  qualify for a 20 percent tax  deduction, a 20                                                               
percent credit, and potentially another  15 percent credit.  That                                                               
potentially adds up  to over a 100 percent, and  does not include                                                               
the state  income tax  deduction, which is  based on  the federal                                                               
MS. WILSON, in  conclusion, said she would be happy  to work with                                                               
the committee to clarify the aforementioned issues.                                                                             
CHAIR  KOHRING indicated  that clarification  might  come in  the                                                               
form of a committee substitute (CS).                                                                                            
[Following  was a  brief discussion  regarding how  the committee                                                               
would be proceeding.]                                                                                                           
The committee took an at-ease from 9:51 a.m. to 9:53 a.m.                                                                       
CHAIR KOHRING  then recessed the  House Special Committee  on Oil                                                               
and Gas to a call of the chair.                                                                                                 
CHAIR KOHRING called the meeting back to order at 11:34 a.m.                                                                    
11:35:54 AM                                                                                                                   
BILL VAN DYKE,  Acting Director, Central Office,  Division of Oil                                                               
&  Gas,  Department  of  Natural  Resources  (DNR),  opined  that                                                               
viscous oil projects are challenged  on the North Slope, and that                                                               
the economics are generally not  on par with comparable light oil                                                               
projects.     He  urged  restraint,  however,   when  considering                                                               
incentives  for  viscous oil  projects  and  the other  types  of                                                               
projects  addressed  in  HB  498.   As  currently  drafted,  with                                                               
respect to viscous  oil, HB 498 cuts a pretty  broad swath across                                                               
the entire North Slope, and  with respect to nonconventional gas,                                                               
it  cuts   a  pretty   wide  swath   across  the   entire  state.                                                               
Furthermore, HB  498 also contains some  unintended consequences;                                                               
therefore,  he said,  he would  recommend that  the bill  be more                                                               
narrowly focused,  perhaps limiting  the proposed tax  credits to                                                               
new capital investments pertaining to  viscous oil, and then only                                                               
with regard  to certain pools and  formations.  He said  he would                                                               
also  recommend thinking  about  providing tax  credits for  EOR,                                                               
nonconventional   and   renewable   energy,  and   research   and                                                               
development at a later time.                                                                                                    
MR. VAN DYKE,  on the issue of  unintended consequences, directed                                                               
the  committee's  attention  to   the  language  of  proposed  AS                                                               
43.55.026(g)(1)(A)(ii) and  noted that it says  "a formation that                                                               
is stratigraphically  equivalent to"  the Ugnu Formation  or West                                                               
Sak - Schrader Bluff Formation;  this leaves the bill pretty wide                                                               
open with regard to depth, location,  and oil gravity.  The word,                                                               
"field"  as used  in proposed  AS 43.55.026(g)(1)(C)  also leaves                                                               
the  bill open  to  unintended consequences;  he  opined that  it                                                               
would be  preferable to  look at  specific pools  and formations,                                                               
because  fields are  generally groups  of  pools and  formations.                                                               
For  example, in  the  Prudhoe  Bay field,  there  are  12 or  13                                                               
separate oil pools.                                                                                                             
MR. VAN  DYKE referred to  proposed AS  43.55.026(g)(1)(D), which                                                               
speaks of oil  that has an API  gravity of 18 or  less, and noted                                                               
that almost every light oil pool  on the North Slope has a tarmat                                                               
at its  base and so  under the bill a  credit would be  given for                                                               
tarmat  production  in light  pools;  this  language will  create                                                               
challenging production and cost  allocation issues down the road,                                                               
though those  issues will have  to be dealt with  regardless when                                                               
they  pertain to  joint-use facilities,  drill sites,  production                                                               
facilities, and  separators.  There  is also the question  of how                                                               
to define  viscous or heavy  oil -  currently there is  no bright                                                               
line -  and the committee  needs to  consider the API  gravity of                                                               
the  oil, the  temperature  of  the oil,  and  the dissolved  gas                                                               
content of that oil.  All  of the aforementioned must be measured                                                               
down in  the reservoir where  the oil  actually has to  flow into                                                               
the well bores.   He posited that although API  gravity can serve                                                               
as  an acceptable  parameter to  define viscous  oil, there  must                                                               
also be appropriate "sideboards" in  place.  In situ viscosity is                                                               
really a  better metric to  use, he opined,  even though it  is a                                                               
little harder to measure.                                                                                                       
MR. VAN DYKE said he would  be willing to work with the committee                                                               
and bill sponsor [to address his concerns].                                                                                     
11:41:57 AM                                                                                                                   
MR.  VAN DYKE,  in response  to  questions, said  that there  are                                                               
commercial  laboratories, which  all  the  North Slope  producers                                                               
have  access  to, that  can  measure  the aforementioned  aspects                                                               
while  mimicking reservoir  conditions;  that  the producers  are                                                               
going to want to know what  an oil's viscosity is anyway; that he                                                               
would prefer to see in situ  oil viscosity used as the parameter,                                                               
though  he could  live  with  API gravity  being  used; that  the                                                               
measurements would  have to  made for each  separate pool  and at                                                               
each of a  pool's different elevations; that it  is very possible                                                               
to get  different API  measurements from  different wells  in the                                                               
same pool  based on  depth and  the geographical  location within                                                               
the  pool;   that  the  API   gravity  will  not  be   the  same,                                                               
necessarily, for every  well in a given pool; and  that there are                                                               
lenses  of  lighter  oil  in   the  West  Sak  -  Schrader  Bluff                                                               
formation, and so one must look  at what's coming out of the well                                                               
bores as  a mixture rather  than attempting to dissect  the layer                                                               
cake and  grant a credit  for the  third layer, for  example, but                                                               
not the forth layer.                                                                                                            
MR. VAN  DYKE, in  response to further  questions, said  that one                                                               
would estimate the centipoise measurements  for separate zones if                                                               
they  are different,  and then  do some  sort of  volume weighted                                                               
average; that  he could live  with an API gravity  measurement if                                                               
it had a  couple more sideboards than are currently  in the bill;                                                               
that it  would be appropriate to  replace the word, "field"  - as                                                               
currently used  in proposed AS  43.55.026(g)(1)(C) -  with either                                                               
the  word,  "reservoir"  or  the word,  "pool";  that  the  term,                                                               
"reservoir" is more  focused than the term, "pool";  and that the                                                               
terms, "horizon"  and "zone"  generally refer  to layers  of rock                                                               
regardless of whether they contain oil.                                                                                         
11:49:58 AM                                                                                                                   
MR. VAN DYKE,  in response to more questions,  said that although                                                               
some  of the  oils on  the  North Slope  have different  chemical                                                               
compositions,  it  might  not  be  possible  to  chemically  tell                                                               
certain oils  apart; and that  proposed AS  43.55.026(g)(1) ought                                                               
to be clarified.                                                                                                                
REPRESENTATIVE  ROKEBERG concurred  with  the  latter point,  and                                                               
acknowledged  Mr. Van  Dyke's  comments  regarding narrowing  the                                                               
MR.  VAN DYKE,  in response  to questions  regarding proposed  AS                                                               
43.55.026(g)(1)(F), said  that most of the  EOR techniques listed                                                               
therein  could be  applied to  either  light or  heavy oil;  that                                                               
steam injection  and in situ  combustion target viscous  oil; and                                                               
that if one were just  looking at capital credits for investments                                                               
for facilities to operate an EOR  project or an injection well or                                                               
a new-production well, as long as  it was targeted to a heavy oil                                                               
reservoir, a  definition could be  arrived at, though  there will                                                               
still  be an  allocation  issue  to deal  with  once  the oil  is                                                               
brought to  the surface  because it's all  going to  processed at                                                               
joint-use facilities.                                                                                                           
MR. VAN  DYKE, in  response to a  question regarding  proposed AS                                                               
43.55.026(g)(1)(E),  remarked  that  the wells  in  the  Lisburne                                                               
reservoir produce too  much gas in association with  the oil they                                                               
are producing  and thus  are not  competitive with  other Prudhoe                                                               
Bay  and  satellite wells,  though  a  number of  horizontal-well                                                               
techniques have  been tried in  order to  stay away from  the gas                                                               
production -  to increase the  oil production in  relative terms,                                                               
in relative amounts.  In  response to further questions, he noted                                                               
that the  Lisburne reservoir  from day  one has  had a  large gas                                                               
cap, and although  it has a large amount of  recoverable oil, the                                                               
gas flows more easily to the  well bore than does the oil, adding                                                               
that the rock  in "the Northern foothill area" is  tighter rock -                                                               
less  permeable rock  -  and  probably more  gas  prone than  oil                                                               
prone.   He remarked that a  lot of the tight  gas reservoirs are                                                               
also fractured, so it would be  hard to say that just because the                                                               
bulk of  the rock has  low permeability that the  reservoir isn't                                                               
highly productive at the same time.                                                                                             
MR. VAN  DYKE, in  response to a  question, recommended  that the                                                               
committee  delay consideration  of a  tax credit  related to  gas                                                               
because  at  this  time  he  is  not  entirely  comfortable  with                                                               
utilizing a  "tight gas standard for  incentive for exploration."                                                               
In response to  more questions, he said he would  agree that once                                                               
folks are  comfortable with a  start-up date for gas  sales, that                                                               
it will change  the economics significantly, and  that he doesn't                                                               
know whether gas should be incentivized at this point in time.                                                                  
12:03:34 PM                                                                                                                   
REPRESENTATIVE SAMUELS  mentioned that a similar  debate occurred                                                               
in the  House Resources Standing  Committee regarding  whether to                                                               
have  a credit  apply  to  Point Thomson  gas  development.   The                                                               
argument went  along the lines  of, "If you  have a gas  line, do                                                               
you  need the  incentive, [but]  if you  don't have  a gas  line,                                                               
there's not going  to be any developed," and so  the language was                                                               
left in HB 488.                                                                                                                 
REPRESENTATIVE McGUIRE  noted that  HB 498  could focus  on heavy                                                               
oil at  this time and then  the legislature could come  back at a                                                               
later point in time and deal with the issue of gas.                                                                             
REPRESENTATIVE ROKEBERG, in response  to comments, indicated that                                                               
if  the bill  could be  moved from  committee today  he would  be                                                               
willing to work  with all the interested parties  before the bill                                                               
is heard in its next committee of referral.                                                                                     
MR. PASKVAN,  in response  to comments  and questions,  said that                                                               
"Prudhoe" has a free gas cap  that's above the oil and that's not                                                               
associated  with hydrates,  and that  gas hydrates  can form  and                                                               
actually plug wells  when "gas lift" is used to  move oil through                                                               
cold  zones such  as those  that are  shallower than  3,500 feet.                                                               
Below that zone,  methane hydrate ice can  be trapped underneath;                                                               
dropping the pressure  in systems where that  occurs can generate                                                               
replacement gas,  and this is one  way to "start to  produce off"                                                               
from the hydrates.  He relayed  that the free gas beneath the gas                                                               
hydrates  isn't  a  huge  target  for  BP  because  it  does  not                                                               
constitute  a  large  accumulation,   though  it  is  appreciable                                                               
because the North Slope is a big place.                                                                                         
MR. PASKVAN, in response to  further comments, concurred that the                                                               
gas hydrate resource on the North  Slope is huge, but pointed out                                                               
that currently there  isn't an economic means  of recovering that                                                               
resource; therefore,  the committee should think  carefully about                                                               
what it chooses to incentivize.   "Right now there ... is no line                                                               
of  sight  to a  clear  economic  development, and  research  and                                                               
development that might  be spurred or incentivized  by this would                                                               
be  applicable  to  what  is  one of  our  larger  potential  gas                                                               
resources," he added.                                                                                                           
REPRESENTATIVE SAMUELS  offered his  understanding that  there is                                                               
10,000 Tcf of [gas hydrates] beneath the Beaufort Sea.                                                                          
12:15:20 PM                                                                                                                   
REPRESENTATIVE  ROKEBERG, referred  to gas  hydrate potential  in                                                               
the  Gulf of  Mexico,  and  remarked that  it  is  a policy  call                                                               
whether  the legislature  should grant  an extra  credit for  gas                                                               
hydrate research.                                                                                                               
MR. WENZEL, in  response to comments and a  question, expressed a                                                               
willingness  to work  with  the  administration regarding  future                                                               
cost  allocations  and the  allocation  mechanism  that would  be                                                               
used; "we'd  want to address those  issues to be sure  that there                                                               
wasn't a  double dipping, if  you will, between  expenditures for                                                               
non-heavy non-viscous  [oil] and ... new  expenditures to develop                                                               
this  resource."   He  added,  "I  won't  dispute the  fact  that                                                               
getting  into  allocations  between  one  type  of  resource  and                                                               
another is going to create  [an] administrative burden - no doubt                                                               
about  that;  is that  burden  worth  while  in  the face  of  an                                                               
additional  credit that  helps us  accelerate the  development of                                                               
this resource - yes."                                                                                                           
REPRESENTATIVE  SAMUELS asked  whether new  facilities for  heavy                                                               
oil will be needed.                                                                                                             
MR. PASKVAN said  that there is specific equipment  that is being                                                               
added into  the existing infrastructure; for  example, production                                                               
heaters to assist the separators,  solids handling equipment, and                                                               
de-sanding equipment.  His company  is cognizant of the fact that                                                               
in planning  drilling wells, investments  in the  facilities must                                                               
be made  to enable them to  deal with heavy oil  - investments in                                                               
heat, hygiene, and  chemicals.  In response  to another question,                                                               
he  said that  heavy  oil  does have  impacts  on the  processing                                                               
equipment at the refineries.   He indicated that BP supplies data                                                               
on the  crude that's being  produced to the  potential recipients                                                               
of that  crude, and  they in  turn make  in investments  in their                                                               
facilities to enable them to better handle that product.                                                                        
12:22:23 PM                                                                                                                   
REPRESENTATIVE  ROKEBERG  asked  whether   BP  tries  to  harvest                                                               
MR.  PASKVAN  indicated  that  tarmats are  out  of  his  current                                                               
geographical area,  but offered  that they are  difficult targets                                                               
to  access,  tend  to  remain   immobile,  and  bring  with  them                                                               
technical  challenges such  as high  amounts of  associated water                                                               
production; BP has not yet  been able to effectively develop that                                                               
resource with standard technology.                                                                                              
REPRESENTATIVE  ROKEBERG asked  Ms.  Wilson  whether inserting  a                                                               
start date after  the effective date would alleviate  some of her                                                               
concerns.  In  this way, only expenditures that  occur after that                                                               
point in time would qualify for the proposed credits.                                                                           
MS. WILSON indicated that such  a provision would add clarity and                                                               
accountability.   In  response to  another question,  she relayed                                                               
that she  had observed earlier that  HB 488 has clauses  that are                                                               
modified by the  term, "in this state", as well  as other clauses                                                               
that  don't specify  that point;  therefore, the  bill should  be                                                               
clarified  with  regard  to the  committee's  intention  on  that                                                               
REPRESENTATIVE ROKEBERG asked how the  current versions of HB 488                                                               
and SB 305  have handled the deductibility  of out-of-state labor                                                               
MS. WILSON said  they provided for an allocation  of overhead and                                                               
rely on operating agreements and standard industry practices.                                                                   
REPRESENTATIVE  ROKEBERG reiterated  that he  would like  to make                                                               
HB 498 consistent  with HB  488.  He  asked whether  research and                                                               
development is considered a deductible expense under HB 488.                                                                    
MS.  WILSON  offered her  recollection  that  that issue  is  not                                                               
specifically addressed  in HB  488, and  so whether  research and                                                               
development would  be allowed  or precluded  as an  expense would                                                               
depend on whether it's specific  to a particular lease and direct                                                               
and necessary  to that lease.   In response to  another question,                                                               
she said that  under the PPT legislation,  operating expenses are                                                               
deductible  and  capital  expenditures are  both  deductible  and                                                               
creditable; furthermore,  under the  federal code, a  company can                                                               
elect whether  to list research  and development as  an operating                                                               
expense or as a capital expenditure.                                                                                            
REPRESENTATIVE ROKEBERG  said he  would appreciate  feedback from                                                               
the committee  regarding which  direction the  legislature should                                                               
take on  this issue.   He  pondered the  question of  whether the                                                               
legislature  should  mandate  specifically whether  research  and                                                               
development  should  be  considered  a deductible  expense  or  a                                                               
capital expense.                                                                                                                
MS.  WILSON posited  that  as  long as  it's  "spelled out,"  the                                                               
administration can handle the accounting aspect.                                                                                
REPRESENTATIVE  ROKEBERG asked  whether  mandating that  research                                                               
and development  be handled  as a  deductible expense  would make                                                               
HB 498 more consistent with "the PPT-type concept."                                                                             
MS. WILSON  said, "That  might be  a little  bit of  a disconnect                                                               
with  PPT,  because   I  think  that  under  the   PPT,  if  it's                                                               
capitalized  for   federal  then   it's  treated  as   a  capital                                                               
expenditure and subject  to a credit - not to  say we couldn't do                                                               
12:31:03 PM                                                                                                                   
MS. WILSON, in response to a  question, said that if the producer                                                               
"expenses  that,"   for  example,   then  there  would   be  that                                                               
disconnect; it's  not impossible  to handle as  long the  bill is                                                               
clear  with  regard  to  how the  legislature  wants  that  issue                                                               
REPRESENTATIVE ROKEBERG asked whether  the legislature should not                                                               
allow a special  provision for research and  development, even if                                                               
that seems to be counterproductive.                                                                                             
CHAIR KOHRING  noted that there is  also the issue of  the Alaska                                                               
legislature providing  a tax credit for  research and development                                                               
that could be used to benefit other countries.                                                                                  
REPRESENTATIVE  ROKEBERG   posited  that  that  issue   could  be                                                               
addressed  by stipulating  that the  research and  development be                                                               
done in state.                                                                                                                  
12:32:18 PM                                                                                                                   
REPRESENTATIVE SAMUELS  said he sees an  allocation problem, from                                                               
an  accounting or  auditing standpoint,  with providing  a credit                                                               
for research and development, even that which is done in state.                                                                 
MR. WENZEL  said that his  company's view regarding  research and                                                               
development is  that it's going to  be done sooner or  later, and                                                               
the benefit  of HB 498  is that  it will accelerate  research and                                                               
development.   So it's a policy  call as to whether  Alaska wants                                                               
to wait for "someone else to  do it" and then use that technology                                                               
without paying  for it;  if Alaska does  pay for  researching and                                                               
developing new  technology, then that technology  could very well                                                               
be shared  and used around  the world.  He  said he can  see some                                                               
validity  for   trying  to  tie  investments   for  research  and                                                               
development to Alaska projects.                                                                                                 
MR. WENZEL, in response to a  question, said that his company has                                                               
a budget line  item for research and  development - blue-sky-type                                                               
research  and  development -  to  the  extent  that it  can't  be                                                               
associated   with   a  specific   project.      He  offered   his                                                               
understanding  that right  now, the  PPT legislation  allows both                                                               
capital expenditures and exploration  expenditures to qualify for                                                               
the 20  percent credit; the  reason for this is  that exploration                                                               
involves both  operating expenses  and capital expenditures.   He                                                               
suggested that heavy oil could be  treated the same way by having                                                               
the  bill  cover  expenditures  related  to  Alaska  projects  on                                                               
viscous heavy oil up to a certain point.                                                                                        
CHAIR KOHRING  suggested that  the committee  move the  bill from                                                               
committee along with a letter  from him requesting that the House                                                               
Resources Standing  Committee address  the issues that  have been                                                               
raised thus far;  doing so would provide the  bill's sponsor with                                                               
an  opportunity to  craft any  necessary amendments  or committee                                                               
substitute (CS) that would address everyone's concerns.                                                                         
REPRESENTATIVE  ROKEBERG concurred,  and  questioned whether  the                                                               
bill  should address  the  issue of  gas hydrates.    He said  he                                                               
wishes to work with the department  to narrow it down and improve                                                               
accountability and conformity.                                                                                                  
CHAIR  KOHRING after  ascertaining  that no  one  else wished  to                                                               
testify, closed public testimony on HB 498.                                                                                     
12:40:17 PM                                                                                                                   
REPRESENTATIVE DAHLSTROM moved to report  HB 498 out of committee                                                               
with individual  recommendations, the accompanying  fiscal notes,                                                               
and the  aforementioned letter  from the  chair of  House Special                                                               
Committee on Oil and Gas to  the co-chairs of the House Resources                                                               
Standing Committee.                                                                                                             
REPRESENTATIVE   GUTTENBERG   objected   for   the   purpose   of                                                               
discussion.    He  said,  "Certainly  we  wouldn't  want  to  see                                                               
research being done  in Mississippi that could be  done here, not                                                               
just the  field work, but the  lab work also," adding  that there                                                               
seems to be  quite a bit of tightening and  refocusing that needs                                                               
to be done [on the bill].                                                                                                       
REPRESENTATIVE GUTTENBERG then removed his objection.                                                                           
CHAIR KOHRING asked whether there  were any further objections to                                                               
reporting HB  498 from committee.   There being none, HB  498 was                                                               
reported from of the House Special Committee on Oil and Gas.                                                                    
There being no  further business before the  committee, the House                                                               
Special  Committee  on  Oil  and Gas  meeting  was  adjourned  at                                                               
12:43 p.m.                                                                                                                      

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