Legislature(2007 - 2008)CAPITOL 124

02/07/2007 01:00 PM House RESOURCES


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01:01:09 PM Start
01:02:09 PM Overview: Department of Natural Resources - Division of Oil & Gas
02:34:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Department of Natural Resources TELECONFERENCED
-Division of Oil and Gas
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        February 7, 2007                                                                                        
                           1:01 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Carl Gatto, Co-Chair                                                                                             
Representative Craig Johnson, Co-Chair                                                                                          
Representative Vic Kohring                                                                                                      
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW:  DEPARTMENT OF NATURAL RESOURCES  DIVISION OF OIL &                                                                   
GAS                                                                                                                             
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KEVIN BANKS, Acting Director                                                                                                    
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Presented Division of Oil & Gas overview.                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  CARL   GATTO  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order at  1:01:09  PM.    Representatives                                                             
Gatto,  Johnson,  Kawasaki,  Kohring,  Wilson,  and  Seaton  were                                                               
present   at  the   call  to   order.     Representatives  Roses,                                                               
Guttenberg, and Edgmon arrived as the meeting was in progress.                                                                  
                                                                                                                                
^OVERVIEW:  DEPARTMENT  OF NATURAL RESOURCES   DIVISION  OF OIL &                                                             
GAS                                                                                                                           
                                                                                                                                
1:02:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced that the  day's only order  of business                                                               
would  be an  overview by  the Department  of Natural  Resources,                                                               
Division of Oil & Gas.                                                                                                          
                                                                                                                                
1:03:01 PM                                                                                                                    
                                                                                                                                
KEVIN BANKS, Acting  Director, Central Office, Division  of Oil &                                                               
Gas, Department  of Natural Resources  (DNR), referenced  pages 2                                                               
and  3  of  his  written   presentation  and  explained  that  by                                                               
encouraging  oil   and  gas  exploration  and   development,  the                                                               
division maximizes  revenue to the  state.  He stressed  that his                                                               
primary  concern  is  making  sure  the state  gets  what  it  is                                                               
entitled to under the provisions of its lease agreements.                                                                       
                                                                                                                                
1:06:04 PM                                                                                                                    
                                                                                                                                
MR.  BANKS then  directed  attention  to page  4  of his  written                                                               
presentation regarding the gross  oil volumes produced from state                                                               
leases between  January 2006  and November 2006.   He  noted that                                                               
during this  time period  the State of  Alaska received  from its                                                               
leases a gross oil volume of  32,823,355 barrels.  This amount is                                                               
four  times the  volume produced  by the  state's fourth  largest                                                               
producer, he pointed out.  The  state is in the enviable position                                                               
of receiving approximately  100,000 to 120,000 barrels  a day, he                                                               
emphasized, a position  most oil companies would  be delighted to                                                               
be in.                                                                                                                          
                                                                                                                                
MR.  BANKS  reminded  the  committee that  oil  and  gas  revenue                                                               
constitutes nearly 90  percent of the state's  total General Fund                                                               
(GF) revenue,  as shown  on page 5  of his  written presentation.                                                               
For fiscal  year 2006 (FY  06), the division was  responsible for                                                               
about $2.4 billion  in royalty collections.  He  pointed out that                                                               
the Division of Oil and Gas  contributed more than half of all of                                                               
the  state's revenues  for FY  06.   Mr. Banks  then referred  to                                                               
pages 6 and 7 of his  written presentation and relayed that, over                                                               
the past  few years,  royalty revenues  on state  lands increased                                                               
while production decreased.   He also pointed out  that the state                                                               
is  selling  over  60  percent  of its  royalty  to  Flint  Hills                                                               
Resources Alaska,  LLC ("Flint Hills"), alone,  and the resulting                                                               
revenue  is  more   than  the  state  receives   from  any  other                                                               
individual producer.                                                                                                            
                                                                                                                                
1:09:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked what percentage of  Alaska's royalty                                                               
is taken in-kind versus in-value.                                                                                               
                                                                                                                                
MR.  BANKS reported  that 60  percent of  the state's  royalty is                                                               
taken  in-kind and  sold to  Flint Hills  Resources, the  state's                                                               
sole customer  for royalty-in-kind (RIK).   Responding to further                                                               
questions, he noted that the  State stopped selling to the Tesoro                                                               
Alaska Company's  ("Tesoro") refinery in  Nikiski in 1998.   Most                                                               
of the oil used by this  refinery comes from the Cook Inlet, with                                                               
additional oil being  shipped in from Valdez.   Tesoro also ships                                                               
oil by tanker to the Lower  48.  In response to another question,                                                               
he  explained  that  state regulations  require  that  the  State                                                               
receive more  for sales  of RIK.   For  example, the  2004 [Flint                                                               
Hills] contract guarantees  the state at least 30  cents more for                                                               
its RIK.  However, he continued,  because of the formula used for                                                               
calculating  RIK, the  state  receives much  more  than that,  as                                                               
compared to what it receives for royalty-in-value (RIV).                                                                        
                                                                                                                                
1:11:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  inquired  whether  Flint  Hills  had  a  lawsuit                                                               
pending to recover some of that royalty money.                                                                                  
                                                                                                                                
MR. BANKS replied that there  are two disputes before the Federal                                                               
Energy  Regulatory Commission  (FERC).   One  is a  long-standing                                                               
dispute  regarding the  calculation of  components in  the Trans-                                                               
Alaska Pipeline  System (TAPS) Quality  Bank.  He  explained that                                                               
when  Flint  Hills and  other  refineries  take  oil out  of  the                                                               
pipeline, make  products from  it, and then  dispose of  oil back                                                               
into the pipeline,  they are changing the quality of  the oil for                                                               
all  the  other   pipeline  users.    Therefore,   he  said,  the                                                               
refineries must  pay into  the Quality Bank  to make  whole those                                                               
companies whose oil  is being shipped all the way  to Valdez.  He                                                               
stated that  Flint Hills and  Petro Star,  Inc. will have  to pay                                                               
more  into the  Quality  Bank  if the  State  and other  shippers                                                               
prevail.                                                                                                                        
                                                                                                                                
MR. BANKS  said the second  dispute involves the TAPS  tariff for                                                               
inter-state  rates.    Several   years  ago,  he  explained,  the                                                               
Regulatory  Commission of  Alaska (RCA)  lowered the  intra-state                                                               
tariff.   Today,  the  pipeline charges  $1.96  [per barrel]  for                                                               
shipping oil  from Pump Station  1 on  the North Slope  to Valdez                                                               
for intra-state use, such as  for the Nikiski refinery.  However,                                                               
the  pipeline's inter-state  rate  has risen  over  the last  few                                                               
years  and  is  currently  $5.20   [per  barrel].    It  is  this                                                               
difference that is at issue, he  pointed out.  The plaintiffs are                                                               
asking the FERC to decrease  the $5.20 inter-state rate.  Because                                                               
of how the State calculates the  price it charges Flint Hills for                                                               
the State's  RIK, he  continued, the  company deducts  that $5.20                                                               
from the price.   If the FERC orders a new  change to the tariffs                                                               
that have  been suspended during  this litigation,  a retroactive                                                               
contract  provision will  allow the  State to  collect the  $3.24                                                               
difference from Flint Hills.                                                                                                    
                                                                                                                                
1:14:44 PM                                                                                                                    
                                                                                                                                
MR. BANKS,  responding to a  further question, stated that  it is                                                               
the pipeline  that charges  the $5.20 for  the service  of moving                                                               
the oil  from the North  Slope to Valdez.   After the  oil leaves                                                               
Valdez there  are additional tanker  charges.  He  explained that                                                               
oil is valued  at Pump Station 1 using  a "net-back calculation."                                                               
This calculation  begins with the  market price where the  oil is                                                               
sold on  the West  Coast, called  the ANS  Spot Price.   Deducted                                                               
from  the market  price  is the  cost of  tankers  or a  location                                                               
differential   one  or the other   then there  is a deduction for                                                               
the tariff, as well as adjustments for quality.                                                                                 
                                                                                                                                
MR. BANKS, referring to page  8 of his written presentation, then                                                               
discussed the six sections comprising  the Division of Oil & Gas:                                                               
Resource   Evaluation,  Leasing/Permitting,   Unit/Tech  Support,                                                               
Royalty Accounting,  Audit Section,  and Commercial Section.   He                                                               
outlined  the  duties  of the  various  sections  which  include:                                                               
developing concepts  about prospects and  exploration, monitoring                                                               
development proposals received from  the oil industry, monitoring                                                               
and  administrating leases,  conducting lease  sales, maintaining                                                               
the  legal  documentation  of  leases,  calculating  royalty  and                                                               
determining  whether  the  state  should take  RIK  or  RIV,  and                                                               
ensuring that  the environmental and other  lease obligations are                                                               
being met by the industry.                                                                                                      
                                                                                                                                
1:18:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON inquired whether  the division's duties are                                                               
easier  since  the  Office of  Habitat  Management  &  Permitting                                                               
(OHMP)  was moved  from  the  Alaska Department  of  Fish &  Game                                                               
(ADF&G) to the DNR.                                                                                                             
                                                                                                                                
MR. BANKS  stated that there  is now  better access to  the OHMP.                                                               
He said  one aspect that is  different is that the  roles between                                                               
his  division  and the  OHMP  seem  more  balanced and  this  has                                                               
reduced the tension that existed before.                                                                                        
                                                                                                                                
MR.  BANKS  then  directed  attention to  the  summaries  of  the                                                               
division's 2006 achievements and  activities as outlined on pages                                                               
9-14  of  his written  presentation  and  to pages  32-37,  which                                                               
summarize  North Slope  and Cook  Inlet oil  and gas  development                                                               
activities.    These summaries,  he  explained,  can be  used  to                                                               
better  interpret  the  features  of the  two  maps  included  in                                                               
committee packets.                                                                                                              
                                                                                                                                
1:20:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  requested the definition of  the term "PA"                                                               
as used on page 11.                                                                                                             
                                                                                                                                
MR. BANKS began by explaining that  a "unit" is an aggregation of                                                               
leases  over  a  prospect.     Aggregating  the  leases  provides                                                               
efficient  and  economic  production  of  the  state's  oil,  and                                                               
reduces  the  environmental  impact   because  only  one  set  of                                                               
facilities  is  built  over  a   field  instead  of  many.    The                                                               
correlative  rights of  the lease  owners within  a unit  must be                                                               
protected when oil developments occur.   At the initial formation                                                               
of a unit, he continued, the  size of the "tank," so-to-speak, is                                                               
not  quite known.    As  exploration occurs,  an  opinion can  be                                                               
formed about how big that tank  is, and a participating area, PA,                                                               
is then  formed.   Production from  that PA  is allocated  to the                                                               
various  owners, including  the state  as  a royalty  owner.   He                                                               
explained that  eventually the  knowledge about  a PA  is refined                                                               
and the  unit will shrink  to the size of  that PA.   The acreage                                                               
remaining outside of  the PA is then released  for attracting new                                                               
entrants.                                                                                                                       
                                                                                                                                
1:22:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  what the  distinction  is  when                                                               
there are four PAs located within one unit.                                                                                     
                                                                                                                                
MR. BANKS  explained that a  unit can  contain more than  one PA,                                                               
depending on  the zones that wells  are producing from.   A PA is                                                               
defined by the pool of hydrocarbons.   There could be a PA at one                                                               
depth and  another PA at  a different depth.   Defining a  PA, he                                                               
continued, determines  what share of production  each lease owner                                                               
will receive from  that PA.  A PA manages  the correlative rights                                                               
of the various participants in  the unit.  For example, depending                                                               
on the various  lease ownerships on the surface,  Company A might                                                               
get  60  percent of  the  production  from  a particular  PA  and                                                               
Company B might only  get 20 percent.  In other  words, a unit is                                                               
a surface area designation and a PA is a reservoir designation.                                                                 
                                                                                                                                
1:24:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  surmised that the definitions  are for                                                               
the horizontal surface  as well as for the vertical  depth of the                                                               
different  fields; therefore,  facilities located  right next  to                                                               
each  other  can represent  very  different  entities.   He  then                                                               
mentioned   the   previous    administration's   proposed   Lease                                                               
Monitoring   and  Engineering   Integrity  Coordinator's   Office                                                               
(LMEICO) to  be established within  the DNR, and asked  what role                                                               
the Division of Oil & Gas would  be playing in the LMEICO and the                                                               
addressing of regulatory gaps.                                                                                                  
                                                                                                                                
MR.  BANKS  stated  that  under the  LMEICO,  liaisons  from  the                                                               
Department  of   Environmental  Conservation  (DEC),   the  Joint                                                               
Pipeline Office,  and other state  and federal agencies  would be                                                               
physically located in one place.   However, he said, the Division                                                               
of Oil &  Gas is suggesting that Governor  Palin instead consider                                                               
using  a  proposed  Petroleum Systems  Integrity  Office  (PSIO),                                                               
described  on  page  20  of   his  written  presentation,  as  an                                                               
alternative.   Rather than establishing a  separate coordinator's                                                               
office, liaison  people would  be identified  within each  of the                                                               
departments  and   arrangements  would   be  made   for  complete                                                               
communication  among those  agencies.   The  liaisons first  task                                                               
would be identifying  regulatory gaps and making  sure those gaps                                                               
are filled.   The PSIO would reside within the  Division of Oil &                                                               
Gas because the pipeline facilities  are within the units managed                                                               
by  the  division  and  the  unit agreements  give  the  DNR  the                                                               
authority  to manage  and inspect  facilities so  that production                                                               
occurs safely and continuously.                                                                                                 
                                                                                                                                
REPRESENTATIVE   GUTTENBERG   responded   that  it   might   take                                                               
legislative  oversight  [of the  PSIO]  to  make sure  that  that                                                               
happens.                                                                                                                        
                                                                                                                                
1:29:31 PM                                                                                                                    
                                                                                                                                
MR.  BANKS  then  directed  attention   to  pages  32-33  of  his                                                               
presentation and  to the  two maps showing  North Slope  and Cook                                                               
Inlet oil  and gas activities for  2006-2007.  He noted  that the                                                               
bold,  black lines  delineate  the units  and  the callout  boxes                                                               
describe the activities  underway within the units.   He reported                                                               
that  exploration activities  increased on  the North  Slope over                                                               
the  past year  and  that  new players  are  involved.   He  also                                                               
reported that  the division just  approved three new  units shown                                                               
on  the  Cook  Inlet  map    the  North  Alexander  Unit  in  the                                                               
Matanuska-Susitna (Mat-Su) Borough area  and the offshore Corsair                                                               
and Kitchen  units.  Not  illustrated on the maps,  he continued,                                                               
are companies  working in  the National  Petroleum Reserve-Alaska                                                               
(NPR-A)  such as  ConocoPhillips Alaska,  Inc. and  FEX, L.P.,  a                                                               
company new to Alaska.                                                                                                          
                                                                                                                                
1:33:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked  whether permits have been  issued for all                                                               
of the  leases awarded in  the Cook  Inlet over the  past several                                                               
years.                                                                                                                          
                                                                                                                                
MR. BANKS  said the answer  is, "No,"  because the leases  for 71                                                               
Cook Inlet  tracts sold  in May  2006 have  not yet  been issued.                                                               
However,  he stressed,  that is  not an  abnormal length  of time                                                               
because a lot  of survey work must be conducted  after a lease is                                                               
awarded.  He said he believes  that leases from a couple of years                                                               
ago which  experienced delays have  all been issued.   HE further                                                               
explained  that  the  timeline between  purchasing  a  lease  and                                                               
taking  possession for  drilling  is much  less  than two  years.                                                               
Title work is done by the  Division of Mining, Land and Water, he                                                               
continued, and an additional title  person was hired to help with                                                               
a backlog in  the workload.  Unlike earlier years,  title work is                                                               
now done after leases are  purchased, rather than before, so that                                                               
time is not  wasted on surveying unsold leases.   Furthermore, he                                                               
said, the  division offers  leases throughout  the whole  area of                                                               
the  Cook  Inlet   each  year.    This   provides  industry  with                                                               
predictable and  manageable access  to the oil  and gas  lands in                                                               
the Cook  Inlet, he emphasized,  and [offering  leases throughout                                                               
the whole  area] also  applies to the  North Slope,  the Beaufort                                                               
Sea, and now the Bristol Bay region.                                                                                            
                                                                                                                                
1:37:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if the  attitude of the  oil and                                                               
gas industry has changed with the  election of a new governor who                                                               
is  seeking  changes  to  the   previous  proposed  gas  pipeline                                                               
contract.                                                                                                                       
                                                                                                                                
MR. BANKS  said he  is being told  by exploration  companies that                                                               
they are targeting  gas on the North Slope, not  just oil.  Also,                                                               
he  pointed out,  there  is an  expectation on  the  part of  new                                                               
players that this pipeline is going  to be built by the time they                                                               
are ready to participate.                                                                                                       
                                                                                                                                
1:38:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG requested  an expansion  on activities                                                               
happening in the Nenana Basin.                                                                                                  
                                                                                                                                
MR. BANKS reported that there  is an exploration license over the                                                               
area  and   that  some  seismic   work  has  been   completed  in                                                               
conformance  to  the  work  commitments.     However,  plans  for                                                               
drilling  a well  are currently  on  hold, he  said, because  the                                                               
Nenana  Basin  geology is  very  complicated  and there  is  some                                                               
uncertainty as to whether a  drilling program there will yield an                                                               
economic  source  of  gas  for  local use  in  Fairbanks  or  for                                                               
delivery to some kind of a  pipeline.  Mr. Banks further reported                                                               
that the division's  approval for putting the  Nenana drilling on                                                               
hold  was not  needed because  a well  was not  part of  the work                                                               
commitment  for   the  license.     Evaluation  of   the  seismic                                                               
information  is  being  completed, he  continued,  and  questions                                                               
remain  as to  whether an  exploration well  is the  logical next                                                               
step.   He offered  to send  members a  more complete  summary of                                                               
activities in the Nenana Basin.                                                                                                 
                                                                                                                                
1:44:19 PM                                                                                                                    
                                                                                                                                
MR. BANKS,  in response  to a question,  relayed that  the public                                                               
school  trust  fund  receives  one-half   of  1  percent  of  the                                                               
royalties and  is not a large  fund.  He offered  to research the                                                               
topic and provide more information to members.                                                                                  
                                                                                                                                
1:45:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO requested clarification  regarding the School Fund                                                               
footnote  on  page 5  which  states,  "Includes Federally  shared                                                               
rentals + royalties".                                                                                                           
                                                                                                                                
MR. BANKS  explained that Alaska  receives "about 27  percent" of                                                               
the royalties from federal lands  located between three miles and                                                               
six  miles on  the outer  continental shelf  (OCS).   The federal                                                               
government  is obliged  to share  these particular  revenues with                                                               
coastal  states  under provisions  of  [Section  8(g)(2)] of  the                                                               
Outer Continental Shelf  Lands Act.  An example, he  said, is the                                                               
royalty collected by the federal  government on its leases in the                                                               
North  Star Unit  on the  North Slope.   Another  example is  the                                                               
royalty  received under  provisions  of the  Mineral Leasing  Act                                                               
where  the  state  receives  90 percent  of  the  royalties  from                                                               
production on  federal lands in the  Cook Inlet.  Beyond  the six                                                               
miles, all of the royalties belong to the federal government.                                                                   
                                                                                                                                
1:46:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  inquired  whether the  percentage  of                                                               
royalty  revenues paid  under the  Outer Continental  Shelf Lands                                                               
Act is the same for each state.                                                                                                 
                                                                                                                                
MR. BANKS said he thinks  the [Section 8(g)(2)] revenues apply to                                                               
all  coastal  states  equally,  a   [27  percent]  share  of  the                                                               
royalties.    Coastal  states  have  tried  through  Congress  to                                                               
acquire a  greater share of  the OCS revenues, he  commented, but                                                               
to his  knowledge those requests were  denied because non-coastal                                                               
states do  not want their  federal revenues clipped by  a coastal                                                               
state.  He  confirmed that the aforementioned revenues  go into a                                                               
pool that is then divided amongst the coastal states.                                                                           
                                                                                                                                
1:48:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  pointed out  that  in  the last  Congress                                                               
there was a  bill in which the five southern  states succeeded in                                                               
getting 70  percent of those  off-shore royalties and  Alaska was                                                               
cut out.   He said he  and others opposed the  Bristol Bay leases                                                               
because that  same royalty distribution  would have  been applied                                                               
to those leases.                                                                                                                
                                                                                                                                
MR. BANKS said  he will get back to the  committee on this issue,                                                               
but  offered his  belief  that  there are  no  current leases  in                                                               
Bristol Bay on the OCS.                                                                                                         
                                                                                                                                
1:49:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  EDGMON asked  if the  division plays  any policy-                                                               
making role in  the OCS process in addition  to any informational                                                               
roles.                                                                                                                          
                                                                                                                                
MR.   BANKS   replied  that   the   division   responds  to   the                                                               
environmental and lease processes  conducted by the U.S. Minerals                                                               
Management  Service on  the  OCS by  providing  comments for  the                                                               
governor's signature.                                                                                                           
                                                                                                                                
1:51:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  inquired whether the  magnetic mapping                                                               
process done by the Division  of Geological & Geophysical Surveys                                                               
while looking for gold could also be useful in looking for oil.                                                                 
                                                                                                                                
MR. BANKS  responded that  magnetic surveys  are indeed  used for                                                               
some of the initial exploration play for oil and gas.                                                                           
                                                                                                                                
1:53:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  requested further  information  regarding                                                               
the issues listed on page 15 of the written presentation.                                                                       
                                                                                                                                
MR. BANKS explained  that on the issue of the  Point Thomson Unit                                                               
the lessees  asked for  a reconsideration  of the  DNR's November                                                               
2006  decision  made by  then-Commissioner  Menge.   In  December                                                               
2006, the  [acting] commissioner, Marty Rutherford,  affirmed the                                                               
first decision.   Mr. Banks  said the  lessees sued the  state on                                                               
the issue  of termination of  the unit  and there is  currently a                                                               
motion to consolidate the appeals into a single case.                                                                           
                                                                                                                                
MR. BANKS next  referred to the issue of the  North Slope Natural                                                               
Gas  Pipeline.     He  said  the  gasline  team   led  by  Acting                                                               
Commissioner  Rutherford   is  proceeding  and  there   has  been                                                               
discussion  with   applicants  and  experts  regarding   how  the                                                               
[proposed]  Alaska  Gasline  Inducement   Act  (AGIA)  should  be                                                               
written.   The  legislature will  help determine  what the  state                                                               
wants out of the gas pipeline  as it considers the AGIA, he said,                                                               
unlike   the  process   of  writing   the  Alaska   Stranded  Gas                                                               
Development  Act   which  simply   offered  a  contract   to  the                                                               
legislature without its involvement.                                                                                            
                                                                                                                                
1:58:52 PM                                                                                                                    
                                                                                                                                
MR. BANKS  then discussed  the issue of  New Unit  Initiatives in                                                               
Cook  Inlet.   Supply-and-demand  is  obviously  going to  be  an                                                               
extremely  important issue  for  the Cook  Inlet, he  emphasized.                                                               
This   is   highlighted   by  "ConocoPhillips"   and   "Marathon"                                                               
announcing that  they would like  to extend their  federal export                                                               
license  to  continue shipping  liquefied  natural  gas (LNG)  to                                                               
Japan through 2011.                                                                                                             
                                                                                                                                
2:00:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if exploration in  Cook Inlet is for gas and                                                               
oil and whether new wells have been productive.                                                                                 
                                                                                                                                
MR. BANKS  stated that recent  exploration in the Cook  Inlet has                                                               
been for gas.  More than  300 exploration wells have been drilled                                                               
in the Cook Inlet over the past  50 years.  During the last seven                                                               
years, he  said, 30  wells were  drilled and  many of  those were                                                               
targeting  gas.    The  market  appears  to  be  opening  up  and                                                               
changing,  he  explained,  and  new  players  are  interested  in                                                               
participating.   There  are  new  reserves as  a  result of  that                                                               
exploration.  Many of the  wells were drilled into existing known                                                               
prospects and development on those  is still pending.  There have                                                               
been a few dry holes too, he said.                                                                                              
                                                                                                                                
2:01:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  offered his  understanding that  some time                                                               
ago  the RCA  had approved  higher gas  prices on  the assumption                                                               
that higher  prices would  stimulate development  and exploration                                                               
for  more gas.    He  said he  further  understood  that the  RCA                                                               
recently  denied  another  proposed  price  increase  because  it                                                               
determined that  the gas companies  had kept the profits  and not                                                               
expanded exploration.   Are "we" left  with a cheap price  in the                                                               
Cook Inlet  that is not  going to expand the  exploration fields,                                                               
he inquired.                                                                                                                    
                                                                                                                                
MR. BANKS explained  his belief was that the  RCA's objection was                                                               
to  the price  mechanism used  in the  contract being  offered by                                                               
ENSTAR  Natural  Gas  Company ("ENSTAR")  and  "Marathon."    The                                                               
contract used  the Louisiana Henry  Hub price indices,  which the                                                               
RCA felt to  be a market indicator unrelated to  the real cost of                                                               
providing gas  in the Cook Inlet.   However, he said,  he did not                                                               
think the RCA categorically stated  that the [Henry Hub] price is                                                               
too high, but  rather that a better market  price indicator might                                                               
be one  used closer  to the  wellhead in the  Lower 48  and would                                                               
still be higher  than the prices seen in  historical contracts in                                                               
the  Cook   Inlet.    He   stated  that,  in  his   opinion,  the                                                               
"Unocal/ENSTAR" contract approved  some years ago by  the RCA did                                                               
generate increased exploration activity in Alaska.                                                                              
                                                                                                                                
2:07:01 PM                                                                                                                    
                                                                                                                                
MR. BANKS  responded to  further questions  by pointing  out that                                                               
ENSTAR  is   reporting  it  will   have  a  gap  in   its  supply                                                               
requirements beginning in 2009; ENSTAR  will have to find sellers                                                               
in the marketplace  that can fill that gap, he  said, and it will                                                               
likely be at historical prices.  He  said a Division of Oil & Gas                                                               
economist describes the  market as a "tightened  balance"   there                                                               
is  only so  much gas  that  can be  consumed in  the Cook  Inlet                                                               
because it is isolated from any  other destination.  As a result,                                                               
he continued,  once that demand  is satisfied  it is hard  to put                                                               
any more gas in at any price.   Mr. Banks stressed that there are                                                               
significant resources  [in Alaska]  "where a  market needs  to be                                                               
cracked open so  that we can see an increase  in reserves instead                                                               
of what looks like a precipitous drop in reserves."                                                                             
                                                                                                                                
2:09:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  discussed that many  people feel  the exportation                                                               
of  LNG from  the Nikiski  plant should  be stopped  and the  gas                                                               
instead  saved for  use  in Southcentral  Alaska.   However,  the                                                               
demand for gas in Cook Inlet  is three times higher in the winter                                                               
than in  the summer, he  explained.   Rather than storing  gas to                                                               
meet  the  winter demand,  the  LNG  exports are  simply  reduced                                                               
during the winter months so that  enough gas is available for use                                                               
in Southcentral  Alaska.  The  end result, he continued,  is that                                                               
having  LNG  exports  is  good  because  it  allows  Southcentral                                                               
Alaskans to have gas  at a decent price.  He  asked whether it is                                                               
possible to  run out of gas  if exportation of LNG  continues, or                                                               
is it that the gas is there  and can be developed when the market                                                               
demand is high enough.                                                                                                          
                                                                                                                                
MR. BANKS  responded that there  is a "chicken and  egg" problem.                                                               
The division's  estimates show  there is  another eight  years of                                                               
known reserves in  currently developed fields.   There is another                                                               
1.6 trillion cubic feet (TCF) of  gas that could be explored for,                                                               
and this would add an additional  eight years of supply.  So yes,                                                               
he said, there is  more gas [in the Cook Inlet],  but it is going                                                               
to be harder to  find and more expensive to develop.   He went on                                                               
to explain  that if, for  example, a producer discovered  a field                                                               
with 10 billion cubic feet (BCF)  this amount would supply only a                                                               
small  fraction   of  the  current  [Alaskan]   marketplace  and,                                                               
therefore,  the producer  would  likely find  a  position in  the                                                               
marketplace.   However, he  said, if this  same producer  were to                                                               
discover 100-200  BCF of  gas, then that  producer might  be left                                                               
standing in line  waiting to develop that resource.   Somehow, he                                                               
stressed, the  market needs to accommodate  for large discoveries                                                               
and this  is an issue  that is being  discussed in respect  to an                                                               
export license extension.                                                                                                       
                                                                                                                                
2:12:27 PM                                                                                                                    
                                                                                                                                
MR. BANKS further  pointed out that the Nikiski LNG  plant is the                                                               
only  LNG  exporter in  the  U.S.    He confirmed  that  Co-Chair                                                               
Gatto's  portrayal  of the  seasonal  swings  in the  marketplace                                                               
correctly describes what is at issue  for ENSTAR and, to a lesser                                                               
extent, other  electrical utilities.   What ENSTAR requires  in a                                                               
contract is that kind of  deliverability and this can be provided                                                               
for by developing the field with  a lot of compression with a lot                                                               
of  wells, or  by  constructing and  providing  storage in  spent                                                               
fields  where gas  is injected  during the  summer and  drawn out                                                               
during the  winter, or by "backing  out" supplies that go  to the                                                               
Nikiski LNG plant.                                                                                                              
                                                                                                                                
2:14:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON requested that Mr.  Banks review page 31 of                                                               
his presentation entitled, "Oil and Gas Incentives".                                                                            
                                                                                                                                
MR. BANKS explained  that this page is an inventory  of the kinds                                                               
of incentives that can be  offered either automatically or at the                                                               
request and  application of a lessee/producer.   These incentives                                                               
figure into the economics of  an exploration prospect differently                                                               
based on  whether they  can be counted  on or  whether permission                                                               
must be requested.   A royalty reduction incentive  would need to                                                               
be applied  for.   Exploration Incentive  Credits (EICs),  on the                                                               
other hand, are offered with the  lease and might be offered with                                                               
a  very  specific work  commitment.    Additional incentives,  he                                                               
continued,   are  discovery   royalties,  Exploration   Incentive                                                               
Credits  (EICs)  through the  Department  of  Revenue (DOR),  and                                                               
production profits  tax (PPT) credits for  North Slope producers.                                                               
His understanding,  he said, is  that at very high  price levels,                                                               
when the PPT is at its maximum,  the state may offer a tax credit                                                               
of up  to 60-70 percent  of the  cost of drilling  an exploration                                                               
well;  however it  remains to  be seen  whether this  credit will                                                               
affect exploration activity.                                                                                                    
                                                                                                                                
2:19:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG referred  to a  recent article  in The                                                             
New York Times  dealing with Gulf Coast oil and  gas issues.  The                                                             
article said that in the long  term, tax and other incentives for                                                               
production did not result in producing  any more oil and gas than                                                               
would have  been produced otherwise.   According to  the article,                                                               
he said, incentives  are generally reductions for  things the oil                                                               
companies were  going to do  anyway and, therefore, end  up being                                                               
enhancements for corporate bottom-lines.   Referencing page 16 of                                                               
the written presentation, he asked  what the division is doing to                                                               
expand the number of explorers  and producers on the North Slope.                                                               
He  said he  believes that  facility  access would  open up  more                                                               
exploration and create more jobs in the state.                                                                                  
                                                                                                                                
MR.  BANKS agreed  that facility  access is  extremely important,                                                               
and  that this  applies to  pipelines  as well  as machinery  and                                                               
buildings.   Also, he  said, low  inter- and  intra-state tariffs                                                               
are important  to a company that  is looking to find  and produce                                                               
oil, because the tariffs affect the  amount a company will get in                                                               
"net-back" value.   The state offers land [for  lease] every year                                                               
on  the North  Slope  on  a predictable  and  area-wide basis  so                                                               
companies  know   they  will  have  predictable   access  to  the                                                               
resource.                                                                                                                       
                                                                                                                                
MR.  BANKS  pointed  out  that the  capacity  and  capability  of                                                               
facilities  on  the  North  Slope  were examined  as  part  of  a                                                               
division study done  several years ago.  He said  the division is                                                               
currently  playing  the  role of  ensuring  that  incumbents  are                                                               
playing fairly with  newcomers.  Virtually all  facilities on the                                                               
North  Slope are  running  at or  near  capacity, he  emphasized.                                                               
They are constrained  either by water or gas handling,  or by oil                                                               
in some of  the newer oil fields.  Putting  a newcomer's oil into                                                               
an incumbent's facility  comes at the cost of having  to back out                                                               
some of  the oil being  produced by  the incumbent.   However, he                                                               
continued, chances  are that some  of the fluids a  [newcomer] is                                                               
requesting  to  bring to  an  incumbent's  facility have  a  much                                                               
higher oil  content than the  fluids coming from  the incumbent's                                                               
oilfield.   In  this  case, a  [favorable]  outcome might  result                                                               
because both parties will benefit  from more efficient use of the                                                               
equipment that  is already there.   Mr. Banks said he  prefers to                                                               
see  the companies  reach their  own solution  to the  problem of                                                               
facility access and, then, if this  does not work the state could                                                               
become more pro-active and get involved.                                                                                        
                                                                                                                                
2:24:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG noted that  not everything on the North                                                               
Slope is  regulated by  either the  FERC or the  RCA and  some of                                                               
those  gaps become  restrictions on  trade.   Wherever there  are                                                               
regulatory gaps the  prices charged can be raised  high enough to                                                               
keep others out.   He asked if either the division  or the RCA is                                                               
looking at closing such gaps.                                                                                                   
                                                                                                                                
MR. BANKS  responded that the  division will first be  looking at                                                               
the issues of systems and  integrity to determine where there are                                                               
regulatory gaps  in implementing a monitoring  program.  However,                                                               
he  said, the  question  of  facility access  still  needs to  be                                                               
explored.   He pointed out  that pipeline access is  regulated by                                                               
the RCA and the FERC, and  the boundary is typically the boundary                                                               
of  the unit.    The Division  of  Oil &  Gas,  through its  unit                                                               
agreements, has  some authority that  could perhaps  be exercised                                                               
for facility  access upstream of  the boundary  of the unit.   He                                                               
said that the division is looking  into what needs to be done and                                                               
what the division can do in that regard.                                                                                        
                                                                                                                                
2:27:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  pointed out that the  long-term issues for                                                               
slowing the  decline in  oil production  and for  facility access                                                               
apply also to  gas.  One of the biggest  problems has been trying                                                               
to provide  capacity for the  minor players,  he said.   He urged                                                               
the Division  of Oil &  Gas to participate in  future discussions                                                               
before  the  House  Resources Standing  Committee  regarding  the                                                               
technology of converting gas to  oil for injecting into the TAPS.                                                               
He  said  his  understanding  is   that  this  would  extend  the                                                               
pipeline's   life  to   the  year   2035   without  further   oil                                                               
discoveries,  and that  this would  also give  the state  further                                                               
options to consider when discussing a gas pipeline.                                                                             
                                                                                                                                
MR. BANKS stated that he planned to be in on those discussions.                                                                 
                                                                                                                                
2:30:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  expressed  his belief  that  converting  gas  to                                                               
liquid is a last resort, or at  least a backup plan, if the state                                                               
is unable to get a gasline.                                                                                                     
                                                                                                                                
2:31:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  offered  his  belief  that  money  is                                                               
supposedly being  set aside for  the dismantlement,  removal, and                                                               
restoration of the  TAPS, should it ever come to  that.  He asked                                                               
if Mr. Banks knew where those funds are being held.                                                                             
                                                                                                                                
MR. BANKS  responded that those  funds "are on the  balance sheet                                                               
of the  owners of  that pipeline."   He  offered to  research the                                                               
issue  and   provide  the  committee  with   further  information                                                               
regarding the  current amount of  those funds and where  they are                                                               
located.                                                                                                                        
                                                                                                                                
2:34:31 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 2:34 PM.s                                                                 

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