01/30/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HJR31 | |
| HB276 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HJR 31 | TELECONFERENCED | |
| *+ | HB 276 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 30, 2012
1:04 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Alan Dick
Representative Neal Foster
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 31
Urging the President of the United States and the United States
Congress to acquire the area commonly known as Central Park on
Manhattan in New York City on behalf of the federal government;
urging the United States Congress to declare Central Park to be
a wilderness area and to prohibit any further improvement or
development of Central Park unless authorized by an Act of
Congress.
- HEARD & HELD
HOUSE BILL NO. 276
"An Act providing for a credit against the oil and gas
production tax for costs incurred in drilling certain oil or
natural gas exploration wells in the Nenana Basin."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 31
SHORT TITLE: DECLARE CENTRAL PARK A WILDERNESS AREA
SPONSOR(s): REPRESENTATIVE(s) JOHANSEN
01/23/12 (H) READ THE FIRST TIME - REFERRALS
01/23/12 (H) RES
01/30/12 (H) RES AT 1:00 PM BARNES 124
BILL: HB 276
SHORT TITLE: OIL/GAS PRODUCTION TAX CREDITS: NENANA
SPONSOR(s): REPRESENTATIVE(s) THOMPSON, DICK, MILLETT, TUCK,
MILLER
01/17/12 (H) PREFILE RELEASED 1/13/12
01/17/12 (H) READ THE FIRST TIME - REFERRALS
01/17/12 (H) RES, FIN
01/30/12 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
REPRESENTATIVE KYLE JOHANSEN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As prime sponsor, introduced HJR 31.
REPRESENTATIVE STEVE THOMPSON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As joint prime sponsor, introduced HB 276.
JANE PIERSON, Staff
Representative Steve Thompson
Alaska State Legislature
POSITION STATEMENT: On behalf of Representative Thompson, joint
prime sponsor, presented further information about HB 276.
ROBERT SWENSON, Petroleum Geologist, Acting Director
Central Office
Division of Geological & Geophysical Surveys (DGGS)
Department of Natural Resources (DNR)
Fairbanks, Alaska
POSITION STATEMENT: During the hearing on HB 276, provided a
PowerPoint presentation and responded to questions.
JAMES MERY, Senior Vice President
Lands and Natural Resources
Doyon, Limited
Fairbanks, Alaska
POSITION STATEMENT: During the hearing on HB 276, provided
information about Doyon's exploration in the Nenana Basin.
ACTION NARRATIVE
1:04:52 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:04 p.m. Representatives Herron,
Gardner, Kawasaki, Dick, Foster, Seaton, and Feige were present
at the call to order. Representatives Munoz and P. Wilson
arrived as the meeting was in progress.
HJR 31-DECLARE CENTRAL PARK A WILDERNESS AREA
1:05:17 PM
CO-CHAIR FEIGE announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 31, Urging the President of the
United States and the United States Congress to acquire the area
commonly known as Central Park on Manhattan in New York City on
behalf of the federal government; urging the United States
Congress to declare Central Park to be a wilderness area and to
prohibit any further improvement or development of Central Park
unless authorized by an Act of Congress.
1:05:52 PM
REPRESENTATIVE KYLE JOHANSEN, Alaska State Legislature, prime
sponsor, described a trip he took to New York City where the
green of Central Park contrasted with the rest of the city. A
few years later he read a description of the flora and fauna
that were present in this area prior to Henry Hudson's arrival.
He described Manhattan as an epicenter of finance and culture in
the U.S. and Central Park as an icon to which everyone can
relate. He said he thought of using Central Park to raise the
level of discussion about what the State of Alaska wants to do
in relation to the Arctic National Wildlife Refuge (ANWR). He
opined that since President Bill Clinton vetoed legislation [to
open ANWR to drilling], the conversation has been repetitive and
unproductive.
REPRESENTATIVE JOHANSEN related that since bringing forth this
proposed resolution, he has been surprised at the support for
it. He said that several co-sponsors have signed on to HJR 31,
and a news story written locally was picked up by several major
news venues. Further, he said, the word of HJR 31 has been
spread across social networks and Internet search engines, and
there is a grass roots discussion about Alaska's biggest issue.
1:10:20 PM
REPRESENTATIVE JOHANSEN noted incidentally that ANWR legislation
is currently being heard by the U.S. House Resources Committee,
which may move to the House Floor in the next couple weeks.
REPRESENTATIVE JOHANSEN admitted that HJR 31 is most likely not
going to happen; however, he emphasized that if the federal
government wanted it to happen, it would. He said that is how
he feels about some of the ideas the federal government has
about how Alaska should develop its land. In the 1970s, he
related, New York City was running a deficit and was considering
all options to balance its budget. One of the proposals was to
give Central Park to the government, but city fathers at the
time considered that if they were to do so, then Central Park
would be in control of the federal government and they would
have no say in how that park was managed. He stated, "I think
that really summed up where I was trying to go with this."
REPRESENTATIVE JOHANSEN told the committee that there were
business and resource development groups in the capitol eager to
testify, but he asked them to refrain in the interest of time.
1:13:27 PM
REPRESENTATIVE HERRON asked whether the sponsor would be willing
to consider an amendment such that short of the proposed
resolution passing, the land that is Central Park could be given
back to the appropriate tribe of Native Americans.
REPRESENTATIVE JOHANSEN responded that the Lanape tribe is
mentioned in the proposed resolution, and the tribe has received
a copy of the resolution, but has not yet responded. He said he
would be willing to support such an amendment.
REPRESENTATIVE HERRON commented he understands the intent of the
language and hopes it will generate dialogue that helps Alaska.
1:15:02 PM
CO-CHAIR FEIGE said he signed onto the proposed resolution
because the point needs to be made. He related that many
passengers from Manhattan have ridden in his plane, and they had
no real basis for knowing what a wilderness is. A lot of
restrictions get attached to a wilderness designation, he said,
and "like the city fathers of New York who were certainly
looking out for the people of New York by resisting the
federalization of Central Park, ... we need to look out for the
increasing ... federal control over Alaska."
1:16:28 PM
REPRESENTATIVE KAWASAKI said although he appreciates the humor
in which HJR 31 was written, he feels that it is a waste of the
committee's time given the number of bills that are still
sitting in the committee. He said he thinks the committee needs
to focus on how to address energy concerns across the state. He
said passing this proposed resolution out of committee will
backfire. People already have a negative opinion of Alaskans
and think that Alaskans are paid to live in the state. He said
the legislature needs to act like adults to prove that the state
is capable of managing its own resources, and he opined that HJR
31 does not get to that point. He stated that he would not
support HJR 31 in committee or on the House floor.
1:18:04 PM
REPRESENTATIVE GARDNER shared that after HJR 31 was introduced,
she received comments from constituents who were not happy. She
said at the time she defended HJR 31 as a humorous way of
drawing attention to a serious topic. She said she was asked
how much it costs the state to draft and carry forward the
proposed resolution, and at the time she said she would not look
into that; however, she said she now may contact that person and
try to produce a figure as to the cost. She concurred with
Representative Kawasaki that there are other issues on which the
committee should focus, and said she is only present out of
respect for the process.
1:19:04 PM
REPRESENTATIVE JOHANSEN responded that he respects the members'
comments, but the topic is about opening ANWR. He admitted that
the proposed resolution was written as satire, but disagreed
that it is a waste of time. He stated that any time the state
can bring up the issue of opening ANWR for resource development
is important to the state's future development. He said there
has not been this much attention to ANWR since President Bill
Clinton vetoed legislation. He opined that not continuing on
with the resolution would have negative consequences, and he
emphasized how serious it is to him that the legislature takes
this proposed resolution seriously.
[CO-CHAIR FEIGE held over HJR 31.]
The committee took an at-ease from 1:21 p.m. to 1:23 p.m.
HB 276-OIL/GAS PRODUCTION TAX CREDITS: NENANA
1:22:59 PM
CO-CHAIR FEIGE announced that the next order of business would
be HOUSE BILL NO. 276, "An Act providing for a credit against
the oil and gas production tax for costs incurred in drilling
certain oil or natural gas exploration wells in the Nenana
Basin."
1:23:11 PM
REPRESENTATIVE STEVE THOMPSON, Alaska State Legislature,
introduced HB 276 as joint prime sponsor. He said the proposed
legislation is designed to incentivize exploratory drilling in
the Nenana Basin. He related that those living in the Interior
of Alaska are suffering from the high cost of gasoline and home
heating fuel, with heating and electric bills that are exceeding
their house payments. The Nenana Basin, just 50 miles from
Fairbanks, has the possibility for a high gas and oil yield,
which is important to the Interior as well as the Railbelt, and
would relieve a lot of the state's problem's with economic
development. He noted that there are buildings waiting for
construction in Fairbanks and those will not get built until
there is some relief in the current situation.
REPRESENTATIVE THOMPSON said the amount of money that the state
would spend on power cost equalization in the Fairbanks area
could amount to $30 million annually. The cost of building a
pipeline from the North Slope to Fairbanks to get relief for
energy costs would be "way ... more money than what we would
have a possibility of spending on this bill." In terms of
natural gas at the wellhead, he said there is not a lot of
incentive for investment; however, HB 276 would incentivize
"getting this done" in an expedited manner, in an area close to
Fairbanks, and relieve a lot of energy problems. He deferred to
his staff, Jane Pierson, for further details.
1:25:30 PM
JANE PIERSON, Staff, Representative Steve Thompson, on behalf of
Representative Thompson, joint prime sponsor, stated that HB 276
is a policy call for the legislature. She said the proposed
legislation will strongly encourage investment in the Nenana
Basin. It is designed to incentivize exploration drilling,
which will benefit the state, because it will get the data. She
said HB 276 will also bring investors to the table, which has
been a problem with natural gas prices as low as they are
currently and Shell exploration having taken center stage. She
related that the Nenana Basin, although sitting in an
undeveloped area, is located 50 highway miles from Fairbanks,
280 highway miles from the Southcentral gas system, and lies
adjacent to the Alaska Railroad System and major power
transition system.
MS. PIERSON stated that HB 276 offers tax credits to the first
three persons who drill an exploration well to the depth of
8,000 feet for the purpose of discovering gas or oil. The first
person to drill an exploration well would be credited at 100
percent of the cost or $25 million, whichever is less; the
second person to drill an exploration well would be entitled to
a credit of 90 percent or $22.5 million; the third would be
entitled to a credit of 80 percent or up to $20 million. She
related that if the exploration results in sustained oil and gas
production from a reservoir, then 50 percent of the rewarded
credits would be returned to the state.
1:27:42 PM
MS. PIERSON said Fairbanks has experienced one of the coldest
winters in its history, and she imparted that her own fuel cost
has already equaled what she paid for the entire previous year.
She said she thinks the proposed legislation could expedite the
influx of more dependable and reasonably priced fuel into the
Interior; the current supply problems are not allowing Fairbanks
to grow its industry. Ms. Pierson concluded by stating her
belief that incentivizing exploration in high production
potential basins located near energy-starved regions of the
state is a step that will help support the state's economy; that
doing so may give the state relief from programs it funds
annually; and that sustained production in these regions would
be a good solution.
1:29:05 PM
MS. PIERSON, in response to Co-Chair Feige, explained that there
is a proposed committee substitute (CS), labeled 27-LS1193\M,
Bullock, 1/18/12, in the committee packet, which would offer a
cleaner method of repayment of the credit. She explained that
both Version M and the original bill version would require 50
percent of the amount of the credit received be repaid to the
department in "monthly installments over a 10-year period";
however, the original bill version would require that the amount
of the monthly installment "shall be the greater of 1/240 of the
total amount of credit received or 10 percent of the gross value
at the point of production for the month immediately preceding
the month the payment is due", while Version M would simply
require "equal monthly installments".
1:30:05 PM
CO-CHAIR SEATON moved to adopt the proposed committee substitute
(CS) for HB 276, Version 27-LS1193\M, Bullock, 1/18/12, as the
working document. There being no objection, Version M was
before the committee.
1:30:39 PM
MS. PIERSON, in response to Representative Kawasaki, said the
bill sponsor modeled HB 276 after the Cook Inlet exploration
legislation that was heard by the legislature two sessions ago
and that created "a stampede."
REPRESENTATIVE KAWASAKI said the proposed legislation would
incentivize an area that is known to have gas but has not been
developed for whatever reason, and therefore the bill makes
sense for the Interior.
1:31:44 PM
REPRESENTATIVE GARDNER cautioned that any time the state offers
100 percent of costs regardless of outcome, it puts itself on
fragile ground. She said someone with a bad track record could
be the first to respond, and the state could end up spending $25
million and get nowhere.
MS. PIERSON said Representative Gardner's concern is valid. She
relayed that currently Doyon, Limited, is exploring the area,
but is having troubles with its investors. She said a lot of
information was gained in the 1990s when previous drilling took
place. In response to a further question, she offered her
understanding that Doyon previously drilled two wells, which may
not have been in the right place, and the company is looking to
drill further north.
1:33:30 PM
REPRESENTATIVE HERRON asked about the possibility of having
legislation that acts as a template, so the legislature does not
have to designate specific basins or areas when legislating this
type of exploration credit.
MS. PIERSON responded that that is something for the committee
to consider. She offered her understanding that Mr. Swenson's
forthcoming testimony may touch upon other unexplored basins
that could fall into this type of model.
1:34:57 PM
MS. PIERSON, in response to Representative Dick, said [a depth
of] 8,000 feet is the number the sponsor came up with when
working with Legislative Legal and Research Services, which is
the Tertiary level where gas would be found. She noted that the
bill sponsor has meetings scheduled with the Department of
Natural Resources (DNR) and the Department of Revenue (DOR) to
discuss the finer points of the bill.
1:35:28 PM
CO-CHAIR SEATON directed attention to language beginning on page
2, line 7, of Version M which read:
(n) The first three persons that drill an exploration
well for the purpose of discovering oil or gas in the
Nenana Basin are eligible for the credit under this
subsection.
CO-CHAIR SEATON noted that in the Cook Inlet it was one operator
that would drill wells for three different companies. Regarding
the aforementioned first three persons, he inquired whether
"persons" is the drilling company or the owner of the resource
that is contracting [the drilling].
MS. PIERSON responded that her understanding is that the money
would go to the actual lessee of the land because the lessee
would have to pay any drilling company that was brought in.
1:37:36 PM
CO-CHAIR SEATON said a couple wells were drilled in [the Nenana
Basin] in response to a 40-percent tax credit. He said he can
understand the desire to enhance drilling, but is concerned
about offering 100 percent up to $25 million. He recollected
that Pedro Van Meurs had, in a recent presentation, said that a
tax credit that is too high gives no incentive to control costs.
He asked the bill sponsor to consider whether there may be a
lower percentage that would still act as an incentive, while
ensuring cost control. He further stated concern about the $25
million cap. He said he understands that cap was placed in
order to bring a special rig up from some other part of the
world to Cook Inlet, and said he would like to see a cost
estimate for a land-based drilling operation as compared to the
jack-up rig that was brought into Cook Inlet.
CO-CHAIR SEATON added that the cost of gas at the wellhead has
been a problem. Fairbanks has a very high price for gas right
now, given it is trucked up from Cook Inlet. He said going
forward, if gas is found 50 miles from Fairbanks, he would like
to know why a low wellhead price of gas would be anticipated
when "most of the ... high cost is taken in the transportation
and the LNG conversion currently."
1:40:59 PM
MS. PIERSON, in response to Representative Foster, said she pays
approximately 22 cents per kilowatt hour of electricity and over
$4 a gallon for heating oil [in Fairbanks where she lives].
The committee took an at-ease from 1:42 p.m. to 1:51 p.m. to
deal with some technical issues.
1:51:48 PM
ROBERT SWENSON, Petroleum Geologist, Acting Director, Central
Office, Division of Geological & Geophysical Surveys (DGGS),
Department of Natural Resources (DNR), said he will start with a
regional overview looking at all of the sedimentary basins in
Alaska and will then put that into context for focusing on the
Nenana Basin. Beginning with a photograph of an outcrop located
just outside of Homer (slide 1), he explained that it is the
type of stratigraphy, type of rock, from which a tremendous
amount of Cook Inlet gas is produced. The black layers are coal
and in between those are layers of sandstone, mudstone, and
siltstone that were laid down in a non-marine setting. Known in
Alaska as Tertiary basins, which is the most recent time period,
it is primarily the age of deposition in most of these basins
and nearly all are non-marine. However, the basins all have
variances, some of them quite large variances.
1:53:53 PM
MR. SWENSON noted that the light blue dots on slide 2 are the
population centers in Alaska and [the red lines] are the
transportation structures around the state. [The light green
areas] are the Tertiary basins with relatively modern sediments
like the aforementioned outcrop. A dramatic amount of these
basins is distributed in the offshore regions around the state,
although there are some fairly significant basins within
Interior Alaska. While these basins look very large in this
satellite-type view, they are similar in size and areal extent
to many of the other basins from which oil and gas is currently
being produced. However, when looking at any geology, it is
important to delve deeper into the details because these basins,
while having some similarities, do have a lot of variances.
1:55:02 PM
MR. SWENSON stressed that Alaska's geology is incredibly complex
(slide 3), as seen by the topography, the variations in the
orientations of the mountain ranges, the volcanoes (depicted in
red), and the earthquake focal locations (depicted in blue).
The earthquake focal locations are related to the down-going
slab on the Pacific plate which is moving at about 63
millimeters a year, the rate at which a person's fingernail
grows. It is the reason for the tremendous amount of tectonic
activity in Alaska - it drives the volcanic systems, the seismic
systems, and creates a lot of deformation in the state, and has
made Alaska's geology very complex. The Interior sedimentary
basins are driven by huge strike-slip systems that traverse
nearly the entire state (depicted by three black lines).
Farthest south is the Castle Mountain Fault System, the central
system is the Denali Fault System, and to the north are the
Tintina and Kaltag fault systems, which are huge strike-slip
crustal-scale type faults. Motion on these faults in the last
80 million years has created a tremendous variance in the
geology of Alaska. The down-going slab, the crustal-scale
motions, and the uplift and subsidence of different areas create
these places where there is deposition of what is eroding off
the surrounding mountain ranges.
1:57:02 PM
MR. SWENSON explained that in the diagram on slide 4, the up
arrows indicate uplift and the vertical black lines represent
faults associated with crustal-scale faults and motion. Uplift
and erosion of those areas then transports sediment into a basin
that is actually subsiding. As that basin subsides, the
meandering rivers (as seen in the photo on the right) will take
the sediment derived from the uplifting areas and deposit it in
that basin. As that basin continues to subside because of the
huge tectonics going on in the state, tremendous thicknesses of
this stratigraphy can be put down. In the photograph on the
left, the lines are related to point bars and other different
types of depositional systems of that river. Those end up being
the reservoirs within an oil and gas system; it is the sandstone
that is deposited in the high energy environments. The ponds
and peat bogs in between the river (photo on right) end up being
lake-type sediments which have lots of organics, and that is
what gives the source rock. In the Cook Inlet and many of these
basins it is going to be biogenic gas. However, if it gets
buried deep enough it will be thermogenic gas, where the
organics are cooked and produce gas; although, with the right
type of kerogen, it will produce oil. Many times after a basin
is developed the tectonics will continue and the rocks that were
once deposited in a subsiding basin are then deformed by folding
and uplifting to the surface. An example of that is the photo
on the bottom left of slide 4, which shows what was once a
meandering stream that is now a bluff along the west side of
Kachemak Bay; the coals are associated with the bogs and the
sandstones are associated with the river systems.
1:59:46 PM
REPRESENTATIVE KAWASAKI inquired whether these basins are large
reservoir types of basins or the types that must be fractured.
MR. SWENSON explained that, especially in non-marine systems,
the sand that is deposited is often relatively loose. If it
does not get buried very deep, the porosity and permeability
within that sandstone remains incredibly high. The Sterling
Formation - the primary gas source in the Cook Inlet - is that
type of system and is a conventional reservoir. The porosity
and permeability in the Sterling Formation are so high that a
person can literally blow through a piece of that rock. As
sandstone is buried deeper it gets compacted and the pore spaces
and sand grains move around. If buried deep enough those sand
grains will deform and that porosity and permeability are lost;
additionally, because of getting into higher temperature and
waters with lots of different chemistries, some of the deposited
sediments can be changed into clays, which plugs up those pore
spaces. In any one of these systems there is basically a full
sweep of possibilities - from very tight rock and unconventional
plays to very high porosity and permeability and conventional
plays.
MR. SWENSON, continuing his answer, added that there are two big
issues associated with any one of these basins. One is the
seal, which is the very tight rock that keeps the gas or oil
from migrating up-section. There must be lots of clays and
mudstones in the system to stop that vertical migration. The
other is that it needs to have an operating petroleum system. A
good thing about any one of these basins is that they will
probably have two petroleum systems - one being a biogenic
system associated with coals that were never buried deep enough
to actually generate thermal type hydrocarbons.
2:02:28 PM
MR. SWENSON, returning to his presentation, noted that after up
to 25,000 or 30,000 feet of sediment is laid down - over 5 miles
of sandstones and coals - the tectonics can then compress the
basin, changing it from a subsidence to a compression event that
creates folds (slide 5, stratigraphy of west side of Cook
Inlet). The vertical scale of the folds depicted on the slide
is about four miles from the surface to the bottom of the
diagram, he pointed out. Drilling a well into one of those
folds, as depicted by the red line on slide 5, would result in
what is seen on slide 6, which depicts a series of [five] wells
along the crest of the Beluga River Gas Field. Everything in
yellow on slide 6 is reservoir and everything in black is coal;
there is production from top to bottom. Lots of complexities
and variations can be seen laterally in this system.
2:04:01 PM
MR. SWENSON directed attention to slide 7, a depiction of all
the exploration wells in Alaska. He said an important point
seen from the slide is the very high focus in exploration in the
North Slope and Cook Inlet areas, where proven petroleum systems
are working. Alaska has 1.4 billion barrels of oil out of the
Cook Inlet and over 8 trillion cubic feet (TCF) of gas have been
discovered and are being produced, along with the resource being
produced on the North Slope. However, in the other basins there
is not a good understanding of the subsurface.
2:05:05 PM
CO-CHAIR FEIGE asked how much of the data, in terms of drill
logs and wire line work, is public and available for other
companies to research at the DGGS facility.
MR. SWENSON replied that a significant amount of the data is
available to the public. He related that the Alaska Oil and Gas
Conservation Commission (AOGCC) has statute to collect a full
suite of the electric well logs, which is the information that
is pulled from the well by running a series of different types
of electric logs in the well. Also available to the public and
kept at the Geologic Materials Center in Eagle River are 10- to
30-foot incremental cuttings from each exploration well, plus
some portion of core.
2:06:10 PM
MR. SWENSON, continuing his presentation, pointed out that the
North Slope and the Cook Inlet have a lease sale system.
However, the Nenana Basin and many of the Interior basins are
under the exploration licensing program (depicted by the yellow
boxes on slide 7), a competitive process initiated in the late
1990s. It is a very different way to bring in companies, he
said, and is important for the committee to hear about.
2:07:09 PM
CO-CHAIR SEATON noted that exploration licenses cover large
areas and asked whether there can be overlay in that or, under
HB 276, would only the one person having the exploration license
be eligible.
MR. SWENSON qualified that he is not the expert to answer
specifics on exploration licensing, but that basically it is a
competitive process through work commitment. Companies come to
the Division of Oil & Gas with a work commitment and the
exploration license area is defined. A term limit is set in
which the work must be done and the data provided to the state,
at which point the company can go to lease on any part within
that license area and it becomes a normal oil and gas lease to
the state. Unlike having an open lease sale where everybody
bids on certain lease tracts, an exploration license allows a
company to come in, look at a very large and high risk area, do
a significant amount of work to try to define the prospects, and
then go to lease on those specific prospects without having to
worry that somebody else can pick up those leases from
underneath the company while it is doing the seismic and other
work.
CO-CHAIR SEATON said this is something that he would like the
Division of Oil & Gas to address before the hearing on HB 276 is
completed.
CO-CHAIR FEIGE suggested that perhaps Mr. Barron [director of
the Division of Oil & Gas] could address the committee after Mr.
Swenson's presentation.
2:09:17 PM
MR. SWENSON, returning to his presentation, pointed out that
because of Alaska's large size and geological complexity, one
issue is the tremendous amount of data (slide 8). He said that
because it is important to make all of that data accessible to
people across the state, he partnered with the Alaska Energy
Authority and the Division of Oil & Gas in 2005 to put together
a web site that will provide the public with data on all
renewables, such as wind, hydropower, and biomass, as well as
oil, gas, and coal. One product of that partnership is a
report, currently in final review, which covers all of the
state's areas and subareas as defined by the Alaska Energy
Authority (slides 9-12). The report provides information on the
available public data within the system for any coal, gas, or
geothermal information that the state or other public entities
may have. The different colors and black lines on the maps
attest to the complexity of Interior Alaska's geology.
2:11:23 PM
MR. SWENSON reported that the next phase of this project is to
look at what data is available, what data is needed to help
assess the petroleum potential of these basins, and what the
state needs to do to gather additional data that gets it to the
point of attracting the industry to explore these areas. This
data will all become public through time, he said. Field work
was started last year in the Susitna Basin (slide 13) and next
year the Nenana Basin will be looked at.
MR. SWENSON next discussed the land status of the Nenana Basin
area (slide 14). He said the tan color delineates the license
area, green delineates conveyed Native lands, blue delineates
selected Native lands, red is allotments, dark blue is federal
acreage, and white is state land that is currently open to
mineral entry. Relative to the North Slope and Cook Inlet, the
Nenana Basin is small; however, it is a very deep basin. He
explained that slide 15 represents the information that was had
about the Nenana Basin in 2003. The dark grey contours
represent the basin's deepest areas, and the blue and light grey
contours moving outward show where it gets shallower and then
becomes very thin. Two wells were drilled in the shallow areas,
Unocal Nenana 1 and ARCO Totek Hills 1.
2:13:50 PM
MR. SWENSON, in response to Co-Chair Feige, confirmed that the
contours represent the basin's thickness from top to bottom,
with the top being the surface and the bottom being basement
rock. He clarified that slide 15 is a structure contour so the
colors represent the thickness of that basin and the contours
are based on remote sensing data called gravity, and modeling of
that remote sensing data.
MR. SWENSON continued his review of what was understood about
the Nenana Basin prior to 2009: about 18,000 feet thick; time
equivalent in stratigraphy to the Cook Inlet, but with a very
different set of stratigraphy; potential for oil very low due to
the thin organic source rocks and the thermal history the basin
was assumed to have. The range of possible reserve outcomes was
considered wide and poorly constrained. The two wells drilled
in 1962 and 1984 were on basement highs, meaning they were
drilled where the basin proper was relatively thin. One well
was drilled to 3,000 feet and the other to 3,500 feet. At that
time it was thought that there would be a lot of deformation, or
the building of traps, in the southern margin of the basin.
2:15:58 PM
MR. SWENSON moved to slides 17-18 and said that since 2009 a
number of seismic lines have been shot across the basin under
Doyon, Limited's, exploration license. The Nunivak #1 well was
drilled [in 2009], which helped to correlate all the other data
that was had. This recent data was published in the January 9,
2012, Oil & Gas Journal and the significant findings include:
the basin could be up to 25,000 feet thick, which has a huge
variance on the thermal history because the deeper the hotter,
as well as the fetch area and the amount of potential for
thermogenic-type hydrocarbons; the encountering of a thick
Paleocene section with trace oil and gas shows, indicating, at
least in a local sense, an operating petroleum system; and coals
showing high hydrogen indices and "S2" values, indicating some
oil potential and which changes the prospectivity of the basin.
Basin history modeling based on the well data, he continued,
leads Doyon to believe that there is an active petroleum system.
2:17:58 PM
MR. SWENSON, referring to slide 19, said the cross section on
the farthest left depicts the north flank of the Alaska Range,
the two middle cross sections are what was encountered in the
[ARCO and Unocal] wells, and the far right cross section is what
was expected would be encountered in [Doyon's] 2009 well. The
part of the [Doyon] well with the question marks is the
Paleocene section that was not known to exist.
MR. SWENSON summarized his presentation by noting that there are
a number of basins across the state in addition to the Nenana
(slide 20). For example, there are basins in the Yukon Flats,
west central Alaska, and extending out into the Bering Strait.
Many of these basins have similar geometries and similar
stratigraphy, but each one has a very unique history and that is
what is very important to take away from today. These basins
are usually non-typical petroleum systems. Very little is known
about the sub-surface geology in most of the basins, a problem
that was seen with the assumptions made on the Nenana Basin.
Most of these basins have zero sub-surface information, he
continued. There is probably potential for biogenic gas in many
of these basins and possibly in some basins for thermogenic gas,
but that is poorly understood. From an exploration standpoint,
these really are wildcat basins.
2:20:54 PM
CO-CHAIR FEIGE, regarding wildcat exploration targets, inquired
what the odds are.
MR. SWENSON replied that depending on the information level for
a play, a wildcat exploration target is usually a 5-15 percent
chance of success. Geologic success versus economic success can
also be talked about, he said, and when going from geologic to
economic the chance factors drop. One important point is that
there are two different types of chance factor variables:
negative information and lack of information. The chance
factors for success on any kind of an exploration well can be
because negative information says there is no petroleum system,
in which case the chance factor is going to go down. The other
side, however, is that there is not enough information and
therefore too many unknowns, in which case the chance factor
still has to be low. It is very difficult from a wildcat
standpoint to make that distinction. The more data there is the
less wildcat it becomes.
2:22:42 PM
MR. SWENSON, in response to Co-Chair Feige, concurred that the
benefit of the Nunivak #1 well was not that it found oil, but
that it expanded the knowledge of the geology and discovered a
layer that was not expected to be there.
MR. SWENSON, in response to Representative Munoz, explained that
the ARCO and Unocal wells, drilled in [1962] and [1984], are no
longer active exploration wells because they have been plugged
and abandoned.
MR. SWENSON, in response to Representative Foster, said the data
from a well drilled by ARCO 30 years ago in Norton Sound would
not be considered obsolete. He explained that while prior
technology could not gather the amount of information that is
now gathered in an operation, that data is still very critical.
Some of the most critical data is just a sample of the rock, he
continued, and this is why having the Geologic Materials Center
is so important. When going back into an area, being able to
look at core dramatically changes the ability to understand the
basin as new data comes in.
2:24:42 PM
MR. SWENSON, in response to Co-Chair Seaton about past drilling
in the Nenana Basin, replied that with any dry hole, post mortem
is the most important thing for understanding what was
encountered. For any trap to actually end up with an
accumulation of hydrocarbon, it is astounding how many different
variables have to fall into place. The more data, the more
pieces that fall into place. It is hard to say why that
accumulation was not seen in the ARCO Totek Hills and Unocal
wells. It could have happened for a number of reasons: the
wells may have been outside of the migration pathway or there
were seal problems, but most likely it was not a reasonable or
viable trap. Additionally, a biogenic system is generated as
it is being deposited and subsiding, which is the reverse of a
thermogenic system. A biogenic system requires a huge amount of
uplift because it reduces pressure and temperature on the fluids
and also on the coals where the gas is absorbed to, and that
reduction in pressure and temperature then releases the gas and
it migrates up.
2:28:11 PM
CO-CHAIR SEATON, in regard to HB 276 and the relationship of
credits for drilling a well when there is not much information,
asked whether the state would be better off to give credit for
three-dimensional seismic work so exploration could be more
specifically targeted.
MR. SWENSON said he misspoke earlier about the older seismic,
and that it was actually seismic that was shot when ARCO drilled
in 1982. Since that time Doyon has acquired a fairly robust
two-dimensional grid of seismic as part of the exploration
licensing program, but Doyon has posted that it would like to
shoot more seismic to the north; so getting additional seismic
for understanding the prospectivity is absolutely part of that.
When Doyon drilled Nunivak #1, it had a fair seismic grid to
identify where the prospect was, it just turned out that it was
not in the correct place and the prospect turned out to be a dry
hole.
CO-CHAIR SEATON inquired whether HB 276 includes seismic in the
credit for a well or is seismic a separate issue that needs to
be looked at outside of, or in addition to, the bill.
MR. SWENSON deferred to the Division of Oil & Gas to provide
this information because of the difference between exploration
licensing and the credit that is before the committee in HB 276.
2:31:11 PM
JAMES MERY, Senior Vice President, Lands and Natural Resources,
Doyon, Limited, noted that Doyon is the Alaska Native Claims
Settlement Act (ANCSA) regional corporation for Interior Alaska
and has over 18,000 shareholders. He said Doyon has several
subsidiary businesses in Alaska and a couple Outside, with a
strong emphasis in oil field support services and other natural
resource development. Additionally, Doyon is the largest
private landowner in Alaska, owning about 12.5 million acres in
the Interior. He said he is a 31-year employee of Doyon and a
35-year resident of Interior Alaska. He disclosed that while he
is not a geoscientist, he employs and manages several who
provided input for this testimony. He specified that he is
speaking only for Doyon and not the other investors in the
[Nenana Basin] project. He specified that HB 276 was not
introduced at the request of Doyon. Rather, Doyon was
approached by Senator Wagoner who wanted to do something for
Nenana modeled on the Cook Inlet jack-up rig incentive
legislation that sparked a lot of new activity in Cook Inlet, as
well as an apparent discovery. He maintained that the similar
incentives in HB 276 present an opportunity to do things at
Nenana which might not otherwise happen or to do more things and
do them sooner on State of Alaska lands in the basin, especially
when the risks of frontier exploration are considered along with
the topsy-turvy world of Alaska gas markets and politics.
2:32:54 PM
MR. MERY began with a history of Doyon's [Nenana] project and a
status update. He conveyed that Doyon is an investor with
several other companies in exploring the basin, with Doyon
having the largest single equity ownership at 60 percent. For
the last year Doyon has been the operator, the day-to-day
manager, of the project. Doyon's investment started several
years ago at only 20 percent and its current percentage of
ownership shows its commitment and belief in the project. The
other project participants are Rampart Energy, a Denver company;
Arctic Slope Regional Corporation; Usibelli Energy LLC; and
Minnesota-based Cedar Creek Oil & Gas Company. The group has a
state exploration license on a little less than 500,000 acres of
state land, as well as leases to about 15,000 acres of Alaska
Mental Health Trust lands. The group is about 10 years into
this project and has been slowed down at several points by the
oil and gas tax changes resulting from the petroleum production
tax (PPT) and Alaska's Clear and Equitable Share (ACES). Both
PPT and ACES had some negative impacts and unintended
consequences on the group which had to be rectified before the
group would move forward. Additionally, availability of drill
rigs has been a real problem, partners have quit, and others
have lost interest because of no big early discovery.
2:34:18 PM
MR. MERY, continuing, pointed out that under the state license
program Doyon will be taking multiple year leases later in this
calendar year, at which time it will start paying the State of
Alaska yearly rentals of $3 per acre. Any production from these
lands will be subject to a 12.5 percent gross value royalty to
be paid to the state, as well as applicable production taxes.
The 43,000 acres of Doyon lands in the Nenana Basin are not part
of the state mental health lands venture, he noted, nor are they
a focus of any current exploration.
MR. MERY stated that this is a very frontier basin that is very
under-explored with only one deep hole which Doyon drilled. A
lot more needs to be learned about the basin, so it is a risky
place to deploy capital. The group's major programs have been a
large two-dimensional seismic program in 2005 and a 2009
drilling program to about 11,000 feet, which was on the flank of
the basin and close to the road system. He allowed that some of
the logistics drove some of that drilling decision, but a lot of
very interesting information was learned, some of which was
shared by Mr. Swenson, and Doyon is excited about the area.
2:35:46 PM
MR. MERY shared that since taking over the operatorship in 2010
Doyon has undertaken multiple efforts to review existing data,
re-analyze the well drill cores, acquire new soils geochemistry,
license a proprietary geophysics, and gather new geophysics.
Implications from the work are that this is an opportunity for
both oil and natural gas. The well data, rock geochemistry, and
new geophysics re-define the shape and depth of the basin.
Doyon believes the basin is substantially deeper than previously
thought and therefore good for both oil and gas generation. He
announced that Doyon will start a 125-mile two-dimensional
seismic program this week and said this multi-million dollar
program further demonstrates Doyon's commitment to the basin.
The seismic will be in an area of the basin in which no seismic
has been shot before, but one that Doyon now thinks has
tremendous promise based on the re-assessment of gravity and
past seismic data that was gathered.
2:37:17 PM
MR. MERY advised that the Nenana Basin is a tough place for
attracting investment, given its stage of understanding. All
that is had are encouraging results - no real discoveries, no
history of development or production like the Cook Inlet or the
North Slope, no oil and gas infrastructure, and unsettled gas
markets which put incredible risk on the project just on the
markets alone. He pointed out that this frontier basin also has
an oil tax that is the same as Prudhoe Bay, it is not the same
as Cook Inlet, and that is something that should be looked at
and that Doyon will be bringing up with other people. He said
Doyon believes that it has had much larger risks and burdens for
any exploration project compared to Cook Inlet or parts of the
North Slope.
MR. MERY estimated that there could be 300 million to 1 billion
barrels of recoverable oil in the Nenana Basin, although they
are likely in multiple smaller fields. He said Doyon also
thinks there will be plenty of thermogenic natural gas as well
as propane. Rather than giant fields like on the North Slope,
it is more like what is seen in the Cook Inlet or the Lower 48.
In that light, Doyon believes that the Nenana Basin is as
deserving as Cook Inlet for enhanced drilling incentives.
2:39:00 PM
MR. MERY stated that Doyon has more reasons to make this work
than most companies: Interior is the home to most of Doyon's
shareholders; Fairbanks is where Doyon's home offices are; job
creation for Interior residents, especially for the nearby
communities of Nenana and Minto where many Doyon shareholders
live; Nenana is the hub of the great river system in the
Interior and there are many Doyon region villages; propane
produced near Nenana could be shipped down the river system; and
Doyon owns multiple oil and gas field service companies. For
these reasons Doyon has the desire to make this happen, he said,
but the risks are huge and HB 276 would allow this project to
move forward much more quickly.
MR. MERY, in response to Representative Munoz, said the cost of
an exploratory well in the Nenana Basin comes down to where the
well is. He related that the $25 million figure comes from the
Cook Inlet jack-up rig legislation. According to consultants
not owned by Doyon, he continued, an 11,000-foot well located in
the central part of Nenana Basin will cost about $25 million.
Doyon's [2009] well was just shy of $20 million; however, that
well was only four miles off the road system on an existing
right-of-way, relatively easy access compared to some of the
other locations being looked at.
2:41:59 PM
CO-CHAIR FEIGE described a scenario of drilling one well that
found an indication of something and then drilling a second well
to confirm the find. He asked what the sum total would be for
those two wells.
MR. MERY replied that it would not be $20 million for each well,
rather some fraction of the $20-$25 million. He added that it
is hard to say because it depends on how far the second well is
offset, but it would not be the same amount of money because the
logistics have already been paid for getting the rig in there.
MR. MERY, in response to Representative Munoz, confirmed that
the State of Alaska provided a 40 percent credit on Doyon's
[2009] exploratory well.
MR. MERY, in response to Co-Chair Seaton, confirmed that, in
addition to the 40 percent tax credit, Doyon is able to convert
the expenditure/investment into a tax credit at 25 percent.
CO-CHAIR SEATON presented a scenario of a 100 percent tax credit
for a $25 million well and also converting that $25 million of
cost into a transferrable tax credit at 25 percent.
MR. MERY answered that both cannot be done.
2:44:37 PM
MR. MERY, in response to Co-Chair Feige, confirmed that Doyon
has a seismic program starting this week, but has no plans to
drill at this point in time, although Doyon would like to.
Nenana Basin is a tough place, he continued, and only one of the
companies in the current investor group is participating in the
seismic program.
CO-CHAIR FEIGE inquired whether the passage of HB 110, but not
HB 276, would alter Doyon's decision on whether to go forward.
MR. MERY responded that while the issues are linked somewhat,
they are almost separate. The overwhelming issue is the risk of
frontier exploration, he said. The tax rate is an ancillary
aspect of that larger question. The geologic risks, litigation
risks, and market risks are as profound, or more so, than the
tax. In further response, he concurred it is a lot of risk.
2:46:25 PM
MR. MERY, in response to Co-Chair Seaton, confirmed that under
Alaska's Clear and Equitable Share (ACES), Doyon would qualify
for the 50,000 barrel per day small producer tax credit or a
proportion of that if production went up to 100,000 barrels a
day.
The committee took an at-ease from 2:46 p.m. to 2:48 p.m.
2:48:39 PM
CO-CHAIR FEIGE asked Mr. Swenson to speak to the prospectivity
of the basins depicted on slides 9-13.
MR. SWENSON reiterated that DGGS, in consort with the Alaska
Energy Authority (AEA), conducted a statewide look at all of the
available data for each energy area. Part of that was trying to
understand what available data there is for the sedimentary
basins, including the Copper River, Susitna, Yukon/Tanana,
Selawik, and other basins. Looking at the statewide picture,
clearly the two basins with the most data are the Cook Inlet and
the North Slope; second to those are the Copper River Basin and
the Gulf of Alaska. A first-pass look for potential in all of
the Alaska basins was done and one of the things used for that
was the gravity information.
2:51:43 PM
MR. SWENSON continued, explaining that the Nenana and Copper
River basins have the most information followed by the Susitna,
which is broken into two sub-basins. The Copper River Basin is
a very broad, open shallow basin without the great thicknesses
seen in the Nenana Basin (slide 10). The Nenana Basin is a
pull-apart basin, the bottom basically drops out of it, while
the Copper River Basin is more of a flexure, or a broad open
depression that collects sediment. The Copper River Basin's
sub-Tertiary stratigraphy has the potential to generate oil,
like that seen in the Cook Inlet. The oil in the Cook Inlet
does not come from the coals, it comes from the Mesozoic rocks,
a stratigraphy that is much older and deposited in a marine
setting; during the time that the rock was deposited it was a
shelf system just like the North Slope. However, while the
Copper River Basin has that same stratigraphy under it, the
thermal maturity does not appear to have gotten to the same
situation as the Cook Inlet. The jury is still out in certain
areas, but it is a much different basin. He reiterated that
each basin has attributes that must be understood, making it
difficult to broad brush all the basins and say they are all
going to be the same - each will have similarities as well as
differences. Additionally, there are varying amounts of data.
2:54:33 PM
CO-CHAIR SEATON surmised that Mr. Swenson is saying the Copper
River Basin did not get thermally reactive enough for oil
formation. He inquired whether the basin is then gas prone or
does not have anything.
MR. SWENSON replied he is not saying that at all; the Native
corporation in the Copper River Basin has some very robust
prospects for natural gas in that Mesozoic section. The real
problem in the deeper part - the Mesozoic section, not the
Tertiary section - is the lack of information. He explained
that the geology underneath the relatively flat-lying Tertiary
sediments is very complex due to much deformation, which was
followed by erosion, which was then followed by the Tertiary
deposit; so, it is very difficult to understand that underlying
sequence. Therefore, part of the risk in the Copper River Basin
is lack of information, not negative information. In response
to Co-Chair Feige regarding improved seismic technology, he
offered his belief that the most recent seismic data [for the
Copper River Basin] is from the 1980s and said he will get back
to the committee with further information.
2:56:14 PM
MR. SWENSON next discussed the geology of the Northwest Arctic
Energy Region (slide 11), which encompasses the offshore Hope
and Kotzebue basins and the onshore Selawik Trough Kobuk Basin.
He said the Kobuk Basin is part of the Mesozoic and has
Cretaceous-age rock that has a tremendous amount of coal. The
Selawik Trough is a Tertiary, younger, basin that has coals and
sandstones in it. The best understanding with current gravity
is that the Selawik Basin is around 10,000 feet; so, if it is
true that it did not get very deep, the chance of thermogenic
hydrocarbons is dramatically lessened. However, other forms of
gas, such as shallow biogenic gas, could possibly be there. The
problem in any one of these basins is that there are no wells
and the data is very limited. The tundra covers up much of the
outcrop information of the onshore basins, so remote sensing is
needed to get a feel for the geometries.
MR. SWENSON, moving to slide 12, said the Yukon Energy Region is
incredibly intriguing. While it is very large in area, it is
not the same type of basin as the Nenana, as it is more of a
flexure than a strike-slip. He related that according to
Doyon's data the Yukon has a possibility of liquid hydrocarbon
source rock out of the coals. He added that DGGS will be
focusing heavily on its sampling programs to help understand the
distribution of that rock type.
2:58:58 PM
REPRESENTATIVE FOSTER requested Mr. Swenson to touch on the
Norton Sound Basin. He observed that slide 2 depicts two
onshore deposits near Nome.
MR. SWENSON explained that geologists portray geology in a
number of different ways. For example, the Tertiary basins are
depicted in yellow on the map [slide 2] and some of these areas,
such as the Nenana Basin, are huge. When a geologist sees a
Tertiary outcrop, the surface map will show it as Tertiary even
though it may be only 100 feet thick at the surface. For many
of the onshore Tertiary areas, the rock is very, very thin and
therefore the prospectivity very limited. So, one thing that
the report will show is the prospectivity. He displayed maps of
the Norton Basin [not included in his PowerPoint presentation]
and explained that the yellow stippled pattern to the south is
the deepest part of the Norton Basin and is the area where the
prospectivity is. This is the case for most of the basins in
the Bering Strait region, he continued. The onshore extent of
that rock becomes very, very thin because the basin feathers
out, so the onshore sections have very limited prospectivity.
He related that a 1986 study by the Minerals Management Service
(MMS), now called the Bureau of Ocean Energy Management (BOEM),
provides an idea of the complexities in that basin, which has
two sub-basins. A number of the wells drilled showed a fair
amount of potential. It is believed from the study that there
is a thermogenic system as trace oil was found in a couple of
the wells, as was a fair amount of reservoir-quality rock and a
lot of structure. However, the other side of that coin is the
cost of exploration and looking at the potential size of any one
of those things.
[CO-CHAIR FEIGE held over HB 276.]
3:03:37 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES HJR 31.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HJR31 Fiscal Note.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB276 version A.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB276 CS version M.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB 276 Explanation of Changes.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB 276 NenBasinLocmap.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB 276 NenYF-BasinLocmap.pdf |
HRES 1/30/2012 1:00:00 PM |
|
| HRES HB276 Sponsor Statement.pdf |
HRES 1/30/2012 1:00:00 PM |
HB 276 |
| HRES HB276-DNR-O&G-01-30-12.pdf |
HRES 1/30/2012 1:00:00 PM |
HB 276 |
| HRES HB276-DOR-TAX-01-30-12.pdf |
HRES 1/30/2012 1:00:00 PM |
HB 276 |
| HRES-HB 276 DNR -Sedimentary Basins-Nenana.pdf |
HRES 1/30/2012 1:00:00 PM |
HB 276 |
| HJR 31 New York Times Blog article.pdf |
HRES 1/30/2012 1:00:00 PM |