Legislature(2007 - 2008)
01/31/2007 03:30 PM House W&M
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| Producer Presentations: Production Decline Reality Check | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 31, 2007
3:30 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
OTHER LEGISLATORS PRESENT
Representative Ralph Samuels
COMMITTEE CALENDAR
PRODUCER PRESENTATIONS: Production Decline Reality Check
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ANGUS WALKER, Commercial Vice-President
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Presented BP Exploration (Alaska) Inc.'s
view of future oil production in Alaska.
SCOTT DIGERT, Resource Manager
Milne Point Unit
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Presented BP Exploration (Alaska) Inc.'s
future plans to explore for and produce oil and gas in Alaska.
CARL LUNDGREN JR., Resource Manager
Liberty Subsurface Project
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Discussed development by BP Exploration
(Alaska) Inc. of a new oil producing area at Liberty Point.
DARREN JONES, Vice President, Commercial Assets
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Presented ConocoPhillips Alaska, Inc.'s
overview of future oil production in Alaska.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 3:30:44 PM. Present at the call to
order were Representatives Cissna and Roses. Representatives
Fairclough, Wilson, Gruenberg, and Seaton arrived as the meeting
was in progress. Also in attendance was Representative Samuels.
^PRODUCER PRESENTATIONS: Production Decline Reality Check
3:31:43 PM
CHAIR HAWKER announced that the committee would hear an overview
of future oil production in Alaska by BP Exploration (Alaska)
Inc. ("BP"), and ConocoPhillips Alaska, Inc. ("Conoco"). This
presentation is the second of a four-part overview of whether
the state faces a fiscal gap due to a probable future decline of
oil production in Alaska. Chair Hawker noted that the subject
of the first meeting with the Department of Revenue ("DOR")
identified the disturbing trend of declining state oil
production. He reminded the committee that in 1989 oil
production was around two million barrels a day, but is now down
to something less than 800,000 barrels a day. High market
prices have masked the consequence of this decline, but as the
DOR noted in the previous meeting, oil production decline is a
serious issue for Alaska.
3:35:17 PM
ANGUS WALKER, Commercial Vice-President, BP Exploration (Alaska)
Inc., stated that the issue of future production was probably
the most important issue to face the oil industry and the state
of Alaska. He then referred to a PowerPoint presentation and
committee handout titled "BP Presentation to the House Ways and
Means Committee, Juneau, 31st January 2007."
MR. WALKER drew the committee's attention to the graph titled
"North Slope Production Decline" which showed a steady decline
in oil production of around 6-7 percent from 1992 to 2006. This
decline, he noted, occurred despite the fact the producers have
been investing around $1 billion a year into the North Slope.
Without this investment, he opined, production would decline at
a rate of around 20 percent. When the Alpine and Northstar Unit
("Northstar") fields came into production the rate of decline
was arrested, which shows how the development of big fields can
slow or stop production decline, at least for a short period.
Despite the short surge in production due to Alpine and
Northstar, the decline trend has recently accelerated in the
last couple years to just above 7 percent, said Mr. Walker
MR. WALKER then referred to the graph titled "ANS production is
declining rapidly" which shows both production decline and BP's
aggregate capital spending on the North Slope. If this decline
rate of 6 percent continues into the future, remarked Mr.
Walker:
"We would see that North Slope production could be as
low as 450,000 barrels a day within 10 years.
Clearly, that is of great concern to us...[and to]
everybody else in the state. The issue is not
shortage of resources-Alaska has vast resources-the
issue is for Alaska to attract sufficient investment
to stem that decline in production."
CHAIR HAWKER queried as to how low a flow of oil the Trans-
Alaska Pipeline System (TAPS) could sustain.
MR. WALKER replied that although he did not have the expertise
to answer that question, he agreed that there is a point, which
has he heard is "around 500,000 barrels a day, where we may have
to start investing in TAPS to change the nature of its
operations. Clearly, the lower the flow rate in TAPS goes, the
more we'll have to think about how that pipeline operates."
3:43:41 PM
MR. WALKER referred to the graph titled "Alaska has adopted the
highest marginal tax rate in the North America" which shows the
marginal tax of oil-producing American and Canadian regions.
Mr. Walker noted that Alaska's adoption of the production
profits tax (PPT) resulted in it adopting the "highest marginal
tax rate, by some considerable margin" of any state or Canadian
province. Mr. Walker referred to Alberta and the Gulf of Mexico
as areas which, through more conservative fiscal policy, have
attracted vast amounts of investment. As a result, those areas
are "booming," while Alaska production continues to decline.
MR. WALKER opined that the structure of PPT could work very well
for Alaska since it is a net tax, which taxes the reality of the
business. Despite significant improvement on PPT by in 2006 by
the legislature, the single biggest problem with PPT is the
scale of the tax, he said. BP continues to believe the PPT rate
is too high and will deter investment in Alaska; therefore
Alaska may be better served by adopting a lower tax rate,
suggested Mr. Walker.
3:45:33 PM
REPRESENTATIVE SEATON questioned whether all taxes, such as
royalties paid to private landowners, were included in
determining the marginal tax rates for other states.
MR. WALKER replied that it is his understanding that the
marginal tax rate is indeed calculated using all the taxes
imposed on producers, including royalty, production, state and
federal income taxes.
3:47:22 PM
MR. WALKER noted that BP's vision for the future is shown on the
page titled "BP Alaska-Building for the future." Simply stated,
BP's vision in Alaska is to create a business that will remain a
material part of BP's portfolio for a very long time to come.
Although past production has focused on extraction of light oil,
future production will focus on other segments of Alaska's vast
resource base. Future projects may not be easy, but with the
right cooperation between industry and government, there should
be a very bright future for BP and the state, summarized Mr.
Walker.
MR. WALKER confirmed Chair Hawker's summation that BP's future
vision depends on new investment. If BP continues with its
current level of investment North Slope production will continue
to decline by 6-7 percent annually.
CHAIR HAWKER further queried about whether Alaska has provided
BP adequate incentive to make further investments in the state.
MR. WALKER replied that government provides the environment
within which industry invests. Within the given environment,
industry's role is to do "as much business as we can possibly
do." and BP plans to continue "to do as much good business as we
can possibly do in Alaska," Mr. Walker informed the committee.
MR. WALKER said BP is evaluating certain future projects, but
the state's decision to adopt a higher tax rate clearly is a
burden on the projects. In response to Chair Hawker's inquiry
about the effect of tax rates, Mr. Walker replied that BP would
continue to invest in Alaska, but as a matter of economic theory
a more conservative tax regime would increase investment by all
producers.
MR. WALKER agreed with Representative Samuel's point that
development of the gas pipeline would increase investment;
indeed the "most important thing that we can do is make the gas
project happen."
REPRESENTATIVE WILSON queried whether development of the gas
line will stem production decline.
MR. WALKER opined that development of the gas pipeline may allow
anywhere from 20 to 40 more years of oil and gas production on
the North Slope.
3:57:57 PM
CHAIR HAWKER asked whether there was any basis to predict more
optimistic gas production than is illustrated by the red gas
sector on the page titled "BP Alaska-Building for the future."
MR. WALKER replied that the graphic assumes the Prudhoe Bay and
the Point Thomson gas that is known today with the expectation
that more gas will be discovered once the gas pipeline project
is underway. Mr. Walker confirmed that the green segment on the
chart represents some currently unknown light oil resources,
while the red sector represents currently known, but
undeveloped, gas resources. Mr. Walker cautioned that without
the gas pipeline and technological breakthroughs, some of the
predicted future production of gas and heavy oil will not occur;
therefore the predicted development on the chart will not
proceed as desired.
MR. WALKER responded to Representative Seaton by confirming that
the aforementioned chart shows only BP's predicted future
production. He reminded the committee that in the past BP had a
"higher equity share of Prudhoe Bay before the alignment with
ARCO," so the BP share of future oil is slightly
disproportionate to its past share of production.
REPRESENTATIVE SEATON asked whether BP had any plans to develop
gas-to-liquid (GTL) absent development of a gas pipeline; noting
that BP and other producers have GTL production plants in other
areas.
MR. WALKER replied that BP's base assumption is that future gas
development will be a gas pipeline project because that has
consistently been the only project that has been demonstrated to
be viable and economic. However, BP is open to any economic
ways to develop Alaska's gas. Mr. Walker did note that BP has
been testing technologies at its $84 million facility in
Nikiski, but has not yet identified a GTL technology which would
work on the scale required for the North Slope.
4:03:23 PM
SCOTT DIGERT, Resource Manager, Milne Point Unit, BP Exploration
(Alaska) Inc., noted that in about 10 years or so BP expects its
production to be approximately one-third each of light oil,
viscous or heavy oil, and gas. Mr. Digert characterized heavy
oil as a tremendous resource; future development of which is one
of the most exciting opportunities on the North Slope. He
further explained that the Prudhoe Bay and Kuparuk River units
are both light oil reservoirs and underpin North Slope
production. These reserves are shown on the map titled "Known
Opportunities on North Slope." The Alpine field and Northstar
unit, which caused the recent upward trend in production, are
not BP fields and thus are not shown on the map, he said. Mr.
Digert said that BP has developments in Tarn Field, Meltwater
Participation Unit, Point McIntyre, and Niakuk, as well as newer
developments at Endicott, Milne Point Unit, and Badami. Mr.
Digert commented that Badami is an example of aggressive
development where BP tried some new techniques to bring on a
marginal field. Despite these efforts and investment of
hundreds of millions of dollars, Badami has been a
disappointment. Current high oil prices allow Badmai to remain
in production, but at a very low rate.
MR. DIGERT said the resources at Prudhoe Bay include heavy oil
reserves under the Kuparuk River and Milne Point Units. This
heavy oil tends to be found at shallower levels, and is colder
and thus more viscous than light oil. He then showed committee
members samples of heavy crude from the Milne Point Unit.
MR. DIGERT referred to the page titled "Status of Known Alaska
Oil," which shows how oil can be placed into categories of
viscosity which illustrate the thickness of oil and the ease at
which it flows. Approximately 40 percent of light oil reserves
have been produced to date, with a remaining potential target of
about 10 percent, or 3.5 to 4 billion barrels. Mr. Digert
explained that the remaining 50 percent of light oil reserves
are not accessible through current technology; therefore BP is
working on new techniques to tap these known, but currently
inaccessible, reserves of light oil. These technologies include
use of displacement techniques such as low salinity water
flooding or gas injection.
MR. DIGERT informed the committee that BP is currently
recovering "tremendous amounts of oil at Prudhoe Bay from the
recycling of the gas at Prudhoe Bay. It's been a phenomenally
efficient recovery mechanism...." Indeed, he continued, gas
"has been put to terrific use so far, and it will continue to be
put to use in the future" at Prudhoe Bay and other fields as
well.
MR. DIGERT addressed the status of viscous oil, a heavier crude
rather like cold maple syrup. Of the 6.5 billion barrels of
this oil, BP is currently recovering about 10-15 percent.
Recovery could be raised to about 25 percent with new
technology; therefore, BP has been working to develop this
resource since the mid-1980s and has had some success in
Schrader and West Sak fields.
MR. DIGERT explained that this type of oil flows more like cold
molasses. He noted that there may be as much as 20 billion
barrels of this heavy oil below the existing oil-producing
infrastructure. Mr. Digert pointed out that BP is very much in
action to develop ways to produce heavy oil. To this end, BP is
establishing Alaska as a center of excellence for heavy oil
production. In 2007, BP expects to spend about 25 million in
pilot tests of some newer technology such as "CHOPS--cold, heavy
oil production and sand," a technique where large amounts of
sand are produced with the oil. On the surface the sand is
separated out and the oil warmed up so it can be transported
with the light oil, explained Mr. Digert.
MR. DIGERT described to Representative Wilson some of the
differences between oil production in Alaska and Alberta,
Canada, by noting that the Alaska reserves can be quite deep,
around 2,500-3,500 feet. This depth makes some methods of
extraction, such as steam injection, inefficient. Additionally,
there tend to be layers of shale in Alaska's ground which also
affect the ease of resource extraction.
4:22:29 PM
CARL LUNDGREN JR., Resource Manager, Liberty Subsurface Project,
BP Exploration (Alaska) Inc., directed the committee's attention
to the map titled "Proposed Liberty Development," and explained
that Liberty, a 100 million barrel offshore oil development, is
one of the largest undeveloped light oil reservoirs on the North
Slope. Future plans include development of this field with
Ultra-Extended Reach Drilling (uERD) technology, explained Mr.
Lundgren. This new drilling technique allows development of
offshore fields through the existing infrastructure on the North
Slope, in this case the Endicott field. Mr. Lundgren likened
the length of the proposed wells to the Liberty development as
akin to drilling a well from downtown Juneau to the Juneau
International Airport, a length of about 8 miles.
MR. LUNDGREN responded to Chair Hawker by explaining that the
Liberty ERD Development ("Liberty") is predicted to peak at
about 40, 000 barrels a day, therefore it will not be as large
as the Alpine field. Mr. Lundgren confirmed Chair Hawker's
observation that development of Liberty would help mitigate
decline, but would not stem oil production decline. Mr.
Lundgren informed the committee that BP intends to invest $30
million in Liberty during 2007, with total investment in the
project expected to be $1 billion. He said BP hopes to begin
construction of a new, state-of-the-art drill rig in 2008, with
production slated to begin in 2010.
MR. DIGERT explained that future BP production plans include
development of heavier oil than has been produced in the past.
He observed that "the easy barrels are behind us," and that
continued production will require "imagination, innovation and
determination."
MR. WALKER closed by emphasizing that North Slope production is
and will continue to decline until there is a step-change in
investment. He stated that BP is focused on bringing forward
technology to make the most of Alaska's resources. He
emphasized the importance of the gas pipeline, development of
which will underpin the future of the North Slope and enable
many other projects in both oil and gas development. Mr. Walker
concluded by noting that industry and government should work
together to create a bright future for the state and oil
industry.
4:39:32 PM
MR. WALKER responded to Chair Hawker regarding ways to assure
adequate future production by noting that decline will continue
at 6-7 percent or higher annually absent further investment and
a major project, such as the gas pipeline. Mr. Walker noted
that BP's interest in developing future projects is an attempt
to flatten production; however, it is unrealistic to assume
production decline will stop in the short term.
DARREN JONES, Vice President, Commercial Assets, ConocoPhillips
Alaska, Inc. ("Conoco"), pointed out that Conoco is Alaska's
number one explorer, and started two new fields (Fiord and
Nanuq) in 2006. Mr. Jones referred to a PowerPoint presentation
and committee handout titled "Testimony to AK House W&M
Committee-ConocoPhillips." As shown on the page titled "NS
Production Decline," past production forecasts have been 5-10
percent higher than actual production.
4:51:08 PM
REPRESENTATIVE CISSNA questioned whether the past tendency to
over estimate production was due to difficulty in getting the
oil out.
MR. JONES replied that the historical tendency to overestimate
production is due to a combination of factors. For example,
fields can take longer to produce than originally thought, or
actual production rates of some heavy oil may be slower than
planned.
MR. JONES noted that development of new satellite fields is the
key to slowing oil production decline. He cautioned that the
bigger fields are found first which leaves smaller, more remote,
fields available for future development. As a result, noted Mr.
Jones, more investment by the producer is needed to find and
produce oil. This is illustrated by what he termed the
"creaming curve" shown on the graph titled "Satellite Discovery
Sizes Down." This type of decline is typical for oil basins,
which is why other oil producing areas such as the Lower 48 or
Alberta are trying to "make sure a lot more wells get drilled,
so [they] get a whole bunch more of the little things. Here in
Alaska we have much harder time doing that," explained Mr.
Jones.
MR. JONES suggested that not all of the aforementioned
production shortfall was due to overly optimistic projections.
He explained that economic factors guide producer investment and
development decisions, making some projects more economically
attractive than others. Current "hyper-inflation" in the
construction industry has resulted in rising costs which have
not declined even as the cost of crude oil has declined, noted
Mr. Jones. He also referred to the need to update the
facilities at Prudhoe Bay.
CHAIR HAWKER asked whether Lisburne is under-producing due to
the age of its facilities.
MR. JONES replied that the only problem he is aware of at
Lisburne concerns a pipeline with some corrosion problems. It
has been shut in and will be replaced, perhaps by summer 2007.
This effects flow of about 12,000 barrels a day. A few wells in
that area are being worked on, he said. But overall Prudhoe Bay
is operating as expected, he concluded.
MR. JONES assured members that capital maintenance of Prudhoe
Bay and Kuparuk has been ongoing under a renewal plan which
allows updates and replacements to be done in an intelligent and
well thought-out plan and manner. He further explained that the
operator of each field plans and oversees maintenance for that
field. He went on to say that higher levels of production
activity are needed to slow production decline. In addition, a
competitive and predictable fiscal regime, a more streamlined
permitting process, and access to acreage will draw investment,
he opined. He said the state's area-wide lease sales have
helped the producers get access to acreage. Mr. Jones pointed
out that the state could assist development, but he cautioned,
the state "could do probably a lot more to make the decline
accelerate."
5:08:37 PM
MR. JONES responded to a question by Chair Hawker by stating
that each producer faces a different rate of future oil
production decline, dependent on that producer's level of
development and exploration. In response to further inquiry, he
stated that given Conoco's current level of investment, its
predicted future production decline would be around 6-7 percent.
In response to a query about future plans, he stated that Conoco
intends to work on development of the gas pipeline as much as
possible. He did note that further technologic advancements
could help develop heavy oil, and that the producers are working
on many different techniques to extract oil.
MR. JONES responded to a question by Representative Seaton about
whether Conoco has any GTL plans for the North Slope by stating
he could get information on GTL projects to the committee.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
5:16:44 PM.
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