Legislature(2009 - 2010)SENATE FINANCE 532

02/16/2010 09:00 AM Senate FINANCE


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09:01:13 AM Start
09:06:27 AM Oil and Gas Production Forecast
10:50:08 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Oil & Gas Production Forecast TELECONFERENCED
Oil & Gas Exploration & Development
Outlook - Dept Natural Resources
Oil & Gas Industry Employment in Alaska
Dept of Labor & Workforce Development
-- Testimony <Invitation Only> --
                                9:01 a.m.                                                                                       
                                                                                                                                
9:01:13 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stedman  called the Senate  Finance Committee meeting to  order at                                                     
9:13 AM.                                                                                                                        
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jennifer Duval,  Petroleum Economist, Tax Division,  Department of Revenue;                                                     
Marcia  Davis, Deputy  Commissioner, Department  of Revenue;  Frank Mollie,                                                     
Petroleum Engineer, Department of Revenue.                                                                                      
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Kevin  Banks, Director,  Division of  Oil  and Gas,  Department of  Natural                                                     
Resources.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^Oil and Gas Production Forecast                                                                                              
                                                                                                                                
JENNIFER DUVAL,  PETROLEUM ECONOMIST, TAX DIVISION,  DEPARTMENT OF REVENUE,                                                     
explained that  her job was  to coordinate  the publication of  the revenue                                                     
sources book. Her  specific responsibility is the  production forecast. She                                                     
introduced   the   PowerPoint   presentation  "Oil   and   Gas   Production                                                     
Forecasting"  (Copy   on  File).   She  introduced   an  outline   for  the                                                     
Presentation.                                                                                                                   
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
        o Decline Curve Analysis                                                                                                
9:06:27 AM                                                                                                                    
                                                                                                                                
Ms.  Duval explained  that the  department  must forecast  for revenue  and                                                     
budgetary purposes.  She referred  to Slide  3, which  categorizes reserves                                                     
versus  resources.  Reserves  are  categorized  as  proved,  probable,  and                                                     
possible.  She  pointed out  that  the  Department  of Revenue  (DOR)  uses                                                     
similar  categorization with  terminologies  such  as currently  producing,                                                     
under development and under evaluation.                                                                                         
                                                                                                                                
Ms. Duval pointed  out that the department did consider  the forecast to be                                                     
conservative. Undiscovered  resources, prospects, leads are  not considered                                                     
in the forecast.                                                                                                                
                                                                                                                                
Ms. Duval addressed Slide 4: "Three Categories of Forecasted Production"                                                        
                                                                                                                                
   1. Currently Producing- Includes base production and enhanced recovery                                                       
     production    from   investment    in   rate    enhancing   activities                                                     
     (perforations, stimulations, well workovers, gas and water injection                                                       
     support).                                                                                                                  
   2. Currently under Development- New projects that are currently funded                                                       
     or awaiting project sanction in near future.                                                                               
   3. Currently under Evaluation- Includes technically viable projects in                                                       
     the "pencil sharpening" stage where engineering, cost, risk and                                                            
     reward are being actively evaluated. Unfunded but are considered to                                                        
     have a high chance of being brought to fruition.                                                                           
                                                                                                                                
Ms. Duval detailed Slide 6: "Factors That Affect Production Forecasting"                                                        
                                                                                                                                
   1. Geology                                                                                                                   
        a. Rock type and formation characteristics                                                                              
        b. Depth, thickness, pressure                                                                                           
        c. Oil and gas characteristics (oil gravity, viscosity, water                                                           
          content, etc.)                                                                                                        
   2. Development Plan                                                                                                          
        a. Well density and development rate                                                                                    
        b. Well bore size and completion technique                                                                              
        c. Artificial lift and enhanced oil recovery                                                                            
        d. Facilities and surface operations                                                                                    
   3. Commercial                                                                                                                
        a. Project economics                                                                                                    
        b. Oil price and market conditions                                                                                      
        c. Government Policy: access, regulation, taxation                                                                      
   4. Production Profile                                                                                                        
        a. History, stage of depletion                                                                                          
        b. Use production profile to extrapolate trends                                                                         
   5. Timing                                                                                                                    
                                                                                                                                
                                                                                                                                
9:09:19 AM                                                                                                                    
                                                                                                                                
permitting  activity affects  the forecast.  Ms. Duval  responded that  the                                                     
type of  permit makes  the difference.  An exploratory  permit will  not be                                                     
included  in the  forecast. Developmental  permits are  categorized in  the                                                     
"under  development" plan.  She noted  that the  department meets  with the                                                     
operators each  year to review plans.  A change in the  permitting activity                                                     
such  as  adjusting the  plan  of  development  will  be reflected  in  the                                                     
forecast.                                                                                                                       
                                                                                                                                
9:12:16 AM                                                                                                                    
                                                                                                                                
Ms. Duval  pointed out that while  the government has control  over some of                                                     
the  factors, there  is  no control  over geology,  oil  price, and  market                                                     
conditions. Areas of government policy  can impact the development plan and                                                     
can be controlled.                                                                                                              
                                                                                                                                
Ms. Duval  described Slide 7:  "Typical Production Profile."  She explained                                                     
that  production increases  at first,  reaches  a peak  then declines.  The                                                     
decline  rate typically  levels off  in later  years. The  field's geology,                                                     
operator's  development plan,  and  commercial factors,  all influence  the                                                     
shape of the curve.                                                                                                             
                                                                                                                                
Ms. Duval compared the  North Slope to the graphs on  Slide 7. She detailed                                                     
the graph  on Slide  8 "Production  Profile of a  Prudhoe Well."  She noted                                                     
that the graph fits the production profile  of a single well shown on Slide                                                     
7. The sum of all the wells that  have produced for Prudhoe and Kuparuk are                                                     
summarized on Slide 9. She noted points  in time where the rate has changed                                                     
slightly.                                                                                                                       
                                                                                                                                
9:15:25 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for a  definition of the  Y axis. Ms.  Duval stated                                                     
that the Y axis indicates millions of barrels per day.                                                                          
                                                                                                                                
Ms.  Duval continued  with  Slide  10: "Alaska  North  Slope History."  The                                                     
addition of  new fields has  mitigated this  decline. In 2009,  Prudhoe Bay                                                     
and  Kuparuk  alone  represented  only  57 percent  of  total  North  Slope                                                     
production. The  addition of  new fields has  been important  in mitigating                                                     
the  decline. Infill  drilling, facility  capacity expansion,  and enhanced                                                     
oil recovery projects have also helped stem decline.                                                                            
                                                                                                                                
Co-Chair Stedman  asked about the  history chart  and whether the  data was                                                     
typical  of  oil basins  around  the  world.  Ms.  Duval responded  in  the                                                     
affirmative. He asked  if the expectation for the industry  to return to $2                                                     
million barrels per day was realistic.  Ms. Duval stated that she would not                                                     
expect so. Co-Chair Stedman commented on  the normal decay of an oil field.                                                     
Ms. Duval  concurred. She noted that  the sections of the  graph indicating                                                     
Alpine  and North  Star  had  a large  impact  on  reducing the  production                                                     
decline. Because Prudhoe Bay and Kuparuk  account for so much production, a                                                     
very large field would be needed to return to historic rates.                                                                   
                                                                                                                                
9:18:15 AM                                                                                                                    
fit into the curve on the graphs.  He asked if it indicated a longer period                                                     
of  development. Ms.  Duval noted  that if  Alpine was  graphed alone,  one                                                     
could see that it fits the  profile well. She supposed that the aggregation                                                     
of the  chart as  an area curve  combined with layering  the fields  in the                                                     
graph  increases the  ambiguity. She  offered to  provide individual  field                                                     
profiles for Senator  Thomas and the committee. Senator  Thomas stated that                                                     
he wanted to understand the lifetime of the fields.                                                                             
                                                                                                                                
Co-Chair  Stedman requested  a focus  on the  last five  and the  next five                                                     
years in production.                                                                                                            
                                                                                                                                
9:21:04 AM                                                                                                                    
                                                                                                                                
Ms. Duval referred to Slide 11: "North Slope Production Decline"                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
     *Excluding 2007, 4.0% decline on average.                                                                                  
                                                                                                                                
     average, through FY 2030.                                                                                                  
                                                                                                                                
Ms. Duval  detailed Slide  12: "ANS Production  History and  Forecast." She                                                     
explained that through FY2050, the  expectation is to recover an additional                                                     
5.3 billion barrels of oil. The  forecast does not include projections from                                                     
the outer  continental shelf, heavy  oil productions  from UGNU as  well as                                                     
most of  the heavy oil  production from West Sak  and Shrader Bluff  or the                                                     
Umiat field.  The forecast does  include some production from  the National                                                     
Petroleum Reserve Alaska (NPRA).                                                                                                
                                                                                                                                
9:24:08 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
Co-Chair Stedman asked for production profiles  for heavy oil in Alaska and                                                     
its potential  impact. One  tax credit  was to  incentivize heavy  oil. Ms.                                                     
Duval stated  that she did  not have  specific slides prepared  on profiles                                                     
for  heavy oil.  She offered  to  pull profiles  for West  Sak and  Shrader                                                     
bluff. She  noted that pools in  the Prudhoe Bay unit  are considered heavy                                                     
oil.  She offered  to  provide  the profiles  for  heavy  oil for  Co-Chair                                                     
Stedman. The resource  contains approximately 20 and 35  billion barrels of                                                     
oil. The recovery for the pools is  much lower than some of the lighter oil                                                     
pools that  are currently producing.  Co-Chair Stedman concurred  and asked                                                     
that the information be added to the presentation on tax credits.                                                               
                                                                                                                                
Co-Chair Hoffman  stated that the  forecast indicates that the  state could                                                     
potentially see  something in 2012. He  asked how many are  currently under                                                     
development. Ms.  Duval stated that  offshore is referring to  Oooguruk and                                                     
Nikaitchuq. Co-Chair  Hoffman asked if  they would be under  category three                                                     
as currently under  evaluation. Ms. Duval stated that the  reference is not                                                     
included under the three layers.                                                                                                
                                                                                                                                
Co-Chair  Stedman asked  about  the difference  between  federal and  state                                                     
waters. Ms.  Duval responded that  federal waters  are beyond the  six mile                                                     
limit. Between zero and three miles  is considered state waters and between                                                     
three and six miles is federal.  Co-Chair Stedman explained that from three                                                     
to two hundred miles is federal and  the state is unable to share resources                                                     
with the industry.                                                                                                              
                                                                                                                                
MARCIA DAVIS,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE, added  that the                                                     
state authority to  tax production stops at the three  mile line. The state                                                     
authority to  receive royalty  generally expands to  three miles  for state                                                     
leased land.  An arrangement for  some royalty  sharing exists in  the zone                                                     
between three  and six  mile where  the state receives  a share  of federal                                                     
royalty.                                                                                                                        
                                                                                                                                
Co-Chair  Hoffman explained  the reason  for addressing  off shore  is that                                                     
although the three mile and six  mile does not directly impact us, offshore                                                     
oil through  the pipeline would lead  to lower tariffs on  the Trans Alaska                                                     
pipeline for the remainder of the  oil travelling through the pipeline that                                                     
benefits Alaska. Ms.  Duval agreed that although the state  may not receive                                                     
tax  revenue  from offshore  federal  waters,  Alaska can  receive  benefit                                                     
through the  shipment of oil  down the  Trans Alaska pipeline.  The impacts                                                     
would show up as  an increased well head price because  the tariff would be                                                     
reduced. An additional benefit would  be seen in petroleum corporate income                                                     
tax.                                                                                                                            
                                                                                                                                
9:30:17 AM                                                                                                                    
                                                                                                                                
Senator Thomas asked about heavy oil.  He asked if the confirmation of data                                                     
occurs  with the  industry  as well.  Ms. Duval  remarked  that the  number                                                     
quoted  is from  a  Department  of Energy  (DOE)  study  that was  recently                                                     
released from  the National Energy  Technology Laboratories. The  study was                                                     
originally released in 2007 with an  addendum in October 2009. The resource                                                     
potential  of the  Alaska  North  Slope is  reported  upon, which  includes                                                     
potential from other sources not included in the department's forecast.                                                         
                                                                                                                                
Ms. Duval  examined Slide 10:  "Alaska North Slope History."  She explained                                                     
that the  slide depicts the forecast.  She noted that the  grey shaded area                                                     
indicates the  production profile  to look  like in  the decline  rate. She                                                     
noted that  the decline rate is  approximately seven percent per  year. The                                                     
expectation is for  new projects for new fields  and additional development                                                     
at currently producing fields as well.                                                                                          
                                                                                                                                
Ms. Duval discussed Slide 14: "Timing is Important!"                                                                            
                                                                                                                                
     DOR's FY 2010 forecasted total NS production:                                                                              
          Spring 1989- 104,000 bpd                                                                                              
          Spring 1994- 583,000 bpd                                                                                              
          Fall 2009- 659,000 bpd                                                                                                
                                                                                                                                
                                                                                                                                
     *However, operators are not bound to what they provide to us. Budgets                                                      
     can change; partners may not approve projects.                                                                             
                                                                                                                                
9:34:00 AM                                                                                                                    
                                                                                                                                
Senator  Huggins agreed  that  timing is  important.  He expressed  concern                                                     
about the  developmental certifications. He  asked if Ms. Duval  wanted the                                                     
new production to come online in  good timing based on economic perspective                                                     
and credentials.  He asked what three  things might be done  to incentivize                                                     
new development and  new production. Ms. Duval responded that  her role was                                                     
not to  discuss policy issues, but  she referred to Slide  6: "Factors that                                                     
Affect Production Forecasting." She noted  that factors that the department                                                     
has control over  are access, regulation, and taxation.  Factors that would                                                     
help  speed  up  developmental certifications  would  include  increase  of                                                     
access,  reducing  inefficiencies  and regulations,  and  making  permanent                                                     
process easier and providing for tax incentives.                                                                                
                                                                                                                                
Co-Chair Stedman  stated that  the intent  of the  upcoming meetings  is to                                                     
address  the  concerns  expressed.  He  agreed that  Ms.  Duval  and  other                                                     
scheduled presenters are not in the policy making business.                                                                     
                                                                                                                                
9:37:01 AM                                                                                                                    
                                                                                                                                
FRANK MOLLIE, PETROLEUM ENGINEER, DEPARTMENT  OF REVENUE, explained how the                                                     
forecast was generated.  He noted that the Alaska Oil  and Gas Conservation                                                     
Commission (AOGCC) maintain  monthly production data for every  well in the                                                     
state. The data is  gathered from the state and used in  a decline curve. A                                                     
decline  curve plots  production  data on  a linear  graph;  it appears  as                                                     
depicted in Slide 17:  "Data Plotted on a Linear Scale."   The scale on the                                                     
left side of  the graph is called  a linear scale. Engineers plot  on a log                                                     
scale. A  log scale is  depicted on  Slide 19: "Decline  Curve Extrapolates                                                     
Trend" where the  left side of the  graph begins at 100 Barrels  of Oil Per                                                     
Day (BBLS/DAY) and moves up to 1000  BBLS/DAY and up to 10,000 BBLS/DAY. If                                                     
oil production is plotted on a  log scale regions appear fairly linear. The                                                     
decline curve  simply includes a line  drawn through the linear  section of                                                     
data, which is then  used to project the oil and  gas production. He stated                                                     
the decline  curve is done  for every producing  well in Alaska.  This data                                                     
can be  moved to  a linear scale  as depicted on  Slide 20:  "Trend (linear                                                     
scale)."                                                                                                                        
                                                                                                                                
Co-Chair Stedman  explained that one  issue is transitioning between  a tax                                                     
and royalties  system to a  production sharing arrangement,  which includes                                                     
capital credit incentives  to increase production. He opined  that there is                                                     
any increase in  production. Mr. Mollie responded that the  graph depicts a                                                     
single well production, which will not include the entire field.                                                                
                                                                                                                                
Mr.  Mollie described  Slide 22:  "KRU  Well Decline  Curve at  the End  of                                                     
2002."  The slide  depicts the  Kuparuk River  Well. He  admitted that  the                                                     
decline method  is not perfect.  The Kuparuk well  if viewed in  2002 would                                                     
                                                                                                                                
9:41:22 AM                                                                                                                    
                                                                                                                                
Senator  Egan asked  which rate  would necessitate  that the  well is  shut                                                     
down. Mr. Mollie responded that he did  not know the answer. He stated that                                                     
other  producing wells  might feed  into  the same  facility. Senator  Egan                                                     
asked for a  specific figure that indicates that shut  down is prudent. Mr.                                                     
Mollie stated no.                                                                                                               
                                                                                                                                
Mr. Mollie described Slide 24: "To Generate a Field Forecast:"                                                                  
                                                                                                                                
   1. Upload production history form AOGCC into database                                                                        
   2. Apply a decline curve to every well with recent production history                                                        
     data                                                                                                                       
   3. Sum all of the production history and forecasts                                                                           
                                                                                                                                
Mr. Mollie moved  on to Slide 25: "Prudhoe Bay  Currently Producing Wells."                                                     
He  explained  that  the  graph  depicts  the  Prudhoe  Bay  decline  curve                                                     
generated  from summing  the individual  well of  the field.  The red  line                                                     
represents the projection of the currently  producing wells. For all of the                                                     
equipment  and  facilities,  this  is  the production  we  expect  for  the                                                     
currently  producing  equipment  production.   The  decline  rate  on  this                                                     
particular graph is six percent.                                                                                                
                                                                                                                                
Co-Chair Stedman  asked if the  analysis shows any  change in the  data for                                                     
the last three years. He asked  if the forecast predicted any fiscal regime                                                     
change. Mr.  Mollie answered that the  last three years of  production from                                                     
Prudhoe Bay  does show  a change  in slope.  He noted  the change  in slope                                                     
shown in the last  three years, which flattens out. He did  not know if the                                                     
flattening slope was  a result of a tax  regime, but it is a  result of the                                                     
gas cap water injection that the company proceeded with during the time.                                                        
                                                                                                                                
Co-Chair Stedman asked for a brief  explanation of gas cap water injection.                                                     
Mr. Mollie responded that an oil reservoir  contains an oil layer and a gas                                                     
layer above it. In order to  maintain pressure in the reservoir to maintain                                                     
the  production profile,  water is  injected into  the gas  cap which  adds                                                     
pressure to the  reservoir that maintains the production rates  for the oil                                                     
well.                                                                                                                           
                                                                                                                                
Co-Chair Stedman  asked about the  down spike in  the fifth or  sixth year.                                                     
Mr.  Mollie believed  that it  was a  pipeline issue  for Prudhoe  Bay. Ms.                                                     
Duval added that in 2006 the drop indicates the shutting of the well.                                                           
                                                                                                                                
9:45:19 AM                                                                                                                    
                                                                                                                                
Mr. Mollie moved  on to Slide 27: "Prudhoe Bay  Currently Producing + Under                                                     
Development."  He explained  that  the red  line  represents the  currently                                                     
producing  wells and  the  green line  represents  the currently  producing                                                     
wells plus any  production forecasted from the  projects under development.                                                     
The  added  investment of  the  projects  will significantly  increase  the                                                     
production rates and maintain them longer.                                                                                      
Development."  The slide  shows  the  decline rate  at  seven percent.  The                                                     
projection is  the same. With decline  curves, a straight line  indicates a                                                     
constant percentage decline.                                                                                                    
                                                                                                                                
Co-Chair Stedman  requested that  Mr. Mollie return  to the  committee with                                                     
charts beginning in the year  2000 through 2015 including Prudhoe, Kuparuk,                                                     
and Alpine. Mr. Mollie agreed to produce the chart for the committee.                                                           
                                                                                                                                
Co-Chair  Stedman asked  if Prudhoe,  Kuparuk,  and Alpine  wells could  be                                                     
separated. Mr.  Mollie pointed out  that he had  a chart that  contains the                                                     
entire North Slope.                                                                                                             
                                                                                                                                
Mr. Mollie referred to  the map on Slide 29: "North  Slope and Beaufort Sea                                                     
Alaska Overview  of Oil  and Gas  Activity January  2005" He  reminded that                                                     
areas  such  as  the  Arctic  National  Wildlife  Refuge  (ANWR)  were  not                                                     
forecasted. Co-Chair Stedman  asked if the map might be  revised to include                                                     
dollars  where the  revenue generation  is  located. Ms.  Duval offered  to                                                     
review  the data  to  determine the  best way  to  graphically display  the                                                     
request. Co-Chair  Stedman stated his  point is  to display the  revenue to                                                     
the treasury. Ms. Duval responded Prudhoe Bay, Kuparuk, Alpine, Northstar.                                                      
                                                                                                                                
9:49:28 AM                                                                                                                    
                                                                                                                                
Mr. Mollie  continued with Slide  30: "Total  North Slope." He  pointed out                                                     
the log  scale and the  area between 1995-2000  where the decline  rate was                                                     
six percent.  The area following 2004  until the current time  is again six                                                     
percent. From  2000 to 2004,  the decline  rate stopped. He  explained that                                                     
during that  time the state had  seven fields begin production.  The fields                                                     
included  Polaris, Alpine,  Aurora,  Meltwater, Northstar,  and Orion.  New                                                     
production can mitigate the decline somewhat.                                                                                   
                                                                                                                                
Mr. Mollie moved  on to Slide 31: "Total North  Slope Currently Producing +                                                     
Under Development." He explained that  the red line indicates the currently                                                     
producing and  the green  line indicates the  currently producing  plus the                                                     
under  development  projects.  The   decline  rates  are  historically  six                                                     
percent.  Future  prediction  is  a four  percent  decline  rate.  Co-Chair                                                     
Stedman  asked if  Point Thompson  is  included. Mr.  Mollie answered  that                                                     
Point Thompson is in the under  evaluation category as depicted by the blue                                                     
line in  Slide 32: "Total North  Slope." The projects under  evaluation are                                                     
not  viewed  with  the  same  confidence  in  the  forecast  as  the  under                                                     
development and currently  producing categories. If all  investment were to                                                     
stop tomorrow, production rates would  include the currently producing data                                                     
only. If  the price  of oil  plummeted investment would  be lost.  With the                                                     
current plans  and development, the green  line is predicted for  the North                                                     
Slope Production. The  bump seen in the  blue line around the  year 2023 is                                                     
the effect  of Point Thompson. In  Point Thompson, there is  the assumption                                                     
that  a  gas  sales  pipeline  exists to  reach  the  level  of  production                                                     
predicted.  If the  gas sales  line  is not  created, the  blue line  would                                                     
follow the green line closely without the increase in production.                                                               
                                                                                                                                
2014. Ms.  Duval added that the  department assumes a ten  year development                                                     
lead time for  Point Thompson and a gasline. Co-Chair  Stedman asked if the                                                     
prediction was the historic norm. Ms. Duval answered yes.                                                                       
                                                                                                                                
9:53:24 AM                                                                                                                    
                                                                                                                                
Mr.  Mollie described  the  graph on  Slide 33:  "Fall  2009 Forecast:  Log                                                     
Scale." The graph  shows Prudhoe Bay with the vast  majority of production.                                                     
Unless  another large  field comparable  to Prudhoe  Bay is  found, similar                                                     
production rates will never be seen again.                                                                                      
                                                                                                                                
Ms. Duval described Slide 34: "Conclusion"                                                                                      
                                                                                                                                
                                                                                                                                
     geology, development plans, commerciality, production profiles,                                                            
     decline curves and timing.                                                                                                 
                                                                                                                                
     producers, AOGCC and DNR                                                                                                   
                                                                                                                                
     currently producing, under development, and under evaluation.                                                              
                                                                                                                                
Co-Chair Stedman reminded  that the department will  return with additional                                                     
information on a more focused area of 2000 through 2020.                                                                        
                                                                                                                                
Senator Thomas  realized that  finding another field  like Prudhoe  Bay was                                                     
highly unlikely.  The existence  of the  heavy oil at  Prudhoe Bay  is more                                                     
than double the  amount extracted. He believed that innovation  is a result                                                     
of desire  and need. He opined  that continuing the development  at Prudhoe                                                     
Bay was desirable  as there is not a need  for infrastructure. He mentioned                                                     
new heavy oil discoveries in the state.  Ms. Duval agreed that the state is                                                     
producing some heavy  oil in the Orion, Polaris, and  Schrader Bluff pools.                                                     
She  pointed out  that  the Ugnu  deposit is  much  shallower and  includes                                                     
stores of heavy oil.                                                                                                            
                                                                                                                                
9:57:48 AM     AT EASE                                                                                                        
10:03:02 AM    RECONVENED                                                                                                     
                                                                                                                                
KEVIN  BANKS, DIRECTOR,  DIVISION OF  OIL  AND GAS,  DEPARTMENT OF  NATURAL                                                     
RESOURCES (via  teleconference), explained  that his presentation  "Oil and                                                     
Gas Activity in  Alaska 2009-2010" (Copy on File)  includes the exploration                                                     
aspect of oil production.  He pointed out the map "North  Slope Oil and Gas                                                     
Activity 2009-2010."  He noted that the  bright blue line shown  on Slide 2                                                     
represents the  three mile limit  from the  coast. Everything south  of the                                                     
line  is state  submerged  waters. North  of  the blue  line  is the  outer                                                     
continental shelf  is managed  by the  federal government.  Production from                                                     
those lands is  not subject to state taxes, however,  between the three and                                                     
six mile limit,  the state shares in  the federal royalties at  the rate of                                                     
27 percent.                                                                                                                     
                                                                                                                                
drilled in 2009,  and red indicate wells that are  permitted or planned for                                                     
2009 and  2010. These wells are  exploration activities, some of  which are                                                     
subject to tax credits as exploration wells.                                                                                    
                                                                                                                                
10:07:00 AM                                                                                                                   
                                                                                                                                
Mr. Banks addressed  Brooks Range petroleum. The unit  was formed recently.                                                     
Brooks  Range is  a new  entrant on  the North  Slope. UltraStar  has begun                                                     
drilling a second well  east of the unit. He noted  that Liberty will begin                                                     
drilling an explorer  well to begin testing their new  ultra extended reach                                                     
drilling  equipment.  He  anticipated  drilling to  begin  on  a  satellite                                                     
drilling unit from the state lands.                                                                                             
                                                                                                                                
Co-Chair  Stedman  asked if  the  normal  tax  activity is  received  under                                                     
Liberty. Mr.  Banks answered that  there is no  tax coming in  for Liberty.                                                     
The oil  and gas  liquids from  Liberty will be  processed at  Endecott and                                                     
production will be allocated to the Liberty production.                                                                         
                                                                                                                                
Senator Olson asked if a tax was  collected by the North Slope borough. Mr.                                                     
Banks answered  no. The  property tax  to the North  Slope Borough  will be                                                     
collected because of  the Endecott facilities and the addition  of the well                                                     
heads and the equipment placed on  the satellite drilling island. There are                                                     
physical improvements  that occur  within the borough  that are  subject to                                                     
property  tax, but  the  well's  bottom hole  location  is  outside of  the                                                     
borough.                                                                                                                        
                                                                                                                                
10:11:20 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  noted that employment  issues will be discussed  later in                                                     
the presentation and  he requested that Liberty be factored  out. Mr. Banks                                                     
pointed  out that  he  did not  know  how to  estimate  the difference  for                                                     
Liberty, but  he knew  that the  majority of employment  will occur  in the                                                     
drilling of  the well. Once  fluids begin to  reach the surface,  the local                                                     
employees  manage  both  state  and  federal oil  and  gas.  Employment  is                                                     
enhanced with the increased activity at the Endecott facility.                                                                  
                                                                                                                                
Mr.  Banks pointed  out  the eastern  part  of the  map  and Badami,  where                                                     
production  is anticipated  to begin  in September  2010. He  addressed the                                                     
Point Thompson text box. He pointed out  that Exxon struck a total depth of                                                     
PT 15  and would enter the  PT 16 well.  When DOR refers to  Point Thompson                                                     
production and timing,  the administration is not a  monolith. He explained                                                     
that DOR relies  on public information with respect to  Point Thompson. Gas                                                     
sales from Point Thompson rely on  the public pronouncement from Exxon both                                                     
in discussions with the public and  hearings with the Department of Natural                                                     
Resources (DNR).                                                                                                                
                                                                                                                                
10:15:46 AM                                                                                                                   
                                                                                                                                
Mr. Banks  continued that Chevron drilled  five wells into the  White Hills                                                     
Program. Chevron  originally permitted 16 wells.  Discussion occurred about                                                     
unitizing the area.  Co-Chair Stedman requested a  definition of unitizing.                                                     
the resource  and to assure  that ownership  of the resources  is correctly                                                     
allocated to  our lessees.  Leases are  offered for  50-100 acres  each. In                                                     
order to  develop a region,  DNR combines leases into  a single unit  to be                                                     
managed  as a  single lease  and everyone's  rights are  taken care  of and                                                     
production is efficient.                                                                                                        
                                                                                                                                
Mr.  Banks  noted   that  the  Department  of   Transportation  and  Public                                                     
Facilities (DOT)  considered routes  from the  Hall Road  to the  Gubik and                                                     
Umiat  area.  The division  has  contributed  some  information to  DOT  to                                                     
indicate the most attractive potential  along the routes. He continued with                                                     
the  west end  of the  North Slope.  The National  Petroleum Reserve-Alaska                                                     
(NPRA) includes  three new wells from  Anadarko, Petro Canada, and  BG. The                                                     
NPRA  was established  in  1910 as  part  of the  naval  oil reserves.  The                                                     
intention was to  find areas under federal management that  would serve the                                                     
nation's needs for  oil and gas. The Department of  Interior took NPRA over                                                     
in  the 1920s.  Now NPRA  is federal  land managed  by the  Bureau of  Land                                                     
Management (BLM)  and has  adopted strong  multiuse provisions  involved in                                                     
its management. The area has been  offered for considerable drilling in the                                                     
1950s. The gas  fields near Barrow were discovered in  NPRA. The BLM leased                                                     
quadrants in the 1990s.                                                                                                         
                                                                                                                                
10:24:55 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman asked  about the tax difference between  Liberty and NPRA.                                                     
Mr. Banks  replied that the taxes  on NPRA are subject  to state production                                                     
taxes and  the state enjoys a  50 percent share of  the royalties collected                                                     
by  the  federal  government.  Co-Chair   Stedman  asked  if  it  was  more                                                     
profitable for the  state's treasury to develop NPRA.  Mr. Banks concurred.                                                     
He added that more  oil may exist offshore than has  been discovered in the                                                     
NPRA.                                                                                                                           
                                                                                                                                
Senator Olson  asked about  ownership of subsurface  rights for  the Arctic                                                     
Slope Regional  Corporation (ASRC) land.  Mr. Banks replied that  ASRC owns                                                     
the subsurface rights.                                                                                                          
                                                                                                                                
Mr. Banks continued  with the area known as the  Greater Moose's Tooth Unit                                                     
conducted by  ConocoPhillips. He expected a  scout well to be  reentered by                                                     
2012 as  an obligation by the  Bear Tooth Unit. ConocoPhillips  had drilled                                                     
the Grandview  and Pioneer wells.  Some of the  wells are subject  to state                                                     
tax credits even though they occur  on federal land. He noted the challenge                                                     
in developing  these areas and testing  the exploration wells. Some  of the                                                     
most expensive wells drilled are in the NPRA.                                                                                   
                                                                                                                                
10:29:03 AM                                                                                                                   
                                                                                                                                
Mr. Banks  pointed out the Alpine  West satellite known as  (CD-5) which is                                                     
on hold for  activity. The reason development was ahead  of the exploration                                                     
activities is because it is already  part of the Colville River Unit, which                                                     
is owned by  the ASRC. The surface  is run by the federal  government and a                                                     
private owner  will benefit.  Through the  unitization and  unit agreements                                                     
that apply  at Colville River, the  development of the Colville  River unit                                                     
for  ASRC than  the  state.  The department's  concern  about  the Corp  of                                                     
Engineer's decision is  an indication that the  federal government believed                                                     
that  leasing the  land would  assure development  although they  failed to                                                     
allow oil companies to access their leases.                                                                                     
                                                                                                                                
Co-Chair Stedman requested data about wells  drilled in 2004 and 2005 along                                                     
with the "feet per year drill." Mr.  Banks pointed out that he had provided                                                     
similar information to  the House Finance Subcommittee.  He prepared charts                                                     
for the last five  or ten years. He pointed out that  the oil companies are                                                     
reluctant to discuss plans for fear that  the state will mistake a plan for                                                     
a commitment.                                                                                                                   
                                                                                                                                
10:33:40 AM                                                                                                                   
                                                                                                                                
Mr.  Banks continued  with the  northern  area of  the map  and the  region                                                     
around  the Kuparuk  River.  Brooks Range  Petroleum  Corporation plans  to                                                     
drill North  Tarn on  a lease  shared with the  Italian Oil  Company (ENI).                                                     
Pioneer has moved  forward with development at the  Oooguruk project, which                                                     
was  challenged initially,  but is  now successful.  He concluded  with the                                                     
Nikaitchuq unit  with expectation that first  oil will be developed  by the                                                     
end of 2010.                                                                                                                    
                                                                                                                                
Senator Egan  asked about multi  phased metering. Mr. Banks  explained that                                                     
multi phased  metering occurs where  water gas  and oil are  mixed together                                                     
and flowing through  a device that distinguishes the amount  of the various                                                     
components.  Normally  oil  production  is  metered  for  the  purposes  of                                                     
royalties or  allocations for the oil  or gas that is  subject to royalties                                                     
or sold. The accuracy  of the meters is high. At  the Oooguruk well, fluids                                                     
are mixed  together with a machine  that meters all three  fluids and parse                                                     
out the different components. The precision  of a multi phase meter is less                                                     
than the traditional lease acquisition  custody transfer meters seen on the                                                     
North Slope. With  appropriate checking and testing against  other kinds of                                                     
devices  of  the  state,  the   companies,  AOGCC  are  gaining  additional                                                     
confidence and are  willing to use multiphase metering  in situations where                                                     
the fluids are blended for processing in already built facilities.                                                              
                                                                                                                                
10:37:57 AM                                                                                                                   
                                                                                                                                
Mr. Banks  added that continued  year-round development drilling  occurs at                                                     
the Prudhoe,  Kuparuk, Colville and  Milne Point  units. He hoped  that DOR                                                     
could provide a forecast. He commended  Ms. Duval on her presentation about                                                     
the potential for  heavy oil on the  North Slope. He agreed  that heavy oil                                                     
is a challenged resource, but once  the wells are drilled, production tends                                                     
to flatten out.                                                                                                                 
                                                                                                                                
Mr. Banks  clarified that  Alaska heavy  oil is  not like  California heavy                                                     
oil, it is better quality and  is assigned the nickname "heavy oil" because                                                     
it is heavier than the oil produced  today. He stated that heavy oil is the                                                     
next phase of development in the existing oil fields on the North Slope.                                                        
                                                                                                                                
                                                                                                                                
10:41:30 AM                                                                                                                   
                                                                                                                                
Mr. Banks moved on  to the map "Cook Inlet Oil  and Gas Activity 2009-2010"                                                     
(Copy  on File).  He pointed  out  that the  activities in  the Cook  Inlet                                                     
include the geothermal projects submitted  as part of the exploration plans                                                     
for the coming season. The potential  exists to develop a large power plant                                                     
which would represent a quarter of the electric demand.                                                                         
                                                                                                                                
Mr. Banks  discussed the Rampart  Energy Company well  at Nunivak 1  in the                                                     
Nanana Basin  which involves an  exploration license. The well  was drilled                                                     
last summer and was one of  the most "wildcat" wells drilled. Activities in                                                     
the Cook Inlet  that Mr. Banks found most interesting  were the Sunrise and                                                     
Shadura prospects near  Swanson River. The Marathon has  begun drilling the                                                     
Sunrise well.  Shadura is  another potential  gas well to  the west  of the                                                     
Swanson  River  drilled by  an  independent  company called  Nordik  Energy                                                     
Partners. Pioneer is working on the  Hansen 1A-L1 well in 2010. The testing                                                     
for the well began approximately two weeks ago.                                                                                 
                                                                                                                                
Mr. Banks mentioned the North Fork  project sponsored by Armstrong which is                                                     
the  company that  initiated the  prospect of  Oooguruk and  Nikaitchuq and                                                     
flipped it to ENI.  Armstrong is a capable explorer who  can put together a                                                     
prospect and find appropriate investors  to development. The consequence of                                                     
the  development  is  a  pipeline  that will  flow  from  Anchor  Point  to                                                     
Ninilchik. Armstrong  will construct a  pipeline from North Fork  to Anchor                                                     
Point to  connect. Infrastructure is reaching  an area of the  Kenai as yet                                                     
undeveloped. He anticipated potential growth in gas plays.                                                                      
                                                                                                                                
Mr. Banks addressed the Kitchen Lights  Unit with Escapada who will bring a                                                     
jack up rig into  the Cook Inlet to drill for an oil  target in the Kitchen                                                     
Lights  unit  as  a  preliminary exploration  program.  The  department  is                                                     
waiting to see if Escapada will be affected by critical habitat issues.                                                         
                                                                                                                                
Co-Chair  Stedman requested  further information  on the  drilling done  in                                                     
Prudhoe Bay, Kuparuk, and Alpine.                                                                                               
                                                                                                                                
                                                                                                                                
10:41:30 AM    AT EASE                                                                                                        
10:50:08 AM    RECONVENED                                                                                                     
                                                                                                                                
                                                                                                                                
ADJOURNMENT The meeting was adjourned at 10:50 AM.                                                                            
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
2010 02 16 DNR AK O&G Activity 2009-10 SFC.pdf SFIN 2/16/2010 9:00:00 AM
Oil and Gas Production Tax Review
2010 02 16 DNR OG Activity CI.pdf SFIN 2/16/2010 9:00:00 AM
Oil and Gas Production Tax Review
2010 02 16 DNR OG Activity NS.pdf SFIN 2/16/2010 9:00:00 AM
Oil and Gas Production Tax Review
Agenda 021610 am.docx SFIN 2/16/2010 9:00:00 AM
201610 DOR TAPS Tariff History & Going Forward.pdf SFIN 2/16/2010 9:00:00 AM
2010 02 16 DOR Prod Forecast Flwup SFC.pdf SFIN 2/16/2010 9:00:00 AM
2010 02 16 DOR Production Forecast SFC v4.pdf SFIN 2/16/2010 9:00:00 AM
Oil and Gas Production Tax Review