Legislature(2019 - 2020)SENATE FINANCE 532

01/17/2019 09:00 AM FINANCE

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Audio Topic
09:02:03 AM Start
09:05:38 AM Department of Natural Resources: Production Forecast
09:33:51 AM Department of Natural Resources: Production Highlights, Permitting Issues, and Status of Development on North Slope
10:51:33 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Dept. of Natural Resources: Production Highlights TELECONFERENCED
Permitting Issues, & Status of Development on
North Slope
- Commissioner Corri Feige
- Deputy Commissioner Sara Longan
- Division of O&G, Director Chantal Walsh
-- Presenters Below Postponed from 1/16/19 --
+ Dept. of Natural Resources: Production Forecast TELECONFERENCED
- Commissioner Corri Feige
- Division of O&G, Director Chantal Walsh &
Commercial Analyst Pascal Umekwe
                  SENATE FINANCE COMMITTEE                                                                                      
                      January 17, 2019                                                                                          
                         9:02 a.m.                                                                                              
9:02:03 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair   Stedman    called   the   Senate   Finance    Committee                                                              
meeting to order at 9:02 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Corri  Feige,  Commissioner,   Department  of Natural  Resources;                                                               
Senator   Cathy   Giessel;   Senator   Shelley   Hughes;   Senator                                                              
Chris  Birch;  Chantal   Walsh,  Director,  Division   of Oil  and                                                              
Gas,   Department    of   Natural   Resources;    Pascal   Umekwe,                                                              
Commercial  Analyst,   Division  of  Oil and  Gas,  Department  of                                                              
Natural    Resources;    Sara   Longan,    Deputy   Commissioner,                                                               
Department of Natural Resources.                                                                                                
DEPARTMENT   OF   NATURAL   RESOURCES:   PRODUCTION   HIGHLIGHTS,                                                               
PERMITTING ISSUES, and STATUS of DEVELOPMENT ON NORTH SLOPE                                                                     
DEPARTMENT OF NATURAL RESOURCES: PRODUCTION FORECAST                                                                            
^DEPARTMENT OF NATURAL RESOURCES: PRODUCTION FORECAST                                                                         
9:05:38 AM                                                                                                                    
CORRI  FEIGE,  COMMISSIONER,   DEPARTMENT  OF NATURAL  RESOURCES,                                                               
introduced   herself.  She  stated  that  she  would  present  the                                                              
Fall  2018  Production   Forecast;   and  an activity   update  on                                                              
the  North  Slope  and  permitting  processes   related  to  that.                                                              
She  noted that  it was  extremely  important  to  the Department                                                               
of  Natural  Resources  (DNR)  that  the  committee  was  provided                                                              
with  the  most  accurate   and  concise   information   possible.                                                              
She  understood   the  gravity   of  the  committee's   work.  She                                                              
noted   the   testifiers   who   would   be  discussing    various                                                              
aspects of the presentation.                                                                                                    
9:07:14 AM                                                                                                                    
CHANTAL    WALSH,   DIRECTOR,    DIVISION    OF   OIL   AND   GAS,                                                              
DEPARTMENT OF NATURAL RESOURCES, introduced herself.                                                                            
9:07:39 AM                                                                                                                    
PASCAL  UMEKWE,  COMMERCIAL  ANALYST,  DIVISION  OF  OIL  AND GAS,                                                              
DEPARTMENT OF NATURAL RESOURCES, introduced himself.                                                                            
Mr.   Umekwe    discussed    the    presentation,    "Fall    2018                                                              
Production   Forecast:   Senate   Finance   Committee"   (copy  on                                                              
file). He looked at slide 2, "Outline":                                                                                         
      ? Overview and Highlights on Production                                                                                   
           o Fall 2018 forecast: Comparing recent actuals vs                                                                    
           o North Slope Projects Highlights                                                                                    
           o Fall 2018 forecast: The State's Overall                                                                            
           Production Outlook                                                                                                   
      ? 2018 Production Forecast                                                                                                
           o Objectives                                                                                                         
           o Overview of Methodology                                                                                            
                 ?Current    Production,    Under    Development,                                                               
                 Under Evaluation                                                                                               
           o Near-term and longer-term results                                                                                  
Mr.   Umekwe   addressed    slide   3,  "Fall   2018   Production                                                               
Forecast:  FY  2019  Outlook."   The  slide  showed  a comparison                                                               
with  the forecast   and the  actual  production.   He noted  that                                                              
the   actual    production   was   approximately     501,569.   He                                                              
remarked  that   it only  addressed   the  first  five  months  of                                                              
the current fiscal year.                                                                                                        
9:10:01 AM                                                                                                                    
Mr. Umekwe highlighted slide 4, "Overall Perspective: North                                                                     
      ? Production is relatively flat:                                                                                          
           o FY15 to FY17 increase in production (2-3                                                                           
           percent per year)                                                                                                    
           o FY17 to FY18 decrease in production (1.5                                                                           
      ? Recent Major Changes in Production                                                                                      
           o Prudhoe Bay Unit                                                                                                   
                 ?Non-rig workovers .notdefincrease active well                                                               
                 ?Reservoir modeling .notdefidentifying targets                                                               
                 ?Facilities modeling .notdefplanning maintenance                                                             
                 ?Doing    more     with     less    .notdefoperational                                                       
           o Kuparuk Unit                                                                                                       
                 ?DS-2S (Sharks Tooth)                                                                                          
           o Colville River Unit                                                                                                
           o GMT1:                                                                                                              
                 ?First oil Oct 2018                                                                                            
      ? Future Projects coming in:                                                                                              
           o Near future:                                                                                                       
                 ? Milne Point Moose Pad, CD5 Expansion, GMT2                                                                   
           o Farther out:                                                                                                       
                 ?   Exciting    discoveries     moving    forward                                                              
                 (Pikka, Willow)                                                                                                
                 ? Old discoveries now moving forward                                                                           
Mr. Umekwe looked at slide 5, "20-Year Production Outlook:                                                                      
Production Categories":                                                                                                         
      ? Currently   producing  (CP)  fields   remain  backbone  of                                                              
      state  oil  production   in  near  and  medium   term.  Near                                                              
      term  projects   under   development   (UD),  often   within                                                              
      existing fields, impact 12-month outlook.                                                                                 
      ? Future fields (UE), which are currently being                                                                           
      evaluated by operators, begin to play a more                                                                              
    significant role in production in the next 5-6 years                                                                        
9:15:24 AM                                                                                                                    
Mr. Umekwe discussed slide 7, "Fall 2018 Forecast                                                                               
      ? Provide a 10-year official production forecast for                                                                      
      the State's Revenue Sources Book                                                                                          
      ? Maintain focus on near-term accuracy                                                                                    
           o   More   emphasis   on   most   recent   history   in                                                              
           projections for the near future                                                                                      
           o   Include   seasonal   changes   in   production   to                                                              
           improve near-term view                                                                                               
      ? Increase focus on longer-term accuracy                                                                                  
           o   Ensure   product    is   valid   for   longer-term                                                               
           projections,      based     on    individual      field                                                              
           characteristics and operator plans                                                                                   
           o   Apply    engineering    constraints     to   ensure                                                              
           realistic    projection    of   near-term   production                                                               
           characteristics into the out years                                                                                   
Mr. Umekwe looked at slide 8, "Production Categories -                                                                          
      Forecast duration: 10-year official forecast                                                                              
      ? Currently Producing (CP): online by 6/18                                                                                
            Oil  from  existing   wells  in  currently   producing                                                              
           pools ? Under Development (UD): < 12months                                                                           
            Oil  from  projects  that  will  add  incremental  oil                                                              
           to  existing   fields,   or  fields   with   first  oil                                                              
           within one year                                                                                                      
            Projects   in Plan  of  Development   document,  often                                                              
           scheduled and part of operator's annual budget                                                                       
      ? Under Evaluation (UE): >12 months                                                                                       
            Oil  from projects   likely to  occur  in the  future,                                                              
           but  which  have  not  met  the  requirements   of  the                                                              
           previous category                                                                                                    
Mr. Umekwe highlighted slide 9, "Production Categories:                                                                         
Addressing Uncertainty":                                                                                                        
      ? Currently Producing (CP) fields:                                                                                        
           o   Relatively   small   uncertainty    range   due  to                                                              
          established behavior of producing pools                                                                               
           o     Probabilistic     Decline      Curve     Analysis                                                              
           projections ? Projects Under Development (UD):                                                                       
           o More uncertainty than CP                                                                                           
           o Uncertainties include financial and reservoir                                                                      
           performance risks                                                                                                    
           o Probabilistic type wells                                                                                           
      ? Projects Under Evaluation (UE):                                                                                         
           o More uncertain than CP and UD                                                                                      
           o Financial risk: using project breakeven price                                                                      
           and State official price forecast                                                                                    
           o Other uncertainties include                                                                                        
                   Chance of occurrence in the 10-year                                                                          
                 forecast window                                                                                                
                   Timing; start of sustained production                                                                        
                   Production profile/reservoir performance                                                                     
                 (probabilistic type wells)                                                                                     
9:20:55 AM                                                                                                                    
Senator    Wielechowski    queried    the   aspects    that   were                                                              
considered   when   examining   the  projects   that   were  under                                                              
evaluation.  He  wondered  whether  there  was an  examination  of                                                              
net  present   value  or  internal  rates   of  return.  He  asked                                                              
specifically   the types  of  internal  rates  of  return  and net                                                              
present  values  to  determine   whether  a  project  should  move                                                              
forward.   He  wondered  whether   there  were  disputes   between                                                              
DNR and the industry.                                                                                                           
Mr.  Umekwe  replied   that  there  was  consideration   of  those                                                              
factors.   He  shared  that  for  some  of  the  projects,   there                                                              
were  discussions   of  the  break-even   price.  The  break-even                                                               
price   included    a  "full-blown    cash-flow    model",   which                                                              
included  the  expected  rate  of return   and expected  spend  to                                                              
get  the production   online.  He  stated  that  ultimately,  when                                                              
a  breakeven    price  was   derived,   the  model   would   allow                                                              
consideration of the future of the project.                                                                                     
Mr.  Umekwe  looked   at  slide  10,  "Continued   Focus  on  Both                                                              
Short- and Long-Term Forecast Accuracy":                                                                                        
      ? DOG  Forecast   maintains  balanced   focus  on  near  and                                                              
      long   term   accuracy,    and    continues   to    evaluate                                                              
      underlying   assumptions   for  its  short   and  long  term                                                              
      outlook on each field                                                                                                     
      ? This approach is important for the forecast to                                                                          
      continue to serve multiple purposes                                                                                       
            Near-term accuracy required to support the                                                                          
           State's near-term budgeting goals                                                                                    
            Long-term   accuracy   required  to  support   State's                                                              
           long   term   revenue    projections    and   decisions                                                              
           around long-term fiscal picture                                                                                      
            Field   level   accuracy   required    for   realistic                                                              
           assessment    of   impact    of   near-and    long-term                                                              
           development    plans    on   non-state    land    (NPRA                                                              
           development, etc.)                                                                                                   
Mr. Umekwe highlighted slide 11, "Near-Term Focus":                                                                             
      ? Ensuring clearest possible outlook in the near term                                                                     
           o  Near term  guidance  is  based  on the  most  recent                                                              
           pool    information,    operational    practices    and                                                              
      ?  Emphasis   is   placed   on   near-term   production   to                                                              
      capture  impacts   of  scheduled   maintenance/turn-around                                                                
      ? Probabilistic   Decline  Curve  Analysis  weighted  toward                                                              
      recent production history                                                                                                 
      ? Full credit to planned UD production                                                                                    
           o  Makes  for   more  accurate   near-term  production                                                               
           forecast  and  helps  account  for rate  additions  due                                                              
           to field efficiency improvements                                                                                     
Mr. Umekwe addressed slide 12, "Near-Term Focus: North                                                                          
      ?  Ensuring  accurate   forecasts   in  the   near  term  to                                                              
      support revenue planning in the next fiscal year                                                                          
      ?   Also,    tracking     observed    monthly    production                                                               
9:25:20 AM                                                                                                                    
Mr. Umekwe highlighted slide 13, "Realistic Long-Term                                                                           
      ? Attention   to  realistic   long-range   outlook  for  the                                                              
      fields reflecting field development plans                                                                                 
      ?  Decline    Curve   Analysis    on   current   production                                                               
      emphasizes  recent  history  but  also  considers   previous                                                              
      history of the fields                                                                                                     
      ?  Engineering   judgement   is  applied   to  honor   field                                                              
     development and reservoir engineering constraints                                                                          
      ? Future  projects  that  add  to production   in out  years                                                              
      are  based   on   current   project   definition,    project                                                              
      characteristics and uncertainty analysis                                                                                  
Mr.   Umekwe   looked   at   slide   14,   "Comparing    Long-Term                                                              
      ? Fall 2018 Forecast: Producers' outlook/forecast                                                                         
      falls within DOG production forecast range                                                                                
Mr.  Umekwe  discussed   slide  15,  "Increasing   Uncertainty  as                                                              
New  Fields/Projects   Come  Online."  He  noted  that  there  was                                                              
uncertainty   in  the  out  years.   He  remarked   that  the  out                                                              
years  had   many  projects.   He  stated   that  the  discussion                                                               
would be related to range, and the high/low sides.                                                                              
Co-Chair   Stedman   surmised   that  there   should   not  be  an                                                              
expectation  of  a million  barrels  per  year,  but there  should                                                              
be  an  expectation    of  500,000  barrels   per   year  for  the                                                              
foreseeable future.                                                                                                             
Mr.  Umekwe  replied  that  it was  a fair  statement.  He  looked                                                              
at slide  15,  and noted  that  the best  estimate  was  somewhere                                                              
around  500,000  barrels  of  oil per  day.  He noted  that  there                                                              
was  a chance   that there  could  be  several  hundred   thousand                                                              
barrels  per  day,   but  stressed  that  it  was  often  not  the                                                              
case.  He stated  that  some projects  were  delayed,  or  may not                                                              
be  as   strong  as   expectations.   He  remarked   that   future                                                              
production  could  only  be  in the  terms  of the  bounds  of the                                                              
possible outcomes going forward.                                                                                                
Mr.  Umekwe  addressed  slide  16,  "Projects  Under  Evaluation,                                                               
Medium  to  Long  Term."  He  noted  the  slide  showed  a  map of                                                              
the  different  land  ownerships   across  the  North  Slope,  and                                                              
the  different   projects   that  were  considered   in  the  Fall                                                              
2018  Forecast.  He  remarked  that  the projects   in the  yellow                                                              
section   were  in  federal   land;  the  pink  section   was  the                                                              
Artic  Slope  Regional   Corporation   (ASRC)  mineral   interest;                                                              
and  the  blue  section  was  state-owned  land.  He  stated  that                                                              
most  of  the projects   were  within  the state  section   of the                                                              
central   North  Slope.   He  remarked   that   there   were  some                                                              
projects  that  were  as  far flung  to  the  west as  Smith  Bay,                                                              
which  were  within  state  waters;  but that  area  was very  far                                                              
away    from    available     infrastructure,      resulting    in                                                              
substantial cost in effort to bring production.                                                                                 
9:30:49 AM                                                                                                                    
Mr.    Umekwe    looked     at   slide     17,    "Risked    Under                                                              
Development/Evaluation    Projects."   He  noted   that,  even  at                                                              
the  peak, production   was somewhere   close to  200,000  barrels                                                              
of  oil per  day,  which  was additional   to the  production.  He                                                              
noted   that   it   was   additional   to   the   declining   base                                                              
production   level.  He remarked   that  it could  not  be  easily                                                              
seen  as  an addition   to today's  500,000   barrels  of oil  per                                                              
day;  rather  whatever  production  would  be  like  at the  point                                                              
of  the  peak.  He  noted  that,  overall,   it  was  an  exciting                                                              
time  when seeing  all  the projects  to  sustain  production.  He                                                              
felt  that   there  should  be   a strong   emphasis   on  current                                                              
projects;   and  those  that  could   bring  projects   online  as                                                              
quickly  as possible.   He thanked  the  members  of the  team who                                                              
conducted   the work   within  the  resource  evaluation   section                                                              
of the division, and the commissioner.                                                                                          
Senator  Wielechowski   queried  the range  of internal   rates of                                                              
return that DNR considered a project to be profitable.                                                                          
Mr.  Umekwe   responded   that   the  cost   of  capital   was  an                                                              
important  component   that  companies  examined   before  project                                                              
investment.   He acknowledged   that  it  could  change  in  time,                                                              
because  money  may  be given.  He  stressed  that  there  was not                                                              
a tight  range,  rather  there  was  a wide  range.  He  furthered                                                              
that  it was  probably  somewhere  around  10 to  15 percent  rate                                                              
of return, depending on the company.                                                                                            
^DEPARTMENT   OF  NATURAL   RESOURCES:   PRODUCTION   HIGHLIGHTS,                                                             
PERMITTING ISSUES, and STATUS of DEVELOPMENT ON NORTH SLOPE                                                                   
9:33:51 AM                                                                                                                    
Commissioner   Feige  stated  that there  would  be  an update  on                                                              
permitting and activity in DNR.                                                                                                 
Ms.  Walsh  discussed  the  presentation   "Alaska  Department  of                                                              
Natural   Resources:   Oil  and  Gas  Outlook,   and  Permitting"                                                               
(copy   on  file).   She  addressed   slide   2,  "Department   of                                                              
Natural Resources, Land Base and Ownership":                                                                                    
      Land Base                                                                                                                 
      ? 586,412 sq. miles?more than twice the size of Texas                                                                   
      ? Larger than all but 18 sovereign nations                                                                                
     ? More coastline than all other 49 states combined                                                                         
      ? More than 3 million lakes; half of world's glaciers                                                                     
      ? Approximately 40 percent of the nation's freshwater                                                                     
      Land Ownership                                                                                                            
      ? Federal Land: more than 200 million acres                                                                               
      ? State Land: Approx. 100 million acres of uplands, 60                                                                    
      million acres of tidelands, shore lands, and submerged                                                                    
      lands, and 40,000 miles of coastline                                                                                      
      ? Native Corporation Land: 44 million acres                                                                               
9:36:05 AM                                                                                                                    
Senator   Hoffman  noted   that  the  Native   Corporation   lands                                                              
were   considered    private   property.   He   asked   how   much                                                              
additional   land   was  considered   private   property   in  the                                                              
Ms. Walsh replied that it was approximately 1 percent.                                                                          
Senator Hoffman queried the number of acres.                                                                                    
Ms. Walsh agreed to provide that information.                                                                                   
Senator  Hoffman  announced   that the  total  acreage  in  Alaska                                                              
was 365 million.                                                                                                                
Ms. Walsh agreed to provide that information.                                                                                   
Senator   Hoffman   pointed   out  that  the   vast  majority   of                                                              
private property in Alaska was native property.                                                                                 
Ms.   Walsh   looked   at  slide   3,   "Department   of   Natural                                                              
Resources, Land Life Cycle":                                                                                                    
      Secure lands and access from Federal Government.                                                                          
      Identify minerals and oil and gas prospectivity via                                                                       
      Best Interest Findings.                                                                                                   
      Lease lands for exploration and development.                                                                              
      Permit programs to ensure conservation of resources                                                                       
      and protection of state's lands and interests.                                                                            
      Manage production units and mines to protect state's                                                                      
      royalty interests.                                                                                                        
      Approve and monitor reclamation and closure operation.                                                                    
Ms.   Walsh  highlighted    slide  4,   "Department   of   Natural                                                              
Resources, Oil and Gas Resource Potential":                                                                                     
      North Slope                                                                                                               
      ? More undiscovered, potentially recoverable oil than                                                                     
      any other Arctic nation                                                                                                   
           o OIL: Est. 40 billion barrels of conventional                                                                       
           o GAS: Est. over 200 trillion cubic feet of                                                                          
           conventional natural gas                                                                                             
      ?    Untapped    unconventional      resource    potential,                                                               
      including  tens  of  billions   of  barrels  of  heavy  oil,                                                              
      shale oil,  and  viscous  oil,  and  hundreds  of  trillions                                                              
      of  cubic   feet  of   shale   gas,  tight   gas,   and  gas                                                              
      Cook Inlet                                                                                                                
      ? Significant undiscovered resources remain                                                                               
          o 19 trillion cubic feet of natural gas                                                                               
           o 600 million barrels of oil                                                                                         
           o 46 million barrels of natural gas liquids                                                                          
Senator    Hoffman   queried    the   number    of   undiscovered                                                               
potential offshore of Alaska.                                                                                                   
Commissioner   Feige   replied  the   numbers  were   "rolled  up"                                                              
figures  that  were  provided  by  the United  States  Geological                                                               
Survey  (USGS)   and  the  Bureau   of  Ocean  Energy  Management                                                               
(BOEM).    She   agreed   to   provide    the   offshore    number                                                              
9:40:34 AM                                                                                                                    
Ms.   Walsh   addressed   slide    5,  "Department    of   Natural                                                              
Resources,   Oil and  Gas  Outlook."  She  shared  that  the  blue                                                              
section  showed  the  current  leases   in the  North  Slope.  She                                                              
announced   that   the  white   section   represented    available                                                              
land.  She  stated  that  the  green  section  showed  the  leases                                                              
that  were  picked  up during  the  lease  sale. She  shared  that                                                              
it was  the  third-highest  revenue  generating   lease sale.  She                                                              
noted  that there  was  not much  land  available  for lease.  She                                                              
shared  that it  was the  highest  bid  per acre,  at nearly  $550                                                              
an  acre.  The  total   acres  leased  were  244,000   acres.  She                                                              
felt  that the  lease  sale was  a positive  statement  about  oil                                                              
and gas exploration in Alaska.                                                                                                  
Ms.  Walsh  discussed  slide  6,  "Alaska  Department  of  Natural                                                              
Resources:     Production    Highlights."     She    shared    two                                                              
      1. Why don't we see the big bumps of production from                                                                      
      the projects that were forecasted in our future, when                                                                     
      we look at our production forecast?                                                                                       
      2. How is it that revenue for the state differs for                                                                       
      where production is occurring, and by what companies.                                                                     
Ms.  Walsh  highlighted   slide  7,  "State  of  Alaska,   Royalty                                                              
Rate."  She stressed   that revenue  for  the state  is  generated                                                              
through    two   different   sources:    royalties    and   taxes.                                                              
Royalties,   which were  administered   through  the  Division  of                                                              
Oil  and Gas  were  brought  into the  state,  and  25 percent  of                                                              
that   collection   went   to   the  Permanent    Fund  with   the                                                              
remaining   75 percent   in  the  General  Fund.  Looking  at  the                                                              
North   Slope,   there  were   four   areas  of   difference   for                                                              
royalty.   She  noted  the  top  of  the  slide,   which  was  the                                                              
offshore  area.   The  offshore  royalty  rate  was  16  and  two-                                                              
thirds.  The  state  of  Alaska,  within  the  first  three  miles                                                              
offshore,  received   100  percent  of  that  16 and  two-thirds;                                                               
three  to  six  miles  out,  the  state  received  27  percent  of                                                              
the  16 and  two-thirds;  and  greater  than  six  miles out,  the                                                              
federal  government   took  the  entire  16  and two-thirds.   She                                                              
looked  at  the state  lands,  which  had  royalty  rates  between                                                              
12.5 percent and 16 and two-thirds percent.                                                                                     
9:45:32 AM                                                                                                                    
Senator   Wielechowski   recalled  that  when   the  royalty  rate                                                              
exceeds  12.5 percent,  there  was a  decrease  in the tax  rate.                                                               
Mr.  Walsh  was not  aware  of  that.  She was  not  an expert  on                                                              
tax.  She  stated  that  taxes  varied  by  the actual   companies                                                              
and the price of oil                                                                                                            
Co-Chair   Stedman   assumed   that   Senator   Wielechowski   was                                                              
referring    to  the   gross   value   of   reduction    mechanism                                                              
embedded   in  the  newer   fields  and   areas,  which   did  not                                                              
directly  target  the  royalties,  but  targeted  a severance.  In                                                              
effect, if reduced the impacts of the newer fields.                                                                             
Senator  Olson  wondered   whether  the  ASRC  contract  with  the                                                              
state would change.                                                                                                             
Ms.  Walsh  responded  that  50 percent  of  the royalty   rate at                                                              
Natural  Petroleum  Reserve-Alaska   (NPRA)  went  to the  federal                                                              
government, and 50 percent went to the mitigation fund.                                                                         
Senator  Olson  wondered  whether  the  five  communities   in the                                                              
mitigation fund were within the North Slope Borough.                                                                            
Ms. Walsh replied in the affirmative.                                                                                           
Senator  Olson  wondered   whether  there  was  discussion   about                                                              
that percentage changing.                                                                                                       
Ms.  Walsh  stated  that she  was  not aware  of  any discussions                                                               
about changing that percentage.                                                                                                 
Commissioner   Feige  furthered   that  there  were  a  number  of                                                              
settlement   agreements   that   governed   the  jointly   managed                                                              
lands.  There  were  no  discussions   to change   the percentage                                                               
Ms.  Walsh   looked  at  slide   8,  "State  of  Alaska,   20-Year                                                              
Production Outlook":                                                                                                            
      ? Risked profiles (Includes risks of occurrence, start                                                                    
      time and performance applied to success case profile)                                                                     
      ? Legacy fields remain backbone of state oil                                                                              
      production in near and medium term                                                                                        
      ? Future fields which are currently being evaluated by                                                                    
      operators, begin to play a more significant role in                                                                       
      production in the next 5-6 years                                                                                          
Ms.  Walsh  addressed  slide  9, "State  of  Alaska,  Analysis  of                                                              
Willow  vs.  Pikka."  She  stated  that  the  Willow  development                                                               
resided  on  NPRA  lands.  The  Pikka  development  was  on  joint                                                              
state  and  ASRC  lands.  The  model used  for  the  analysis  was                                                              
built  and supported   by divisions,  and  the data  was  publicly                                                              
9:50:49 AM                                                                                                                    
Ms.  Walsh   looked  at  slide   10,  "State  of  Alaska,   Willow                                                              
Development (Success Case)":                                                                                                    
      2019 WIO:                                                                                                                 
      100 percent ConocoPhillips                                                                                                
      Land Ownership:                                                                                                           
      Project Milestones (operator):                                                                                            
           .notdef 2019 Further Appraisal                                                                                     
           .notdef 2024 or 2025 First Oil                                                                                     
      Project Scale (operator):                                                                                                 
           .notdef Resource size (500  1100 mmboe)                                                                            
           .notdef Likely plateau (over 100 mbbls/day)                                                                        
           .notdef Graph 1: CPAI is a minimum taxpayer                                                                        
           .notdef Graph 2: CPAI is a net taxpayer                                                                            
      Tax Impacts:                                                                                                              
           .notdef Expenditure                                                                                                
           .notdef Price                                                                                                      
    Potential to generate over $8B - $13B to SOA through                                                                        
      2040 (undiscounted)                                                                                                       
9:54:28 AM                                                                                                                    
Co-Chair   Stedman  queried   the  year  that   it  would  be  net                                                              
cashflow positive to the state.                                                                                                 
Ms. Walsh replied that it would be 2026                                                                                         
Co-Chair   Stedman   surmised   that  there   should   not  be  an                                                              
expectation of helpful revenue in two years.                                                                                    
Ms. Walsh agreed.                                                                                                               
9:55:05 AM                                                                                                                    
Co-Chair   Stedman   stressed   that   there   was  an   immediate                                                              
issue.   He  felt  that  the   project  would   not  assist  in  a                                                              
current positive cashflow.                                                                                                      
Ms. Walsh agreed.                                                                                                               
Senator  Wielechowski   queried   the  cost  to  the  treasury  in                                                              
the upcoming decade.                                                                                                            
Ms.  Walsh  replied  that  there   was  a document   submitted  to                                                              
the  legislature   that   was  the  cause  of   why  there  was  a                                                              
collaboration   with DOR.  The  biggest  negative  impact  to that                                                              
analysis,  which  looked   at the  $75  per  barrel,  was  Willow.                                                              
Willow projected a build of a new facility.                                                                                     
Ms.  Walsh   looked  at   slide  11,  "State   of  Alaska,   Pikka                                                              
Development (Success Case)":                                                                                                    
      2019 WIO:                                                                                                                 
      51 percent Oil Search, 49 percent Repsol                                                                                  
      Land Ownership:                                                                                                           
      83 percent State, 17 percent ASRC                                                                                         
      Project Milestones (operator)                                                                                             
      .notdef 2018 Winter Appraisal (2 wells)                                                                                 
      .notdef 2019  2020 FEED                                                                                                 
      .notdef 2021  2023 Development                                                                                          
      .notdef 2023 or 2024 First Oil                                                                                          
Co-Chair Stedman asked for a definition of "FEED."                                                                              
Ms.  Walsh   replied  with  a  definition   of  FEED:   front  end                                                              
engineering design.                                                                                                             
Ms. Walsh continued with slide 11:                                                                                              
      Project Scale (operator):                                                                                                 
      .notdef Resource size (400  720 mmbbls)                                                                                 
      .notdef Likely plateau (120 mbbls/day)                                                                                  
Co-Chair   Stedman  remarked   that  one  still  did  deductions,                                                               
but carried them forward.                                                                                                       
Ms. Walsh agreed.                                                                                                               
Co-Chair  Stedman  wondered   what  would  occur  with additional                                                               
Ms.  Walsh replied  that  a $60  per barrel  would  be similar  to                                                              
the  ConocoPhillips    example,   and  would   be  at   a  minimum                                                              
taxpayer   bracket.  The  right-offs   would  occur   after  first                                                              
10:00:16 AM                                                                                                                   
Senator  Micciche   noted  that  the  Willow  development  had  an                                                              
estimate  of  100,000  barrels per  day.  He noted  the impact  of                                                              
the  lack of  royalty,  yet less  production  over  time  with the                                                              
same  return  to the  state.  He looked  at  Pikka,  which  showed                                                              
a higher  level  of expected   production  with  the advantage  of                                                              
royalties   to the  state,  yet  the  same  level  of  return.  He                                                              
wondered what he was missing in the calculation.                                                                                
Ms.   Walsh   replied   that  there   may   be  a   typo   in  the                                                              
presentation, and agreed to address the issue.                                                                                  
Co-Chair   Stedman  looked   at  Willow,  and  assumed   that  the                                                              
charts  included  the  net cash  flow to  the state,  rather  that                                                              
cash flow to another entity.                                                                                                    
Ms.  Walsh replied  that  the  Willow development   had an  orange                                                              
and grey bar that were each revenues.                                                                                           
Ms. Walsh continued with slide 11:                                                                                              
           .notdef Graph 1: Min tax for extended time due to spent                                                            
           and loss carryforward (LCF)                                                                                          
      .notdef Graph 2: LCF impacts fewer years of tax                                                                         
      Tax impacts:                                                                                                              
           .notdef No negative pre-production stream                                                                          
           .notdef Little to no tax production for early years                                                                
           Potential to generate over $8B - $13B to SOA                                                                         
           2040 (undiscounted)                                                                                                  
Senator   Wielechowski   asked  for  charts   with  a  10  percent                                                              
discount rate.                                                                                                                  
Ms. Walsh agreed to provide that information.                                                                                   
Ms.  Walsh  stated  that  the  correct  number  for  Willow  was 5                                                              
to 9, whereas Pikka was correctly indicated at 8 to 13.                                                                         
Senator  Micciche   noted  that  there  was  a  negotiation   with                                                              
the  federal   government,   and   the  state   lost  significant                                                               
royalties  in  the Alaska  National  Wildlife  Refuge  (ANWR).  He                                                              
wondered  the  administration  was  pushing  for  a change  in the                                                              
Commissioner   Feige  replied   in  the  affirmative,   and  there                                                              
was  an  introduction  to  the  concept  with  the  Department  of                                                              
the Interior.                                                                                                                   
10:06:18 AM                                                                                                                   
Co-Chair Stedman asked for a definition of "significant."                                                                       
Ms.  Walsh  addressed   slide   12,  "State  of  Alaska,   Royalty                                                              
Analysis."  She  stated  that  there  was  an examination   of the                                                              
four different areas.                                                                                                           
Commissioner   Feige  furthered   that  the   50  percent  of  the                                                              
$345  million  for  Willow  would go  into  the  mitigation  fund.                                                              
The result would be approximately $300 per year.                                                                                
Co-Chair  Stedman  stated  that  the number  would  be divided  by                                                              
Commissioner Feige agreed.                                                                                                      
Senator   Wielechowski   wondered   whether  the   fields  on  the                                                              
federal  lands  were  eligible   for  the gross  value   reduction                                                              
under the tax law.                                                                                                              
Commissioner Feige replied in the affirmative.                                                                                  
Ms.  Walsh hoped  the  questions  had been  addressed  related  to                                                              
where production occurred on the North Slope.                                                                                   
10:09:05 AM                                                                                                                   
Ms.  Walsh  discussed  slide  14,  "State  of  Alaska,  Status  of                                                              
      .notdef 2019 is expected to be the highest year in the last                                                             
      20 years for exploration and production rig activity.                                                                     
10:09:42 AM                                                                                                                   
AT EASE                                                                                                                         
10:10:36 AM                                                                                                                   
10:11:19 AM                                                                                                                   
Co-Chair   Stedman  queried   DNR's  opinion  on  the  activities                                                               
within the oil and gas industry.                                                                                                
Ms.  Walsh responded   that  DNR was  in a  position  to see  jobs                                                              
for  individuals   in  the  oil  and  gas  industry,   because  of                                                              
activity.    She   stated   that   exploration    did   not   lead                                                              
immediately   to  production,   or money   to  the  state  general                                                              
fund.  She  stressed   that  it was  an  exciting   indication  of                                                              
the state's oil and gas.                                                                                                        
Commissioner   Feige  furthered   that  part  of the  exploration                                                               
uptick  was   because  of  Brookian   play  types.   She  stressed                                                              
that  there   was  excitement   in  the   classification   of  the                                                              
North  Slope   as a  "super   basin",  because   of  the  prolific                                                              
nature of the resource.                                                                                                         
Co-Chair  von  Imhof  asked  whether   there  were  other  factors                                                              
that a company would invest in Alaska.                                                                                          
Commissioner   Feige  stated   that,  in  her  personal   opinion,                                                              
companies   wanted   a   diverse   set   of  projects   in   their                                                              
10:15:46 AM                                                                                                                   
Senator    Wielechowski    asked   how   many   exploration    and                                                              
production   rigs  were   on  the  North  Slope,   and  queried  a                                                              
comparison to Texas or North Dakota.                                                                                            
Ms.  Walsh  stated  that the  projected  rig  count  for the  2019                                                              
season  was  upward  of 15  rigs,  which  was  the high  in  2004.                                                              
She felt that Alaska barely compared to the other states.                                                                       
Co-Chair Stedman requested the historical rig count.                                                                            
Ms. Walsh agreed to provide that information.                                                                                   
Ms. Walsh continued with slide 14:                                                                                              
      .notdef Pikka, Mustang, and Placer finds demonstrate   great                                                            
      .notdef New data suggests enormous potential in Nanushuk and                                                            
      Torok formations.                                                                                                         
      .notdef Legacy fields including Prudhoe  and  Kuparuk   have                                                            
    exceeded internal expectations through infield work.                                                                        
      .notdef Smaller companies, like   Caelus,    BlueCrest   and                                                            
      Armstrong,  are engaging   in exploration   plans that  will                                                              
      help maximize TAPS throughput into the future.                                                                            
      .notdef New players, like Oil  Search,   indicate   industry                                                            
      acknowledgment   of   large,   viable   fields   that   were                                                              
      .notdef Continuous work with   North   Slope   communities,                                                             
      presidential     administration,      and     Congressional                                                               
      delegation  on Arctic  energy  policy  and  decision  making                                                              
      that  support   responsible    development   (ANWR   Coastal                                                              
      Plain, OCS, NPR-A)                                                                                                        
Ms.   Walsh   discussed   slide   15,   "Department   of   Natural                                                              
Resources,   Status  of  Development."  The  slide  showed   a map                                                              
of North Slope Oil and Gas Activity.                                                                                            
Co-Chair   Stedman    asked   Ms.   Walsh   to  provide    further                                                              
information pertaining to land ownership                                                                                        
Commissioner   Feige commented   that she  would  provide  follow-                                                              
up maps.                                                                                                                        
10:21:58 AM                                                                                                                   
Ms.  Walsh   highlighted   slide   16,  "Department   of   Natural                                                              
Resources,   Status  of  Development,"   which  showed  two  maps.                                                              
She  noted  that  activity  maps  for  Cook  Inlet  were  also  on                                                              
the  department  website.   She  directed  attention   to the  map                                                              
on the left of the slide.                                                                                                       
Commissioner   Feige   read  slide  17,   "Alaska  Department   of                                                              
Natural  Resources:   Permitting  Status."   She stated  that  Ms.                                                              
Longan would address the information.                                                                                           
SARA  LONGAN,   DEPUTY   COMMISSIONER,   DEPARTMENT    OF  NATURAL                                                              
RESOURCES,  looked  at  slide 18,  "State  of Alaska,  anatomy  of                                                              
a Large Scale Development Project":                                                                                             
      .notdef Statewide or regional   impact   -   infrastructure                                                             
      development, economic growth opportunities                                                                                
      .notdef Generally require long term   leases  or   dedicated                                                            
      legal  access   such  as  easements   in  order   to  obtain                                                              
      project financing                                                                                                         
      .notdef Lease/Unit Plan of Operations or Plan of Development                                                            
      .notdef Shorter term land use permits   are  necessary   for                                                            
      .notdef Material sales for development                                                                                  
      .notdef Water Authorizations for development and operations                                                             
10:25:54 AM                                                                                                                   
Senator    Bishop   asked   about    water   authorizations.    He                                                              
wondered  if  they  were  annual  or  if  it was  possible   to do                                                              
multiple year authorizations.                                                                                                   
Ms.  Longan  replied   that  some  of  the  water  authorizations                                                               
were  annual,   and  there   were  tools   for  multi-year   water                                                              
authorization    and   use.   She  stated    that   there   was  a                                                              
scientific   process   to  analyze   the  available   water,   and                                                              
monitored   it  over  time   based  on  the   various  companies'                                                               
water needs.                                                                                                                    
Ms.  Longan   discussed   slide   19,  "Operating   Efficiencies,                                                               
Division of Oil and Gas":                                                                                                       
      Division of Oil and Gas                                                                                                   
      .notdef Now includes the State Pipeline Section                                                                         
           .notdef Average oil and gas permit timeline is 3 month                                                             
           .notdef Currently no permit backlog                                                                                
           .notdef Electronic applications                                                                                    
      .notdef Continuous feedback loop with applicants                                                                        
           .notdef Updated guidance documents available online                                                                
Co-Chair   Stedman   requested   a  comparison   between   Alaska,                                                              
North  Dakota,   and  Texas  related   to  permitting  timelines.                                                               
Ms.  Longan   highlighted   slide  20,   "Oil  and  Gas   Resource                                                              
Potential From Federal Managed Lands":                                                                                          
      Tax Act  Coastal Plain Activity                                                                                           
      .notdef BLM to administer an oil and gas leasing program in                                                             
      the Coastal Plain of ANWR                                                                                                 
      .notdef Section 200001 PL 115-97 requires at least 2 lease                                                              
      sales to be held by 2024                                                                                                  
      .notdef Each sale must offer   400,000   acres  of   highest                                                            
      hydrocarbon  potential,   up  to  2,000  surfaces  acres  of                                                              
      Federal   land   to   support    production    and   support                                                              
      .notdef SOA Royalty 50 percent                                                                                          
      NPR-A Activity                                                                                                            
      .notdef Oil and Gas Leasing                                                                                             
      .notdef CPAI continued progress                                                                                         
           o CD-5 production                                                                                                    
           o GMT-1 began production October 2018                                                                                
           o GMT-2 and Willow Development                                                                                       
           o SOA Royalty 50 percent through NPR-A Impact                                                                        
           Mitigation Grant Program                                                                                             
      SOA authorizes water withdrawal; fish habitat permits                                                                     
      for activities on federal lands                                                                                           
      SOA consultation, shares expertise on tundra travel,                                                                      
      air quality, reclamation, etc.                                                                                            
10:32:13 AM                                                                                                                   
Co-Chair   von  Imhof  wondered   whether  there   could  be  more                                                              
than two lease sales.                                                                                                           
Ms. Longan replied in the affirmative.                                                                                          
Co-Chair  von  Imhof queried  the  determination   of the  highest                                                              
hydrocarbon potential.                                                                                                          
Ms.  Longan   replied   that  it   was  utilizing   oil   resource                                                              
estimates,   with   an  understanding   where   there   was  high,                                                              
medium,   and  low   perspectivity   in  various   major   federal                                                              
Co-Chair Stedman handed the gavel to Co-Chair von Imhof.                                                                        
Senator   Wielechowski   wondered  whether   the  department   was                                                              
impacted by the current federal government shutdown.                                                                            
Ms. Longan replied in the affirmative.                                                                                          
Senator  Wielechowski   requested  an  analysis  of  the  impacts,                                                              
and whether they were severe impacts.                                                                                           
Ms.  Longan  replied  that  the issues  were  on a  sliding  scale                                                              
of impacts. She agreed to provide further information.                                                                          
10:35:15 AM                                                                                                                   
Senator   Shower  wondering   whether  the  data  included   other                                                              
agencies.   He  asked  whether   it  was  an  aggregate,   or  was                                                              
there a possibility for the data to not be included.                                                                            
10:35:43 AM                                                                                                                   
Ms.  Longan  replied  that  it  was not  included.   She hoped  to                                                              
highlight    other   agencies   permitting    processes,    for  a                                                              
possible collaboration to reduce delays on projects.                                                                            
Co-Chair von Imhof handed the gavel to Co-Chair Stedman.                                                                        
Ms.  Longan discussed   slide 21,  "Federal  Processes  can  Drive                                                              
Timelines,  NEPA."  She  wanted  to  address  the  length  of time                                                              
it took to receive an oil and gas permit.                                                                                       
Ms.    Longan     highlighted     slide     22,    "State/Federal                                                               
Coordination    is  Key,   Office  of   Project   Management   and                                                              
      OPMP coordinates permitting of natural resource                                                                           
      development     projects     in    accordance     with    AS                                                              
      The commissioner may lead and coordinate all matters                                                                      
      relating to the state's review and authorization of                                                                       
      resource development projects.                                                                                            
  .notdef OPMP is located in the DNR Commissioner's Office                                                                    
      .notdef OPMP coordination is voluntary, reimbursable                                                                    
Ms.   Longan   looked    at  slide    23,   "Office   of   Project                                                              
Management and Permitting, State Agency Coordination":                                                                          
      .notdef Department of Environmental                                                                                     
      .notdef Department of Fish and Game                                                                                     
      .notdef Department of Natural Resources                                                                                 
      .notdef Department of Health and Social                                                                                 
 .notdef Department of Transportation and Public Facilities                                                                   
      .notdef Department of Law                                                                                               
      .notdef Department of Commerce, Community and Economic                                                                  
      .notdef Department of Labor and Workforce Development                                                                   
      .notdef Department of Public Safety                                                                                     
      .notdef Department of Revenue                                                                                           
      .notdef Alaska Railroad                                                                                                 
      .notdef Regulatory Commission of Alaska                                                                                 
      .notdef Alaska Oil and Gas Conservation Commission                                                                      
Ms.   Longan   highlighted    slide   24,   "Office   of   Project                                                              
Management and Permitting, State Agency Coordination":                                                                          
      .notdef Army Corps of Engineers                                                                                         
      .notdef Environmental Protection Agency                                                                                 
      .notdef Bureau of Land Management                                                                                       
      .notdef Bureau of Ocean Energy Management                                                                               
      .notdef Bureau of Safety and Environmental Enforcement                                                                  
      .notdef DOT Pipeline and Hazardous Materials Safety                                                                     
      .notdef National Park Service                                                                                           
      .notdef U. S. Forest Service                                                                                            
      .notdef U. S. Fish and Wildlife Service                                                                                 
      .notdef National Marine Fisheries Service                                                                               
      .notdef Federal Aviation Administration                                                                                 
      .notdef Occupational Safety and Health Administration                                                                   
      .notdef U. S. Coast Guard                                                                                               
Ms.  Longan   addressed   slide   25,  "Communication    Protocol,                                                              
State Agency Coordination."                                                                                                     
10:45:49 AM                                                                                                                   
Senator  Bishop  requested   an update  on  the  Arctic  Strategic                                                              
Transportation   and  Resources  (ASTAR)  Project.   He wanted  to                                                              
take advantage of the royalty rate in Smith Bay.                                                                                
Commissioner    Feige   replied   that   ASTAR   was  established                                                               
approximately   one   year  prior   in  DNR,  and   was  still  an                                                              
active  program.  She  shared  that  there had  been  a number  of                                                              
public  meetings  with  villages  and  communities   on the  North                                                              
Slope.  She  remarked   that  there  was   work  planned  for  the                                                              
coming   season  for  evaluation   of  gravel   resources   within                                                              
Natural  Petroleum  Reserve-Alaska   (NPRA).  She  noted  that, as                                                              
projects  and  exploration   marched  west  and east,  gravel  was                                                              
a  key   resource.   She  added   that  water   was  also   a  key                                                              
resource  for  construction   of ice  roads  and ice  pads  during                                                              
exploration   season.   She  stated   that  ASTAR  was   currently                                                              
focused  on  understanding   the gravel  resource   to understand                                                               
its  availability   for  future   development.   She  stated  that                                                              
the  coming  summer  would  focus on  work  that the  Division  of                                                              
Geological   and   Geophysical   Surveys   would  be  doing   with                                                              
gravel drilling.                                                                                                                
Senator  Bishop  asked  whether   ASTAR  was a  priority  for  the                                                              
current administration.                                                                                                         
Commissioner    Feige    replied   in    the   affirmative.    She                                                              
furthered  that  there  was  a critical  need  to  understand  the                                                              
resources.   She  stated  that  it  was  important   to  move  the                                                              
program  forward   and gathering   the  information  so  that  the                                                              
state was "ahead of the power game."                                                                                            
Senator  Micciche   wondered   why Alaska   was  excluded  from  a                                                              
2006  Gulf of  Mexico  Energy  Security  Act, where  37.5  percent                                                              
went  to  gulf  producing   states.  He  noted   that  Alaska  was                                                              
excluded   form  that   Act.  He  noted   that  Alaska   was  also                                                              
excluded  from  the  onshore  federal   revenues  of  49  percent.                                                              
He  wanted  to  reignite   the  discussion  around   potential  of                                                              
the  nonstate  lands,  which  would  have  a long-term  impact  on                                                              
Commissioner Feige agreed to provide that information.                                                                          
Co-Chair   Stedman   announced   that   he  would   disperse   the                                                              
responses to the questions.                                                                                                     
10:51:33 AM                                                                                                                   
The meeting was adjourned at 10:51 a.m.                                                                                         

Document Name Date/Time Subjects
011619 SFIN - Oil production and revenue fcst 20190115_Leg presentation update_01142019_v2.pdf SFIN 1/17/2019 9:00:00 AM
Operating Budget
011719 CORRECTED OG Permitting SFIN 01 17 19 FINAL- corrects slide 19.pdf SFIN 1/17/2019 9:00:00 AM
Operating Budget