Legislature(2005 - 2006)SENATE FINANCE 532
03/30/2005 02:30 PM Senate RESOURCES
| Audio | Topic |
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| Overview: Nenana Basin Gas and Oil Project | |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT OVERVIEW
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 30, 2005
2:37 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Kim Elton
Senator Bert Stedman
Senator Ben Stevens
HOUSE RESOURCES
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Gabrielle LeDoux
Representative Jim Elkins
Representative Carl Gatto
Representative Kurt Olson
Representative Harry Crawford
Representative Paul Seaton
HOUSE OIL AND GAS
Representative Vic Kohring, Chair
Representative Ralph Samuels
Representative Nancy Dahlstrom
MEMBERS ABSENT
SENATE RESOURCES
Senator Fred Dyson
Senator Gretchen Guess
HOUSE RESOURCES
Representative Mary Kapsner
HOUSE OIL AND GAS
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Berta Gardner
Representative Beth Kerttula
COMMITTEE CALENDAR
Overview: Nenana Basin Gas and Oil Project
BOB MASON, Vice President, Exploration, Andex Resources
Corporation
SEAN PARNELL, Deputy Director, Division of Oil and Gas,
Department of Natural Resources (DNR)
BOB SWENSON, Petroleum Geologist, Division of Geological and
Geophysical Surveys, Department of Natural Resources (DNR)
MITCH USIBELLI, Manager, Usibelli Energy
TOM DODDS, President and CEO, Andex Resources Corporation
JIM MERY, Doyon Corporation
TONY IZZO, President, Enstar Natural Gas Company
JOHN LAU, Director, Transmission Operations, Enstar Natural Gas
Company
DAN BRITTON, President, Fairbanks Natural Gas
JOE BEEDLE, Vice President, Finance, University of Alaska
ACTION NARRATIVE
CHAIR THOMAS WAGONER and CO-CHAIR JAY RAMRAS called the joint
meeting of the Senate Resources and the House Resources Standing
Committees and the House Special Committee on Oil and Gas to
order at 2:37:08 PM. Present were Representatives Ramras, Olson,
Gatto, Elkins, Crawford, and Senators Elton and Wagoner.
^OVERVIEW: NENANA BASIN GAS AND OIL PROJECT
BOB MASON, Vice President, Exploration, Andex Resources, said a
tremendous opportunity exists because there is so much gas in
the Nenana Basin. Usibelli Energy, Doyon Corporation and Arctic
Slope Regional Corporation are partnering with Andex for
development of approximately 10 tcf. Gas could be provided to
the Anchorage area and ultimately, when the new gas pipeline
comes down from the North Slope, along the TAPS, to Fairbanks.
He highlighted the similarities between the rock formations in
the Nenana Basin and the Cook Inlet where folds of rock about 20
miles below the surface allowed gas hydrocarbons to be formed in
the Tertiary period. The strong potential for gas combined with
a nearby natural gas market makes development of this site very
attractive.
High quality data was gathered by ARCO and Shell, which Andex
combined with all the other information that has been gathered
by the state, the USGS and various academic institutions. It
created a tremendous "data set" indicating that the Nenana Basin
has significant potential. If this information had existed in
any basin in the Lower 48, industry would have drilled
evaluation wells years ago. Because of where the Nenana Basin is
located, industry recognized it as a gas prone basin; but it
just wasn't economic to produce it in the early 80s. Now it's a
different story.
MR. MASON said that Andex was issued an exploration license in
October of 2002 for 480,000 acres. It has four years remaining
on the primary term and it has the option to convert that
acreage to leases with another seven-year term. This provides
Andex with the time it needs to evaluate and develop the Nenana
Basin and they have committed to spending $2.5 million on new
exploration work there. If it is successful, Andex would go to
its partners, Usibelli Energy, Doyon Corporation and the Arctic
Slope Regional Corporation (ASRC), and attempt to get them to
agree to an exploration drilling program to begin by 2006. If
successful then, they could be in the development phase in late
2006 or early 2007. First gas sales could be in Fairbanks by
late 2008.
He emphasized how geographically strategic the Nenana Basin is
and how absolutely critical that was to Andex's decision to go
forward with an exploration program. If the reserve base is
large enough, a pipeline could be built along the Alaska
Railroad Right of Way into Anchorage.
3:03
SEAN PARNELL, Deputy Director, Division of Oil and Gas,
Department of Natural Resources (DNR), introduced BOB SWENSON,
Petroleum Geologist, Division of Geological and Geophysical
Surveys, who covered the state's oil and gas activities in the
Nenana Basin. He said that of all the basins, the Nenana Basin
clearly has the majority of the subsurface information, which is
critical for an exploration program. The state's exploration
license program provides exploration companies with an incentive
to go into areas that have not been explored or have had very
little exploration. Test wells that have been drilled have been
on the outside of the formation and he cautioned that one of the
critical risks of drilling in the formation is the possibility
that the gas hydrates will become trapped and, therefore,
inaccessible.
3:10
MITCH USIBELLI, Manager, Usibelli Energy, said he is very
enthusiastic about the project and the potential to diversify
his company's energy resource base.
TOM DODDS, President and CEO, Andex Resources Corporation,
explained that the company is privately owned and the owners
have been in the oil business since the 1950s. They feel the
Nenana Basin has great potential for gas and oil, but it is a
high-risk area and operating in Alaska is expensive. They have a
two and half month a year drilling season and have barely
finished seismic operations this year. Andex will start working
with the various state departments on permitting wells within
the next 30 to 40 days.
3:16
JIM MERY, Doyon Corporation, said that Doyon worked to get the
project kick-started and helped Andex put together an
exploration license on the adjacent state lands. Doyon's board
liked the project so much that it decided to invest hard cash in
it.
3:18
TONY IZZO, President, Enstar natural Gas Company and JOHN LAU,
its director of Transmission Operations, said Enstar serves
nearly half the state's population and owns and operates 3,000
miles of natural gas pipeline. It is the largest distribution
company and largest utility in the state.
The transmission pipeline arm of Enstar is called the Alaska
Pipeline Company (APC) and it has constructed and operated over
450 miles of high-pressure transmission pipeline and 2,600 miles
of distribution lines. This represents 75 percent of all
transmission pipeline in the state right now for natural gas and
100 percent of the distribution lines. Of great concern to them,
assuming nothing new is discovered, is that the Cook Inlet gas
supply and demand graphed lines intersect in 2012.
3:25
MR. IZZO said that all home heating and power generation gas
requirements are met until 2008. If customers, for some reason,
had to flip to using fuel oil, the next cheapest source of fuel
today, that would represent a $300 million per year increase in
the cost of their energy. This estimate does not include the
cost to convert to that fuel - about $5,000 to $10,000 for an
average home. Enstar already has to scramble to provide power on
high-use days and its strategy is to contract for additional
supply. Changing from an excess supply market to a supply and
demand market has changed the way that supply is negotiated.
Department of Energy (DOE) surveys indicate that sixty-five
percent of customers favored a spur line from the north rather
than local natural gas development.
3:31
The estimated cost for developing onshore gas is $5 billion to
$6 billion with the costs being recovered through the rate-
payer. That much money could also advance a pipeline pretty far
north where proven reserves of natural gas are 35 tcf and would
serve the area's total needs for a few hundred years.
3:36
JOHN LAU, Director of Engineering Transmission Operations for
Enstar, talked about what it takes to build a medium-sized
pipeline. Eighteen percent of the 63 bcf Enstar produces is used
internally and of the remaining, 90 percent is used for
residential use and 10 percent for commercial.
3:35
MR. LAU said a conceptual study of a spur line from Fairbanks to
Cook Inlet will take 18 months and will include everything from
right-of-way leases and permitting to construction contracts and
ordering equipment. Building the pipeline is estimated to take
two years. Towards the end of the construction process the RCA
would review and determine tariff issues. The year 2009 is not
an unrealistic date to look at for needing more supply and the
time to start doing the study work is right now.
Enstar is in the conceptual study process right now. It is
partnering with the Department of Energy, ML&P, Chugach
Electric, ANGDA and the other state agencies to determine what
type of lease they would get for the right-of-way. It is also
sizing the pipeline and looking at storage options.
3:43
MR. IZZO concluded adding that they figure the pipe will be 24
inches with compression potential for future growth.
3:45
SENATOR SEEKINS asked why anyone would do any further
exploration in Cook Inlet if it is so expensive and how would
Enstar make up the gas deficit in the meantime.
MR. IZZO replied that he basically feels Enstar's mission is to
bring the lowest-cost dependable energy to the consumer as
possible. If Nenana Basin gas is developed, their plan would not
be to fill up their requirements 100 percent with it since
potential natural disaster and federal regulation makes
potential emergencies too costly. Enstar's contracts are
continuously layered for reliable service without relying too
heavily on just one source. It's possible that they might fill
requirements long enough that other companies might be
discouraged from going forward with any new activity.
CO-CHAIR RAMRAS asked what it would cost to build 50 miles of
transmission lines to Fairbanks.
MR. LAU indicated that a 12-inch line could be built for around
$700,000 to $800,000 per mile and a 24-inch pipe, which would be
more suitable for future growth, was estimated to cost around
$1.5 million per mile, plus or minus 20 percent, two years ago.
CO-CHAIR RAMRAS asked what kind of demand from Fairbanks would
be needed to justify building a transmission line from Nenana to
Fairbanks.
MR. LAU replied that the full potential for Fairbanks would be
27 bcf per year - 9 bcf would be residential and commercial and
the other 18 bcf per year would be if power generation,
including military generation, were on natural gas. The
Fairbanks market is as big as Enstar's market is right now in
Southcentral.
3:58
DAN BRITTON, President, Fairbanks Natural Gas and Northern
Eclipse LLC, said they have a liquid natural gas facility in Pt.
Mackenzie that liquefies Cook Inlet gas and trucks it to
Fairbanks for the heating market. They deliver about .6 bcf per
year to a little over 700 Fairbanks customers and see strong
market growth. The challenge has been to compete with fuel oil
markets in Fairbanks and their customers will save money when
converting to gas. Reheating and transportation costs that they
now have would go away when a pipeline is built and gas is
cleaner and very versatile to use compared to fuel oil. He
projected 85 percent of their customers would convert from fuel
oil to gas in the Fairbanks area.
REPRESENTATIVE RAMRAS asked what comes first, production or
infrastructure.
MR. IZZO responded that Enstar would have a two-year build out
in the Fairbanks region starting with the skeleton
infrastructure and going from there. The transporter would
contract with the supplier/developer and the seller.
CO-CHAIR RAMRAS asked if a $50 million pipe were built from the
Nenana Basin to Fairbanks before transmission lines were built
to residential and commercial users, how much gas would have to
go through for tariff to be bearable.
MR. IZZO replied that once the study was mature, they would know
what the expected rate of return would be and what tariff would
be acceptable. It would not be difficult to solve.
CO-CHAIR RAMRAS asked how many miles of pipe would go to Cook
Inlet.
MR. LAU replied that a 24-inch pipe would be a little more than
300 miles long and operate at 1,400 psi.
MR. BRITTON expanded that in Fairbanks for every mile of
distribution, coinciding LNG infrastructure has to be built.
Fairbanks Natural Gas is spending more on LNG infrastructure
than on distribution, but that will change when the
infrastructure is finished. If it had more supply, its market
would increase significantly.
CO-CHAIR RAMRAS asked what comes first - the production or the
infrastructure.
MR. BRITTON replied that Fairbanks Natural Gas would continue to
expand its system with an LNG supply as well as expanding its
existing distribution backbone in Fairbanks, but they are ready
for gas supply at any time.
CO-CHAIR RAMRAS asked the producers what the relationship is
between the producer and the people who build the pipe. He
specifically asked if it was a friendly relationship or
adversarial.
MR. IZZO replied that Enstar's process is that once something
has been identified to sell, they enter into an agreement on
supply, which varies depending on the amount of gas being
negotiated. A recently approved contract to serve Homer, for
instance, says that the producer must produce a certain amount
and his company is required to build a line to Homer.
CO-CHAIR RAMRAS asked what the Legislature can do to facilitate
the process.
MR. IZZO replied that the permit process could be accelerated.
Right now their estimates are optimistic.
4:15
MR. MASON added that Andex is still in the high-risk exploration
phase and part of their problem is the short time frame of two
and half months in which they actually operate in the Nenana
Basin. The most important thing would be to be able to extend
the current tax-incentive program into the exploration phase.
MR. DODDS added beyond that, a quick response time on permits is
very important in order to have the time to get drilling rigs
and other exploration equipment where they need to be when they
need to be there. Otherwise they have to wait one additional
year before drilling any wells. The cost of their drilling has
increased 50 percent in the last year in the southern part of
the United States. He said the state could also allow for
drilling other than in January, February and the first part of
March, depending on where a lease is located.
SENATOR WAGONER directed his comment to Mr. Parnell saying that
he assumed no one in the department would be taking extended
vacations.
MR. PARNELL responded that the department hasn't experienced
those difficulties, but he is willing to work with any company
that is.
JOE BEEDLE, Vice President, Finance, University of Alaska, said
that it benefits from education and research associated with
activities in the Nenana Basin. In addition, the university
consumes several million dollars worth of energy resources each
year and the potential of Nenana gas is exciting. Secondly, as
the university is a land grant university, he is awaiting the
outcome of HB 130, which transfers 250,000 acres to it. The most
exciting single parcel is the 90,000 acres in the Nenana Basin,
which represents approximately 20 percent of the licensed
acreage area. The university would own the subsurface and
surface estate and be entitled to the 12.5 percent royalty
associated with the acres under license.
CO-CHAIR RAMRAS thanked everyone for their presentations and
adjourned the meeting at 4:25 p.m.
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