Legislature(2011 - 2012)Kenai City Hall
10/20/2011 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Cook Inlet Tax System | |
| Railbelt Energy Needs | |
| Marathon Oil Alaska Presentation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
KENAI, AK
October 20, 2011
9:10 a.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bert Stedman
Senator Lesil McGuire - via teleconference
MEMBERS ABSENT
Senator Bill Wielechowski, Vice Chair
Senator Hollis French
Senator Gary Stevens
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Representative Mike Chenault
Representative Paul Seaton
COMMITTEE CALENDAR
Overview: Updates on Cook Inlet production
Cook Inlet Tax System
Railbelt Energy Needs
Marathon Oil
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to consider
WITNESS REGISTER
BRUCE TANGEMAN, Deputy Commissioner
Tax Division
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Presented "An Overview of Cook Inlet
Production Tax Structure and Incentives" to the committee.
JOE GRIFFITH, President
Alaska Railbelt Cooperative Transmission and Electric Company
(ARCTEC)
Anchorage, AK
POSITION STATEMENT: Provided ARCTEC history and Railbelt energy
needs perspective.
WADE HUTCHINGS, Asset Manager
Marathon Oil Company Alaska
Anchorage, AK
POSITION STATEMENT: Provided overview of Marathon's Cook Inlet
production activities and development philosophy.
PAUL ABOKHAIR, Sr. Commercial Advisor
Apache Corporation
POSITION STATEMENT: Provided overview of Apache's Cook Inlet
activities.
BRUCE WEB, Vice President
Escopeta Oil Company
Anchorage, AK
POSITION STATEMENT: Related Escopeta's rig transit to Alaska.
VLADIMIR KATIC, Alaska Project Manager
Escopeta Oil Company
Anchorage, AK
POSITION STATEMENT: Provided an overview of Escopeta's
development activities in Cook Inlet.
ETHAN SCHUTT, Sr. Vice President
Land and Energy Development
Cook Inlet Regional Inc. (CIRI)
Anchorage, AK
POSITION STATEMENT: Provided overview of CIRI's proposed
underground coal gasification (UCG) project in Cook Inlet.
PAUL THOMSEN, Director
Policy and Business Development
Ormat Technologies, Inc.
Anchorage, AK
POSITION STATEMENT: Provided overview of geothermal development
and an update of Ormat's Mt. Spurr geothermal project.
RAHM ORNSTEIN, Director
Business Development
Mount Spurr project lead
Ormat Technologies, Inc.
Anchorage, AK
POSITION STATEMENT: Answered questions about Ormat's geothermal
development at Mt. Spurr.
DARREN MEZNARICH, Manager
Cook Inlet Assets
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Commented on ConocoPhillips' Cook Inlet
activities and its Kenai LNG facility in particular.
ACTION NARRATIVE
9:10:41 AM
CO-CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 9:10 a.m. in Kenai. Present at the
call to order were Senators Stedman, Paskvan, and Wagoner.
^Cook Inlet Tax System
9:12:03 AM
CO-CHAIR WAGONER invited Mr. Tangeman from the Department of
Revenue to explain the Cook Inlet tax system.
BRUCE TANGEMAN, Deputy Commissioner, Tax Division, Department of
Revenue (DOR), presented "An Overview of Cook Inlet Production
Tax Structure and Incentives" to the committee. He explained
that Cook Inlet production tax is the lower of Alaska's Clear
and Equitable Share (ACES) and the Economic Limit Factor (ELF).
ELF on oil production is zero, so no production tax is paid on
oil. The ELF ceiling generally limits tax on gas to an average
of $0.177 per mcf. He provided a sample tax calculation on Cook
Inlet gas under both ACES and ELF and reviewed the numbers for
the committee (slide 3). He said the taxable gas in BTU
equivalent barrels of oil is set currently in statute at a ratio
of 6:1 and that result is the number at which the base rate is
calculated with progressivity kicking in at over $30 a barrel.
9:13:58 AM
SENATOR STEDMAN remarked that the values in his example are so
elementary that they don't accurately reflect how the tax
actually affects the state treasury, and that other issues are
involved like credits and dilution for produced oil. Cook Inlet
was originally ring-fenced and special credits were established
to stimulate development there; a year ago they even added a
"Wagoner Hail Mary." The state knows it's going in the right
direction, but accurate feedback is needed in terms of the
treasury.
MR. TANGEMAN said he agreed that the example is elementary, but
he had to start somewhere and he was given a half hour to
discuss this. He said he would get a lot more detailed in future
discussions.
9:17:03 AM
SENATOR STEDMAN said it would be nice if he not only integrated
the oil and gas tax structure within Cook Inlet but the Arctic
tax structure as well and see how they come together - and look
at successes and failures under the current tax structure and
credits to consider for potential modifications.
REPRESENTATIVE CHENAULT said he had some of the same concerns as
Senator Stedman and he thought the public should be able to see
the tax before ACES and after ACES, when the oil tax was
increased 700 percent, and consider how that change impacted
investment in the state of Alaska.
9:20:05 AM
CO-CHAIR WAGONER said this hearing was to get a capsulation of
what is going on in Cook Inlet. He asked Mr. Tangeman to show
the disparity between the tax structure on the North Slope and
the Cook Inlet where subsidization is going on. He asked what
would happen if the ratio at today's prices - North Slope oil at
$110 and gas at $3.78 - were used.
MR. TANGEMAN replied that a significant difference is obvious
because the price of oil went up and the price of gas went down.
But the statute currently says 6:1 and that is what has to be
used.
CO-CHAIR WAGONER asked if he thought the ratio was significantly
past 20:1 or 25:1.
MR. TANGEMAN replied "perhaps."
9:22:09 AM
MR. TANGEMAN next walked through the following production tax
credits that are available to Cook Inlet explorers and
producers: the qualified capital expenditure credit (AS
43.55.023(a)), the carry-forward loss credit (net operating loss
credit .023(b)), the well lease expenditure credit (.023(l)),
the small producer credit which is based on amount of production
(.024(c)), the alternative credit for exploration (.025), the
jack-up rig credit (.025(l)) and the gas storage facility credit
that is taken against corporate income tax rather than
production (AS 43.20.046).
9:24:11 AM
He explained that the AS 43.55.023 (a)(1) and (2) credits are
for qualified capital expenditures up to 40 percent; Subsection
(b) is the 25 percent carry forward annual loss credit. The 40
percent credit for well lease expenditures, for the Cook Inlet
only, is under AS 43.55.023 (l)(1). It's 20 percent for north of
68 degrees latitude. AS 43.55.024 is the small producer credit
for up to $12 million based on average daily production.
Production is pro-rated to zero from 50 to 100 million
barrels/day; the credit goes away after 100 million barrels/day;
it can only be applied against tax liability and cannot be
cashed in or carried forward.
9:25:18 AM
AS 43.55.025 is the alternative tax credit for oil and gas known
as the exploration tax credit. Eligibility is either 40 percent
outside 10 miles of an existing boundary or 30 percent if it's
inside. In order to be eligible for this tax credit certain
information has to be turned over to the Department of Natural
Resources (DNR).
9:26:14 AM
AS 43.55.025(l) is the Cook Inlet jack-up rig credit that was
enacted a few years back. It is eligible to the first three
unaffiliated persons using the same jack-up rigs that drill an
offshore exploration well. The credit is 100 percent, 90 percent
and 80 percent for the three wells; $67.5 million is available
for the three wells and there is a 50 percent repayment
requirement if exploration activity turns into production.
9:27:00 AM
SENATOR STEDMAN stated that the legislature had put $67.5
million in this year's budget to be available for this credit.
CO-CHAIR WAGONER asked if it wasn't used this year, would it be
reappropriated.
SENATOR STEDMAN replied no; it would roll forward for next year.
MR. TANGEMAN said AS 43.20.046 is the Cook Inlet tax storage
credit that is applicable against the state's corporate income
tax. It's equal to $1.50 per million cubic feet (mmcf) for
working gas storage capacity up to the lesser of either $15
million or 25 percent of start-up costs. The facility must have
working gas storage capacity of at least 500 million cubic feet
and a withdrawal capacity of 10 million cubic feet per day.
9:29:46 AM
SENATOR STEDMAN asked for a rundown on the royalties. He didn't
want folks to get the impression that zero revenue is coming
into the treasury from the Cook Inlet Basin.
9:30:16 AM
MR. TANGEMAN replied that the royalty is handled by the DNR, and
it is set at 12.5 percent.
9:31:30 AM
REPRESENTATIVE SEATON asked him to explain the corporate income
tax on gas storage.
MR. TANGEMAN responded that credit is for the owner/operator of
the storage facility itself and it would go against their
corporate income tax.
9:33:42 AM
At ease from 9:33 to 9:34 a.m.
^Railbelt Energy Needs
9:34:37 AM
CO-CHAIR WAGONER invited Mr. Griffith to review Railbelt energy
needs for the committee.
JOE GRIFFITH, President, Alaska Railbelt Cooperative
Transmission and Electric Company (ARCTEC), said the cooperative
was created about a year ago on the ashes of the Greater
Railbelt Energy and Transmission Corporation (GRETC) bill that
didn't go anywhere. Five of the six Railbelt utilities got
together and created a Railbelt Generation and Transmission
Cooperative and called it ARCTEC. ARCTEC received a $56 million
grant from the legislature for which they are very thankful.
MR. GRIFFITH said ARCTEC has a plan that can easily be called
the Railbelt Energy Plan; it's a derivative of the Railbelt
Integrated Resource Plan that the Alaska Energy Authority (AEA)
started three or four years ago. About five years of effort went
into earlier versions.
He explained that the Southcentral Power Project is a Chugach
Electric and ML&P partnership; it is being built at the Chugach
headquarters site. The Eklutna Generation Station Project is the
Matanuska Electric (170 mgw) Plant to be built at the Eklutna
site, the old power house site for the original Eklutna
hydroelectric project. Battle Creek is near Bradley Lake and the
intent is to divert 30,000 mgw hours-worth of additional water
into Bradley Lake. It hasn't received a full go-ahead as yet,
but money has been placed on it and people are working today.
The good news is that no one has found any fish in the area that
affects the diversion. It's probably a $30 million project and
$3 million to $5 million has gone into it so far.
He said there are several transmission projects but the whole
transmission system is very confusing so he wouldn't go into
great detail. Two transmission lines run from Fairbanks to
Healy; one was funded by AEA and the second one has been there
"an eternity" and was built to provide a path to get the 25 mgw
of the Healy coal site up to Fairbanks. The Alaska Intertie runs
from Healy to Teeland; the portion from Teeland to Willow
belongs to NEA and is under lease to AEA (this is one of their
two large successes - Bradley Lake is the other one).
9:39:38 AM
In the Railbelt, the geothermal project is proceeding with one
additional well. Fire Island, 17 mgw of wind power, just went
before the Regulatory Commission of Alaska (RCA); Chugach has
agreed to take that power with Matanuska Electric taking 15
percent. The price is not finalized, but it looks like it's in
the $90 to $95 mgw/hour range. The Eklutna generation site is
Matanuska's project about six miles down the road from the
existing Eklutna hydro. South Anchorage is a Chugach and ML&P
joint effort. There are several Interties that come from Beluga
around the Inlet; one that crosses the Inlet to Elmendorf Air
Force Base and one that comes from Bradley Lake up across to
Homer up to Nikiski over to Quartz Creek and all the way back
into Anchorage. It's a weak system, Mr. Griffith emphasized, but
a very important one, because they are the means by which power
gets delivered to the people of Southcentral Alaska.
MR. GRIFFITH said the $56-million appropriation from last year
is a major factor in upgrading the system. They are going to
upgrade from Nikiski to Quartz Creek and from Quartz Creek up to
the University segment. Another project is the Cook Inlet Gas
Guttering System (CIGGS) remodel that changed a fitting between
Nikiski and Tyonek so gas could be moved in either direction. It
will require some compression and the compressors are not in
yet, so it's not fully usable now. Unfortunately, he said, the
major delivery to Anchorage comes from the 20 inch line from
Beluga up to Palmer and around the corner and back down to ML&P
plant 2. The bulk of the state's population is on that 20 inch
line.
He said that Golden Valley is doing 25 megawatt wind power
project at Eva Creek and is considering importing North Slope
LNG to Fairbanks by truck. That will be a difficult project, but
it will deliver energy at less than what Golden Valley is paying
today and the price of energy in Fairbanks is a problem for
everybody.
MR. GRIFFITH said everyone believes LNG importation will happen,
because Alaska can't get its resources on line, barring some
really good production out of Cook Inlet, in time to solve the
utilities' gas problem.
9:43:53 AM
He related that Watana hydro on the Susitna River about 125
miles upriver from Talkeetna is a facility AEA is working on.
ARCTEC is supporting it, but does not have an active role other
than going to the meetings and providing advice. Just yesterday,
AEA finally got around to asking how much the utilities would
require out of Watana when and if it is produced and ARCTEC will
be providing that answer soon.
The Intertie Management Committee is the group that is defining
the operation of the Interties. It will be in place within 60
days and will replace the old Intertie Operating Committee that
operated the Alaska Intertie from Douglas/Teeland up to Healy.
Most of the work on it has been done and it awaits approval by
the Alaska Industrial Development and Export Authority (AIDEA)
board. He didn't see any difficulty at this time.
MR. GRIFFITH said he meets with the AEA's project people
periodically and talks about what is under way and how the
energy situation can be improved. A Bradley Lake Project
Management Committee, made up of the managers of the utilities,
has been in place since Bradley Lake was born and it has worked
well.
9:46:06 AM
REPRESENTATIVE CHENAULT asked who owns the Interties.
MR. GRIFFITH replied that the State of Alaska owns Healy to
Douglas, NEA owns Teeland to Douglas, Chugach owns University to
Quartz Creek (under the Bradley Lake agreement), Homer owns
Quartz Creek all the way to Bradley Lake except the portion that
was built with Bradley Lake money (under an agreement). As long
as Bradley Lake is there Homer has to move the power over, a
real benefit to Homer, because no matter what they do they get
energized.
He said that the Alaska Intertie Agreement is the current
agreement under which the utilities operate the Interties, and
while some don't think that is a big problem, it really is. It's
a coordination issue to ensure that, first, the most efficient
energy is on line at all times and, second, that you have all
the reserves you need, because a blip anywhere on the system can
cause the whole system to break down. That last happened in 1989
and it took five days to put back together.
He related that they work together on legislative efforts that
will be brought to the legislature through AEA next year and he
forewarned them that they will see an awful lot of Intertie
requests, because that is one of the weakest portions of the
system today.
He said ARCTEC is working with a number of independent gas
explorers and has talked to everyone on Cook Inlet and that
Enstar is building the Cook Inlet Natural Gas Storage Alaska
facility (CINGSA). ARCTEC is also working on LNG importation and
jointly on crisis plans and exercises. Everyone believes this
will be the most difficult year to face, because CINGSA isn't on
line and the gas supply with the LNG plant shut down will be
less. When a cold snap comes "it will take some tight management
to get us through that."
9:49:49 AM
MR. GRIFFITH stated that Cook Inlet exploration is their
alternative fuel and if AGIA goes forward, a spur line off of
Delta Junction or Glennallen is pretty much a given. A bullet
line is being pushed by the ASAP folks; LNG importation is being
looked at as well as propane. In fact, he has asked the
producers of the engines he will put in the Eklutna site to run
some tests on burning of propane - first, because it's a
wonderful backup and, secondly, because he can buy it cheaper
than he can buy diesel fuel. The last resort is burning diesel,
and any of the plants that have a supply and the fuel nozzles
fixed can burn diesel. ML&P plant 2 has a dual fuel capacity and
the Eklutna gas generation site will also have dual fuel
capabilities.
9:50:08 AM
He said that gas is exceptionally important to members - he
always says that heat and light are not optional in Alaska - and
the electrics have to protect the gas system, because they are
the ones who can shut people off and reduce the demand. The gas
deliverers have little capability to do that and the worst thing
that can happen is to let the gas system decline to the point
that it fills up with air and the pilot lights go out; it takes
months to repair. For a serious gas shortfall they would plan to
do rolling blackouts.
MR. GRIFFITH said that electricity greases the economy and he
related how in one of the big outages last year the MTA system
went down because the generators at the various sites ran out of
gas, and people became really incensed that they couldn't
communicate with anybody. Electricity is important and it's
important to the gas system. So, first priority has to be the
gas system and they always like more supply if they can get it.
Unfortunately the ASAP line will not come in time to solve the
immediate problem, so something has to be done soon and Enstar
has taken a step. If reliable, Cook Inlet supply can be
accomplished and that would be wonderful. But in the meantime
quick permitting is needed as well as incentives for drilling.
And he didn't see any way out of importing LNG. He provided a
comparison of Cook Inlet retail energy prices and reviewed those
figures (slide 7).
9:53:43 AM
He didn't touch on any of the bigger Southeast energy issues
saying they have good interties and hydro facilities. Other
folks in the Bush have their own problems and challenges.
CO-CHAIR PASKVAN asked if LNG imports from the North Slope in
the comparison are intended to be tanker transport.
MR. GRIFFITH replied no; Golden Valley was looking at using 40
trucks per day.
CO-CHAIR WAGONER introduced several people in the audience:
Harold Heinze, Alaska Natural Gas Development Authority (ANGDA);
Brad Janorschke, Homer Electric; Joe Gallagher, Homer Electric;
Dan [indisc.] ExxonMobil; David Hall, [indisc.] and Jeff Logan,
lobbyist.
10:29:43 AM
Recess from 9:56 to 10:30 a.m.
^Marathon Oil Alaska Presentation
10:29:43 AM
CO-CHAIR WAGONER called the meeting back to order and mentioned
a two-page handout from Harold Heinze, ANGDA CEO, and that he
wouldn't do a presentation.
WADE HUTCHINGS, Asset Manager, Marathon Oil Company's Alaska
Business, said Marathon has a rich company history and a rich
history of exploring for and producing gas in Alaska. The
company recently completed a major corporate transformation
where they spun off their entire refining, marketing and
transportation business into a stand-alone company now known as
Marathon Petroleum Corporation. The remaining entity, Marathon
Oil Corporation, is now an independent oil and gas exploration
and production company still headquartered in Houston, Texas,
with worldwide operations. They have a new logo and competitors,
but have the same enduring commitments to safe, clean and
responsible operations.
10:32:15 AM
He said there have been several very positive changes in the oil
and gas investment environment in the Cook Inlet. The first are
Cook Inlet tax reforms and then the several process improvements
at the RCA. The tax reforms have allowed Marathon to make its
projects more competitive on a global scale and to continue to
access investment knowledge for the corporation. They compete
for capital within their own company with projects all over the
world.
MR. HUTCHINGS said the process improvements within the RCA have
created much better stakeholder alignment and timeliness of
decisions, which has been critical in helping Marathon plan its
business better. Most of these changes have come directly from
legislation or via legislative support and he thanked them for
the work they had done to make the changes. He also noted they
were pleased to see recognition within the DNR of the continued
need for streamlining of the regulatory process, because a
predictable and transparent regulatory and fiscal regime is
critical in continuing to attract investment dollars to the
state and to Cook Inlet.
He said that Marathon has frequently said they see a Cook Inlet
supply/demand cross-over point sometime in the next two to three
years. Certainly increased exploration, development and storage
capacity can potentially offset that balance for several years,
but a focus on assuring sufficient supplies of natural gas both
internal and external for the Basin is a necessary and
responsible approach.
Marathon's base business in the Cook Inlet remains strong and
they remain committed to investing there Mr. Hutchings said. In
2010 they averaged gas sales of $104 mmcf/day, which represents
roughly 34 percent of total Cook Inlet gas sales.
10:35:11 AM
The primary objective of their Alaska business is meeting the
contractual gas sales commitments to their company. Their other
primary objectives are operating in a safe, clean and
responsible manner and ensuring that their assets produce
competitive returns. Meeting their current and anticipated
future contractual commitments requires investment on their part
in maintenance and new equipment to keep wells and fields
producing reliably, particularly during the winter months' peak
demand.
Given the supply/demand balance, Marathon recognizes
opportunities to develop additional resources and capture
incremental gas sales. Their capital investment plan reflects a
take that is fairly in line with their recent investment
history. These investments will be in many forms: drilling new
wells, going after deeper or new targets and drilling additional
development wells within their fields and trying to add
productive capacity within the well base they currently have.
MR. HUTCHINGS said the investment Marathon has made in its Kenai
gas storage continues to be a critical component of their
operating model. The DNR has listed this storage with a volume
of 60 bcf with a deliverability of 60 mmcf/day. This storage
capacity has been an important part of their operational ability
to both contract and meet winter peak gas sales. Provided
regulatory clarity is maintained they plan to continue to invest
in and utilize this gas storage.
Marathon also plans to continue to invest in their people and
their local communities. Over 90 percent of their Alaska-based
employees are Alaskans and while some of their technical staff
have relocated to North Dakota, Texas and other places, those
individuals are being replaced with mostly local people.
He reported that Marathon is very pleased with the strides its
team has made to operate safely and cleanly and recently went 18
months without a reportable injury by both Marathon and its
contractors. They also continue to see important improvements in
their ability to limit, and even eliminate, minor spills to the
environment, and he said Marathon will continue being actively
engaged in the communities they live in.
10:37:51 AM
MR. HUTCHINGS said state government needs to strike a balance
between two very important objectives, meeting Southcentral
Alaska's energy demands and encouraging a vibrant Cook Inlet in
an exploration and production environment. In addition to the
potential for resources and regulatory and fiscal certainty,
investment in exploration and development requires a high degree
of market certainty.
Historically the upward limit of market availability has
inhibited robust natural gas exploration and development. The
reality is that projects like the Alaska Stand Alone Pipeline
(ASAP) introduce new uncertainty for producers in the Inlet
regarding the future of the gas market there. The implications
for the local consumption market, which is estimated to be
around 90 bcf/year, are important to this discussion. It's
probably stating the obvious that a pipeline like ASAP will
require significant long-term contracts to be viable. And it's
not a stretch that such contracts could likely tie up all the
uncontracted future local market in the Inlet.
10:39:19 AM
The throughput capacity of ASAP is roughly 180 bcf/year, and
they question whether this volume will be sufficient
particularly on a monthly seasonally adjusted basis to sustain
or create industrial consumption centers similar to past Cook
Inlet gas lines. They also ask questions around what impacts a
project like this would have upon market price for gas within
the Inlet, which at the end of the day, really is the
underpinning of resource development there.
MR. HUTCHINGS concluded saying that these are complex issues,
but a lack of certainty in these areas creates uncertainty for
long term gas exploration and production projects. It's clear
that these kinds of solutions create an environment with a very
small industrial gas consumption market and a situation where
nearly all of the local market is tied up in long term
contracts. Then there is little incentive for future Inlet gas
exploration and development. He encouraged all parties to work
on solutions for ensuring that local demand is met particularly
during the peak winter months and that a robust Cook Inlet
exploration and production environment continues to exist.
REPRESENTATIVE SEATON asked if Marathon has discussed this issue
before or has it just come up.
MR. HUTCHINGS answered that generally speaking it hasn't been a
significant part of their current day-to-day operational
discussion, but he brought it up today in the broader picture of
future projects when they would want to be available to sell gas
in the Inlet.
CO-CHAIR PASKVAN asked if their long term plans are affected by
export potential.
MR. HUTCHINGS replied that generally speaking with the pace of
their investments over the past couple of years and the pace
they plan on continuing, those kinds of considerations have
significant impacts.
CO-CHAIR WAGONER, finding no further questions, thanked him for
his testimony.
10:43:44 AM
At ease from 10:43 a.m. to 10:47 a.m.
10:47:27 AM
CO-CHAIR WAGONER invited Mr. Abokhair to give his presentation
on Apache's Cook Inlet activities.
PAUL ABOKHAIR, Sr. Commercial Advisor, Apache Corporation, said
they are a new comer to Cook Inlet and right now they have about
3 billion barrels of oil equivalent (BOE) reserves and have
produced 732,000 BOE/day for 1Q2011. They operate in six areas
of world: they are the largest producer in Egypt's Western
Desert, they are with the EnCana joint venture in Canada's Horn
River Basin; they are the fourth largest producer in the Gulf of
Mexico (number one in shallow water), the second largest
producer in Texas, the seventh largest in Argentina, the third
largest in UK North Sea and the third largest in Australia's
Carnarvon Basin.
Apache's mission is to grow a profitable global exploration and
production company in a safe and environmentally responsible
manner for the long term benefit of their shareholders. They are
committed to transparency of their operations and to the
environment.
10:49:05 AM
MR. ABOKHAIR said their International New Ventures Group is in
charge of the Cook Inlet project. They became the largest
acreage holder in Cook Inlet with more than 800,000 acres.
CO-CHAIR WAGONER asked him if that acreage is all on state land
since Alaska has a 500,000 acre restriction and if the other
300,000 acres is non-state holdings.
MR. ABOKHAIR answered "correct" and that the restriction will
not apply to privately held land. The way they intend to acquire
more leases in the future is by taking part in existing units
and on privately-held CIRI and Tyonek lands and other nations'
land where the restriction does not apply. Their main focus is
oil and they believe Cook Inlet has a lot of potential that
hasn't been tapped yet. The Inlet has very limited 3D seismic,
so their biggest concentration now is on conducting a full Cook
Inlet 3D seismic operation in the next few years; it covers both
onshore and offshore acreage. He stated they intend to operate
here for 25 or 30 years and that they have applied for permits
in "the left area [of Cook Inlet]" as he indicated on slide 7.
MR. ABOKHAIR said they will use a wireless seismic nodal system
that has minimal environmental effects for onshore seismic. The
nodes weigh about five pounds each and are buried in the ground
and can't be seen. He said the information can be shared with
other operators "under certain conditions, of course."
10:53:41 AM
For offshore operations another new technology nodal system will
be used with nodes that look like half a barrel of oil and weigh
65 lbs. each. Like the onshore nodes, they are powered by
rechargeable batteries. They are connected by a small tether and
get dropped off by boats to lie at the bottom of the sea. These
nodes are listening devices and have no transmitters just like
the onshore ones. Basically, an explosion is set off, the nodes
pick up the sound and the information gets downloaded. Currently
they are using about 6,000 nodes for onshore operations and
about 2,000 for the offshore.
10:55:35 AM
He said the biggest hurdle right now is the permitting of
operations. Their timeline is aggressive and they are on
schedule for finishing in three years.
10:58:53 AM
REPRESENTATIVE CHENAULT asked how the subsea seismic nodes will
be shot.
MR. ABOKHAIR replied they will use onshore detonations for
shallow water, but in deep water they will use an air gun in the
water.
CO-CHAIR WAGONER, finding no further questions, thanked him for
his presentation.
11:00:42 AM
Recess from 11:00 a.m. to 1:30 p.m.
1:30:50 PM
CO-CHAIR WAGONER invited Mr. Web to present Escopeta Oil's
update on Cook Inlet activities.
BRUCE WEB, Vice President, Escopeta Oil Company, said he was
born and raised in Alaska and spent 13 years at the Department
of Natural Resources (DNR) in Permitting and Compliance. When he
retired from the state he went into private consulting and to
work for Aurora Gas in the Cook Inlet for about five years. Once
the jack-up rig got close to Alaska he jumped ship and went to
Escopeta.
VLADIMIR KATIC, Alaska Project Manager, Escopeta, said he is a
petrochemical engineer with 40 years of experience in world-wide
drilling and production and now he is in Alaska.
1:32:11 PM
MR. KATIC said their presentation would be in two parts. Mr. Web
would talk about the rig's transit to Alaska and he would give a
presentation on how Escopeta will develop gas and oil with
accelerated development for gas.
1:32:31 PM
MR. WEB said the rig left Galveston, Texas, on March 18 for the
beginning of its three-month voyage to Nanaimo, British Columbia
(BC), where he became more involved with the project. The rig
was too big to go through the Panama Canal, so it had to go
around the tip of South America. It was actually welded to the
boat and when it hit rough seas in the southern Gulf of Mexico
it had to pull over in Uruguay for repairs. That resulted in
extensive leg inspections while in British Columbia. The rig
finally arrived in Kachemak Bay, Alaska, on August 7, five
months after it left Galveston.
1:36:56 PM
MR. KATIC remarked if it wasn't for the state's incentives this
rig would not be in Cook Inlet. It would be too expensive for
little guys especially. It will aid Escopeta in finding oil and
gas in the Kitchen Unit under four scenarios:
1. outrigger caisson
2. subsea
3. two-deck platform
4. 3-deck platform
The outrigger caisson can be installed with the jack-up rig. It
is 14 ft. in diameter and similar to one leg for the Osprey
Platform; it has a six well capability and a deck with heliport
and emergency quarters. The caisson structure could be
fabricated in Anchorage, Vancouver, Washington or the San
Francisco Bay area. The caisson would be towed to Cook Inlet.
1:41:01 PM
CO-CHAIR WAGONER remarked that they could be fabricated in Kenai
and Nikiski saying, "We have some of the best welders in the
world here and if they aren't the best, we've got a teacher out
at the college who can teach them to be."
MR. KATIC said they would like it to be in Kenai as long as it
has the facilities. He said no large barge cranes would be
needed to install the caisson; it could be pulled upright by a
boat and settle to the bottom. Then a jack-up rig moves onto
location and assuming the well is successful the jack-up unit is
used to drive piles and install the deck. It could have gas
production in March.
1:42:05 PM
The advantages in using an outrigger caisson platform are that
no derrick barge is needed, it has minimum cost and there is a
short timeline to production. He didn't see too many
disadvantages, and said that one had been modified before and
used in Cook Inlet.
1:42:24 PM
Subsea wells work well if there is no ice (if the well goes down
nothing can be done until spring time) and it hasn't ever been
done in the Cook Inlet.
The existing platform has some known oil around it but it can't
be reached, but another platform can be tied to it and
additional oil can be recovered that way.
1:43:25 PM
He showed pictures of a single subsea "Christmas tree."
1:44:01 PM
CO-CHAIR WAGONER asked the distance from the mudline of the
subsea well completion to the tree cap.
CO-CHAIR WAGONER asked if the whole unit stays on the ocean
bottom with the cage around it.
MR. KATIC answered yes; the protective cages will deflect any
rocks. He said this has more protection than any other pipeline.
1:45:36 PM
He said that the Osprey Platform is a good example of a two deck
platform. The disadvantage is that it can only be installed in
shallow water - 40 to 60 feet deep - and has no space for
production facilities. It does not need a heavy lift barge crane
and has a 28-well capacity. He said the Osprey was fabricated in
Anchorage and shipped to the platform.
MR. KATIC explained if they have a large oil and gas discovery
in the Kitchen Lights Unit they would model the design after
Steelhead [three-deck platform], which requires a heavy lift
barge to install. A gas line would be 8 to 10 inches depending
on the volume and a six-well caisson could produce 10 mmcf/day
per well. A six-well platform would produce 50 to 60 bcf/day and
would be handled by an 8-inch line either to north Cook Inlet or
to the shore. He said he was using 2008 numbers so those would
have to be updated.
1:48:55 PM
CO-CHAIR WAGONER asked how long it would take to get producible
gas.
MR. KATIC replied if they are successful in drilling to the gas
zone this year, the engineering and fabrication could be done
during the winter season and then everything would be ready.
They will know where the reserves are and after checking with
all the agencies Kitchen well 1 would have to be deepened to the
Jurassic strata. Then they will start developing the six wells
in the third quarter of next year. Production would happen in
2012 and early 2013, because all six wells won't be able to be
drilled at once.
1:51:03 PM
REPRESENTATIVE CHENAULT asked if they preferred to use caissons.
MR. KATIC replied that is the preference for gas only
development.
REPRESENTATIVE CHENAULT asked if they would use a bigger
platform design if they found oil and gas, and added that the
timeline to production has always been a concern (Mr. Katic
earlier mentioned 18 months.)
1:52:48 PM
MR. KATIC responded that they would still use at least one
caisson to get the gas off, but his timeline assumes no
interference from anybody - just full steam ahead. If there is
sufficient gas for two, they would commission a three-level
platform for the oil, because the water is fairly deep, and that
would take three years.
REPRESENTATIVE OLSON asked the current status of a legal issue
[Indisc.].
MR. WEB answered that that homeland security and border
protection issued a notice of violation with a fine of $15
million. Now the attorneys are working on factors that will
reduce that fine.
REPRESENTATIVE OLSON asked if the fine was automatically based
on the greater cost of the cargos.
MR. WEB answered yes.
1:54:59 PM
CO-CHAIR PASKVAN asked how he defines a successful drilling
program.
MR. KATIC replied by the amount of reserves that are being
produced. For a six-well caisson it would be a discovery of 100
to 150 bcf and for a three-level platform it would take about 50
to 100 million barrels. It's all about economics.
CO-CHAIR WAGONER asked what price he uses to determine that.
MR. KATIC replied $70 a barrel was used in their original
numbers.
CO-CHAIR WAGONER asked when they have to pull off this year and
where they would store the rig for the winter.
1:56:37 PM
MR. WEB replied that they had identified both Port Graham and
Seward but would prefer Port Graham, because it has a heavy duty
mooring station and the travel time would be much quicker.
Seward has more infrastructure, but big tug boats would have to
come up from Seward and take the rig back and go out into the
Gulf of Alaska with its bad weather issues.
CO-CHAIR WAGONER said originally they were supposed to be off
site on the last day of October and asked if they are working
toward an extension.
MR. WEB replied they have had an agency meeting with the Coast
Guard, DNR, DEC, AOGCC and NOAH, and the person in charge of the
NOAH ice desk who has 18 years of experience has indicated that
this year, based on historic data, ice won't start forming in
Nikiski until December 8. So it's 18 days back from that date
with the stipulation that they cease all drilling activities by
October 31.
1:58:38 PM
SENATOR GIESSEL asked him to talk about the Beluga whale issues
Escopeta might face.
MR. WEB replied they had to get a Corps of Engineer River and
Harbor Act permit in order to set the rig in Cook Inlet. Because
it was a federal permit they had to go through the Federal Nexus
process which involved getting other agencies to concur with the
Corps determination that there is no significant effect to the
Beluga whales. One of the biggest concerns NMPS had was the 120
decibel level of continuous in-water noise that was determined
to have an adverse effect on the Belugas. So Escopeta hired
Marine Acoustics to put acoustic monitoring buoys around the rig
and monitor in-water noise the rig generated during different
activities. That data is being produced right now; no other data
like it is available for the Cook Inlet.
He said they are also required to have Beluga whale watchers and
a notification system in case one is spotted. Belugas generally
aren't in their area of Cook Inlet until mid-December and during
the drilling season they are typically up in Turnagain Arm. They
haven't seen any from the rig, but a dead Beluga floated by four
miles to the west of it last week.
CO-CHAIR WAGONER, finding no further questions, thanked them for
their presentation.
2:01:50 PM
At ease from 2:01 to 2:03 p.m.
2:03:05 PM
CO-CHAIR WAGONER called the meeting back to order and invited
Mr. SCHUTT, CIRI, to present their update on Cook Inlet
activities, namely underground coal gasification (UCG).
2:04:43 PM
ETHAN SCHUTT, Sr. Vice President, Land and Energy Development,
Cook Inlet Regional Inc. (CIRI), said he oversees their land and
resources group as well as their energy development activities.
Today he would talk about one of their energy projects, the
underground coal gasification project. He said CIRI is the
largest private landowner in Southcentral Alaska with more than
1.3 million acres of surface and subsurface estate available for
responsible oil, gas mineral and alternative energy development.
Their underground coal gasification project is through a company
called Stone Horn Ridge, a joint venture between CIRI and Laurus
Energy, a Houston-based UCG technology company. Laurus is an
affiliate of Ergo Exergy which is a UCG technology company based
in Montreal.
MR. SCHUTT explained that UCG is developing around the world. It
is a process that converts coal in the ground in a deeply buried
coal seam into what is called syn-gas. The process occurs below
impermeable rock layers that are isolated from and protect
freshwater aquifers. Most environmental and safety risks
associated with traditional coal mining, handling, transport and
waste are eliminated using this technology. Many more than 50
test and commercial projects have been completed worldwide; 50
more projects are in development right now and he thinks this
technology will emerge as a factor in the state's energy
scenario.
2:06:15 PM
He described the UCG process as drilling two wells deep into a
coal seam so that they have a connection between them and are
able to communicate. An oxidant such as air or pure oxygen is
injected into one well that starts a combustion reaction that
provides heat and energy, which drives five other chemical
reactions that gasifies the coal and produces the syn-gas. The
combustion reaction consumes about 20 percent of the energy
content. The second well produces syn-gas to the surface where
it is cleaned up for use. It's really a little more complicated
than that and, "You really have a matrix of injection and
production wells instead of a simple well tear."
2:07:46 PM
MR. SCHUTT said that Southcentral Alaska needs more energy and
the Cook Inlet Basin as a whole is a world class coal basin with
no coal production, and they believe it can be produced in an
environmentally acceptable manner. They have done a significant
amount of exploration work and it has confirmed they have a
significant commercial coal resource in the type of geological
setting that is favorable for UCG development.
2:08:54 PM
Syn-gas can be burned or upgraded into other energy products.
Most interesting for their purposes is a process called
"methanation" where it is turned into methane, the primary
element of natural gas. Most of the natural gas in Cook Inlet is
pure methane for local use and potential export. CIRI has also
analyzed using it for manufacturing clean liquid fuels through a
Fischer-Tropsch reactor that has a lot of application in Alaska,
particularly rural Alaska where the diesel crisis is going on.
He explained that the Agrium plant turned natural gas into syn-
gas that got turned into fertilizer. Mr. Schutt said that syn-
gas can be used as feedstock to produce clean liquid fuels,
fertilizer and other petrochemical products if it can be made at
a cheap enough cost.
2:10:06 PM
MR. SCHUTT said their project is located on CIRI land on the
west side of Cook Inlet that has significant confirmed
commercial coal resources. Multiple commercial coal seams have
been confirmed below 650 feet and so has favorable geology. He
showed various slides of well locations, land ownership
patterns, the road network and two of the major regional faults.
2:11:56 PM
MR. SCHUTT said CIRI spent about a year validating UCG as a
legitimate energy technology in a group of technology providers.
They formed a joint venture on Stone Horn Ridge and conducted a
13-hole core drilling program and collected wire line data on
oil and gas exploration from most of the holes. They conducted
field examinations of the core as well as laboratory
examinations, did mud logging and built robust geological models
of the resource. They have also commissioned and received a
concept engineering and costing study of surface facilities with
estimated product costs for most of the products he talked about
earlier. Through this modeling program they have commissioned
specific geological rock mechanics and hydrogeological modeling
and rolled them all into one robust dynamic computer model.
2:13:58 PM
This project is on the cutting edge of a commercial deployment,
he said, but CIRI will take the time it needs to be careful and
make responsible decisions and only build a UCG facility after a
deliberate process.
CIRI commissioned a high resolution shallow seismic program that
will actually go in the field for 25 to 30 days in November. The
results will be incorporated into the data they already have and
a preliminary model of the site will be completed. The next
phase of the program would be a characterization drilling
program. More permitting is needed and baseline environmental
data is being collected for that.
2:15:38 PM
CO-CHAIR WAGONER asked if they are just looking at developing a
syn-gas process or generating and selling some power into the
grid or piping it to some place like Beluga for use as
feedstock.
MR. SCHUTT replied that a fair amount of surface facilities are
required to make commercial syn-gas and they will evaluate the
various markets. One they see now is electric generation with
two basic scenarios; one is to sell to the Chugach facility at
Beluga and the other would be to construct a new power facility
for the project. Methanation to make natural gas is another
option and that would be available to all the in Alaska plus to
ConocoPhillips' LNG export terminal and the Agrium facility. The
third market that has a lot of promise is a Fischer Tropsch
reactor to make diesel and/or jet fuel as a product. Methanation
and/or making synthetic liquid fuels will almost certainly need
large investors.
2:17:44 PM
CO-CHAIR PASKVAN asked how to turn off the underground
combustion once it has been started.
MR. SCHUTT explained that first of all the site is very deeply
buried below the water table and doesn't have any natural
connection to the surface and they would simply quit pumping
oxygen into the combustion chamber. It wouldn't stop immediately
but relatively quickly.
CO-CHAIR PASKVAN asked if a UCG facility could generate
electricity at a comparable cost to natural gas in Southcentral.
MR. SCHUTT replied that he thought the cost would be
significantly lower. The best analogue he could think of was a
South African national UCG facility that has some of the
cheapest electric power in the world. They use a "templated
power plant" with six 700 megawatt coal boilers placed side-by-
side. The scale and design make it very low cost.
REPRESENTATIVE CHENAULT asked if they have estimated how much
gas their UCG facility would produce.
2:21:13 PM
MR. SCHUTT replied no, but the technology is inherently
scalable; and they are finishing the site modeling to validate
their preliminary estimate of more than 300 million tons, which
could be gasified into 4.8 tcf. They have looked at models
running from 20 bcf/year to 90 bcf/year production and found
significant economies of scale at the mid-range.
REPRESENTATIVE OLSON asked if CIRI's project has economies of
scale that Blue Sky's didn't have.
MR. SCHUTT answered yes. He explained that Blue Sky gasified its
coal in surface facilities which cost a lot to build, maintain
and operate, and CIRI plans to use the earth for its
gasification chamber.
CO-CHAIR WAGONER asked what percentage of coal over time would
be combusted.
MR. SCHUTT replied it depends on the overall project design and
other variables.
CO-CHAIR WAGONER said this coal would probably never be mined
anyway.
MR. SCHUTT replied that's right; it's way too deep.
2:25:43 PM
CO-CHAIR WAGONER asked if a large dewatering project would be
needed for combustion when they get into the wet coal.
MR. SCHUTT replied that the water in the coal seam is necessary
for the reaction itself and extra water isn't needed for the
process.
CO-CHAIR WAGONER, finding no further questions, thanked him for
his testimony.
2:26:31 PM
At ease from 2:26 to 3:01 p.m.
3:01:59 PM
CO-CHAIR WAGONER called the meeting back to order and invited
Mr. Thomsen with Ormat Technologies to give his presentation.
PAUL THOMSEN, Director, Policy and Business Development, Ormat
Technologies, Inc., introduced Rahm Ornstein, Director, Business
Development and Mt. Spurr project lead, Ormat Technologies. He
said Ormat Technologies is a publicly traded company and that
their expectations might not always be correct.
3:03:24 PM
MR. THOMSEN said Ormat Technologies is a leader in the
geothermal power sector. It owns and operates approximately 553
megawatts of geothermal power worldwide. They have supplied over
a gig watt (1,000 megawatts) of equipment in 24 countries. Ormat
is unique in that it is vertically integrated meaning they have
the geologists and resource engineers to design the
infrastructure needed for resource development, they design and
manufacture their own equipment and they also have the business
development team to move these projects forward. They employ
about 500 people in US and over 1,100 worldwide.
He noted that the 30 megawatts of operating geothermal power in
Hawaii shares some of the same geological conditions as Mt.
Spurr. He said Ormat's commitment to Alaska started in 1975 when
they supplied over 100 remote power units on the TransAlaska
Pipeline (TAPS) and their first geothermal unit was tested in
Alaska at the University of Alaska Fairbanks (UAF) in 1979.
3:06:15 PM
MR. THOMSEN said one the unique attributes of geothermal
development is that it is a base-load energy resource; that
means they produce power 24/7/52 weeks a year. Once these
projects are up and running they are very reliable, cheap and
cost competitive; once a project is up and running it can offer
fixed, long-term pricing. Geothermal systems, especially Ormat
systems, also tend to be closed-loop systems with near zero
emissions; the geothermal brine being pumped up from the
reservoir can be recycled and air cooling can be used instead of
precious water. They can also create long-term and high quality
jobs.
3:08:03 PM
Some of the inhibitors to geothermal development are that the
resource is scarce - not so much in Alaska that has a lot of
volcanic activity, but they are incredibly hard to find. They
also require a high upfront capital expenditure (CAPEX). In a
risky environment this separates companies with a good equity
position from those that have to raise capital.
3:08:44 PM
He next recapped the fact that approximately 11,000 megawatts of
geothermal power is applied throughout the world and that 24
nations have utility-scale geothermal generation. All of them
have policies in place that have been instrumental in getting
those initial geothermal projects moving forward. So, he said
Ormat is very thankful to the State of Alaska for amending
royalty legislation, providing grants and other avenues for
getting capital into this development.
MR. THOMSEN said Mt. Spurr is located 35 miles west of
Anchorage. Ormat leased 36,000 acres of state land there in
October 2008 and got their "non-intrusive exploration" in the
summers of 2009/10. They drilled two exploration core holes to
the depth of 1,000 ft. in September 2010 and then one deep
exploration hole to 4,000 ft. in the summer of 2011, and over
6,000 ft. of core samples had been donated to the Geological
Material Center in Eagle River to help the state learn about
conditions in the rock they encountered.
The results of the 2009 drilling work were very encouraging, but
the results to date have been less so. The rock is a
conglomerate that is more porous and doesn't do as good a job of
trapping the heat; the temperatures are also much cooler than
expected. They also had rig issues which slowed down their
drilling timeline and so they are just analyzing the work now
and updating their 3D geological model. All their data to date
is being shared with the state DNR, DGGS and AOGCC, and Ormat is
in discussions with them to get thoughts on things they can do
better in their continued exploration efforts to find a prolific
geothermic resource amount at Mt. Spurr.
MR. THOMSEN said the next step is to update their current
exploration claim, which may include a recommendation to rotary
drill to a much deeper depth. He said this project is not dead.
Their best talent is reevaluating where to drill and how to get
below the conglomerate rock to where they think the prolific
geothermal resources exists. He said they are also working with
the state that has some of the best talent in Alaska.
3:13:39 PM
He recapped that Ormat has leased 36,000 acres for about $3.5
million and is currently paying about $100,000 in annual rent on
it. Ormat has spent about $3 million on the nonintrusive
exploration, the exploration drilling and permitting and the
state has spent about $2 million. And while they thought they
would be at resource comp formation moving into 2012, but they
have extended the exploration drilling period and moved it to
2013.
3:15:48 PM
They expect the capacity at Mt. Spurr to be somewhere between 50
to 100 megawatts; their target is still to get 50 megawatts on
line in 2016. This project is a possible near-term solution
bridging the gap to larger projects such Susitna or the Watana
hydro projects. Ninety-five percent availability for a 50
megawatt project would produce about 416 gig watt hours a year.
The estimated cost of power for this project is a fixed $.12
kilowatt hour and they are still in discussions with utilities
trying to get to that point. The utilities really like these
projects, because geothermal is base-load and doesn't have
integration costs that other renewable energies do. Many times
that integration cost is not incorporated in the offered
purchase price. And while the cost of geothermal is comparable
to other alternatives, all of those avoided costs are likely to
go up in the future.
MR. THOMSEN said the FY 2012 budget had a direct appropriation
for $12.5 million and Ormat was awarded the AEA round four grant
for $2 million. Because of the 2011 lackluster drilling results
they are working closer with AEA and DNR on updating the scope
of work and once they have that, they will recommend a new plan
of exploration and present that to them.
He said they expected to be drilling three wells in 2012 and now
they are looking at maybe one much deeper well and evaluating
the impacts that has on the plan.
3:17:57 PM
MR. THOMSEN said Ormat has great community support; they work
very well with Tyonek, the Kenai Peninsula Borough and
Anchorage, all of which have provided letters of recommendation
and have been overwhelmingly supportive of their efforts on this
project. Environmental and renewable energy communities are also
very supportive. The project had been verbally supported by all
six Railbelt utilities and ARCTEC, as a potentially viable near-
term solution. They are excited to continue working on this
project that will provide 100 megawatts of geothermal power,
enough power to provide 60 high paying jobs and well over 100
construction jobs, the impact of which extends to approximately
200 local vendors. A 30-year operating life would fuel the local
economy with over $850 million; it could save 600 mmbtus of
depleting Cook Inlet natural gas and that's roughly the
equivalent of Anchorage's entire residential heating
consumption. They can also avoid the emission of 3,200 tons of
CO.
2
He summarized that Mt. Spurr development would provide clean,
reliable, base-load power to the Railbelt, be significant relief
to Cook Inlet natural gas consumption, be a significant
contributor to meeting the state's renewable goal of 50 percent
by 2025, provide long-term price stability, be a near-term
solution for power concerns and provide high quality, long-term
green jobs.
3:20:14 PM
CO-CHAIR WAGONER asked if he thought 100 megawatts is the
maximum capacity of the Mt. Spurr area or if different sections
of their lease be expanded.
RAHM ORNSTEIN, Director, Business Development and Mount Spurr
project lead, Ormat Technologies, Inc., replied that number came
from other projects they have built the biggest in the
Philippines of 140 megawatts. So, theoretically it could be even
bigger, but at this point they don't want to speculate. They
would be very happy to "open a big find of 50 megawatt resource
there and even more if we have 100."
REPRESENTATIVE SEATON asked if the rig they are using now is
capable of lateral drilling.
MR. ORNSTEIN replied that a rig isn't there currently; one was
leased for the summer and is now somewhere else. The rig that
was there was a core rig that goes deep up to 6,000 ft. and
couldn't drill directionally. They ended up with 18 degrees of
direction. It's too early to say what they want to do next; it
depends on work the geologists are doing. The plan might be to
drill a larger diameter well using rotary drilling to deeper
depths and they will probably want to go vertically to get below
the layer of conglomerate.
REPRESENTATIVE SEATON asked what kind of seismic data is
available for Mt. Spurr.
MR. ORNSTEIN replied that there are no seismic surveys of Mt.
Spurr since it is an active volcano and it is useful only for
crew safety through the Volcano Observatory. Aerial magnet
surveys and high resolution photography were used. On-ground
exploration was done with ground gravity and metallurgics. A
combination of all of these was used to create a geologic model
from which the drill target was selected. He was told that they
probably don't need additional surveys but rather additional
drilling.
3:25:28 PM
CO-CHAIR PASKVAN asked what temperatures they need to find and
when will they get that answer.
MR. ORNSTEIN replied they really need temperatures in the range
of 350 F or higher. They thought it would be found this year,
but only half of that was found because the rock is different
than everyone expected and didn't contain heat very well and it
had more mixing with the glacial waters than what they thought.
3:27:53 PM
SENATOR GIESSEL asked how much will drilling a larger-bore
deeper well add to the project.
MR. ORNSTEIN answered that it's premature to answer that now.
The major cost is going to be the logistics of getting larger
rigs in as the nearest road ends almost 20 miles away from their
leases. They might need to build an ice road, which would cost
around $5 million for one season. For the round four grant
application they told AEA $11 million for the first deep larger
hole and the drilling costs and that number will get refined as
the plan gets updated.
SENATOR GIESSEL asked if that changes the cost per kilowatt of
what the project would produce.
MR. ORNSTEIN replied that it potentially could, but they used
full sized commercial geothermal production and injection wells
in their models and if the next step is highly successful the
impact on the economics may not be significant. But if they come
to the conclusion that the resource in general is either much
deeper or colder than their initial model assumed the economics
would definitely change.
3:31:23 PM
REPRESENTATIVE CHENAULT said he thought the legislature
appropriated about $17.5 million for Ormat plus an additional $2
million, but added that the numbers could be worked on later. He
asked how deep they will drill before finally saying they can't
find the temperature they are looking for.
MR. ORNSTEIN responded that Ormat originally asked for $18
million in a direct appropriation that together with the $2
million from AEA would have brought them to the $20 million they
were shooting for. Ultimately, the governor reduced the
appropriation to $12.5 million.
As to his second question, Ormat has developed geothermal
resources in variable depths ranging from 1,000 ft. or less in a
Reno plant up to 8,000 ft. or more in their Hawaii plant. In Mt.
Spurr, based on previous models, they were hoping to find a
resource somewhere in the 3,000 to 5,000 ft. depth this year,
but they had to stop at 4,000 because of mechanical issues. He
said that 8,000 ft. is still doable. Geothermal economics are
primarily set by a combination of the depth and the temperature;
shallow and hot is golden, deep and cold doesn't work. Deep and
very hot can work or if it's very shallow and not very hot.
3:35:04 PM
REPRESENTATIVE CHENAULT commented that an extra $2 million or $7
million will probably pencil out in the long term.
CO-CHAIR WAGONER agreed and said it's like geothermal in that
respect. He invited Mr. Meznarich from ConocoPhillips to
testify.
3:36:17 PM
DARREN MEZNARICH, Manager, Cook Inlet Assets, ConocoPhillips
Alaska, Inc., said they operate three assets in the Cook Inlet
area; Beluga onshore gas field, the north Cook Inlet offshore
unit known as the Tyonek Platform and the Kenai LNG Plant.
Between the Beluga River unit and the north Cook Inlet unit,
ConocoPhillips operates approximately 130 mmcf/day of natural
gas production. He said he cannot speculate on what might happen
under the various scenarios the committee has described and
believed in letting the market dictate the most efficient and
economic solutions and what will ultimately happen with regards
to Cook Inlet gas supply. However, one of the historically
significant components of the Cook Inlet gas market, one that
drove early development of gas in the Inlet and helped provide a
market for gas production in excess of the utility requirements,
is the Kenai LNG plant. He would focus on that today.
3:38:11 PM
MR. MEZNARICH explained that the Kenai LNG Plant has been
operating for more than 40 years and is currently the only
significant industrial user of natural gas in Southcentral
Alaska. The Kenai LNG Plant received its current two-year export
license on October 5, 2010 and the license extension will expire
on March 31, 2013. ConocoPhillips closed the acquisition of
Marathon's 30 percent interest in the plant in late September
and it now owns 100 percent.
In February, ConocoPhillips announced the length of the shut-
down of the plant to be in the April or May timeframe based up
the decline in market conditions, which meant that the continued
operations were not commercially viable. The unfortunate March
tsunami in Japan and ConocoPhillips' success in marketing LNG to
new customers enabled them to continue operation of the plant
longer and it is now expected to operate into November before
being shut down and preserved for an interim period for
potential future use.
As both the utilities previously testified, he said a forecast
of a natural gas shortage for Southcentral Alaska in the next
few years, unless a new source of gas is identified and
developed very quickly, will make LNG imports and regasification
necessary to help fill the shortfall. In this import scenario
the plant, its dock and its LNG tanks could serve a role in the
interim solution where LNG is imported and regasified to supply
natural gas to the Southcentral utilities and users. In the long
term, the plant could be refurbished and turned into an LNG
export facility for either exporting local gas, if a significant
Cook Inlet gas discovery is made, or as a means of selling North
Slope gas if the North Slope pipeline to Southcentral is
constructed.
MR. MEZNARICH stated if no future opportunities for the Kenai
LNG Plant materialize, they will permanently shut it down. That
is not their desired outcome. He emphasized that ConocoPhillips
is still "evaluating the role of the Kenai LNG Plant in the
various scenarios that might develop with regards to both Cook
Inlet exploration and development of the Alaska North Slope gas
resources."
3:41:22 PM
CO-CHAIR PASKVAN asked in the import scenario what volumes they
would import and what quantities they would export if they
refurbished.
MR. MEZNARICH replied that he couldn't speculate on imported
LNG, but the utilities have specified an increasing rate of
imports starting off with 2 or 3 bcf/year building up to 20
bcf/year or more (10 tankers per year).
CO-CHAIR PASKVAN asked what capacity the plant would have under
a refurbishing scenario.
MR. MEZNARICH replied its capacity is 240 mmcf/day. In the near
term the plant could potentially ramp up to levels close to
that. Over a longer time the 40 year old facilities would need
retooling and the costs would be higher.
3:43:13 PM
REPRESENTATIVE CHENAULT commented that the plant's high output
was about 63 bcf/year and that Agrium used around 53 bcf/year.
REPRESENTATIVE SEATON asked under the import solution, what kind
of retooling, expense and time delay is there to convert an
export facility to an import facility.
MR. MEZNARICH replied that the dock would be used to bring in
ships instead of sending them away full, and then it would be
offloaded into the LNG tanks; so that part doesn't change. It
just goes in the other direction. But they would have to build
a regasification facility, which basically heats up the LNG and
makes it gas again before it is sent into the pipeline. The cost
is confidential right now, but it's nothing like the ASAP.
REPRESENTATIVE SEATON said he is not familiar with a re-gas
facility and asked if it uses sea water or air as a heat source
or are they burning fuel.
MR. MEZNARICH answered that LNG would come in and steam would
come out of a heat exchanger on other side.
REPRESENTATIVE SEATON asked if some natural gas would be used on
the other side for the heating conversion.
MR. MEZNARICH answered yes.
CO-CHAIR PASKVAN asked if more than 8.6 bcf/year were to be
exported, could someone like ConocoPhillips consider potentially
build a new export facility.
MR. MEZNARICH replied that it would be hard to speculate on what
the market and fiscal terms would be at that time.
CO-CHAIR WAGONER referenced ASAP's report that says at 500
mmcf/day their tariff would be $9.63 mmcf and the only
commercial user that big in Cook Inlet or the Southcentral area
is the plant and asked if they plan to request an extension of
their export license in the near future or is it guess work.
MR. MEZNARICH replied they would have to look at events as they
unfold. Right now they have to look at commercial and fiscal
terms.
3:49:17 PM
SENATOR GIESSEL invited Escopeta back and asked Mr. Web about
the Kitchen development timing on chart 42. She noticed first
production for gas at the end of bar group number 3 and first
production of oil in the middle of number 4, and she wanted to
know how that would work with the AOGCC that typically wants the
oil to be produced first - before the gas.
MR. WEB responded that the AOGCC requires oil to be produced
first if the two formations are together and the gas cap is
supplying the pressure for the oil formation. The geologic
structures they are looking at are the Sterling gas sands,
Beluga gas sands and the Upper Tyonek gas sands as geologic
structures that are separate and distinct from oil. If they
drilled into an oil reservoir that had a gas cap, they would
have to produce the oil first because the gas is the driver. But
in this situation they are drilling into gas sands and gas
reservoirs - they are all separate from oil reservoirs.
3:51:37 PM
CO-CHAIR WAGONER, finding no further questions, thanked everyone
for their participation and adjourned the meeting at 3:51 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 1-DOR-Sen Res - Oct 20.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 2-ARCTEC-Sen Res - Oct 20.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 4-Apache Corp - Sen Res Oct 20 2011.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 5-Escopeta-Sen Res-Oct 20 2011.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 3-Marathon-Sen Res-Oct 20 2011.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 0- AGENDA Sen Res Oct 20-21 2011.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 0-Rev AGENDA Sen Res Oct 20-21 2011.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 6-CIRI UCG-Sen Res Oct 20.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |
| 7-ORMAT-Mt Spur-Sen Res Oct Oct 20.pdf |
SRES 10/20/2011 9:00:00 AM |
Cook Inlet Meeting |