Legislature(2011 - 2012)BUTROVICH 205

02/07/2012 03:30 PM Senate RESOURCES


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03:33:06 PM Start
03:38:06 PM Overview: Gleason Decision of 12/30/2011 by Robin O. Brena
05:00:59 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview of the Decision Following Trial De Novo TELECONFERENCED
Re: 2007, 2008, and 2009 Assessed Valuations of
the Trans Alaska Pipeline (i.e., the Gleason
Decision of 12/30/2011)
- Presentation by Robin O. Brena, Owner, Brena,
Bell & Clarkson, P.C.
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        February 7, 2012                                                                                        
                           3:33 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Cathy Giessel                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
OVERVIEW: GLEASON DECISION OF 12/30/2011 REGARDING THE ASSESSED                                                                 
VALUATIONS OF THE TRANS ALASKA PIPELINE                                                                                         
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ROBIN BRENA, Attorney                                                                                                           
Brena, Bell, and Clarkson, P.C.                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Testified during the presentation on the                                                                  
Gleason Decision.                                                                                                               
                                                                                                                                
CRAIG RICHARDS, Attorney                                                                                                        
Walker and LeBreck                                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Testified during the presentation on the                                                                  
Gleason Decision.                                                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
^Overview: Gleason Decision of 12/30/2011 by Robin O. Brena                                                                     
OVERVIEW: GLEASON DECISION OF 12/30/2011 REGARDING THE ASSESSED                                                             
            VALUATIONS OF THE TRANS ALASKA PIPELINE                                                                         
                                                                                                                              
3:33:06 PM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:33  p.m. Present at the  call to                                                               
order were  Senators French, Stedman, McGuire,  Wielechowski, Co-                                                               
Chair  Paskvan  and  Co-Chair  Wagoner.  He  noted  that  Senator                                                               
Giessel was also present.                                                                                                       
                                                                                                                                
CO-CHAIR  PASKVAN announced  that  the  committee would  continue                                                               
with the testimony of Mr. Robin  Brena and Mr. Craig Richards who                                                               
will summarize key points regarding  market structure on Alaska's                                                               
North  Slope and  then present  information  on the  life of  the                                                               
Trans Alaska  Pipeline (TAPS), with a  focus on the price  of ANS                                                               
crude, reserves, and minimum mechanical throughput.                                                                             
                                                                                                                                
SENATOR STEVENS joined the committee.                                                                                           
                                                                                                                                
CO-CHAIR PASKVAN noted  that Mr. Brena and Mr.  Richards would be                                                               
testifying as  Alaska residents,  not as paid  representatives of                                                               
clients.                                                                                                                        
                                                                                                                                
CO-CHAIR PASKVAN  shared a memo entitled  "Meeting the Governor's                                                               
Goal of Increasing  Oil and Gas Production by 3  Percent a Year",                                                               
written a decade  ago by the director of the  Division of Oil and                                                               
Gas. He referred  to the massive volume  of information regarding                                                               
oil  and gas  production. He  recalled the  topic of  yesterday's                                                               
presentation -  the North Slope's  integrated market  structure -                                                               
which magnified the  significance of the memo of  nearly a decade                                                               
ago.                                                                                                                            
                                                                                                                                
CO-CHAIR PASKVAN quoted from the memo:                                                                                          
                                                                                                                                
     Mergers  and market  concentration on  the North  Slope                                                                    
     have  created a  non-competitive  environment in  which                                                                    
     three majors  have a  near monopoly  that gives  them a                                                                    
     large    competitive    advantage    in    exploration,                                                                    
     development,  production,  and  transportation.  It  is                                                                    
     this uneven  playing field that has  raised the barrier                                                                    
     to  new entrants  from  smaller  independents to  large                                                                    
     integrated  majors. As  long as  these majors  invested                                                                    
     sufficient  capital  for  exploration  and  development                                                                    
     activities, the  state accepted the consequence  of the                                                                    
     oligopoly.  Since the  existing  majors  no longer  are                                                                    
     willing to  invest sufficient resources  on exploration                                                                    
     or  development, the  state  must  look elsewhere.  The                                                                    
     state must look  beyond the existing majors  to the new                                                                    
     wave  of   independence  and  remaining   majors.  This                                                                    
     situation  parallels the  experience in  other oil  and                                                                    
     gas  basins  worldwide,  several  of  which  have  been                                                                    
     successful in this transition.                                                                                             
                                                                                                                                
CO-CHAIR  PASKVAN  opined  that  it was  an  important  piece  of                                                               
information   for  the   committee  to   consider  in   light  of                                                               
yesterday's testimony. He stated that  the memo seems to indicate                                                               
that the testimony  from yesterday was supported a  decade ago by                                                               
the director of the Division of Oil and Gas.                                                                                    
                                                                                                                                
3:38:06 PM                                                                                                                    
SENATOR  WAGONER  asked Mr.  Brena  what  would happen  to  those                                                               
companies  currently exploring  on  the North  Slope  if some  of                                                               
their credits  were taken  away and  allotted to  new independent                                                               
explorers as incentives.                                                                                                        
                                                                                                                                
ROBIN BRENA,  Attorney, Brena, Bell,  and Clarkson,  P.C., Alaska                                                               
Counsel for  the Fairbanks  North Star  Borough and  lead counsel                                                               
for  the  TAPS, inquired  if  Senator  Wagoner was  referring  to                                                               
taking credits away  from all current producers or  just from the                                                               
independent companies.                                                                                                          
                                                                                                                                
SENATOR  WAGONER  clarified  that   he  meant  reallocating  some                                                               
exploration  credits  that  the independent  companies  currently                                                               
receive.                                                                                                                        
                                                                                                                                
MR.   BRENA  explained   that  his   testimony  is   directed  at                                                               
establishing tax policy  and the first step is  to determine what                                                               
the free  market can accomplish.  He said  until there is  a free                                                               
market operating  on the North  Slope, it is unknown  whether any                                                               
incentives   need  to   be  provided.   He  reported   on  active                                                               
development in the  Gulf Coast, in North Dakota, and  in the Cook                                                               
Inlet,  without incentives,  when free  market conditions  exist.                                                               
Another  factor is  that  the price  of oil  has  increased by  a                                                               
factor of five in the last decade.                                                                                              
                                                                                                                                
MR. BRENA stated  that the first step is to  establish a baseline                                                               
that does not  substitute for a free market system  from which to                                                               
form  tax  policy.  He  said  he has  not  done  an  analysis  of                                                               
incentives; however,  he believed  the key is  to find  the right                                                               
companies to  incentivize and reward  the behavior  being sought.                                                               
Next,  would  be to  target  incentives  that will  optimize  the                                                               
development of the North Slope.                                                                                                 
                                                                                                                                
3:41:43 PM                                                                                                                    
CO-CHAIR PASKVAN  thanked the presenters for  their participation                                                               
and left it to them as to how to proceed with their testimony.                                                                  
                                                                                                                                
MR. BRENA  related that he  has a high  opinion of the  author of                                                               
the  memo, Mark  Myer,  and  said he  agrees  with  the memo.  He                                                               
commented on the barriers to new  entrants, as referred to in the                                                               
memo, and concurred  with the suggestions made. He  noted that he                                                               
has  worked  for  twenty years  on  achieving  opportunities  for                                                               
independent producers.                                                                                                          
                                                                                                                                
MR.  BRENA summarized  yesterday's  presentation. The  production                                                               
and  transportation  of Alaska's  North  Slope  does not  operate                                                               
under a free and open market  system of economics. It is a market                                                               
place dominated by the "big  three" oil companies. After 35 years                                                               
of operation, there  is one independent shipper on  TAPS and most                                                               
of the  independent producers are  selling their oil  upstream so                                                               
they  don't  have  to  deal with  the  barriers  associated  with                                                               
transporting their  own oil. He  opined that the nature  of those                                                               
barriers  are   due  to  permitting  culture,   access  to  field                                                               
facilities,  and  cost  of  transportation  by  pipeline  and  by                                                               
tanker.  He  suggested  that  the   state  should  do  everything                                                               
possible to reduce those three barriers.                                                                                        
                                                                                                                                
3:46:04 PM                                                                                                                    
MR.  BRENA said  he  also believes  that,  when establishing  tax                                                               
policy, there  is a  natural evolution  in an  oil basin.  In the                                                               
initial phase,  the major producers build  a major infrastructure                                                               
that opens  up the region in  order to develop the  major fields.                                                               
After that,  the independents come  in and develop  mid-sized and                                                               
smaller  fields.  He  maintained  that an  efficient  tax  policy                                                               
should recognize the  existing market structure and  the state of                                                               
development  in  the  North  Slope.  It  should  not  attempt  to                                                               
substitute  tax  incentives for  objectives  that  a free  market                                                               
system is capable of achieving.  Open access lower transportation                                                               
rates will  optimize development  on the North  Slope, especially                                                               
in light of current and projected oil prices.                                                                                   
                                                                                                                                
MR. BRENA stated that tax  policies should not attempt to provide                                                               
tax  incentives to  least willing  and least  efficient producers                                                               
for that stage  of development of the basin. He  pointed out that                                                               
of the  big three, ConocoPhillips  indicated some  willingness to                                                               
do some exploration and development,  particularly in the area of                                                               
heavy oil. He opined that it  was important to develop heavy oil.                                                               
He  reported  that  British  Petroleum  (BP)  closed  down  their                                                               
exploration activity in the early  2000's and indicated it needed                                                               
a billion barrel field in order  to justify its tax structure. BP                                                               
left exploration in Alaska for other  parts of the world. He said                                                               
he  shared a  similar view  of Exxon  as a  company that  was not                                                               
willing to explore in Alaska.                                                                                                   
                                                                                                                                
3:48:13 PM                                                                                                                    
MR. BRENA referenced page 13 of a memo from BP.                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN noted  that  all documents  will  be posted  on                                                               
BASIS and  are accessible at the  meeting so that the  public can                                                               
have access to them.                                                                                                            
                                                                                                                                
MR.   BRENA  related   that   he  was   lead   counsel  for   the                                                               
municipalities on the ad valorem  case with regard to the Gleason                                                               
Decision,  as well  as representing  Anadarko and  Tesoro in  the                                                               
Federal Energy Regulatory Commission  (FERC) matter regarding the                                                               
inclusion   or   exclusion   of   funds   spent   for   strategic                                                               
reconfiguration  of whether  they  should be  "float through"  in                                                               
rates. The BP memo was a public document from the latter case.                                                                  
                                                                                                                                
MR. BRENA read from the BP memo:                                                                                                
                                                                                                                                
     As  described  in   the  Pump  Station  Electrification                                                                    
     Appraise  FM  of  March 2003,  Alaska's  role  in  BP's                                                                    
     portfolio is  to provide a  stable production  base and                                                                    
     cash  flow to  fuel  growth elsewhere  in the  business                                                                    
     while improving margins and returns.                                                                                       
                                                                                                                                
MR. BRENA termed BP's view of their Alaskan operations as a                                                                     
"cash cow" to fund other exploration in other parts of the                                                                      
world. He maintained that BP has been upfront with this                                                                         
information. He reiterated his suggestions about how to deal                                                                    
with tax incentives.                                                                                                            
                                                                                                                                
3:51:29 PM                                                                                                                    
CO-CHAIR PASKVAN pointed out that the  quote is found on page 13,                                                               
Section 2.1, of the document.                                                                                                   
                                                                                                                                
MR. BRENA added more information  about litigating large cases in                                                               
Alaska.  He said  there  are  three ways  to  approach an  issue,                                                               
litigation, negotiation,  and legislation.  Sometimes legislation                                                               
attempts  to change  the outcome  of litigation.  He referred  to                                                               
comments on  page 15  - RCA Issues.  "We've considered  the risks                                                               
that  the  Regulatory  Commission  of  Alaska  (RCA)  will  exert                                                               
approval  authority  over  the  proposed  facility  changes."  He                                                               
stated that  the RCA  has specific  statutory authority  over the                                                               
abandonment  of all  facilities. The  issue was  decided and  RCA                                                               
approved    strategic    reconfiguration   based    on    certain                                                               
representations  by  the  owner  companies.   He  added  that  BP                                                               
prepared  a  legislative  solution  in  case  the  RCA  seeks  to                                                               
intervene.                                                                                                                      
                                                                                                                                
3:53:38 PM                                                                                                                    
SENATOR FRENCH  commented on the aggressiveness  of the strategy.                                                               
He  summarized BP's  document to  say that  if the  RCA moves  to                                                               
assert authority  over facility  changes, BP  will try  to change                                                               
the law to prevent that. He asked if Mr. Brena agreed.                                                                          
                                                                                                                                
MR. BRENA agreed and noted  the strategy was consistent with when                                                               
he acted on  Tesoro's behalf through the RCA to  reduce the rates                                                               
from over  $4 to $1.96,  and changed  their return from  over 100                                                               
percent  on unrecovered  capital  down to  a  12 percent  return,                                                               
which  led to  BP's  involvement  with HB  277  in  2005. HB  277                                                               
provided  that the  state would  agree  to a  settlement that  is                                                               
deemed   a  just   and  reasonable   rate  and   interveners  and                                                               
independents don't have the right to  contest it. It took away an                                                               
independent shipper's right to even be heard by the regulator.                                                                  
                                                                                                                                
3:55:05 PM                                                                                                                    
MR. BRENA  stressed that these  were not theoretical  issues, but                                                               
real issues.  He referred to  the non-development of  Milne Point                                                               
by ConocoPhillips  because of excessive transportation  costs. He                                                               
quoted  from  page 29  of  the  Cicchetti Report.  Commenting  on                                                               
trading Milne Point  to BP, Conoco President  and Chief Executive                                                               
Archie Dunham said, "We traded  in all our Milne Point properties                                                               
in Alaska to BP.  It broke my heart to trade  Milne Point, but we                                                               
had to do it. All the value  of that property was taken away from                                                               
us in the pipeline tariffs."                                                                                                    
                                                                                                                                
MR. BRENA noted that  the price of oil was less  at that time and                                                               
the transportation rate  was more, but emphasized  that these are                                                               
real issues.  He stated that  this was Conoco acting  before they                                                               
were integrated in Alaska; they had to leave a field behind.                                                                    
                                                                                                                                
CO-CHAIR  PASKVAN  requested  a discussion  on  the  Trans-Alaska                                                               
Pipeline System (TAPS).                                                                                                         
                                                                                                                                
MR. BRENA related  that he would discuss three areas  in the life                                                               
of TAPS. The first area is the  price of ANS crude oil. Every ten                                                               
dollar increase in the price of  oil adds 5.5 more years to TAPS.                                                               
He maintained that  "a rising tide raises all  ships." The second                                                               
area is  reserves and  thru-put profiles, and  the third  area is                                                               
minimum throughput.                                                                                                             
                                                                                                                                
He noted  that in  the Judge  Gleason Order,  the municipalities'                                                               
estimates  of reserves  were adopted,  as well  as the  ANS price                                                               
projections for  crude oil, and  the minimum  throughput analysis                                                               
advanced by the municipalities.                                                                                                 
                                                                                                                                
He explained that  the analysis worked by taking  the reserves to                                                               
create a  throughput profile  and when  that number  hits 100,000                                                               
barrels per day,  that is what is  deemed to be the  life of TAPS                                                               
in Judge Gleason's analysis.                                                                                                    
                                                                                                                                
3:58:39 PM                                                                                                                    
MR.  BRENA turned  to the  first area  in the  life of  TAPS, the                                                               
price of ANS oil. He noted that  there has been a lot of focus on                                                               
throughput  declines,  rather  than price  increases.  Currently,                                                               
there is  greater value going  through TAPS than ever  before. He                                                               
figured  2.1  million  barrels,  times $10  a  barrel,  does  not                                                               
compare to  600,000 barrels at  $100 a  barrel. The value  of the                                                               
reserves today  is greater  than it ever  has been:  $700 billion                                                               
worth  of proven  reserves on  the North  Slope, a  huge economic                                                               
driver. He emphasized that the oil  would find its way to market,                                                               
despite what some would say.                                                                                                    
                                                                                                                                
4:00:04 PM                                                                                                                    
CO-CHAIR  PASKVAN asked  for clarification  of  the term  "proven                                                               
reserves." He wondered if it was North Slope conventional oil.                                                                  
                                                                                                                                
MR.  BRENA replied  that he  is using  the definition  that Judge                                                               
Gleason used,  which says that the  reserves have to be  based on                                                               
known  technology,  be  economically  feasible,  and  be  legally                                                               
deliverable  into TAPS.  Judge Gleason  did not  include most  of                                                               
Point Thomson in  the definition. Mr. Brena concluded  that it is                                                               
a very narrow  definition of proven reserves,  which is important                                                               
because  it's   conventional  oil;  there  are   no  probable  or                                                               
speculative reserves included, as well  as nothing from the Outer                                                               
Continental Shelf. Also  not included is 95 percent  of heavy oil                                                               
or any shale oil.                                                                                                               
                                                                                                                                
CRAIG RICHARDS,  Attorney, Walker  and LeBreck, added  that Judge                                                               
Gleason looked  favorably on the  categories that  the Department                                                               
of Revenue uses  in terms of oil that is  under production, under                                                               
development,  and   under  evaluation  -  oil   from  development                                                               
projects that might not be sanctioned or funded yet.                                                                            
                                                                                                                                
4:02:04 PM                                                                                                                    
MR. BRENA continued  to discuss the topic  of throughput decline.                                                               
He related that  in the last five years, the  value of throughput                                                               
has increased, has  economic leverage and is growing.  He said it                                                               
was  important to  keep  that in  mind. He  stated  that when  he                                                               
questioned experts to  see if any pipeline in the  world had ever                                                               
"shut  in" economic  production,  he found  that  the answer  was                                                               
"no." He reminded  the committee that Alaska has  $700 billion in                                                               
proven  reserves and  there are  engineering solutions  for every                                                               
potential problem.                                                                                                              
                                                                                                                                
SENATOR  MCGUIRE said  she understood  Mr. Brena's  argument that                                                               
the value  of oil  is higher  because it is  trading at  a higher                                                               
price, but she  maintained that the market can  change. She asked                                                               
what would  happen if ANS  prices drop back  to $30 or  less. She                                                               
pointed out  that the volatility  goes both ways. She  also asked                                                               
Mr.  Brena  for  his  theory  was on  why  the  "Big  Three"  oil                                                               
companies were coming to the state  for a reduction in high taxes                                                               
which they maintain are detrimental to investment.                                                                              
                                                                                                                                
4:07:25 PM                                                                                                                    
MR. BRENA addressed  volatility in price. Judge  Gleason used the                                                               
U.S.  Energy Information  Administration  (EIA)  prices. At  some                                                               
point  policy  decisions  have  to  be made  based  on  the  best                                                               
information at  hand, which  is that  there is  going to  be real                                                               
growth in  the price of  oil over  the next decade.  He discussed                                                               
the disparity  between ASN and WTI  crude oil, which he  said was                                                               
predominantly  because  WTI has  stranded  oil  in Oklahoma  that                                                               
can't make it  to the refineries on the Gulf  Coast. He called it                                                               
a temporary condition  due to imbalance in the  market and should                                                               
not drive a tax policy in Alaska.                                                                                               
                                                                                                                                
4:09:03 PM                                                                                                                    
MR.  BRENA  emphasized that  whatever  tax  policy Alaska  adopts                                                               
should  not be  based on  the prediction  that the  pipeline will                                                               
shut  down  tomorrow.  He  said  he does  not  believe  that  any                                                               
discussion of a  tax policy should be made  under an artificially                                                               
created concept of crisis, such  as TAPS shutting in $700 billion                                                               
worth of oil.                                                                                                                   
                                                                                                                                
MR.  BRENA  discounted  the  idea that  the  oil  companies  were                                                               
playing  games. Instead,  he suggested  they  were attempting  to                                                               
gain profits  and expand  their margins  in Alaska.  He suggested                                                               
that before the  state takes any action, it should  find out what                                                               
the  oil companies'  current development  plans  are, what  their                                                               
projections are, in the form  of specific documents. He cautioned                                                               
not to give $2  billion to the oil companies to  go "do what they                                                               
were going to do, anyway."                                                                                                      
                                                                                                                                
4:11:59 PM                                                                                                                    
SENATOR  MCGUIRE  addressed  the  challenge  of  obtaining  those                                                               
documents from the oil companies.  She stressed that there was no                                                               
"meeting  behind   closed  doors."  She  pointed   out  that  she                                                               
referenced the price  discrepancy between WTI and  ASN because it                                                               
demonstrates precisely what can happen in a political decision.                                                                 
                                                                                                                                
MR.  RICHARDS opined  that the  focus should  be getting  the oil                                                               
companies to invest  in existing fields. A lot  of the discussion                                                               
is based  around progressivity,  which misses the  mark regarding                                                               
the  concerns  the  oil  companies   have  raised.  He  said  oil                                                               
companies  are  concerned   about  capital  investment  decisions                                                               
meeting  positive net  present value  requirements. He  suggested                                                               
the focus should be on  ACES, not driving investment dollars away                                                               
by  making  otherwise positive  projects  negative  cash flow  at                                                               
different oil prices based on  the tax structure. He encouraged a                                                               
tax structure that would give  the oil companies positive project                                                               
investment incentives across the whole range of oil prices.                                                                     
                                                                                                                                
4:15:49 PM                                                                                                                    
MR. BRENA  said that he  did not mean  to imply that  oil company                                                               
positions  were  not  public.  He  noted  he  would  address  the                                                               
proprietary  nature  of  oil company  information  in  tomorrow's                                                               
hearing. He  recommended seeing oil company  information in order                                                               
to make  policies, and  if it  was not  forthcoming, it  would be                                                               
"very persuasive."                                                                                                              
                                                                                                                                
MR. BRENA turned to the EIA price forecast charts.                                                                              
                                                                                                                                
CO-CHAIR  PASKVAN   clarified  that   EIA  is  the   U.S.  Energy                                                               
Information Administration.                                                                                                     
                                                                                                                                
MR. BRENA  addressed price forecasting  as the best  indicator in                                                               
"The  Life of  TAPS". He  referred to  a chart  by Dr.  Cicchetti                                                               
which shows  the price impact  of three political events  for the                                                               
past  three decades.  He showed  a  graph of  the average  annual                                                               
world oil prices  in three cases from 1980 to  2035. Based on the                                                               
best information  of today,  the price  of oil  in 2035  would be                                                               
$130 to $140 per barrel.                                                                                                        
                                                                                                                                
4:19:36 PM                                                                                                                    
He discussed another graph based  on EIA forecasts and noted that                                                               
the most likely  forecast recently went up. He said  that all oil                                                               
price projections have real growth.                                                                                             
MR. BRENA  reiterated a  previous statement  that an  increase of                                                               
$10 per  barrel equals 5.5 years  for TAPS. He related  that when                                                               
Judge Gleason  decided that  the life of  TAPS would  end between                                                               
2065 and 2068, the decision was  based on a very restrictive view                                                               
of what  proven reserves  would be produced  and did  not include                                                               
Point Thomson. When any price  of oil projected today is factored                                                               
in, it is  not possible to find an economic  limit with regard to                                                               
production. Judge  Gleason "cut it  off at 100,000  barrels, even                                                               
though 100,000 barrels  continue to be economic  to produce." The                                                               
life of TAPS  was not cut off because the  economics changed, but                                                               
because the  minimum mechanical  capacity of  TAPS was  deemed by                                                               
Judge Gleason to be 100,000 barrels.                                                                                            
                                                                                                                                
4:21:54 PM                                                                                                                    
MR. BRENA  turned to the  topic of unproven reserves,  which were                                                               
not included  in Judge  Gleason's decision.  He listed  ANWR, the                                                               
Chukchi  Sea, the  Beaufort Sea,  and NPRA  as found  in a  chart                                                               
produced by the National Energy  Technology Laboratory (NETL). He                                                               
stated  that these  reserves  were  economically recoverable  and                                                               
were likely to be produced.                                                                                                     
                                                                                                                                
CO-CHAIR PASKVAN asked if those  reserves were in addition to the                                                               
proven reserves.                                                                                                                
                                                                                                                                
MR. BRENA said  yes. He referred to a chart  that showed that the                                                               
value of  remaining crude for the  next 25 years will  exceed the                                                               
current  cumulative value  of  oil shipped  in  real and  nominal                                                               
terms.                                                                                                                          
                                                                                                                                
4:23:06 PM                                                                                                                    
MR. BRENA  discussed the  impact of oil  production in  the Outer                                                               
Continental  Shelf  (OCS). In  the  late  2020's and  2030's  the                                                               
upward  capacity  of  TAPS  will be  challenged  again  based  on                                                               
Shell's projections.                                                                                                            
                                                                                                                                
SENATOR  WIELECHOWSKI  noted  that  the chart  was  from  Shell's                                                               
presentation.                                                                                                                   
                                                                                                                                
MR. BRENA pointed out that Shell  has $4 billion invested and the                                                               
resources consist of drilled holes  and productive wells. He said                                                               
the longer  production is  delayed, the longer  the life  of TAPS                                                               
will be.                                                                                                                        
                                                                                                                                
MR.  BRENA turned  to  a  chart that  showed  ANS historical  and                                                               
forecast oil production from  producing fields, known undeveloped                                                               
fields,   and  undiscovered   fields.  He   commented  that   the                                                               
discussion about tax  policy focuses on what  happens right after                                                               
a rapid decline and when  throughput is expected to stabilize. He                                                               
pointed out  that at  that point of  slope development,  there is                                                               
less investment  associated with  production and  more associated                                                               
with maintenance, as seen in recent years.                                                                                      
                                                                                                                                
He noted  that some of the  decline is as a  result of breakdowns                                                               
of field facilities, such as in  Prudhoe Bay due to corrosion. He                                                               
concluded that  the more the  decline, as  a result of  delays in                                                               
projects or field facility problems,  the longer the life of TAPS                                                               
will be.  He encouraged the  committee to believe that  TAPS will                                                               
be  around  for a  long  time  and there  is  plenty  of time  to                                                               
evaluate it.  He said  that this  is a perfect  time to  make tax                                                               
policy decisions  because oil production is  stabilizing and then                                                               
will increase.                                                                                                                  
                                                                                                                                
SENATOR  PASKVAN  asked  if that  table  included  any  potential                                                               
shale.                                                                                                                          
                                                                                                                                
MR.  BRENA  said that  it  does  not  include  any shale;  it  is                                                               
conventional oil  only. Nor does  it include 95 percent  of heavy                                                               
oil,  of which  there are  20 billion  barrels. He  recalled that                                                               
there  were 9.6  billion  barrels of  proven  reserves when  TAPS                                                               
began;  today there  are  between  7 and  8  billion barrels.  He                                                               
emphasized that  fields grow and  technology changes,  which will                                                               
also be true in the future.                                                                                                     
                                                                                                                                
4:28:26 PM                                                                                                                    
SENATOR WIELECHOWSKI inquired who developed the forecast.                                                                       
                                                                                                                                
MR. RICHARDS replied that it was Dr. Hite.                                                                                      
                                                                                                                                
MR.  BRENA added  that Dr.  Hite developed  the forecast  for the                                                               
Department of Energy, not for litigation purposes.                                                                              
                                                                                                                                
MR.  BRENA  related  that the  reserve  estimate  and  production                                                               
forecast  that  Judge Gleason  adopted  was  developed by  Dudley                                                               
Platt.  Judge  Gleason  was  taxed  with the  job  of  trying  to                                                               
determine  which of  the experts  was correct,  so she  looked at                                                               
proprietary internal  documents of  the major oil  producers. She                                                               
maintained  that Mr.  Platt's  predictions  were consistent  with                                                               
those internal documents. He called that a "reality check."                                                                     
                                                                                                                                
4:31:28 PM                                                                                                                    
MR. BRENA  explained the second  criterion used by  Judge Gleason                                                               
was  financial  reporting to  the  U.S.  Securities and  Exchange                                                               
Commission  (SEC). He  explained BP's  Prudhoe Bay  Royalty Trust                                                               
and auditing procedure by Miller and Lents, Ltd.                                                                                
                                                                                                                                
CO-CHAIR  PASKVAN  referenced slide  51  as  the source  of  that                                                               
information.                                                                                                                    
                                                                                                                                
4:32:48 PM                                                                                                                    
MR.  BRENA referred  to BP  Royalty Trust  documents and  gave an                                                               
example of a  report to SEC, which used only  proven reserves and                                                               
the price  of oil on  December 31 of  the prior year.  Today, the                                                               
average of  12 months is  used instead. The document  stated that                                                               
based on $96 oil, BP  expected continued economic production at a                                                               
declining rate through 2075.                                                                                                    
                                                                                                                                
MR.  BRENA concluded  that  Judge Gleason  had  access to  inside                                                               
information  that was  shared with  the investment  community and                                                               
shown  to potential  buyers. Those  sources  of information  were                                                               
consistent with Dudley Platt's forecasts.                                                                                       
                                                                                                                                
4:36:01 PM                                                                                                                    
MR.  RICHARDS added  that  Judge Gleason  also  found that  DOR's                                                               
current  forecasting methodology  did  not  reflect internal  oil                                                               
company numbers. He  noted that slide 46 lists  her concerns with                                                               
DOR's new forecast  approach, which changed from  a pool analysis                                                               
to  a  well-by-well  forecast   methodology.  Judge  Gleason  was                                                               
concerned that DOR did not  have enough information on individual                                                               
wells and their interaction with other wells.                                                                                   
                                                                                                                                
He turned to slide  47, an example of a well  profile DOR used to                                                               
project production which was complex  and difficult to use. Judge                                                               
Gleason  found that  DOR had  to  make projections  on new  wells                                                               
without having adequate  data. Those are a couple  of examples of                                                               
why Judge Gleason  found that DOR was  underestimating the amount                                                               
of  total  production that  would  probably  occur on  the  North                                                               
Slope.                                                                                                                          
                                                                                                                                
SENATOR STEDMAN stated that he  had just received the current SEC                                                               
10K filings,  or annual report,  from December 31, 2010.  He said                                                               
he did  not see any  reference to  Miller and Lentz  or regarding                                                               
TAPS lasting until 2075.                                                                                                        
                                                                                                                                
4:39:40 PM                                                                                                                    
MR. BRENA said that Senator Stedman  was correct that in 2010 and                                                               
2011 the data  was withheld as a result of  the data appearing in                                                               
litigation. Contained in  the 10K report is data  from years 2006                                                               
- 2009  and a chart that  shows the correlation of  each of those                                                               
data points -  slide 56. He pointed out that  there is tremendous                                                               
consistency between  the data points.  He said, "As the  price of                                                               
oil  goes up,  the  life  of Prudhoe  goes  out."  He noted  that                                                               
further sources  of information would  be forthcoming  that would                                                               
contrast public information on the life of TAPS.                                                                                
                                                                                                                                
4:42:59 PM                                                                                                                    
MR.  BRENA addressed  minimal mechanical  throughput as  shown on                                                               
slide 59.  He stated that  there is  no hydraulic limit  on TAPS;                                                               
however, there is  a mechanical limit, which is  less than 50,000                                                               
barrels per  day (BPD). He  said this information comes  from the                                                               
"the  owner's   expert  witness."  He  related   that  there  are                                                               
operational  constraints on  the  continuing  operation of  TAPS;                                                               
however, the problems  have been solvable when  there is economic                                                               
oil to produce.                                                                                                                 
                                                                                                                                
SENATOR  WIELECHOWSKI  requested  clarification of  the  decision                                                               
Judge Gleason made  and the people and information  she relied on                                                               
to make her decision.                                                                                                           
                                                                                                                                
MR.  BRENA  explained  that  there  was a  nine  week  trial  and                                                               
involved  a  most thorough  discussion  of  TAPS. He  said  Judge                                                               
Gleason had been  involved in previous trials  similar in nature.                                                               
He spoke highly of Judge Gleason's credentials.                                                                                 
                                                                                                                                
4:46:53 PM                                                                                                                    
MR.  BRENA returned  to operational  concerns  and reported  that                                                               
former  Alyeska Chief  Operating  Officer,  Dan Hisey,  concurred                                                               
that  there  is no  hydraulic  or  mechanical minimum  throughput                                                               
limit on  TAPS. Alyeska will  continue to  find ways to  move the                                                               
oil.  He  stressed   the  importance  of  keeping   in  mind  the                                                               
tremendous value of  the oil, which is a  huge economic incentive                                                               
to keeping the line going.                                                                                                      
                                                                                                                                
MR. BRENA  related that one of  the solutions to keeping  the oil                                                               
moving is to  add heat. He referred to slide  79, prepared by Mr.                                                               
Hisey, which shows mitigation measures  available to keep the oil                                                               
moving. He  said that assuming  continued decline, which  he said                                                               
he does  not believe will  happen, the  state is at  a stabilized                                                               
level  of throughput  that  will begin  to  increase. When  Shell                                                               
comes  online, it  will go  up substantially.  He predicted  that                                                               
production may reach  the point where it will push  the limits of                                                               
TAPS again.                                                                                                                     
                                                                                                                                
He referred  to a  flow study  done by BP  that showed  that TAPS                                                               
could operate down  to 135,000 barrels a day. Once  a certain low                                                               
point is reached  it is possible to add heat  and recirculate the                                                               
oil.                                                                                                                            
                                                                                                                                
4:51:03 PM                                                                                                                    
MR. BRENA pointed  out that adding heat  would cost approximately                                                               
$1 billion  to $2 billion  over the  period of decline.  There is                                                               
heat currently being added to heavy California oil.                                                                             
                                                                                                                                
MR.  RICHARDS  pointed  out  key  studies  included  in  members'                                                               
packets. In the  JTG study, on page 11, there  are five scenarios                                                               
regarding  operating  TAPS  at  ultra-low  flows.  The  Carpenter                                                               
study, on  page 8, shows  a determination  made that TAPS  can be                                                               
operated with heat down to very  low flow. Below 50,000 to 70,000                                                               
barrels a day would require solutions other than heating.                                                                       
                                                                                                                                
SENATOR STEDMAN asked  why BP would spend the effort  or money on                                                               
developing the analysis to run  the pipeline at 100,000 barrels a                                                               
day, if they never thought they'd be at that point.                                                                             
                                                                                                                                
MR. RICHARDS explained  that the purpose of the  study was simply                                                               
to  book   their  proven  reserves.  The   SEC  requires  certain                                                               
assumptions  to  be  made  to book  reserves,  such  as  economic                                                               
testing.                                                                                                                        
                                                                                                                                
4:54:27 PM                                                                                                                    
MR. BRENA  added that Alyeska did  a low flow study  with a range                                                               
from 300,000 barrels per day to  1.14 million barrels per day. He                                                               
emphasized that it is not a  question of whether or not they will                                                               
get  the low  flow,  but when.  The other  two  studies, JTD  and                                                               
Carpenter,  were  for BP  and  assessed  how  low TAPS  could  go                                                               
because they  wanted to book  additional reserves and add  to the                                                               
value  of their  company for  financial reporting  purposes. They                                                               
determined TAPS could go down  to 135,000 barrels per day without                                                               
recirculation.  Their experts  testified  TAPS could  go down  to                                                               
50,000 barrels  per day  with recirculation.  That allowed  BP to                                                               
book 63 million  additional barrels and to increase  the value of                                                               
their company by 63 million, times the price of crude oil.                                                                      
                                                                                                                                
4:56:35 PM                                                                                                                    
MR. RICHARDS  brought the committee's  attention to  the Larkspur                                                               
Study where  BP lays  out where  the heaters  need to  be located                                                               
along TAPS  in order to get  down to 100,000 barrels  per day and                                                               
the cost of doing so.                                                                                                           
                                                                                                                                
MR. BRENA  noted that Alyeska  studies issues for years.  One way                                                               
to know when "they are  serious" about implementing a solution is                                                               
when they  spend money. They have  yet to study the  issue of low                                                               
flow  pigging or  to buy  heaters. He  mentioned the  Flint Hills                                                               
heat  recovery  system. He  concluded  that  knowing a  company's                                                               
process provides information as to how impending an issue is.                                                                   
                                                                                                                                
CO-CHAIR PASKVAN said he looked forward to the conclusion of the                                                                
presentation at tomorrow's meeting.                                                                                             
                                                                                                                                
5:00:59 PM                                                                                                                    
CO-CHAIR PASKVAN adjourned the Senate Resources Standing                                                                        
Committee meeting at 5:00 p.m.                                                                                                  

Document Name Date/Time Subjects
BRENA_2012-02-06 FINAL.pdf SRES 2/7/2012 3:30:00 PM
Mark Myers_Oil and Gas Briefing Paper.pdf SRES 2/7/2012 3:30:00 PM
BP_Doc_SOA-0588 (20110916 revised redactions FINAL).pdf SRES 2/7/2012 3:30:00 PM