Legislature(2011 - 2012)BUTROVICH 205

02/22/2012 01:30 PM Senate RESOURCES


Download Mp3. <- Right click and save file as

Audio Topic
01:33:16 PM Start
01:33:41 PM SB192
01:34:43 PM Alaska North Slope Plans of Development by Dnr
02:45:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
Alaska North Slope Plans of Development
Presentation by Department of Natural Resources
<Invited Testimony Only on DNR Presentation>
Bills Previously Heard/Scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 22, 2012                                                                                        
                           1:33 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                                                                                                            
                                                                                                                                
SENATE BILL NO. 192                                                                                                             
"An Act relating to the oil and gas production tax; and                                                                         
providing for an effective date."                                                                                               
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PRESENTATION: ALASKA NORTH SLOPE PLANS OF DEVELOPMENT                                                                           
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 192                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX RATES                                                                                   
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
02/08/12       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/12       (S)       RES, FIN                                                                                               
02/10/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/10/12       (S)       Heard & Held                                                                                           
02/10/12       (S)       MINUTE(RES)                                                                                            
02/13/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/13/12       (S)       Heard & Held                                                                                           
02/13/12       (S)       MINUTE(RES)                                                                                            
02/14/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/14/12       (S)       Heard & Held                                                                                           
02/14/12       (S)       MINUTE(RES)                                                                                            
02/15/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/15/12       (S)       Heard & Held                                                                                           
02/15/12       (S)       MINUTE(RES)                                                                                            
02/16/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/16/12       (S)       Heard & Held                                                                                           
02/16/12       (S)       MINUTE(RES)                                                                                            
02/17/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/17/12       (S)       Heard & Held                                                                                           
02/17/12       (S)       MINUTE(RES)                                                                                            
02/21/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/21/12       (S)       Heard & Held                                                                                           
02/21/12       (S)       MINUTE(RES)                                                                                            
02/22/12       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BILL BARRON, Director                                                                                                           
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Juneau, AK                                                                                                                      
POSITION  STATEMENT:  Gave  overview  of  North  Slope  plans  of                                                             
development (POD).                                                                                                              
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:33:16 PM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 1:33  p.m. Present at the  call to                                                               
order  were  Senators  French,  Stevens,  Wielechowski,  Co-Chair                                                               
Wagoner, and Co-Chair Paskvan.                                                                                                  
                                                                                                                                
            SB 192-OIL AND GAS PRODUCTION TAX RATES                                                                         
         ALASKA NORTH SLOPE PLANS OF DEVELOPMENT BY DNR                                                                     
                                                                                                                                
1:33:41 PM                                                                                                                    
CO-CHAIR PASKVAN  announced that  today the committee  would hear                                                               
more about  plans of development  from the Department  of Natural                                                               
Resources (DNR).                                                                                                                
                                                                                                                              
CO-CHAIR WAGONER  said he was  intrigued by what Mr.  Barron said                                                               
about the exploration  currently taking place on  the North Slope                                                               
and what  led to it.  He was under  the false assumption  that it                                                               
was entirely  related to  credits, but the  director said  it was                                                               
also related to  the terms of the leases. He  asked Mr. Barron to                                                               
expand on that.                                                                                                                 
                                                                                                                                
^Alaska North Slope Plans of Development by DNR                                                                                 
1:34:43 PM                                                                                                                    
BILL BARRON, Director, Division of  Oil and Gas (DOG), Department                                                               
of Natural  Resources (DNR), said  the discussion related  to the                                                               
apparent robust nature  of the drilling program this  year on the                                                               
North Slope and  while DNR believes that tax credits  have a play                                                               
in the  dialog, the  lion's share  of the  drilling was  a direct                                                               
result of lease  terms expiring. These leases  that were acquired                                                               
5, 7  or 10 years  ago, are about to  "term out" and  if adequate                                                               
work hasn't been done to  prove moveable hydrocarbons and to form                                                               
a unit, those leases will expire and be returned to the state.                                                                  
                                                                                                                                
1:36:03 PM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
                                                                                                                                
1:36:55 PM                                                                                                                    
CO-CHAIR  PASKVAN asked  how much  money the  state had  paid out                                                               
under the 40 percent exploration credit.                                                                                        
                                                                                                                                
MR. BARRON  replied that he  didn't know,  but he could  get that                                                               
number for him.                                                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN said  he  was  trying to  figure  out what  the                                                               
decision-making is  if they  don't know how  much money  has been                                                               
paid out  in credits and  the director  says the lion's  share of                                                               
the decisions are about lease terms.                                                                                            
                                                                                                                                
MR. BARRON  elaborated that while the  tax credit is part  of the                                                               
internal  fiscal decision  process  for a  company,  the risk  of                                                               
losing  the land  and access  to it  for exploration  drives that                                                               
decision  in a  much greater  way.  He explained  that a  company                                                               
makes  an internal  decision at  some  point to  drill, find  and                                                               
prove hydrocarbon; then they form  a production unit and the land                                                               
stays with  them for another  five year  term until it's  on full                                                               
production. But  once a company loses  the land, it goes  back up                                                               
for lease sale.                                                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN asked  if  DNR analyzed  the  number of  leases                                                               
terming out over the last five years and then the next five.                                                                    
                                                                                                                                
MR. BARRON replied yes and that information is available.                                                                       
                                                                                                                                
CO-CHAIR PASKVAN  asked him  to provide  that information  to the                                                               
committee.                                                                                                                      
                                                                                                                                
1:39:12 PM                                                                                                                    
SENATOR STEDMAN joined the committee.                                                                                           
                                                                                                                                
SENATOR STEVENS  asked if any  effort at  all to drill  stops the                                                               
loss of a lease or if the department requires a certain level.                                                                  
                                                                                                                                
MR. BARRON said  he had this information in  the presentation and                                                               
at the  right time he could  address that question within  a more                                                               
comprehensive context.                                                                                                          
                                                                                                                                
1:39:47 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  how long the lease terms  were and if                                                               
companies need  that much time  or did  they wait until  the last                                                               
minute to  do anything.  Are the state's  lease terms  where they                                                               
need to be and, if the lease terms  are such a big driver, do the                                                               
tax credits need to be as high as they are?                                                                                     
                                                                                                                                
MR.  BARRON  said, again,  that  his  presentation would  address                                                               
those  questions. He  commented that  he was  still on  his first                                                               
slide and he already had half  a dozen questions. The request was                                                               
to discuss plans  of development (POD) and it's  important to set                                                               
the broader  stage of how  one gets to  one. He first  would walk                                                               
them through area-wide lease sales  and exploration licenses, the                                                               
primary  term for  explorers  to  have access  to  the land.  The                                                               
primary  focus of  the  exploration  during that  term  is to  do                                                               
prudent  exploration activities  and  demonstrate  by drilling  a                                                               
well that it is a candidate for unitization.                                                                                    
                                                                                                                                
Unitization   is   the   next  phase   after   proving   moveable                                                               
hydrocarbons  and  a  company  can  reasonably  estimate  closure                                                               
(capture  area)  that the  hydrocarbons  are  based in.  At  this                                                               
junction the  state has a  great deal  of leverage in  moving the                                                               
needle  in terms  of establishing  a work  scope for  development                                                               
operations.   Once  a   unit  is   on  sustained   production,  a                                                               
participating area (PA) is established and  this is when a POD is                                                               
required.                                                                                                                       
                                                                                                                                
1:43:12 PM                                                                                                                    
He explained that the exploration  license and/or area-wide lease                                                               
sale can turn  into lease issuance or primary  exploration and to                                                               
proving of moveable hydrocarbons. If  the answer to that question                                                               
is no or no work done, then the  land is returned to the state so                                                               
it can be put  back into a lease sale. If a  unit is formed, that                                                               
is   there  for   five  years   until  sustained   production  is                                                               
established  and  that  holds  the  unit  as  long  as  there  is                                                               
production.                                                                                                                     
                                                                                                                                
1:43:56 PM                                                                                                                    
The state has had varying lease  terms over many years. They have                                                               
been  as short  as five  years and  seven years  (primarily North                                                               
Slope). The  Kenai Peninsula, appropriately, has  its own shorter                                                               
timeframes,  because  of  its existing  infrastructure  and  road                                                               
systems  allow easier  access. Having  longer lease  terms of  10                                                               
years on the North Slope,  for instance is appropriate where part                                                               
of the requirement  for exploration is that it be  done in winter                                                               
off of ice roads  and ice pads. So by having  a longer breadth of                                                               
time, they  gain enough land  to have a reasonable  critical mass                                                               
of area  to explore, are able  to do seismic and  analyze it, can                                                               
find an appropriate target, can  get the proper permits in place,                                                               
secure a rig,  build an ice pad  and ice road to  it and commence                                                               
drilling.                                                                                                                       
                                                                                                                                
He said that  the North Slope experiment of five  year leases was                                                               
a  detriment  to  both  the   state  and  the  industry,  because                                                               
companies didn't have enough time to  get the pre-work done to be                                                               
able to establish  where they should drill their  first and maybe                                                               
only exploration well.                                                                                                          
                                                                                                                                
MR.  BARRON said  the division  interviewed  many companies  that                                                               
were  historic explorers  on the  North Slope  and companies  who                                                               
were  interested  in  becoming  explorers there  about  the  most                                                               
advantageous   lease  terms   under  the   pretext  that   it  is                                                               
advantageous to the state to  do proper exploration as quickly as                                                               
possible  to find  and  then produce  hydrocarbon  and avoid  the                                                               
warehousing issue.                                                                                                              
                                                                                                                                
1:47:04 PM                                                                                                                    
He said the  lease sale the division conducted  in December ranks                                                               
in  the  top   six  revenue-producers  in  history   and  had  an                                                               
interesting  blend of  terms. They  went  with the  full 10  year                                                               
term, and after  year 7, the lease rates jumped  from the current                                                               
$10 an acre  to $250 acre for  years 8, 9 and 10.  DOG was trying                                                               
to say that 7 years is  enough time to do primary exploration and                                                               
some  delineation and  10 years  definitely, but  if an  operator                                                               
isn't interested in moving forward  with a project, they probably                                                               
also know that by year 5, 6 and  7. If they are not interested in                                                               
moving forward but  want to retain the land, the  DOG imposes the                                                               
idea that  basically you can keep  the land for the  10 years but                                                               
it's going  to cost you  the same amount  of money that  it would                                                               
cost to drill  a well. There is  a choice and they  are trying to                                                               
encourage companies to  make that choice and make  it early. It's                                                               
isn't  a formula,  but  strong encouragement  to  make the  right                                                               
decision at the right time and for the state's benefit.                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN  asked  over  the  next  five  years  how  much                                                               
additional  exploration  activity  he   anticipates  due  to  the                                                               
increased cost of holding a lease.                                                                                              
                                                                                                                                
MR. BARRON replied that the additional  cost will be in effect in                                                               
seven years  from the last lease  sale, so none in  the next five                                                               
years.                                                                                                                          
                                                                                                                                
CO-CHAIR  PASKVAN  said  he  knew  Cook  Inlet  had  some  leases                                                               
potentially  for  five  years,  but  the  primary  focus  of  his                                                               
question was on exploration on  the Central North Slope connected                                                               
to existing leases.                                                                                                             
                                                                                                                                
MR. BARRON said  he would have to look at  those numbers when the                                                               
leases expire and get him that information.                                                                                     
                                                                                                                                
SENATOR  WIELECHOWSKI  said a  motivated  company  is capable  of                                                               
exploring quickly.  Great Bear,  for example,  just took  out its                                                               
leases a  year to two  ago and is exploring  a dozen or  so wells                                                               
this year.  Royale just acquired  shale leases there and  will be                                                               
exploring  next  winter, and  Repsol  just  acquired leases  from                                                               
Pioneer that  they are exploring. Did  he agree with that  or was                                                               
something  different  about  those  cases  that  enable  them  to                                                               
explore very rapidly?                                                                                                           
                                                                                                                                
MR. BARRON responded  that while Great Bear picked  up its leases                                                               
two  years  ago,  they  have  yet to  do  any  exploration  work.                                                               
Hopefully, they will get a rig and  be able to do so. He modified                                                               
their lease  terms to work off  the road system so  they can work                                                               
year-round. Royale  may or may  not work as planned,  either, but                                                               
that's the nature of the industry.  Repsol is a good example of a                                                               
company  that picked  up leases  that were  about to  expire and,                                                               
with  their  partners,  are  very  motivated  to  drill  quickly,                                                               
primarily  because of  lease exploration  terms. They  are moving                                                               
quickly, because it's either "drill it or lose it."                                                                             
                                                                                                                                
1:52:58 PM                                                                                                                    
He presented  an exhibit  of how  a unit works:  Company A  and B                                                               
acquires land  over time  and have established  two wells  and an                                                               
injector.  The  red  box  was  the  unit  boundary.  The  PA  was                                                               
represented by the blue line and  was established as close to the                                                               
reservoir  boundaries  as possible;  its  primary  purpose is  to                                                               
establish  how  much production  and,  therefore,  value will  be                                                               
allocated to the  different parties by tract. So  all the players                                                               
know how much they are going to get for the land that they own.                                                                 
                                                                                                                                
1:54:38 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if the  department had figured out how                                                               
they are going to unitize shale oil.                                                                                            
                                                                                                                                
MR. BARRON  answered no.  It will  be an  interesting discussion,                                                               
because he  had just  shown them  a "conventional"  reservoir; he                                                               
explained that  injector wells and producer  wells interfere with                                                               
each other,  because you inject  liquids to move  the hydrocarbon                                                               
to the producer  wells. There is well-to-well  connection, so you                                                               
have  tract factors  to establish  how  much is  granted to  each                                                               
tract by that production.                                                                                                       
                                                                                                                                
In a shale  development, every well has no  interference with the                                                               
well  next to  it, because  of the  nature of  the rock  which is                                                               
extraordinarily tight  (very low permeability and  porosity). The                                                               
reason to  form a unit is  to protect all interested  parties. In                                                               
theory for shale, every well is its own unit.                                                                                   
                                                                                                                                
MR. BARRON  said he  was working closely  with the  Department of                                                               
Law (DOL) to  figure out how best to unitize  the shale prospects                                                               
to protect the  state. In a conventional play, a  single well can                                                               
hold the  lease as  long as  it's producing.  One shale  well can                                                               
hold an  entire lease even though  you may need 50  or more wells                                                               
to fully drain the volume within that lease.                                                                                    
                                                                                                                                
MR. BARRON  said given  that "hard nut  to crack,"  they quarter-                                                               
sectioned  all  the  leases  in  the  areas  they  deemed  to  be                                                               
primarily  shale development  plays.  So rather  than having  one                                                               
lease  of  the normal  size,  they  quartered  it and  sold  each                                                               
quarter as individual leases and  tracts. At least now four wells                                                               
have to be drilled to hold that same acreage.                                                                                   
                                                                                                                                
1:57:51 PM                                                                                                                    
MR. BARRON  explained that a  PA is formed after  unitization and                                                               
after sustained production is happening.  The reservoir has to be                                                               
more fully defined, because going  through the allocation process                                                               
is very laborious and contentious.  A separate PA is required for                                                               
every producing horizon within a unit.  When you are looking at a                                                               
normal reservoir almost anywhere in  the world, it's very rare to                                                               
have a  single horizon as  a discovery, he explained.  One column                                                               
usually has  many layers within it  that are producible and  a PA                                                               
is formed for each one.                                                                                                         
                                                                                                                                
The approval of  the PA includes an apportionment of  the cost of                                                               
revenue for the protection of all parties, including the state.                                                                 
                                                                                                                                
1:59:07 PM                                                                                                                    
Once a PA is formed, a  Plan of Development (POD) is required for                                                               
each one.  It is  issued by  the operating  company on  an annual                                                               
basis and  is reviewed by the  DOG. If it is  deemed insufficient                                                               
for  approval, activities  can't move  forward. The  division may                                                               
propose  modifications and  if the  operator agrees  to them  the                                                               
project can move forward.                                                                                                       
                                                                                                                                
MR. BARRON listed POD requirements:                                                                                             
-must include  a long range  proposed development  activities for                                                               
the participating area;                                                                                                         
-must describe  the plans for exploration  and delineation, plans                                                               
of reservoir simulation and modeling;                                                                                           
-must include proposed plans of  operations for at least one year                                                               
-must tell the division where  the surface locations are and what                                                               
kind of equipment,  processing camps, road and  additions will be                                                               
put on the land, itself.                                                                                                        
                                                                                                                                
2:00:45 PM                                                                                                                    
MR. BARRON's next  exhibit indicated that the North  Slope has 18                                                               
existing  producing units  and  42 PAs.  He said  that  a lot  of                                                               
activity is managed by the DNR  and the operating companies on an                                                               
annual basis  and that every  year the  division looks at  all of                                                               
the  plans. He  said that  a lot  of data  is required  in a  PA,                                                               
because they are plans for the next 12 months.                                                                                  
                                                                                                                                
He reviewed the POD approval process:                                                                                           
-annually submitted by the operating companies                                                                                  
-technical review of POD by the DOG                                                                                             
-DOG  develops a  series of  questions  and information  requests                                                               
involving many meetings with the operators                                                                                      
-DOG completes a POD matrix  score sheet and attaches bubble maps                                                               
and decline curves for internal use                                                                                             
                                                                                                                                
MR. BARRON said if all of those  things seem to fit and fall into                                                               
place, they approve the POD  and the operators proceed with them.                                                               
If the DOG is not satisfied,  they sit down with the operator and                                                               
devise ways  and means to get  the state satisfied and  come to a                                                               
negotiated  settlement with  them.  These plans  are approved  by                                                               
both parties, but  most of these companies  have working interest                                                               
owners and sometimes the plans change because of them.                                                                          
                                                                                                                                
2:03:43 PM                                                                                                                    
CO-CHAIR  WAGONER  asked  if  the state  ever  gets  involved  in                                                               
disputes between a unit operator and its partners.                                                                              
                                                                                                                                
MR. BARRON  answered yes. Typically  unit agreements  have stand-                                                               
down  clauses  for parties  that  don't  want to  participate  in                                                               
projects. In those  cases, there is usually  a rather significant                                                               
(400-500  percent) penalty  for  them to  ever  "back into"  that                                                               
project. It is  their own self-policing mechanism and  part of an                                                               
operating  agreement  that  most   companies  don't  want  to  go                                                               
through.                                                                                                                        
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  if   the  department  performs  any                                                               
economic  analysis  when determining  what  the  POD should  look                                                               
like.                                                                                                                           
                                                                                                                                
MR. BARRON  answered no;  they look at  the overall  direction of                                                               
whatever  activities  are  taking place,  not  necessarily  their                                                               
economics.                                                                                                                      
                                                                                                                                
SENATOR  WIELECHOWSKI asked  if performing  an economic  analysis                                                               
wouldn't be helpful  in terms of the state  managing its resource                                                               
and making sure it gets maximum benefit from it.                                                                                
                                                                                                                                
MR. BARRON  replied that sometimes  they have that  dialogue with                                                               
the  operators, but  the division  can see  whether a  plan seems                                                               
reasonable and would  be profitable or not without  doing a great                                                               
deal of economic  review. He pointed out that  companies will not                                                               
bring projects  forward that  aren't going  to be  profitable for                                                               
them, and  therefore, profitable  for the  state, too.  And while                                                               
having an economic  model in conjunction with the  POD might have                                                               
some benefit, it doesn't sway the  needle much at all in terms of                                                               
the DOG's ability to encourage that development.                                                                                
                                                                                                                                
2:07:44 PM                                                                                                                    
SENATOR WIELECHOWSKI  said if the  state had an  understanding of                                                               
the economics  of a field  it would have  a much stronger  leg to                                                               
stand on in terms of forcing a company to develop.                                                                              
                                                                                                                                
MR.  BARRON responded  that it's  not a  question of  agreeing or                                                               
not;  the  process  they  are  trying  to  encourage  is  prudent                                                               
economic  development in  a field  and not  encourage waste.  The                                                               
North  Slope  has   42  PAs,  primarily  driven   by  three  main                                                               
companies.  They are  doing allocation  of resources  internal to                                                               
their companies  including asset  allocation throughout  the rest                                                               
of their  portfolios. For the state  to look at a  single project                                                               
and say  it is economic, go  do it, the company  could agree, but                                                               
it  could also  say  that  it doesn't  meet  their threshold  for                                                               
investment  at  this  time  and  that they  are  going  to  do  a                                                               
development somewhere  else in Prudhoe  Bay. These  companies are                                                               
trying  to do  reservoir management,  long-term field  management                                                               
and portfolio  analysis all at  the same  time, not for  just the                                                               
fields in this state but in other areas, too.                                                                                   
                                                                                                                                
CO-CHAIR PASKVAN  asked if all  three owners must agree  in order                                                               
for a development to proceed.                                                                                                   
                                                                                                                                
MR. BARRON replied that he  didn't know of specific examples, but                                                               
the  approval of  the POD  is  the DOG's  responsibility and  the                                                               
operator presents them  their plans. In theory,  the operator has                                                               
had those  discussions with their  co-owners prior  to submitting                                                               
the POD. But  things change from one project to  another within a                                                               
plan, and  that change might require  the plan to change  and not                                                               
move forward  on some part of  it at all. It's  possible that one                                                               
partner might want to rethink it.                                                                                               
                                                                                                                                
CO-CHAIR PASKVAN asked  if that was another way  of saying unless                                                               
there is  agreement with all  three working interest  owners, the                                                               
state would not receive the POD.                                                                                                
                                                                                                                                
2:12:44 PM                                                                                                                    
MR. BARRON  answered no.  The DOG  still receives  the POD  on an                                                               
annual basis per  the lease terms. Once the POD  is approved, the                                                               
operator has approval to proceed with  those plans. But in a risk                                                               
business, anywhere in that 12-month  timeframe things can change.                                                               
The DOG  would be advised  of the change  and then the  next year                                                               
upon  the new  POD,  they  would have  that  dialogue about  what                                                               
happened. The companies don't have  to get working interest owner                                                               
approval  to present  the plan;  they  have to  get that  working                                                               
interest approval to progress the plan after it is approved.                                                                    
                                                                                                                                
He said  the division has  a process by  which it keeps  track of                                                               
historic PODs,  what has  been approved and  what they  said they                                                               
were going to do.  Their  "bubble map" gives staff a quick visual                                                               
of  which wells  are producers  and which  are injectors  and the                                                               
relative size  of the  bubble indicates how  much water  has been                                                               
put in or how much oil has been extracted.                                                                                      
                                                                                                                                
MR. BARRON said  he would talk about three  primary case studies:                                                               
ConocoPhillips'  Kuparuk   Unit  (discovered  in  1969   and  has                                                               
recovered  2.4   billion  barrels  of  oil),   BP's  Milne  Point                                                               
(recovered   over  300   million  barrels),   BP's  Prudhoe   Bay                                                               
(discovered in 1967  and recovered 12.2 billion  barrels of oil),                                                               
satellites and  all of  the associated  PAs so  they could  get a                                                               
sense of some of the dialogue and activities they work through.                                                                 
                                                                                                                                
2:14:30 PM                                                                                                                    
ConocoPhillips'  PAs include  Kuparuk, Tarn,  West Sak  and News.                                                               
POD topics  reviewed are:  development of  West Sak  and Kuparuk,                                                               
their infield  drilling program, their side  track opportunities,                                                               
the coil tubing  drilling, the impacts to  the operation relative                                                               
to  surface  casing  corrosion, subsidence,  pipeline  integrity,                                                               
flow line  integrity and general facility  maintenance. They talk                                                               
about  gas  management and  the  impact  of production  on  their                                                               
overall gas management and reservoir management of gas wells.                                                                   
                                                                                                                                
MR.  BARRON said  a Matric  Breakthrough Event  (MBE) is  when an                                                               
injection  well is  tied to  a producing  well and  the injectant                                                               
breaks through  into the producer  very rapidly; and "It's  not a                                                               
good thing." Part  of the problem is that you  have an entire POD                                                               
laid  out  for  a  water  flood, for  instance,  and  a  MBE  can                                                               
completely change  the direction  of where you  are going  to put                                                               
liquid and the entire pattern.                                                                                                  
                                                                                                                                
SENATOR FRENCH  asked how  one well  can hold  a lease  when more                                                               
than  one  reservoir is  under  the  lease;  Kuparuk was  a  good                                                               
example with Melt Water and Tobasco.                                                                                            
                                                                                                                                
MR.  BARRON  answered that  happens  and  it  is referred  to  as                                                               
stacking of PAs. A single well  holds the whole surface unit and,                                                               
therefore, it holds everything in that column.                                                                                  
                                                                                                                                
2:17:36 PM                                                                                                                    
He  showed   a  bubble   map  (slides   13,  14),   a  "beautiful                                                               
presentation"  of picture  perfect ConocoPhillips'  Kuparuk water                                                               
flood profile: the  green bubbles are oil producers  and the blue                                                               
ones are water. You can  see development scenarios of water being                                                               
pushed  to the  producers making  them  produce more  oil as  the                                                               
water front moves out along with  areas that didn't have a lot of                                                               
work done  in them. In  looking for opportunities  for additional                                                               
drilling  and expansion,  the state  builds a  rapport and  trust                                                               
with the  operator and  it takes place  over many  years. "Sharks                                                               
Tooth"  in the  lower left  hand corner  of the  unit was  one of                                                               
those, and  he said  that ConocoPhillips  was moving  forward and                                                               
drilling it right now.                                                                                                          
                                                                                                                                
2:19:49 PM                                                                                                                    
Moving to BP's  Milne Point Unit, he noted that  it had a Kuparuk                                                               
PA,  a Schrader  Bluff PA  and an  Ugnu Pilot  program. Slide  15                                                               
showed  the  typical  discussion  they  have  with  the  operator                                                               
looking  back  on the  last  several  PODs and  looking  forward,                                                               
looking  at  their enhanced  oil  recovery  (EOR) treatments  and                                                               
projects, their  low-saline injection  treatment and  their water                                                               
alternating  gas treatments.  They also  talk about  drilling rig                                                               
activity, availability and mobilization. How  to get all the work                                                               
done with  the limitation of rigs  on the North Slope  has become                                                               
quite  a healthy  dialogue. So  even if  the project  is robustly                                                               
economically viable on paper, if there  is no rig to drill it, it                                                               
really doesn't matter.                                                                                                          
                                                                                                                                
MR. BARRON  said they talk  to BP and ConocoPhillips  relative to                                                               
mechanical issues:  gas injection,  corrosion and work  over plan                                                               
issues. In a very mature oil  field like Kuparuk, Prudhoe Bay and                                                               
Milne  Point, work-overs  become a  great deal  of the  activity.                                                               
They  talk about  the electrical  submersible pump  (ESP) failure                                                               
rate at  Schrader Bluff  and what kind  of new  technologies they                                                               
are working  on with the  service companies in terms  of reducing                                                               
that failure rate - in trying  to understand how to encourage the                                                               
continuation of those operations.                                                                                               
                                                                                                                                
In terms of Ugnu, the DOG is  talking to them about CHOPS and the                                                               
five-year pilot program  there. Field activity is  an offshoot of                                                               
that entire  discussion. They talk  about the reprocessing  of 4D                                                               
seismic (on the POD) and  securing potentially another one or two                                                               
rigs. In  fact, he said they  are trying to secure  a special rig                                                               
just for CHOPS. They talk about  well programs for the four wells                                                               
that are planned and continue talks about MBEs.                                                                                 
                                                                                                                                
SENATOR FRENCH said  the last time he got an  update on CHOPS was                                                               
in the Petroleum  News and it was very positive.  He asked if Mr.                                                               
Barron  had heard  anything  more  recent about  it.  Do you  see                                                               
monthly updates or production totals from that project?                                                                         
                                                                                                                                
MR. BARRON replied  that he keeps tabs on CHOPS,  because it is a                                                               
technically  fascinating  project.  Right  now,  they  are  still                                                               
trying to figure  how the pump at their last  well created a hole                                                               
in the tubing through its rotation  and are working with the pipe                                                               
manufacturer  to  come up  with  a  different  type of  seal  and                                                               
"centerizing" tools  to keep  the pump  from wobbling  inside the                                                               
tubing. There  is no  production; so they  are basically  shut in                                                               
waiting for a new design.                                                                                                       
                                                                                                                                
SENATOR FRENCH asked  if it's the same original  well, because he                                                               
saw  a   production  report  indicating   a  well   with  lengthy                                                               
production.                                                                                                                     
                                                                                                                                
MR.  BARRON  answered yes.  The  expectations  of that  well  far                                                               
exceeded anyone's imagination. He said  CHOPS heavy oil has to be                                                               
done in concert  with lighter production, because  its diluent is                                                               
needed to produce it.                                                                                                           
                                                                                                                                
He said  as they talk about  these PODs, the division  can't look                                                               
at any  one project  in isolation.  They must  look at  the broad                                                               
picture  of what  is going  on in  a field  to make  sure that  a                                                               
project like CHOPS  is developed in a simultaneous  sort of dance                                                               
with the  other fields so  that they have that  diluent available                                                               
to  flow the  heavy  oil  into the  pipeline.  They  try to  help                                                               
orchestrate all of those activities throughout all of the PAs.                                                                  
                                                                                                                                
2:43:33 PM                                                                                                                    
CO-CHAIR  PASKVAN said  last year  at a  "Lunch and  Learn," Erik                                                               
West from BP  talked about the blending process and  how it holds                                                               
great promise for Alaska to potentially increase throughput.                                                                    
                                                                                                                                
MR. BARRON emphatically agreed.                                                                                                 
                                                                                                                                
SENATOR FRENCH asked what the plan  is if they have just one well                                                               
and it's shut in, because the POD calls for four wells.                                                                         
                                                                                                                                
MR.  BARRON answered  that  he didn't  have  that available,  but                                                               
would get that part of the plan for him.                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI asked if slide 16 indicated dry holes.                                                                     
                                                                                                                                
MR. BARRON replied  this type of exhibit is over  the Milne Point                                                               
area and it  didn't include any production  or injection numbers.                                                               
A dry hole would show up as a  black dot with no resource tied to                                                               
it on the rest of them.                                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI asked for the  rough percentage of dry holes                                                               
on the North Slope.                                                                                                             
                                                                                                                                
MR. BARRON replied  that he didn't have that figure,  but that it                                                               
does happen and it is  amazingly frustrating. Beaver Creek on the                                                               
Kenai Peninsula is a textbook  example where one well was drilled                                                               
between two robust  oil producers; everyone was  certain it would                                                               
be a good producer,  too, but it was dry. You  just sit there and                                                               
scratch  your head.  He  added that  these  are incredibly  well-                                                               
managed reservoirs by  any stretch of the  imagination; it's very                                                               
high activity in a very mature basin.                                                                                           
                                                                                                                                
2:28:15 PM                                                                                                                    
MR. BARRON  said PODs  were submitted for  the previous  two case                                                               
studies he  talked about; the  DOG had lengthy dialogue  and made                                                               
modifications made to each one. Then the PODs were approved.                                                                    
                                                                                                                                
The Borealis and Orion PAs were  sent to the division in November                                                               
or December  of last year  for their  annual review and  they are                                                               
still in very healthy negotiations with  BP over them. The IPA PA                                                               
is due in March; I-pad is part  of that and was first proposed in                                                               
the 2006  POD. The activity  was sanctioned and it  moved forward                                                               
on some  civil work. It has  paused on shallow ice  lenses issues                                                               
and has been on the POD ever  since but with no activity. DOG has                                                               
been in  very deep negotiations  with BP over  it as well  as the                                                               
gas  partial  pressure  issue  over  the  last  three  months  to                                                               
understand their plans and their intent.                                                                                        
                                                                                                                                
2:30:07 PM                                                                                                                    
CO-CHAIR PASKVAN said  in reviewing the 2010 POD for  Orion PA it                                                               
says "gas  partial processing plant  (GPP) is midway  through the                                                               
execute engineering  for the plant  design and  installation." He                                                               
asked what  that meant. And  then it continues: "Gravel  has been                                                               
installed on  Z-pad. Long lead  times have been procured  and the                                                               
turbine  compressor has  been constructed."  What  are long  lead                                                               
times and what is a "turbine compressor" and where is it?                                                                       
                                                                                                                                
MR. BARRON answered  that he had no clue where  the compressor is                                                               
right  now.  This  project  is  in the  final  design  and  final                                                               
engineering  stage;  the  long  lead  time  items  would  be  the                                                               
compressor or the turbine. This  project is designed to take some                                                               
gas, process  it and  then compress  and use it  for gas  lift to                                                               
augment  the  overall recovery  of  that  area.  This is  a  very                                                               
typical  project plan  as  generated by  a  project manager.  The                                                               
civil work they are talking about  at Z-pad is just the work that                                                               
is done  to move gravel and  level and compact it  in preparation                                                               
for the  physical installation of  the equipment.  That equipment                                                               
has not been installed, yet.                                                                                                    
                                                                                                                                
2:32:37 PM                                                                                                                    
CO-CHAIR  PASKVAN  said  his understanding  of  the  gas  partial                                                               
processing plant is that  it is to divert the gas  from the GHX 2                                                               
treatment  facility  so it  can  produce  more oil.  His  overall                                                               
understanding was that  there would be about  40,000 more barrels                                                               
of oil per day of output if the GPP were operating.                                                                             
                                                                                                                                
MR. BARRON replied that he  didn't know the specific numbers, but                                                               
that is  where he understand the  process was heading and  it was                                                               
in the right direction.                                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI asked if I-pad  and GPP had been promised by                                                               
the producers if oil taxes were rolled back.                                                                                    
                                                                                                                                
MR. BARRON replied that he didn't  know; the tax question is best                                                               
answered by the operator.                                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI asked if I-pad  was included in the last POD                                                               
that was approved.                                                                                                              
                                                                                                                                
MR. BARRON answered yes.                                                                                                        
                                                                                                                                
SENATOR  WIELECHOWSKI asked  when the  producers had  promised to                                                               
undertake that project.                                                                                                         
                                                                                                                                
MR.  BARRON  replied that  the  plans  are  plans; they  are  not                                                               
promises or  commitments. It's  a scenario  that is  presented in                                                               
terms of  their planning  purposes and  for the  state's planning                                                               
purposes.                                                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI asked when that plan was submitted.                                                                        
                                                                                                                                
MR.  BARRON  answered  that the  I-pad  Orion/Borealis  plan  was                                                               
submitted last year  and I-pad had been on the  PODs for the last                                                               
four or five years.                                                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI asked  the rationale he is  getting for them                                                               
not going  forward with the plan  since it has been  on the books                                                               
for four years.                                                                                                                 
                                                                                                                                
2:35:42 PM                                                                                                                    
MR.  BARRON used  slides 18  and  19 to  explain the  problematic                                                               
issues; slide 18  showed a cross section of the  Prudhoe Bay Unit                                                               
and  how things  are  stacked and  how they  can  be retained  in                                                               
acreage - roughly to scale. Orion  and Borealis were on the upper                                                               
left hand  side of the  top two layers  of the exhibit.  Slide 19                                                               
was a bubble  map of Orion and Borealis PAs  showing that a great                                                               
deal  of work  had been  done in  the center  section and  to the                                                               
lower  right, primarily  in Borealis  and to  a lesser  degree in                                                               
Orion. The little square in the  upper left hand side was a rough                                                               
estimated location  of I-pad (very  far western pad put  in place                                                               
to try and capture the resource within the PA).                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN asked if he was referencing Orion or Borealis.                                                                 
                                                                                                                                
MR. BARRON replied  in both; they are on top  of each other. That                                                               
is why he showed them the  stacked exhibit first. He took them to                                                               
the  next bubble  map of  IPA (slide  20) that  was "the  telling                                                               
story" of why  some of these things are moved  around in time. It                                                               
is the large  oil reservoir within the greater  Prudhoe Bay area.                                                               
It indicated a tremendous amount of  activity in the main part of                                                               
the  field  and  some  gas  activity to  the  east.  The  western                                                               
development will  continue being challenging with  not only costs                                                               
and remoteness  but also activities  associated with  the primary                                                               
function  of greater  Prudhoe Bay  - asset  allocation, reservoir                                                               
management, gas processing, oil  processing and water processing.                                                               
While  the  activities associated  with  Orion  and Borealis  are                                                               
important (now they are talking  about value), the companies have                                                               
to decide if they  are going to get more oil out  of those or out                                                               
of  continued  efforts  in  the IPA,  and  they  have  continuing                                                               
dialogues  with  the  state  about   it.  For  every  dollar  the                                                               
companies spend,  the division  wants them  to maximize  value to                                                               
state.  But  they want  to  maximize  value to  the  corporation.                                                               
Whether it  has been pushed back  or delayed, the answer  is this                                                               
question: for  the money  you are spending  are you  bringing the                                                               
greatest value to  the state? And the answer is  a blend of those                                                               
three bubble maps.                                                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI asked  if he had been told  the reason I-pad                                                               
hasn't gone forward is economic or technical.                                                                                   
                                                                                                                                
2:40:13 PM                                                                                                                    
MR. BARRON answered he had been told technical reasons.                                                                         
                                                                                                                                
He summarized  that the state  is in negotiations over  Orion and                                                               
Borealis. He  had asked for  a lot more technical  data, detailed                                                               
scoping  plans, milestones  and deliverables.  As sloppy  as this                                                               
approach  may seem,  he said  this  POD process  has generated  a                                                               
tremendous reserve  base for the  state. Slide 22  indicated BP's                                                               
PODs   that  showed   the  original   recoverable  reserves   and                                                               
everything that  has been proven  and developed above  and beyond                                                               
the original  forecast; it was  driven by the entire  process, of                                                               
continuing "artful"  dialogue and negotiation, of  "prodding" the                                                               
companies  to  continue to  do  work  and  continue to  push  the                                                               
envelope  on   a  lot  of   these  activities.   Continuation  of                                                               
production, the extension  of field life and  the absolute higher                                                               
recovery factors  in the field  is the  end result that  you want                                                               
from a  robust plan of  development and  as messy as  the process                                                               
is, it has yielded tremendous value to the state, he stated.                                                                    
                                                                                                                                
2:42:22 PM                                                                                                                    
In summary,  Mr. Barron said  that lease utilization  is critical                                                               
to  the state;  formations of  PAs  are required  once they  have                                                               
producible   hydrocarbons  and   sustained   flow;  PODs   follow                                                               
immediately after  that on  an annual  basis. There  are detailed                                                               
technical reviews  by the DOG  and sometimes  outside consultants                                                               
are hired  for support. Stacked PAs  in one unit is  very complex                                                               
and it gets  back to the value assessment.  All developments have                                                               
to be conducted under the terms of an approved POD.                                                                             
                                                                                                                                
2:43:08 PM                                                                                                                    
CO-CHAIR PASKVAN  said on  page 22 it  appears that  somewhere in                                                               
2009 an event caused an  increased delineation of proven reserves                                                               
and asked where that came from.                                                                                                 
                                                                                                                                
MR. BARRON answered that he didn't know, but BP might.                                                                          
                                                                                                                                
CO-CHAIR PASKVAN asked if it  could coincide with proven reserves                                                               
transferred to booked reserves.                                                                                                 
                                                                                                                                
MR. BARRON  replied that this  is nothing about  booked reserves;                                                               
this  is  cumulative  recovery  (production  that  has  been  put                                                               
through the line).                                                                                                              
                                                                                                                                
CO-CHAIR  PASKVAN thanked  the participants  and held  SB 192  in                                                               
committee.                                                                                                                      
                                                                                                                                
2:45:41 PM                                                                                                                    
CO-CHAIR   PASKVAN  recessed   the   Senate  Resources   Standing                                                               
Committee meeting until 3:30 p.m.                                                                                               

Document Name Date/Time Subjects
SRES_DNR-DOG_Plans of Development_2_22_12_final.pdf SRES 2/22/2012 1:30:00 PM
SB 192