Legislature(2013 - 2014)BUTROVICH 205
02/01/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Petroleum Leasing and Unitization | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 1, 2013
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Fred Dyson, Vice Chair
Senator Peter Micciche
Senator Click Bishop
Senator Hollis French - via teleconference
Senator Anna Fairclough
MEMBERS ABSENT
Senator Lesil McGuire
COMMITTEE CALENDAR
PRESENTATION: PETROLEUM LEASING AND UNITIZATION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BILL BARRON, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided presentation on leasing and
unitization in terms of land and resource management.
ACTION NARRATIVE
3:30:09 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Dyson, Bishop, Fairclough, and Chair
Giessel.
3:31:05 PM
SENATOR MICCICHE joined the committee.
^Presentation: Petroleum Leasing and Unitization
Presentation: Petroleum Leasing and Unitization
3:31:19 PM
CHAIR GIESSEL invited Mr. Barron to testify on petroleum leasing
and unitization.
3:31:29 PM
BILL BARRON, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), Anchorage, Alaska, said leasing and
unitization is a fundamental piece of what the department does
in terms of land and resource management.
3:31:59 PM
There are three primary management stages through the life of
oil and gas exploration and development: Leasing (the oil and
gas mineral rights of the state), the development phase through
unitization, and the creation and management of resources
through participating areas (PA).
3:32:40 PM
Leasing is the first step in the whole process. This is where
the state grants exclusive rights to explore and develop the oil
and gas minerals to private parties. The department has an
ongoing and fairly robust five-year program of lease sales and
publishes a book annually. They have three area-wide lease sales
that are competitive bids. Sometimes the terms and conditions
change, but typically they lease out on a tract by tract basis,
the tracts being 3 miles by 3 miles. A subtle change happened
last year when they decided to quarter section the primary shale
area that hopefully would benefit the state.
The area-wide lease sales happen one each in spring and fall.
The spring sale is for Cook Inlet and the Alaska Peninsula where
the last several have been very robust, especially with Apache
coming in and picking up a tremendous amount of acreage. New
players like Hilcorp have also picked up some acreage.
The fall lease sale is in three primary areas bundled together
into one sale: the North Slope, the North Slope Foothills and
the Beaufort Sea.
3:35:04 PM
SENATOR DYSON asked if he could say something about the Alaska
Peninsula sale.
MR. BARRON answered that lease sale happens every spring and
there is very little interest from industry in them.
SENATOR DYSON asked if any seismic work had been done there.
MR. BARRON said if there has it's been limited.
SENATOR DYSON asked what makes him think people will bid on it.
MR. BARRON said the story he hears is the local community asked
for that acreage to be put into a general lease sale. Then the
state went through its best interest finding process and
established the areas that would be available for sale and
started the lease sale after that.
SENATOR DYSON said the feds had anticipated that would happen
and asked what caused them to think that.
MR. BARRON said he had no idea. He continued explaining that the
primary term is when the state expects companies to do
exploration seismic and drilling activities to establish what
kind of hydrocarbon potential is in the area. The primary North
Slope area has lease terms of seven years with a minimum bid of
$5/acre and an annual rental rate of $1/acre that elevates
through time to no more than $3/acre. In 2001-2004 the minimum
bid went from $5 to $10. In 2005 the North Slope went to a 10-
year term on the primary lease and back to a minimum $5/acre
bid. Soon after, depending on the geographic area, it went to
seven-years or five-years and back up to $10/acre.
In 2011, as part of the outreach program with the industry, the
division asked from a lease sale perspective what the biggest
problem was. They heard that the primary term is too short
especially for the North Slope. So, they decided to try a 10-
year lease with a $10/acre rental for the first 7 years going up
to $250/acre after that in years 8, 9 and 10, the idea being
that companies involved in oil and gas exploration do one thing
very well and that is make good business calls. So they allowed
them to make a business call. If they had done substantial work
in that first seven years, the commissioner has the discretion
to waive the higher rental rate. If they had not done sufficient
work in the exploration primary phase, then they have a choice:
to either relinquish the acreage and return it to the state
where it would go back into the leasing program or they can pay
the $250/acre and retain that exclusive right.
3:41:20 PM
CHAIR GIESSEL asked what happened to folks in 2010 who had
signed up for a 5 or 7 year lease term when they went to 10
years.
MR. BARRON answered the leases are contracts with the state and
are no different than leasing an apartment where your neighbor
rented for 10 years and you only rented for 5 years. They had
observed that the short term leases were not allowing people
enough time to do their exploration work and they were using the
unitization process to try and expand their opportunities. But
unitization is not about lease extension. A unitization without
drilling is not good for the state and does not promote
competition.
CHAIR GIESSEL asked what happened with Pt. Thomson.
MR. BARRON said that is a unit.
SENATOR MICCICHE asked if primary acreage goes from $57,000/year
for the first 7 years up to $1.4 million/year for years 8, 9,
and 10.
MR. BARRON answered yes.
3:45:26 PM
MR. BARRON explained that the department was trying to build a
relationship that is business driven. They want wells drilled to
prove oil and gas, because just seismic isn't good enough.
3:50:07 PM
SENATOR MICCICHE asked if an expired lease is available
immediately for another party.
MR. BARRON answered that it is put in the next lease sale all of
which are competitive sealed bids that are opened before the
public.
SENATOR BISHOP asked when a lease is terminated if the lessee
can bid for it again at the next sale.
MR. BARRON answered yes; it's an open bid and anyone can bid.
SENATOR BISHOP asked how much information he receives from an
exploration company.
MR. BARRON answered that they get a lot of seismic and well data
in the course of unitization, but most of it is confidential.
The AOGCC gets some data, too, but it is held in extreme
confidence. Some companies also volunteer information and ask
that it be kept confidential.
3:53:17 PM
SENATOR FRENCH was attending on line.
3:54:43 PM
MR. BARRON said a lease can be extended several ways; one is by
unitization through a certification procedure done by the
division when it receives enough information to certify that the
lease can produce in paying quantities whether it is producing
or not. Two other ways to extend a lease is through actual
sustained production or through actively drilling a well. If a
company is actively drilling a well at the time of exploration,
they don't pull its lease.
3:55:07 PM
He explained that unitization is really just a mechanism to join
contiguous leased tracts of land together to form a unit; this
is done to protect the interests of all parties including the
state. It ensures proper reservoir management and enhances
recovery of the reserves. He explained that maybe 100 years ago
the industry worked like this: if you did not have a unit and
were competing side-by-side with a company in the same reservoir
that would be deemed a competitive reservoir because the more
you can produce the less your neighbor can produce. It is a
really poor and inefficient way for ultimate recovery, because
it doesn't encourage people to install enhanced oil recovery. It
encourages rapid depletion and massive extraction without
forethought.
3:57:13 PM
MR. BARRON said "unitization" as a concept was probably
developed in west Texas and Oklahoma, the purpose being to
conserve the natural resource, prevent waste, and to promote the
activities of all parties. They look at certain things in
statutes and regulations like the environmental cost and benefit
of unitization and the geologic and engineering characteristics
of the reservoir, then they establish the size of a unit based
on that information. In that effort, they look at prior
exploration and other relative facts and figures including
mitigation measures.
3:58:22 PM
The operators have to demonstrate in their application that a
trapping mechanism and reservoir has been defined and the only
sure of defining a reservoir is with a bit.
3:58:54 PM
He explained that if part of a lease is associated with another
reservoir, they work with companies to define the reservoir
through geologic means - seismic, pressure testing, et cetera -
and work with the other parties to establish what the whole
reservoir looks like and then build a box around it that would
be deemed as the unit boundaries.
4:00:27 PM
SENATOR BISHOP asked how this model would work for shale.
MR. BARRON answered that it really doesn't, because a single
well can hold the lease in a conventional sandstone or carbonate
reservoir. That is why the tracts are 3 miles by 3 miles and a
single well can, in theory, drain the whole tract. Shale is a
whole different issue; a single well in a shale zone will never
deplete an entire lease. That is exactly why the division
instituted quarter-sectioning the leases in the primary shale
zone. One can own up to 500,000 un-unitized shale acres and
someone could come in and put one well down in every tract and
prove that well will flow, have it certified, and retain that
tract to the exclusion of everyone else, and never be able to
fully develop the oil or gas relative to the size of that tract.
So unitization for shale really doesn't work. In fact, you could
argue that every well is its own unit in shale, because shale
wells drilled next to each other won't even see each other. He
held up a chap stick whose diameter represented the "pour
throat" of shale or the area available for oil to flow through,
and remarked that a conventional oil play is 10 yards in
diameter. That is why unitization in shale becomes very
complicated.
4:04:15 PM
He said that units can expand and contract over time explaining
that sometimes the division gives a company "latitude of
uncertainty" recognizing that nothing is absolutely known for
sure at the time of establishing a unit. If in time that land,
through geologic and engineering principles can be shown to have
no part of the reservoir, that piece can be extracted, for
example, or be put into a different unit.
4:06:14 PM
He said unitization is not for conducting seismic work. If you
have any lease you can conduct seismic activities anywhere in
the state, especially on state lands. All you have to do is get
permission. You can conduct seismic operations on private
inholdings as long as you get the landowner's permission. You
don't need a unit to shoot seismic or to conduct activities
lease by lease. And unitization doesn't work really well for
single owners, because it is a contract and it is for the
protection of all parties to it.
CHAIR GIESSEL asked what the benefit to having a lease is.
MR. BARRON explained that you're trying to show if a single well
holds a lease, but if the lease next door doesn't have a well
under production that could be lost. And that is why you would
form a unit or write the agreement - between the state and the
party - in such a way that says we believe this is all part of a
common area for unitization.
4:08:57 PM
He said the unit expires after five years unless there is
sustained production, a participating area (PA) is formed, or it
has a certified well.
SENATOR MICCICHE asked if frequent lawsuits have been filed
accusing a neighboring unit of extracting from their reservoir.
MR. BARRON answered no and that is primarily because of
unitization, but historically the Lower 48 had some significant
lawsuits over that issue. The end result of unitization for the
state is the robust development of enhanced oil recovery (EOR)
and the ability for companies not to have to worry about
somebody drilling and pulling product away and it works well
here.
4:11:48 PM
SENATOR DYSON asked him to explain when a field is unitized how
the oil and gas throughout the area is proportioned so everybody
profits equally from doing the EOR.
MR. BARRON said the point of unitization is where the state has
an opportunity to flex its muscle to encourage work programs,
advanced techniques and new drilling. In some cases, they have
issued a unit when a well has not been drilled to a company with
a lease that is about to expire (or not) who thinks it's got
something worth protecting the acreage - with the requirement of
a well within a certain timeframe. That gets bonded so if they
don't drill it they lose the bond and the unit expires. But most
importantly the state wants the well.
Once there is a unit, the state has the opportunity to "default
and cure," when it is about to expire if the company had not
satisfied the terms of the unit but was diligently trying to do
so. The unit could be extended for one year or a period of time
with the understanding that they have to drill their well. If
they don't drill it, the unit expires along with the leases and
it comes back to the state for lease sale again.
4:15:18 PM
Turning to participating areas (PA), Mr. Baron said to think of
three-dimensionality and sustained production. There is a
separate PA for each reservoir and it is a subset of a unit. All
PAs create allocation factors that are determined by the
companies in very intense negotiations; some are based on the
acres associated with that geologic horizon; some are based on
oil in place, some are based on recoverable reserves, all of
those factors or any combination. It's all about making sure
each company does its very best to protect their company in
terms of their allocation factors, and unless redetermination
points are indicated in the unit agreement, those tract factors
are set. You pay your working interest, your costs and
liabilities on that, and get your revenue stream. A PA can be
expanded as information becomes known, which can be fun to
watch.
4:18:56 PM
MR. BARRON said PAs have to be producing. He explained that you
head for the "basement" with your first well. You drill through
what is like a "hefty bag that is full of balloons" and produce
from the bottom up (primarily because it's easier from an
operational aspect because of reservoir pressure hydraulics and
well bore construction). You know the balloons are there, but
you can't pull a PA because you're not producing from them. And
if you come up the hole later on or are subsequently drilling
new wells and hit that balloon again and begin to produce it,
then you establish the PA. Again, the PAs can be expanded and
contracted based upon what is contributing in paying quantities
to the area.
SENATOR MICCICHE asked if "capable of producing" would be in a
PA.
MR. BARRON explained that "capable of producing" is the key
concept. A reservoir could have areas that don't have wells
drilled in them, but that area is still being drained by the
producing wells, so it would still be within the PA.
4:20:58 PM
He said that right now the North Slope has 18 units and 38 PAs,
the initial PA (IPA) having been established in Prudhoe Bay in
1977. He had an exhibit that showed when PAs were created in the
four primary producing horizon layers that are all part of the
total reserves at Prudhoe Bay.
CHAIR GIESSEL asked how each pocket they drill into is
classified.
MR. BARRON replied, especially with coil drilling or high angle,
horizontal drilling you are trying to increase the contact of a
well bore to the sand base. He explained further:
They are trying to thread the needle through a thin
zone to decrease pressure drop to allow more product
to come through with less energy required. So, they're
not necessarily hitting different pockets; they're
hitting the same pocket in a horizontal manner.
Now if they're drilling and drilling directionally and
they hit all of these, they probably aren't producing
them all in the same well bore. Because they have to
account for the fluid coming from each one of the PAs
uniquely, relative to Senator Dyson's question how do
you account for each one of the barrels, it has to be
allocated to a PA. So, unless they have mechanical
techniques or down-hole logging or down-hole metering
to identify at what depth what portion of the fluid is
coming from that zone, then they probably aren't
producing more than one zone or PA from the well bore.
Now you can have multiple well bores from a single
well. I think Conoco has just announced that they are
going to have an 8-legged monster out there. They're
going to have 8 wells from a single well bore. That is
just the beauty of fantastic drilling.
He continued that some PAs were originally established with a
technology like coil tube drilling that can extract hydrocarbons
from much thinner zones at the edge of the field, which would
now beg the question of whether the PA can be expanded. An
extension may actually bring a new player in, in theory, and he
works with companies on a fairly routine basis to help them
account for everyone's rights because of this.
4:28:49 PM
MR. BARRON said the state manages an effective area-wide lease
sale program, the unitization process and reservoirs through the
PA level contributions. They do all of it to encourage continued
exploration, development and prudent sustained production.
SENATOR BISHOP asked if he knew of any other state that employs
its own exploratory drill rig.
MR. BARRON responded that it wouldn't surprise him if another
state would do that, but Alaska is unique in this case because
most states don't own the mineral rights. In most other states,
private citizens own the mineral rights. In that regard, Alaska
would be one of the few states to have that opportunity to do
its own exploration work.
4:31:14 PM
SENATOR FRENCH commented that the Prudhoe Bay slide was new from
last year and thanked Mr. Barron for it.
MR. BARRON acknowledged that by thanking him.
4:32:07 PM
CHAIR GIESSEL found no further questions and adjourned the
Senate Resources Committee meeting at 4:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Oil and Gas Journal.Government-industry-- UK tax regime. Vol 110 12 .2012 12 03.pdf |
SRES 2/1/2013 3:30:00 PM |
|
| SRES Leasing & Unitization B.Barron 20130201.pdf |
SRES 2/1/2013 3:30:00 PM |