Legislature(2005 - 2006)BUTROVICH 205

01/31/2005 03:30 PM RESOURCES

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03:37:23 PM Start
03:39:00 PM Overview: by Mark Myers, Director, Division of Oil and Gas, Department of Natural Resources (dnr)
04:31:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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Bills Previously Heard/Scheduled
<Bill Hearing Postponed to 02/02/05>
Scheduled But Not Heard
Overview - Division of Oil and Gas
Director Mark Myers
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        January 31, 2005                                                                                        
                           3:37 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Thomas Wagoner, Chair                                                                                                   
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Ben Stevens                                                                                                             
MEMBERS ABSENT                                                                                                                
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Fred Dyson                                                                                                              
Senator Gretchen Guess                                                                                                          
COMMITTEE CALENDAR                                                                                                            
OVERVIEW: State Gas and Oil  by Mark Myers, Director, Division of                                                               
Oil and Gas, Department of Natural Resources (DNR)                                                                              
SENATE BILL NO. 69                                                                                                              
"An Act making  special appropriations to promote  the opening of                                                               
the Arctic National  Wildlife Refuge for oil  and gas exploration                                                               
and development; and providing for an effective date."                                                                          
     SCHEDULED BUT NOT HEARD                                                                                                    
^OVERVIEW: Department  of Natural Resources (DNR),  Department of                                                               
Oil and Gas, by Mark Myers, Director                                                                                            
ACTION NARRATIVE                                                                                                              
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:37:23 PM.  Present were Senators                                                             
Elton, Stedman and Chair Wagoner.  Senator Ben Stevens arrived at                                                               
3:39:00 PM                                                                                                                    
^OVERVIEW:  by Mark  Myers, Director,  Division of  Oil and  Gas,                                                             
Department of Natural Resources (DNR)                                                                                         
MR. MYERS  presented a power  point presentation  called, "Alaska                                                               
Oil and Gas Activities." The following are some highlights.                                                                     
He explained that the state gets  money from its land in two ways                                                               
-  as a  resource owner  through leases  and from  its powers  of                                                               
sovereign  taxation. The  department  gets its  funds from  three                                                               
different  sources -  leasing  land, rentals  from  the land  and                                                               
royalty money when production occurs  on it. Seventy-five percent                                                               
of  the state's  royalty money  goes  into the  General Fund,  25                                                               
percent  into the  Permanent Fund  and .5  percent goes  into the                                                               
School Fund.  He said  the state received  about $1.4  billion in                                                               
royalties and $1 billion in taxes  this year. The taxes came from                                                               
being a property  owner, corporate income tax  and severance tax.                                                               
About 87 percent of state's  general unrestricted fund comes from                                                               
royalty taxes.                                                                                                                  
3:43:40 PM                                                                                                                    
MR.  MYERS   said  that   the  state's   two  large   fields  are                                                               
dramatically  declining, but  more small  productive fields  have                                                               
begun producing to  offset that decline. Bringing  in new parties                                                               
to explore the Basin is  critical to bringing on new undiscovered                                                               
fields within the declining picture.                                                                                            
3:46:37 PM                                                                                                                    
High gas  prices are the  reason revenues  are up for  the fiscal                                                               
year, not declining oil and gas volumes.                                                                                        
3:49:12 PM                                                                                                                    
MR. MYERS  said that in  the last 10  years, 27 percent  of North                                                               
Slope production came from new production.  He said that a lot of                                                               
units were formed in Cook Inlet  in the last few years, which has                                                               
resulted in  increased exploration activities and  more successes                                                               
with smaller accumulations of gas.  There has also been increased                                                               
exploration by new players in  response to higher gas prices, but                                                               
the  big question  is  if there  are  sufficient exploration  and                                                               
discoveries to offset the decline.                                                                                              
3:51:27 PM                                                                                                                    
He  stated that  internal state  use of  gas is  highly variable;                                                               
more is used  in the winter than  in the summer. There  must be a                                                               
surplus and some  way to store it. In the  past, producers always                                                               
had a  surplus in their shut-in  wells that were reopened  in the                                                               
winter, but there  is barely enough gas to meet  needs now and it                                                               
gets worse  every year. Reservoirs  can be used for  storage, but                                                               
reinjection will  add to costs.  The Cook Inlet  Drilling Summary                                                               
for 2004  indicates that  it has  a nine-year  supply, but  it is                                                               
losing ground.                                                                                                                  
3:52:52 PM                                                                                                                    
MR.  MYERS said  the state  is  in discussions  with three  major                                                               
producers, TransCanada and  Midamerican Holding Corporation. Both                                                               
are progressing, but at various  paces. The state made two offers                                                               
in  the producer  negotiations. Its  initial offer  was rejected.                                                               
Discussions on  the second offer  with a different  structure are                                                               
ongoing.  Trying  to make  the  state  a  partner in  a  pipeline                                                               
project is complex.                                                                                                             
Both parties  are affected  by who controls  the rights  to build                                                               
the pipeline to  Canada. There are two possibilities.  One is the                                                               
Northern Pipeline  Act, the treaty rights  that Transcanada holds                                                               
through their  purchase of Foothills.  The second is a  new built                                                               
project  through the  National Energy  Board. It's  been reported                                                               
that the  Governor will decide  which approach is  reasonable and                                                               
allowable  and Mr.  Myers  said  he thought  that  would have  an                                                               
impact on  who actually has  the rights  in Canada to  build this                                                               
3:54:40 PM                                                                                                                    
On  the Alaska  side,  TransCanada has  requested a  right-of-way                                                               
from the  State of Alaska and  that is being looked  at now. It's                                                               
also  possible for  the  state to  grant  them a  non-conditional                                                               
right-of-way. The  state has not  had a similar request  from the                                                               
producers for right-of-way.                                                                                                     
3:55:20 PM                                                                                                                    
CHAIR WAGONER asked for more details on the right-of-way.                                                                       
MR. MYERS  responded that TransCanada  already has  a conditional                                                               
right-of-way from the  federal government in Alaska,  but it does                                                               
not have  a state  right-of-way. It applied  for and  requested a                                                               
non-conditional   right-of-way.   In   that  process,   the   DNR                                                               
Commissioner reviews the  application and puts it  out for public                                                               
comment,  which  has  occurred.  He  now  has  to  make  a  final                                                               
decision. DNR strongly believes  that a non-conditional right-of-                                                               
way  is not  an exclusive  right-of-way and  another right-of-way                                                               
could be applied for along the same route.                                                                                      
3:56:52 PM                                                                                                                    
CHAIR WAGONER  asked if  that would  preclude Alaska  Natural Gas                                                               
Development  Authority (ANGDA)  from  receiving its  right-of-way                                                               
(in addition to TransCanada's).                                                                                                 
MR.   MYERS  replied   that  Yukon   Pacific  actually   holds  a                                                               
conditional right-of-way  permit for an LNG  project. ANGDA could                                                               
have a  right-of-way, as well.  From DNR's perspective,  they are                                                               
not mutually exclusive.                                                                                                         
3:57:10 PM                                                                                                                    
SENATOR  ELTON  asked  if a  non-conditional  right-of-way  would                                                               
allow either TransCanada  or the producers to  use that right-of-                                                               
MR.  MYERS replied  that that  particular  right-of-way would  be                                                               
TransCanada's  in this  case.  The producers  could  apply for  a                                                               
separate  right-of-way and  be granted  a separate  one -  in the                                                               
DNR's view.                                                                                                                     
3:58:36 PM                                                                                                                    
SENATOR BEN STEVENS asked if they could have the same corridor.                                                                 
MR. MYERS replied  that it could not  conflict with TransCanada's                                                               
rights  along that  right-of-way, but  the producers  could apply                                                               
for  a  separate right-of-way  along  the  same route.  It's  not                                                               
exclusive, but their  rights can't be conflicting.  This is DNR's                                                               
view, not the Department of Law's.                                                                                              
3:58:58 PM                                                                                                                    
SENATOR ELTON asked  if he is suggesting that the  state could be                                                               
establishing a property right that  TransCanada could sell to the                                                               
MR. MYERS answered that the real  question is can the state grant                                                               
only  one highway  right-of-way and  DNR's  view is  that it  can                                                               
grant  multiple highway  rights-of-way. There  is nothing  in the                                                               
lease language that  is de facto exclusive.  The counter argument                                                               
has been  that a conditional  right-of-way grants  no exclusivity                                                               
and, therefore,  a non-conditional must be  exclusive. But that's                                                               
not  logical. He  said the  Joint Pipeline  Office is  working on                                                               
this issue.                                                                                                                     
3:59:41 PM                                                                                                                    
MR. MYERS  stated that he  is working to  get data from  the Port                                                               
Authority  to  accurately  model   an  economical  highway  route                                                               
project,  but the  department  has  not done  the  same level  of                                                               
analysis on LNG projects.                                                                                                       
4:02:14 PM                                                                                                                    
SENATOR BEN STEVENS asked where the  money is coming from for the                                                               
state to do the modeling on  the Port Authority. He also asked if                                                               
there  was any  effort by  the  Port Authority  to reimburse  the                                                               
state for its analysis.                                                                                                         
4:02:59 PM                                                                                                                    
MR. MYERS  replied that there  are two components to  his answer.                                                               
The  Stranded   Gas  Act  assumes   that  the  state   will  make                                                               
significant concessions to  the parties in terms  of property tax                                                               
relief, royalty evaluation  methodologies or any other  of a list                                                               
of items contained  in the Act. The Port Authority  has not asked                                                               
for  any  concessions,  but  it  has  only  asked  the  state  to                                                               
understand the  project at this  point. In that sense,  there was                                                               
no reason  for the Port  Authority to  be under the  Stranded Gas                                                               
Act  and  they  believe  the   project  stands  on  its  own.  To                                                               
understand  whether that's  true and  to weight  the benefits  of                                                               
that versus the benefits of  getting reimbursed for its expenses,                                                               
but ultimately  making concessions  in the  project, DNR  felt it                                                               
was necessary to  model it using existing staff  and travel time.                                                               
He needs to  acquire as much data as possible  from them directly                                                               
and to do  that, he needs some form of  confidentiality. For this                                                               
he used an MOU.                                                                                                                 
4:04:21 PM                                                                                                                    
In addition, he asked the  Legislature for $1.5 million last year                                                               
that  is not  reimbursable to  help  develop the  model, but  the                                                               
division will far  exceed that before the full  analysis is done.                                                               
If he  finds holes  in the  Port Authority's  data, he  will need                                                               
significantly more money.                                                                                                       
4:06:03 PM                                                                                                                    
He reported that discussions are  ongoing with the Federal Energy                                                               
Regulatory   Commission  (FERC),   both  in   Anchorage  and   in                                                               
Washington,  D.C.,  to be  adequate  for  the new  pipeline.  "No                                                               
matter  who  builds the  pipeline,  the  regulatory structure  is                                                               
incredibly   important   to   protect   Alaska's   own   internal                                                               
4:08:57 PM                                                                                                                    
The average  estimate of undiscovered conventional  gas currently                                                               
exceeds 236  TCF, approximately seven  times the amount  of known                                                               
gas  reserves on  the North  Slope. In  addition, there  are huge                                                               
amounts  of   non-conventional  gas,  particularly   natural  gas                                                               
hydrates  - 100  TCF  of  known gas  hydrates,  alone, in  Milne,                                                               
Prudhoe Bay  and Kuparek -  all of which is  recoverable. Coalbed                                                               
methane is also present in  large amounts. Every exploration well                                                               
has found gas, a very good  indication, and a lot of it underlies                                                               
existing infrastructure.                                                                                                        
4:13:12 PM                                                                                                                    
The Legislative Budget  and Audit Committee has  a joint proposal                                                               
with the Administration to continue  the Methane Hydrate Research                                                               
Act for another  five years with a cost of  $70 million. It would                                                               
focus on  testing the hydrate  resources to see if  the reservoir                                                               
models are accurate  in predicting rates. Progress  is being made                                                               
in the Interior basins and the USGS has increased its estimates.                                                                
4:15:31 PM                                                                                                                    
CHAIR WAGONER asked if anyone  has shown interest in exploring in                                                               
the Gulf of Alaska.                                                                                                             
MR. MYERS replied no, but that  is an area of potential. There is                                                               
a lack  of source data,  because no one  has looked hard  for gas                                                               
potential.  To promote  new investment  he has  tried to  get new                                                               
players through  opening up new  areas of  land. There is  a need                                                               
for  new  exploration data  and  data  integration from  the  new                                                               
companies  as well  as  the  majors. The  department  is using  a                                                               
Department  of  Energy  grant  to  work  with  the  Oil  and  Gas                                                               
Conservation Commission to  get all the well-walking  done and to                                                               
get it  on the web  so one can  simply download it.  He mentioned                                                               
that permitting needs to be  streamlined. The state needs success                                                               
stories so companies can see what is really happening up here.                                                                  
4:20:15 PM                                                                                                                    
MR.   MYERS  stated   that  maximizing   the   use  of   existing                                                               
infrastructure and facilities  is a critical aspect  on the North                                                               
Slope. New  infrastructure is needed  in terms of  staging areas,                                                               
roads and new  drilling sites - to name a  few. New equipment and                                                               
equipment storage is also needed  on the Slope and lighter-weight                                                               
rigs. A  lot of  good ideas come  from new  companies. Innovative                                                               
technologies are being proposed and  they should be considered in                                                               
4:22:08 PM                                                                                                                    
The  Nenana  Basin  exploration license  area  has  good  quality                                                               
partners, Usibelli  Energy and Doyon  Corporation, who  have come                                                               
in  to  try  to develop  it.  The  Basin  has  a good  amount  of                                                               
commercial gas and  coal for the Fairbanks market  and good long-                                                               
term potential. The Copper River Basin  has first its new well in                                                               
20 years, although it is not on state land.                                                                                     
MR. MYERS  related that the  division also converted  its shallow                                                               
gas-leasing program  to exploration licensing  as a result  of HB                                                               
531 passing last year. The Kenai  Peninsula has had a sale and he                                                               
thought  it  was one  of  the  most  underrated basins  in  North                                                               
America.  It is  gas-prone, but  has oil  in it  also. Opposition                                                               
from  the fishing  industry and  environmental organizations  has                                                               
slowed exploration there.                                                                                                       
4:25:07 PM                                                                                                                    
He reported  that he had  reopened the settlement with  Exxon and                                                               
expects a substantial  amount of money would be  recovered; he is                                                               
currently  looking at  going  to arbitration.  It  is case  where                                                               
there  is  a difference  in  the  royalty valuation  term.  Exxon                                                               
believes  that their  tanker costs  ought  to be  higher and  the                                                               
state  believes  the  destination   value  that  it  receives  is                                                               
significantly higher than the current  market value. The division                                                               
has also  entered a protest over  the recent raising of  the TAPS                                                               
4:26:21 PM                                                                                                                    
MR. MYERS  recapped that  a couple of  years ago  the Legislature                                                               
gave audit  authority back  to DNR  and DOR.  The numbers  on the                                                               
audits have  gone up  slightly, but more  important is  that they                                                               
are  much  more  timely  on getting  them  done  and,  therefore,                                                               
getting caught  up with their  backlog. In the  future, recovered                                                               
monies should  go down  because the audits  will cover  fewer and                                                               
fewer years.                                                                                                                    
4:26:50 PM                                                                                                                    
On  the coalbed  methane  issue,  the Legislature  put  a lot  of                                                               
protections for surface  water and private property  owners in HB                                                               
531  last year  that is  simply not  there in  other states.  One                                                               
significant  protection  requires  the  operator,  prior  to  any                                                               
production,  to  designate and  implement  a  water well  testing                                                               
program  to provide  baseline  data on  water  quality for  AOGCC                                                               
approval.  Those are  statewide  protections  regardless of  land                                                               
title. The Mat-Su Valley now  has enforceable world-class coalbed                                                               
methane standards.                                                                                                              
4:29:29 PM                                                                                                                    
HB 531 also required the  DNR commissioner to establish set backs                                                               
and noise mitigation measures for  compression stations, which is                                                               
the  largest potential  nuisance in  coalbed methane  operations.                                                               
The surface impacts standards are  exemplary - in terms of noise,                                                               
visual  light  shield,  solid waste,  erosion  control  permanent                                                               
erosion  and  timber harvesting  -  and  production will  not  be                                                               
allowed to  occur in densely  pop areas. The issues  are specific                                                               
and easy to understand.                                                                                                         
4:31:08 PM                                                                                                                    
CHAIR WAGONER  thanked Mr. Myers  for his presentation.  He noted                                                               
there was  no quorum  at this  time so  he would  hold SB  69. He                                                               
adjourned the meeting at 4:31:37 PM.                                                                                          
NOTE:  The  meeting was recorded. A copy of  the recording may be                                                               
obtained  by  contacting  the  Senate  Records  Office  at  State                                                               
Capitol, Room 3, Juneau, Alaska  99801 or calling (907) 465-2870.                                                               
After  adjournment of  the second  session  of the  Twenty-Fourth                                                               
Alaska  State Legislature  this  information may  be obtained  by                                                               
contacting the Legislative Reference Library at (907) 465-3808.                                                                 

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