Legislature(2005 - 2006)SENATE FINANCE 532

03/30/2005 02:30 PM RESOURCES

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02:37:08 PM Overview: Nenana Basin Gas and Oil Project
02:37:08 PM Start
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Joint w/(H) Resources
Nenana Basin Gas & Oil Project
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                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT OVERVIEW                                                                                       
              SENATE RESOURCES STANDING COMMITTEE                                                                             
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         March 30, 2005                                                                                         
                           2:37 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
SENATE RESOURCES                                                                                                                
 Senator Thomas Wagoner, Chair                                                                                                  
 Senator Ralph Seekins, Vice Chair                                                                                              
 Senator Kim Elton                                                                                                              
 Senator Bert Stedman                                                                                                           
 Senator Ben Stevens                                                                                                            
HOUSE RESOURCES                                                                                                                 
 Representative Jay Ramras, Co-Chair                                                                                            
 Representative Ralph Samuels, Co-Chair                                                                                         
 Representative Gabrielle LeDoux                                                                                                
 Representative Jim Elkins                                                                                                      
 Representative Carl Gatto                                                                                                      
 Representative Kurt Olson                                                                                                      
 Representative Harry Crawford                                                                                                  
 Representative Paul Seaton                                                                                                     
HOUSE OIL AND GAS                                                                                                               
 Representative Vic Kohring, Chair                                                                                              
 Representative Ralph Samuels                                                                                                   
 Representative Nancy Dahlstrom                                                                                               
MEMBERS ABSENT                                                                                                                
SENATE RESOURCES                                                                                                                
 Senator Fred Dyson                                                                                                             
 Senator Gretchen Guess                                                                                                         
HOUSE RESOURCES                                                                                                                 
 Representative Mary Kapsner                                                                                                    
HOUSE OIL AND GAS                                                                                                               
Representative Lesil McGuire                                                                                                    
Representative Norman Rokeberg                                                                                                  
Representative Berta Gardner                                                                                                    
Representative Beth Kerttula                                                                                                    
COMMITTEE CALENDAR                                                                                                            
Overview: Nenana Basin Gas and Oil Project                                                                                    
BOB   MASON,  Vice   President,   Exploration,  Andex   Resources                                                               
SEAN  PARNELL,   Deputy  Director,  Division  of   Oil  and  Gas,                                                               
Department of Natural Resources (DNR)                                                                                           
BOB  SWENSON, Petroleum  Geologist,  Division  of Geological  and                                                               
Geophysical Surveys, Department of Natural Resources (DNR)                                                                      
MITCH USIBELLI, Manager, Usibelli Energy                                                                                        
TOM DODDS, President and CEO, Andex Resources Corporation                                                                       
JIM MERY, Doyon Corporation                                                                                                     
TONY IZZO, President, Enstar Natural Gas Company                                                                                
JOHN LAU,  Director, Transmission Operations, Enstar  Natural Gas                                                               
DAN BRITTON, President, Fairbanks Natural Gas                                                                                   
JOE BEEDLE, Vice President, Finance, University of Alaska                                                                       
ACTION NARRATIVE                                                                                                              
CHAIR THOMAS  WAGONER and  CO-CHAIR JAY  RAMRAS called  the joint                                                             
meeting of the Senate Resources  and the House Resources Standing                                                               
Committees  and the  House Special  Committee on  Oil and  Gas to                                                               
order at 2:37:08 PM. Present  were Representatives Ramras, Olson,                                                             
Gatto, Elkins, Crawford, and Senators Elton and Wagoner.                                                                        
^OVERVIEW: NENANA BASIN GAS AND OIL PROJECT                                                                                   
BOB MASON,  Vice President, Exploration, Andex  Resources, said a                                                               
tremendous opportunity  exists because  there is  so much  gas in                                                               
the Nenana  Basin. Usibelli Energy, Doyon  Corporation and Arctic                                                               
Slope  Regional   Corporation  are  partnering  with   Andex  for                                                               
development of  approximately 10  tcf. Gas  could be  provided to                                                               
the  Anchorage area  and ultimately,  when the  new gas  pipeline                                                               
comes down from the North Slope, along the TAPS, to Fairbanks.                                                                  
He highlighted  the similarities  between the rock  formations in                                                               
the Nenana Basin and the Cook  Inlet where folds of rock about 20                                                               
miles below the surface allowed  gas hydrocarbons to be formed in                                                               
the Tertiary period.  The strong potential for  gas combined with                                                               
a nearby natural  gas market makes development of  this site very                                                               
High quality  data was  gathered by ARCO  and Shell,  which Andex                                                               
combined with  all the other  information that has  been gathered                                                               
by  the state,  the USGS  and various  academic institutions.  It                                                               
created a tremendous "data set"  indicating that the Nenana Basin                                                               
has  significant potential.  If this  information had  existed in                                                               
any  basin  in   the  Lower  48,  industry   would  have  drilled                                                               
evaluation wells years ago. Because  of where the Nenana Basin is                                                               
located,  industry recognized  it as  a gas  prone basin;  but it                                                               
just wasn't economic  to produce it in the early  80s. Now it's a                                                               
different story.                                                                                                                
MR. MASON  said that Andex  was issued an exploration  license in                                                               
October of  2002 for 480,000  acres. It has four  years remaining                                                               
on  the primary  term  and  it has  the  option  to convert  that                                                               
acreage  to leases  with another  seven-year term.  This provides                                                               
Andex with the  time it needs to evaluate and  develop the Nenana                                                               
Basin and  they have  committed to spending  $2.5 million  on new                                                               
exploration work  there. If it  is successful, Andex would  go to                                                               
its partners,  Usibelli Energy, Doyon Corporation  and the Arctic                                                               
Slope Regional  Corporation (ASRC),  and attempt  to get  them to                                                               
agree to  an exploration  drilling program to  begin by  2006. If                                                               
successful then, they  could be in the development  phase in late                                                               
2006 or  early 2007.  First gas  sales could  be in  Fairbanks by                                                               
late 2008.                                                                                                                      
He emphasized  how geographically  strategic the Nenana  Basin is                                                               
and how  absolutely critical that  was to Andex's decision  to go                                                               
forward  with an  exploration  program. If  the  reserve base  is                                                               
large  enough,  a  pipeline  could  be  built  along  the  Alaska                                                               
Railroad Right of Way into Anchorage.                                                                                           
SEAN  PARNELL,   Deputy  Director,  Division  of   Oil  and  Gas,                                                               
Department of  Natural Resources  (DNR), introduced  BOB SWENSON,                                                               
Petroleum  Geologist,  Division  of  Geological  and  Geophysical                                                               
Surveys, who  covered the state's  oil and gas activities  in the                                                               
Nenana Basin.  He said that of  all the basins, the  Nenana Basin                                                               
clearly has the majority of  the subsurface information, which is                                                               
critical  for an  exploration  program.  The state's  exploration                                                               
license program provides exploration  companies with an incentive                                                               
to go  into areas that  have not been  explored or have  had very                                                               
little exploration. Test  wells that have been  drilled have been                                                               
on the outside of the formation  and he cautioned that one of the                                                               
critical risks  of drilling in  the formation is  the possibility                                                               
that  the  gas  hydrates  will  become  trapped  and,  therefore,                                                               
MITCH  USIBELLI,  Manager,  Usibelli  Energy,  said  he  is  very                                                               
enthusiastic  about the  project and  the potential  to diversify                                                               
his company's energy resource base.                                                                                             
TOM  DODDS,  President  and  CEO,  Andex  Resources  Corporation,                                                               
explained  that the  company is  privately owned  and the  owners                                                               
have been  in the  oil business  since the  1950s. They  feel the                                                               
Nenana Basin  has great potential  for gas and  oil, but it  is a                                                               
high-risk area and operating in  Alaska is expensive. They have a                                                               
two  and  half month  a  year  drilling  season and  have  barely                                                               
finished seismic  operations this year. Andex  will start working                                                               
with  the various  state departments  on permitting  wells within                                                               
the next 30 to 40 days.                                                                                                         
JIM MERY,  Doyon Corporation, said  that Doyon worked to  get the                                                               
project   kick-started  and   helped   Andex   put  together   an                                                               
exploration license  on the adjacent  state lands.  Doyon's board                                                               
liked the project so much that  it decided to invest hard cash in                                                               
TONY IZZO,  President, Enstar natural  Gas Company and  JOHN LAU,                                                               
its  director  of  Transmission Operations,  said  Enstar  serves                                                               
nearly half  the state's population  and owns and  operates 3,000                                                               
miles of  natural gas  pipeline. It  is the  largest distribution                                                               
company and largest utility in the state.                                                                                       
The  transmission pipeline  arm of  Enstar is  called the  Alaska                                                               
Pipeline Company (APC)  and it has constructed  and operated over                                                               
450 miles of high-pressure transmission  pipeline and 2,600 miles                                                               
of  distribution  lines.  This   represents  75  percent  of  all                                                               
transmission pipeline in the state  right now for natural gas and                                                               
100 percent of the distribution  lines. Of great concern to them,                                                               
assuming nothing  new is discovered,  is that the Cook  Inlet gas                                                               
supply and demand graphed lines intersect in 2012.                                                                              
MR.  IZZO said  that all  home heating  and power  generation gas                                                               
requirements are met  until 2008. If customers,  for some reason,                                                               
had to flip  to using fuel oil, the next  cheapest source of fuel                                                               
today, that would  represent a $300 million per  year increase in                                                               
the  cost of  their energy.  This estimate  does not  include the                                                               
cost to  convert to that  fuel - about  $5,000 to $10,000  for an                                                               
average home. Enstar already has  to scramble to provide power on                                                               
high-use  days and  its strategy  is to  contract for  additional                                                               
supply. Changing  from an  excess supply market  to a  supply and                                                               
demand  market has  changed the  way that  supply is  negotiated.                                                               
Department  of  Energy  (DOE) surveys  indicate  that  sixty-five                                                               
percent of  customers favored a  spur line from the  north rather                                                               
than local natural gas development.                                                                                             
The estimated  cost for developing  onshore gas is $5  billion to                                                               
$6  billion with  the  costs being  recovered  through the  rate-                                                               
payer. That much  money could also advance a  pipeline pretty far                                                               
north where proven  reserves of natural gas are 35  tcf and would                                                               
serve the area's total needs for a few hundred years.                                                                           
JOHN  LAU, Director  of Engineering  Transmission Operations  for                                                               
Enstar,  talked  about what  it  takes  to build  a  medium-sized                                                               
pipeline. Eighteen percent of the  63 bcf Enstar produces is used                                                               
internally  and  of  the  remaining,   90  percent  is  used  for                                                               
residential use and 10 percent for commercial.                                                                                  
MR. LAU said a conceptual study  of a spur line from Fairbanks to                                                               
Cook Inlet will  take 18 months and will  include everything from                                                               
right-of-way leases and permitting  to construction contracts and                                                               
ordering equipment.  Building the  pipeline is estimated  to take                                                               
two years.  Towards the end  of the construction process  the RCA                                                               
would review  and determine tariff  issues. The year 2009  is not                                                               
an unrealistic  date to look at  for needing more supply  and the                                                               
time to start doing the study work is right now.                                                                                
Enstar  is in  the  conceptual  study process  right  now. It  is                                                               
partnering  with   the  Department   of  Energy,   ML&P,  Chugach                                                               
Electric, ANGDA  and the other  state agencies to  determine what                                                               
type of  lease they would  get for  the right-of-way. It  is also                                                               
sizing the pipeline and looking at storage options.                                                                             
MR. IZZO  concluded adding that they  figure the pipe will  be 24                                                               
inches with compression potential for future growth.                                                                            
SENATOR   SEEKINS  asked   why  anyone   would  do   any  further                                                               
exploration in  Cook Inlet if  it is  so expensive and  how would                                                               
Enstar make up the gas deficit in the meantime.                                                                                 
MR. IZZO replied  that he basically feels Enstar's  mission is to                                                               
bring  the  lowest-cost  dependable  energy to  the  consumer  as                                                               
possible. If Nenana Basin gas  is developed, their plan would not                                                               
be  to fill  up  their  requirements 100  percent  with it  since                                                               
potential   natural  disaster   and   federal  regulation   makes                                                               
potential   emergencies  too   costly.  Enstar's   contracts  are                                                               
continuously  layered for  reliable service  without relying  too                                                               
heavily on  just one source.  It's possible that they  might fill                                                               
requirements   long  enough   that  other   companies  might   be                                                               
discouraged from going forward with any new activity.                                                                           
CO-CHAIR RAMRAS  asked what it  would cost  to build 50  miles of                                                               
transmission lines to Fairbanks.                                                                                                
MR. LAU indicated  that a 12-inch line could be  built for around                                                               
$700,000 to $800,000 per mile and  a 24-inch pipe, which would be                                                               
more suitable  for future  growth, was  estimated to  cost around                                                               
$1.5 million per mile, plus or minus 20 percent, two years ago.                                                                 
CO-CHAIR RAMRAS  asked what kind  of demand from  Fairbanks would                                                               
be needed to justify building  a transmission line from Nenana to                                                               
MR. LAU  replied that the  full potential for Fairbanks  would be                                                               
27 bcf per  year - 9 bcf would be  residential and commercial and                                                               
the  other  18  bcf  per  year  would  be  if  power  generation,                                                               
including  military   generation,  were   on  natural   gas.  The                                                               
Fairbanks market  is as big  as Enstar's  market is right  now in                                                               
DAN  BRITTON,  President,  Fairbanks  Natural  Gas  and  Northern                                                               
Eclipse LLC, said they have a  liquid natural gas facility in Pt.                                                               
Mackenzie  that  liquefies  Cook  Inlet  gas  and  trucks  it  to                                                               
Fairbanks for the  heating market. They deliver about  .6 bcf per                                                               
year  to a  little over  700 Fairbanks  customers and  see strong                                                               
market growth.  The challenge has  been to compete with  fuel oil                                                               
markets in  Fairbanks and  their customers  will save  money when                                                               
converting to  gas. Reheating and transportation  costs that they                                                               
now  have would  go away  when  a pipeline  is built  and gas  is                                                               
cleaner  and very  versatile  to  use compared  to  fuel oil.  He                                                               
projected 85 percent  of their customers would  convert from fuel                                                               
oil to gas in the Fairbanks area.                                                                                               
REPRESENTATIVE  RAMRAS  asked  what comes  first,  production  or                                                               
MR. IZZO  responded that Enstar  would have a two-year  build out                                                               
in   the   Fairbanks   region    starting   with   the   skeleton                                                               
infrastructure  and  going  from  there.  The  transporter  would                                                               
contract with the supplier/developer and the seller.                                                                            
CO-CHAIR RAMRAS asked  if a $50 million pipe were  built from the                                                               
Nenana Basin  to Fairbanks before  transmission lines  were built                                                               
to residential and  commercial users, how much gas  would have to                                                               
go through for tariff to be bearable.                                                                                           
MR. IZZO replied that once the  study was mature, they would know                                                               
what the expected  rate of return would be and  what tariff would                                                               
be acceptable. It would not be difficult to solve.                                                                              
CO-CHAIR RAMRAS  asked how many  miles of  pipe would go  to Cook                                                               
MR. LAU replied  that a 24-inch pipe would be  a little more than                                                               
300 miles long and operate at 1,400 psi.                                                                                        
MR.  BRITTON  expanded  that  in  Fairbanks  for  every  mile  of                                                               
distribution,  coinciding LNG  infrastructure  has  to be  built.                                                               
Fairbanks  Natural Gas  is spending  more  on LNG  infrastructure                                                               
than   on   distribution,  but   that   will   change  when   the                                                               
infrastructure is  finished. If  it had  more supply,  its market                                                               
would increase significantly.                                                                                                   
CO-CHAIR RAMRAS  asked what comes  first - the production  or the                                                               
MR. BRITTON replied that Fairbanks  Natural Gas would continue to                                                               
expand its  system with an  LNG supply  as well as  expanding its                                                               
existing distribution  backbone in Fairbanks, but  they are ready                                                               
for gas supply at any time.                                                                                                     
CO-CHAIR  RAMRAS asked  the producers  what  the relationship  is                                                               
between  the producer  and  the  people who  build  the pipe.  He                                                               
specifically  asked   if  it  was  a   friendly  relationship  or                                                               
MR. IZZO  replied that  Enstar's process  is that  once something                                                               
has  been identified  to sell,  they enter  into an  agreement on                                                               
supply,  which  varies  depending  on the  amount  of  gas  being                                                               
negotiated.  A recently  approved  contract to  serve Homer,  for                                                               
instance, says  that the producer  must produce a  certain amount                                                               
and his company is required to build a line to Homer.                                                                           
CO-CHAIR RAMRAS asked  what the Legislature can  do to facilitate                                                               
the process.                                                                                                                    
MR. IZZO  replied that the  permit process could  be accelerated.                                                               
Right now their estimates are optimistic.                                                                                       
MR. MASON added that Andex  is still in the high-risk exploration                                                               
phase and  part of their problem  is the short time  frame of two                                                               
and  half months  in which  they actually  operate in  the Nenana                                                               
Basin. The  most important thing  would be  to be able  to extend                                                               
the current tax-incentive program into the exploration phase.                                                                   
MR. DODDS added beyond that, a  quick response time on permits is                                                               
very important  in order to  have the  time to get  drilling rigs                                                               
and other exploration  equipment where they need to  be when they                                                               
need  to be  there. Otherwise  they have  to wait  one additional                                                               
year before  drilling any wells.  The cost of their  drilling has                                                               
increased 50  percent in the  last year  in the southern  part of                                                               
the  United  States. He  said  the  state  could also  allow  for                                                               
drilling other  than in January,  February and the first  part of                                                               
March, depending on where a lease is located.                                                                                   
SENATOR WAGONER directed  his comment to Mr.  Parnell saying that                                                               
he  assumed no  one in  the department  would be  taking extended                                                               
MR.  PARNELL responded  that  the  department hasn't  experienced                                                               
those difficulties,  but he is  willing to work with  any company                                                               
that is.                                                                                                                        
JOE BEEDLE,  Vice President, Finance, University  of Alaska, said                                                               
that  it benefits  from education  and  research associated  with                                                               
activities  in  the Nenana  Basin.  In  addition, the  university                                                               
consumes several  million dollars worth of  energy resources each                                                               
year and  the potential of  Nenana gas is exciting.  Secondly, as                                                               
the university  is a  land grant university,  he is  awaiting the                                                               
outcome of HB 130, which transfers  250,000 acres to it. The most                                                               
exciting single parcel  is the 90,000 acres in  the Nenana Basin,                                                               
which  represents  approximately  20   percent  of  the  licensed                                                               
acreage  area.  The  university  would  own  the  subsurface  and                                                               
surface  estate  and be  entitled  to  the 12.5  percent  royalty                                                               
associated with the acres under license.                                                                                        
CO-CHAIR  RAMRAS thanked  everyone  for  their presentations  and                                                               
adjourned the meeting at 4:25 p.m.                                                                                              

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