Legislature(2017 - 2018)BUTROVICH 205

03/05/2018 03:30 PM RESOURCES

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Audio Topic
03:30:12 PM Start
03:30:37 PM Presentation: Bonding, Idle Wells, and Orphan Liability
04:26:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: TELECONFERENCED
Bonding, Idle Wells & Orphan Liability
- Alaska Oil & Gas Conservation Commission
- Department of Natural Resources
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 5, 2018                                                                                          
                           3:30 p.m.                                                                                            
                                                                                                                                
                             DRAFT                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator John Coghill, Vice Chair                                                                                                
Senator Bert Stedman                                                                                                            
Senator Kevin Meyer                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Click Bishop                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: BONDING, IDLE WELLS, AND ORPHAN LIABILITY                                                                         
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
CATHY FOERSTER, Commissioner                                                                                                    
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Provided overview of idle wells and orphan                                                                
liability.                                                                                                                      
                                                                                                                                
JIM BECKHAM, Deputy Director                                                                                                    
Division of Oil and Gas (DOG)                                                                                                   
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                             
POSITION STATEMENT: Provided presentation of state oil and gas                                                                
bonding policies.                                                                                                               
                                                                                                                                
HOLLIS FRENCH, Commissioner                                                                                                     
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:  Answered  a   question  on  the  idle  well                                                             
overview.                                                                                                                       
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:30:12 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  Bishop, Meyer,  Stedman, Wielechowski,  and                                                               
Chair Giessel. Senator Von Imhof was excused.                                                                                   
                                                                                                                                
^Presentation: Bonding, Idle Wells, and Orphan Liability                                                                        
    Presentation: Bonding, Idle Wells, and Orphan Liability                                                                 
                                                                                                                              
3:30:37 PM                                                                                                                    
CHAIR GIESSEL announced the presentation  on bonding, idle wells,                                                               
and  orphan  liability and  turned  the  discussion over  to  the                                                               
Alaska Oil  and Gas Conservation  Commission (Alaska Oil  and Gas                                                               
Conservation Commission (AOGCC).                                                                                                
                                                                                                                                
3:31:05 PM                                                                                                                    
CATHY  FOERSTER, Commissioner,  Alaska Oil  and Gas  Conservation                                                               
Commission  (AOGCC), Anchorage,  Alaska,  said she  was asked  to                                                               
speak  today about  AOGCC's  concerns with  idle  wells and  well                                                               
abandonment liability. First, she  reminded them about what their                                                               
responsibilities   and  activities.   She   said   AOGCC  is   an                                                               
independent  quasi-judicial body  that  holds  hearings and  make                                                               
rulings  on things  such as  well spacing  and other  exceptions,                                                               
pool rules, gas offtake allowables.  Every day they grant or deny                                                               
permits for such  things as drilling wells  and performing sundry                                                               
well work. By statute they  have three commissioners; one must be                                                               
a  petroleum geologist,  Dan Seamount;  one must  be a  petroleum                                                               
engineer,  and that  is her;  the  third must  have training  and                                                               
experience relevant  to the oil  and gas industry, and  that seat                                                               
is held by Hollis French. On  staff they have two geologists, six                                                               
engineers,   nine  field   inspectors,  and   several  IT,   data                                                               
management, and administrative support staff.                                                                                   
                                                                                                                                
3:32:46 PM                                                                                                                    
SENATOR COGHILL joined the committee.                                                                                           
                                                                                                                                
3:33:45 PM                                                                                                                    
MS. FOERSTER said the AOGCC  is charged with preventing waste and                                                               
encouraging   greater  ultimate   recovery  of   hydrocarbon  and                                                               
geothermal  resources,  protecting   fresh  groundwater  sources,                                                               
protecting  correlative  rights,   and  protecting  human  safety                                                               
during  drilling  well work  and  well  operations. People  often                                                               
confuse  their  roll  with  that of  the  Department  of  Natural                                                               
Resources (DNR), but  they are very different. DNR  serves as the                                                               
landowner representative  for the  state on  all state  lands and                                                               
AOGCC's job  is to  ensure that  state's resources  are developed                                                               
for the maximum benefit of the state.                                                                                           
                                                                                                                                
She said  the AOGCC regulates the  industry everywhere throughout                                                               
the state not just on state  lands. They try to encourage greater                                                               
ultimate  recovery,  protect  against waste,  and  protect  fresh                                                               
groundwater.  Occasionally,  because   they  are  an  independent                                                               
agency,  the  DNR comes  before  them  as  a plaintiff,  but  the                                                               
department has  no greater  standing before  them than  any other                                                               
agency.  That is  why  their independence  is  so important.  For                                                               
example,  if the  Governor could  fire  her at  will, then  every                                                               
decision would  be in favor for  the DNR. Once a  commissioner is                                                               
confirmed, the  governor has to have  cause in order to  fire him                                                               
or her  or they are  in for the  full six-year term.  That allows                                                               
latitude to  make decisions based  on the  statutory requirements                                                               
they were charged with protecting.                                                                                              
                                                                                                                                
3:35:26 PM                                                                                                                    
She reported that drilling and  well work activity continued at a                                                               
fairly steady  pace in 2017.  BP and ConocoPhillips  continued to                                                               
drill  and  work   over  wells  in  Prudhoe   Bay,  Kuparuk,  and                                                               
Coleville. Hilcorp continued drilling  and fixing broken wells in                                                               
Cook  Inlet, Milne  Point, and  at the  other North  Slope fields                                                               
they acquired from BP in 2015.                                                                                                  
                                                                                                                                
In 2018, they expect BP,  ConocoPhillips, and Hilcorp development                                                               
activities to  continue at about  the same pace. What  the others                                                               
are planning to do is still a little unclear to them.                                                                           
                                                                                                                                
MS.  FOERSTER  said  ConocoPhillips will  drill  6-8  exploratory                                                               
wells this  year all in  the Greater  Moose's Tooth area.  Eni is                                                               
drilling one  well at Spy  Island and Glacier has  an exploratory                                                               
well permitted in the Badami area.                                                                                              
                                                                                                                                
The  other significant  well work  is  plugging and  abandonments                                                               
(P&A),  which she  would detail  later in  the presentation.  But                                                               
several  operators  are plugging  wells  with  no future  utility                                                               
and/or with mechanical integrity issues, a very good thing.                                                                     
                                                                                                                                
SENATOR BISHOP  asked if Eni  is drilling with an  extended reach                                                               
rig on Spy Island.                                                                                                              
                                                                                                                                
MS. FOERSTER said she didn't know what rig they are using.                                                                      
                                                                                                                                
SENATOR BISHOP said they had commissioned a new drill rig.                                                                      
                                                                                                                                
MS. FOERSTER said they are using the new rig.                                                                                   
                                                                                                                                
3:36:59 PM                                                                                                                    
She said $50  million was originally appropriated  from the Healy                                                               
and  Stewardship Act  of 2013  to the  Bureau of  Land Management                                                               
(BLM)  for travesty  well clean-up,  and  BLM tells  her that  if                                                               
everything goes well with cleaning up  a cluster of five wells at                                                               
Wolf  Creek this  winter,  a total  of 24  wells  will have  been                                                               
plugged   and  abandoned   and/or  have   had  surface   clean-up                                                               
completed.  As  of today,  one  of  those has  been  successfully                                                               
completed. Those  are less technically complex,  and problems are                                                               
not  expected.  BLM estimates  that  26  more  wells need  to  be                                                               
addressed at  a cost  of $90-100 million.  These wells  will cost                                                               
more  because they  are "one-offs"  and not  located in  clusters                                                               
where mobilization and demobilization costs can be maximized.                                                                   
                                                                                                                                
CHAIR  GIESSEL asked  if these  closures can  happen only  in the                                                               
winter.                                                                                                                         
                                                                                                                                
MS. FOERSTER replied  that most of them are out  in the middle of                                                               
nowhere  and  require  tundra  travel  permits  or  winter  work,                                                               
although a few have been addressed off infrastructure.                                                                          
                                                                                                                                
3:38:50 PM                                                                                                                    
SENATOR MEYER  asked for a  timeframe for  the 26 wells  that are                                                               
left.                                                                                                                           
                                                                                                                                
MS. FOERSTER replied  that they have no money for  that work, and                                                               
added that she hadn't done a  reconciliation to see if she agrees                                                               
that it's only 26 wells.                                                                                                        
                                                                                                                                
SENATOR MEYER asked what the future plans are for those wells.                                                                  
                                                                                                                                
MS.  FOERSTER answered  she  would  get to  that.  The two  worst                                                               
wells,  one  incapable  of  flowing oil  and  the  other  leaking                                                               
methane, were supposed  to have been covered in  the original $50                                                               
million. Unfortunately,  BLM and  its contractor chose  to ignore                                                               
AOGCC directives  and instead used  an unacceptable  procedure to                                                               
attempt to  "poor boy"  the job  leaving both  wells in  such bad                                                               
shape  that fixing  them will  be very  costly, if  possible. The                                                               
Simpson well is  still capable of leaking oil. There  is no money                                                               
to clean it up  and they have no plans to do  it. The other well,                                                               
the Iko  Bay wellhead, nicknamed  the "whistling well,"  has been                                                               
repaired  and no  longer leaks  methane  - for  now, she  warned.                                                               
Should  its integrity  be  compromised, it  is  still capable  of                                                               
leaking methane.  There is  no money  left to  clean up  any more                                                               
legacy  wells, which  leaves the  Department of  Interior in  the                                                               
position of finding some.                                                                                                       
                                                                                                                                
3:41:28 PM                                                                                                                    
SENATOR  BISHOP asked  if her  dad was  a pipeliner,  because one                                                               
needs a lot  of experience in the industry to  use the term "poor                                                               
boy." Cross-country pipeliners use a lot.                                                                                       
                                                                                                                                
MS. FOERSTER  replied that her  dad was a  metallurgical engineer                                                               
and she didn't have to go  to her dad for experience, because she                                                               
has 40 years of it in the oil and gas industry.                                                                                 
                                                                                                                                
3:42:24 PM                                                                                                                    
MS.  FOERSTER said  the real  reason she  wants to  talk to  them                                                               
today is they  don't want the State of Alaska  to become a legacy                                                               
well collection  site. As  oil fields in  Alaska mature,  and new                                                               
and smaller  companies come  to the state,  the threat  of orphan                                                               
wells increases. In 2016, two  new companies went bankrupt. If no                                                               
one buys their assets, then the  landowner - usually the State of                                                               
Alaska  -  may   be  left  holding  the  bag   for  plugging  and                                                               
abandonment  (P&A)  liability.  For  instance,  Aurora  Gas  went                                                               
bankrupt  with  19  wells  and does  not  exist  anymore.  Aurora                                                               
Exploration, the company  that bought six of those  wells, has no                                                               
legal responsibility to  P&A any of them. Ten of  those wells are                                                               
on CIRI land,  who fortunately as the landowner made  a deal with                                                               
the prior  owner to clean up  those wells, and CIRI  is enforcing                                                               
that clause.                                                                                                                    
                                                                                                                                
She  said  the State  of  Alaska  will be  on  the  hook for  the                                                               
remaining three wells  and she expects the DNR will  "get a nasty                                                               
letter from  my agency" telling  them to  clean them up.  This is                                                               
just a microcosm of what will  happen to the 5,300 other wells in                                                               
the state.                                                                                                                      
                                                                                                                                
3:45:28 PM                                                                                                                    
Also, in 2016,  two companies relinquished leases  that had wells                                                               
on them, and  by Alaska law, the operator is  required to P&A all                                                               
wells before  relinquishing them. But  if they don't do  that and                                                               
the  landowner doesn't  tell them  before they  are relinquished,                                                               
the state  is chasing them  down the road  trying to get  them to                                                               
clean up as they disappear into  oblivion, which goes back to the                                                               
story of the landowner being responsible.                                                                                       
                                                                                                                                
3:46:39 PM                                                                                                                    
                                                                                                                                
MS. FOERSTER said the rest of  her presentation would be on AOGCC                                                               
concerns  relating to  idle wells  and orphan  well liability.  A                                                               
trend has started  that she didn't think would  turn around soon.                                                               
The state  has about  5,300 wells,  about 900  of them  idle, and                                                               
that number increases as our  oil and gas infrastructure matures.                                                               
A lot  of new  little operators  are coming  into the  state. For                                                               
instance,  BP just  sold a  lot of  their stuff  to Hilcorp.  New                                                               
operators  have  also been  enticed  to  come to  Alaska  through                                                               
exploration  incentives. Often  they  don't  have huge  financial                                                               
resources,  so now  there  is an  increasing  number of  operator                                                               
bankruptcies. This  results in an increasing  number of landowner                                                               
liabilities -  State of  Alaska -  for the  cost of  plugging and                                                               
abandoning the wells.                                                                                                           
                                                                                                                                
3:48:30 PM                                                                                                                    
MS.  FOERSTER  said  this  problem won't  go  away  and  multiple                                                               
approaches will  be needed to  make sure Alaska doesn't  become a                                                               
legacy well  site. Over  4,000 of  these wells  are on  the North                                                               
Slope, but  close to 1,000  of them are  in Cook Inlet,  which is                                                               
also "Alaska's playground." Her suggested solutions include:                                                                    
                                                                                                                                
     1. Decrease and manage the  number of idle wells in the                                                                    
     state. AOGCC has  an initiative in which  they bring in                                                                    
     each  operator every  year and  review their  idle well                                                                    
     list. They  identify wells that  all can agree  have no                                                                    
     future  utility  and  the wells  that  have  mechanical                                                                    
     integrity issues that are either  a current threat or a                                                                    
     future  threat  and  aren't fixable.  It  seems  to  be                                                                    
     working  well,  but it's  a  slow  process and  doesn't                                                                    
     bring additional money into the general fund.                                                                              
                                                                                                                                
     2. Change the way bonding  is done. Now regulations say                                                                    
     when an operator comes to the  state they have to get a                                                                    
     bond for no  less than $100,000 for the  first well and                                                                    
     no  less  than  $200,000   for  the  total  blanket  of                                                                    
     operations in  the state. This means  the state's bonds                                                                    
     for the  2,000 abandoned  wells on  the North  Slope is                                                                    
     $200,000 and  that can't even  pay for  the engineering                                                                    
     study to do the estimate of  what it would cost to plug                                                                    
     them all.                                                                                                                  
                                                                                                                                
     3.  Establish  legal authority  to  go  back on  former                                                                    
     operators if  the new ones default.  This would require                                                                    
     a change to statutes.                                                                                                      
                                                                                                                                
     This is a multi-billion-dollar  problem. If Kuparuk and                                                                    
     Prudhoe Bay  get sold to  someone who doesn't  have the                                                                    
      financial wherewithal to P&A those wells, the state                                                                       
     has three choices:                                                                                                         
     - go back on the old operator                                                                                              
     - ask the legislature for money                                                                                            
     - just let the problem exist                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  asked what the existing  legal requirements                                                               
are for companies when they stop using wells.                                                                                   
                                                                                                                                
3:54:09 PM                                                                                                                    
MS. FOERSTER  answered the law  requires an operator to  plug and                                                               
abandon  all  the  wells  on a  lease  before  relinquishing  it.                                                               
However, if  a company goes  bankrupt, like Aurora Gas  did, what                                                               
do you do?                                                                                                                      
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  if  there  is  bonding  legislation                                                               
currently  and if  AOGCC has  regulatory authority  to set  it at                                                               
appropriate levels.                                                                                                             
                                                                                                                                
MS. FOERSTER answered the commission  can set the bonding higher,                                                               
but they really  don't know the right answer. It  would cost BP a                                                               
couple of  pennies on the dollar,  but it might cost  50 cents on                                                               
the  dollar for  a little  independent. Hilcorp  can't afford  to                                                               
bond Milne Point, Endicott, and  North Star. The more financially                                                               
secure a  company is, the  cheaper it is to  get a bond  but also                                                               
the less worried the state is about it having one.                                                                              
                                                                                                                                
3:55:47 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  as wells  become idle  on the  North                                                               
Slope what is done now.                                                                                                         
                                                                                                                                
MS. FOERSTER  answered a variety  of things: now, if  an operator                                                               
on  the North  Slope has  a  well they  know there  is no  future                                                               
utility for  it, they will  plug it, but  operators hang on  to a                                                               
lot of wells  for future utility. For instance, if  the state had                                                               
required BP  to plug  all the  idle wells  at Prudhoe  Bay before                                                               
cold  tubing technology  evolved,  they couldn't  have gone  back                                                               
into them for more production.                                                                                                  
                                                                                                                                
3:57:28 PM                                                                                                                    
She said  the practice  of going back  on former  operators isn't                                                               
unheard of in  the oil and gas world. Two  states, California and                                                               
Kansas,  have  statutes  allowing  them to  do  that.  California                                                               
recently  did it  to  ExxonMobil that  sold  Platform Holly,  off                                                               
Santa  Barbara,  to  a  little   company  that  didn't  have  the                                                               
financial  wherewithal  to  plug  it   when  they  were  done.  A                                                               
landowner can write it into their  lease, like CIRI does, and DNR                                                               
is  doing more  of that  sort  of thing.  But putting  sufficient                                                               
money to do this into a bank account with the state as a co-                                                                    
signer needs to go along with the language.                                                                                     
                                                                                                                                
If the commission  is given this authority, it can  be used to go                                                               
back on  operators at the time  the legislation is put  in place,                                                               
but she  didn't know  if they  could go  back on  prior operators                                                               
before that. Or  an idle well fee could be  assessed; it would be                                                               
an annual  fee that increases  over time and  it could go  into a                                                               
fund specifically  for orphan well  clean-up. For  example, every                                                               
idle well will cost $100 in the  first year; if you have 300 idle                                                               
wells that comes  to $30,000. But next year, each  idle well will                                                               
cost $500  for a total  of $150,000. The  next year it  will cost                                                               
$1,000 per  well and  the next  $5,000. Pretty  soon, it  will be                                                               
financially  lucrative  to  get  rid of  those  wells.  The  only                                                               
problem  with  a fund  like  that  is that  it  can  be used  for                                                               
whatever the legislature wants.                                                                                                 
                                                                                                                                
4:02:13 PM                                                                                                                    
SENATOR STEDMAN said assuming company  X leaves the state with an                                                               
abandoned well, how does that tie in with platforms and roads.                                                                  
                                                                                                                                
MS.  FOERSTER  answered   that  DNR  is  the   landowner  and  is                                                               
responsible  for the  surface clean-up,  and sometimes  they want                                                               
the  road,   the  platform,  or   the  infrastructure.   The  DNR                                                               
commissioner has worked  well with operators in the  past to take                                                               
care  of the  state's interests.  For instance,  he has  asked an                                                               
operator to not plug a well because of a potential.                                                                             
                                                                                                                                
CHAIR GIESSEL thanked her and invited DNR's Jim Beckham forward.                                                                
                                                                                                                                
4:04:00 PM                                                                                                                    
JIM  BECKHAM, Deputy  Director, Division  of Oil  and Gas  (DOG),                                                               
Department of  Natural Resources  (DNR), Anchorage,  Alaska, said                                                               
the  division  issues oil  and  gas  leases  that have  a  clause                                                               
requiring the  lessee to return the  land in a condition  that is                                                               
satisfactory to the state.                                                                                                      
                                                                                                                                
He said the department has several bonding gates:                                                                               
     1. The initial operation's lease level of $100,000                                                                         
      2. A unit bond, which is a collection of leases, and                                                                      
     requires a statewide bond of $200,000                                                                                      
     3. A  unit bond can be  applied to all leases  and that                                                                    
     is   $500,000.   These   monies   are   earmarked   for                                                                    
     dismantlement,  removal,   and  restoration  activities                                                                    
     (DR&R).                                                                                                                    
       4. Finally, when an operator or a lessee wants to                                                                        
         assign or sell their interest in the lease, an                                                                         
     assignment bond may be required.                                                                                           
                                                                                                                                
4:06:10 PM                                                                                                                    
In 2009, Mr.  Beckham said, the Pacific  Energy Resources Limited                                                               
bankruptcy  identified the  significant exposure  the state  had.                                                               
Fortunately for the state, other  people stepped in and picked up                                                               
the significant  assets and moved forward.  Recognizing the state                                                               
had dodged  a bullet coupled  with the fact that  major companies                                                               
are  now   moving  to  small  and   mid-sized  limited  liability                                                               
companies,  the   division  started   to  look  at   the  state's                                                               
increasing liability  on the  various leases  and units.  DNR has                                                               
basically chosen  to reach out to  the new lessees to  talk about                                                               
their  liabilities  and their  plans  for  them  at the  time  of                                                               
assignment in formal DR&R agreements.                                                                                           
                                                                                                                                
4:08:29 PM                                                                                                                    
MR. BECKHAM  said the department  also started  coordinating with                                                               
the Alaska Oil  and Gas Conservation Commission  (AOGCC) when Ms.                                                               
Foerster  brought   their  attention  to  limiting   the  state's                                                               
liability during the lease relinquishment process.                                                                              
                                                                                                                                
4:09:19 PM                                                                                                                    
He said there  are a number of ways to  cover the liability (that                                                               
is only  for the percent of  interest a company has  in the lease                                                               
or unit)  in a dismantlement, removal,  and restoration agreement                                                               
(DR&R). Publicly traded companies are  on the top of the spectrum                                                               
and are required to list  an asset retirement obligation (ARO) in                                                               
their  financial statements.  Typically,  the department  doesn't                                                               
know the details,  but it knows the rolled-up  amount and assumes                                                               
the funds are set aside to  address a company's obligations as it                                                               
relates to its lease in Alaska.                                                                                                 
                                                                                                                                
The  full faith  and  credit  of the  parent  company is  another                                                               
vehicle  that  can be  used  for  the  obligations of  a  limited                                                               
liability  company.  The  department   can  also  have  signatory                                                               
authority  on  cash deposited  into  a  bank, known  as  "sinking                                                               
funds." A company can also  use certificates of deposit issued in                                                               
the name of the state in  an amount for the estimated obligation.                                                               
Performance  bonds can  also be  issued to  guarantee a  specific                                                               
performance on the  unit or the lease and those  would be sold to                                                               
pay for the action should that operator or lessee not perform.                                                                  
                                                                                                                                
4:11:24 PM                                                                                                                    
MR. BECKHAM  said they are  constantly improving  their processes                                                               
to get  more coverage for  the units, wells,  and infrastructure.                                                               
DOG is  responsible for the  surface assets that  are constructed                                                               
to  access the  mineral estate  and  they look  at everything  in                                                               
their  agreements including  the  well  bore. Some  comprehensive                                                               
agreements include  plugging and abandoning  the well, and  he is                                                               
working  with  the commissioner  to  make  sure the  operator  or                                                               
lessee is not paying twice for the same issues.                                                                                 
                                                                                                                                
4:12:11 PM                                                                                                                    
CHAIR  GIESSEL asked  if the  $100,000 bond  is enough  to remove                                                               
infrastructure on the surface of a lease.                                                                                       
                                                                                                                                
MR. BECKHAM  responded that the  figure seems  low, but a  lot of                                                               
times the initial operations on  a lease are minimal. It's either                                                               
building a gravel  pad or an ice road for  winter activities, and                                                               
when they pull out, nothing  remains. One company has drilled two                                                               
wells  from an  existing pad  that does  not belong  to them  and                                                               
posted bonds  for both  leases the well  bore touched.  When they                                                               
left,  nothing was  there other  than the  plugged and  abandoned                                                               
wells.                                                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI asked if the  administration supports any of                                                               
the  AOGCC proposals  they have  heard today  to deal  with these                                                               
bonding issues.                                                                                                                 
                                                                                                                                
MR.  BECKHAM   replied  that  he   is  not  aware  of   what  the                                                               
administration  supports.  However, the  AOGCC  and  the DOG  are                                                               
working to ensure that any kind  of obligation left on a lease or                                                               
at a unit  site is adequately addressed so the  state isn't stuck                                                               
with the bill.                                                                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  if  the  federal  government  could                                                               
require the state to clean up  the wells if they are abandoned in                                                               
the future.                                                                                                                     
                                                                                                                                
MR. BECKHAM replied that he didn't know.                                                                                        
                                                                                                                                
4:14:28 PM                                                                                                                    
MS. FOERSTER  responded that she  didn't know if they  could, but                                                               
they  never have.  Oklahoma, Texas,  Kansas, and  California have                                                               
thousands  of  idle  wells  and  the  federal  government  hasn't                                                               
required them to be cleaned up.                                                                                                 
                                                                                                                                
4:15:04 PM                                                                                                                    
SENATOR COGHILL  asked how hard it  has been to go  back to prior                                                               
lessees for plugging and abandonment.                                                                                           
                                                                                                                                
MS. FOERSTER replied  they have never had cause to  do that and a                                                               
bond had been  used for P&A only once before.  However, Alaska is                                                               
a young  oil and  gas state, and  it is getting  to the  point of                                                               
having to deal with issues it has never had before.                                                                             
                                                                                                                                
CHAIR GIESSEL asked if DNR had used any bonds.                                                                                  
                                                                                                                                
MR. BECKHAM answered  they had not, but they are  probably at the                                                               
doorstep of  doing that with  recent bankruptcies  and unattended                                                               
wells.                                                                                                                          
                                                                                                                                
SENATOR COGHILL asked what statutory limitations there are.                                                                     
                                                                                                                                
MS. FOERSTER replied  that Alaska's statutes and  regs require an                                                               
operator to plug and abandoned  every well before he relinquishes                                                               
his lease, but if he has no money, what good is the law?                                                                        
                                                                                                                                
SENATOR BISHOP remarked the federal  government won't clean their                                                               
own wells up  and how could they come here  and require Alaska to                                                               
do it.                                                                                                                          
                                                                                                                                
SENATOR COGHILL  asked how they  are keeping track of  each lease                                                               
and well bore. Are they catalogued differently?                                                                                 
                                                                                                                                
MR.  BECKHAM   replied  that   they  are   aggressively  pursuing                                                               
dismantlement,   removal,   and   restoration   agreements   with                                                               
companies at the time of  assignment. They are also approaching a                                                               
couple of  companies that have  multiple holdings  throughout the                                                               
state to work out an agreement that covers everything.                                                                          
                                                                                                                                
4:18:45 PM                                                                                                                    
CHAIR GIESSEL thanked  Mr. Beckham for presenting  today and said                                                               
they would reach  out to him with their questions.  She asked Ms.                                                               
Foerster to provide the production data update.                                                                                 
                                                                                                                                
MS. FOERSTER displayed a graph  of average oil production for the                                                               
state since  1960 saying it looks  pretty much the way  it always                                                               
has and skipped to the next  one that detailed the last 18 years.                                                               
In looking  for something positive,  she noted that there  was no                                                               
decline this year. Prudhoe Bay was  flat and maybe up a tiny bit.                                                               
Oooguruk, Knight,  Nikiatchuq, and  Point Thomson  production was                                                               
up a little bit, too. Kuparuk  stayed flat, also. Coleville is up                                                               
a bit and  ConocoPhillips is continuing to expand  there. This is                                                               
all good news.                                                                                                                  
                                                                                                                                
4:21:08 PM                                                                                                                    
The next  graph depicted exploratory  well drilling and  she said                                                               
Alaska has  had a whole rainbow  of explorers over the  years. In                                                               
2017,  Hilcorp drilled  a handful  of tiny  "postholes" to  learn                                                               
more about  the lay of the  land for other things  they are going                                                               
to do. They have all been  plugged. Accumulate drilled a well and                                                               
this year  ConocoPhillips is going  to be drilling; Eni  is going                                                               
to be drilling as well as Cook Inlet.                                                                                           
                                                                                                                                
SENATOR   WIELECHOWSKI  remarked   that  2017   had  the   lowest                                                               
exploratory well count since 2003.                                                                                              
                                                                                                                                
MS. FOERSTER  said that was  right, but 2018  is going to  be up,                                                               
closer to 10.                                                                                                                   
                                                                                                                                
4:22:18 PM                                                                                                                    
MS. FOERSTER  said the next  picture was development  and service                                                               
drilling of wells and well  branches. She added that every branch                                                               
of a multi-lateral  is counted as a separate  well. BP's drilling                                                               
activity was  down; ConocoPhillips'  was holding  strong; Hilcorp                                                               
has  picked up  on  their  drilling, along  with  a couple  other                                                               
little companies.  It's down a  little bit  from 2016, but  not a                                                               
lot.  Whatever they  did,  even  though they  did  a little  less                                                               
drilling, production was up a little bit.                                                                                       
                                                                                                                                
4:23:15 PM                                                                                                                    
The workover activities  slide was split into  three groups. Dark                                                               
green is work that is done  to enhance production like a frac job                                                               
or an acid  stimulation. That was held constant for  the last few                                                               
years.  The  repairs  group  is  down a  little  bit.  The  other                                                               
category  is  for  things  like  converting  a  well  from  water                                                               
injection  to gas  injection  or other  sorts  of workovers  that                                                               
don't fall easily  into the repair or  enhancement category. That                                                               
level  of work  is  down a  little  but  not too  bad  and it  is                                                               
expected to be similar next year.  A lot of these activities came                                                               
from production wells on the North Slope.                                                                                       
                                                                                                                                
The  next biggest  chunk of  activity  was service  wells on  the                                                               
North Slope and  a bunch of little "strat-test"  that Hilcorp did                                                               
to  learn more  about  the shallow  geology.  Another slide  just                                                               
compared 2016 to 2017. That concluded her testimony.                                                                            
                                                                                                                                
CHAIR GIESSEL thanked her.                                                                                                      
                                                                                                                                
4:24:49 PM                                                                                                                    
SENATOR MEYER  said the  third bar  graph on  the right  side: is                                                               
that supposed to be the price of oil?                                                                                           
                                                                                                                                
MS. FOERSTER answered yes.                                                                                                      
                                                                                                                                
SENATOR MEYER asked if the price of oil went down to $30 in                                                                     
2014; what was he misreading?                                                                                                   
                                                                                                                                
4:25:32 PM                                                                                                                    
HOLLIS  FRENCH, Commissioner,  Alaska  Oil  and Gas  Conservation                                                               
Commission (AOGCC), clarified that the  price of oil is the graph                                                               
behind the  bar charts and  it dips down  to $30 in  2015/16. The                                                               
dip Senator Meyer was referring to was in 2016.                                                                                 
                                                                                                                                
4:26:31 PM                                                                                                                    
CHAIR GIESSEL, finding no further questions, adjourned the                                                                      
Senate Resources Committee meeting at 4:26 p.m.                                                                                 

Document Name Date/Time Subjects
Senate Resources - Hearing Agenda - 3 - 5 - 2018 .pdf SRES 3/5/2018 3:30:00 PM
AK Oil & Gas Conservation Comm Presentation to Senate Resources - 3 - 2 - 2018.pdf SRES 3/5/2018 3:30:00 PM
Oil and Gas
DNR Presentation to Senate Resources - 3 - 5 - 2018 .pdf SRES 3/5/2018 3:30:00 PM
Oil & Gas