04/13/2005 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB163 | |
| SCR6 | |
| SCR7 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 53 | TELECONFERENCED | |
| *+ | SB 163 | TELECONFERENCED | |
| *+ | SCR 6 | TELECONFERENCED | |
| *+ | SCR 7 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 13, 2005
3:40 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
Senator Gretchen Guess
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 53
"An Act relating to a credit for certain exploration expenses
against oil and gas properties production taxes on oil and gas
produced from a lease or property in the state; relating to the
deadline for certain exploration expenditures used as credits
against production tax on oil and gas produced from a lease or
property in the Alaska Peninsula competitive oil and gas
areawide lease sale area after July 1, 2004; and providing for
an effective date."
HEARD AND HELD
SENATE BILL NO. 163
"An Act extending and amending the requirements applicable to
the credit that may be claimed for certain oil and gas
exploration expenses incurred in Cook Inlet against oil and gas
properties production (severance) taxes."
HEARD AND HELD
SENATE CONCURRENT RESOLUTION NO. 6
Urging the governor to direct the division of oil and gas,
Department of Natural Resources, to undertake a comprehensive
review of the subject of Cook Inlet oil and gas platform
abandonment for the purpose of developing new oil and gas
platform abandonment regulations and their adoption and
implementation.
MOVED CSSCR 6(RES) OUT OF COMMITTEE
SENATE CONCURRENT RESOLUTION NO. 7
Endorsing the ongoing efforts of the administration to review
and revise program regulations with the objective of
streamlining the exploratory oil and gas process.
MOVED SCR 7 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: SB 53
SHORT TITLE: AK PENINSULA OIL & GAS LEASE SALE; TAXES
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/12/05 (S) READ THE FIRST TIME - REFERRALS
01/12/05 (S) RES, FIN
03/02/05 (S) RES AT 3:30 PM BUTROVICH 205
03/02/05 (S) Heard & Held
03/02/05 (S) MINUTE(RES)
04/13/05 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 163
SHORT TITLE: COOK INLET OIL & GAS TAX CREDIT
SPONSOR(s): RESOURCES
04/06/05 (S) READ THE FIRST TIME - REFERRALS
04/06/05 (S) RES, FIN
04/13/05 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SCR 6
SHORT TITLE: COOK INLET OIL & GAS PLATFORM ABANDONMENT
SPONSOR(s): RESOURCES
04/06/05 (S) READ THE FIRST TIME - REFERRALS
04/06/05 (S) RES
04/13/05 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SCR 7
SHORT TITLE: OIL AND GAS REG REVISIONS
SPONSOR(s): RESOURCES
04/06/05 (S) READ THE FIRST TIME - REFERRALS
04/06/05 (S) RES
04/13/05 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MARY JACKSON
Staff to Senator Wagoner
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on SB 53, SB 163, SCR 6 and SCR 7
for the sponsor.
MARK MYERS, Director
Division of Oil and Gas
Division of Geological and Geophysical Surveys
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Supported SB 163, SCR 6 and SCR 7.
LISA PARKER
Agrium Inc.
Kenai AK
POSITION STATEMENT: Supported SB 163.
DAN DICKINSON, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Supported SB 163.
DAN SEAMOUNT
Alaska Oil and Gas Conservation Commission (AOGCC)
333 W. 7th Ave., Ste. 100
Anchorage, Alaska 99501
POSITION STATEMENT: Supported SCR 6.
MIKE MONGER, Executive Director
Cook Inlet Regional Citizens Advisory Council (CIRCAC)
910 Highland Ave.
Kenai AK 99611
POSITION STATEMENT: Commented on SCR 6.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:40:35 PM. Present were Senators
Guess, Ben Stevens, Stedman, Seekins and Chair Wagoner.
SB 53-AK PENINSULA OIL & GAS LEASE SALE; TAXES
CHAIR WAGONER announced SB 53 to be up for consideration.
MARY JACKSON, staff to Senator Wagoner, explained that the
companion measure, HB 71, is heading in this direction and they
are amendments.
The point of bringing this to your attention is to let
you know that all of these are coming. Senator
Wagoner's intention is to hold SB 53 in this committee
so that when HB 71 comes across, that would be the
bill that would be in front of you.
CHAIR WAGONER said there was no public testimony and set SB 53
aside to wait for legislation to arrive from the other body.
SB 163-COOK INLET OIL & GAS TAX CREDIT
CHAIR THOMAS WAGONER announced SB 163 to be up for
consideration.
3:44:15 PM
SENATOR KIM ELTON joined the committee.
MARY JACKSON, staff to Senator Wagoner, explained that
exploration incentive credits were extended to regions in Alaska
in previous legislation, but not in the Cook Inlet region. She
was instructed to work on credits that would apply to the Cook
Inlet and that's what SB 163 does. She provided a map to explain
positioning for credits and said that the old bill provided that
exploration wells must be outside of three miles from the first
drill to receive the first 20 percent incentive credit. Any
wells outside of 25 miles would receive a second 20 percent
credit. "None of it fits the Cook Inlet."
3:46:32 PM
MS. JACKSON explained that SB 163 says the drill must be within
the three miles for the first 20 percent credit and outside of
ten miles for the second 20 percent. However, she pointed out
that even the 10 mile is too big and very little would be
applicable there. It also provides that the producer has to
apply for the credits and the department must respond within 60
days, although the department would like 90 days. The credit is
capped at $20 million.
3:47:40 PM
SENATOR KIM ELTON asked how much incentive would be needed in
terms of making production efficient in Cook Inlet at the
current price levels.
3:47:56 PM
MARK MYERS, Director, Division of Oil and Gas and Division of
Geological and Geophysical Surveys, replied that the chairman
asked him what could be done in terms of incentives for Cook
Inlet that already has a large number of wells. There are still
some legitimate exploration targets that have not been explored.
He explained why saying that the earlier tax EIC used a
mechanical mechanism that defined an exploration well via its
distance from other wells. That's only one test that may be
relevant and while it is simple, it's really artificial. It is
irrelevant to the geological and economic risk taken on by a
producer or an explorer. A lot of the plays are in deeper
horizons near existing infrastructure, but they are no less
risky geologically than a frontier area or wildcat in the sense
of the geologic risk. The question is in a basin that is
relatively mature, how to define viable exploration plays and
how to provide incentives for them. Recognizing the three-mile
distance criteria doesn't really define an exploration play.
This presupposes a geological test - that a company would make
its case to the department with seismic and well data or other
geological and geophysical data and the commissioner would
predetermine if it is a separate target or if it is a
development well of an existing discovery.
If they can demonstrate that it is geologically
distinct or reasonably estimated with the data to be
distinct, the commissioner would pre-certify that they
would be eligible for the credit for the well.
The Cook Inlet is seen by the majors as a relatively mature
asset and the credit should encourage smaller independent
companies to explore. It would assist in their drilling
relatively expensive wells or bringing in the expensive jack up
rigs or other infrastructure needed to drill in the offshore
areas. Capping the amount at $20 million limits the downside
potential to the state.
SENATOR ELTON said he didn't think there was a perfect answer
because it's highly speculative.
3:52:00 PM
SENATOR DYSON joined the committee.
SENATOR ELTON asked what the status of the shallow gas leases in
the southern Kenai Peninsula are and if this credit would be
applicable there.
MR. MYERS replied there is no restriction on the credits as to
where they would apply in Cook Inlet - any well as long as it
meets the standards would qualify.
3:53:49 PM
SENATOR SEEKINS commented that a dry hole is still a dry hole
regardless of the price of oil.
3:54:28 PM
LISA PARKER, Agrium Inc., Kenai, said she appreciated the
legislature's efforts to encourage development in Cook Inlet.
With respect to SB 163, she said section 1 would apply to
activity after July 1, 2005 only and she asked if that is the
intent or a typing error.
She said section 4 and the five-year program in Cook Inlet with
the $20 million limit would mean that five or six wells could be
drilled or one, if it is offshore. She asked them to reexamine
the limit.
The programs still contain the usual exclusions, which diminish
the attractiveness of the incentive program. These exclusions
include administration, supervision, engineering, geological,
management and the environmental costs - all of which are
significant components and reduce the actual incentive from 20
percent to around 10 percent. With the incentive being at the
discretion of the commissioner who usually decides after the
work is incurred, potentially these would have little impacts on
an oil company's economics.
3:56:33 PM
CHAIR WAGONER said the July 1, 2005 date was wanted in the bill
and that the $20 million limit could at least get activity
started and could be revisited.
At this time I think the $20 million laying out there
gives some certainty to a lot of people that sometimes
question an open-ended incentive....
DAN DICKINSON, Director, Tax Division, Department of Revenue
(DOR), echoed Mr. Myers' and Ms. Jackson's comments. He said
this is a production tax credit that is more attuned to what is
going on in Cook Inlet. He corrected Ms. Parker who said that
the credit is capped at $20 million per well, saying that it is
not per well, but each well getting 20 percent credit not to
exceed $20 million total. But, he thought who actually gets the
credit could be clarified.
CHAIR WAGONER noted that there was no further public testimony
and set SB 163 aside.
SCR 6-COOK INLET OIL & GAS PLATFORM ABANDONMENT
CHAIR WAGONER announced SCR 6 to be up for consideration.
MARY JACKSON, staff to Senator Wagoner, sponsor, said the two
resolutions coming before the committee are part of the results
of the February Kenai meeting about abandonment of the platforms
in Cook Inlet, a serious issue since 1996. This resolution urges
the governor to ask the department to promulgate regulations.
There was some question about whether the Department of Natural
Resources or the Alaska Oil and Gas Conservation Commission
(AOGCC) had precedence over that and it was found that the
department does.
4:02:03 PM
MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR) said abandonment is really a big deal.
Many wells are ending their lives; some have been "lighthoused"
and some have been partially abandoned. It involves a lot of
stakeholders and has issues like navigability. The leases
require full-abandonment - full removal and back to original
condition.
However, there are questions of whether there might be better
and higher uses for the platforms and who retains the liability
at the point of abandonment. The state has historically relied
on parent company guarantees and the deep pockets of the
original lessee. "It's not a liability you can sign away. That's
a very strong incentive, again, a very strong protection in the
process."
Smaller companies can take over some of the platforms and that
has happened, but the state wants to make sure it's protected
from liability. With all that said, the liability becomes an
issue when folks want to sell the platforms and they should be
entitled to some certainty about how, in fact, and what standard
the state is going to hold the lessee to.
In the end, we fully need a process. We need a series
of regulations about how we deal with these things and
quite honestly, since statehood, really we haven't
gone through full abandonment of these platforms. So,
we're into new territory. We expect to hold a full set
of procedures this year on this issue, but until we
have our act together, but until we have all the
participants at the table, all the stakeholders
involved, we haven't been prepared to do it. This
urges us to do it. We recognize in fairness to all
parties we need to do it; we recognize there are a lot
of stakeholders involved and we are the lead agency.
He supported the resolution, but admitted it is a daunting task.
4:04:39 PM
DAN SEAMOUNT, Alaska Oil and Gas Conservation Commission
(AOGCC), said he really supports the goal of future oil and gas
exploration and development. He said there is potential for
undiscovered oil within reach of the Cook Inlet platforms
because the known reservoirs still have a lot of oil. Recovery
of the original oil in place has been relatively slow off a
number of the platforms - less than 30 percent compared to other
field such as Prudhoe Bay with recoveries of greater than 50
percent of the original oil in place.
We believe there are hundreds of millions of barrels
of oil left in the produced fields of Cook Inlet in
known reservoirs. With this, motivated and energized
production companies such as Crosstimber should be
encouraged to use technology to recover more of the
known oil - that's the oil that's reachable from the
platforms. Also, there's exploration potential left
within reach. There are fewer than 300 exploration
wells and 1,000 total wells that have been drilled in
the entire history of the 10,000 square mile basin.
MR. SEAMOUNT said that he knows of similar size basins such as
the San Juan Basin in New Mexico, which has 29,000 wells and
discoveries are still being made there.
Leslie Lagoon with the USGS - expert geologist and
geochemist - has concluded that only four percent of
the total oil generated in Cook Inlet Basin has ever
been found. We don't know yet if condensing oil has
escaped to the surface or it's still trapped in
undiscovered oil fields or both, but there is a lot of
oil that has not been accounted for yet. As Mark Myers
was saying, there are untested fault blocks within
reach and under exploratory prospects that there's
been identified by many petroleum explorationists over
the last 50 years.
Possibly the highest potential play is the Pre-
tertiary, Cretaceous and Jurassic rocks that we've
been hearing about lately in the news and Mr. Myers
mentioned. The Jurassic rocks is where almost all the
oil is generated. To date, only 55 wells have been
drilled in this section and most have been drilled
only into the very top. Little is known of its
productive potential. We feel the existing offshore
platforms represent viable infrastructure and it makes
sense to reenter their idle well bores and deepen or
sidetrack to test the Pre-tertiary section of 5,000
ft. extra depth below the Tertiary. It's an arbitrary
number, but it really comes close to fully evaluating
the Pre-tertiary sections potential. You could also
drill to see the new fault blocks and the other
prospects before abandoning the platforms.
As I've alluded to, there are four tiers of potential
that are within reach of the platforms. There's the
unproduced oil in known reservoirs; there are new
fault blocks. There are many identified exploration
prospects and there's the Pre-tertiary play. These
plays would most likely be uneconomic and unreachable
if it were not [indisc.] to existing platforms.
Our new commissioner, Kathy Forester, pointed out to
me - she's got a lot of experience on the North
Slope.... She pointed out to us that the situation at
Cook Inlet is analogous to that of the North Slope
where ConocoPhillips and BP are already using idle
well bores on existing pads to deepen or sidetrack for
small accumulations of reservoirs that would be
uneconomic if not for the existing infrastructure. In
other words, it's possible that Cook Inlet has already
been shown to be successful by the success on the
North Slope.
We feel the platforms should be viewed as assets and
we recommend that all stakeholders be very careful
when considering abandonment and do everything they
can to have all of the potential oil and gas reserves
tested before abandonment. There's a window of
opportunity right now to capture additional reserves.
Platform abandonment would close that window. Once the
window closes, much of the state's resources and Kenai
Peninsula's economic potential could be lost.
4:10:34 PM
CHAIR WAGONER added that currently there are over 300 jobs
directly related to Cook Inlet platforms. "It's a very important
part of the overall oil and gas economy that we have based in
Cook Inlet right now."
4:11:05 PM
MIKE MONGER, Executive Director, Cook Inlet Regional Citizens
Advisory Council (CIRCAC), said the council has similar
interests in the Cook Inlet platform removal. Their research has
revealed that DNR has no specific regulations or statutes
governing lessee's obligations and determines their obligations
on a case-by-case basis. He said the council's research paper
will be released in May and he would be happy to share it with
them.
4:13:28 PM
CHAIR WAGONER closed the public hearing.
4:13:33 PM
SENATOR GRETCHEN GUESS moved Amendment 1.
24-Ls0775\A.1
Chenoweth
4/12/05
AMENDMENT 1
OFFERED IN THE SENATE BY SENATOR WAGONER
TO: SCR 6
1 Page 2, line 6:
2 Delete "smaller"
3 Insert "growing, independent"
SENATOR ELTON objected to ask if using the word "growing" limits
the intent.
MS. JACKSON explained that this paragraph references XTO Energy
that is no longer in a smaller bracket. "They are a growing
independent company."
CHAIR WAGONER said it is growing worldwide since taking over the
Shell platforms.
SENATOR ELTON removed his objection.
4:15:32 PM
SENATOR SEEKINS moved CSSCR 6(RES) from committee with
individual recommendations. There were no objections and it was
so ordered.
SCR 7-OIL AND GAS REG REVISIONS
CHAIR THOMAS WAGONER announced SCR 7 to be up for consideration.
MARY JACKSON, staff to Senator Wagoner, said this resolution
came from the Kenai meeting also. Practically speaking, a
gentleman named James Udelhoven who began work in Cook Inlet in
the late 1960's cautioned, "Don't make the first hurdle so big
that the new kid won't try to take the hurdle."
She said this resolution was created to applaud the efforts that
have been made to streamline permitting and to insure that those
efforts are continued.
MARK MYERS, Director, Division of Oil and Gas and State
Geological Survey, supported SCR 7 saying it would eliminate
overhead and duplication.
4:19:01 PM
CHAIR WAGONER said the Regulatory Commission of Alaska (RCA)
could work at a faster rate and has already demonstrated that
recently.
SENATOR RALPH SEEKINS asked for examples of enhanced
attractiveness of exploration and development.
MR. MYERS replied that some outstanding examples are in the
Beaufort Sea where Teck Cominco and Armstrong Resources bought
leases and within four months had their permits to drill in the
Beaufort Sea, which is usually one of the hardest places to
permit because of the environmental issues, remoteness of
location and concerns over subsistence resources. They have
developed good working relationships with the North Slope
Borough, which is necessary. Kerr McGee did the same with two
separate rigs this winter and last. These companies are brand
new to Alaska. He explained that the hearing process within the
communities has to happen up front and that while it is labor-
intensive, it streamlines the process later on.
4:22:51 PM
SENATOR SEEKINS asked if the streamlining had been accomplished
through efforts of the legislature or just through incentives
initiated by the administration.
MR. MYERS replied that the legislature has enhanced the process
by funding some positions and moving program offices like
Coastal Zone Management into the Department of Natural
Resources. It has provided funding on a case-by-case basis for
project coordinators and supported budget increases at times for
agencies like DEC in critical areas. Having extra folks on staff
has been critically important.
4:24:45 PM
CHAIR WAGONER related that other companies are going to drill in
the Beaufort Sea.
MR. MYERS replied that ConocoPhillips has a well, Kerr McGee has
multiple wells and Pioneer is looking at development. Another
well will potentially be shallow-drilled off the Point McIntyre
area.
CHAIR WAGONER asked if Pioneer was in the process of having a
platform built for them.
MR. MYERS replied yes, it is lighter weight and more mobile. He
said Pioneer is not actively drilling this year, but they are
assessing sanctioning a development project from the earlier
successful drilling out there about two years ago.
4:26:19 PM
SENATOR SEEKINS moved to pass SCR 7 from committee with
individual recommendations and zero fiscal note. There were no
objections and it was so ordered.
CHAIR WAGONER adjourned the meeting at 4:26:58 PM.
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